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Executives

Michael McCarthy – Assistant Corporate Secretary

Henry H. Graham, Jr. – Chief Executive Officer & Director

Dennis L. Randolph, Jr. – Chief Financial Officer, Executive Vice President & Treasurer

Analysts

Tien-Tsin Huang – JP Morgan Securities

Wayne Johnson, III – Raymond James

Franco Turrinelli – William Blair & Company LLC

Gary Prestopino – Barrington Research

TNS, Inc. (TNS) Q4 2007 Earnings Call February 25, 2008 5:00 PM ET

Operator

Good day ladies and gentlemen and welcome to the TNS, Inc. fourth quarter fiscal year 2007 earnings conference call. My name is Jahida and I will be your coordinator for today. At this time all participants are in listen only mode. We will be facilitating a question and answer session towards the end of this conference. (Operator Instructions) I would now like to turn the presentation over to your host for today’s call, Mr. Michael McCarthy, Assistant Corporate Secretary for TNS. Please proceed.

Mike McCarthy

Good evening everyone and thank you for joining us to review TNS fourth quarter 2007 financial results and 2008 outlook. 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 TNS’s website 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, level 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, level of activity, performance or achievements. We caution you not to place undue reliance on forward-looking statements which reflect our analyst only and only speak as of today’s date. We undertake no obligation to publically update the forward-looking statements to reflect subsequent events or circumstances. Finally, we refer you to our Form 10K filed with the SEC on March 16, 2007 and which is available on our website for additional information concerning factors that could cause actual results to materially differ from the forward-looking statements.

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

Henry H. Graham, Jr.

Thank you everyone for joining us to discuss TNS’ fourth quarter 2007 results. As always, I’ll begin today’s call with an overview of the quarter’s results and accomplishments, give you a brief overview of the year and take you through our strategic plan for 2008. Then, Dennis Randolph our CFO will take you through the financials and our financial outlook. After Denny’s remarks he 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 we will be presenting on our website.

TNS’s fourth quarter performance exceeded our outlook for sales and adjusted earnings capping off a year of consistently strong growth based on disciplined forecasting, execution and continued strengthening of our operating model. Additionally, after completing a long term study of tax structure best practices with the assistance of our outside tax advisors we announced today that we have implemented a change in our international tax planning strategy that is more efficient and more appropriately mirrors our operating structure resulting in substantial cash tax savings going forward. Denny will detail this in his prepared remarks.

Let’s start with the quarter review, webcast slide number two. Revenues in the quarter grew 19.6% to $89 million and adjusted earnings excluding a non-recurring charge grew 47.8% to $8.1 million. During the quarter sales were better than expected in our international and telecommunications services divisions and combined with further operating leverage expansion drove earnings and cash flow growth.

Let’s talk about our divisional performance. Our international services division, TNS’ largest division recorded year-over-year sales growth of 38.1% in fourth quarter and accounted for nearly 45.4% of total revenue. On a constant dollar basis excluding the effect of foreign exchange item ISD sales grew 25%. On a constant dollar basis excluding the effect of foreign exchange and acquisitions, ISD sales grew 17.6%. During the quarter demand remained strong for our international POS and FSD services in all markets particularly in Europe and Australia where transaction volumes were higher than expected. ISD margins continued to be strong in the fourth quarter with gross margins in excess of 60%. Looking at ISD by geography, in Europe our growth remained strong in POS as well as FSD services as we gained share of growing markets. In the fourth quarter, volume for our POS services grew in the double digits particularly in the regions I mentioned earlier. In the UK we saw growth from existing and new customers and from selling additional services to independent sales organizations and terminal deployers. In France, our migration and implementation of customer traffic associated with the JPG acquisition is on schedule with volume continuing to ramp up well into the fourth quarter.

In the international FSD business, we won new customers in Western Europe with the announcement of new contracts. Growth in the FSD services also remained strong except for Europe and the Asia Pacific region where TNS is playing a key role in supporting the formation of the modern trading area as these markets progress. Also in Asia Pacific our Dialect acquisition continues to deliver good results as we worked with the Internet merchants in the region. We are on track for our integration of Dialect and what our objective of this acquisition becoming accretive by its anniversary in June.

Moving on to our FSD division. Revenue in our domestic financial services division increased 15.1% year-over-year and was 12% of total fourth quarter revenue. As in previous quarters most of FSD’s domestic growth continued to come from expanding bandwidth requirements from existing customers as demand continues to build for low latency direct access and market data to exchanges and ECS. During fourth quarter we won a contract in the North American market place from Pure Trading, the first alternative trading system in Canada to offer a fully electronic continuous auction market to provide customer connectivity through our managed secured trading extranet. We ended Q4 with 1,278 global physical endpoints of which 940 are domestic and 10,293 domestic logical virtual connections.

Moving to TSD; revenue in our telecommunications services division increased 19.8% from last year and was 20.3% of total fourth quarter revenue. This growth in the quarter came from building volumes from new cable customers who are migrating traffic on to our network faster than we expected plus higher than anticipated database access volume. We also continue to ramp up volumes with neutral [inaudible].

Moving to our POS division; revenue in our domestic POS division decreased 4.4% year-over-year in the fourth quarter and accounted for 22.3% of total fourth quarter revenue. Total POS dialup transaction count decreased 3% year-over-year and was down 4% sequentially. This was primarily due to one of our customers moving a portion of its dialup volume off our network in the fourth quarter to diversify its vendors as is a matter of policy. We have been informed this action was completely unrelated to TNS’ performance. We anticipate this customers’ diversification will affect our POS sales by $2 million in 2008 but have minimal impact on earnings. In the fourth quarter we continued our transition planning with CO-OP Financial Services and have started to see a small amount of revenue. We expect to begin to generate meaningful revenue from CO-OP in the second half of 2008. The pace of broadband installations remain slower than we anticipated but we are cautiously optimistic that the changes we have made to improve the product positioning and the conversion process are beginning to show results.

2007 was a very important year for TNS. With a new management team in place we asserted the strategic operational and financial control that has enabled us to raise the level of consistent execution company wide, grow our share of addressable markets and more than achieve our growth objectives. We also made an important strategic acquisitions, Dialect which enables us to enter the fast growing global Internet payments market. We delivered growth for the year of 13.8% in revenues and 34% in adjusted earnings before charges and will return to concrete value to our investors in the form of special dividend. We enter 2008 having established a product development capability and with a refined approach to our customers an enhanced operating model and a cohesive organization, all of which position us very well to capture our growth opportunities.

Let’s talk about the key elements of our 2008 strategy. First, we are focusing our efforts on six key geographic markets to efficiently manage our growth efforts. These include the US, U, France, Italy, Spain and Australia. We believe concentrating our efforts in this way will position TNS to grow our business in these markets while reaching out into adjacent countries generating 8 to 10% organic growth with minimal capital investment. We are also making better decisions on resource deployment to both improve customer service and raise our return on our investment in organic growth. Second, we will also complete our integration of Dialect business including the fulfillment of Dialect’s obligations to our major customers. We are targeting to begin selling our Internet payment gateway services in Europe later this year. It is our intention to roll out the full investment of the acquisition and level these new capabilities into future growth potential. Third, in all divisions we are focused on better managing our existing customers and selling to new customers with stronger service levels. We are particularly focused on reinvigorating growth in the POS division. Our investment in product development has rationalized and sharpened our product offerings particularly for the IP based products and our objective is to win a greater share of spend by selling additional services including broadband solutions into our existing customer base. Last, we are always on the lookout for strategic acquisitions that can broaden our product suite, expand our customer reach or deepen our existing geographic credibility.

2007 was [inaudible] year yet for TNS. Not only did we exceed our financial outlook and pay a special dividend but we invested in our business by initiating a formal product development process and completing the Dialect acquisition helping deepen our market and product penetration. We are very excited with the results we have delivered and will continue to productively invest in our growth in 2008. I would like to personally thank everyone at TNS for all their hard work and dedication over the last year.

With that, I’ll turn the call to Denny for the financial review.

Dennis L. Randolph, Jr.

Good evening everyone. I’ll start the financial review with income statement highlights beginning with webcast slide three. Total revenue in the fourth quarter increased 19.6% to $89 million from $74.4 million in the fourth quarter 2006. I won’t repeat the divisional components that Henry has already detailed. Gross margin in the fourth quarter increased approximately 420 basis points to 52.4% from 48.2% in the fourth quarter 2006. The improvement in gross margin is a result of increased contributions from ISD and FSD, the company’s highest gross margin divisions as well as strengthening operating leverage. Fourth quarter gross margin increased 220 basis points sequentially primarily through increased contribution from our ISD as a result of higher dialup transaction volume from POS services internationally and to a lesser extent improvements in telecommunications charges in the domestic point of sale division as we work to lower these and other costs.

Engineering and development costs in the quarter were $7.6 million or 8.6% of fourth quarter 2007 revenue compared to $6.9 million or 9.3% of revenue in the fourth quarter 2006. This increase is attributable to the investment we made in our Internet payment gateway capabilities from Dialect as well as the expense related to our investment in product development. SG&A expenses were $20.4 million or 23% of the fourth quarter 2007 revenue compared to $16.7 million or 22.4% of revenue in the fourth quarter of 2006. Included in SG&A for the fourth quarter 2007 is a $900,000 pre-tax charge for severance. Included in SG&A for the fourth quarter of 06 is a pre-tax charge of approximately $700,000 for severance associated with our cost reduction initiative and expense incurred by the special committee of TNS’ board of directors. Stock compensation included in SG&A was $2.6 million in the fourth quarter versus $1.1 million in the fourth quarter 2006. The increase results from additional shares granted in relation to the company’s performance based equity compensation program. Excluding the non-recurring charges from the fourth quarters 2007 and 2006, and the increase in stock compensation expense, SG&A was 19.2% of sales compared to 20% of sales in the fourth quarter 2006. As we continue to expand our operating leverage while investing to support our business growth.

Depreciation expense in the fourth quarter was $5.9 million versus $6.3 million last year. Included in the fourth quarter of 2006 was a $400,000 charge related to the impairment of vending related assets. Amortization of intangibles was $7.2 million versus $9.1 million in the fourth quarter 2006. Included in the fourth quarter of 2007 was a charge of $1.1 million related to the impairment of certain customer relationship intangible assets. Included in the fourth quarter of 2006 were charges of $2.1 million related to the impairment of certain customer relationship assets and $1.1 million related to the impairment of vending related intangible assets. Excluding these impairment charges, amortization increased as a result of the amortization of tangible assets acquired from Dialect in June of 2007.

Interest expense in the quarter was $4.2 million versus $2.5 million last year. Interest expense increased due to higher debt levels incurred as a result of the recapitalization supporting our special dividend. Interest income and other income was $300,000 during the quarter versus $1.2 million in the fourth quarter 2006. The decrease relates primarily to lower income primarily from the revaluation of foreign currencies predominantly the pound sterling and euro.

Equity and net income loss of affiliates was income of approximately $9,000 in the fourth quarter of 07 compared to a loss of over $2.2 million in the fourth quarter of 06 as we have fully written down our investments in Waste Systems and IT Commerce in the fourth quarter 06. Because of the high amount of amortization of acquired intangibles that we record and the fluctuations in our effective GAAP tax rate we use two non-GAAP measures to evaluate operating performance, EBITDA before stock compensation expense and adjusted earnings both of which are illustrated in today’s press release in the accompanying slide presentation.

Let’s take a look at slide number four. EBITDA before stock compensation expense is calculated by taking income from operations and adding back in interest, taxes, depreciation, amortization and stock compensation expense. EBTIDA before stock compensation expense for the fourth quarter 2007 was $21.9 million amounting to 24.6% of revenues as compared to $14.1 million or 19% of revenues for the fourth quarter of 06 an increase of over 55%. Excluding the pre-tax charges from both quarters, EBITDA before stock compensation expense grew 34.8% to $22.8 million from $16.9 million. Our EBTIDA contribution margin in the quarter improved to 25.6% from 22.7% last year excluding non-recurring charges for a 290 basis point improvement in operating leverage.

Now, moving to slide five. Adjusted earnings are calculated by taking pre-tax earnings or 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. The results of which have historically been tax affected at a 38% rate. Adjusted earnings for the fourth quarter 2007 nearly tripled to $7.5 million for $0.31 per share from fourth quarter 2006 adjusted earnings of $2.7 million or $0.11 per share. Excluding the pre-tax charges from both Q4 07 and Q4 06 adjusted earnings have increased 47.8% to $8.1 million or $0.33 per share from $5.5 million or $0.23 per share. These results include incremental interest expense of $1.7 million or $0.04 per share related to the recapitalization and reflect our efforts to increase our operating leverage.

Now, let’s review some of our balance sheet highlights on slide six. Our current ratio was 1.43 times, only slightly down from 1.45 times at the end of last year and up from 1.31 at the end of last quarter. Long term debt at quarter end was $205.5 million for total debt to capitalization ratio of 68.6% versus 70.3% last quarter and 40% a year ago. In the fourth quarter we made voluntary prepayments on our term loan of $5 million and since year end have repaid an additional $5 million for a total of $24.5 million prepaid since the March recapitalization. Cash at quarter end was $17.8 million down $1.7 million from last quarter an up $500,000 from last year. During Q4 we generated $6.4 million from operations for nearly $41.7 million from operating cash generated in 2007 compared to $35.1 million in operating cash flow generated through all of 2006. Capital expenditures in Q4 were $4.2 million compared to $6.7 million in the fourth quarter 2006.

Now, let’s take a minute to discuss our revised international tax funding strategy and its effect on our cash taxes and our financial outlook. We announced today that with the assistance of outside tax advisors, during the fourth quarter 2007 we implemented a more efficient international tax planning strategy that will significantly reduce the overall effective tax rate on our international earnings. This updated tax planning strategy more closely aligns our international tax structure with the structure of our current business operations. As a result we expect a GAAP tax rate on our future international earnings to be in the range of 15 to 20% therefore going forward we are lowering the tax rate we apply to our non-GAAP adjusted earnings calculations to 20% from 38% as we believe this lower rate more closely approximates our expected cash tax rate. Also during 2008 we will report quarterly adjusted earnings, year ago comparisons and our comment on our 08 outlook on both our current and former tax rates so there will always be an apples-to-apples basis for comparison. To illustrate clearly the revenue and earnings growth implied by our 08 outlook separate and apart from the reduction in cash taxes, we have laid out our 2008 outlook calculated on both the old 38% tax rate and the new 20% tax rate over the next two slides.

Let’s move to slide seven which shows our 2008 outlook on the 38% tax rate which is comparable as to how 2007 was originally reported. For 2008 our outlook for total revenue is for 9 to 11% growth to $355 to $363 million versus 2007 revenue of $325.6 million. By division for the full year 2008 we are targeting the following: ISD revenue growth of 14 to 18%; FDS revenue growth of 14 to 17%; POS revenue growth of 1 to 4%; and TFD revenue growth of flat to 5%. Our outlook for 2008 adjusted earnings is $28.6 to $31.1 million or $1.16 to $1.26 per share versus $25.2 million or $1.04 per share for 2007 before charges. This represents growth in earnings per share of 12 to 22%. For the first quarter 2008 outlook for total revenue was for 11 to 16% growth to $81 to $84 million versus first quarter 2007 revenue of $72.7 million. Our outlook for adjusted earnings is $4.5 to $5.4 million or $0.18 to $0.22 per share versus $4.2 million or $0.17 per share for first quarter 2007. Again, please note that these numbers do not include any non-recurring charges.

Let’s move to slide eight which shows these comparisons for both 2007 and 2008 based on the new 20% tax rate. For the full year and first quarter 2008 our outlook for total revenue is unaffected by tax so I won’t repeat it. Our outlook for adjusted earnings for the year based on the new 20% tax rate is $37 to $40.2 million or $1.50 to $1.63 per share versus $32.5 million on the new 20% tax rate or $1.33 for 2007 before charges. This also represents EPS growth of 22%. For the first quarter 2008 our outlook for adjusted earnings based on the new 20% tax rate is $5.8 to $7 million or $0.23 to $0.28 per share versus $5.4 million on the 20% tax rate or $0.22 per share for the first quarter 2007 before charges. As I mentioned, as we move through 2008 we will report each quarter and its comparison the last year on both tax rates for clarity.

In closing, we expect our rise in operating leverage to generate cash at an increased rate and expect pre-cash flow which is defined as operating and cash flow less capital expenditures to approximate $40 million in 2008. We plan to use our excess cash flow to fund our growth and continue with our accelerated debt prepayment plans.

With that I will now turn it back to Henry.

Dennis L. Randolph, Jr.

Operator this concludes our remarks and we’re ready to open the call for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Tien-Tsin Huang with JP Morgan. Please proceed.

Tien-Tsin Huang – JP Morgan Securities

I had a few questions, I guess the first one gross margins definitely came in higher than what we expected. I didn’t catch in the outlook, is this level sustainable as we think about the progression throughout the year?

Henry H. Graham, Jr.

Well yeah, I think it is Tien-Tsin. Obviously, there’s some cyclicality to the first quarter, second quarter, third quarter, fourth quarter but obviously because of the scale we gained in ISD and FSD to improve the product mix within TSD and to some extent the mitigation of the access charges that we talked about a great deal. Quite frankly, we do thing this is a sustainable overall for the year gross margin. It might even go a little bit higher.

Dennis L. Randolph, Jr.

I think Tien-Tsin for 2008 we ended the year 2007 just under 50% from a gross margin standpoint. We’d expect improvement in the gross margin line in to the 50 to 51% range next year on an overall basis.

Tien-Tsin Huang – JP Morgan Securities

Okay. So, it sounds like it is mostly mixed. If we think about just overall cost cutting it sounds like you’re ahead of plan; that’s great. Is there more room on the cost side in general as we look out and recast for 08?

Henry H. Graham, Jr.

Well, as we said from the very beginning I mean obviously the original $9.8 million was the low hanging fruit if you will. We also cautioned everyone that we would make more of a surgical effort as we go. I think the cost cutting that you see is a combination of additional costs, opportunities that have presented itself also to realign the organization more consistently with our operating goals as we move forward. You’re not going to see a great deal more additional cost cutting but I’m not going to say that there’s not additional opportunities that may present itself as we continue to evaluate as we move forward.

Tien-Tsin Huang – JP Morgan Securities

More surgical? I get that word a lot these days. A couple of other questions, the first quarter revenue guidance that was down a little more sequentially than what we’ve seen in the past, anything unusual there?

Dennis L. Randolph, Jr.

There is one customer contract that is up for renewal in the first quarter that we expect to have an impact of about $1 million. But, other than that there’s really nothing else and it really conforms to the level of revenue performance throughout the year that we typically see.

Tien-Tsin Huang – JP Morgan Securities

Was that in TSD? Because, that beat us in the fourth quarter and then you’re guiding – if I annualize fourth quarter I’m at like a double digit rate.

Dennis L. Randolph, Jr.

That customer is in effect in TSD.

Tien-Tsin Huang – JP Morgan Securities

Okay. That would explain the flat to up 5% guidance for the year. Last question for me, can we just get the currency benefit for revenue and operating income again for the quarter?

Henry H. Graham, Jr.

The currency benefit for revenue was approximately, hold on just one second, the currency benefit for the quarter on a year-over-year basis was approximately $3.6 million. To break down the 38% revenue growth 12% of the growth came from foreign exchange, 8.1% of the growth came from acquisitions primarily Dialect and the balance of the growth was organic so about 17.6% organic growth.

Tien-Tsin Huang – JP Morgan Securities

Then the 3.6, how does that flow through on to operating income on the foreign exchange?

Henry H. Graham, Jr.

Operating income we had a benefit of $1.2 million.

Operator

Your next question comes from the line of Wayne Johnson with Raymond James. Please proceed.

Wayne Johnson, III – Raymond James

Just a couple of questions, can you talk a little bit more about the POS, the domestic POS, the prospects for growth going forward, is there FDC lurking around? How should we think about where potential growth would be originating from?

Henry H. Graham, Jr.

Well Wayne, obviously we have a constant dialog with FDC and I have to say that recently we have had some additional dialog with FDC about possible additional business we may do there. To the extent you hear us announce anything with FDC it would be accretive to what we’ve already told you as far as our guidance is concerned. Most of the growth is going to come from further expansion of our broadband product. We have seen some renewed interest and I think we’re starting to solve the riddle of how we convert this somewhat large pipeline we have into a more meaningful actual revenue gains if you will. So, it’s a combination of the CO-OP coming on all during the year especially in the second half of the year and the increased number of endpoints associated with our broadband and there are some other things that we’re looking at right now that may in fact bring us some additional sales. But yes, we expect fully that you will see that growth that we put out there this year as we have begun to see some traction if you will within the pipeline that we’ve already emulated on these calls.

Wayne Johnson, III – Raymond James

Right. Just to refresh my memory, I apologize for going over treaded territory but on the FusionPoint and the broadband products, what again is the secret sauce that’s allowing you to break down the barriers of the past for that to be integrated and enabled, installed on a predictable basis?

Henry H. Graham, Jr.

Well, predictable may be a too strong of a word at the present time but effectively one thing that we have learned if you will is in addition to the corporate hurdles that we have to get over there are several very large jobbers as they call them that may have clusters of stores of 75 or more. We have found that we have to deal in some instances directly with the source in order to move these products. The good news is that it continues to be a truism that after we get them installed people are very, very happy with the installation of the product. So, we’ve moved downstream focus some of our efforts and coordinated efforts if you will through the corporate context that we have to put out additional marketing collateral and analysis and white papers to these people so that they understand the cost savings. The results of that have been quite favorable so far.

Wayne Johnson, III – Raymond James

That’s helpful. Can you talk a little bit about how much the cost reductions over the past year have been POS related?

Henry H. Graham, Jr.

The cost reductions? You mean the severance charges that we’ve taken?

Wayne Johnson, III – Raymond James

Yes, yes. And, were there any kind of structural changes there? Were there any write off of equipment or anything? Were there streamlining of transaction processing flows in any way?

Henry H. Graham, Jr.

None of the severance that you saw during this past year, and this is off the top of my head and I’m pretty sure I’m right, had anything to do with POS. We have not reduced the investment that we have in our domestic POS, if anything we’ve stepped it up.

Wayne Johnson, III – Raymond James

Okay. Then, on the broad band FusionPoint, what percentage of POS is that, does that represent in terms of revenues?

Dennis L. Randolph, Jr.

For 2007 it was approximately 10% of the overall revenues.

Wayne Johnson, III – Raymond James

Okay.

Dennis L. Randolph, Jr.

And the 10% is from all of our managed broadband products not necessarily just FusionPoint.

Wayne Johnson, III – Raymond James

That’s great. Can you talk a little bit about the progress again in greater detail? What’s going on with JPG in France? What percentage of those POS devices have been converted to the TNS network and when do you expect the remainder to be completed?

Henry H. Graham, Jr.

Somewhere around 40% has been converted and quite frankly the population seems to grow as we go through the conversion process. We will continue to ramp that up, and by the way Wayne, that is consistent with what we thought we would have converted at this time when we first gave the guidance of 8 to 10% accretion that we expected out of that. We would expect that that migration will continue on into fiscal year 2008 and quite frankly, it will probably continue right on into the second and into the beginning of the third quarter before we get it fully converted over. Obviously, as you might imagine we took some of the easier ones faster ones first because more and more difficult because of the disparity between different terminal types when you get outside of the United States is quite marked.

Operator

Your next question comes from the line of Franco Turrinelli with William Blair. Please proceed.

Franco Turrinelli – William Blair & Company LLC

I think a lot of my questions have been asked but, I wanted to kind of go back to your point that you would focus on, I think it’s fair to say a more limited number of geographical regions. Can you kind of just help us understand a little bit better the thinking that went into that conclusion?

Henry H. Graham, Jr.

Yeah. I think we’ve talked about it before. I mean obviously, United Kingdom is the largest country that we [inaudible]. But Franco, we have found that depending on which market you look at France, Italy, Spain, we have operations that are already profitable, already cash flow positive and we only have in most instances something less than 50% of the market share that we could possibly gain over there. And, we have found that by concentrating and focusing on these areas two things happen, number one we can get the opportunity to get faster revenue ramp and profitability with a minimal amount of investment is quite helpful. And secondarily, we have also found that by concentrating on these large countries if you will, there are additional adjacent countries that present themselves as a result of contacts and customers that we have in the current countries. So, that was a conscious decision that was made to do that. Ray Low is here, Ray do you want to add anything to that?

Raymond Low

Well, I guess it’s always easier to sell to existing customers and those customers in those countries. But, those markets are the largest [inaudible] markets in the world so makes sense for us to focus on them.

Franco Turrinelli – William Blair & Company LLC

Yeah Ray but it just feels though like we’re focusing efforts more and I’m kind of wondering also what that entails in terms of redeployment of resources or people? Or, is this really just more at your and Henry’s level that you’re focused more on those markets?

Henry H. Graham, Jr.

We have made some redeployment of what we would consider assets that could help us with these efforts to expand market share within these countries. Now, under no circumstances Franco does that mean that we walked away from what we could consider to be future markets in India, South Korea and some of the other places that we talked about. I think we’ve been very clear that those markets are probably more 2009, 2010 for TNS. But, by focusing on these markets, by reallocating resources, we have in fact reinvigorated the growth rate in RSD.

Dennis L. Randolph, Jr.

The other thing to point out here to is that in 2007 we invested over $4 million in a product development group that is primarily focused on our payments business.

Franco Turrinelli – William Blair & Company LLC

That kind of prompts and interesting – well maybe an interesting question. Of the – I’m trying to figure the best way of asking this, so of the growth that we saw this year in ISD and maybe we should just focus on six markets that you’re focusing on?

Dennis L. Randolph, Jr.

That is fair to say.

Franco Turrinelli – William Blair & Company LLC

So these are the markets also where the momentum is, is probably also fair to say right? So we’re leveraging that momentum to kind of keep it going.

Raymond Low

Those five key markets internationally generate over 85% of the total international revenues.

Henry H. Graham, Jr.

But again, Frank, I want to caution you, by no means are we walking away from future markets.

Franco Turrinelli – William Blair & Company LLC

It makes a lot of sense, Henry. I didn’t mean to suggest otherwise. And then just kind of as a matter of housekeeping I’m assuming that we should assume and expect in future releases for your adjusted earnings per share number that you present in the press release to be based on the 20% tax rate and therefore it would be appropriate for us to present our estimate the first call on that basis as well. Is that kind of what we’re going to do here?

Henry H. Graham, Jr.

Yes, that’s correct.

Operator

(Operator Instructions) Your next question comes from the line of Gary Prestopino with Barrington Research. Please proceed.

Gary Prestopino – Barrington Research

Most of my questions have been answered but I just want to – any issues should we be concerned about, what’s going on in the worldwide financial markets with the FSD division?

Henry H. Graham, Jr.

We’re not seeing any fallout from that so far, Gary. I mean obviously it’s something that we monitor very, very closely but quite frankly we’ve seen no impact certainly on the international basis and no impact here domestically either yet.

Operator

And you have a follow up question from the line of Frank Turrinelli with William Blair. Please proceed.

Franco Turrinelli – William Blair & Company LLC

Since we’re seeing a little bit of a welcome break up in the log jam on FusionPoint I’m going to dare ask if we’re seeing any improvement in the outlook for vending?

Henry H. Graham, Jr.

I’ll let Mr. Low answer that one.

Raymond Low

This is an area of product that we’re focusing on. It’s a US product, it’s something that we’re not seeing an awful lot of growth for in 2008 and I think we’ll just report on that quarter by quarter. So it’s not a big focus for us going forward.

Operator

You have a follow up question from the line of Tien-Tsin Huang. Please proceed.

Tien-Tsin Huang – JP Morgan Securities

I get this question a lot, Henry, so I thought I’d ask it the historical weaker environment from the consumer, what kind of impact does that have on transaction growth in POS?

Dennis L. Randolph, Jr.

Well actually, if you look at POS on a year-over-year basis and you take out the anomaly as far as transaction counts the anomaly of the large company diversifying a little bit on us Tien-Tsin actually the transactions were flat to slightly higher than they were on a year-over-year basis? Remember that we’re not too worried about the interchange fee or the size of the transaction, we’re mainly concerned if the transaction in fact takes place. So, thus far as far as transaction counts we’ve seen no fall outs from this. I mean quite frankly, I guess it’s a phenomena, you know maybe people are using credit cards just as much, maybe the transactions are not as large or maybe in some instances people may actually use them a little bit more than they should. Keep in mind that about 90% of our terminals only generate about 10 transactions per day.

Henry H. Graham, Jr.

The other thing to note there too is we have a substantial number of off premises ATMs on our networks so a lot of our transaction volumes come from off premises ATMs.

Raymond Low

I’ll add something there as well, overseas you see probably half the transactions generated across our networks coming from debit. What you tend to see certainly overseas is transactions moving away from credit towards the debit. We get paid the same for both.

Tien-Tsin Huang – JP Morgan Securities

That is extremely helpful and pretty consistent with our thesis. Just to be sure then, the one customer that did diversify in the quarter in POS, is that the right run rate that we should assume now in the fourth quarter? Or, is there a little bit more to come?

Dennis L. Randolph, Jr.

That transition came mid quarter so you don’t have the full impact of it yet in the quarter.

Tien-Tsin Huang – JP Morgan Securities

Okay. So maybe a little bit of a sequential impact then?

Dennis L. Randolph, Jr.

Right. And, there is some seasonality going into the first quarter as well.

Tien-Tsin Huang – JP Morgan Securities

Sure. The normal seasonality plus a little bit of residual I guess from the client.

Henry H. Graham, Jr.

But, we expect the impact to be about $2 million on revenues year-over-year.

Tien-Tsin Huang – JP Morgan Securities

Got it. Then, I guess cap ex, did we get that for the 08 outlook?

Henry H. Graham, Jr.

About $25 million.

Tien-Tsin Huang – JP Morgan Securities

So $25 million, if I net that against your earnings that’s a 20% cash tax, that’s a pretty good proxy for free cash flow?

Dennis L. Randolph, Jr.

That’s a good proxy for our free cash flow.

Tien-Tsin Huang – JP Morgan Securities

Okay. Then, in terms of debt reduction, I think you talked a little bit about that but, how should we think about redeploying that cash?

Dennis L. Randolph, Jr.

Tien-Tsin I take that back, you wouldn’t subtract it from the adjusted earnings because depreciation expense is included in there. The adjusted earnings is really our proxy for free cash flow.

Tien-Tsin Huang – JP Morgan Securities

So, that’s our best proxy?

Dennis L. Randolph, Jr.

That’s your best proxy for pre-cash flow.

Henry H. Graham, Jr.

Especially now that we use the 20% tax rate.

Tien-Tsin Huang – JP Morgan Securities

That gives you a little bit of a lift. In terms of just the use of cash and I’ll jump off the line. What should we think about in terms of debt reduction versus other uses of cash?

Henry H. Graham, Jr.

I would assume at this point a substantial portion of free cash will be used to repay debt.

Operator

At this time you do not have any more questions in queue and I would like to turn the call back over to Mr. Graham for closing remarks.

Henry H. Graham, Jr.

Thanks again everyone for participating today. We look forward to speaking with you again at the end of the first quarter. Have a good evening.

Operator

Thank you for your participation in today’s conference. This concludes the presentation you may now disconnect.

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