Oh no, it is worse… MTSL takes another $561 thousand torpedo

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USS John Young

In a recent posting (here) I wrote about the fourth quarter and full fiscal 2013 year earnings announcement by MER Telemanagement Solutions, an Israel based company that I have followed for quite a while.

I noted that the company had announced (1) a new high in cash (and cash equivalents) on hand almost exclusively on the strength of a very profitable contract with Simple Mobile, a West-coast based MVNO whose managed services contract with MER Telemanagement Solutions had generated a guaranteed $300 thousand in revenues and cash every month throughout MER Telemanagement Solutions’ fiscal 2013 year; and (2) the end of this revenue and cash stream, effective as of December 31st, 2013.

The termination of the Simple Mobile contract in itself was a disaster, but, unfortunately, things were even worse, with overall revenues and operating profit down significantly year-over-year and net income down $1 million to $1.4 million year-over-year when accounting for a one time $1 million tax charge in the company’s fiscal year 2012.

In my posting I included a computation table, trying to assess the impact of the Simple Mobile contract loss on the 2014 results based on previous results, and — oh, boy! — it was not pretty (here is a direct link to the table,) projecting a revenue drop of $3.6 million (or 28.5%) in 2014 and a net income drop well into the red.

Today, the company filed its 20-F filing with the Securities and Exchange Commission, and, unfortunately, things went from bad to worse. While I, in my table had estimated the Simple Mobile revenue contribution for 2013 to be 28.5%, it showed to be a staggering 33%.

As the company wrote in its very first qualitative statement in the 20-F filing:

If we do not replace the revenues generated by Simple Mobile LLC our operations and financial condition will be adversely affected.

Our principal customer during the three years ended December 31, 2013 was Simple Mobile LLC, a U.S.-based mobile virtual network operator, or MVNO, for whom we provided hosted billing services. In 2011, 2012 and 2013, sales attributable to this MVNO accounted for approximately 16.4%, 22.8% and 33.3% of our revenues, respectively. During 2012, Simple Mobile was acquired by TracFone and in 2013 TracFone migrated our hosted billing services to its own platform and did not renew its agreement with us, which ended in December 2013. If we are unable to replace the revenues generated by Simple Mobile LLC, our operating results and financial condition will be adversely affected.

Not exactly encouraging stuff.

The difference of 4.5% or $561 thousand between our previous estimate and the new announced results is significant enough in itself, but, unfortunately, there is more.

First, this means that the revenue contribution that has to be backed out of the 2014 projections are higher…. arghhh!…. leading to even more loss, in fact an additional loss of $453 thousand for a projected worst-case loss of $1.8 million in 2014.

Second, the significant increase in the Simple Mobile revenue contribution means that MER Teleamangement Solutions’ revenues that were not attributable to Simple Mobile declined a full 17.5% in 2013… a disaster of the highest magnitude.

Here is the updated table:

(c) Per Jacobsen, 2013 and 2014. All rights reserved

(c) Per Jacobsen, 2013 and 2014. All rights reserved

Oh, by the way, this worst case scenario, may not, in fact, be the worst case, since it assumes that the non-Simple Mobile revenue will be stable in 2014. If, instead, the drop in revenues continues, then we need to clear the decks for a much worse worst case.

Now, I hasten to say that there were some good news in the 20-F filing, albeit not much.

First and foremost, the company has reduced its payroll, laying of a large part of its staff. This, of course, was something that I knew had to happen, but that the company for some reason saw fit to not tell its shareholders was happening (read more about this and the company’s puzzling and, in my opinion, warped communications with its shareholders in my previous MER Telemanagement Solutions postings… you can use the nifty XREFs section to get them.)

The reduction is force is deep, but it does not make up for the loss off the Simple Mobile contract (to be fair to the company, almost nothing except a full scale roll-back of staffing in the very early part of 2013 could make up for the catastrophic loss of the Simple Mobile contract) and the extensive cost of winning and launching new managed service of cloud business. So, in spite of the lay-offs — a case of too little, too late — things are definitely looking bad.

Moreover, there were more somber language about the PFIC classification and its potentially adverse impact on United States based shareholders (read more about this here.) As I wrote I this earlier posting, the cash hoarded from the — now dead — contract with Simple Mobile may, in a ironic twist, become a poison pill for United States based holders of shares in MER Telemanagement Solutions.

Interestingly, today, on the tail-end of the filing of the 20-F, when investors (if they could — and cared to — read) should be heading for the hills, the company’s equity exploded. This could, of course, be caused by anything, including investor stupidity or leaking of information that the company is getting sold or having gained another customer, but it certainly does not mean that the company is doing well.

With respect to the potential for the gain of new customers to change the fundamental situation of the company, it may be worth thinking deeply about the depth of the problem to be plugged. As I wrote in an earlier posting (here) where I discussed an, in my opinion, less-than-reputable and poorly researched article by Mr. Sujan Lahiri, a self-confessed post-for-profit contributor to Seeking Alpha:

Mr. Lahiri’s rather simplistic view continues throughout his article. For instance, he writes:

For instance, if MTSL were to land one large customer, EPS could easily grow from current $0.27 to $0.40 per share in the near future. Apply the industry average of P/E 15, and you have a $6.00 share. Another customer could mean $0.50 or $0.60, that’s a $7.50 or $9.00 share. Any extra customers directly add to the profit without a substantial increase in costs. The upside potential is therefore very large.

Well, let’s look at this. The assumption here is that a new customer would add something like $0.13 in earnings in the near future. In real terms this means yearly earnings (not revenues!) of $585 thousand or so, or just about $50 thousand per month. Assuming a liberal 20% margin, this amounts to $250 thousand in revenues per month.

With the Simple Mobile pricing a benchmark for per subscriber revenues, pointing to something like a quarter of a dollar per subscriber per month in revenues, this would mean that the fictive customer would have a subscriber count of one million.

MVNOs or MVNEs with 1 million subscribers are relatively rare, and, importantly, they don’t just emerge in one go (read about subscriber count in the MVNO world in an earlier posting here,) so I think that Mr. Lahiri’s projection of the “near future” earnings is… well… laughable.

So, new customers are definitely not a valid reason for a surge in the per share price of MTSL.

We’ll soon see what gives, I guess.

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