For anyone interested I did some analysis today to to help me decide about further investment in TSYS going forward. Here is the link
I think your analysis is fundamentally flowed. The value of a company is not the present value of the future not the past.
TSYS has now 173 patents and 300+ patent applications as broken down in the most recent corporate presentation http://phx.corporate-ir.net/External.File?item=UGFyZW50SUQ9MTA3NTYxfENoaWxkSUQ9LTF8VHlwZT0z&t=1
As a result of its acquisition it qualifies to be a prime contractor. It now tracks bidding opportunities in the amount of $15 billion.
I has a significant markets share in LBS infrastructure a market that is growing 23% annually and has potential partnering opportunities globally.
SMS license sales will resume in 2012.
The upside lies in successful execution. We could wake up one day to a major contract win.
Bottom line: you can't look at it daily as the upside catalyst is unknown. All estimates reflect current business. which is what you are doing. Even based on just that the company is cheap.
How do you know the breakdown of commercial system revenue?
We all know that SMS made the lions share in the past and has fallen and location revenues have picked up in the last few quarters but I have never seen any breakdown from the company of the commercial system revenue.
If the first two quarters had any SMS revenue and we expect the SMS revenue to dry up in the future then that line of business will be dependent on location alone. It looks as fixed costs are about 3.5mm a quarter on the systems business and if you don't expect a pick up in the location revenues then at best we should only expect break even results for commercial system gross profit for the next several quarters.
I'm still betting that TSYS will see continued strong growth in the government service revenues in which the marginal gross profits have been near 50% for the past several quarters.
The company transformed in the past two years from a company in which growth came from commercial telecom to a company with growth on the government service and system sector.
Within he next 6 months we should know if TSYS will be an awardee on one or more of the government contracts 10-20billion each which will last for the next 10 years.
The final figures for the WWSS contract that TSYS has been operating under since its award in 2006 but best I can figure they won contracts worth about 20% of the $5 billion initial WWSS ceiling (ans only 3.5billion offered) with much of this still unfunded. They only have another 9 months or so for these wins to be funded as the contract runs out next August.
I believe that they have a high probability of being named an awardee on the new programs is because they were able to out bid and win such a large portion of the wwss program.
The breakdown of SMS license/maintenance in prior years was disclosed in pieces on several conference calls in 2010 in attempts to answer numerous Q's about commercial weakness, margin pressure and guidance reductions. I've also talked to TomB a couple times as follow up to confirm my conclusions. He naturally wouldn't provide any additional detail, but did mention he was impressed that I could pull together this much detail based upon his commentary. I'm pretty confident about the SMS revenue accuracy leading into this year.
The SMS for 2011 was guided to be none on licenses and normal growth on maintenance. The Jun call indirectly confirmed this when Tose commented in his overview about SMS as he specifically categorized the contribution from SMS as maintenace during this year.
They have indicated that they believe SMS license revenues will become a contributor in 2012 again. It appears that this would come primarily from the initiatives focused upon using SMS for government distribution of alerts from traffic to amber alerts to storm/disaster notification. There is a deadline of 4/2012 for implementation of these types systems by the Fed and they are working on a trial in Maryland. The FCC has also gotten involved with putting pressure on state governments to implement so looks like the trend is real though who knows how significant or soon the impact would be.
On the govt side, the WWSS contract vehicle of around $5b was set to expire this August and has been extended to next Aug as expected by the company. I haven't tracked the pct of dollars won, but as of the Sep-10 conference call they had won 53 contracts out of the 74 they had bid on.
Hard to know with the new contract vehicle how much of the work TSYS is qualified to bid on, but their winning pct is pretty impressive though likely also with pricing concessions to achieve it. As you mentioned the service margins for government business have been pretty solid growing from around 20% in C09 to 34% last quarter.
Hope that helps.
Marty, thanks for writing up the pros & cons of TSYS on SA and for your previous rational posts here on the message board. I've no position at the moment as I update my DD. I've been watching on and off for a year, after having missed the $3/shr last fall.
In your SA article you mention TSYS earned $0.12 in both 31Mar2011 and 30Jun2011 quarters. In the company 10-Q reports it shows $0.03 (diluted) for qtr end 30Jun and $0.04 (diluted) for 31Mar. How do you arrive at 12 cents/qtr?
Hi RJ..The numbers I'm using are comparable to how the analysts are now forecasting and measuring the company. For the past 3 yrs TomB has tried to sell the idea of EBITDA as a more appropriate approach which the street never adopted. They have come up with a different approach they call adjusted EPS. It's less advantageous than EBITDA in that depreciation of PPE, amortization of devel SW costs and the cash component of income taxes are not added back. They continue to add back the non-cash income taxes, amortization of acq'd intangibles and stock based comp expense. It makes a lot of sense as devel SW is monies spent and capitalized so adding back the amortization would mean they never get charged against earnings.
If you look at most web sites tracking earnings/forecasts you'll see they are still using the old method for C10, but have migrated to this approach for C11. It's pretty confusing as some press releases compared the GAAP number to the steet forecasted adj'd eps number and initially stated they missed.
Hope that helps. it's not GAAP but similar to many companies a more reasonable way to measure the company with all the amortization of capitalized costs that are noncash.