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

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. Moreover, 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.

…. And, if you find yourself enjoying this posting, consider supporting the blog through a donation. For your convenience, PayPal links are provided to the right and at the end of the posting.

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.

Donations, please….

As usual, if you found this posting useful or entertaining — or if it saved you time, you can express your appreciation through donation via PayPal right now.   For this type of posting a one-off donation of $20 is suggested — however, any donation is, of course, appreciated.


PFIC… What was that again? — A double-edged sword

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. Moreover, 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.

…. And, if you find yourself enjoying this posting, consider supporting the blog through a donation. For your convenience, PayPal links are provided to the right and at the end of the posting.

Conolly_SINKEX-300x272

My recent posting about MER Telemanagement Solutions, an Israel based technology company whose equity, MTSL, is traded on Nasdaq, resulted in some questions from readers of the blog.

In the posting (read it here,) which broadly speaking discussed MER Telemanagement Solutions’ quarterly earnings announcement in which the company 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.

In my posting, I pointed out that the straightforward economic loss of the Simple Mobile contract coupled with tremendous expenses related to capturing and launching new customers to replace the loss of the contract could hit MER Telemanagement Solutions and MTSL in ways that had the potential for simply bleeding MER Telemanagement Solutions out:

Also, with the loss of the contract revenue and its high margin there is now, I believe, a substantial risk that the company will be considered a PFIC by the IRS of the United States with serious tax implications for common shareholders in the United States. As the company wrote in its 20-F filing for its 2012 fiscal year:

We may in the future be classified as a passive foreign investment company, or PFIC, which will subject our U.S. investors to adverse tax rules.

This comment caused a couple of comments and questions to arise, intensifying as the per share price of MTSL inexplicably started rising when it should, in fact, decrease, reflecting the potential for loss in the first quarter.

Sidenote: I say inexplicably, but that is not really so. In fact, the price was rising, I believe, as part of a deliberate pattern of stimulating buys intended to pull a number of loss positions out of the fire (due to a series of speculative run-ups and subsequent implosions in the per share price of MTSL over the last year the majority, if not all, of the true free float of MTSL is seriously under water.) However, we will let this lie for now as it has only a tangential connection with the issue of PFIC, which is the point of this posting.

Let me attempt to address these question here (spoiler alert: A PFIC classification of MER Telemanagement Solutions may be really bad news for current United States based holders of MTSL shares and may adversely and seriously impact the per share price of MTSL.)

PFIC is shorthand for Passive Foreign Investment Company, an oddity in the United States tax code that was introduced because the United States Congress was concerned that persons investing in passive assets indirectly — through a foreign investment company — could gain a tax advantages relative to persons investing in the same assets directly.

The resulting law attempts to eliminate this problem, but, unfortunately, also have the potential to impact genuine foreign operating companies, for instance companies that are earning substantial passive income (such as a company that has a large war-chest, generating income.)

The way the law is written it attempts to identify a PFIC by way of two criteria. Either 75% of its gross income is passive income or more than 50% of its assets generate passive income.

I am grossly simplifying here, but if you read my previous postings, I am sure that you can see that there is a real possibility of MER Telemanagement Solutions being categorized as PFIC given its cash position (the result of cash gushing out of Simple Mobile for three years) and its off-the-cliff drop in revenues and income.

For MER Telemanagement Solutions itself the classification as a PFIC will really have very limited direct implications, but for United States based shareholders in MER Telemanagement Solutions it gets complicated and dirty very quickly.

First, any gain recognized by the shareholders becomes subject to ordinary income rates, rather than capital gains rates (a vast difference) and — hold on to your pants here — the gain is subject to a non-deductible interest charge over the holding period for the shares.

And it doesn’t end there. In special cases the income tax rate assessed will not be the United States based shareholder’s “normal” tax rate, but, rather, the highest marginal income tax rate in the United States.

It may be worth saying this again: Rather than paying between 15% and 20% in gain tax, United States based shareholders will be paying between 30% and 40% and they will be paying interest on the gain (deemed interest, in fact!)

Second, there is a paper burden here that is well beyond the casual investors, traders, and speculators (I, unfortunately, do not believe that casual investors, traders, and speculators are plagued by detailed knowledge of the environment that they are operating in, which, of course is why they a-l-w-a-y-s lose money in the market.) Essentially, he or she must make a baffling election between mark-to-market or qualified electing fund treatment, both of which are just as confusing as they sound and require certain detailed disclosures by the PFIC (good luck in getting a company to provide disclosure beyond what it has provided in its filings with the SEC.)

How bad is PFIC classification for a United States based shareholder? Well, I think it is very bad. In fact, I think the acronym PFIC was chosen by some fiendish soul in United States Congress with a twisted sense of humor because it also is the acronym for Progressive Familial Intrahepatic Cholestasis, a very nasty liver disease, to signify precisely how bad it is.

I said before that for MER Telemanagement Solutions itself the classification as a PFIC will have very limited direct implications. Likewise, the classification will not have any direct implications for MTSL shareholders that are not based in the United States. However, the operative word here is direct.

A classification as an PFIC is adverse and will make any sensible investor think twice before he or she invests in MER Telemanagement Solutions by way of MTSL, and, so, we have an indirect effect on both MER Telemanagement Solutions and its non-United States based shareholders in that the price per share of MTSL will drop — perhaps a lot!

The irony should not escape us here. The successful looting of Simple Mobile and accumulation of loads of cash may very well be a textbook case of a Pyrrhic victory.

Yes, that’s also a beaut of a double-whammy. First, a drop because of the changes in the fundamentals and, second, a further drop because of a perverted tax treatment.

Now, over time, the PFIC issue will, of course, go away, since, in all probability, MER Telemanagement Solutions will start bleeding, rapidly eating away of the cash (and cash equivalent) asset that is the underlying problem. But, as a solution there is not much comfort to be had here, I think.

Perhaps this is why the company was talking about M&A alternatives in its earnings report? Well, this is certainly going to be interesting!

Donations, please….

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Breaking, pre-open news — MER Telemanagement in near extremis

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. Moreover, 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.

…. And, if you find yourself enjoying this posting, consider supporting the blog through a donation. For your convenience, PayPal links are provided to the right and at the end of the posting.

??????????????????Breaking pre-open news

Yesterday, after the close of the market, MER Telemanagment Solutions, an Israel based technology company whose equity is traded on Nasdaq, reported its fourth quarter and full year results for the company’s fiscal year 2013, and, frankly, in my opinion it is not looking good.

As the reader of this blog will know I have followed MER Telemanagement Solutions and its equity MTSL, for a while now, noting since the outset that the loss of the Simple Mobile contract constitutes a clear and present danger to the company and its shareholders. If you are new to this issue, you can start reading here and go backwards or you can use the nifty XREFs section to here.

Revenues and operating profit are down significantly year-over-year and net income was down $1 million to $1.4 year-over-year when accounting for a one time $1 million tax charge in the company’s fiscal year 2012.

The $1 million one-time charge in fiscal year 2012, which somewhat masks the enormous drop in net income in fiscal year 2013, was described in the company’s 20-F filing for the 2012 fiscal year:

Taxes on Income.

We recorded taxes on income of $736,000 for the year ended December 31, 2012, compared to taxes on income of $10,000 for the year ended December 31, 2011. Our taxes on income for the year ended December 31, 2012 are primarily attributable to a $1,050,000 charge related to the tax assessment from the Israeli tax authorities relating to an Israeli court’s decision with respect to our 1997 to 1999 tax years, net of a deferred tax asset recognition of $371,000 based on an estimate of future taxable profits and losses in the tax jurisdictions in which we operate, which is expected to be utilize in the foreseeable future. Our low level of taxes on income for the year ended December 31, 2011 is primarily attributable to the utilization of deferred tax assets by our subsidiary in Hong Kong and the state income taxes in the U.S.

Moreover, in the current earnings release the company confirmed that the fourth quarter marked the end of the revenue contribution from the all-important Simple Mobile contract, so, going forward, each fiscal quarter will have $900 thousand, or so, less in revenue and perhaps $450 thousand less in net income, which most probably will result in a loss in each quarter.

Also, with the loss of the contract revenue and its high margin there is now, I believe, a substantial risk that the company will be considered a PFIC by the IRS of the United States with serious tax implications for common shareholders in the United States. As the company wrote in its 20-F filing for its 2012 fiscal year:

We may in the future be classified as a passive foreign investment company, or PFIC, which will subject our U.S. investors to adverse tax rules.

Holders of our ordinary shares who are United States residents face income tax risks. There is a substantial risk that we may become a PFIC. Our treatment as a PFIC could result in a reduction in the after-tax return to the holders of our ordinary shares and would likely cause a reduction in the value of such shares. For U.S. Federal income tax purposes, we will be classified as a PFIC for any taxable year in which either (i) 75% or more of our gross income is passive income, or (ii) at least 50% of the average value of all of our assets for the taxable year produce or are held for the production of passive income. For this purpose, cash is considered to be an asset which produces passive income. As a result of our relatively substantial cash position at the time, we believe that we were a PFIC in certain periods over the last few years under a literal application of the asset test described above, which looks solely to the market value of our assets. We do not believe that we were a PFIC in 2012. If we are classified in the future as a PFIC for U.S. federal income tax purposes, highly complex rules would apply to U.S. Holders owning ordinary shares. Accordingly, you are urged to consult your tax advisors regarding the application of such rules.

The company’s earnings release contained no indications of cost-control measures or new deals, relying rather on the tired we-see-opportunities approach that we have seen from previous quarterly announcements and that I commented on in an earlier posting (here):

In fact, ever since the termination of the Simple Mobile contract was announced it has been clear that the company … 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.

It is hard to give the casual reader a sense of just how catastrophic the loss of the Simple Mobile contract coupled with the company refusal to reduce cost and it hell-bent pursuit of new business at great expense and risk is (read here about how bad it can get when you engage in what I consider to be reckless pursuit of new deals instead of buckling down down and controlling expenses,) but perhaps this table — greatly simplified and making sweeping assumptions where information is not available — can provide some insight:

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

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

As you can see, the Simple Mobile contract’s revenue and margin contribution was integral to the company’s performance and without it, the company will be hemorrhaging.

Acknowledging this imminent distress, which is now so obvious that no amount of voodoo or fancy leg-work will make it go away, the company closed its earnings announcement by stating that it is considering M&A options at this point, which I interpret to mean that either a fire-sale or a last-ditch clutching on to another company for buoyancy may be imminent. Either way, focusing on M&A — which, as we, know is associated with huge transaction costs and enormous risks — is bad news for the shareholders, I think.

The company did not offer any details about an upcoming earnings call in its earnings release.

Given the excessive — and completely unsubstantiated — speculative run-ups that have taken place over the last year (read more about this by starting here,) there is absolutely no way to predict what will happen to the per share price of MTSL in the very short run, but I am fairly certain that in the near and medium term, once whatever silly movement the market will make today and over the next week has completed its cycle, we will see another substantial drop in the per share price.

I would be remiss if I did not issue an early warning as well. Based on historic developments, I am fully expecting another SeekingAlpha article to arrive soon with unpredictable results (read about the previously published MTSL-centric SeekingAlpha article by Mr. Sujan Lahiri (here) — in my opinion, a prime example of bad research, wrong conclusions, and biased research aimed at generating a short-term run-up in the per share price of an equity.)

It appears that it is time to fire those emergency flares.

Donations, please….

As usual, if you found this posting useful or entertaining — or if it saved you time, you can express your appreciation through donation via PayPal right now.   For this type of posting a one-off donation of $10 is suggested — however, any donation is, of course, appreciated.


No Comment: What speculation looks like — MTSL/MER Telemanagement

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. Moreover, 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.

…. And, if you find yourself enjoying this posting, consider supporting the blog through a donation. For your convenience, PayPal links are provided to the right and at the end of the posting.

Revenue and margin drop off — Volcano eruptions in per share price

MTSL chart R-O-O chart3

And… From the company’s 20-F filing for fiscal year 2012:

During 2012, Simple Mobile was acquired by TracFone and in October 2012, we renewed our agreement with them to provide for minimum monthly payments of $300,000 during the year ending December 31, 2013. Recently, we were advised that TracFone intends to migrate the hosted billing services to their own platform. It is unlikely that we will receive significant revenues from TracFone in 2014, which will adversely affect our operating results.

And… extracted from the company’s 20-F filings from fiscal years 2008 through 2012:

2010 - 2012 Revenues MTSL -- Adjusted

References

Recognizing Speculation in Equities – MER Telemanagement Solutions redux
Chicken coming home to roost
The sting of the scorpion – MER Telemanagement Solutions proves me right… again
Stand Fast — The near-final chapter of the saga of MER Telemanagement Solutions

Dont be a Mooch!

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DataXoom — what is it?

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. Moreover, 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.

…. And, if you find yourself enjoying this posting, consider supporting the blog through a donation. For your convenience, PayPal links are provided to the right and at the end of the posting.

Recently, on July 3rd, 2013, Mer Telemanagement Solutions announced that it had entered into a three and half years agreement with DataXoom to provide the company’s cloud and managed services MVNE solution. According to the announcement, the agreement provided for minimum total revenues of $1.1 million through its term.

Here it is, from the horse’s mouth, so to speak, i.e. from the company’s press release, as filed in a 6-K filing with the United States Securities and Exchange Commission:

DataXoom Selects MTS as Their MNVE Solution Provider

RA’ANANA, Israel – July 3, 2013 — MTS – Mer Telemanagement Solutions Ltd. (NASDAQ Capital Market: MTSL) , a global provider of Mobile Virtual Network Enabler (MVNE) services and Telecommunications Expense Management (TEM) solutions, today announced that it entered into a three and half years agreement with DataXoom, a large U. S. based MVNO, to provide its cloud and managed services MVNE solution. The agreement provides for minimum total revenues of $1.1 million through the term of the agreement.

The agreement is significant for MER Telemanagement in that it: (1) helps to offset the loss of a key contract with Simple Mobile (read about this here,) and (2) somewhat validates the sustainability of MER Telemanagement Solutions’ managed services offering for MVNE.

So far, so good.

Now, a somewhat bizarre Microsoft PowerPoint presentation has been posted on slideshare (here.)

The presentation, which appears to have been uploaded by a slideshare user with the handle robchamberlin, consists of 18 pages and is labeled 2012, but, no matter, as it seems to refer to things happening or having happened in 2013.

Likewise, the presentation is labeled Proprietary and Confidential, but apparently not so much that it can’t be uploaded to slideshare as an example of … well, frankly, I don’t know quite what, but something.

In the presentation, which seems to be a fund-rasing document uploaded to slideshare on Jul 25st, 2013, and seeking one million dollars (perhaps… frankly, I am not sure, since it is not entirely clear if the presentation is made for the purpose of fundraising, and, if so, if the amount indicated as the funding goal is some sort of jokey reference, since the one million dollars are referenced next to a picture of Dr. Evil from the Austin Myers movies,) the business model for DataXoom is described.

Additionally, the presentation contains a milestone slide from which we read:

  • First carrier agreement – Sprint – Q4 2012
    • Data-centric includes 3G, 4G LTE, 4G WiMax
  • MVNE agreement – MTS – Q2 2013
    • 3 year agreement with worldwide MVNE service provide MTS at a minimum commitment of $1.1M
  • Full connectivity – Sprint – Q2 2013
    • First device activated on DataXoom – May 2013
  • Second carrier agreement – Verizon – Q2 2012
    • Connectivity to be completed and launched by Q4 2013
  • First beta customer load – August 2013

Note: I think that the “Verizon – Q2 2012” snippet is a typo and should really be “Verizon – Q2 2013” or “Verizon – Q3 2013”

The presentation looks genuine, albeit not totally polished. And, of course, the fact that the presentation is proprietary and confidential, yet widely circulated is a little odd. In particular it is odd in view of the fact that the handle of the person uploading it on slideshare has a more than passing resemblance to the name of one of the co-founders of DataXoom.

If the presentation is genuine, it does raise the question as to how DataXoom, which from the presentation seems to be nascent, could possibly be characterized as a “large U. S. based MVNO.” In fact, I struggle to find DataXoom on Wikipedia’s list of MVNOs or in any FCC documents.

That being said, the arithmetic for the multitude of MVNOs shooting up these days is a bit fuzzy. While, clearly, the largest player is TracFone and its multitude of brands, including Simple Mobile (a current customer of MER Telemanagement Solutions,) with than 20 million subscribers, the next tiers are not exactly easy to pin down, with 25 thousand to 100 thousand subscribers sometimes being referred to as significant.

So perhaps the press release is not that crazy. Arguably, when you are talking about subscriber numbers of 100 thousand or less as being significant in a country with 326 million wireless subscriptions, you could be excused for considering even a handful of beta customers to be a large number. Personally, I disagree, but, then again, I have known to be a stickler for precision in investor communications.

Before I get chastised I hasten to say that it is possible, of course, that DataXoom somehow, somewhere is affiliated with an established, larger MVNO, and that this affiliate is the nexus for the adjective “large” in the company’s press release.

Regardless, running some arbitrary, simplified, and hugely crude calculations for the guaranteed $1.1 million over three and a half years, it looks like DataXoom will need to run an average of 50,000 subscribers per month, or so, before exceeding the guarantee limit, assuming a charge of $0.50 per subscriber per month.

Of course, after meeting the limit, the numbers are extremely grateful.

If, for instance, DataXoom manages to build an average of 100,000 subscriber customer base for the term of the contract, then, given the aforementioned $0.50 per subscriber, MER Telemanagement Solutions would collect an additional $1.1 million, and, naturally, these additional revenues would be characterized by high margins. Assuming, further, that the average subscriber number hits 250,000 and, in accordance with normal economic theory, the monthly per subscriber charge sinks to $0.35, then MER Telemanagement Solutions would collect an additional $2.6 million.

And so on… You see why the numbers are best characterized as grateful, I am sure…

For TracFone, which routinely adds more than half a million subscribers per quarter, this subscriber count is, of course, a mere rounding error. What it is for DataXoom is something that the investors in MER Telemangement Solutions are about to find out.

Anyway, for the reader’s convenience, I embed the slideshare presentation player linked to the DataXoom presentation:

Update

After the publishing of this posting, which received quite a lot of traffic, the slideshare presentation has been removed (something that I wrote about here.)

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MER Telemanagement does it again

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. Moreover, 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.

…. And, if you find yourself enjoying this posting, consider supporting the blog through a donation. For your convenience, PayPal links are provided to the right and at the end of the posting.

It’s déjà vu all over again
— Yogi Berra

2551092070_273726beb7_oMER 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.

Loaded bases

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?

Ninth inning

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.

Update

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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Off track or…

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Derailed by an earnings announcement

On April 10th, 2013, I wrote a lengthy posting (here) discussing MER Telemanagement Solutions, a publicly traded company, and its equity, MTSL, with a focus on establishing a target price for MTSL.

2162653769_86b66df75c_oIn my posting, I briefly explained the speculative character of a run-up in per share price of MTSL since August of 2012 and detailed the complete (and expected) break-down of this run-up since March of 2013. Subsequently, I took a stab at determining how much revenues and earnings MER Telemanagement Solutions will record in 2013 and 2014.

With respect to these revenues I wrote:

Generally, I estimate that 2013 revenues will be approximately $14.5 million, for an increase of 10% over revenues for 2012, and earnings for 2013 will grow to between $2.4 million and $2.7 million, or $0.60 per share, a significant increase relative to 2012. From a value investor’s perspective these numbers are, of course, mostly meaningless since they are predicated on the terminating contract [with Simple Mobile,] but, since speculators care little about what the long term outlook is of an equity or the underlying company, I note that these numbers most likely will drive the per share price in the rest of 2013, starting with the first quarterly earnings announcement, through the early part of 2014. When seen in isolation and applying blinders in the manner that a highly speculative market might do, the numbers support a per share price of at least $6 for MTSL — a +100% premium to the current per share price.

I also wrote that:

[u]nless significant new customers are secured or significant additional revenue-contributions are made by existing customers in 2013 and 2014, the company could, relative to the 2013 results, encounter a $4 million revenue drop in 2014 with a corresponding drop in net income of $2.7 million, which would lead the company to experience negligible earnings — or even a loss — per share in 2014.

As it happens the per share price did not go up in the period from April 10th, 2013, through the first quarter earnings release on May 9th, 2013. However, after a drop in the per share price in the days immediately following April 10th, 2013, the per share price did stabilize and climbed quite a bit, maxing out at $2.36 in the days before May 9th, 2013.

Whatever gain were made in the period leading up to the day of the earnings release, however, were eradicated when the company announced that results for the first quarter. It was not that the results were bad… far from it…. the company had positive results and grew its cash position by a whopping $1.1 million in the quarter.

In fact, the beef may have been with the earnings number, $0.07 per share, which on a year-over-year basis was unchanged and on a quarter-over-quarter basis had deteriorated $0.01 per share.

Now, in absolute terms there was nothing fundamentally wrong with the earnings results for the first quarter, but there was probably an expectation problem. 2012 , a somewhat bumpy year, had generated earnings of $0.30 per share, and, so, using calculations similar to those I put forward in my posting, there was an expectation that the company could head towards $0.60 in earnings, before, if you will, falling over the cliff in 2014 when the Simple Mobile contract could no longer be relied on.

Moreover, there may have been an issue with the perception of the revenue situation, since, for the third quarter, while the quarterly year-over-year revenues increased by from $2.98 million to $3.3 million, the quarterly quarter-over-quarter revenues declined from $3.48 million to $3.3 million.

I, for one, had expected that the revenues for 2013 would increase, reflecting, among other things, that there would be some professional services work related to the migration of the Simple Mobile customers, but, clearly, that does not appear to be the case in the first quarter. This year-long view may be right or wrong, but, certainly, it was not reflected in the first quarter.

Not helping matters, on the revenue side there is a significant revenue recognition issue with the managed services model, which had worked so well for the Simple Mobile contract, perhaps causing some problems in the first quarter in that the two new deployments have to get up to steam before they start throwing off revenues — and until they do so, they are costly, eroding the margin from the other revenue sources.

So, overall, for the first quarter, it looks like a double whammy: Increased expenses to get the two new deployments going and no significant increase in revenues.

Regardless of the reason, however, the market clearly did not like what it saw, and between May 9th, 2013, and today, the per share price has declined to $1.56.

The consequences of the first quarter

Effectively, the per share price of $1.56 places a market value of $7.24 million on MER Telemanagement Solutions. This number should be understood in light of free cash on hand of $5.26 million, no debt, and quarterly net income in excess of $300 thousand, pointing towards a net income of $1.2 million or better for the 2013 year. Assuming that there are no accounting games at play, these $1.2 million could be added to the cash at hand, for free cash on hand of at least $6.16 million at the end of 2013 (see an important caveat, below.)

Effectively, unless something dramatic happens, you can therefore — right now — buy $6.16 million in cash for $7.24, and in return for the balance of $1.08 million be left with a company, which, sans the revenue contribution from Simple Mobile, should generate at least $10 million in revenues in 2014 and, once the operational overhead associated with the Simple Mobile contract is gone (more about this, below,) should generate a nice positive cash-flow. Quite a deal.. And, here is the best part: It is the worst-case scenario.

If the company does achieve the additional migration-related revenues that I guessed would be forthcoming, and once the company finishes the deployment of the two new contracts, the top and bottom lines should improve dramatically, sweetening the deal for a buyer.

The sweetness of the deal, however, is somewhat contingent on two things. First, the company has to reduce its operational expenses almost immediately to reflect the revenue and cash loss that it will incur when the contract with Simple Mobile is effectively terminated. Second, the cash position is impacted by some oddity in the first quarter.

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…”

What this means, I think, is that the company will rightsize as soon as possible, but, if that is the case, why not just come out and say it loud and clear? The Simple Mobile contract is done… The market has reacted… Now, anything that deals constructively with how the world will look in 2014 will be interpreted positively by the market.

With respect to the cash, it is important to note that during the first quarter of 2013 the company’s cash position increased $1.1 million on net income of $344 thousand. Assuming that there is no such thing as a free lunch, the net difference of $750 thousand, or so, has to be accounted for either in the future or in the past.

Using only the filed financial statements it is difficult to determine if, or how, this will happen. For instance, the company recorded a substantial increase in deferred revenues from fourth quarter of 2012 to first quarter of 2013, from $1.65 million to $2.1 million, a net change of $450 thousand, which could account for some of the cash received, but only the company’s insiders would know if this is the case.

Looking forward

Regardless of the source or origin of the cash, the issue, of course, is that drawing a parallel between cash and revenues (as I did, above,) is at best difficult and at worst a fool’s errand.

And, so, the situation is not clear-cut — except that it is clear that the company should do fine (or very good!) in 2013 from both a cash and revenue standpoint with a significant potential for upside, and that the company in 2014 probably should do fine, but exactly how fine is dependent on its ability to secure new orders in 2013, to finish the deployment of the two new contracts in 2013, and to right-size the operations during 2013. Moreover, almost regardless of how 2013 and 2014 plays out, the per share price of $1.56 is incredibly cheap.

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