TSYS

[David Randolph]

Analysis on May 11th, 2007:

TSYS's brief technical & fundamental analysis:

[David Randolph]

TSYS is another low volume stock, nothing happening here.

[David Randolph]

I've been studying information about TSYS for a few hours and now it is somewhat difficult to write, in not a lot of words, why I like this stock for the long term.

Here's what I'll do, I'll just write a few fundamental and technical topics and then I'll attach the full reports from analysts at the bottom of this post (the links are just above the final chart):

- TSYS is a $186 M market cap company, so it is a small cap. The company has been growing revenues nicely over the years, from $45 M in 1999 to $144 M in 2007. For 2008 analysts estimate revenues will be $170 M and $193 M in 2009. So the price to sales ratio is just a bit more than 1.

- Even though TSYS had this strong revenue growth, the company still lost money in every year between 1999 and 2007 (inclusive). This is why the Q1 2008 results, with GAAP EPS of $0.11, produced such a strong rally in TSYS shares:



- This profitability was mainly due to growth in text messaging. I believe the following paragraphs explain TSYS investment story reasonably well:

«Commercial Systems –Text Messaging Drives a Robust Quarter

Commercial Systems generated $10.7 million of revenue in Q1, which is up an impressive 167% sequentially and 57% YoY. This was well above our estimate of $9.0 million. Segment gross margin was 81%, which is up from 69% in Q4, and 79% in 1Q07. This was above our estimate of 77%. Commercial Systems is typically the smallest segment (though larger than Government Services in this quarter), but has the most profound impact on profitability given the high margins. Thus, given the strong revenue and margins, it is not surprising to see TCS' solid profitability overall. We believe the company continues to benefit from robust SMS growth in North America with customers such as Verizon Wireless, Alltel, and 30 other carriers. While CTIA indicated that text messaging grew 137% from 158 billion messages in 2006 to 363 billion messages in 2007, TCS' largest customer (Verizon Wireless) recently indicated 160% YoY growth. Management indicated the company delivered 25% of the 363 billion messages in 2007 and expects this market share to improve with two competitive displacement wins. We also believe this segment will benefit from the recent move by Verizon to raise its pay-per-use text messaging rate while introducing all-you-can eat messaging plans. More precisely, the increase of the pay-per-use text messaging rate should help Verizon to migrate casual SMS users towards messaging bundles, which should translate into higher messaging usage and spending. Ultimately this expected higher messaging volume could benefit TCS' Commercial Systems segment. In the past 12 months, an increasing number of U.S. carriers have migrated towards a flat-rate messaging pricing strategy, and we expect this to continue, which should play in favor of TCS. On the location front, we believe the uptake of LBS such as navigation is driving market awareness. Management announced several deals worldwide ranging from its infrastructure software to applications. Management also highlighted traction of 112 safety services in Europe, which has spurred infrastructure wins for the company in UK, Sweden, and Denmark.

Going forward, management indicated it sees a floor of $7.5 million in messaging revenue under existing contracts for Q2 and Q3. In addition, management believes a recent carrier win and revenue from LBS should layer on top of this. Given the magnitude of visibility. We are increasing our estimates for Commercial Systems revenue. We also expect margins to remain high in the 60-80% range. With text messaging growth following similar trends as Europe, we agree with management that there is several years of robust growth left.»

- Analysts expect Q2 2008 to be much weaker than Q1 (one expects EPS of $0.0 and the other $0.01 for the quarter), but in the 2nd half profitability will probably come back as they expect pro forma EPS of $0.45 in full year 2008 (and GAAP EPS of $0.45 in 2009). So TSYS is trading at roughly 10 times forward earnings.

- Overall, the investment idea is: TSYS has been around for a long time, but losing money (even though it didn't dilute shareholders value for four years now and it has been buying back some shares). However, its high margin business, which consists in selling software and text messaging capacity to wireless carriers, has now reached a size that it turned the company profitable. The SMS market is growing triple digits in the US and TSYS seems to be the right company to benefit from this trend. The stock's valuation doesn't seem to be pricing this growth appropriately, at least not yet.

- TSYS is a long term investment at start, as I know the story completely and truly like what I see, but I'll keep an open mind and may take a short term profit or loss. Due to several failures and missteps of the past my hands aren't as strong as they once were, specially with small caps.

The Trading Plan is:

Buy TSYS around the open for the Main Portfolio, 6.66% of capital as usual.

[David Randolph]

TSYS investment story is simple and I would like to make some more comments about it.

The company has 25% of the SMS market in the US, but its market share is growing and may reach 50% in 12 months. The SMS market itself is growing more than 100% a year and this growth is expected to continue for two more years and then grow 40% a year (this pattern is similar to what happened in Europe, which is a few years ahead of the US in terms of mobile phone usage (weird)).

So, in 2009, I see double market share and double market size, which translates into a quadrupling of 2008 revenues in this business segment for TSYS. This is a fat margin business for TSYS, so I expect it to have a very material impact in the company's bottom line.

Analysts expect $0.45 GAAP EPS for 2009, but I believe it can be a lot more than that. But even if they're right, TSYS is trading at just 10 times forward earnings, which I think is cheap given the growth rate of its more profitable business segment.

Another reason why I like TSYS so much is I believe the company is not only independent, but it can even benefit from an economic crisis. I don't know about you, but I find SMS a cheap alternative to making a phone call. If consumers are under financial stress, they'll probably adhere to one of those packages when one can send all SMS's he likes for a flat rate. This would mean more SMS's and of course, more need of capacity to send them. TSYS sells that capacity to mobile carriers.

It is possible that TSYS will consolidate the big upside day it had after earnings and that would mean a potential correction, maybe to the midpoint of the white candle (well, now I see that already happened yesterday). But 12 months from now I see TSYS significantly higher than the current share price and I'll keep on holding it.

[David Randolph]

My latest update says it all for TSYS. I'll just let the profits run.

[Ramsburg]

Update:

TSYS continues to rally, now testing the $5 psychological resistance level. The stock will probably consolidate the recent gains, even if no signal has been given so far.
The fundamental case is encouraging with TSYS trading at just 10 times frwrd earnings while the sector trades around 20. If current estimates are correct TSYS has a lot of room to go up on the long term.

Trading Plan:
Hold TSYS

[Ramsburg]

Update:

Despite the broad market behavior TSYS is holding this level quite well. Fundamentals are strong, and the stock has a lot of upside potential for the long term.
Even though, and given the current distance from its ascending support, TSYS may have to consolidate these recent gains, and this could mean a «little» correction to the $4.40/$4.50 area. So, we'll be setting a protective stop to lock profits a few cents below the last relative high, if we drop this position we'll probably be buying it near the support later on.

So the new trading plan is:

Trading Plan:
Hold TSYS with a stop @ $4.95

[Ramsburg]

Update:

Interesting news:
- TeleCommunication Systems, Inc. Set to Join Russell 3000 Index and Russell Global Index on June 27

TSYS has been holding quite well this upper trading range, I must confess that when I first set the stop @ $4.95 I was expecting a good chance of a re-test to the ascending support level... two weeks later TSYS keeps trading in the same range and our stop wasn't hit yet.
In the other hand, this ascending support level is not @ $4.40 anymore, it stands near $4.75, so I see no reason to keep this stop level at the same spot, since now we can take a support re-test movement with less risk (only 20 ticks below our current stop instead of 55 ticks like a few weeks ago). With that said, I will decrease our stop in order to also decrease our chances of being wiped out with normal stock volatility.

The new trading plan:

Trading Plan:
Hold TSYS with a stop @ $4.70

[Ramsburg]

TSYS was stopped @ $4.70 at the very end of yesterday's session.