Dangerzone Ahead — Crowd trading in MTSL in the face of potentially bad news for MER Telemanagement Solutions

As it is the case for all postings in this blog, my standard disclaimers apply for this posting.  However, since this posting discusses investments, I urge you to review the disclaimers laid out in the About section with extra diligence.  Morever, even if you have already reviewed these disclaimers in the past, you need to review them again, as they are subject to change without notice.  Do it now, and remember that whatever I say in this blog posting is simply my opinion — it is not science, it is not advice, and it is not an attempt to make you act in any way whatsoever.

I have followed MER Telemanagement Solutions (Nasdaq: MTSL) for a long time — many years, in fact.   It is part of a basket of companies that I follow because I think they may — just may — yield a garage sales find (see my posting on MIND CTI if you don’t know what I mean by this.)

There are many reasons as to why I added MER Telemanagement Solutions to the basket, most of which I will not share in this posting, as they are not relevant to the issue at hand. Suffice it to say that I saw something in the company and its equity that I felt could, ultimately, result in the company’s equity appreciating considerably, and, so, I embarked on a multi-year journey, shadowing the company.

By way of background, MER Telemanagement Solutions is a technology company incorporated in 1995 and headquartered in Israel.   The company’s business is the supply of telecommunications expense management (TEM) and telecommunications billing solutions, and the company’s revenue path has been one of slow growth over the last decade or so, peaking at $11 million in annual revenues in fiscal year 2011, with net income swinging from a loss of $5.7 million in fiscal year 2007 to a gain of $500 thousand in fiscal year 2011.

In 2008 the company acquired AnchorPoint, a Massachusetts-based provider of TEM solutions, at a cost of approximately 25% of the outstanding shares of the MTSL equity.  Subsequently, the company was litigated by Asentinel, a competitor, as an extension of Asentinel’s suit against the former AnchorPoint.  The company settled in 2011, agreeing to making substantial lump payments to Asentinel and agreeing to a license agreement under which MTSL would be paying royalties to Asentinel going forward.   The litigation and the ensuing settlement had a notable drag-effect on the company’s results for fiscal year 2011 and the first quarter of fiscal year 2012.

The company’s primary customer is Simple Mobile, a U.S.-based mobile virtual network operator (MVNO,) for whom MER Telemanagement Solutions provides hosted billing services, and in fiscal year 2011 the contract with Simple Mobile accounted for more than 15% of the company’s revenues.  The agreement with Simple Mobile, which ran until the end of the year of 2011 was renewed at the end of 2011, providing guaranteed — to the extent that there is such a thing — revenues of $2.5 million for fiscal year 2012.

In the very early part of fiscal year 2012, on the tail-end of the litigation resolution and following the renewal of the contract with Simple Mobile, I was sufficiently interested that I took a small position — what I refer to as a sampler, sufficient to giving me a seat at the table, an outpost in no-man’s land, if you will, but not having any financial weight.  And then I waited, anticipating a slow appreciation over the fiscal year, possibly culminating with me taking a somewhat large position in the third or fourth quarter.

The Crowd Arrives

The crowd arrives

Reading the latest earnings announcement, released by the company on Thursday, August 17th, 2012, I noted with some interest that the company, to a large extent on, I belive, the strength of the contract with Simple Mobile and the closing-out of the litigation issue, recorded impressive gains in second quarter of fiscal year 2012, with revenues for the second quarter up 10% and operating profit up 170% year-over-year, earnings per share on a six-month basis up 110% year-over-year, and the business generating $1 million in the first six months of the fiscal year.

Generally, the company’s results were beginning to look really good providing it with a strong basis for growth if it could maximize the high revenues and margin and promotional value inherent in the Simple Mobile contract — if the company could keep up the pace and — as a minimum — defer a termination of the Simple Mobile contract to fiscal year 2013, achieving net income of $0.40 per share for fiscal year 2012, which, of course, would be excellent for a company that was trading in the $1.60 range in August.

I was expecting these results for the second quarter of fiscal year 2012 to provide some momentum for the MTSL equity, which had been trading at relative low volumes — well — forever, but the the market’s reaction on Friday morning is best described as being violent.    

The company announced its second quarter results on Thursday, after the close of the market, and on Friday the company’s shares soared at the open, opening at a price of $2.18 per share, up from $1.60 per share at the close on Thursday (a 36% gain), and peaking at $2.84 per share (a 111% gain), before settling down at $2.25 per share at the close of the market (a 41% gain day-over-day.)  Trading volume for the MTSL equity was 661,271 shares, compared to an average daily volume of 12,333 shares over the last three months and a trading volume of 0 — zero — on Thursday.

Another measure of the avalanche that hit the MTSL equity was that the associated Yahoo message board, normally exhibiting an activity level roughly equivalent to that of an Burmese restaurant located in a U.S. retirement community at 9:30 p.m. on Monday night, was inundated with postings, including the usual baloney stock-picking, news-letter, spam-casting services.  Altogether, more than 50 postings were made, which for the most part were complete drivel — a number that should be understood up in the light of the fact that the previous posting was made on June 21st, and the posting before then was made on February 15th.

So far, you would expect that I went out and cracked open a good bottle of wine — perhaps the 2009 Pinot Noir from the Oregon-based Elk Cove Winery that Jeff Altenburger sent to me recently — congratulating myself on having picked another winner ahead of — or in face of — the herd, if you will.  You would, however, be dead wrong.  In fact, rather than increasing my position on the basis of the excellent results announced on Thursday and the increased trading volume experienced on Friday, I ran for the exit as soon as I saw the stampede.  Here is why.

Haystack

The Needle in the Haystack — The essence of a prickly feeling

On May 21st, TracFone, another U.S. MVNO, owned by América Móvil, announced that it was acquiring Simple Mobile, and on June 19th, TracFone announced that it had completed its purchase of Simple Mobile.

Kaboom!

Something, undoubtedly, is going to happen with MER Telemanagement Solutions’ contract with Simple Mobile — either a marked expansion of its scope to include non-Simple Mobile TracFone subscribers or, much more likely, a termination on the back-end of an integration of the Simple Mobile operations into TracFone’s legacy billing and customer care system.    Simply put, the Simple Mobile contract, which, as I said, is a critical component of the 2012 fiscal year results for MER Telemanagement Solutions, could go away before the end of the 2012 fiscal year or in the early parts of next fiscal year.

On a side-note, in order to to learn about this piece of potentially critical information about MER Telemanagement Solutions, you would need to go through the process of first understanding that Simple Mobile was a critical customer for MER Telemanagement Solutions, which would require parsing the company’s filings and looking carefully at Simple Mobile’s business, and, recognizing the significance of Simple Mobile on MER Telemanagement Solutions’ past, current, and future financial results, you would have to follow Simple Mobile. In other words, this is an instance where it is insufficient in the area of stock-stalking to simply shadow the principal target, and, in fact, is necessary to shadow a number of companies with a tangential connection to the target — something that the vast majority of retail and institutional investors are not willing to do or, as it may be, capable of doing. This fact is precisely why a tenacious, educated, and knowledgeable retail-investor can outperform an institutional investor in spite of a lack of access to privileged information and a smaller purse — something that I plan to blog about — at length — in the future.

I had, of course, been watching MER Telemanagement Solutions as a hawk since May, trying to glean any insights about the Simple Mobile contract, since, in my opinion, if the company was to lose the contract, it would require significant operational excellence by the good folks at MER Telemanagement Solutions for the results to not incur a significant drag on earnings and revenues, and, conversely, if there was a chance that the scope of the contract would be expanded, then there would be a possibility that the company’s earnings and revenues would be significantly boosted.   Alas, the earnings announcement for the second quarter was silent on the issue of  the contract, and — astonishingly — on the change in the Simple Mobile ownership, which, of course, raise the usual questions about what exactly constitutes material information.

Having scoured the earnings release for pigeons and finding not even a dropping, I was, on Thursday evening, determined to continue my wait, but when the barbarians arrived at the city gates on Friday, in a heartbeat driving the per-share price for the MTSL equity well out of its fundamentals range, I gracefully slipped out the back-door, liquidating my position.

In my simple analysis, a per share price of $2.84 for MTSL, indicative of a capitalization of $12.7 million for MER Telemanagement Solutions, is a bit rich given the very real risk that the Simple Mobile contract will evaporate, wiping in excess of $2.5 million from the recurring revenue stream.     More  to the point, however, I do not believe that any reasonable number of the estimated 1,000 parties buying and selling the MTSL equity on Friday actually had any idea about the disposition of the Simple Mobile contract or — even worse — the faintest idea of what MER Telemanagement Solutions actually does — exhibiting exactly the sort of ignorance that is the core component in violent price-swings, including free-fall speed drops in per share pricing.

So, I am out with a nice little gain and with a new experience under my belt.   Had I been a trader, I would, of course, have kicked myself for not stepping up my position in May, when the first quarter earnings release came out, containing clear indications that the company’s results for , but, I am value investor — of some ilk — and the reality is that the value appreciation, which was by then just beginning to become visible through the fog of war, became questionable when TracFone made is announcement, and, so, the right move was to stand by and wait.

Waiting for the Crowd to Leave

The crowd leaves

I anticipate that the share price will move a bit up and down on Monday through Friday — possibly in spasmodic fits, and that over the next weeks, on the outside, some of the investors or traders now holding some subset of the, then more than on million freshly traded shares will discover the TracFone announcement and, adding two and two together, and getting four — heck, there have to be one or two of these people who can actually read and count beyond a third grade level — will quietly slip out the back-door, eventually — as they share their insight with the world, — cause a stampede for the emergency exit.   In fact, I would not be surprised if, in accordance with the law of reaction-overreaction that I have observed in the market, the per share price will eventually sink well below Thursday’s closing price of $1.6, yielding a nice opportunity to set up our outpost again —  this time at an even lower price and with the comfort of having already collected a nice purse — and wait for the Simple Mobile train to either come in or be derailed.  Either way, I am watching and waiting.

Link it forward:

Money, money, money….

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3 Comments on “Dangerzone Ahead — Crowd trading in MTSL in the face of potentially bad news for MER Telemanagement Solutions”

  1. […] my recent posting, I described in some detail the events leading up to a violent uptake in the per share price of […]

  2. […] results.  Exceptions have been polls in our postings related to MER Telemanagement Systems (here, here, and here,) which generated what I would characterize as fire-storms in the polls, but, […]

  3. […] have had three postings related to MER Telemanagement Systems on this blog (here, here, and here,) some of which has generated what I would characterize as fire-storms in our […]