This has been my all time most profitable trading stock of the last 12 years. A few months ago i built a subatantial position while the stock from just above 3 to 3.60. I sold most of my position just under 5 on the first major contract award. I wanted to rebuild the position on a pullback that never happened with the announcement of further contracts over the past few weeks. I was able to sell 6k after hours yesterday at 5.75-5.78 as soon as I seen the drop in 4q revenue and earnings forecast.
I was hoping for a better bounce this morning but it never materalised so I sold nearly my entire position prior to the close.
I took time to lay out the PROS and CONS for this company and the Cons won out.
1)the fortunes of TSYS have depended on SMS licenses for the past 4 years. Take a look at the financial model. When ever license sales were up earnings were up and whenever the sales came in below expectations the stock subsequently dropped. Early 2009 and early this year are prefect examples. This revenue stream has been falling for the past 2 years. The growth rate has declined and the rate for new licenses has come down. I believe that one of the past calls indicated that the cost of a license has come down at a 40% annual rate. Their largest custmer has already purchased the minimum annual license requirement for this year and revenues will bee very light in the 4th quarter.
2)LBS market is just starting to bear some fruit but it is still lumpy and the growth that we have been expecting has taken much longer than expected. For the past 3-4 years revenues for this product have been just arount the corner.
3) Service margins (commercial) have been falling steadily all year. Once again look at the financial model. One of the things portfolio managers want to see is rising sales and rising margins (economies of scale).
4) systems margins for govt have dissapeared. 6% is a joke. I can't believe that analysrt on the conference call didn't press management on this issue. One pethetic answer was that margins will only be slightly better next quarter and get back to a normal low teens in the following year.
5)Management wants to see growth in EBITA, SALES, and last profit. This seems backwards to me.
6) does anyone on this board NOT think that all government spending will be under pressure next year. Will these contracts be pushed out another year?
7)nokia entering the market
8)much of the revenue from many of these contract wins may never be funded.
I still believe that TSYS can have some great appreciation once the LBS starts to ramp up.
They are getting a more diversified covernmenrt contract base with the most recent award and the cyber security contract also provides another source of revenue.
Quarterly sales of 100mm+ and a balance sheet of 500MM may make the company eligible for purchase by mid cap funds once they get their margins to turn around.
All in ALL i believe that the declining SMS revenue AND PROFITS and the declining services gross margins will keep this company under pressure until next year. I don't like the markets in general and believe that this stock could drift back toward 3.60-80 in the next several weeks.
Look at the trading pattern of this stock over the last several quarters. It has a run just prior to earnings then a gap down and then a drift for the next week or two. I like the long run story for this company but if you arn't nimble and trade the stock you may just ride the rolercoster up and down and get off where you started several years ago.
Hi ed, Thanks for a thoughtful post. First off congrats on a great trade! Sounds like you had a very nice ROI and it's never a bad thing to take profits, especially on a stock that has behaved like TSYS has. My reactions to your points follows:
1) SMS licensing has indeed been a major drag this year. However this is almost all behind us. The $40m C10 SMS revenues is 50% maintenance(growing still) and half licenses. The $20m in licensing this year is down from around $35-40m last year and with it's high (80%?) variable margin it has really hurt profits this year as well. For C11 they are telegraphing this as flat so no drag but no return to yesteryear. 4th qtr light as forecast is likely.
2) LBS is lumpy but not surprising given the economic backdrop. Spending on infrastructure is required and with carriers all under profit constraints they are trying to balance their profits as well. The last 3-4 yrs didn't anticipate the economic cliff we jumped off so if you believe we are starting a recovery this should benefit next year as well. Advertising though will likely take more time to evolve.
3) Economies of scale don't really exist in most service based businesses. The vast majority of the recent decline in margin here was porting of products to work with new handsets and w/o's regarding cap costs and acquisition integration. I don't see this erosion continuing next year but I've been wrong before.
4) This and next quarter govt margins are a joke. Pricing has been an issue for sure but I suspect there is some clean up going on that they want to close out this year. Might as well get it behind them going into C11 but something we all need to watch.
5) I don't agree here given the debt situation. EBITDA is really cash flow and they need to maximize cash flow to pay off the debt. Revenue growth goes hand in glove with that stmt. EPS growth unfortunately comes in last because it's weighed down with w/o's and noncash charges.
6-8) Govt spending will be under pressure but these products will likely not. Communications and cyber security are critical needs that can't be ignored and without which the productivity of deployment would decline. The PR value (potential value) of the announced contracts may very well not be fully realized so we should focus on funded backlog and funding progress.
So in summary I can't disagree that there are concerns but where we differ is that I think this is baked into the cake and that the company is at or close to the bottom of this SMS cycle. Upturn looks less significant that we hoped but it doesn't seem to forecast a drop in value to the range you are suggesting.
Anyway just my 2 cents. Good luck and look forward to hearing you are back in the fold!
"does anyone on this board NOT think that all government spending will be under pressure next year".....yea, but not for communication expenditures that save dollars by cutting manpower needs.
Certainly, the experience of this year, with gov't contract releases being delayed and seemingly timed to the beginning of each new quarter, tells you spending commitments are being restrained by DOD. No reason to believe this will change in terms of second guessing every expenditure. The question is will hardware expenditures be really cut or just delayed until Gates retires and the Republican House, supposedly strong on defense, controls the budget. In terms of communicating with boots on the ground that is going forward, along with addressing cyper security threats. Can't really answer with any authority your question but inclined to think software-related funding will fare better.
In the Q&A on the Q2 cc Tose said he was quite comfortable with SMS revenue at $41mm, down from $54mm in Cal.'09, off 24%, not 40%. The 3rd qtr 6% margin you refer to relates to Gov't systems, where they have been ramping up hiring for the contracts which just began to be released in October. With the VZ iPhone coming in early 1st Qtr and Apple users having historically been heavier users of applications(service for TSYS) and gov't systems orders and revenues ramping upward, I think there is considerable room for margin improvement before considering tighter overhead control. I suspect pretax could grow at least 2X the growth of revenues next year. This has been a disappointing year in terms of the implosion of sms systems business, stretchouts in gov't work and deferment of VZ iPhone to 1st qtr next year. Mgt could have done a better job along the way but lets not forget that they are in the center of a very dynamic market, directly/indirectly tied to the best players and are moving into high growth markets like cyper security. Each to their own on the stock market outlook but I think when investors carefully review where the company stands, the outlook is for the stock to move towards $6 rather than under $4.
Why sell on a friday along with the rest of the market? I believe a lot of the selling was merely profit taking. That was seen across all stocks, if not most. If you're going to sell do so when the market is green. The government will never cut spending on communication technology. NEVER! How do you win wars without it?