TeleCommunication Systems' CEO Discusses Q4 2013 Results - Earnings Call Transcript

TeleCommunication Systems, Inc. (TSYS) Q4 2013 Earnings Conference Call January 30, 2014 5:00 PM ET


Maurice B. Tose - President & Chief Executive Officer

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

Bruce White - Senior Vice President, General Counsel & Corporate Secretary


Mark Jordan - Noble Financial

Ryan MacDonald - Northern Capital Markets

Chris Quilty - Raymond James

Anya Shelekhin - Sidoti & Co.


Good day, ladies and gentlemen and thank you for standing by. Welcome to the TeleCommunication Systems Inc. Fourth Quarter and 2013 Earnings Conference Call.

During today's presentation all participants will be in a listen-only mode. Following the presentation, the conference will be open for question. (Operator Instructions)

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

Maurice B. Tose

Well, thank you. Good evening and thank you for joining us to discuss TeleCommunication Systems fourth quarter 2013 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. 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 those statements with the knowledge that actual results may differ materially from the forward-looking statements.

For example, but without limitation, our statements about the 2014 outlook, guidance and backlog and tax reserve, expected improved visibility and stability with the passage of the Federal budget, our strategies for growth and acceleration of our order pays and large IDIQ contracts, awards, expected acceleration of VoLTE and 9-1-1 next generation deployment, expected operational efficiencies to lower cost and IP monetization expectations are all forward-looking.

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 the 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 reconciliations in our press release and on the website.


Maurice B. Tose

Thank you, Bruce. Our fourth quarter 2013 earnings release was issued at about 4:15 today, and a full text copy has been distributed via e-mail and is also available on our website.

2013 was a tough year for the economy, for government contractors and for TCS. In our last earnings call in October, we announced significant changes to our guidance and promised cost cutting and cost management actions to address the impact of these challenges.

As a result, while we came in short of revenue we did exceed the upper ranges we provided for adjusted EBITDA and adjusted net income. We did this in spite of sequestration, continuing resolutions and the fourth quarter government shutdown that together created unprecedented and unpredictable circumstances for our government business.

We also addressed the setbacks in one of our important commercial customers in the new device market we have penetrated. We believe the hardest part is behind us, but we recognize that we still have challenges to face as we proceed on our charted course into 2014.

From a big picture standpoint, our breadth, scale and cumulative history have positioned the company to significantly payoff.

Commercial and defense global technology leaders looking for subject matter experts and secure wireless communication are coming to TCS to collaborate on new communication technologies such as the Commerce Department's FirstNet program with the lines of public safety and national security intersect. A number of such initiatives are underway and not limited to the U.S. We look forward to be being able to apply U.S. specifics in the coming months.

TCS LBS applications today displaying maps on wireless devices for nearly 100 countries, so we're among the very few players with proven global proficiency in LBS. A proficiency that we continue to believe is of significant importance to device manufacturers and others as they pursue global initiatives. And with the government budget finally approved, we expect better visibility and stability in this segment of our business in the current year.

Turning to comments on fourth quarter operating results, the government segments, $37 million of revenue and $10 million of gross profit were down by about 50% from the year before, in part due to lower pass-through business, but mainly due to the less funded order flow for our deployable communication systems; sustained turmoil in the Federal budget process in 2013, related postponement and delays in contract awards, system purchases and services contracts.

We have responded to the government spending trends by curtailing operating expenses in a way that preserves TCS investments needed for success in 2014 and beyond.

With a new $1 trillion Federal budget passed last week, the automatic and sequester activity will cease and new contracts are being awarded. The Defense Department will now be allowed to set its own priorities in many projects that were delayed as a result of sequestration in 2013 will get funded in 2014.

We made progress in new products and contract awards, adding a $6.8 million GTACS past quarter for army watercraft, highlighting the expansion of our products to include maritime terminals and below-deck shipboard equipment.

We're also recently notified of our selection as a prime contractor on the army's Worldwide Communications and Infrastructure Support or WCIS Basic Ordering Agreement or BOA. The WCIS agreement scope, its infrastructure and network upgrade projects at facilities outside the continental U.S. or OCONUS, an area where our track record in Afghanistan, Iraq, and elsewhere reflects favorably.

Our proposals I mentioned for The Department of Homeland Security Eagle II contract vehicle is currently being re-evaluated by the government as a corrective action undertaken by DHS in response to protest file.

Our major (inaudible) team is tracking 28 contract vehicles that will be released for bid over the next three years with a potential selling value of a $128 billion. Nine of these opportunities we expect will be released for bid in 2014 and TCS priming eight.

As we move into 2014, we have added access to 12 contract vehicles to our portfolio. In some cases, it is subcontracted to a partner; bringing our total number of major contract vehicles to 31. Our $27 million of government services revenue and $8 million gross profit were 30 plus percent lower than the fourth quarter of 2012 mainly due to the wartime drawdown of our OCONUS Field Service Reps or FSRs, supporting army and marines in Afghanistan.

The customer also shipped the procurement arrangement for these services to a cost plus arrangement from the previous firm fixed price structure, which will lead to thinner margins in 2014.

To offset the wartime reduction, we're leveraging existing relationships to increase TCS participation on current and new programs. Including seven of the nine major proposals, we're anticipating in 2014, there are services-centric contracts.

We're receiving orders for continued SNAP FSR support for the year ahead, starting in November when we announced $7 million in the initial funding in support of the U.S. marine core under the army's Rapid Response Third Generation or R2-3G contract.

As a subcontractor, the CACI, our initial award was for $7 million with a total expected three-year contract value of $40 million for FSR technical support. We anticipate continued field service growth across the board throughout 2014.

TCS's sustained superior performance in the field has led additional customers to undertake to transition their business to TCS. We've noted a similar trend with state side work. Since the recomputed award in 2013, of a $20 million two-year contract with three additional option years to deliver IT services to various city of Baltimore agencies, we have substantially increased our staffing in city facilities.

As mentioned earlier, our new WCIS BOA positions TCS as a prime contractor to support the project manager installation, information, infrastructure, communications and capabilities or PM I3C2 mission, which falls under the army Program Executive Office for Enterprise Information Systems or PEO EIS. They'll all be used to upgrade army OCONUS facilities. And we're obtaining arrangements to this work with top tier partners, including one that was a prime, one of predecessor contract.

TCS's 2013 cyber business was adversely impacted by both sequestration and the government shutdown. These setbacks and services were partially offset by increases in our training programs resulting in a flat year-over-year performance. As a result, our cyber training business surpassed two milestones in 2013. We now have delivered more than 100,000 hours of cyber training instruction, and we have trained over 3000 cyber professionals.

Our cyber training program is anchored by the DoD joint cyber analysis course, which is expected to grow in 2014 and the intelligent tutoring, authoring and delivery system development program that is now fully staffed and expected to continue well into 2015.

Government systems revenue was $10 million for the quarter, down from last year's $40 million, which included about $10 million of pass-through business. The decline was far more than we expected as funding a new program for which we are prepared was delayed.

We anticipate a strong performance in 2014 and 2015 from our suite of systems with new products, advancements in baseband technology and expanded offerings. We have moved beyond the success of our marquee SNAP, Tropo and affordable land terminals into the maritime space where our systems are now in 37 ships in five countries. We recently received a new order for army watercraft maritime stabilized antenna systems and below-deck equipments on up to 63 vessels with a total contract value of about $7 million if all options are exercised.

In October, we announced our first GTACS award, the $14 million order with initial funding of about $1.1 million from Microsat terminals and sustainment. Increased GTACS activity is expected, now that the fiscal 2014 Federal budged has been approved. There is a backlog of about 20 GTACS order tips we expect to be released in the near future.

TCS products and services just fully transitioned from WWSS to GTACS by the end of this quarter. Just as the company received exceptional performance evaluations under the WWSS contract, we're confident of similar success under GTACS.

TCS continue to innovate with terminals, baseband technology and components. Our new X/Y Tracking Antenna Systems began shipping to small satellite operators and other customers this quarter. As market takes advantage of expanded capability the terminal offers at a lower price point and faster shipping times and similar offerings from the competition. These precision systems are specifically designed for low earth orbit and medium earth orbit satellites and support of Earth observation, remote sensoring and telemetry tracking and control applications.

We received about $2.5 million in orders for our new impact TCS Service Router or TSR baseband unit component. This patent-pending single rack unit protects customer investments in interdependent equipment while providing enhanced data rates. The TSR is also a key component of our SNAP VSAT program delivering improved performance in a more compact package.

Our VSAT facility turned around 89 complete SNAP VSAT system resets in 2013. We expect the SNAP VSAT program or the SNAP reset program to be a growing stream of business as the Department of Defense is committed to use SNAP.

TCS deployable systems continue to be featured prominently at the army semi-annual Network Interoperability Evaluation or NIE events, which served to accelerate the deployment of new superior technology in the military's networks. The spring 2014, NIE event will feature TCS's tactical transportable tropo or 3T solutions for beyond line of sight communication links, up to 150 miles without the cost of satellite airtime.

Also, our SNAP Lite 1.2 VSAT product will be used for the first time as NIE infrastructure, supporting multiple applications and platforms.

We expect to resurge in sales of our hardened and radiation-tolerant electronic components for civil engineering space projects in Japan and Korea as well as the restarting of work on NASA Orion programs.

Our Rugged Solid State Drives are designed into an increasing number of major defense and avionics platforms in Europe and the United States, which we expect to generate repeat sales over many years.

As DoD struggles with the lack of affordable terminals or its advanced EHF satellite constellation, the Lockheed Martin, Northrop Grumman and TCS consortiums, low cost terminal is progressing through the certification process with Air Force Special Operations Commands sponsorship.

According to DoD officials, the cost of buying and installing terminals can run anywhere from 20 to 30 times the cost of the rockets and spacecraft. The DoD challenged by decreased budgets yet needing to provide hardened, protective comps in an increasingly cyber challenged world, we believe our efforts and investment are well placed.

TCS products are embedded in DoD's communications architecture and will be so in the foreseeable future as evidenced by continued investments in SNAPs and efforts to complete program of record logistics.

We continue to advance our products releasing protective communications, X/Y terminals, radiation-hardened components and higher capacity solid state drives. We maintain high customer satisfaction ratings, and are expanding with new customers, new offerings to existing customers and new and enhanced global technology partners.

For the commercial segment, fourth quarter revenue was $42 million, down $8 million from last year's quarter with gross profit of $22 million, down $6 million.

Growth in our 9-1-1 business and applications work for non-carrier customers and in carrier platform business did not fully offset the impact of lower carrier application revenue. Growth continued in 9-1-1 related business during the quarter, which includes wireless and Voice over IP, enhanced 9-1-1, network monitoring for caller routing, the evolving SMS to 9-1-1 business and next generation 9-1-1 system deployments and related professional services.

As wireless carriers transition their networks to LTE, that is the Long Term Evolution air interface successor to GSM and CDMA, TCS has evolved E9-1-1 technology to deliver 9-1-1 via Voice Over LTE or VoLTE.

In the fourth quarter, we continued VoLTE testing and deployment activities for two Tier 1 wireless carriers and expect to support accelerated VoLTE 9-1-1 deployment activity in 2014. Tier 1 wireless carriers are also deploying SMS 9-1-1 technology for compliance with recent FCC rulemaking and voluntary commitments.

During the quarter, TCS deployed Verizon SMS 9-1-1 systems to local jurisdiction in five states bringing the total to 14 states. Our Voice Over IP 9-1-1 network monitoring business continue to grow in the quarter as more network operators added VoIP over their fiber or cable networks.

During the fourth quarter, we signed three Voice over IP 9-1-1 deals and now serve more than 30% of U.S residential VoIP subscribers.

On average the Federal budget accounts for approximately 30% of state revenues making it the largest single source of money for many states. In 2014, we anticipate a renewal of demand for both Nextgen 9-1-1 call handling and ESINET or Emergency Services Internet solutions as funds from the Federal government began to flow down into state and local (customers) as a result of the end of sequestration.

TCS is currently preparing proposals for multiple state-wide ESINETs, following a year long period of few new state-wide RFPs. TCS's NENA i3 standards compliant ESINETs deployed across the population base of over 15 million people and plan 33% growth in its coverage in 2014. ESINET coverage now only provides us a recurring service revenue stream, but also positions us to offer our call handling system.

During the quarter we signed 9 Public Safety Answering Point call handling deals. FirstNet is a $7 billion Federally-funded initiative to build out a nationwide LTE broadband network to first responders. The broadband telecommunications opportunity program and state and local implementation grant program, our state and local level programs developed to support the planning and build out of broadband networks that will ultimately integrate with and become part of FirstNet. These two initial programs had grant installing $440 million.

TCS is starting all of these broadband public safety business opportunities positioning solutions from multiple TCS business units, including location platforms and applications such as workforce locator and vehicle location, satellite deployable communication system, Nextgen 9-1-1 and cyber security.

TCS has developed an extensive partner ecosystem; supplement our in-house solutions providing a compelling solution set for FirstNet and related programs. FirstNet is targeting contract award for the first three RFPs in the Q4 2014 timeframe.

TCS platforms and applications business unit continues to successfully redirect resources to customers beyond wireless carriers. The well-publicized restructuring of one of our device customer for navigation did not affect 2013 revenue, but led to changes in our plans for 2014.

We are aligning the commercial portfolio to be more operationally efficient and expect labor cost in 2014 to be significantly lower than in 2013. Our location-based platform revenue increased in 2013, including featured sales, upgrades and custom development for existing products and customers.

In early 2014, we'll complete development of the 4G features required to support 9-1-1 in Canada and build on our current carrier revenue by upgrading legacy platforms to 4G. We're seeing strong renewal activity and continued purchases of additional capacity from our customer base, as our existing worldwide platform transaction volumes more than doubled year-over-year.

Building upon our U.S. market leadership and messaging platforms, we have created an over-the-top enterprise focused messaging service called Cloud Messaging Center. We recently closed our first customer with deployment expected to complete in the second quarter.

TCS's suite of platforms and applications technology is differentiated by our software design architecture. We have developed and own software development kits that are designed with Application Programming Interfaces or APIs to efficiently incorporate valuable features and new solutions. These APIs which we developed over the years for messaging and location infrastructure and applications continue to prove to be smart investments as they position us well to collaborate with OEMs, device companies and others in the enablement of the Internet of things. This capability has resulted in new relationships with global technology leaders.

We have also used our APIs to develop a virtual tele-help application in conjunction with a healthcare organization. In 2014, we will launch VirtuMedics into the market serving positions and patience enabling access to the platform to hospitals, health clinics and other channels.

We have more than 30 monetization projects underway, involving assets from across our patent portfolio that may result in further sales, licensing, direct patent enforcements and third-party represented patent enforcement.

We continue to work with patent licensing and enforcement companies, agents, brokers and consultants, and now have 12 patent groups under enforcement action and 12 groups under review by interested companies for sale and/or licensing and several more in varying stages. Recall that, these activities generally involve two major components, the upfront consideration to TCS and the future royalties or payments resulting from enforcement.

We expect that in 2014 we will see more incomes, more income than the second component over IP monetization projects as the enforcement campaigns mature. Also, our activities to-date entails less than half of the portfolio. So, more projects continue to be initiated. Since 2008, our patent monetization program has generated more than $40 million of gross proceeds to TCS.

In the fourth quarter, the company filed 16 U.S. patent applications and was issued eight U.S. and five foreign patents. So we now have 349 issued patents worldwide and about 400 applications pending.

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

Thomas M. Brandt, Jr.

Thank you, Maurice. The details of the fourth quarter results are included in the press release, and they will be viewed in context by other model posted on our company's website.

As set forth in the press release, the company ended the year with about $125 million of total liquidity, about the same as last quarter, comprised of $30 million of unused bank credit availability, $33 million of undrawn, delayed draw term loan, and $62 million of cash and securities.

Our company's practice is to maintain at least $50 million of liquid balance sheet assets as reassurance to our target customers and partners around the world. Funds were generated in the quarter by $9 million of adjusted EBITDA, $6 million decrease in working capital and $2 million in capital lease borrow. Cash was used for $6 million of debt repayment, $4 million for capital expenditures and $5 million for cash interest taxes and other items.

During 2013, we substantially completed the refinancing of the $103 million of 2009 convertible notes coming due in 2014. Less than $15 million of the old notes remain outstanding at year-end.

Our year-end funded backlog was $288 million of which we expect to recognize about $158 million during the next 12 months. Our methodology for computing backlog is described in our press release in SEC filing.

As indicated in the press release for the quarter, we booked non-cash $32 million pre-tax impairment charge with goodwill and intangible assets of the company's platforms and applications supporting unit. After we adjusted projections for uncertainty, they developed late in 2013 as a significant cost. The platforms in apps unit is comprised of the re-organized asset addressing commercial markets other than public safety with wireless location base and messaging technology solution.

As a result of our impairment charges and other factors, Generally Accepted Accounting Principles require that we assess the need to reserve the value of our deferred tax assets. So, our fourth quarter's tax provision was a net $21 million charge comprised of the unusual $9 million tax benefit associated with the intangibles impairment offset by $30 million non-cash charge to fully reserve the year-end deferred tax assets.

Deferred tax assets represents expected future benefits from unused payoff net operating loss and R&D credit carry forwards, most of which don't expire till 2021 and later. Company will be able to reverse the tax reserve as we generate future taxable income, and the non-cash charges served to take risk out of the booked balance sheets.

Our company's investor relations practices to provide and update annual guide. For 2014, we expect total company revenue of $365 million to $375 million versus 2013's $362 million.

We expect government segment revenue to be about flat to 2013. It was a little thinner average margin from services. We are also guiding with commercial segment revenue, will be about flat to 2013. As public safety and platforms grow offsets lower expected applications revenue, and as the customer mix and business models for the platforms and applications unit continues to evolve.

We expect 2014 adjusted EBITDA of $34 million to $38 million versus 2013's $36 million. And we plan CapEx of $14 million to $16 million versus 2013's $19 million. So, operating cash flow should be up in 2014.

It's noteworthy that our business plan assumes that our software developers will be working on projects that entail about $5 million less spending that subject to capitalization as part of CapEx than in 2013. So that change in mix will push OpEx up and CapEx down by roughly that amount.

Non-cash charges in 2014 should total about $26 million down from 2013 $34 million before the impairment charge. And we expect cash interest, net of other income and expense to be about $8.5 million.

Our only cash income tax payments were for income taxes in 2013, and we collected some small refunds. Our goal in the 2014 was about $19 million of net or operating loss and $8 million of R&D credit carry forwards. So we do not expect to pay any material cash taxes in 2014. At year-end '13 upon applying the guideline for (inaudible) used to comply with the ASC 740 rules for tax accounting. We were obliged to fully reserve the $30 million deferred tax asset on the year-end book.

For 2014, our non-cash tax provisions will continue to be unusual, and we are using 25% overall effective tax rate on expected annual pre-tax income as we do our planning. So, expected adjusted net income for 2014 will be in the $10 million to $14 million range or $0.17 to $0.23 per diluted share using 60 million shares.

At this time, I will turn the call back to Maurice.

Maurice B. Tose

Thank you, Tom. We viewed our 2013 EBITDA and operating cash flows as the flow of a cycle, our third such cycle since going public. We thoughtfully re-examined all of our calls and priorities as we put the 2014 plan together.

We believe that the guidance comp summarized this evening is more conservative than the last few years. And there were some breaks in the timing of business for which we have prepared; we would raise the bar in the months to come.

We entered 2014 with a solid capital structure that enables us to reassure our global partners and TCS has the strength to pursue opportunities with quality, timeliness and reliability.

Our leadership addressing the public safety, Federal and commercial markets with TCS solutions is stronger than ever. We've taken risks. Some of which had paid off better than others, and we have learned from them all.

We believe we have built a company, whose value will be realized as we execute our plan for 2014 and beyond.

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

Question-and-Answer Session


Thank you, sir. (Operator Instructions) And our first question comes from the line of Mark Jordan with Noble Financial. Please go ahead.

Mark Jordan - Noble Financial

Good afternoon. Maurice, I guess you mentioned that the governmental services marketplace obviously in the fourth quarter hit a loss about 26.7 million. The sequential declines you mentioned was a result of declining overseas support activities. Where is the bottom in that group? In the fourth quarter, everything was going on with regards to domestic contract flow to find the bottom to that segment or do you see that showing further weakness opportunity as you continue to see you have declines in overseas activity?

Maurice B. Tose

Well, (part) I guess is in the commentary. One of the biggest issues that affected that I mean (part) was drawn down, but in the absolute number of FSRs, but was also the contracts that we had previously operated under in firm fixed price where we -- I guess many companies don't do well for a fixed price; we did extremely well for fixed price. And the government chose to do it under different cost structure, different contract. And as a result, we had at the beginnings of significant margin compression there. So we'll feel that margin compression in 2014 and the next starting in the first quarter.

Mark Jordan - Noble Financial

Okay. And from an absolute revenue stand point, is that segment bottoming or it should be stable moving forward?

Maurice B. Tose

It's going to go down some. But again, as I said, we're engaged with a lot of potential partners as we've established a significant pedigree in OCONUS support, not just in Iraq and Afghanistan, but other places that are post-deployed. And we believe in part our success in being selected as awardee on the WCIS contract or the WCIS BOA is in part due to our reputation that we've garnered for providing a high level of support in a very demanding environment. And again as noted, one our subs is a significant Tier 1 company that in fact had been a prime under one of the successor contracts. We think we've established our pedigree fairly strong or in a very strong way. And we believe it's going to boat us well in the years to come.

Mark Jordan - Noble Financial

Okay. Sort of a philosophical question here, over the last three years you have averaged operating expenses of about $136 million annually, supporting for desperate business groups. Do you feel that given the times that you've gone through that there is the opportunity or is there the interest to look at all the business operations and saying, are there all or some of them that don't have attractive return potential and there will be an opportunity to restructure the organization and take significant incremental, say, Op expense out of the organization?

Maurice B. Tose

Mark, we in fact continually do part of the reductions that we announced on the last call, and we undertook as a company in fact did just that. But it's something that it's not a static drill, it is an ongoing endeavor. As I've tried to bring out in the comments, we're experiencing a number of relationships or potential relationships with global technology leaders because of the position that we enjoy in the marketplace with our technology and our expertise.

And we are hopeful and believe that in the coming months, we'll be able to talk more lucidly with you in fact about them. But again, it's a constant process. We more and more have cross business unit opportunities that bring everything we do to the (poor). I mean cyber security is an example. Cyber security is in across the board -- across everything we do endeavor, now in -- as far as we can see. I would say into eternity, or as long as we're going to be breathing breathe on this planet. This morning there was an article about the GAO, I think it was the GAO looking at Nextgen 9-1-1 and cyber security and the vulnerabilities of which in all Internet world portends.

Again, as we -- again, to go back to your question, it's a continual process. It's not a static one. It's one at which we're always looking at. And 2013 was a very tough year, not just for us, but for the largest defense and aerospace companies on the planet. They were able to weather it in different fashion because they're much larger and they have the ability of different business units that were unrelated to their defense business being able to provide uplifts. We're not of that scale yet, but we're pressing on. And I believe that the value will be realized in the months to come.

Mark Jordan - Noble Financial

Okay. Final question from me, if I may, you mentioned your cyber training activities and the insight of that, could you scale it for us as to in that pure training activity how large a business is that on a quarterly basis or in the fourth quarter as you exit the year?

Maurice B. Tose

We choose not to break that out for a variety of reasons. And that it is a very competitive space. And the majority of our revenue in that is from the cyber security training.

Mark Jordan - Noble Financial

Okay. Thank you very much.

Maurice B. Tose

Thank you.


Thank you. Our next comes from the line of Mike Latimore with Northern Capital Markets, please go ahead.

Ryan MacDonald - Northern Capital Markets

Hi, this is Ryan MacDonald, I'm for Mike Latimore. First up, I mean so guidance was in the 365 to 375 for next year, but in the segments that you discussed more of each business being flattish each year. Obviously I mean which segment do you think is there some potential for upside there? And also I mean is there any patent-mark station, revenue fit into your guidance or is that just considered to be outside of the rate?

Maurice B. Tose

No. So right now again we're stepping back and trying to take a bit more of a conservative approach in having years past. And we see the potential for growth in all segments of the business. And we're engaged with large strategic global partners in just about all of those areas.

So we're starting off flat with, and we're putting in a bottom that we are looking to begin the acceleration upward in '14. We do have some IP monetization money in the budget, in our forecast. As we've said, we've been undertaking a number of efforts that go across the board in which again we have 12 -- again, in your market we have 12 patent groups or families that are under various stages of enforcement. Again, these actions take time. So we've been planting lots of seeds and we continue to plant more and more and more and we expect to harvest more this year than we have in the past given the numbers that have been out there in the timeframe in which the activities began.

Ryan MacDonald - Northern Capital Markets

Great. And then focusing a bit more on government, can you walk us through how that may might play out through as we go through the year now that there it seems to be a bit more clarity in terms of funding. I mean, do you think that that business can bounce back fairly quickly in first quarter or second quarter, or do you think the major -- more of that revenue from government and more of the upside comes in the back half of the year?

Maurice B. Tose

Yes. I'd say it comes -- first quarter, it's going to be ramping. It's more -- it can be interceded in the second quarter and the balance of the year. There are a number of exciting things that we are engaged in, that again, we hope to be able to report out before long.

Ryan MacDonald - Northern Capital Markets

Okay. And then just one final question, do you have kind of a timeline set out or any clarity on when you might be able to share your decision on that Eagle II forecast?

Maurice B. Tose

We believe that could be as far out as 90 days or thereabouts. I mean they could obviously do it sooner, but I'm trying to remember, I think there are some timeframes that normally put it out to as much as 90 days.

Ryan MacDonald - Northern Capital Markets

Got you. All right, thank you very much.

Maurice B. Tose

Thank you.


Thank you. (Operator Instructions) Our next question comes from the line of Chris Quilty with Raymond James. Please go ahead.

Chris Quilty – Raymond James

Good afternoon, guys. A question, I know you don't particularly give guidance in terms of your pipeline per se, but just trying to get a sense, if you could perhaps qualitatively tell us when you look at your pipeline of business today, both on the government commercial side versus where you stood last quarter or year ago, how you feel it shaping up? And secondarily, amongst the opportunities you are working on, how many of these things are opportunities that if one in the first half of the year could actually contribute for these longer term type of programs?

Thomas M. Brandt, Jr.

Yes. Chris, this is Thomas. I would say we are in a lot better position as we go into '14 than we were throughout most of '13 and went into '13. We've gone through this transition of WWSS, the GTACS, and the disruption of sequestration and budget (sale mix) built up a big backlog of (our caps) that Maurice mentioned in his remark.

We've been working as we've alluded to here, indirectly with some brand named big partners on business that we are optimistic we have come well enough along that it won't be too much longer before we can report progress in a meaningful way. And that's beyond the Lockheed Martin, Northrop Grumman, we've been talking about for a while which will take longer to actually payoff, but which has gotten a lot more visibility as we read about the need for low cost terminals in the AEHF arena. So in that respect, I think qualitatively, your question is a very good one and that we are in a much better position now, than six or 12 months ago.

And similarly on the commercial side, we've had some fits and starts with Nextgen as Maurice pointed out, state and local funding was installed because of the state locals depend as much -- depend heavily on Federal money in their budgets. And we're optimistic that what we're looking at as we go into '14 is a more ripened set of opportunities than 12 months ago.

And finally, all the seeds planted from our sides in the IP portfolio that the second stage go just by the cumulative efforts we've made and get projects started, increases the odds of a payoff in '14 over where we were (before years -- an extra's years work).

Maurice B. Tose

If I can add a couple of things there, one, we have talked on previous calls about program of record status being worked towards for both Tropo and for SNAP, which we believe long-term will benefit TCS and give us enhanced visibility, which we haven't had, when you can look into the program or palm funds for these programs.

Longer term went successful with the AEHF program, which again there was a good article in National Defense Industry Associate, NDIA, which spoke to the issue of these terminals costing 20 to 30 times, and terminals costing as much as $18 million and $6 million, where our terminal is a fraction of that. That article goes further to talk about the way DoD has done it in the past in which it's the installed pipes. It's been the vehicles launched and the integrators and then the terminals all being separate and being costly.

Well, for us they are the consorting which has the systems integrator and the manufacturer of the birds. Then the folks that put them in the air and that are responsible for the way it forms. So, we believe we are in good stead there, actually further out, but having a quality sponsor like AFSOC or the Air Force Special Operations Command is a good readout on that.

And then to the commercial segment, as try to as well speak to the historical significance of our history in messaging and location, we have lots of APIs that we have built, developed over the years that now in a modular (Lego) fashion approach to providing these to folks. We believe it gives us a position to play as more and more move towards the Internet of things as well as over-the-top or displaying in a mobile world, meaning reading, messaging and LBS capabilities that we are very well suited for.

Chris Quilty – Raymond James

Got you. And can you remind me more uses there? Are you equally sharing the development cost with your partners on that AEHF terminal?

Maurice B. Tose

I'm trying to remember how much of this we've shared, so I don't get -- I don't want to file them, but a part of this is they spent a significant amount of their own R&D dollars and then sought us out. They did competitions. They looked externally and internally and then looked at what we've done in our presence or position or market share and our mindshare and came to us.

And we've invested, but we have invested it nearly as much as they have.

Thomas M. Brandt, Jr.

We are continuing to chip in.

Maurice B. Tose


Chris Quilty – Raymond James

Got you. Tom, did you mention in this script that you plan on about $26 million of charges in '14?

Thomas M. Brandt, Jr.

Set up in '14, yes. You want to talk about non-cash overall?

Chris Quilty – Raymond James


Thomas M. Brandt, Jr.

Yes, that's what I said.

Chris Quilty – Raymond James

Okay. And is that related to further goodwill write-downs or --

Thomas M. Brandt, Jr.

No, that's just the regular amortization flow. That's the whole non-cash stock-based compensation, depreciation, amortization, of fixed assets and other intangibles.

Chris Quilty – Raymond James


Thomas M. Brandt, Jr.

And these are more write-downs? No, this is just last year absence. The non-recurring, that was 30 plus.

Chris Quilty – Raymond James

Got you.

Thomas M. Brandt, Jr.

So, the write-down brought the non-cash for '14, yes.

Chris Quilty – Raymond James

And just looking at sort of the sequential or quarterly progression throughout the year, is there anything I should be mindful of in terms of onetime events either cost-wise or -- I know, I can go back and look at my notes and models, but any big things, are we looking at kind of a clean year on comps?

Thomas M. Brandt, Jr.

Well, yes. There is the -- we're going to ramp up until we're right during the course of year. And with the fourth quarter of '13, I think we've hit the bottom as far as the revenue is concerned and we should overall be up from there. Maurice pointed out the services are going to take a little bit of a further haircut on the transition of the FSR business in the first quarter, but otherwise there is not much of volatility of the quarters as we breakdown the year.

Chris Quilty – Raymond James

Got you. All right, thank you very much gentlemen.

Thomas M. Brandt, Jr.

Thank you, Chris.

Maurice B. Tose

Thank you, Chris.


Thank you. Our next question comes from the line of Anya Shelekhin with Sidoti. Please go ahead.

Anya Shelekhin - Sidoti & Co.

Hi, just one question. I was wondering about sales and marketing and general and administrative costs for this past quarter, there were some reductions there. Could you provide some further detail on what those were? You mentioned labor cost and software development. Is there anything else?

Thomas M. Brandt, Jr.

Well, we reported in our last quarter that as adjusted to the changes in the outlook for government in the balance of '14 and also as we were rearranging or reorganizing the platforms in apps part of the company that we made the rightsizing adjustment that were predominantly labor. We made some changes to our employee benefits as well. But substantially all that cost that we're talking about comes out of the labor and (print) cost of the company.

Anya Shelekhin - Sidoti & Co.

Thanks, guys. That's it from me.


Thank you. And I'm showing no further questions in the queue at this time. I'd like to turn the call over to management for closing remarks.

Maurice B. Tose

This concludes our 2013 year-end investor call. We look forward to speaking with you again to discuss our progress and first quarter 2014 results.


Ladies and gentlemen, this does conclude our conference for today. Thank you for your participation. You may now disconnect.

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