Please Note: Blog posts are not selected, edited or screened by Seeking Alpha editors.

TSYS conference call follow up.

|Includes:TeleCommunication Systems, Inc. (TSYS)

After relistening to the conference call and updating my model for TeleCommunications Systems I thought I'd do a quick update on my last blog.  My general impression was that the call had a little better content than my first reaction.  They still have a long way to go to improve the quality of the calls and guidance but overall it had more positives than I originally thought.

The Sep-10 quarter met the consensus expectations for revenues and earnings per share.  Revenue mix was more favorable with commercial systems (LBS licenses and infrastructure) coming in higher while government systems were soft.  This should have helped the overall gross margin but the decline in government systems margins to only 6% made the overall impact negligible.  Management addressed the government systems margin in the Q&A portion of the call stating that it was primarily due to end of year pass through costs.  Tom Brandt the CFO stated he expected this to be somewhat better next quarter though not as bad as in Sept.  He stated that margins should improve after first of the year. 

Dec-10 guidance was reduced.  Tom provided range guidance for the CY-10 in revenues, tax provision, earnings, shares, non-cash charges and ebitda.   The guidance for revenues and earnings were below previous guidance so analysts have been busy revising their forecasts downward. 

The better news was that once the reaction to the guidance was out of the way I could listen to some of the content more carefully:
- The company now has almost 65% of their revenues in recurring service revenues.  These revenues have much more predictability and linearity going.
- LBS is continuing to be a big opportunity.  The Navbuilder inside strategy allows carriers to keep their relationship with the customer which is generating a lot of traction.  The strategy employed by Google and Nokia competes/eliminates the channel (wireless carriers) which is causing stress benefiting TSYS. 
- The government contract vehicle for WWSS was originally pegged not to exceed $5b for all subcontractors.  This contract has awarded $3.2b of this amount and while the remainder has an expiration date of next August, the company expects this to be extended or rolled into a new vehicle.    TSYS has had considerable success winning government business under this contract.  Of the 74 opportunities they have bid on, they have won an admirable 53 times.  This bodes well going forward as the company continues to track 30 major government opportunities that are sized in total at a multiple of the $5b. 
- While admitting that government defense spending in general will continue to be under pressure in C11, the company stated that SNAP and WPPL revenues which represent the largest portion of the company's defense business have ongoing funding and will be largely unaffected.
- Management repeatedly stated that they have set goals to achieve a minimum of 15-25% growth in revenue and ebitda for the long term. In the Q&A they did soften this by suggesting it could be through either organic or external methods. 

Despite a quarter that was clearly pressured to meet expectations, the company generated substantial cash.  Ebitda was approximately $17.5m or 17% of revenues. More importantly (to me) was free cash flow.  My method of measuring this company's cash generation is to take ebitda and subtract back out interest/other, purchased PPE and capitalized software development costs.  That resulted in $10.8m in free cash flow.  I measure that as a percentage of market cap and it came out to around 17% or about double the average over last few quarters.

It also is worth noting that they drew down $10m on their credit facility  Per management their interest rate on this debt is 4.5% which in this environment I view as a positive sign.  This additional cash and free cash flow allowed TSYS to increase their cash and equivalents to $112.8m up from $76.4 only six months ago. 

Finally, it is interesting to see the early forecasts from analysts (9) covering the company.  Predictably the Dec quarter is down across the board with all 9 analysts reducing their forecasts.  However, most are still upbeat about next year.  While 4 dropped their earnings marginally, 2 raised their with the rest standing pat.  Also it appears all raised their revenue growth projections based upon the conference call commentary.

Clearly everyone should do their own due diligence but my view is that the valuation should be based upon their ability to generate free cash flow predictably going forward.  My take is that the current valuation is less than 5x C11 free cash flow.  Not bad for a company going on record with a 15-25% growth objective. 

Stocks: TSYS