TCS reported earnings yesterday after close that met guidance. This was substantially better than consensus expectations for two reasons:
- They have been a serial disappointer. That history likely led the street to forecast below the guidance range indicated by management.
- They provide annual guidance only. Management confirmed guidance for the CY despite the consensus beat, which translates to my conclusion that they met guidance and the Q3/Q4 mix was too heavily weighted on Q4 by the street.
As is the case with most companies trying to turn the corner after a sustained downturn, the conference call and financials represented a mixed bag, with much to be optimistic about, and some ongoing issues to watch. The valuation continues to be compelling for a value investor at around .4x EV/TTM revenues.
A quick analysis of the reported results and commentary on the conference call:
- Revenue growth overall was very good. This includes the impact of MicroDATA acquisition so it is not organic. Systems grew 59%. Services grew 7%.
- Government was 65% of total and was up 38%. Note that the low/no margin pass-thru government was up $15m Y/Y so excluding that, government grew 17% Y/Y.
- Commercial was 35% of total and grew 4% Y/Y (Note Jun-12 and mar-12 declined 14% and 12% respectively).
- Gross margins showed modest improvement.
- Operation expenses were up significantly though again this includes the impact of the acquisition. G&A growth was much higher than anticipated, likely caused by deal costs.
- GAAP earnings grew three-fold Y/Y to $4.2m.
- EBITDA was flat Y/Y and up 80% sequentially.
- Cash increased sequentially but was all from borrowing. FCF for quarter appears to be nil. This came as cash used for changes in operating assets and liabilities, matched the $15m in EBITDA cash generated. The largest component was an increase in receivables of $11m. This is worth watching going forward.
- The company reported increased capitalized Software Development costs of approx $4m sequentially. This is higher than normal. Increase could be from the incremental activities of microDATA or because they are spending more on R&D and capitalizing it. They 10Q should disclose how much they capitalized.
Management pointed out several business trends they were seeing that could provide incremental catalysts going forward:
- They are now tracking 31 major government opportunities looking out 5 years that have a combined extended opportunity of $146B.
- DHS Project Eagle II and GTAC are progressing, with one award imminent and the other expected by EOY.
- TCS was named one of 8 CS2 prime vendors. The company expects task orders to begin being released in late 2012. They compared this process to their involvement in WWSS which has so far resulted in $636m in funded orders and $733m in unfunded options.
- 2 new VoLTE contracts are being negotiated and expected to conclude in Q4-12.
- IP licensing/sale activities are progressing with 4 transactions being negotiated and 2 expected to be announced in Q4-12.
- The "global handset manufacturer" was mentioned again with no additional details other than stating it was "slated to be released in the coming months".
Overall the call and results were solid. The stock will likely rally off this report as their underperformance has caused many investors to sell into a release cycle.
I spent some time looking at the guidance vs the consensus. Since mgmt doesn't provide quarterly guidance, the best way to look at this quarterly beat is that the street didn't trust the guidance and didn't emphasize the Marine order that was a significant component of this quarter. Looking forward....
YTD revenue $354.7m. Midpt guidance CY $485m. Q4 guidance = $130.3m.
YTD adj'd EPS $0.21. Midpt guidance CY $0.36. Q4 guidance = $0.15
Compare that to Q4 consensus per yahoo:
Overall good news. Should mean that the consensus will stay pretty consistent on revenues but increase on earnings depending upon how much the analysts believe this confirmed guidance. Regardless, in the context of many companies missing and guiding down this quarter, TCS should trade well while we wait for some news in next few weeks on:
1) Global handset manufacturer
2) VoLTE contracts
3) Eagle II
5) IP monetization
Also listen for the commentary on the call about the debt. Mr Tose mentioned that they plan to deal with the debt well before the payment date. In Q&A he referred to 4 options that they were evaluating. This was excluded from the written transcript so you'll have to listen to the call to hear it. Resolving this uncertainly could become another catalyst but depends upon how shareholder friendly this resolution is.
Disclosure: I am long TSYS.