A critical look at MER Telemanagement’s Third QuarterPosted: October 23, 2013
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No one rises so high as he who knows not whither he is going.
— Oliver Cromwell
The other day I was asked what actually changed in the outlook for MER Telemanagement Solutions with the closing of a new deal, a sale of a solution to a U.S. based local service provider on either a managed service basis or on a cloud basis.
Just for clarification, I am not writing “managed service or cloud basis” to be coy. I simply do not know which one it is going to be since the details of the sale are somewhat fuzzy — something that you can read more about here.
The question was prompted by a near-instantaneous, enormous leap in the market capitalization of the company last week, from $8 million to $15 million, as the function of a short term run up in per share price of MTSL, the company’s equity, from $1.75, or so, to $3.25.
Since this is the third short-term, violent speculative run up in the per share price of MTSL in recent time, each of which has been followed by an equally violent collapse (read more about the first speculative run-up and total break-down here,) the question is certainly valid. In fact, since, in the case of the last speculative run-up, which took place last week, the per share price has not yet retreated to its pre-rally level of $1.75, currently stubbornly clinging onto the $2.25 level on very low trading volume and with the earnings announcement for the third quarter looming on the horizon, the question is actually very pertinent.
The answer to the question is probably that nothing changed, which, if correct, of course, has profound implications for traders and investors currently holding MTSL in their portfolio (or trading position, as it is probably called by traders.) Let me explain.
From my perspective, a $1.75 per share price of MTSL represents a strong discount to the true value of MER Telemanagement Solutions if, and only if, the company takes appropriate steps to immediately implement cost-savings initiatives and communicates these steps to the market. The reasons for this view is the exceptional deep impact of the loss of the Simple Mobile contract on margin and revenues.
This view has, I think, collided with the view of the company’s management, which appears to be that the resulting revenue and margin slack should be picked up through the winning of new cloud based and/or managed services based MVNE and/or BSS contracts (the company also has a TEM segment, but this segment is, at best, stagnant.)
The reason why I don’t think that this new business acquisition focused strategy will work is quite simple.
First, there is the issue of timing of the replacement revenues and the depth of the loss. In my experience, managed services based contracts are upside down for a considerable amount of time and cloud based contracts are a slow way to grow vendor revenues (at least at first) and, critically, are entirely dependent on the success of the customer, which effectively means that the pace or security of the revenues and margins are not controlled by the vendor.
So, the acquisition of new business, including the recently announced contracts with SBC Communications, LLC (not to be mistaken with SBC/AT&T) and DataXoom (an apparently embryonic business — read more about this here,) a contract somewhere in Africa, and a contract vaguely referred to by the company in a past press-release, probably will not offset the revenue and margin loss expected to kick in when 2014 rolls around (the revenue loss from the Simple Mobile contract is expected to be more than $300 thousand per month and the bottom line impact may be $300 thousand, or more, per quarter.)
In fact, because of the nature of managed services contracts and cloud contracts, which effectively shifts start-up costs and risks from the customer to the vendor, these new contracts may increase the size of the loss in 2014, rather than reducing it.
This is a short to medium term consideration, and will not be addressed by any number of contracts unless one or more of these contracts is extra-ordinary, enabling the front-loading of considerable revenues.
Second, there is the issue of whether the Simple Mobile contract’s extra-ordinary revenue and margin growth over the last years — fueled by the spectacular growth of Simple Mobile’s MVNO business — is indicative of the revenue and margin growth that can be expected from, say, the DataXoom contract.
In other words, can we reasonably expect DataXoom’s business model and execution to be comparable with the business model and execution of Simple Mobile?
If, for instance, DataXoom’s execution and business model are one tenth of that of Simple Mobile (however we would measure these,) then, arguably, MER Telemanagement Solutions would need to secure ten DataXoom contracts in order to make up for the revenue and margin loss from the Simple Mobile contract.
This, of course, is a long term consideration, and has not impact on the issue outlined above. In fact, picking up ten DataXoom contracts between now and 2014 would potentially deepen the short to medium term loss, and, so, would create further problems for MER Telemanagement Solutions.
Additionally, it is worth remembering that the DataXoom contract came with a “guarantee” of $1.1 million over three and a half year. Ignoring for a second the fact that such guarantee probably is no better than the viability of the underlying business and the fact that the apparent search for funding of one million dollars outlined in the now deleted presentation on Slideshare (read more about this here) could somewhat make us doubt the depth of the guarantee, this $25,000 per month guarantee, which probably is a good as it is going to get when one deals with embryonic businesses, stands in stark contrast to the $300,000 per month provided by Simple Mobile.
So, here is where it gets tricky. Prior to the announcement of the SBC Communications, LLC contract, the market valued MTSL at a price of $1.75, or so, per share. Assuming an efficient market, then, if I am correct in saying that the SBC Communications, LLC contract has no positive short term impact, and, in fact, may have an adverse short to medium term impact, the issue then becomes that the per share price of MTSL ought to be $1.75 after the “crazyness” around the announcement has rescinded. So, when the price is currently hovering at $2.25, the question is whether this price reflects ignorance and what event will adjust the per share price to its appropriate level.
My guess, and a guess it is, of course, is that the uniqueness of the the Simple Mobile contract and the nature of revenues and margin profiles for cloud and managed services based business are not fully understood by the market, and, accordingly, that there is an expectation that MER Telemanagement Solutions’s third quarter results will somehow show monumental revenue and net income gains. If, so, I think the market is in for a surprise, and, if the per share price does not decline prior to the earnings announcement, which I estimate will occur in the second week of November, then there will be an immediate (and expensive) drop in the per share price at the time of the announcement.
This, by the way, is consistent with the way that the market reacted to the announcement of the DataXoom contract. This contract announcement, which I remind the reader was stronger than the most recent contract announcement related to SBC Communications, LLC, in that it provided a clear identification of the product, revenue information, and information about the scope of contract, at first resulted in a run-up in the per share price, but this run-up was rapidly eradicated once the market recognized and acknowledged the relatively limited impact that the DataXoom contract would have on the vacuum left from the Simple Mobile contract.
So, in the absence of other data, I continue to believe that MER Telemangement Solutions may be a good investment if, and only if, the company takes appropriate steps to immediately implement cost-savings initiatives and communicates these steps to the market. And, certainly, given the current per share price of MTSL and the expectation that this price level may be unwarranted until such cost-savings initiatives are implemented and communicated I would not buy MTSL and, in fact, I would probably pare down any investment in order to capture the opportunity inherent in the optimistic $2.25 price level (after all, regardless of how much you believe in the company’s long term prospects, there is little point in sitting still while your investment decreases almost 25% in value over a couple of weeks.)
in the immortal words of the Amityville Horror:
For God’s Sake, Get Out!
But do check in again in the end of November!
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