TCS reported revenues of $132.7 million and $487.4m, for the quarter and year ended December 31, 2012, respectively. The revenues included approximately $3 million for sale and licensing of patents, without which, they met street consensus for the quarter. Government revenues came in at $82.6 million or 62% of total. However, order flow during the quarter was soft resulting in a decline in government funded backlog of $31 million, to $93 million. With the backdrop of sequestration, the pending fiscal cliff and political issues, this represented a solid performance.
Commercial revenues totaled $50.1 million for the quarter, up about 4% from both prior year and prior quarter. However, this included the patent transactions which accounted for more than the total growth. During the conference call, the company commented that E911 growth offset declines from telecom provider navigation revenues.
Reported adjusted earnings were $0.20 per share, over 2x consensus expectations of $0.09. The patent transactions represented about $0.04 per share. Also contributing to the out-performance, was a sequential improvement in gross margin of 400 basis points and lower than anticipated operating expense.
The company provided their first look at 2013, guiding revenue expectations to a range of $450-$475 million. TCS guided earnings per share to a range of $0.25-$0.31 per share. TCS does not provide quarterly guidance. This guidance was below consensus street expectations, which served to mute the reaction to the December beat. This softening of expectations for 2013 was consistent with that seen by many companies in the defense sector.
Additional highlights worth noting
· The WWSS contract vehicle has been extended to march 2014. This vehicle has approximately $2 billion remaining. TCS has won over 40% of all task orders awarded under this contract vehicle.
· TCS was named as one of 8 awardees of the DISA 5-year, $ 2.6 billion CS2 contract.
· TCS was named as one of 20 awardees of the Army 5-year $10 billion GTACS contract.
· TCS was renewed under the GSA services contract. Historically this has provided approximately $50 million over a 5-year duration.
· TCS announced that the Blackberry 10 handset will include TCS navigation, maps, LBS and software components. This was structure with both recurring and non-recurring revenue components.
· The IP monetization that occurred in the December quarter is expected to continue and become a recurring revenue stream. Another opportunity has already been negotiated and is in due diligence.
Homeland Security Eagle II contract vehicle is now not expected to be announced until spring of 2013.
· The company early-retired $10 million of their convertible notes that become due in 2014. They announced they are evaluating option to retire the remainder, stating conditions were favorable and any impact on common shares should be modest.
· Goodwill and other intangible assets decreased sequentially.
There was much to like about the latest quarter and the outlook for the future. However, until sequestration and defense spending picture is clearer, TCS will likely not be fully rewarded for it. I view this as a trading stock rather than a long term hold. Volume is too low. The debt overhang is still too high. Reliance on the government sector is too significant. And, the outlook for the 1H of 2013 is soft per a recent conference presentation by the CFO. Once the order flow begins under the above-mentioned contract vehicles, this could rally hard given the current low valuation.
Disclosure: I am long TSYS.