TeleCommunication Systems, Inc. (TSYS) Write-up by Troy Marchand

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Business Summary: TeleCommunication Systems is a technology innovator in secure, highly reliable wireless communications.

Business Segments: Commercial (50% of Revenues), Government (50% of Revenues)

Rationale for Owning: On a sum-of-the-parts valuation, TeleCommunication Systems seems cheap with a hidden asset worth the entire current market cap.  The 9-1-1 business is very conservatively, right now, worth $200-300M, with significant opportunities to grow in the future. The 9-1-1 business makes up roughly one-third of the Company’s revenues.

Catalysts: Activists now have 2 seats on the board, and continue to push for corporate governance change/strategic review where a sale of the entire company is properly run process, possible firing of CEO. Growth in the 9-1-1 business continue to be huge, that segment could easily be gobbled up, as it generates 20-25% EBITDA margins, which would be ideal for PE or a competitor (Intrado, now West Corp). New director purchased 300k shares in the open market (Don Bell).

Valuation: Undervalued as a sum-of-the-parts play.

9-1-1 Business is capable of producing $25M in EBITDA in 2016, conservatively, and Intrado was bought at a 12x EV/EBITDA multiple, so placing a 10x multiple on that segment, it would be worth $250M or $4.15/share. More than the current market cap and only accounts for one-third of the revenue.  The other businesses generate positive EBITDA and are worth something, especially the cyber business for the Government.  The other businesses are capable of producing $20-25M in EBITDA as well, and applying a 5x EV/EBITDA multiple (ultra-conservative), would generate another $100M in value or $1.66/share.  Minus net debt of $1.36/share, for a total price of $4.45. We would argue that this valuation is conservative and ultimately the business could be purchased for greater than $5. Potential buyers would be PE, General Dynamics, or West Corp

Upside Target: $5 based on valuation above

Downside Scenario: $3, based on the value of 9-1-1 business, and applying zero value to the other segments (offset by debt)

Risks to our Rationale: Management continues to deteriorate shareholder value. 9-1-1 business does not grow or loses out potential contract wins to Intrado or General Dynamics.  The other business continues to remain weak.

Activists/Shareholders Involved: Becker Drapkin Management (6%), Dimensional Fund Advisors (6%), Cannell Capital (6%), Jon Kutler (5.5%)

A strategic review was announced by management on July 6, 2015. Click here to view the entire press release.

“No timetable has been set for TeleCommunication Systems's evaluation of strategic alternatives. TeleCommunication Systems does not expect to comment further or update the market with any additional information on this matter unless and until the Special Committee has approved a specific transaction or otherwise deems disclosure necessary or appropriate. There is no certainty that the review of strategic alternatives will result in TeleCommunication Systems pursuing a particular transaction or completing any such transaction.”

Disclosure:  This is not a solicitation or recommendation for the stocks mentioned in this article.  The writer manages Foundry Value Fund, LP, which does hold a position in the above mentioned security.  He has no obligation to update readers on changes and may buy or sell at any time without prior notice.

TeleCommunication Systems