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TNS Inc (NYSE:TNS)

Q3 2007 Earnings Call

November 5, 2007, 05:00 p.m. ET

Executives

Henry Graham Jr - Chief Executive Officer

Dennis Randolph – Executive Vice President and CFO

Jim McLaughlin - Executive Vice President and Corporate Secretary

Ray Low - President

Analysts

Wayne Johnson III - Raymond James

Tien-Tsin Huang - J.P. Morgan

Paul Bartolai - Credit Suisse

Franco Turrinelli - William Blair & Company

Gary Prestopino - Barrington Research

Operator

Good day, ladies and gentlemen. Thank you for standing by and welcome to the 2007 Third Quarter TNS Earnings Conference Call.

I would now like to turn the presentation over to your host for today’s call, Mr. Jim McLaughlin, Executive Vice President and Corporate Secretary of TNS. Please proceed, sir.

Jim McLaughlin

Good evening, everyone and thank you for joining us to view TNS’ Third Quarter 2007 Results. I am Jim McLaughlin, TNS’ Corporate Secretary.

This conference call webcast are accompanied by a brief slide presentation that we invite you to access on TNS’ website at www.tnsi.com.

Leading today’s call from TNS are Henry Graham, our CEO and Dennis Randolph, our 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 and only speak as of today’s date.

We undertake no obligation to totally update the forward-looking statements to reflect subsequent events or circumstances. Finally, we refer you to TNS’ form 10-K file with the SEC on March 16, 2007 and is available on our website for additional information concerning factors that could cause our actual results to materially differ from the forward-looking statements.

With that, I would like to turn the call over to Henry Graham, TNS’ CEO.

Henry Graham

Thank you, Jim and thanks everyone for joining us to discuss TNS’ Third Quarter 2007 Results. As always, I will begin today’s call with an overview of the quarter’s results and accomplishments and give you an update on our priorities for the remainder of the year. Then Dennis Randolph, our CFO will take you through the financials on our fourth quarter outlook. Afterward, Dennis and I will be available to answer your questions in the time remaining.

As we go through the discussion, we invite you to follow along with the slides that we will be presenting on our website.

Let us start with the quarter review or webcast slide number two, TNS’ third quarter performance was very strong and exceeded our outlook range on both on the top and bottom lines. Revenues in the quarter grew 15.5% to $84.5 million in adjusted earnings excluding a $1.1 million charge for severance grew 38.5% to $7.2 million. Buy-ins in all divisions were at least in line with our expectations and we continue to drive leverage at the gross margin and SG&A lines, all of which generated higher cash flow.

As we have been communicating to you, the mission for 2007 has been consistent execution, realistic forecasting and further refinement of our strength and business model. Our performance to date demonstrates that we are clearly on track.

Let us talk about our divisional performance. Our international services division, TNS’ largest division recorded year-over-year sales growth of 39.9% in the third quarter and accounted for nearly 44.8% of total revenue. On a constant dollar basis excluding the effect of foreign exchange from the third quarter of 2007, ISD sales grew 29.6%.

During the quarter, demand remains strong while international POS and FSD services in all markets particularly in Europe. The greatest growth came from the UK plants, Australia, Italy and Spain. ISD margins continue to be strong in Q3 with gross margins in excess 60%.

Looking at our ISD by geography, in Europe, we continue to gain share of a growing market with increasing demand for our POS services in volume growth into double digits. In France, our migration and implementation of customer traffic associated with the JPG acquisition is proceeding, and is ranking up in the second half. In the UK, our broadband offering is gaining traction in the retail sector and we are enjoying a growing pipeline of opportunity and a strong conversion rate.

In Italy and Spain, growth remains strong. In Central European countries, we continue to experience increased demand by FSD services in particular. TNS continues to play an instrumental role in supporting the formation of the modern trading era as this markets progress.

In the Asia Pacific, our Dialect acquisition in Australia is delivering good results. We are working with major financial institution customers on new opportunities. As we have discussed, Dialect establishes TNS’ credibility in the card ___ (1) 2:17 present market with an internet payment gateway and relationships with important new customer types and major strategic advancement with TNS that offers us an incremental future growth opportunity.

Integration of this acquisition into our infrastructure and product alignment is on track and we continue to expect this acquisition to be accreted within 12 months from the date of acquisition. Late in the third quarter, we entered into a customer agreement with the Singapore Stock Exchange to distribute its securities and derivate market data to the global market place through our secured trading extranet. This brings global scale to SGX’s customer activity from just a few connections within Singapore’s boundaries.

Lastly, Japan, South Korea, Thailand and Taiwan are also performing well with new FSD customers we have brought home to our network. We continue to expect ISD, our most profitable division to contribute more meaningfully to revenue and profitability as growth continues to scale.

ISD is benefiting from accelerating trends and transaction called adoption in world markets outside of the United States, and the adoption of modern trading practices and connectivity in developing countries, we are executing very well on its growth including the integration of our two most recent acquisitions.

Moving on to our financial services division, revenue on our domestic financial services division increased 17.6% year-over-year and was 12.3% of total third quarter revenue.

FSD growth in the quarter continued to come primarily from expanding bandwidth requirements from existing customers as demands continue to build to low latency direct access and market data to exchanges and ECMs.

We ended the quarter with 1252 global physical endpoints of which 935 were domestic and 10,174 domestic logical virtual connections. We continue to expect this year’s growth rate in FSD to remain consistent, driven primarily by growth in revenue for fiscal endpoint with existing customers as we expand heights and fulfil demand to increasing force speeds as bandwidth and complexity needs to continue to rise.

Moving to TSD, revenue on our talk communications services division decreased to half a percentage point year-over-year and was 18.3% of total third quarter revenue. Pass-through revenue contributed $1.2 million to this quarter, excluding this on a year-over-year basis, revenue grew 1%. Volumes of building from cable customers as we continue to migrate this traffic onto our network. We are continuing to ramp up volumes with Neutral Tandem, a customer that that provides a neutral infrastructure for exchanging voice traffic across a variety of platforms.

For this year, TSD is clearly gaining traction with non-traditional voice providers and we expect to be able to build on these gains as demand for call signalling and services is created by digital voice providers who need to link up with legacy providers. We continue to pursue additional opportunities in this niche.

Moving to our POS division, revenue on our domestic POS division decreased 4.3% year-over-year in the third quarter. Excluding pass-through revenue, POS revenue was $20.1 million. POS accounted for 24.6% of total third quarter revenue.

Total POS dial-up transaction count decreased 5.3% year-over-year, but was up slightly sequentially. The average price for transaction was also up slightly from last year overall showing a more stable trend.

Toward the end of the quarter, we were very pleased to have been selected by CO-OP Financial Services, the largest credit union service organization in the United States providing ATM and host connectivity, and manage network services. This is a three-year $9 million minimum deal.

This relationship is a very strategic one for TNS. It is a significant contract that leverages a range of our products from our legacy dial up capability to our recently introduced broadband and wireless solutions demonstrating very clearly our ability to customize a highly secure and cost efficient suite of services to the needs of our customer and its member institutions.

TNS was selected by CO-OP because of our proven expertise in providing ATM connectivity services and because we offer a right sized solution that was designed to evolve with CO-OP’s product offering.

We expect CO-OP volumes to ramp up over the next one to two years as we implement facilities and expect to begin booking revenue in the second half of 2008.

Interest in our broadband retail products remain strong and are translating into an increasingly robust pipeline. The conversion right into actual installer remains challenging though the projects we have completed continue to be strong successes with very positive feedback coming from these customers.

As a management team, we remain focused on finding the right combination of levers and incentives to persuade potential customers to install. We also continue to address the opportunities to expand our pipeline.

Today the POS division’s product suite is very robust as the CO-OP win shows and we believe there is additional opportunity to leverage the combination of our legacy and our new products as a broad offering that satisfies a range of customer needs. For the remainder of the year, we are working to accelerate broadband installations, continuing to enhance style, product margins and developing additional new products. We are very pleased with our first nine months progress which demonstrates the higher caliber of consistent performance driving improvement terms to our shareholders.

Given the strength and consistency of our execution to date, in the year, TNS is well positioned for very solid fourth quarter and full year performance. We are capturing our growth opportunities on all divisions by winning new customers who come to us for the breath of our product suite and the quality of our service. We are ramping up these new customers efficiently and are integrating the acquisitions made this year. We are executing well day-to-day as normal season of volume ramps are up, and we are reinforcing the sustainability, profitability and cash generation capability of our business model. We are very much on track to achieve our growth objectives and we will continue to honor our commitments to discipline, planning and execution as we enter the final months of the year.

With that, I will turn the call to Dennis for the financial review.

Dennis Randolph

Thanks Henry, and good everyone. I will start the financial review with income statement highlights beginning with webcast slide three.

Total revenue in the third quarter increased 15.5% to $84.5 million from $73.2 million in the third quarter of 2006. Components of revenue are as follows: International Services division revenue which is derived from sales of TNA services outside North America increased 39.9% from $37.9 million from $27.1 million in the third quarter of 2006. The impact to foreign exchange on IT revenue was a benefit of approximately $2.7 million and as Henry mentioned, the increase in revenue was 29.6% on constant dollar basis. The increase in revenues during the quarter resulted primarily from the inclusion of a full quarter of Dialect revenue. Increases in the level of transaction volumes and a number of international customers in both the non-US POS and FSD businesses and a migration of JPG customer traffic on to TNS’ network in France.

Financial Services Division revenue which is derived from provisioning of secured voice and data services, the Financial Services Industry remain very steady at 17.6% rising to $10.4 million from $8.8 million in the third quarter of 2006. This is due to continuing growth in customer connections and endpoints, as well as increases in the average revenue per customer endpoint resulting from higher bandwidth installations.

Telecommunication Services Division revenue which is derived from call signalling, database access and validation services to wire line, wireless and voice providers decreased half a percentage point to $15.4 million from $15.5 million in the third quarter of 2006. So the pass-through revenue in the third quarter of 2007 was $1.2 million compared to $1.3 million in the third quarter of 2006. The TSD revenues excluding pass-through revenues grew 1.2%.

During the quarter, we experienced growth from migration on to TNS’ network of new cable customer traffic which was partially all set by lower database access query volumes.

POS Division revenue decreased 4.3% to $20.8 million from $21.7 million in the third quarter of 2006. POS transactions in the third quarter decreased by 0.3% in the third quarter of 2006. However, average gross revenue per transaction again increased to approximately 1% year-over-year. Sequentially, POS revenue grew slightly through increased contributions from higher transaction volumes from our traditional dial-up point of sale of sail product, and additional endpoints from our broadband service offerings.

Gross margin in the third quarter increased approximately 140 basis points to 50.2% from 48.8% in the third quarter of 2006. Excluding $2.6 million and $2 million in total pass-through revenues in the third quarters of 2007 and 2006, gross margin increased to 51.8% from 50.2%. The improvement in gross margin from last year is a result of increased contribution from ISD and FSD, the Company’s highest gross margin divisions, which helped to offset margin declines in the POS division as a result of increased telecommunication charges. The third quarter gross margin increased to100 basis points sequentially excluding pass-through revenues, resulting from higher transaction volumes in ISD and continued improvements in telecommunication charges in the POS division as TNS continues to work to lower these and other costs.

Engineering and development costs in the quarter were $6.9 million or 8.2% of third quarter of the 2007 revenue as compared to $5.3 million or 7.2% revenue in the third quarter of 2006. This increase is attributable to employees who join TNS as part of the Dialect acquisition as well as the expense related to our investment in product developments. Sequentially E&D costs were up approximately $300,000.00 primarily from the inclusion of the full quarter of Dialect.

SG&A expenses were $20.1 million or 23.8% of the third quarter of the 2007 revenue as compared to $21 million or 28.7% of revenue in the third quarter of 2006. Including the SG&A for the third quarter of 2007 is a $1.1 million pre-tax charge for severances we continue to streamline our organization including an SG&A for the third quarter of 2006, the pre-tax charge of $4.5 million for severance associated with our cost reduction initiative and expenses incurred by the special committee or TNS’ board of directors.

Stock compensation expense included in SG&A was $3 million in the third quarter of 2007 versus $1.8 million in the third quarter of 2006. Excluding the non-recurring charges from the third quarters of 2007 and 2006, an increase in stock compensation expense, SG&A was 18.9% of sales compared to 20.1% of sales in the third quarter of 2006, decreasing through cost cutting measures we put in place and continued focus on cost control.

Depreciation expense in the third quarter was $6 million versus $5.6 million last year, this slight increase is due to increases in capital expenditures to support our revenue growth. Amortization of intangibles was $6.3 million versus $5.5 million in the third quarter of 2006 with the increase due primarily to our acquisitions of JPG in September 2006 and Dialect in June of 2007. Interest expense from the quarter was $4.3 million versus $2.5 million last year. Interest expense increased due to higher debt levels incurred as a result of the recapitalization recording our special dividend. Interest income and other income was $1.4 million during the quarter versus $831,000.00 in the third quarter of 2006. Increasing primarily as a result of a gain on foreign courtesy translation due predominantly to fluctuations in the Pound Sterling, Euro and Australian dollar. Equity net income loss of affiliates was income of approximately $135,000.00 in the third quarter of 2007 compared to a loss of $904,000.00 in the third quarter of 2006 as we had fully written down our investment and weighed system in IP commerce in the fourth quarter of 2006.

During the third quarter of 2007, we sold 10% of our stake in A.K. Jensen, our only remaining equity method investment for gain inquired intangibles that we record and a fluctuations in our effective tax rate, we use two non-GAAP measures to evaluate operating performance. EBITDA before stock compensation expense in adjusted earnings, both of which we are illustrating today’s press release and in the company slide presentation. Let us take a look at slide four.

EBITDA before stock compensation expense is calculated by taking income from operations and adding back interest taxes depreciation amortization and stock compensation expense. EBITDA before stock compensation expense for the third quarter of 2007 was $19.2 million, amounting to 22.7% of revenues as compared to $12 million or 16.4% of revenues for the third quarter of 2006. This represents an increase of 59.9%.

Excluding the pre-tax charges from both quarters, EBITDA before stock compensation expense grew 23% to $20.3 million from $16.5 million. Our EBITDA contribution margin in the quarter improved to 24% from 22.5% last years excluding non-recurring charges for 150 basis point improvements in operating leverage. Now moving to slide five.

Adjusted earnings are calculated by taking pre-tax earnings for loss from continuing operations before equity and net loss of affiliate, and adding back certain non-cash items, including amortization of intangible assets and stock compensation expense. Adjusted earnings for the third quarter of 2007, more than doubled the $6.5 million or $0.27 per share from the third quarter of 2006 adjusted earnings of $2.4 million or $0.10 per share.

Excluding the pre-tax charges from both Q3 ‘07and Q3 ‘06, adjusted earnings increased to 38.5% to $7.2 million or $0.29 per share from $5.2 million or $0.21 per share. These results include incremental interest expense of $1.8 million or $0.5 related to the recapitalization in reflects our efforts to increase our operating leverage.

Let us review some of our balance sheet highlights from slide six.

Our current rate this year was 1.31 times down from 1.46 times at the end of the fourth quarter and 1.36 times in the third quarter of 2006. Sequentially, our current ratio increased slightly from 1.3. Long-term debt at quarter end was $210.5 million for a total debt to capitalization ratio of 70.3% versus 72% in the last quarter and 40% a year ago.

In the third quarter, we made voluntary pre-payments on our term B loan of $5.5 million. Cash at quarter end was $19.5 million down $3.5 million from last quarter and up $2.1 million from yearend.

During Q3, we generated $8.1 million from operations with over $35.3 million in operating cash generated in the first nine months of the year. To-date this year, we have already exceeded the $35.1 million in operating cash generated for all of 2006. Capital expenditures in Q3 were $5 million compared to $6.4 million in Q3 ’06 was $8 million for the JPG acquisition.

As we move in to the seasonally strong fourth quarter, we would expect our rising operating leverage to generate cash at an increased rate enabling us to more than fund our growth in debt pre-payment plans.

Turning now to the financial outlook on slide seven, for the fourth quarter of 2007, our outlook for total revenue is $82 million to $85 million versus fourth quarter of 2005 revenue of $74.4 million. For the fourth quarter outlook for adjusted earnings, it is $6.1% to $7.3 million versus $5.5 million in the fourth quarter of 2006 and adjusted earnings per share of $0.25 to $0.30 versus $0.23 for the fourth quarter of 2006. Please note that these numbers do not include any non-recurring charges. For the full years of 2007, this implies adjusted earnings growth from 22% to 28%, please note that these numbers exclude the previously disclosed non-recurring items. This outlook also assumes the incurrence of an incremental $6 million or $0.15 per share of interest expense from the recapitalization.

With that, I will turn it back to Henry.

Henry Graham

Thank you, Dennis. Operator, this concludes our prepared remarks and we are ready to open the call for questions.

Question-and-Answer Session

Operator

Your first question will come from the line of Wayne Johnson of Raymond James.

Wayne Johnson III - Raymond James

Just a couple of quick clarifications, I came in a little bit late on the conference call. What was the foreign currency impact on the quarter?

Henry Graham

On revenues, the impact year-over-year was $2.7 million.

Wayne Johnson III - Raymond James

Okay, and how does that equate in EPS?

Henry Graham

In terms of EPS, year-over-year, that would equate into $1.2 million.

Wayne Johnson III - Raymond James

Okay, and on JPG, just on the percent of completion, do you guys feel comfortable that you are going to be finishing that up by the end of this year? Will it spill over to the first quarter of next year? How should we think about that?

Henry Graham

Well, basically, Raymond, obviously now, we will follow a little better than halfway through. Quite frankly, all of the estimates that we had given and had anticipated would be some further cleanup conversion in the first quarter of next year, but as we stand today, it is right on track on what we thought it was going to be, so there will still be some additional conversions in the first quarter of next year. But it is on track to be completed within the timeframe that we originally anticipate.

Wayne Johnson III - Raymond James

Okay, that is really helpful. And on Dialect, what do you expect to get from Dialect kind of in the fourth quarter and moving into the first half of ’08?

Henry Graham

Well, it has been averages, somewhere around $600,000.00 to $700,000.00 a month. We do not expect that to move, all poured down, there maybe a couple of spikes one way or the other. But the main thing that we are working on right now is to make sure that we have got that fully integrated, finalize all of the existing contracts that we have outstanding within that and again to make it accreted within 12 months of the date of acquisition.

Wayne Johnson III - Raymond James

Okay, great. And then on FusionPoint. What could be done if it is possible to expedite the rate of conversion? On FusionPoint that all of a sudden, we have been hearing a lot about and look forward to hearing more results on it, but it seems like it has had a long tail to kind of get to where we are, could you remind me what is the backlog of that pipeline now and talk a little bit about the opportunity to speed up the conversion rate.

Henry Graham

Well, the backlog inclusive of the information, well, there is probably in the 7,000 to 8,000 stores, I mean one of things that we are doing is we are continuing to pursue additional customers on that, hoping with the diversity that we would get from additional customers that that would help us increase the rate at which we would get conversions. We are in constant communication with all the headquarters that has chosen this particular broadband solution as their solution and Wayne, we are doing everything we can to find the right buttons, levers and incentives that are necessary to get them to convert.

The ironic thing about all of that is once you do get one to convert and go through the pain of doing that, they absolutely love it after the conversion is done. If there is any disappointment to us, that is the conversion rate in this particular area, but the pipeline continues to grow and hopefully the diversity in the pipeline as we add additional customers will increase that rate.

Wayne Johnson III - Raymond James

Okay, that is super. That looks like a favorable quarter with favorable result. Any indication on ’08? Can you give us any kind of rough guidelines how we should think about revenue, EBITDA growth going forward here as we are in to the fourth quarter now and the guidance looks like it is very strong, above consensus if not hitting higher, so what kind of color can you give us next year?

Henry Graham

Well, obviously, we are right in the middle of our budgetary processes right now, but right, now today, Wayne as we sit here, we think we are poised for a very strong 2008. But I mean, right now we would say that revenue growth from 8% to 10% range overall, EBITDA growth from 12% to 15% range, obviously we are on track to do quick cash flow this year of $31 to $32 million dollars. We would think that next year that would be in the high 30s or low 40s as far as quick cash flow is concerned.

If we do not have anything more noble to do with that, we will continue to go after the debt which means incrementally our adjusted earnings would increase at a rate faster than the 12% to 15% EBITDA. So, 2008 we will be very strong and we will give additional specific color on that on our fourth quarter call.

Wayne Johnson III - Raymond James

Great, thank you very much.

Operator

Your next question will come from the line of Tien-Tsin Huang of J.P. Morgan, please proceed.

Tien-Tsin Huang - J.P. Morgan

Hey, good afternoon guys and great results.

Henry Graham

Thanks Tien-Tsin.

Tien-Tsin Huang - J.P. Morgan

Just a few questions I guess, I got the Dialect contribution to the ISD, but I see revenues, the sequential uptake was actually still quite big. So, with the majority of it, just Dialect and the conversion of JPG or is something else that we should consider. I heard the commentary around the country but—

Henry Graham

Tien-Tsin, if you look at it and back all of that acquisitions and everything out, I mean organically it is up about 11% or 12%. But when we gave up 14% to 17% guidance, if you will, we anticipated the inclusion of JPG. So, you know, we have had strong results, double-digit growth overall, even organically, so there has been a constant demand for POS and FSD type services. So overall, we are pretty pleased with ISD’s performance today and we have seen no reason why that performance would deteriorate.

Tien-Tsin Huang - J.P. Morgan

So it is good. So it sounds sustainable then. But the CO-OP contract stood out to be a pretty solid, I know we have talked about that before, but can you give us just a little bit more details there. How do you go about winning that? Who is the incumbent, and I guess, why did it take so long to convert the revenues? It sounds like second half ’08 when we saw that it hit the piano?

Henry Graham

Well, obviously we were being conservative about that, I mean obviously we answered the RFP, the incumbent that provided those services if you will was eFunds and understand this. We are partnering with eFunds into buying this service going forth because eFunds continues to process for the CO-OP. Basically, we were able to answer the RFP and provide them with the type of connectivity across all the lines that they were looking for. The contract is specifically, $1 million in the first year, $3 million in the second year, and $5 million in the third year. Second half ‘08, I am being conservative there. Transitions have a tendency to come up and bite you if you are not conservative on them. We would expect when that traffic is fully ramped to be something in the order of $5 to $8 million a year gross revenue for us. So, hopefully, we will get a transition faster, but we are trying to be conservative because we are dependent upon other people for certain areas of this transition.

Tien-Tsin Huang - J.P. Morgan

Okay, that is terrific. Just two more, the details on the severance, how many people are being impacted here and what area did you address and what is the savings impact?

Henry Graham

That is $1.1 million. It represents approximately seven people and really it is across all lines on ISD, quite frankly, Tien-Tsin, after this quarter, we are probably coming to the end of the substantial severance charges that you will see and I do not want to get anymore specific than that.

Tien-Tsin Huang - J.P. Morgan

Okay, fair enough, it is good to see the cleanup there. The last question I have was just the revenue, clearly the guidance is good, but the 4Q revenue guidance implies sequentially flat to down revenue, so it looks like historically, except for, it looks like ’04 we have seen 4Q slightly higher than 3Q. Anything different that we should be aware of this year?

Henry Graham

I think it is just conservatism on our part, I mean, obviously we do not know what the exchange rates are going to do. We are trying to put forward a conservative number, I know it appears a little strange looking, but basically with $82 to $85 million, I think that what we have quoted here, we are very happy with that. We have no news other than a continued impact particularly in TSD of this consolidation that we talked about earlier so, this conservative outlook was consistent, my eyes now are more on the overall yearly performance as opposed to quarter-to-quarter.

The third quarter was big quarter for us to get under our belt and it votes well for what we would do in the fourth quarter. So, overall, we feel pretty good about the entire year.

Dennis Randolph

The other thing, Tien-Tsin, in the third quarter, we had about a million dollar more and faster revenues than we would anticipate in the fourth quarter.

Tien-Tsin Huang - J.P. Morgan

We like conservatism. Nice job guys. Thank you.

Operator

And your next question will come from the line of Paul Bartolai of Credit Suisse.

Paul Bartolai – Credit Suisse

Thanks, good afternoon.

Henry Graham

Hi Paul.

Paul Bartolai – Credit Suisse

Just to clarify an earlier question, the question of profit contribution from currency, the $1.2 million I think you said, that that was a net income contribution?

Dennis Randolph

Yes. It flows through the other income line of our P&L.

Paul Bartolai – Credit Suisse

Okay. And then, just looking at the international market, I mean, obviously, we are seeing some pretty good trends there. I just wonder if you can give us any commentary on what you see there in terms of the competitive environment?

Henry Graham

Well Paul, I mean Ray Low is in the room, I will have him answer this also. I mean basically we have not seen any increase in competition if you are roaming. We continue to enjoy what we have. We have renewed our place, we have talk about it earlier this year and there were some discounts associated with that, but for the most part there has not been that much of a change in the competitive landscape in the international sector. Obviously, we operate in much higher gross margin there for a number of different reasons, but as we continue to role out the TNS product offerings in particular, FSD, we have not really seen a lot of pricing sensitivity. Ray, you want to add anything to that?

Ray Low

Yes, hi Paul. I guess we are unique in this market in that we are a global player. We provide global POS services to our clients, and our competitors are all regional, or more specifically here in the country. So, when we do compete, we compete very locally, and as Henry says we do not tend to get too much pressure form the local incumbent because they do not have the products and services and the breadth of cover that we have. So, we do find ourselves in a very unique position.

Paul Bartolai – Credit Suisse

Okay great. That is helpful, and back in the US, you mentioned about the pricing increases, just curious what do you think is driving that if that is sustainable in the pricing environment in the domestic POS business?

Henry Graham

Well if anything, part of this increase in telecom expenses, one of they buy-product of that, is that now that everybody is kind of woken up to the fact of how much it really costs. The there will be short duration calls with shortly rationed average length of call if you will, at least a stabilization in that. I do not know that you are going to see a tremendous increase in that, but I do not expect to see it to start to fall again to be able to follow a new trend.

Paul Bartolai – Credit Suisse

Okay, then just a last question, the stock comp expense is quite a bit higher than we were expecting. Can you talk about what drove that and what we should look for in that number going forward?

Henry Graham

In terms of the stock comp going forward, they are really beautiful. The expense for this quarter was really driven by recent grants that we were given as part of the management change. Going forward from a model perspective, you should expect about a very similar model that you show at this quarter of stock compensation expense.

Paul Bartolai – Credit Suisse

The $3.8 million going forward?

Henry Graham

Yes.

Paul Bartolai – Credit Suisse

For full year of ‘08 as well?

Henry Graham

Yes, for the full year of 2008.

Paul Bartolai – Credit Suisse

Okay, thank you

Operator

Your next question will come from the line of Franco Turrinelli of William Blair.

Franco Turrinelli - William Blair & Company

Good afternoon, gentleman.

Henry Graham

Hello Franco.

Franco Turrinelli - William Blair & Company

Many of the questions have been awesome. I apologize for not asking more happy questions, but the first one is I am sure, Henry you are not pleased with the performance of POS other than pushing people to do FusionPoint, is there much we can do to get this business back to positive growth?

Henry Graham

Well Franco, I guess the first step in that outside of the broadband offering is in fact the CO-OP contract that we have announced. We are pretty pleased about that, certainly this partnership in-conjunction with us. CO-OP an eFunds, is a demonstration that there is in fact light in some of the legacy talks the we currently have there.

We would expect that in the conversion of that and of the conversations that are going on it that space that we would return that. Notwithstanding the broadband offering that we have, we are very bullish of that and that we are very bullish on the pipeline and hopefully we will continue to diversify that pipeline of more customer that will add to the number of all a successful conversions that we have. We do feel that POS is in a position for positive growth, certainly during 2008.

Franco Turrinelli - William Blair & Company

I guess, one of the things about making it more difficult is all about pieces volume is now converted, right? So, there is no help from there.

Henry Graham

That is correct.

Franco Turrinelli - William Blair & Company

Just more broadly Henry, could you kind of give us an update or sense of where you feel that you are in this, pretty wide ranging initiative to make sure that your costs are appropriate for the business. I mean, you have obviously done a lot so far. I am kind of wondering if you could bring us up-to-date on how much more you feel there is to do, or how much more opportunity there is?

Henry Graham

Well, as we said, when we did the original $9.8 million, we have continued to do what I would consider to be more of a surgical evaluation of different areas within the company. As we exit 2007, I think that cost structure that we have in place is in fact the cost structures that we will have going forward. I think you will begin to see us leverage both E&D and SG&A on a going-forward basis.

As I said, a number of times on previous calls, we are probably at the end of the cost-cutting measures, we did invest in products that we talked about a number of times on these calls in order to focus our group on the outcomes that we have currently. So, what you see right now and maybe just a few more changes during the full quarter, we will finalize that, so we are basically at the run-rate that you would expect going forward other than inflationary increases, Franco, I do not think you will see much additional expense coming on board and if anything, the percent of the totals of both in the E&D and SG&A should begin to show the leveraging effect.

Franco Turrinelli - William Blair & Company

Okay, that is very helpful and congratulations on your excellent execution on this run of last 12 months or so. Just two real minor housekeeping items if I may. The $1.1 million of severance, is that all in SG&A?

Henry Graham

All on SG&A.

Franco Turrinelli - William Blair & Company

Did you ever give us a breakout last year of the $4.5 million? I forgot, I was looking through my notes. I do not think I have anything from my –

Henry Graham

The majority of it was SG&A but there was probably, I would have to get back to it, but probably four to five hundred thousand dollars was in E&D.

Franco Turrinelli - William Blair & Company

Nothing would have shown up in cost of goods sold, right?

Henry Graham

No.

Franco Turrinelli - William Blair & Company

And then, I am sorry but I think I am being stupid about this. The Forex impact, so that is coming through in other income, does it have a tax consequence or does that really all flow through the bottom line?

Henry Graham

It does have tax consequences. It is the timing difference, so it flows through the deferred tax assets that we have.

Franco Turrinelli - William Blair & Company

So, just to kind of make sure that we are all on the same page, because I do not think you want us to go away and think about of the impression of year-over-year increase in earnings that you have had, but it is all due to Forex impacts. What should we think of as the actual earnings Forex impact for this quarter?

Henry Graham

The foreign exchange impact to this quarter was $1.2 million. So that equivocates to about $0.03 per share.

Franco Turrinelli - William Blair & Company

Okay great, that was what I was looking for. Thank you.

Operator

Your next question will come from the line of Gary Prestopino of Barrington Research.

Gary Prestopino - Barrington Research

Henry, Dennis, how are you doing? Can you hear me?

Henry Graham

Yes we can.

Gary Prestopino - Barrington Research

Great, could you just give me down your capex plans and total capex for this year? What is going to be about?

Henry Graham

Total capex for this year on a net basis is going to be somewhere around $19 million.

Gary Prestopino - Barrington Research

Okay great, and then did you give any number for what JPG contributed on revenue basis for this quarter?

Henry Graham

On a revenue basis, JPG on an incremental basis contributed about $1.2 million.

Gary Prestopino - Barrington Research

$1.2 million great, and then with the range of guidance that you have given, you have tightened the low end of the range. What is the EBITDA guidance? How does that equate into EBITDA?

Henry Graham

It is somewhere in the neighbourhood between $74 and $76 million.

Gary Prestopino - Barrington Research

Okay, and then with Dialect, when will that be integrated to the point where you can start taking that on to the European continent? Do you have plans to come into the US with Dialect as well?

Henry Graham

Yes we do, and like we said, time before, right now we are concentrating on executing the things that we acquired. There are certain contracts that are being worked through, we are readying that.

It will probably be sometime in the late second half of 2008, early part of 2009 before we start looking at the United Kingdom and the United States. It could be sooner, but that is our plan right now, Gary.

Gary Prestopino - Barrington Research

From my notes last time, it looked like you had about 1200 FusionPoint installations. Is that correct?

Henry Graham

You are asking what is it today?

Gary Prestopino - Barrington Research

Yes, what is it today, right now?

Henry Graham

About 1342 I think something like that.

Gary Prestopino - Barrington Research

Okay, not to beat a dead horse here, but with FusionPoint, I mean, you have got the contracts signed, you are still having conversion issues, does it \ever get to the point where if you do not hit a certain number of conversions that there could be some detriment to the contract?

Henry Graham

No, there is nothing in these contracts like that, Gary. Yes, basically, what it boils down to is just, it is a more complex customer that we are dealing with and it is at a lower range than we normally deal.

Quite frankly, in addition to the contract signing what we have would be with the corporate office for the lack of a better term, I will use that is an example, then we have major jobbers, some of them big, some of them small, but we have to get to convert. The good news is that once they do go through the pain of conversion, they are all very happy with it.

The other thing that we are doing is that there are number of people who we are talking to now, to the extent that we can continue to diversify that pipeline and make it grow larger and have different corporate organizations behind it. We would expect that by default, the number of conversions would increase.

We will continue to try and look for the right buttons and levers and incentives, if you will, to get these people to convert over. If it is going to happen, it is more or less, when it is going to happen and we have been a little disappointed in the uptake on this particular part. Now, actually, this is only the only disappointment that I have had in the past 12 months.

Gary Prestopino - Barrington Research

Okay thanks guys.

Operator

That will conclude the question and answer session. I would like to turn the call over to Mr. Henry Graham for closing comments.

Henry Graham

Okay, thanks again everyone for participating today, we are looking forward to speaking with you again after the yearend. Have a good evening.

Operator

Ladies and gentlemen, thank you for your participation in today’s call. This concludes the presentation. You may now disconnect. Have a wonderful day.

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