TCS Gets Funding Boost

By Jennifer Freer, Staff Writer

One area that equity players are watching closely is the sizzling telecommunications market, and an Annapolis, Md.-based company that develops software and solutions for wireless and wireline networks is reaping the benefits with two investments totaling $10 million.

TeleCommunication Systems Inc., which develops network application software and systems integration solutions for wireless and wireline telecommunication networks, will receive $5 million each from Signal Equity Partners, New York, and GE Equity, Stamford, Conn. The investors will now have a combined stake in TCS of 15 to 20 percent, said Thomas Brandt, TCS' senior vice president and chief financial officer.

TCS will use the money to develop software and other products that focus on sending data over wireless networks, Brandt said. It also will step up marketing and seek to boost revenue as it explores whether to go public in 2000, he said.

The relationships with the investors can introduce TCS to companies that have the technology to enhance its business, and introduce TCS to underwriters who may be interested in expediting the company's growth, said Brandt.

TCS is a minority business enterprise that started out as an 8(a) company in 1987. The 8(a) program, named for a section of the Small Business Act, is an initiative to help socially and economically disadvantaged citizens, including African, Asian, Hispanic and Native Americans, gain access to the economic mainstream.

In 1999, TCS had revenue of more than $40 million, with $25 million coming from government clients. TCS sells services to defense agencies including Special Operations and Defense Telecommunications Services-Washington. The company also recently worked with the State Department, the city of Baltimore and other Defense Department units, according to Brandt, who declined to identify more specific clients

TCS' commercial customers include major telecommunications players such as Lucent Technologies Inc., Murray Hill, N.J., and AT&T Corp., Basking Ridge, N.J. Through its partnership with Lucent, TCS sold software to Bell Atlantic Corp., New York; Sprint Corp., Westwood, Kan.; US West Inc., Denver; Comcast Corp., Philadelphia; and PrimeCo Personal Communications LP, Westlake, Texas.

TCS' partnership with Lucent began in 1995 when TCS approached Lucent with the idea that Lucent could provide the platform technology, while TCS provided the enhanced services wanted by the marketplace.

In the partnership, Lucent provides the marketing, sales and deployment support for customers and TCS provides services like wireless messaging and prepaid calling, said Curtis Holmes, vice president of Lucent's Intelligent Network unit.

"The Lucent relationship is part of a strategy to focus technology expertise in a strong growth market," Brandt said. "The partnership with Lucent was optimal for a young company to provide sophisticated products to carriers."

Brandt said the company has leveraged its government expertise to expand into the commercial side of the wireless and wireline business, and a combination of the two businesses has resulted in growing profits. The company's revenue jumped by $15 million from the 1998 figure of $25 million to more than $40 million in 1999, Brandt said.

While TCS' position in the market and its capabilities were important drivers in Signal's decision to invest, it was management that most impressed Signal officials, said Timothy Bradley, a partner at Signal.

TCS "performed well with demanding clients in government," which bodes well for its dealings with commercial customers, said Bradley.

Signal views the exploding wireless communications marketplace as a sweet spot and thus has made other such investments. During the past five years, Signal has invested $5 million in Spike Technologies, a wireless broadband equipment manufacturer in Nashua, N.H. It also plowed $6 million into Centennial Cellular Corp., a large cellular network firm in Neptune, N.J., and $6 million into FiberNet Telecom Group Inc., a broadband telecom company in New York.

According to Bradley, Signal hopes to triple its investment. "A conservative projection would be that we hope to earn at least 30 percent compounded annually on our money," he said. He noted that the trend in telecom is for investors to reap up to 10 to 20 times their investment.

The match between TCS and the two investment firms is not unusual in today's business world, said Jonathan Catherwood, a partner specializing in telecommunications at the investment banking firm Boles, Knop & Company LLC. of Middleburg, Va.

Catherwood said TCS is fortunate to be caught up amid trends that can benefit all parties. TCS has a broad knowledge of building networks for sophisticated customers and an expertise in wireless platforms. And TCS writes the software that forms interaction between these two, he said.

TCS' competition includes wireless companies in the United States as well as European systems integration companies.

In the arena where TCS focuses on connecting the Internet and wireless networks, it competes with Phone.com Inc., a software company based in Redwood City, Calif.

Competitors in the network software and system integration arena include European firms like Logica plc, which specializes in consulting, systems integration, maintenance and project management, as well as Sema Group plc and CMG plc, all of which are headquartered in London.