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Marty Chilberg
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I'm a retired CPA who spent the majority of his working career in technology companies. My work included management stints at Atari Inc, Daisy Systems Corp, Symantec Corp and Visio Corp. My last position at Visio (VSIO) was as CFO and VP Finance and Operations.
  • TeleCommunication Systems Inc: The Catalysts Of Volatility 3 comments
    Nov 8, 2012 9:31 AM | about stocks: TSYS

    With defense related companies are now heading into a choppy timeframe, with fear about sequestration and the fiscal cliff staring us in the face, it's worth looking back at what drove past TCS volatility. Following that, I'll highlight some potential catalysts to watch. I'm not trying to advise anyone to buy/sell but am just posting my reflections to both recall and assist others who may be starting to do their own due diligence.

    Recent history impacting stock performance.
    Acquisitions:
    - 2009 bought 2 companies in commercial segment: Location Logic and NetworksInMotion. They brought TCS location based services and navigation to complement the existing LBS platform group in San Diego. Shortly after buying NIM, Google came out with their free Google Maps and navigation. Despite company comments to the contrary, this turned out to be the key to much of the negative performance in 2011-12.
    - 2009 bought 2 companies in government segment: Sidereal and Solvern. They added Cyber Security and SatComm capabilities to the company. These appear to have been solid added pieces though they increase reliance on government contracts.
    - 2010 TCS bought Trident Space & Defense. Again appears to have been a solid add while increasing reliance on government. This group leveraged into international markets, rugged solid state drives, and now manages the IRIS (internet routing in space) which likely led to their selection in CS2.
    - 2012 TCS bought microDATA, which bridges the commercial/government segments. This is a strategic fit in the NG911/CMAS space which is a significant market opportunity for next 5 years.

    Earnings performance:
    The company has been abysmal at setting and meeting earnings expectations. Lots of factors appear to have driven this including:
    1) Poor financial leadership.
    2) Too many acquisitions stretched their ability to manage.
    3) Poor grasp of the SMS market which drove major revenue/profit declines in 2010-11.
    4) Poor grasp of the impact of free navigation and the ultimate erosion of paid subscriptions.
    5) They only provide annual guidance, which provides analysts little to go on for interim quarters.
    6) Government orders typically are concentrated in 2H of year and can be modified or moved by government fairly easily.
    7) Company didn't prioritize investment opportunities, choosing rather to invest in numerous diverse areas. This led to an inability or unwillingness to reduce spending to match reduced revenue streams.
    8) Management acknowledged EPS was not a priority as they "focused" on cash flow and revenue growth. Only one of several disconnects with shareholders. Another one that has alienated many investors is their recurring insider selling accompanied with significant annual replacement stock awards....despite poor performance.

    Stock performance:
    8/3/11 high $5.57
    8/18/11 low $3.55 (-36%) very bad macro market/TCS reduced forward guidance.
    10/27/11 high $4.03 (+14%) rally up to pending earnings announcement.
    12/15/11 low $2.10 (-48%) 10/27 conference call: Missed on revenue and earnings. Dropped CY-11 guidance.
    4/26/12 high $2.71 (+29%) rally up to pending earnings announcement.
    7/27/12 low $1.12 (-59%) 4/26 conference call: Missed on revenue and earnings . Goodwill w/o pre-announced. JP Morgan analyst (Cosner) commented that debt overhang is becoming a concern.
    9/6/12 high $2.24 (+100%) rally on business outlook. 8/31 JP Morgan analyst upgraded and expressed reduced concern over debt repayment in 2014. 9/5 awarded CS2 prime status
    10/25/12 low $1.69 (-25%). Market sold off into anticipated earnings.
    11/7/12 $2.32 (+37%). 10/25 conference call: Beat on revenues and earnings. Upbeat tone regarding outlook despite flat CY guidance.

    Last May while investors waited for the impact of the NIM goodwill writedown and with the stock selling off daily, I looked at the longer term prospects for TCS in an attempt to decide how to proceed. I posted the following nine catalysts which led me to buy. I've included an update to keep them current:
    1) QNX Car 2 rollout. UPDATE: I recently found a blog on a QNX site that they are expected to see cars with this platform in late 2013 or 2014. TCS has continued to invest by diverting some NIM resources to telematics.
    2) NG9-1-1. UPDATE: This item has become more compelling with the acquisition of microDATA. Latest company presentation states that 9-1-1 revenues were approximately 45% of commercial segment. Frost & Sullivan market segment report states that TCS now has 56% of market
    3) Latin America location based services with Telefonica. UPDATE on last conference call: This is proceeding as a soft launch.
    4) Mobile security market. TCS is investing heavily here. This bridges commercial and government sectors. See company website for products and services description. The company's back ground in secure communications along with these investments should begin to pay off in CY13. This market was estimated at around $700m in C11 (mostly antivirus) and is projected to double in C13 to over $1.4B. UPDATE: Company included Secure the Edge with certain LBS/SMS revenues to reach 23% of commercial segment revenues in last presentation.
    5) Cyber Security is an area of strength for TCS. The statement by Panetta that DoD will spend $3.2B in C12 on cyber security, shows how important this market is to the government segment. Commercial is a growing opportunity as well. UPDATE: Still appears to be a growth opportunity based upon many data points. Many hires/open job postings for cyber security including some contingent upon awards.
    6) Homeland Security project Eagle II is one of the pending capture opportunities that has been discussed for 2 years. It's well past the targeted award date and was hinted at being announced this quarter by Mr Tose. I'm not relying on this happening in this timeframe, but do believe it will be announced and that TCS has a high probability of receiving significant contracts. No UPDATE other than company statement that it is expected by CYE.
    7) The Army GTACS contract vehicle of an estimated $10B, is also likely to be announced soon. Hopefully TCS will be a significant awardee. UPDATE: TCS one of 20 vendors awarded prime status on 11/1. No funded contracts have been released to date.
    8) The WWSS contract vehicle was extended to Jul-13, and has an additional authorized $2B ceiling to be awarded. TCS has been very successful to date with WWSS awards. Even if they don't get any incremental awards, there is over $800m in options under previous WWSS awards that have yet to be funded or included in guidance. UPDATE: this was extended again to Mar-14.
    9) Licensing of IP will likely be another catalyst in C13. I'm not viewing this as a reason to invest but it should provide news that will be tradable. UPDATE: company stated on last conference call that 4 negotiations are ongoing, with 2 announcements expected by Y/E. Not necessarily license deals based upon wording.

    To that list I'll add the following additions as of today:
    10) FCSA CS2 wasn't reflected in this list. On 9/5 TCS was named as one of 8 prime vendors for this $2.6b 5yr contract vehicle. No contract awards have been released to date. The company indicated that they expected this to begin before CYE.
    11) Company has stated that they have signed one global handset manufacturer for a navigation/LBS bundle, and expect at least one more by Y/E. Timing of announcement and all details are controlled by partner.
    12) In Building Wireless is being mentioned as a growing opportunity. They mentioned a $12 million order for DoD medical facilities which was received.
    13) Low Cost Terminal (LCT) developed with Lockheed and Northrup was announced in Sep-12. This appears well suited for the growing need for mobile communications in a cost contained budget. I found an article that spoke glowingly about this product. It mentioned that this product would have to go through a thorough testing process by the government, which could take 1 year. Therefore this is considered a longer term upside possibility.
    14) Frost & Sullivan named the TCS Tropos 3T VSAT as their most innovative product. Mr Tose mentioned this product was dramatically less expensive than competition and he was optimistic that the upside was substantial.

    Disclosure: I am long TSYS.

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Comments (3)
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  • Author’s reply » Update: This was a bit of a fluff piece recently published from Deep Dive Intellingence:

     

    The first thing you notice in the foyer of the TeleCommunication Systems headquarters in Annapolis is the flat screen TV with red dots showing where people in the U.S. are making 9-1-1 calls on their cellphones.
    The locations are calculated with technology from TCS and other companies that provide Enhanced 9-1-1 services to Verizon, AT&T and other carriers. The display zooms in on one of the dots, and I’m a little spooked when I recognize the street name. It’s around the corner from my favorite Maryland fishing shop.
    Authentication tokens will ensure you're not being spied on when using TeleCommunication Systems' new app. Credit: TCS
    TCS operates at our society’s convergence of military, intelligence and civil technologies. One moment it’s helping 9-1-1 operators find wireless callers. The next it’s transmitting text messages for consumers – 900 billion in the past 12 months. It also runs an unclassified “Art of Exploitation” cyber training course, and it has big plans to win a place in the network protection business.
    TCS was founded in 1987 by Maurice B. Tosé. He’s an Annapolis-grad and Naval reserve officer who remains CEO, president and chairman. Tosé is African American and he started the company with the aid of section 8(a) of the Small Business Act. It gives an edge to minority-owned small companies for some federal contracts. TCS started out by providing satellite communications to special operations forces, but the company has diversified and grown to 1,400 employees. It does not plan to stop there.
    None of that is why TCS executives invited me here to their headquarters on the fourth floor of a brick office building in Annapolis. They want me to try the new secure wireless phone service they’re developing.
    TCS is one of the firms chasing a potentially lucrative line of business sparked by the National Security Agency. NSA has started a Mobility Program whose goal is to give government workers “the rich user experience of commercial technology” even when they’re engaged in secure communications.
    The underlying technology sounds hard to believe. NSA wants companies like TCS to figure out how to carve secure communications tunnels through commercial 3G and 4G networks using multiple encryption layers and authentication protocols. Government workers would download the apps onto phones of their choosing – or maybe their agency’s choosing – under an approach dubbed BYOD for Bring Your Own Device.
    TCS likes to point out that its version requires no extra hardware. Workers would simply download the app through one of the new government app stores now in the works.
    NSA has been testing the basic concept of secure mobility under a pilot project called Project Fish Bowl – the bowl being encryption and authentication, and the fish being government workers. NSA would judge the security of the services but individual agencies would do their own selecting.
    I don’t have good insight yet about whether Fish Bowl is gaining traction, but TCS sure acts like it is. The company has soaked up every nuance it can find in the series of “Mobility Capability Packages” NSA began publishing on its public website in February. These guidelines tell competitors like TCS how to structure their secure communications services.
    TCS expects NSA to release its last package before the end of the year, and hopes to start selling its service in 2013.
    For now, though, I’m intrigued to have one of their demo phones in my hand. It happens to be a Motorola but really it’s the app that matters. Across the conference room table, TCS’ Vineet Sachdev holds an identical phone.
    Sachdev is director of product marketing and management. He enters a password for me so that a TCS computer called the Security Broker can wirelessly verify it. The broker also generates the cryptographic keys that will scramble our voices on one end and de-encrypt them on the other. When Sachdev and I begin our conversation, a string of four authentication characters, called a token, appears on each of our screens. The first thing the participants in a secure call would do is read their tokens to each other. The characters are supposed to match. That’s how the system verifies that a Voice Over Internet Protocol call is not passing through a “man-in-the middle” computer, a device programmed to eavesdrop. Sachdev says he won’t reveal exactly how the authentication works, but in a nutshell, the two devices pass content between each, and this content would generate mismatching characters if it had passed through a third computer.
    After we verify that our tokens match, I touch confirm.
    Our voices are traveling over the Verizon consumer network, but the signals are disguised by the government’s Advanced Encryption Standard 256 algorithm.
    This was fun, but I wouldn’t dare try to weigh the security merits of the TCS system. That said, the phone looks and feels familiar. It’s easy to see why some people want this type of secure communications to be the future.

     

    Despite everything on their plate, TCS keeps on spending. Here's hoping that a few of these investments start paying off.
    9 Nov 2012, 07:51 PM Reply Like
  • what are your thoughts after the latest earnings release and projections for 2013?
    4 Feb 2013, 10:16 AM Reply Like
  • Author’s reply » Hi Steve-I listened to call and made some notes. Was hoping to read the 10K before updating, but that looks like its a month away based upon prior years. I'll try to get a blog post out in the next few days.
    4 Feb 2013, 12:48 PM Reply Like
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