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TNS, Inc. (NYSE:TNS)

Q1 2009 Earnings Call

May 5, 2009 5:00 PM

Executives

Mike McCarthy – Assistant Corporate Secretary

Henry Graham – Chief Executive Officer

Dennis Randolph – Executive VP, CFO

Analysts

Andrew Jeffrey – Suntrust

Tien-Tsin Huang – J.P. Morgan

Wayne Johnson – Raymond James

Franco Turinelli – William Blair & Co.

Gary Prestopino – Barrington Research

[Roger Tsinsin – George Weiss]

Operator

Welcome to the first quarter 2009 TNS Incorporated earnings conference call. (Operator Instructions) I would now like to turn the call over to Mr. Mike McCarthy, TNS's Assistant Corporate Secretary.

Mike McCarthy

Good evening everyone and thank you for joining us on this call to review TNS's first quarter 2009 financial results and the acquisition of the Communications Services Group from VeriSign.

I'm Mike McCarthy, TNS's Assistant Corporate Secretary. This conference call and webcast are accompanied by a brief slide presentation that we invite you to access on our TNS's web site at www.tnsi.com. Leading today's call from TNS are Henry Graham, CEO 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 consists 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 circumstance. Finally, we refer you to our Form 10-K filed with SEC on March 16, 2009 and our press release issued today both of which are available on our website for additional information on factors which could cause actual results to materially differ from the forward-looking statements.

With that, I turn the call over to Hendry Graham, TNS's CEO.

Henry Graham

Thanks everyone for joining us on our call this afternoon. Today we will discuss TNS's first quarter 2009 results and acquisition of Communications Services Group from VeriSign that we are very pleased to have closed this past Friday. For any CSG employees that may be listening on this call, the entire management team joins me in welcoming you and your colleagues to TNS.

I'll begin the call with an overview of the first quarter results, then I will turn over the call to our CFO Dennis Randolph who will take you through the financials. I will then come back and discuss the acquired CSG operations, our strategy and integration plans and Dennis will detail our revised 2009 outlook for the company.

As usual, we have prepared a slide presentation that is available on our website, www.tsni.com. We invite you to follow along as we move through the discussion. Let's move ahead with Slide 2, TNS's divisions.

TNS's first quarter performance demonstrated consistent execution with adjusted earnings of $0.29 per share, slightly exceeding our outlook of $0.24 to $0.28 per share. Similar to last quarter, revenue was affected by transaction softness in certain markets and by the impact of foreign exchange rates.

We had anticipated these effects and they were no worse then we planned. Revenues decreased 2.5% year over year within our outlook range. Gross margin decreased 50 basis points from last year but remained at healthy levels. SG&A decreased both in absolute dollars and as a percentage of sales.

So while EBITDA decreased in the quarter, we absorbed a $2.6 million currency impact and overall weathering the global economic downturn very well. We are controlling what we can control and are experiencing a lower but still sustained level of demand of our mission critical services.

I'll walk briefly through our divisional performance. Our International Services Division which until this past Friday was TNS's largest division recorded a year over year revenue decreased of 18.7% in the first quarter and accounted for 40.2% of total revenue. Foreign currency impact on the quarter was $8.4 million in line with our expectations.

On a constant dollar basis, ISD revenues grew 3.9%. On average the pace of international transaction volumes have remained steady since the step down we saw in the September/October time frame but we continue to gain market share overall.

Looking at ISD by geography, in Europe as we indicated on our past two calls, transaction volumes have slowed in most countries though we continue to gain share in some of these markets. In the United Kingdom, first quarter revenues in constant dollars were down approximately 3%. Dial transaction volumes in the U.K. were slightly down year over year in line with plan and processing revenue decrease due to the loss of customers. This was offset by growth in sales of our payment gateway and optic services.

This quarter we reached an agreement with Gemalto, a POS terminal manufacturer to supply POS terminal management services to over 140,000 terminals in the United Kingdom. We also signed an extension to our contract to supply U.S. network services to a GK subsidiary.

In France, transaction volumes in the first quarter were also down slightly for our existing customers, but overall volumes were up as we continue to gain market share of dial services. We continue to see demand of IP related products and are working with our network partners and customers in the country to maximize these opportunities.

In Spain our experience in volume declines for our existing customer base due to the current economic climate. However we expanding our market share of our core dial business. In addition, we have combined this with a supply of our network of value added services to the retail sector.

In Italy dial volumes continued to grow although at a moderate pace and were in line with expectations. We are also expanding market share of the wireless and IP service markets with merchants in Italy.

In Australia, transaction volumes were up resulting in revenue growth in constant dollars of approximately 15.4% and transaction volume trends are still growing. As part of our effort to launch new products into growing markets in the first quarter, we established our ATM processing presence in the Australian market.

Australian payments market is adopting the practice of surcharges to ATM transactions which is driving a growth opportunity to our ATM processing solutions. We also launched Fusion Point lighting in the Australian and New Zealand markets.

In the Asia Pacific region, we continue to see good traction in the core verticals. We are focusing our sales effort in this region for this product across many types of merchant categories and continue to see strong adoption of this platform. We are also seeing opportunities to sell our broadband services directly to merchants across the region.

Overall, many of our customers in our international markets are looking for ways to reduce their operating costs and are or considering outsourcing the POS and ATM network needs. Our international FST business growth was 16.8% in the first quarter on a constant dollar basis and we benefited in the quarter from our expanding community of interest leveraging content from the many exchanges that are now connected to our network around the world.

During the quarter we added network capacity for a number of customers including Deutsche Bank and Sanford Bernstein in the United Kingdom and Fidelity in France. Just last week we announced we entered an agreement with Burgundy a multi-lateral trading facility owned by a consortium of leading Nordic banks and securities trading firms to provide a central connectivity service between Burgundy and its trading participants through our secure trading intranet.

Burgundy's owners serve nearly half of the Scandinavian trading volume and expect the facility to launch this quarter. This is another example of TNS's support and evolving global trading systems through our mission critical connectivity.

In addition to Burgundy, Europe added to its network expanding our portfolio of alternative exchanges. In addition we added Accalon and Polaris in Hong Kong as a new influence on the TNS secure trading extranet. Asia Pacific region is still providing a great opportunity for expansion of the TNS community of interests.

Moving on to domestic FSD, revenue in our Financial Services Division increased 12.2% year over year, an acceleration from last quarter's growth rate and was 16% of total first quarter revenue. FSD's growth in the first quarter continues to come from primarily from large band width installation supporting market data feeds as well increases in the number and speed of connections with existing customers.

High migration of a number of IT broker connections onto our network continues to proceed smoothly and is now nearing completion. We're pleased to expand our relationship with this very important customer. Also Alpert Trading added to its network further expanding our portfolio of alternative exchanges.

We ended the first quarter with 1,544 global fiscal end points of which 1,097 are domestic and 10,837 domestic logical virtual connections. While our LVC count is down slightly from Q4 as we saw some churn in financial services customers, our growth and influence remains strong.

Moving forward in the year, we will continue to expand our customer connectivity, network brokerage and exchange connectivity, further extending the FSD community of interest. We are confident in meeting our 2009 growth outlook for FSD.

Moving to our POS Division, revenue in the POS Division decreased 2.1% year over year in the first quarter and accounted for 23.9% of total first quarter revenue. Total dialup transaction counts were down 9.7% year over year due to continued economic softness essentially in line with expectations.

Revenue per transaction decreased as a result of traction on renewal of certain customer contracts and consolidation in the industry. Now with a trend towards IT services which enjoy a recurring revenue model rather than a transaction model is helping to mitigate this decline. Our migration of coop clients with services ATM network continues to go well, is ahead of schedule and is contributing to the division's year over year results comparisons. We expect to complete this migration by the end of the second quarter. Again, this has been a massive migration and our team has done a great job.

In April, we signed a new contract with CUSC, Coop Financial Services Shared Grant subsidiary to provide network connectivity to their Credit Union and enable them to offer services to their individual members similar to those of the large U.S. banks.

In terms of broadband installations, we have completed new installations for smaller accounts aside from Coop. IT connections have grown over 110% on a year over year, with almost 9,000 devices now live on TNS's network. Last quarter we discussed stepping up our ATM process and capabilities in North America, Australia and the United Kingdom.

Our Canadian subsidiary has performed well in the first part of the year and is well positioned to take advantage of ATM outsourcing opportunities in the countries it currently serves. We also recently began working with customer, ACS roll out dial network services to 12,000 electronic benefit transfer terminals, adding approximately 5 million additional transactions per month onto our networks.

During the quarter, we also expanded our relationship with Waste Systems to offer ten dedicated capabilities to mobile merchants customers via our synapse payment gateway. Since 2005 Waste Systems has utilized a synapse solution by TNS to process credit card transactions of TNS's secure global network. Once implantation is complete our synapse customers utilizing the payment terminal devices will be able to process both debit and credit transactions over the TNS payment gateway.

We also expanded the functionality of the suite of products we offer. In the area of security enhanced network services, we partnered with Syntek, a leader in magnetics technology to provide managed encryption and communications services as part of an end to end hard processing encryption solution for the payments industry.

This arrangement joins TNS's PCI DSS certified global backbone network and Syntek's cipher hidden encryption in a solution that helps prevent fraudulent card transactions. This service will launch this summer and is compatible with existing processing environment making its implementation easy for participating retailers, suppliers and processors.

Moving forward in the year, we will continue to focus on our core network services both domestically and internationally, continuing to develop our ATM processing and network capabilities world wide, further developing our optic broadband and payment gateway opportunity and adding security enhancement and fraud protections for customers.

We believe that our network and gateway services are ideally suited to aid our merchant, supplier and retail customers as they navigate their way through this economic downturn.

Moving to TSD, revenue in our Telecommunications Services Division decreased 15.9% from last year and was 20% of total first quarter revenue. First quarter revenue benefited from continued migration of stable customer traffic onto our network, increasing revenue as we add their subscribers and core SS7 network services growth.

This growth was offset by two major factors that resulted in a down year over year comparison which has largely been addressed as a result of the CSG acquisition. First, as we anticipated, we were faced with negative comparisons to last year's first quarter from the loss of caller ID business from two customers later in the year. Through the CSG acquisition however, we have regained these customers.

Second, after we announced signing an agreement to purchase CSG we lost volumes from a customer who has been a caller ID service provider to us and with whom we now compete through CSG. In terms of new customers during the quarter, [TeleStreet] Communications selected TNS to provide SS7 signaling and hosting services.

We also launched a local number portability service into the Canadian marketplace. Additionally, we continue to cross sell TNS's payment services and at the same time introduce our POS customers to our CSG customer base.

The intention is to leverage our payment and telecomm expertise by assisting the customers from both divisions to cross over products. We see a large opportunity here as I will detail later in the call.

Yesterday we announced that we have brought Michael Robison into TNS to head Telecommunications Services Division. Michael has a long career in telecommunications and wireless technology and deep experience in new business development. We are thrilled to have Michael with us, particularly at this important time in CSG's evolution. I will come back to our strategic outlook for CSG in a few minutes.

Overall the first quarter of 2009 results indicate that we are weathering the currency and economic factors well. While we are clearly feeling the impacts of foreign exchange and transaction softness in some markets, the general tone of near term demand for our services solutions has remained steady from fourth quarter levels.

Competitively we are very strong and continue to gain market share with our cost saving mission critical solutions. As we discussed last quarter, we planned very prudently for 2009. We are managing costs closely and continue to make selective strategic investments in all of our divisions crucial to our growth potential and market competitiveness.

We remain focused on execution and with our strong balance sheet and cash generating, operating model we are well positioned to continue to negotiate the current environment while improving our competitive position.

Now I'll turn the call over to Dennis for a review of the financials.

Dennis Randolph

Good evening everyone. I'll start the financial review with income statement highlights beginning with webcast Slide 3. Total revenue in the first quarter decreased 10.5% to $75 million from $84.1 million in the first quarter of 2008. The negative impact from foreign exchange translation of approximately $8.4 million on the revenue line, $2.6 million of EBITDA and $0.07 impact to adjusted earnings per share was in line with our expectations.

I'll detail these impacts by currency later in my comments. As Henry has already detailed the divisional components of revenue, I'll move down to the gross margin line. Gross margin for the first quarter of 2009 decreased 50 basis points to 51.1% from 51.6% in the first quarter of 2008.

On a constant dollar basis, first quarter gross margin increased 40 basis points to 52%. Constant dollar improvement in gross margin is due primarily to improvements in the margins of our POS division as a result of continued focus on controlling the costs of network services provided to us and to a lesser extent, as a result in the increase of the percentage contribution of FSD, one of TNS's highest gross margin divisions.

Engineering and development costs in the quarter were $6.4 million compared to $7.2 million in the first quarter of 2008 and decreased over a full percentage point to 8.5% of revenue. On a constant dollar basis, E&D decreased 1.3% to $7.1 million.

Engineering and development costs decreased on a net basis as the amount of cost capitalized during the first quarter of 2009 increased over 2008 levels. And increase in the amount of labor costs capitalized relates to investments we were making in our payment gateway applications, in particular our card not present service offerings.

SG&A expenses were $17.8 million or 23.4% of first quarter of 2009 revenue compared to $19.4 million or 23.1% of revenue in the first quarter of 2008. On a constant dollar basis, SG&A expenses increased 1% to $19.6 million. Included in SG&A for the first quarter of 2008 was a $900,000 pre tax benefit associated with the settlement of a state sales tax liability.

On a constant dollar basis, excluding this benefit, SG&A decreased primarily from a reduction in performance related stock compensation. Stock compensation included in SG&A for the first quarter of 2009 was $1.4 million compared to $2.2 million for the first quarter of 2008. This was partially offset during the first quarter of 2009 as we incurred approximately $600,000 of professional fees related to the CSG acquisition.

In addition, during the first quarter we controlled costs carefully in order to create additional leverage of our cost structure. Depreciation expense in the first quarter decreased 2.2% to $5.8 million and 7.8% of revenue versus $6 million or 7.1% of revenues last year. On a constant currency basis, depreciation expense increased $200,000 to $6.2 million due to investments required to support our growth opportunities.

Amortization of intangible decreased 8.8% to $5.6 million in the first quarter of 2009 and was 7.4% of revenues versus $6.1 million last year or 8.8% of revenues. On a constant currency basis, amortization expense was flat with the year ago period.

Included in amortization expense for the first quarter of 2009 are impairment charges of $400,000 related to certain customer relationship intangible assets which are offset by a reduction in amortization expenses as certain intangible assets reached the end of their economic lives.

Interest expense in the quarter was $1.4 million versus $3.7 million last year as we expected primarily due to a lower effective interest rate, and to a lesser extent, lower debt levels. In a moment I will discuss the re-pricing of our debt as part of the amendment of our credit facility associated with the CSG acquisition financing.

Because of the high amount of non cash charges that we record and the fluctuations in our effective GAAP tax rate, we used two non-GAAP measures to evaluate operating performance; EBITDA before stock based compensation expense and adjusted earnings both of which are illustrated in today's press release.

EBITDA before stock based compensation expense for the first quarter of 2009 was $16.3 million amounting to 21.7% of revenues compared to $19.7 million or 23.5% of revenues for the first quarter of 2008, a decrease of 17.3%.

Included in the first quarter results of 2008 is the $900,000 pre tax benefit I mentioned earlier. Excluding this benefit, EBITDA before stock based compensation expense decreased 13.4%. On a constant dollar basis EBITDA before stock based compensation expense increased .5% to $18.9 million or 25.2% of revenues.

Adjusted earnings for the first quarter of 2009 decreased 12.4% to $7.3 million or $0.29 per share from first quarter adjusted earnings of $8.3 million or $0.33 per share. Excluding the year ago pre tax benefit, adjusted earnings decreased 4.1% and adjusted earnings per share decreased 3.3%.

Share count increased 0.2% to 25.2 million shares. On a constant dollar basis excluding the year ago pre tax benefit adjusted earnings for the first quarter of 2009 increased 19.7% to $9 million or $0.36 per share.

Now let's move to Slide 4 to review the balance sheet. At quarter end our current ratio was 1.79 times above 1.59 times at the end of last year and up from 1.45 times at the end of the first quarter of last year.

Long term debt at quarter end was $178.5 million for a total debt to capitalization ratio of 63.9% versus 63.5% at the end of last year. Cash at quarter end was $35 million down $3.9 million from year end and up from $22.9 million last year.

During the first quarter we generated only $3.7 million in cash from operations due to the timing of working capital differences of $11.7 million. We expect these timing differences related to working capital will reverse themselves in subsequent quarters.

Capital expenditures in the first quarter of 2009 were $5.8 million compared to $6.7 million in first quarter 2008 and down from $6.8 million in fourth quarter of 2008 continuing to moderate as planned.

Now let's move to Slide 5 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 currencies results and report in U.S. dollars using the average exchange rates for each currency in effect for that period.

In the first quarter of 2009 40% of our total company revenues were transacted in currencies outside the U.S. in our International Services division. These primary currencies are the pound sterling, the Euro and the Australian dollar.

To give you an idea of the currency exposures in our business model, the currency composition of our first quarter results are as follows: International Services division revenues were 40% of our total revenues of which the pound sterling represented 41%, the Euro 34% and the Australian 18% and other currencies make up the balance of 7%.

The International Services division expenses were 34% of our total operating expenses of which the pound sterling represents 44%, the Euro represent 30% and the Australian dollar represents 17% with other currencies making up the balance of 9%.

The weighted average exchange rate used to translate our non U.S. dollar denominated revenues and expenses for both the first quarter of 2009 and first quarter 2008 were as follows; the British pound declined at 27% year over year from $1.98 to $1.44. The Euro declined 13% year over year from $1.50 to $1.31 and the Australian dollar declined 27% year over year from $0.91 to $0.66.

As I mentioned earlier the negative impact on our first quarter 2009 results from these changes in the weighted average exchange rates used for translation purposes is as follows; revenue was impacted by $8.4 million, EBITDA was impacted by $2.6 million, and adjusted earnings was impacted by $1.8 million or $0.07 per share.

Now I'll turn the call back to Henry.

Henry Graham

Let's move to Slide 6. Yesterday we announced that on May 1, we closed the acquisition of the Communications Services Group from VeriSign. This is a historic moment for TNS. CSG offers us significant strategic operational and financial benefits. However, we paid a very fair price and funded the acquisition by completing what we believe is the first successful leverage loan financing in the U.S. in 2009.

We are very pleased with this outcome and I want to thank everyone at the now combined organization for their very hard work in bringing it about.

In the past two years we have increased an already high level of operating leverage in our business model to generate additional cash which we devoted to accelerated debt repayments, and we believe this paid off in the current environment. We thank our existing term loan investors for the continued support and welcome our new investors.

As I mentioned, we believe CSG offers significant benefits to our Communications Services division and to TNS as a whole. It reinforces CSG's status as a premier provider of SS7 network connectivity and affords us scale in terms of network reach and customer breadth. It makes TNS a leading provider of intelligent data base services including caller ID through ownership of the premier independent authoritative CNAM data base.

It brings us into the wireless roaming and clearing services market for the first time. It strengthens our competitive position and all product areas that CSG now serves. It brings us a group of talented, product developers that complements our existing capability. It reinforces the division's high return revenue, cash generating business model and it is immediately materially accretive to earnings.

Let's move to Slide 7 to discuss CSG in more detail. CSG generated revenues from three product lines which will all be integrated into the CSG's operations. In order to help you understand the business we acquired, I will give you an approximate percentage breakout of CSG's historical net revenue but we will not provide this level of disclosure in the future.

SS7 network and products contributed approximately 36% of CSG's 2008 net revenue. As you know, TNS currently operates an unaffiliated SS7 network. The acquired network which is the largest unaffiliated SS7 network in the United States extends our reach and brings additional features expanding our network to over 340 access points with direct access to every local access and transport area in the United States including direct connectivity networks.

Intelligent data base services contributed approximately 58% of CSG's 2008 net revenue. These services are provided through the SS7 network and sit on top of network level services. CSG brings to TSN the largest independent authoritative calling name data base and hosts 144 million names out of approximately 400 million names in the United States. We understand we are now the only CNAM provider with relationships with all major Ilec's giving us nationwide delivery and the broadest portfolio of CNAM products.

Roaming and clearing services provided to wireless telecom operators contributed approximately 6% of CGS's 2008 net revenue. Wireless clearing enables invoicing and payments for all network standards. Roaming services provide an international signaling, carrier and technology interoperability and network management tools. This is a small but desirable market position with a comprehensive product line that makes us a competitive alternative to the largest provider in the space.

As I mentioned earlier, the acquisition provides CSG, a group of leading edge developers with expertise in both SS7 and IP based protocols and a proven record of originating commercially successful products.

In terms of customer breadth, CSG brings over 700 customers most of whom are new to TNS. These customers including leading wire line, wireless and alternative telephony providers strengthening our list of blue chip relationships. At TNS we pride ourselves on maintaining a very strong customer relationship and providing excellence service. This makes CSG a great fit and we welcome these new customers to TNS.

Let's move to Slide 8 to give you some industry history and discuss our strategy for CSG. In recent years, revenues from SS7 network and caller ID services overall have been affected by consolidation in the industry as tier one carriers merge, downstream providers vertically integrated and lower priced calling name data base offering were introduced creating pricing pressure.

TNS's strategy in this space during this period was as you know, to gain market share in the SS7 network services by providing a robust offering, breaking into the cable vertical early and when an outsource provider offering a non authoritative C7M solution. We were not a participant in wireless roaming and clearing at this time.

Now it's generally believed that the adjusted SS7 and CNAM market is expanding through unaffiliated SS7 network and data base providers driven by alternative telephony providers taking market share away from traditional wire line providers. Consolidation among the users of these services has slowed and as you have seen from CSG's performance over the past year, new growth is being driven by cable and VoiP providers who are entering the telecom space.

These providers are offering basic services and increasingly making caller name data base products a part of their bundled service offerings. We believe the current price points for authoritative caller ID are at levels compelling enough for customers making price value decisions to avoid the reputational and financial losses that can occur because of poor quality and accuracy.

Further, industry consolidation that took place in the past now favors larger players, especially with respect to CNAM markets. TNS's strategy, evidenced by the CSG acquisition is to invest in the highest quality data bases and networks available to build a strong competitive base from which to gain further share with non traditional telephony providers.

We are also establishing a foothold in wireless and roaming and clearing which could provide additional long term opportunities in terms of caller ID and are investing in both near term product development and long term technological development.

Our strategy this year in CSG is to integrate customers and our networks in a seamless fashion which I will discuss in a moment and pursue growth opportunities with our current product lines both in cable VoiP and wireless providers.

As I mentioned earlier, through the acquisition, we have gained two caller ID customers that we had previously lost and are very well positioned to compete in the new SS7 network and intelligent data base services opportunities on the strength of what we believe is the best offering available.

Looking beyond this year we have an identified an opportunity to expand our CSG services globally particularly in the wireless, roaming and clearing. Finally as the telecommunications environment makes technological advances, and moves increasing to IT based switching, we anticipate there will be a need for an inter connectivity platform that provides signaling and voice switching for cable and non traditional telephony suppliers.

As of today, there is no standard set for such a platform, but as part of the acquisition, we have gains CSG's electronic memory or ENUM platform and I view this as the strongest technology available to provide this interconnectivity and was recently selected by a group of cable companies to develop a VoiP clearing connectivity. We believe this puts us at the forefront of post SS7 technology development.

Let's move to Slide 9 to discuss our plan for integration. As an everyday part of our business, we migrate networks and customers such as the customer migration. Additionally TNS has made many acquisitions in the past. Because of this history, we believe we have an established ability to manage integration smoothly with minimal if any impact to our customers or their traffic.

We provide mission critical services to our customers and recognize how critically important seamless service is. To lead the CSG integration we have established a professionally led program management office. This office will report to Michael Robinson, our new Head of PSD who will work closely with Mike Keegan, TNS's Chief Operating Officer who is undertaking the primary responsibility for this acquisition's operational integration.

Communications with TNS's new employees began in earnest as soon as the acquisition closed and Michael and Mike have been traveling to the CSG offices this week. I will be visiting those offices as well this week.

Over the next several months the focus of our integration efforts will be on the following; we will transition the back office functions that had been provided by VeriSign Corporate to TNS. We will also be communicating with our new CSG customers to support the transition to TNS and with our TNS customers to keep them informed.

We will continue to employ integration, implementing the appropriate processes and blending the two company's cultures. During this time we will further develop and evaluate the plan of network integration that was started before the acquisition closed and we will give you an update on all of these activities on our next earnings call.

Overall we expect the integration to take 12 to 18 months to complete. We believe that because there is already interconnectivity between the two SS7 networks, both networks are able to run parallel allowing us to consolidate and migrate technologies smoothly with minimal if any disruptions.

We expect to derive synergies by consolidating operations in production as well as eliminating vendor duplication. With respect to people and systems, we have already begun integrating all of our employees into our combined corporate structure and culture.

Moving forward our integration office and the coming TNS, CSG employee teams will work together to identify overlaps and increase CSG's efficiency as we come together. As Dennis will discuss, our revised 2009 outlook including CSG from data flows does not assume any integration synergies.

Clearly we expect to achieve quantifiable savings which we will detail for you on future calls. With the scale and similar recurring revenue, cash flow generating business model, the CSG acquisition is highly accretive transaction even before synergies are achieved. Our integration risk potentially may be mitigated by the compatibility of the SS7 networks. We are keenly focused on effecting a smooth integration and particularly in this economy are keeping our outlook conservative.

Now I'll turn the call back to Dennis for a discussion of the transaction financing and our 2009 outlook.

Dennis Randolph

Let's move to Slide 10 to review the transaction financing. TNS paid a purchase price of approximately $226 million in cash which is subject to a post closing working capital adjustment. We financed the purchase price through a new $230 million term loan and used approximately $26 million in cash on hand to pay expenses related to the transaction and debt issuance calls.

The new $230 million term loan was issued at 90% of face value so the original discount associated with the debt was $23 million. This discount will be amortized over the life of the loan through interest expense.

We also amended our existing $178 million term loan to allow for increased indebtedness as a part of the financing adjusted the interest rate to both the existing term loan and our revolver to market rates.

The total amended and restated credit facility is priced at LIBOR plus 600 basis points with a 250 basis point LIBOR floor and matures in March of 2014. So the total cash coupon on the entire debt facility today is 9.5%.

TNS's balance sheet remains very strong post financing. We have available $15 million undrawn revolving credit facility and approximately $12 million in cash on the balance sheet. Total long term debt outstanding as of closing was $408.5 million.

Pro forma for the acquisition financing as of March 31, 2009 our long term debt to capital ratio would have been approximately 80.2%. As we have done in the past, we anticipate using our incremental cash flow to prepay incremental debt. As Henry expressed earlier, TNS appreciates its support of its existing and new term loan investors.

Let's move to Slide 11 to review our 2009 and second quarter outlook. The revised outlook presented in today's press release and the slide include the acquired CSG operations from May 1 2009 and it's shown on both a constant and current dollar basis reflecting our estimates of the negative impact of foreign currency translation in our International Services Division. All acquired CSG revenues are U.S. dollar denominated.

Our revised outlook for 2009 total revenue is for 36% to 40% increase to $468 million to $482 million versus 2008 revenue of $344 million. This includes $144 million to $148 million in CSG revenue from the date of close.

On a constant dollar basis, our revised outlook for revenues are 45% to 49% growth to $497 million to $512 million. Our starting point for revenue growth remains in mid single digit recession outlook in local currencies to which we identify foreign exchange effects of ISC and added on the Communications Services group.

The revised outlook for 2009 adjusted earnings including CSG is $43.9 million to $47.8 million or $1.69 to $1.84 per share versus $40.2 million or $1.50 for 2008. This includes $0.31 to $0.36 in adjusted earnings from CSG from the date of close.

On a constant dollar basis our revised outlook for adjusted earnings is $51.7 million to $55.6 million or $1.99 to $21.4 per share. Please note that these numbers do not include any non recurring charges.

For the second quarter of 2009 our revised outlook for total revenues including CSG is for 24% to 28% increase to $112 million to $116 million versus second quarter 2008 revenue of $90.1 million. This includes a $35 million to $36 million assumption for CSG contribution.

On a constant dollar basis our revised outlook for total revenue is for 35% to 40% increase or $122 million to $126 million. Our revised outlook for adjusted earnings including CSG is $10.8 million to $12 million or $0.42 to $0.47 per share versus $10.8 million or $0.43 per share for the second quarter of 2008.

On a constant dollar basis our revised adjusted earnings outlook is for 22% to 23% growth to $13.2 million to $14.5 million or $0.51 to $0.56 per share. Again please note that these numbers do not include any deal costs related to the CSG acquisition that we will be expensing in the second quarter.

Now let's move to Slide 8. Clearly the added scale that CSG brings makes the transaction immediately materially accretive to earnings and cash flow in 2009 and we see further benefits to be derived from leveraging infrastructure and building efficiencies. As Henry mentioned, given that we are at the very beginning of integration, and are operating in a difficult economy, we have forecast an outlook that we believe is prudently conservative and does not include any benefit of future synergies.

Our 2009 full year forecast contemplates the $29 million to $30 million of revenue and a $0.30 impact to adjusted earnings from a negative impact of foreign currency translation. We continue to anticipate the following average exchange rates for the major currencies in 2009 which is unchanged from our prior year end guidance.

The pound sterling exchange rate of $1.45 which represents a 21% decline year over year, the Euro exchange rate of $1.29 which represents a 12% decline from 2008 levels and the Australian dollar exchange rate of $0.65 which represents a 20% decline from 2009.

Even though the exchange rates for the currencies I just mentioned are currently above our estimates, given the recent volatility and continued economic uncertainty, we are not changing our full year outlook for currency at this time. To the extent the weighted average exchange rates differ from our estimates the impact of foreign exchange will differ as well.

Now I'll turn the call back to Henry.

Henry Graham

This completes our prepared remarks. Operator, we're ready to open up the call to Q&A.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Andrew Jeffrey – Suntrust.

Andrew Jeffrey – Suntrust

Can you elaborate a little bit on the stability of the Cobalt customer base as you did your due diligence and as reflected in the guidance you're giving? It sounds like you're picking up a couple of customers that TNS stand alone had lost previously. What's going on within Cobalt's customers? Is there any reason to think that the pro forma trailing EBITDA that the combined companies had would do anything other than grow with the business or are there any customers at risk out there?

Henry Graham

There's always customer risk. But the long and short of it is that we, as we said in our comments, we were very conservative about this. We think that we have included what we consider to be a very steady state of both company's prospects as we move forward.

Quite frankly we feel very strongly that as we move forward with this to combine interests of both customer bases and a new customers that were bought, the fact that we now have the largest authoritative unaffiliated caller name data base that we have growth prospects look very ripe for us in the future.

So as far as the amount of revenue that we're using in this, this quite frankly is very consistent with run rates that we've seen in recent months. Obviously we monitor very closely their star of the year and we feel very strongly that the guidance that we've given both from a revenue standpoint and an earnings standpoint is prudently conservative.

Dennis Randolph

A lot of these contracts are under long term commitments that have minimums in them. So through the diligence process we've been able to get very comfortable with what the expectations that this business will deliver for the balance of this fiscal year.

Andrew Jeffrey – Suntrust

With respect to the guidance, you just reported a 9.6% adjusted net income margin. You're guiding to low 10's in the second quarter but then something closer to 10% for the full year. Is that just conservatism because it seems like you're getting a little bit of a pick up in the second quarter? You don't have a full quarter of inclusion of Cobalt and then the balance of the year you're looking for those margins to dip down a little bit.

Henry Graham

We're being conservative as we've said a couple of times.

Dennis Randolph

As we move forward through the balance of this year we are going to have, and we have considered this in the guidance that we've given, there will be incremental costs to the business from an integration standpoint. That will impact us more in the second half of the year but we anticipate those integration costs will largely be complete by the end of this fiscal year.

Andrew Jeffrey – Suntrust

And those are integration costs so you plan to expense explicitly through the P&L?

Andrew Jeffrey – Suntrust

What is the EBITDA equivalent for the full year in '09 just in dollars? You gave net income. I'm just trying to back in EBITDA

Dennis Randolph

At the mid point of the range you are going to have roughly $130 million in EBITDA.

Operator

Your next question comes from Tien-Tsin Huang – J.P. Morgan.

Tien-Tsin Huang – J.P. Morgan

On the POS side, pretty flat sequentially which was nice to see, a little bit down, Can we assume that we're back to sequential growth for the rest of the year in the POS division?

Henry Graham

I think that's a safe assumption.

Tien-Tsin Huang – J.P. Morgan

Nothing new from a change of client portfolio. Will we see a step up from some of the wins you've called out assuming no change in the economy.

Henry Graham

Assuming transaction levels remain where they are, and again the transaction levels that we saw, where we saw the step down in that September/October time frame of 2008 we sort of see that trend sort of continue here through the first quarter. Things have moderately improved in the month of April so as long as transaction trends hold where they are, you should expect to see the domestic POS division improve sequentially as we add more of the monthly recurring broadband based products, as we continue to ramp the coop and ramp for our processing business up in Canada.

Dennis Randolph

I want to say that monthly occurring revenue gets larger every month. We're very close to completing the transition of the coop so we feel pretty good about the growth prospects on a quarter to quarter basis going forward assuming the economy doesn't get any worse and a number of other things.

Tien-Tsin Huang – J.P. Morgan

On the CSG I know that it's early and things are moving all the time but can you give us some help on what the impact might be on the face of the P&L in areas like gross margin and then just the seasonality of CSG from a revenue standpoint. What do we need to consider here?

Henry Graham

From a seasonality standpoint, there's just not a lot of seasonal fluctuations in this business. Volume patterns tend to be pretty consistent quarter to quarter. In terms of the gross margins, the margins in this business are in line with the overall gross margins of TNS so you should expect somewhat of a margin decline, but as we work out some of the classification issues between our P&L and theirs, we will flush that out more on the next call.

Tien-Tsin Huang – J.P. Morgan

From a revenue attrition risk, I don't know what the pricing differential is between the legacy business and what you're acquiring and it sounds like there's some shifts in the clients as well. When do you think you'll get more clarity what that might look like? I know you've left some room on the downside but I just wanted to make sure.

Henry Graham

One of the things that you need to understand is that there's not a lot of overlap from a customer perspective. Most customers you purchase at the SS7 services do so from one provider so the risk of overlapping contract in pricing, based on the diligence we performed, we believe that risk in terms of customer overlap to be minimal.

Our guidance for the full year anticipates what we've done through the course of our diligence process.

Operator

Your next question comes from Wayne Johnson – Raymond James.

Wayne Johnson – Raymond James

On the POS segment did I hear correctly same store sale transaction volume down about 9% in the quarter?

Henry Graham

That's correct.

Wayne Johnson – Raymond James

What should be our expectation for that for the upcoming quarters?

Dennis Randolph

I think what you'll see as we move forward into the second quarter in terms of a same store sales perspective, we should see volume declines in the second and third quarter of about 8% and then if things stay as they are, we should see that improve in the fourth quarter as we anniversary the impact of when we saw the step down last year.

For the full year we anticipate volumes being down about 6% for the full year.

Wayne Johnson – Raymond James

On Fusion Point I think you did give some statistics, where do you stand on that in terms of number of installations and back log?

Henry Graham

We had just over 9,000 actual end points right now. That would be inclusive of about 3,400 of the coop end points. The back log on that, there's still several thousand because we're signing new deals all the time. Don't underestimate the cumulative impact of that install base as we finish out the coop conversion and we move on to an affiliated areas that we just signed a contract on.

So even though we may have transaction decline of 8% in the future quarters that is going to begin to build momentum going forward. So about 9,000 in total which is up significantly from last year as you well know of which there's about 3,400 to 3,500 of those that are coop and we have about 400 more of those to go and we should complete that this quarter.

Wayne Johnson – Raymond James

So the coop ramp up in total should be completed this quarter?

Henry Graham

That's correct. Aside from the new one we just signed, one of their affiliates.

Wayne Johnson – Raymond James

On ISD can you talk a little bit about the dialect roll out, how that's going, how the relationship is with American Express?

Henry Graham

As we mentioned in our comments obviously when we talk about that, that's dialect if you will. We continue to see great traction for that particularly in this Asia Pacific area. The relationship with Amex is still good. We're still trying to complete certain things that they require as part of the offering that we're developing for them.

But we're continuing to have good traction in that. As you know we actually were a little bit ahead of schedule when we sold one instance of that ion the United Kingdom toward the end of last fiscal year.

By the end of the second quarter we should be completely finished with the Amex requirements on the contract that we acquired for that and we'll turn those developers to looking for additional new business as we move forward. So we're still very pleased with the performance of that and we are still expecting big futures out of that hopefully in the not too far distant future.

Wayne Johnson – Raymond James

On the integration with France.

Henry Graham

That's pretty much done. The last batch of terminals now and we can only hope that they find another batch that have not been....

Wayne Johnson – Raymond James

What's the total terminal count now from that acquisition?

Henry Graham

I have no idea off the top of my head. You call me later I'll try to get it for you.

Wayne Johnson – Raymond James

On CSG, you did mention some roaming, can you talk about, is TNS going to be as aggressive as VeriSign was in terms of pricing for roaming and where do you expect to take that over the next couple of years?

Henry Graham

Obviously we consider that an opportunity. We're not going to disrupt anything that they did there because quite frankly we were not involved in that business. I would prefer to make comments on that in the future but we do have a global footprint where CSG did not have that, so we're expecting that that is an opportunity for us as we move forward.

We have no intent of disrupting whatever they had in place. Hopefully we'll give them an opportunity to sell in the 28 some odd countries and around the globe where we have foreign presence now.

Operator

Your next question comes from Franco Turinelli – William Blair & Co.

Franco Turinelli – William Blair & Co.

Related to CSG, I'm assuming since you didn't mention anything about a tax rate we can still apply the previous tax rate to the post CSG TNS?

Dennis Randolph

Yes. For the near term we will continue to benefit from the lower marginal tax rate. As we move forward and integrate this over the next three to five year period, we will revisit that tax rate.

Franco Turinelli – William Blair & Co.

But we should apply this current tax rate, I'm sorry, we should assume that the current tax rate is what's embedded in your guidance going forward.

Dennis Randolph

That is correct. We have assumed in the guidance that we've given a 20% tax rate on a combined basis moving forward.

Franco Turinelli – William Blair & Co.

I guess I could get it by myself but are you able to provide us any EBITDA impact guidance kind of following up on Wayne's question from earlier.

Dennis Randolph

EBITDA towards the upper end of the range it's about $130 million or approximately $130 million for EBITDA.

Franco Turinelli – William Blair & Co.

Which is for the combined, right? I was wondering if you wouldn't mind sharing with us just the CSG impact.

Dennis Randolph

The guidance for TNS at the upper end of our range was roughly $80 million.

Franco Turinelli – William Blair & Co.

What kind of growth rate should we be assume for CSG? Obviously CSG has been up and down for various reasons with a lot of puts and takes. I'm wondering what you think we should think of as the appropriate targeted internal growth rate for CSG?

Henry Graham

As said overall, given where the economy is still a little uncertain, we're talking overall TNS in the mid single digits. Right now, until I get a better insight, somewhere around 4% to 6% is probably what I would target right now. That's what we're using. I hope we improve more than this, but that is in fact what we're looking at right now.

Franco Turinelli – William Blair & Co.

To be clear, it's about 4% to 6% for the company overall for just CSG.

Henry Graham

Just for CSG.

Franco Turinelli – William Blair & Co.

So it should be accretive to the growth rate that we're currently seeing, right?

Henry Graham

That's correct.

Franco Turinelli – William Blair & Co.

By our calculations, the TNS stand alone guidance was unchanged and I just want to make sure that you agree with that statement.

Dennis Randolph

That's correct. Actually if you look at if from a revenue perspective, you've actually bracketed the bottom end of the range on both a revenue and adjusted earning standpoint.

Franco Turinelli – William Blair & Co.

I want to make sure I understand this correctly. You're saying that going back to POS for a second, for POS I think you said that transactions down 9.7% and then I think in your prepared comments you also made a comment that revenue transaction was down because of consolidation and other factors all of which I understand but the glass more than half full view here is that you were able to more than replace that, or almost entirely replace that with new business. Is that the right way of thinking about this?

Henry Graham

Absolutely. That's the correct way of thinking about it. The dial business through a combination of transaction declines and pricing was down about 12% to 13% year over year, but overall the revenues of POS were only down about 2% so the growth that we're seeing in broadband services which are monthly recurring type activity and then the launch of our ATM processing products in Canada are helping to offset the declines we've seen in that core dial business. When I say broadband I'm including the coop, but in that broadband product family.

It's like 9,000 broadband end points right now. About 3,400 to 3,500 of those are indeed coop. All the rest are something else.

Franco Turinelli – William Blair & Co.

This whole initiative on your part around transaction security seems really important and it seems like this is something that you can apply not only to traditional dial up world but to the IT world and it seems to me that maybe this is what you've been looking for to really sell your services into the IT world which has been somewhat hard to penetrate. Can you give us a little bit more perspective on the security products and how you're going to market with those?

Henry Graham

The new security, remember its access agnostic and we also have the PCR compliance going for us. So we feel that those two combined, and we really don't care what access methodology they use. The encryption will work for any access method.

Franco Turinelli – William Blair & Co.

Are there any early reads on the reaction here?

Henry Graham

Pretty much. It's still very early in the game. Obviously it's something we announced not that long ago but quite frankly, thus far the feed back has been very, very positive. As you know, given some of the things that have occurred here recently, some of them having something very much to do with this, some of them have nothing to do with this, fraudulent credit card transactions are something that everybody's focused on right now and quite frankly that those give us a lot of opportunity.

And the partnership with Syntec is brining in opportunities. So as we get more information that is solid information, we won't hesitate to pass it on.

Operator

Your next question comes from Gary Prestopino – Barrington Research.

Gary Prestopino – Barrington Research

All of the revenue models for the three different segments, the SS7 is monthly signaling route charges, right?

Dennis Randolph

The SS7, effectively that's our core business today. So the majority of revenues generated in that product line come from fixed monthly recurring charges.

Gary Prestopino – Barrington Research

The other two businesses are per transaction?

Dennis Randolph

That's correct.

Gary Prestopino – Barrington Research

Could you also give us a little bit of help in terms of just for modeling what's the depreciation and amortization of intangibles should be running on a quarterly basis going forward with this acquisition?

Dennis Randolph

That's one of the things that we'll update you on on the next call. We're in the process right now of completing the purchase price allocation. We've begun the initial valuation work but as you know all of those assets from acquisition will be carried over from a fair value perspective.

What we've assumed in terms of depreciation expense in the second quarter results that we've given you is roughly $3.2 million for this business. From an intangible perspective, since we don't have the valuation yet complete from the outside valuation firm that we're going to use, I will update you on our next conference as to what those levels will be moving forward.

Remember now that's just two months of depreciation.

Gary Prestopino – Barrington Research

Your current SS7 business, you still have to provide for that. You still have to pay for that intelligence data base services until the end of '09, right? That will entirely go away next year?

Henry Graham

If you're referring to our caller ID product that is correct. Just a point of clarification there, we only have to continue to use that service for customers that were existing as of the end of last year so with the CSG customers that are brought over we will continue to use their authoritative ID offering especially when we go out to new customers in the marketplace with opportunities that we see that we will offer the authoritative ID data base that we bought as part of this acquisition.

Gary Prestopino – Barrington Research

But you're still going to have some kind of inherent clause for your pre CSG customers, correct?

Henry Graham

That's correct. At the end of this fiscal year that cost will go away.

Gary Prestopino – Barrington Research

In terms of your POS business domestically, could you give us an idea of what percentage of that is now broadband or Fusion Point this quarter?

Henry Graham

In terms of our POS products, roughly $2.5 million of revenue came from our broadband POS and about $1.3 million in the first quarter of last year.

Operator

Your next question comes from [Roger Tsinsin – George Weiss]

[Roger Tsinsin – George Weiss]

If you could help me understand the pro forma '09 guidance for EPS inclusive 12 months of ownership of CSG.

Dennis Randolph

If you look at the impact that we gave for an eight month period from an earnings per share perspective we gave a range for that eight month period of $0.31 to $0.36. For the first couple of months it's been steady for the first four months of the year based on our understanding of the results.

You can effectively annualize that impact that we gave you related to the CSG business for the eight months.

[Roger Tsinsin – George Weiss]

So basically that gets us about $1.85 to $2.02 in terms of the low end to the high end of the range.

Dennis Randolph

That's correct.

[Roger Tsinsin – George Weiss]

If you could talk about synergies in terms of nature and scope what will be undertaking.

Henry Graham

As we pointed out, as we get further into this we'll give additional guidance. We have assumed those synergies. There will be some but quite frankly we're not prepared right now to say exactly how much it will be. Just remember that the guidance that we've given and all the calculations that we've used assumes no synergies at the present time.

[Roger Tsinsin – George Weiss]

The synergies are going to come from any one moving data base service in house, right?

Henry Graham

If we talked at high level about the areas that we'll initially target one will be the duplicate data base platforms. Today TNS, historically TNS used an outside third party to provide caller ID information. Both organizations from intelligent data base perspective run local number portability and toll free routing platforms.

In addition we both have SS7 networks with duplicate capacity and reach in certain geographies. Obviously we'll have to take into consideration capacity constraints in order for us to combine the networks. But there is a plan under way right now where we will look to combine the two SS7 networks.

So as we move forward and come out of this integration we will not longer run a TNS SS7 network and a CSG SS7 network. We will combine the two networks. So those are the initial targeted area that we'll go after. Again, we're very early in the integration process and this is something that we will update you on at the end of the second quarter.

[Roger Tsinsin – George Weiss]

Could you talk about the integration expense that's baked into the second half and put it in the second half '09 guidance?

Dennis Randolph

In terms of integration expense one of the big efforts that we'll have underway falls into two categories. One is from an operational nature. As we integrate the businesses a lot of the back office functions for the communications services group were provided by VeriSign so there will be an initial effort underway, most of it capital in nature to replace certain of those back office systems and functionality.

So the amount of capital expenditures we anticipate just sort of on a one off basis in the second half are roughly $4 million to $5 million and in terms of operating expenses related to the integrated, there is a transition services agreement as well as a reverse transition services agreement between us and VeriSign that covers some of these shared functions that are provided by the corporate identity.

Those range in scope and length from one to months to a year and then we have costs that we have for a project management office. So we anticipate about $1.5 to $2 million of expense in the second half of the year related to these items.

[Roger Tsinsin – George Weiss]

Can you repeat the one time EPS impact from the integration expenses?

Dennis Randolph

From an earnings per share perspective that's anywhere from $0.05 to $0.07 earnings per share in the second half.

[Roger Tsinsin – George Weiss]

So that should go away as we build out 2010. We should have that back.

Henry Graham

We would certainly hope so.

[Roger Tsinsin – George Weiss]

If we take conservatively the mid point of your '09 guidance range, we add back $0.06 to $0.07, we have to include the inherent mid single digit growth in your business and add synergies it would seem like it would not be very difficult for us to pencil out somewhere in the mid $2.00 EPS range. Is that a fair way of thinking about it directionally?

Henry Graham

Well that's your math.

[Roger Tsinsin – George Weiss]

Do you think my math makes sense?

Henry Graham

Obviously you did the calculations correctly, but it is your math.

Operator

There are no further questions at this time. I'd like to turn it back over to Mr. Graham for closing remarks.

Henry Graham

Thanks again everybody and we look forward to speaking with again after the second quarter. Have a good evening.

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Source: TNS, Inc. Q1 2009 Earnings Call Transcript

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