MER Telemanagement does it againPosted: August 15, 2013
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It’s déjà vu all over again
— Yogi Berra
MER Telemanagement Solutions is an Israel based company that I have written extensively about, primarily related to a speculative craze that played out around the company’s equity in late 2012 and early 2013, ending with a tremendous crash with the per share price of MTSL, the company’s equity, dropping from $5.11 to $1.56 in a very short time period, leaving a number of shareholders stranded with equity positions that were under water.
I won’t get into details (if you want the details, read the previous postings, starting here and working your way backwards,) but for a while I have considered MER Telemanagement Solutions and MTSL as a significant value opportunity.
The value opportunity has arisen because the company, which currently has excellent fundamentals, including zero debt, strong cash flow, positive net income, and strong revenues, is facing a situation where it, in 2014, will lose a key contract with Simple Mobile, a United States based Mobile Virtual Network Operator (MVNO), that currently provides for more than $3 million of high-margin revenues, representing a full 25% of the company’s total revenues and probably the bulk of its profitability.
MER Telemanagement Solutions and the market are, of course, fully aware of the situation that the company is in, and, as it should, the market has factored the future revenue loss into the current per share price.
As usual, however, the market has gone one step — or rather 100 steps — too far in its correction, and the current per share price now provides for a market capitalization of $9 million, or so, for MER Telemanagement Solutions, for a P/E ratio of 6. Since the company holds cash and marketable securities of $5.6 million, or so, the market is effectively valuing the company’s ongoing operations at approximately $3.4 million.
A swinging bunt
The earnings results for the first quarter of the company’s fiscal year 2013 were, by any objective measure, excellent, but the company’s presentation of these results (the messaging, if you will) was poor, causing the market to react negatively (something that I wrote extensively about here.)
Put squarely, the company’s first quarter earnings announcement was a disaster, attempting to dance around the subject that was on every investor’s mind: What specific steps the company would take to maintain profitability in 2014.
The math is, of course, childishly simple… At $300 thousand, or so, revenue contribution per month from Simple Mobile, with net income of $300 thousand per quarter for the company in 2013, and assuming a margin on Simple Mobile related work of 30% or higher, 2014 is clearly shaping up to be a year defined by quarters painted in red ink.
In fact, ever since the termination of the Simple Mobile contract was announced it has been clear that the company, which I hasten to say has serious potential for greatness, is heading directly for exsanguination.
To avoid death, immediate action is needed on two simultaneous fronts: New sales and cost control.
The instinct in a tech company is to overcome a revenue crisis by bringing in new revenues. However, given the sales cycle time for enterprise software sales and the trailing revenue curves for managed services sales, the company’s areas of expertise, the pursuit of additional revenues alone is not going to solve the problem. Rather, the company has to immediately reduce its expenses while, at the same time, building up its sales effort.
Instead of addressing the situation heads-on in its first quarter earnings announcement, the company engaged in some sort of combined danse macabre and tap dance, which I certainly did not find reassuring. As I wrote in an earlier posting:
With respect to the expenses, the underlying question is clearly how the company will manage in the post-Simple Mobile world. This is, of course, a question of cost-control, shaving the company to a size that is appropriate as soon as possible and preferably before the Simple Mobile contract’s effective end-date. The question is dealt with in the earnings press-release, but, unfortunately, this is done in an opaque, almost, shy way, with the CEO stating that the company is: “.. closely monitoring our operating expenses and … will make the necessary adjustments based on the business needs and changes…”
I live in the Washington, D.C. area, the epicenter of political fluff, so I recognize a non-answer when it is provided. And so, of course, did the market, which promptly ran for the hills, causing a significant drop in the per share price.
A checked swing
OK. Mistakes happens. So, you fire your investor relations advisers and move on, taking the opportunity to, in your next press release, put forward a detailed plan for how you will grow revenues and reduce costs. Right?
Not really… Today the company released its earnings release for the second quarter of its 2013 fiscal year, and, believe it or not, it did it again.
From a purely living-in-the-moment, the second quarter was excellent with continued positive net income, strong cash-flow, and the addition of $1.3 million in cash and marketable securities since the beginning of the year.
But the issue at hand is not the current earnings — or, for the matter the earnings in 2013, and, so, everyone eagerly skipped past the details of the earnings for second quarter, looking for the plan that would save the company from going over the cliff in 2014.
And here is what they found: Nothing…. And I do mean nothing… Zero… Zilch… Nada.
OK, I am being unfair. The company did write:
We are seeing other opportunities in the TEM, MVNE and Mobile Money markets and are working diligently to convert these opportunities into new contracts
That is it? That’s the plan? Working hard and hoping to win a new deal? Well, in terms of a plan, that amounts to nothing. As I like to say: Hope is not a strategy.
What is going on? Who is drafting these catastrophically void earnings announcements? I mean, once may be a mistake, but twice? I don’t know, but the term clueless comes to mind, and I am not thinking of the cute movie with Alicia Silverstone.
Well, if nothing else, the market knows what to do when faced with cluelessness, and, so, the per share price of MTSL immediately dropped 20%, and after some life-support from God knows who, it finished the day 11.5% down.
Just for the record, it is not like the looming situation is some sort of secret buried deep inside a bunker in the Sinai desert and guarded by trained killers from Mossad. In fact, the company referenced the issue in its 10-K filing for the 2013 fiscal year:
Our first MVNO customer, Simple Mobile, is a U.S.-based MVNO for whom we provide MVNE services. In 2010, 2011 and 2012, sales attributable to Simple Mobile accounted for approximately 3.6%, 16.4% and 22.8% of our revenues, respectively, and are expected to account for a greater percentage of our revenues in 2013. During 2012, Simple Mobile was acquired by TracFone and we were recently advised that they intend to migrate the hosted billing services onto their own platform. If we are unable to offset the loss in revenues our operating results and financial condition will be adversely affected.
So I don’t get it. Last time I checked, Israel was one of the most hardcore capitalistic countries on the planet. Have things changed? If not, why is it that the management and Board of Directors of MER Telemanagement Solutions appear constitutionally unable to do the very simple things that are guaranteed to ensure profitability and grow the per share price in a sustainable manner?
Now, this is serious stuff, so, let’s take a deep breath and try again: The revenue-cost equation at MER Telemanagement in the post-Simple Mobile world is clearly going to be out of balance, causing massive hemorrhaging of cash.
Something needs to be done, and doing nothing is not doing something.
With this being the second earnings release to be categorically rejected by the market, I assume that the management and Board of Directors of MER Telemanagement Solutions is getting the point. Clearly, the market wants to see a plan and it is not going to accept any excuses.
There is only four and a half month left of the Simple Mobile contract, so the company needs to act now. With With $5.6 million in the bank and heading for net income of $1.3 million in 2013, there is simply too much value to squander away by thumb twiddling.
Until the company does something or, in the absence of the company doing something, until first quarter of 2014 emerges with a vengeance, MTSL continues to be a bargain extraordinaire. As I have said before, the company’s cash position, offering, and tenacity provides its management and Board of Directors with the unique opportunity to create what is possibly be the rarest of gems among tech companies: A company that grows while consistently maintaining profitability.
I, for one, can’t wait to see what they are going to do next.
In the morning of October 15th, 2013, this blog posting began receiving a large number of hits from the Israeli investment blog of Mr. Rose Ido (here,) where a reader had provided a link to the posting, commenting that it provided an explanation of why MER Telemanagement Solutions was undervalued at the current per share price of MTSL.
I welcome readers from Mr. Ido’s blog and I urge them to enjoy my blog and, if possible, support my blog through subscriptions on Twitter and financial contributions, but I also am compelled to emphasize that while I believe that there is explosive opportunity in MER Telemanagement Solutions and MTSL, this belief is mine and, as it is the case with any belief, this belief may be erroneous (after all it used to be a commonly held view that the world was flat.) Moreover, my belief that an opportunity exists is anchored in a number of assumptions, which mostly are unstated and the failure of any of which would completely undermine the potential opportunity.
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