MER Telemanagement Solutions — Back into the trenchesPosted: October 30, 2012
This posting discusses investments. If you came here because you are interested in the Great War and trench warfare, you might want to read another posting by me (here.) Otherwise read on….
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Undaunted by these firestorms, we now revisit MER Telemanagement Solutions and its equity, MTSL.
By way of background, you should read this posting, in which I pointed out that a speculative tsunami had hit the equity on the tail-end of some good results that were announced in the company’s filings for its second quarter of the 2012 fiscal year.
Some of the reasons why I classified what went on with the MTSL equity as speculation were detailed in this posting.
Another strongly contributing reason for the classification was the fact that the company’s results were predicated on a yearly service contract with Simple Mobile, a United States based MVNO, and that this contract may be in jeopardy because Simple Mobile has been acquired by another, larger MVNO — a fact that the majority of the investors that took positions in the company were unaware of.
Since my last posting there has been a number of developments, some good, some bad….
Extension of the Simple Mobile managed service contract
On the good side, the company announced on October 15th that it had extended its contract with Simple Mobile for another year, perhaps expanding the contract scope and certainly expanding the revenue value significantly, from $2.5 million dollars to $3.6 million dollars. In the announcement, the CEO said:
“This customer contract extension, which provides for minimum total revenues of $3.6 million through the end of 2013, is a result of our commitment to our customers to provide flexible and scalable solutions that can grow and adapt to their changing business requirements in a highly competitive marketplace.”
However, although the announcement language around the contract renewal is quite clear when it comes to the $3.6 million as an amount, it is quite ambiguous as to what this amount represents.
The statement that “… the customer contract extension … provides for minimum total revenues of $3.6 million through the end of 2013” can be read in a number of ways since it does not say what the period of performance is (is the $3.6 million, for instance for the calendar year 2013 or for the calendar year 2013 plus some balance of calendar year 2012, superseding the 2012 contract,) what services are included (does the $3.6 million, for instance, include a termination fee and fees for some termination consultancy services related to a migration of Simple Mobile’s data of the MER Telemanagement Solutions supplied MVNO platform,) and what form for guarantee underlies the provision for minimum total revenues of $3.6 million.
Even if the true 2013 revenues for the Simple Mobile contract are frozen at $2.5 million, however, this must be considered a plus when compared to the alternative, that the contract was not renewed and migration of the MER Telemanagement Solutions provided platform occurred in 2012 or 2013. Don’t get me wrong. I can see a lot of possibilities for the contract with Simple Mobile to evaporate in the future, a very bad event for MER Telemanagement Solutions, but, if the company’s assurance about the revenues is meaningful, it amounts to an assurance, and, therefore, at least the impact will not be felt before 2014, which is a lot better than if it was felt in 2013.
Ambiguity in communicating with its shareholders is nothing new for MER Telemanagement Solutions and leads us directly to the second point.
Announcement of what is perhaps not a new deal
In its press release announcing the results for the second quarter of fiscal year 2012 and looking back at its historic performance the CEO said:
“Our second quarter results represent continued improvements in our financial results and indicators as a result of our efforts to develop our Telecom Expense Management opportunities through partners, new customer acquisitions and expanding our existing customer base … In addition, our company’s Billing and Mobile Virtual Network Operator (MVNO) activity as a managed service has grown and we were able to sign an additional managed service agreement with a new MVNO in the U.S. and we see other opportunities in this market.”
The last sentence implies, I think, that there is another customer in the United States for the company’s MVNO service offering. Certainly, this appear to be the understanding that some investors in MTSL have after having read the announcement, and, as recently as today, Paul, a frequent contributor on Seeking Alpha, confirmed that this was his understanding, writing:
The CEO mentions three items: First is that their efforts to grow are bearing fruit. Second they signed a new customer (I will come back to this). Lastly, the CEO looks forward to improving top and bottom line performance. This last statement confirms that management is focused and believes they are in growth mode going forward.
In the Seeking Alpha posting, Paul goes on to classify the MTSL as being significantly undervalued at its current per share price of $2.50.
My issue is that I have seen nothing that confirms that a second deal had actually been won (there has been not announcements to that effect,) and, in fact, I believe — until corrected by the company in one form or another — that the CEO in its statement was referring simply to the fiscal year 2012 Simple Mobile contract, not a new contract with a new customer. If the company had signed a new customer, I think the CEO’s sentence should have read “we were able to sign a managed service agreement with a new customer in the U.S.” rather than we were able to sign an additional managed service agreement with a new MVNO in the U.S.”
The difference between the meaning behind these two sentences is enormous, of course, and since, clearly, as illustrated by Paul on Seeking Alpha, investment opinions are being formed and expressed on the basis of the understanding that the announcement means that there is a new contract with a new customer in play — presumably as large and profitable as the contract with Simple Mobile — then the difference is material.
Interestingly, it appears that one poster on the message board for Yahoo Finance had written to the company seeking clarification respect to this ambiguity (I say “it appears” because with posters on Yahoo Finance’s message boards, you never really know what is true and what is not,) and had received an answer from Alon Mualem, the company’s Chief Financial Officer, which the poster interpreted as being a confirmation that the company had, indeed, secured a new managed services contract with a new MVNO customer in the United States. Unfortunately, however, the actual response appear to have been — and I quote:
From: Alon Mualem
Subject: RE: MTSL Shareholder
Date: Thursday, August 30, 2012, 7:22 AM
In our Q2 financial PR we notified that we were able to sign an additional managed service agreement with a new MVNO in the U.S. and we see other opportunities in this market.
The core of this message, of course, is not an answer to the question, but, rather, a verbatim rehashing of the text that created the ambiguity in the first place.
If there is a new customer with a scope like that of Simple Mobile, then that would be a really big deal for MER Telemanagement Solutions and its shareholders. For now, we simply don’t know anything except that the company is not a shining example when it comes to communicating clearly with its investors.
So good or bad news? You tell me. Certainly, if the Yahoo poster was truthful, it is interesting that the company did not take the opportunity to eliminate the ambiguity when asked.
Certainty and taxes
On the definitely bad side, the company announced on October 24th that it had lost its appeal of a tax ruling of the Israeli tax authorities that was issued with respect to the 1997 to 1999 period.
The issue at hand has been brewing since, I think, 2000, when the company received a claim from the Israeli tax authorities for approximately 6 million Israeli Shrekel, equivalent to approximately $1.57 million at today’s exchange rates, a significant sum by any measure. The company’s response was to appeal the matter and to create a contingent liability for those portions of the claim that MER Telemangement Solutions thought that it may not prevail on in the appeal.
|Note: A contingent liability is a potential liability, which, in a nutshell, is depending on a future event occurring or not occurring. In accounting, a contingent liability and the related contingent loss are normally recorded with a journal entry only if the contingency is probable and the amount can be estimated. If a contingent liability is possible, but not probable, or if the amount cannot be estimated, a disclosure is required, but a journal entry is not required. If a contingent liability is remote, then neither a journal nor a disclosure is required.|
Now, more than a decade later, the claims brought by the company in the appeal were partly accepted and partly rejected, but the net-out is that the company lost its appeal and, as a consequence, apparently will have to immediately increase the provision already made for the tax exposure in its financial statements and, ultimately, once it receives the final assessment from the tax authorities as to the amount that is due, promote the contingent liability to a current liability, perhaps adjusting it further, and pay the assessment from the company’s cash.
The first step is in the works, with the company and its tax counsel working to determine the financial impact of the ruling, which should be included in the company’s upcoming financial statement for the third quarter of the fiscal year 2012.
At this stage all we know is that original demand by the tax authorities was for $1.57 million or so and that the recorded contingent liability is $632 thousand or so. It is not, for instance, clear if the upwards adjustment will be on a partial amount of the original “naked” $1.57 million demand, or if some allowance will need to be made for interest and penalties (after all, a decade or so have passed.) Also, it is not clear if the company will have to — from a cash perspective — pay the entire assessment, can make an offer in compromise, or can offset the assessment against some of the tax loss that it has accrued over the decade.
Whatever the company has to eventually pay the Israeli tax authorities will presumably hit the cash balance, which in 2011 was $4.2 million, perhaps draining 25% or more of this balance, which would be quite a hit.
Clearly, this is a really bad news, adversely impacting the balance sheet and results in third quarter of this fiscal year, and adversely impacting balance sheet, cash position, and results in the future.
What does it all mean
What makes MER Telemanagement Solutions and its equity MTSL so interesting to me is primarily the huge amount of uncertainty around the company and its equity, partly caused by the company’s lack of clarity and transparency in its communication, and the fact that investors and traders appears to completely lack an understanding of or interest in this uncertainty.
Certainly, from the standpoint of a conservative investor, before any investment can be made in the company’s equity, the company needs to address what is going to happen with the Simple Mobile contract in the future, whether or not a new contract has been won with a new MVNO in the United States, and what the tangible impact is of the tax ruling.
I plan to write more about the significance of clarity and transparency in communications with investors in a future posting with the — working — title “Best Practices for Investor Relations.” Stay tuned!
Money, money, money….
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