TNS, Inc. Q4 2008 Earnings Call Transcript

| About: TNS, Inc. (TNS)

TNS, Inc. (NYSE:TNS)

Q4 2008 Earnings Call

March 2, 2009 5:00 pm ET

Executives

Jim McLaughlin – Assistant Corporate Secretary

Henry Graham - Chief Executive Officer

Dennis Randolph – Executive Vice President and Chief Financial Officer

Ray Low – President

Analysts

Gary Prestopino - Barrington Research Associates, Inc.

Franco Turrinelli - William Blair & Company

Tien-Tsin Huang – JP Morgan

Operator

Welcome to the fourth quarter 2008 TNS Inc. earnings conference call. (Operator Instructions) I would now like to turn the call over to Mr. Jim McLaughlin, Executive Vice President and Corporate Secretary.

Jim McLaughlin

Good evening everyone. Thank you for joining us on this call to review TNS’ fourth quarter 2008 financial results and the proposed acquisition we announced today. I am Jim McLaughlin, TNS’ Corporate Secretary and General Counsel. This conference call and web cast are accompanied by a slide presentation that we invite you to access on TNS' website at www.TNSI.com. Leading today's call from TNS are our CEO, Henry Graham and Dennis Randolph, Executive Vice President and CFO.

Before turning the call over to Henry I will read the Safe Harbor Statement. The matters that we will be discussing today, other than historical information, consist of forward-looking statements. These statements relate to future events or our future financial performance and involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to differ materially from those expressed or implied by these forward-looking statements.

Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. We caution you not to place undue reliance on forward-looking statements which reflect our analysis only and speak only as of today's date. We undertake no obligation to publicly update the forward-looking statements to reflect subsequent events or circumstances.

Finally, we refer you to our form 10K filed with the Securities and Exchange Commission on March 16, 2007, which is available on our website, for additional information concerning factors that could cause actual results to differ materially from the forward-looking statements.

With that, I turn the call over to Henry Graham, CEO.

Henry Graham

Thank you Jim and thanks everyone for joining us this afternoon. In addition to our fourth quarter 2008 results which was the original purpose of this call, this afternoon we made another significant strategic announcement. TNS has entered into a definitive agreement to acquire the Communication Services Group from VeriSign. We will cover both on this call.

As always we have prepared a slide presentation that is available on our website www.TNSI.com and clicking on Investors on the left hand bar and then on Events and Presentations. We invite you to follow along as we move through the discussion. Let’s move ahead with slide two, the call agenda.

Today Denny Randolph, our CFO and I will begin the call with an abbreviated overview of our fourth quarter 2008 results and our outlook for 2009. Please bear in mind our outlook will be on a TNS only basis. Once the transaction closes we will update our outlook and provide additional financial detail of the combined entities. After our discussion of the fourth quarter we will walk through the proposed CSG acquisition in some detail so you can understand the strategic rationale and its financial and operational importance. After this we will take your questions on everything we have discussed today. Let’s get started on the fourth quarter 2008 review moving to slide three, TNS’ divisions.

TNS’ fourth quarter adjusted earnings performance exceeded our revised outlook coming in at $0.42 per share versus our outlook of $0.34 to $0.38 per share. While we are affected on the revenue line by transaction softness in certain markets and by foreign exchange rate swings that were more severe than we anticipated in our outlook the impact to our other income from foreign currency revaluation was less than previously anticipated.

Revenues decreased 8.9% coming in slightly below our expectations as the U.S. dollar continued to strengthen against the Pound Sterling, the Euro and the Australian dollar. We expanded gross margin and leveraged SG&A resulting in an EBITDA margin increase of 130 basis points. This is a testament to the increasing operating leverage of our model. I will walk briefly through our divisional performance.

Our international services division, TNS’ largest division, recorded a year-over-year revenue decrease of 13.3% in the fourth quarter and accounted for 43.2% of total revenue. Foreign currency impact in the quarter was $8 million, $2 million above our expectations. On a constant dollar basis ISD revenue grew 6.3%. As I mentioned earlier we continued to see weakness in the pace of transactions in certain markets which I will explain in more detail as I go along.

Looking at ISD by geography, in Europe as we indicated on our last call POS transaction volumes have slowed in most countries though we continue to gain additional share in some of these markets. In the United Kingdom fourth quarter growth on constant dollars was approximately 4.7%. Dial transaction volumes in the U.K. were roughly flat year-over-year with growth in this market driven primarily by sales of our payment gateway and IP services.

During the first quarter of 2009 we resigned for a further three years our long standing contract with the Royal Bank of Scotland for the supply of dial and lease line POS services. Our expectation for 2009 dial volumes from existing customers in the United Kingdom market is for a flat comparison.

We are seeing continued interest in our value added services such as our payment gateway and IP related products and expect to see this trend continue through the remainder of 2009.

In addition we are seeing demand for cost [forward] acquiring POS transaction message conversion and our fraud and security products. In France we began to see weakness in transaction volumes in the fourth quarter. However, we are seeing continued demand for our IP related products in France and are working with our network partners in the country to maximize these opportunities.

We are also on schedule to complete the migration of the final trench of terminals associated with the JPG acquisition. In Italy and Spain we are continuing to see some softness in dial transaction volumes. However, we continue to focus on expanding our market share of our core dial business in these countries. In addition we have combined this with the supply of our network and value added services to the retail sector.

In Australia, revenue growth in constant dollars was approximately 34%. Our core business in Australia is performing well with transaction volume trends still growing. We believe the recent Australian government initiatives intended to kick start the economy have had the effect of keeping transaction levels growing.

In the Asia Pacific region we continue to see good traction in the card not present vertical. We are focusing our sales efforts in this region for this product across many types of merchant categories and are seeing strong adoption of this platform. We are also seeing opportunities to sell our broadband services directly to merchants across the region.

Our international FSD business in the fourth quarter continued to win new business by expanding our existing community of interest and leveraging our content from the many exchanges that are now connected to our network throughout the world. We established a connection with the Taiwan Stock Exchange to deliver real time market data for end users, data vendors and other intermediaries. We are also working with Turquoise, the Pan European Trading Platform established by Europe’s leading investment banks to service its expanding portfolio of automated trading systems, exchanges and ECN’s.

During the quarter we also signed with IDC’s interactive data real time service to provide fully managed connectivity paring market data fees and other services to its clients. We also became an accredited network service provider for the London Stock Exchange. This allows our existing and new customers to utilize our network connectivity to London’s main exchanges.

In the first quarter we also signed with BATS Europe, the low latency, multilateral trading facility to provide client connectivity services. Finally, in the Asia Pac region we have been successful in growing our international FSD business via our newly established sales offices in Hong Kong and Singapore.

Moving on to domestic FSD, revenue in our financial services division increased 10.7% year-over-year and was 14.5% of total fourth quarter revenue. FSD growth in the fourth quarter resulted primarily from large bandwidth installations supporting market data fees as well as increases in the number and speed of our connections with existing customers.

Toward the end of 2008 we reached an agreement to migrate a number of ITG broker connections onto our network. I am pleased to report that this migration is progressing well and we are on target to complete it by the middle of this year. This arrangement will add a further 120 connections onto our network worldwide.

In the fourth quarter we signed with Alpha Trading Systems, the latest alterative trading system to launch in Canada, to establish a connection to our secure trading extranet. We ended the fourth quarter with 1,456 global physical end points of which 1,025 were domestic and 10,977 domestic logical virtual connections. In 2009 we will continue to expand our customer connectivity, network coverage and exchange connectivity further extending the FSD community of interest.

Moving to TSD, revenue in our telecommunications services division decreased 11.2% from last year and was 19.8% of total fourth quarter revenue. Fourth quarter revenue benefited from continued migration of cable customer traffic onto our network, increasing revenue as we add their subscribers. This growth was more than offset in the quarter by the loss of caller ID business from two customers. We will face negative comparisons as we anniversary these customer losses in the first half of 2009. We continue to pursue further expansion into the cable vertical where a large opportunity for growth remains for our TSD division. Our pipeline continues to grow with a number of opportunities for us in the network and database area. We continue to work with our TSD customers to explore cross selling opportunities to market our POS products through their sales channels.

Moving to our POS division, revenue in the POS division decreased 8.4% year-over-year in the fourth quarter and accounted for 22.5% of total fourth quarter revenue. Total POS dollar transaction counts were down 10.2% year-over-year through a combination of softness in the economy and the anniversary of a large customer moving traffic off our network in November of last year. Revenue per transaction also decreased slightly resulting from consolidation in the industry. The migration of the Coop Financial Services ATM network continues to go well. To date we have 3,016 end points installed or are in the process of being installed out of an estimated total of 3,800 and expect to have completed this migration by the end of the second quarter. Our team has done a great job migrating this customer across our network.

During the quarter we also completed additional broadband installations bringing the total U.S. broadband connections to over 7,000. We also signed a number of new contracts in the quarter including GPM to install our broadband solution to nearly 200 Fas Mart’s and Shore Stop’s with Worsley for another 88 locations and with the British Jones Group which is using our synapse wireless payment gateway.

For 2009 in our POS business in addition to our core network systems both domestically and internationally we are putting an additional focus on the following: First we are stepping up our ATM network capabilities in North America, Australia and the United Kingdom. As part of this strategy, TNS has taken over the contracts and certain assets associated with the Trident Calypso ATM processing business. This along with our existing processing business in the United Kingdom and our worldwide transaction network will provide us with a unique global ATM driving capability.

Second, we are focusing on our innovative IP related broadband and payment gateway services. Third, we are developing our security enhanced network services. Finally, we also plan to establish a business in Turkey to focus on POS, ATM and FSD services.

In summary, the fourth quarter capped off a year in which we faced the financial challenges of unprecedented currency changes and a slow growing economy by executing extremely well from a customer, new business and operational perspective, achieving the high end of our original adjusted earnings outlook for the year. In 2009 we have planned very prudently given we fully expect to face financial foreign currency fluctuations at currency rates as much as $30 million as well as weaker volumes and are managing costs throughout the organization.

However, we do enter the year very well positioned to weather the current economic challenges with our strong balance sheet, competitive position and cash generating business model. Also while some customers and prospects are pulling back others are considering outsourcing their mission critical data communications as an option to increase their own cost efficiency. This is what TNS does for a living and the proposition upon which TNS was founded and we are therefore well positioned to take advantage of these opportunities as they emerge. We are also continuing to make strategic investments in all our divisions that are crucial to our growth potential and market competitiveness. By focusing on execution, careful investment and cost control I am confident that we can weather this recession well and emerge from it a stronger and more competitive company.

Now Denny will take you through the financials including foreign currency and our 2009 outlook.

Dennis Randolph

Thanks Henry. Good evening everyone. We’ll start the financial review with income statement highlights beginning with web cast slide four.

Total revenue in the fourth quarter decreased 8.9% to $81.1 million from $89 million in the fourth quarter of 2007. As we discussed with you last quarter we had factored into our Q4 outlook an impact from foreign exchange of $6 million on the revenue line and a $1 million impact from unrealized foreign currency revaluation losses on assets and liabilities which flow through the other expense line of our P&L.

The overall impact of foreign currency translation on a year-over-year basis was $8 million to revenue and $3 million to EBITDA. This was partially offset by a $900,000 gain from the revaluation of certain balance sheet accounts which are denominated in foreign currencies. I will give you an update later in my comments about our exposure to the major currencies we operate in and how currency affects our P&L. As Henry has already detailed, the divisional components of revenue I will move down to the gross margin line.

Gross margin in the fourth quarter of 2008 increased 50 basis points to 52.9% from 52.4% in the fourth quarter of 2007. On a constant dollar basis gross margin for the fourth quarter increased 230 basis points to 54.7%. Constant dollar improvement in gross margin relates to the increase in scale of ISD which is TNS’ highest gross margin division.

Engineering and development costs in the quarter were $7 million compared to $7.7 million in the fourth quarter of 2007 and increased 10 basis points to 8.7% of revenue. On a constant dollar basis E&D decreased 2.1% to $7.5 million. Engineering and development costs decreased on a net basis as the amount of costs capitalized during the fourth quarter of 2008 increased over 2007 levels. The increase in the amount of labor cost capitalized relates to investments we are making in our payment gateway applications, in particular our card not present service offerings.

SG&A expenses were $16.7 million or 20.6% of fourth quarter 2008 revenue as compared to $20.4 million or 23% of revenue in the fourth quarter of 2007. On a constant dollar basis SG&A expenses decreased 10.8% to $18.2 million. Included in SG&A for the fourth quarter 2008 were severance charges of $400,000 and for the fourth quarter 2007 were severance charges of $700,000.

On a constant dollar basis, excluding the severance charges, SG&A decreased primarily from a reduction in performance related stock compensation. Stock compensation included in SG&A for the fourth quarter of 2008 was $1.1 million compared to $2.6 million for the fourth quarter of 2007. In addition, during the fourth quarter we controlled costs carefully in order to create additional leverage of our cost structure.

Depreciation expense in the fourth quarter increased 20.1% to $7.1 million and was 8.7% of revenues versus $5.9 million or 6.6% of revenues last year. Included in depreciation expense is a charge of $1.1 million related to the impairment of certain capitalized software assets primarily related to our vending platform. The negative impact related to foreign currency translation was $300,000 on a year-over-year basis.

The amortization of intangibles increased 1.6% to $7.4 million in the fourth quarter of 2008 and to 9.1% of revenues versus $7.3 million last year or 8.1% of revenue. Included in amortization expenses are impairment charges of $2 million in the fourth quarter of 2008 and $1.1 million in the fourth quarter of 2007 related to certain customer relationship intangible assets. The negative impact related to foreign currency translation was $400,000 on a year-over-year basis.

Interest expense in the quarter was $2.1 million versus $4.2 million last year as we have substantially reduced our debt levels and are benefiting from a lower effective interest rate. As a reminder, our current debt is priced at a variable rate at LIBOR plus 200 basis points. Based on the current environment we expect interest expense on our existing debt to come down in the first quarter of 2009.

Other income was income of $1.1 million during the quarter versus $300,000 in the fourth quarter of 2007. The increase primarily relates to gains from the revaluation of foreign currency balances, mainly denominated in Euro or Pound Sterling held in jurisdictions where the local currency is neither the Euro nor Pound Sterling. The total impact to adjusted earnings year-over-year is approximately $0.02 per share related to these items.

Because of the high amount of amortization of acquired intangibles we record the fluctuations in our effective GAAP tax rate we use two non-GAAP measures to evaluate operating performance; EBITDA before stock compensation expense and adjusted earnings both of which are illustrated in today’s press release. EBITDA before stock compensation expense for the fourth quarter of 2008 was $21 million, amounting to 25.9% of revenue compared to $21.9 million or 24.6% of revenues for the fourth quarter of 2007, a decrease of 4.1%.

Included in the fourth quarter results of 2008 and 2007 are pre-tax charges associated with severance of $500,000 and $900,000. Excluding these charges from both quarters EBITDA before stock compensation expense decreased 5.7%. On a constant dollar basis EBITDA before stock compensation expense increased 9.6% to $25 million or 28.1% of revenues. Adjusted earnings for the fourth quarter of 2008 increased 5.2% to $10.2 million or $0.40 per share from fourth quarter 2007 adjusted earnings of $9.7 million or $0.40 per share. The share count increased 2.8% to 25.3 million.

Excluding the previously mentioned pre-tax severance charges from both periods adjusted earnings for the fourth quarter of 2008 increased slightly to $10.6 million or $0.42 per share from $10.5 million or $0.43 per share for the fourth quarter of 2007. On a constant dollar basis excluding the pre-tax severance charges, adjusted earnings for the fourth quarter of 2008 increased 22.1% to $12.6 million or $0.50 per share. These figures are calculated on a tax rate of 20%.

Now let’s move to slide five to review our balance sheet. Our current ratio is 1.59 times, above 1.43 times at the end of last year and up from 1.45 times at the end of the third quarter. Long-term debt at quarter end was $178.5 million for a total debt to capitalization ratio of 63.5% versus 68.9% at the end of last year. In the fourth quarter we made voluntary pre-payments on our term B loan of $2 million for a total of $46.5 million pre-paid since the March 2007 recapitalization. 2008 debt prepayments totaled $27 million.

Cash at year end was $39 million up nearly $16 million from last quarter and up $21 million from last year. During the fourth quarter we generated $25.5 million in cash flow from operations which is 3.8 times the level generated in the fourth quarter of last year. For the full year 2008 we generated free cash flow which we define as cash flows from operating activities less capital expenditures of $42 million compared to $25 million in 2007. This represents an increase of over 71% and reflects our focus on increasing our operating leverage.

Capital expenditures in Q4 were $6.7 million compared to $4.2 million in the fourth quarter of 2007 but were down from $11.6 million in the third quarter moderating as planned. In 2009 we expect capital expenditures to be approximately $32 million which is flat with 2008.

Now let’s move to slide six to review currency effects. In the markets in which we operate we recognize revenue and incur expenses in each markets local currency. We then translate these local currency results and report in U.S. dollars using the average exchange rate for each currency in effect for that period. 43% of our total company revenues are transacted in currencies outside the U.S. in our international services division which carries EBITDA margins of approximately 38%.

The primary currencies are the Pound Sterling, the Euro and the Australian dollar. To give you an idea of the currency exposure in our business model the currency composition of our fourth quarter results was as follows: ISD revenues of 43% of total revenues of which the Pound Sterling represents 45%, the Euro represents 31%, the Australian dollar represents 18% and other currencies make up the balance of 6%. ISD expenses are 34% of total operating expenses of which the Pound Sterling represents 50%, the Euro represents 29%, the Australian dollar represents 13% and other currencies make up the balance of 8%.

The weighted average exchange rate used to translate our non-U.S. dollars denominated revenues and expenses for both the fourth quarter 2008 and the fourth quarter 2007 were as follows: The British Pound declined 24% year-over-year from $2.05 to $1.55. The Euro declined 9% year-over-year from $1.45 to $1.31. The Australian dollar declined 25% year-over-year from $0.89 to $0.67.

The negative impact on our fourth quarter 2008 results from these changes in the weighted average exchange rates used for translation purposes is as follows: Revenue was impacted by $8 million. EBITDA was impacted by $3 million. Adjusted earnings was impacted by $1.6 million or $0.06 per share.

Let’s move to slide seven to review our 2009 and first quarter outlook. Today’s press release and the slides we are showing reflect our outlook on both a constant dollar basis as well as our estimate for the negative impact of foreign currency translation. We will walk you through our specific currency assumptions and the related impact later in the call.

For 2009 our outlook for total revenue is for a 2-4% decrease to $324-334 million versus 2008 revenue of $344 million. On a constant dollar basis our outlook for total revenue is for 3-6% growth to $353-364 million. As we described last quarter our starting point for revenue growth was a mid single digit recession outlook in local currency which we then applied foreign exchange effect for ISD.

By division for the full year 2009 we are targeting the following: ISD revenue growth on a constant dollar basis of 5-7%, FSD revenue growth of 10-14%, POS revenue growth of 3-6% and TSD revenue decrease of 5% to flat. Our outlook for 2009 adjusted earnings is $36.2 million to $39.4 million or $1.33 to $1.48 per share versus $40.2 million or $1.60 for 2008.

On a constant dollar basis our outlook for adjusted earnings is $41.7-45.4 million or $1.63 to $1.78 per share. Please note that these numbers do not include any non-recurring charges and do not take into account anticipated results from the CSG acquisition. For the first quarter 2009 outlook for total revenue is for a 9-12% decrease to $74-77 million versus first quarter 2008 revenue of $84.1 million. On a constant dollar basis our outlook for total revenue is for a range of a decrease of 2.5% to an increase of 1% for $82-85 million.

Our outlook for adjusted earnings is $6.1 million to $7.1 million or $0.24 to $0.28 per share versus $7.5 million or $0.30 per share for the first quarter 2008. On a constant dollar basis our adjusted earnings outlook is for 7-21% growth to $8.1-9.1 million or $0.32 to $0.36 per share. Again please note these numbers do not include any non-recurring charges.

Now let’s move to slide eight. Our current forecast contemplates the following exchange rates for the major currencies for 2009: Pound Sterling exchange rate of $1.45 which represents a 21% decline from 2008 weighted average exchange rate. The Euro exchange rate of $1.29 which represents a 12% decline from 2008 weighted average exchange rates. The Australian dollar exchange rate of $0.65 which represents a 20% decline from 2008 weighted average exchange rates.

These exchange rate assumptions are based upon actual average exchange rates through February 2009 as well as estimates based on a composite of financial institutions forecasts. Based on these currency assumptions we anticipate an impact to revenue of $29-30 million and to adjusted earnings of approximately $0.30 for 2009. To the extent the weighted average exchange rates differ from our estimates the impact of foreign exchange will differ as well.

Please note that slide eight offers a sensitivity analysis for a $0.01 movement in each of these exchange rates.

Now I will turn the call back to Henry.

Henry Graham

Thanks Denny. Let’s turn to slide nine. This afternoon we announced we have entered into a definitive agreement to acquire Communication Services Group’s assets from VeriSign for $230 million. The proposed acquisition joins TSD’s core competency in providing network connectivity, valuation and billing services to the U.S. telecommunications industry with CSG’s scaled product set and R&D capabilities. This combination creates a premier provider of SS7 network services and intelligent database offerings. The acquisition gives TNS a long-term strategic position in these businesses and provides an excellent financial, operational and technological fit.

It extends our reach into new verticals and strengthens our ability to compete effectively in the fastest growing areas of the segment such as voice over IP and wireless roaming and clearing. It brings us a business model we know well. CSG’s annual revenue run rate is approximately $200 million and carries the familiar revenue and strong cash flow characteristics of our TSD division. It brings us a very talented group of people including a product development group with several next generation products already under development that bring the post SS7 future to TNS.

It brings an SS7 network already connected to our own which reduces the risk inherent in any integration. We anticipate the acquisition to be accretive to TNS’ earnings in 2009 upon close and provide support for the conservative, efficient use of debt capital. Given that we are combining similar operations, business models, customer bases and technologies, CSG represents a good risk adjusted fit.

Now let’s move to slide ten to take a closer look at the assets we are buying. TNS has built its reputation as the gold standard of value added connectivity through our divisions that move payments, money and voices around the world. Through the CSG transaction we are adding scale to our operations and adding best in class service offerings that are new to TNS in an industry we know well.

Assets we are buying through CSG are world class and represent a strategic investment in TNS’ future. First TNS currently operates an unaffiliated SS7 network. The acquired network is more extensive, feature rich and will expand our functionality and reach to over 340 access points with direct access to every local access and transport area in the United States including direct connectivity to ILEC and RBOC networks.

Second, we will gain the largest independent authoritative calling name database; the only provider with relationships with all the major ILEC’s giving it nationwide delivery and the broadest portfolio of CNAM products. As you know we have historically been a reseller of non-authoritative third party calling name services. With this acquisition we are adopting an own versus rent strategy which is designed to strengthen our competitive position, our efficiency and our ability to adapt to the future demands of the industry.

Third, with this acquisition we would enter the roaming clearing space for the first time with a comprehensive product line and a small but desirable market position as a competitive alternative to a larger, dominant provider.

Fourth, as I mentioned we will bring in house a talented group of leading edge developers complementary to our existing product development group who are highly accomplished in both SS7 and e-based protocols and an originating commercially, successful product. Our objective is to harvest SS7 technology and develop follow-on IP applications that represent the future app to SS7.

Let’s move on to slide 11. Our TSD division has very strong relationships with customers and is known among wire line and wireless providers as offering superlative service. This makes us a great fit for CSG. With CSG we will add over 700 customers, most of whom are new to TNS and strengthen our list of blue chip relationships including traditional leading wire line and wireless providers. As I mentioned earlier TNS will be well positioned to increase our sales to the cable and voice over IP vertical and to wireless roaming and clearing providers, two segments that are growing more quickly than the marketplace.

We also envision an opportunity for the combined division to offer a set of more robust, cost effective bundle solutions to customers and to be at the leading edge of new product innovation through our combined R&D expertise.

Now let’s move to slide 12. Over the course of multiple transactions most of which have involved heavy customer migrations like the JPG acquisition, TNS has proven its ability to manage integrations smoothly and professionally with minimal, if any, impact to customer traffic. Because we provide mission critical services to our customers we recognize how critically important this is. We have outlined an integration blueprint internally the main points of which are on this slide.

In terms of technology consolidation and customer migration the inter-connectivity of the two SS7 networks means that both networks are able to run parallel, allowing us to migrate customer traffic smoothly and helping minimize integration risk. We expect to derive synergies by consolidating operations and production and eliminating vendor duplication. In terms of product integration we plan to make a review of the combined product lines called the best from both suites and create a unified robust product line.

We will also put product development and engineering road maps in place for future innovation particularly in broadening the suite we offer to both TSD and POS customers, international products, roaming and clearing, routing and IP based routing. As I mentioned earlier we believe we will have a significant opportunity to offer cost effective, bundled solutions for customers.

With respect to people and systems once the transaction closes we plan to integrate the employees new to TNS into our corporate structure and our culture to create a cohesive, efficient team. Now I will turn the call over to Denny who will give you an overview of the financial aspects of this transaction.

Denny?

Dennis Randolph

Thanks Henry. The purchase price and the total cash consideration for the assets of $230 million inclusive of working capital. Henry mentioned earlier CSG has a revenue run rate of approximately $200 million and its business model is characterized by a high percentage of recurring revenue and strong cash flow generation. As is the case with CSG today, CSG’s overall revenue model is derived from a combination of multi-year service contracts with monthly recurring revenue and per clear[ing] charges for intelligent database services. We expect the transaction to be funded through a combination of cash on hand and an additional $250 million in debt.

The acquisition is contingent upon financing and the successful amendment of our existing facility to allow for the additional indebtedness. We anticipate that part of the amendment process, repricing our existing term loan at market rates. We anticipate closing the financing in the transaction within the next 60 days. We believe the transaction represents an efficient use of capital and a conservative use of leverage in this environment.

As we stated earlier our balance sheet is strong with $39 million in cash, $15 million available under our revolver which is undrawn and our intention is to arrive at post-close leverage levels that are not significantly higher than the levels TNS is carrying today. As always we plan to use incremental cash flow to pre-pay the incremental debt. Through the added scale that CSG brings to our business we anticipate the transaction once it closes will be accretive to earnings in 2009.

We also expect further benefit to be derived from leveraging infrastructure and network efficiencies.

Now I’ll turn the call back to Henry.

Henry Graham

Thanks Denny. Now we will turn the call back over to the operator to begin taking your questions.

Question-and-answer Session

Operator

(Operator Instructions) The first question comes from the line of Gary Prestopino - Barrington Research Associates, Inc.

Gary Prestopino - Barrington Research Associates, Inc.

Are you at liberty to give us some idea of what the adjusted EBITDA margin of this business is at this point?

Dennis Randolph

We are not at liberty to disclose that at the moment.

Gary Prestopino - Barrington Research Associates, Inc.

On the wireless side with what they are doing, I am not altogether too familiar with the wireless side of this business. Is it also based on call signaling routes that are charged on a per month basis to the carrier?

Henry Graham

Yes.

Dennis Randolph

It is very much the same revenue model as ours. They provide complementary network signaling services which we charge a fixed monthly fee for each of the routes. For access of the databases it is a per clearing charge for each access to the database.

Gary Prestopino - Barrington Research Associates, Inc.

So this company is providing these to the smaller wireless carriers? I would assume the larger ones have their own in-house SS7.

Dennis Randolph

Effectively this business provides services to the independent, rural Telco’s. It provides services to the cable MSO’s. Most of the traditional ORBOC selects of AT&T, Verizon, Qwest, those institutions run their own SS7 networks. It is the smaller guys down from them that use an unaffiliated hubbing service such as TNS provides or the CSG business provides.

Henry Graham

For the most part it is the same business we do today with our own SS7 network.

Gary Prestopino - Barrington Research Associates, Inc.

But the difference is you own the data versus renting it, right? That is a big positive issue for you.

Henry Graham

Yes it is.

Operator

The next question comes from Franco Turrinelli - William Blair & Company.

Franco Turrinelli - William Blair & Company

I guess I could do the math myself but if you don’t mind just kind of helping us out here, the company overall constant currency growth rate I’m not sure I caught that?

Dennis Randolph

It is roughly flat in the fourth quarter. The impact was roughly $8 million of currency on a year-over-year basis and so on a constant dollar basis we would report at $89.1 million versus $89 million in the fourth quarter of last year.

Franco Turrinelli - William Blair & Company

Since you are helping me out here, on the guidance on slide seven I think you mentioned ISD 5-7% outlook on a constant currency basis. On a reported basis?

Dennis Randolph

What we also said is we believe the impact of foreign currency which is all in the international services division is between $29-30 million. So you take that 5-7% and then you mark it down by $29-30 million.

Franco Turrinelli - William Blair & Company

On the VeriSign acquisition which certainly looks like an excellent fit from your point of view could you give maybe if you can a little bit more insight into why they are selling this business? At the same time why frankly the outcome isn’t a different one which is you selling your TSD business to them?

Henry Graham

We really can’t expand beyond what we have already said. As soon as we get more information and certain documents to file we will be glad to answer as many questions as we can and even more so when the transaction closes.

Dennis Randolph

Effectively this was one of the businesses that VeriSign had designated as non-core and so this was a planned divestiture from their standpoint they announced over 15 months ago.

Henry Graham

That’s true. That is in their public documents.

Franco Turrinelli - William Blair & Company

I am assuming that since you have come to the market with this you are reasonably confident of your ability to obtain the financing and change in terms you discussed on the call?

Dennis Randolph

That we are.

Henry Graham

That would be a good assumption on your part.

Operator

The next question comes from Tien-Tsin Huang – JP Morgan.

Tien-Tsin Huang – JP Morgan

Just a follow-up question about the funding. I didn’t catch all of it. Is it committed? What is the visibility here on the funding to get this deal done?

Henry Graham

It is not committed. We feel highly confident right now we will be able to successfully finance this transaction.

Tien-Tsin Huang – JP Morgan

The expectation for accretion, is that assuming some level of synergies here? Are you just assuming sort of folding the business in?

Henry Graham

It assume no synergies.

Tien-Tsin Huang – JP Morgan

So no synergies on the deal. So opportunistically we have seen JPG happen and some other things here, at a high level sort of the opportunities around the synergies is it significant a la JPG or is there another way to frame the opportunities around the synergies?

Henry Graham

I think we answered your question. Obviously we would hope there would be some synergies but we are not counting on any.

Tien-Tsin Huang – JP Morgan

Just a non-VeriSign related question in the POS business what kind of…I think you talked about it a little bit but I didn’t write it down fast enough, the same store growth you saw in transaction counts in 4Q how was that versus plan and what are you expecting in 2009? I’m just trying to isolate the new wins ramping versus growth in the underlying business.

Dennis Randolph

I think you know when we got on the third quarter call last time we started to see an impact. The majority of the markets we operate in now if we look at the U.S. where we are still suffering from the comparison to [thesis] we have probably seen the biggest impact to dial transaction volumes in the U.S. What our expectations are going into next year is we are tracking down between 6-8% in terms of volumes. If we look at the U.K. market where we had seen transaction growth really through the first eight months of 2008 in the 4-6% range, most of the months it was trending at the bottom end of that growth range. We have seen dial transaction volumes in the U.K. moderate. Effectively the comparisons are flat year-over-year. Italy, Spain and France are sort of a mixed bag. One of the things we still have within those markets is we are continuing to gain market share so we do expect transaction volume increases in those markets in fiscal year 2009 but in terms of your same store sales analogy we expect volumes to be flat in those markets.

The only market to this point where we have not yet seen a significant erosion in the transaction volumes is the Australian market where we expect transaction volumes to be up in the mid single digits in fiscal year 2009 on a sort of organic basis.

Henry Graham

Does that give you what you need?

Tien-Tsin Huang – JP Morgan

It does. I’m just trying to close it out, I guess POS growth I can get to the ISD just from looking at some of the annualization in the fourth quarter but I guess POS guidance of up 3-6% is what I think I caught. I guess that is assuming a timely conversion and continued up ramp of wins like Coop and everything else. I’m just trying to understand some of the visibility.

Henry Graham

That’s correct. We have got pretty good visibility. We have in fact very good visibility into that conversion as I stated in my comments and Denny stated in his. So we do need that conversion to take place.

Dennis Randolph

Remember once the Coop is fully ramped up to a revenue run rate of between $7-8 million we expect to have all those ATM’s converted early in the second quarter.

Operator

The next question is a follow-up question from Franco Turrinelli - William Blair & Company.

Franco Turrinelli - William Blair & Company

Just going back to Tien-Tsin’s question a second, one of the things I think you need to adjust for right is the decline of transactions in the fourth quarter still have the de-conversion of the customer in it whereas 2009 will be kind of a clean comparison from that point of view. Is that correct?

Dennis Randolph

That is correct. So adjusting for that customer where we saw transaction volumes down in the fourth quarter if I take that customer out they were down roughly 8%. So our expectation is through the first 9 months of the year next year when we anniversary this based on the current trends we are seeing in volumes the volumes are down on a year-over-year basis about 8% right now in the U.S. market.

Franco Turrinelli - William Blair & Company

Again, Coop and other things in the pipeline are more than sufficient to get us back up to that 3-6% is really the take away here?

Dennis Randolph

That’s correct. It is substitution of the dial business with our broadband and IP capabilities.

Franco Turrinelli - William Blair & Company

We were trying to get all of this down but I’m not sure we all got it down correctly. I wanted to just ask you to help me out here on the table which is in your press release, the two last tables EBITDA before stock compensation expense and the adjusted earnings. In particular I wanted to focus on the adjusted earnings for a second. If I scribbled everything down correctly there are I think three separate items affecting, not the adjusted earnings, but there are three basic one-time items here. Right? The intangible write offs you talked about.

Dennis Randolph

Effectively those aren’t included in the calculation of adjusted earnings because they are non-cash charges.

Franco Turrinelli - William Blair & Company

Also they are also excluded from EBITDA as well?

Dennis Randolph

That is correct.

Franco Turrinelli - William Blair & Company

So those we can kind of not worry about too much unless we are looking at the GAAP numbers. But there is, as you point out, severance charges in here offset by the $0.9 million benefit. Is that they way of thinking about it?

Dennis Randolph

I think the $0.9 million benefit is for the full year so that actually if you remember that was back in the first quarter when we settled favorably one of the sales tax liabilities we had on the books for some time. So if you look on a net basis for the year the severance being offset by the benefit, the full year impact of the sort of non-recurring charges is roughly $0.01.

Franco Turrinelli - William Blair & Company

So in the fourth quarter the only thing we need to potentially back out in addition to this is the severance charges from the fourth quarter?

Dennis Randolph

That is correct.

Operator

The next question is a follow-up question from Gary Prestopino - Barrington Research Associates, Inc.

Gary Prestopino - Barrington Research Associates, Inc.

Also just looking and talking about this POS business can you give us an idea of what percentage of the revenues are now say broadband, IP or fee basis versus transaction?

Dennis Randolph

In 2008 roughly 80% of the business related to dial related type business. Of that 80% about 80% of it is variable. So 80% of our dial business relates to transaction volumes.

Gary Prestopino - Barrington Research Associates, Inc.

So 20% is based on fees then?

Dennis Randolph

Our traditional dial business there has always been a fixed fee element for certain connectivity that we provide as well as the reporting capabilities. We also provide some dedicated lease line connectivity, some of the old historical business.

Gary Prestopino - Barrington Research Associates, Inc.

So as we go further into the year if I get you right I kind of got 80% of your 80% about 64% is really based on pure transactions?

Dennis Randolph

That is correct.

Gary Prestopino - Barrington Research Associates, Inc.

So as you go through 2009 what you are doing with Coop, adding IP, adding connections, where do you think you will be in terms of the split there? Where do you see that going?

Dennis Randolph

Effectively what we said is that we expect transaction volumes through the first nine months of 2009 to be down roughly 8%. We are going to start to anniversary in the October timeframe where we really started to see a decline in transaction volumes.

Henry Graham

We expect the broadband to grow significantly in fiscal year 2009. A lot of that work has been done by the conversion of a significant number of the Coop locations as well as other new things we talked about in our narratives.

Gary Prestopino - Barrington Research Associates, Inc.

Lastly, right now with your SS7 business you currently own a contract with a database provider. Is that correct?

Dennis Randolph

We are in the 12-month tail of the services being provided by that third-party provider.

Gary Prestopino - Barrington Research Associates, Inc.

When you say the 12-month tail of getting it, how much longer do you have to be with this provider for your business in-house that you can switch over?

Dennis Randolph

The term of that agreement ends December 31, 2009.

Operator

At this time we have no more questions in queue. I will now turn the call back over to Mr. Graham for closing remarks.

Henry Graham

Thanks everybody for joining us tonight. We look forward to talking to you again at the end of our first quarter earnings. Good night.

Operator

Thank you for your participation in today’s conference. This concludes your presentation. You may now disconnect and have a wonderful evening.

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