TNS, Inc. Q1 2008 Earnings Call Transcript

May. 5.08 | About: TNS, Inc. (TNS)

TNS, Inc. (NYSE:TNS)

Q1 2008 Earnings Call Transcript

May 5, 2008 5:00 pm ET

Executives

Jim McLaughlin – EVP, General Counsel and Secretary

Henry Graham – CEO

Dennis Randolph – EVP, CFO and Treasurer

Analysts

Wayne Johnson – Raymond James

Gary Prestopino – Barrington Research

Franco Turrinelli – William Blair

Reggie Smith – JP Morgan

Operator

Good day, ladies and gentlemen. Thank you very much for your patience and welcome to the first quarter 2008 TNS Incorporated earnings conference call. My name is Bill and I'll be your conference coordinator. (Operator instructions) I would now like to transfer the conference over to your host for today's presentation, Mr. Jim McLaughlin, Executive Vice President and Corporate Secretary. Please proceed, sir.

Jim McLaughlin

Good evening, everyone, and thank you for joining us for TNS' first quarter 2008 financial results. As Operator said, I’m Jim McLaughlin, TNS' Corporate Secretary. This conference call and webcast are accompanied by a brief slide presentation that we invite you to access at TNS' Web site at www.tnsi.com.

Leading today's call for TNS are Henry Graham, our CEO and Dennis Randolph, EVP and CFO for TNS.

Before turning the call over to Henry, I’ll 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 for 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 these forward-looking statements which reflect our analysis only and speak only as of today's date. We undertake no obligation to publicly update the forward-looking statements to reflect subsequent events or circumstances. Finally, we refer you to our Form 10-K filed with the Securities and Exchange Commission on March 17, 2008, and which is available on our Website for additional information concerning factors that could cause actual results to differ materially from the forward-looking statements. With that, I'll now turn the call over to Henry Graham, TNS' CEO.

Henry Graham

Thank you, Jim and thanks everyone for joining us to discuss TNS' first quarter 2008 results. I'll begin today's call with an overview of the quarter's results and accomplishments and give you an update on our plans for 2008. Then Dennis Randolph, our CFO, will take you through the results 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’ first quarter performance was strong with a combination of better-than-expected performance in our ISD and TSD divisions, and solid gross margin expansion boosting our adjusted earnings slightly above our range of expectations. Revenues in the quarter grew 15.8% to $84.1 million and adjusted earnings excluding non-recurring items grew 40.1% to $7.5 million. These results which were generated on our improved business model increased our free cash flow 155% from last year's first quarter, and all were off to a very good start for the year.

Let's start with the quarter review on Webcast Slide 2. Let's talk about our divisional performance. Our International Services Division, TNS' largest division recorded year-over-year sales growth of 31.8% in the first quarter and accounted for 44.2% of total revenue. On a constant dollar basis, excluding the effect of foreign exchange, ISD sales grew 24%. ISD margins continue to be strong in the first quarter.

Looking at ISD by geography. In Europe, demand remains strong for our international QS [ph] and financial services where transaction volumes continue to increase, our growth opportunities continues in POS and financial services as we gain share of growing markets. For international POS, in the UK, we saw first quarter growth from existing and new customers and from selling additional services to independent sales organizations and terminal distributers.

In France, our first quarter migration and implementation of customer traffic associated with the JPG acquisition continued on schedule with volume ramping as anticipated. Transaction volumes remain strong in Italy and Spain and we look to develop new services in these countries. Our broadband product is being well received internationally and continues to grow with over 100,000 wireless and wireline end points now installed.

In the international FSD business, we continue to expand primarily in Asia Pacific as our customers with emerging financial markets demand electronic trading technologies. We won a new customer in Korea, Korea Investment and Securities, a broker based in Seoul seeking to strengthen its new overseas division by connecting to our secure trading Extranet.

In Australia, first quarter revenues remain strong. We added a new customer for dial-up POS services and in addition demanded increase for our Internet payment gateway. Our integration of the Dialect acquisition continues to deliver good results as we work with the Internet merchants in the region. We are on track to complete the integration and with our objective of this acquisition becoming accretive by its anniversary in June. Our planned expansion of the Internet gateway product into Europe remains on track for late this year or early next year.

Moving on to FSD. Revenue in our domestic Financial Services Division increased 10.3% year over year and was 12.8% of total first quarter revenue. Most of FSD’s growth continued to come from expanding bandwidth requirements from existing customers as demand bills for low latency, direct access and market data to exchanges and ECM's.

In the first quarter FSD’s year-over-year revenue growth moderated from the fourth quarter’s growth rate due to a timing issue related to longer sales cycles associated with the large band installations we are now performing. As we had discussed in the past these lead times can create an uneven quarterly growth pattern. Our April billings for example, show a sizeable pick up in sales for the first quarter and we expect this trend to remain strong through the second quarter. We ended the first quarter with 1323 global, physical end points of which 940 are domestic, and 10, 530 domestic logical virtual connections.

Moving to TSD. Revenue in our Telecommunications Services Division increased 19.7% from last year and was 21% of total first quarter revenue. Similar to last quarter, first quarter growth came from increasing volumes from our cable customers migrating traffic on to our network. We have now proven ourselves in the cable verticals which expands our sales potential within this industry.

In first quarter, we renewed a contract with our second largest TSD customer extending the relationship for another three years. For the second quarter, we continue to anticipate that one of our largest customers will begin to migrate services off of our network. We have been expecting this move and have already incorporated this into our 2008 forecast.

Moving to POS Division. Revenue in our Domestic POS division decreased 7.3% year over year in the first quarter and accounted for 21.8% of total first quarter revenue. Total POS dollar transaction count decreased 9% year over year. Similar to last quarter, this was primarily due to one of our customers as a matter of policy completely unrelated to TNS' performance, continued to move a portion of its dollar volume off our network in order to diversify its vendor relationships.

This affected the quarter by $700,000 and we continue to anticipate this customer's diversification will affect 2008 POS division sales by up to $2 million. We continue to make improvements to the positioning of our broadband product; we're expecting the migration of the credit unions associated with the CO-OP Financial Services to start during the second quarter. While we know this division is under performing to date, and are not satisfied with this, the performance of our other divisions is allowing us to exercise some patience and deliberation in developing the products and services necessary for future growth in POS.

We are continuing to focus on developing our broadband suite of services and as importantly, we are developing numerous relationships to expand our traditional (inaudible) offering domestically and working with numerous opportunities to grow globally with our customers. We are excited about the future growth opportunities in POS, but understand that these opportunities are not immediate and will need to be closely cultivated.

We have expected our first revenue comparisons in the POS division to be down followed by strengthening growth patterns in the second half of the year as the CO-OP migration and broadband installations contribute. We expect to start to see a benefit from our efforts in the second half but will evaluate our growth outlook for this division and keep you updated as we move ahead. We also understand that many of you may have questions concerning Heartland Payment, acquisition of Alliance Data Systems network services business.

We are aware of this proposed transaction and are evaluating it. We look forward to discuss in future opportunities with ADS and Heartland Payments and at this early date do not have any additional information to offer you related to this acquisition. However, at this point, we do not expect this will have a material impact on our business for 2008.

In summary we had a strong start to the year. Now, I'll turn the call over to Denny for a review of the financials.

Dennis Randolph

Thanks, Henry and good evening, everyone. I'll start the financial review with income statement highlights beginning with Webcast Slide 3. Total revenue in the first quarter increased 15.8% to $84.1 million from $72.7 million in the first quarter of 2007. As Henry has already detailed the divisional components, I'll move down to the gross margin line.

Gross margin in the first quarter increased 510 basis points to 51.6% and 46.5% in the first quarter of 2007. The improvement in gross margin is a result of increased contributions from ISD, which is the company’s highest gross margin division, and an improvement in the gross margin of our POS division as we work to lower cost of services provided to us.

Engineering and development costs in quarter were $7.2 million or 8.9% of first quarter 2008 revenue, compared to $6.4 million or 8.8% of revenue in the first quarter 2007. The dollar increase is attributable to the investment we made in our Internet payment gateway capabilities from Dialect.

SG& A expenses were $19.4 million or 23.1% of first quarter 2008 revenue, compared to $17.2 million or 23.6% of revenue in the first quarter 2007. Included in SG&A for the first the quarter 2008 is a $900,000 pre-tax benefit associated with the state’s sales tax liability settlement. Included in SG&A for the first quarter 2007 is a pre-tax charge of $900,000 related to executive severance.

Excluding these items, SG&A increased 24.5% to $20.3 million or 24.2 % of sales in the first quarter 2008 from $16.2 million or 22.3% of sales last year as we invested in a business development group which is focused on driving revenue growth from our global customers and a sales force to drive sales of our Internet payment gateway applications we acquired through Dialect.

Depreciation expense in the first quarter was $6 million versus $5.8 million last year, and the increase in depreciation expense is a result of increased capital expenditures to support our revenue growth primarily in the International Services Division.

Amortization of intangibles was $6.1 million in both periods. Interest expense in the quarter was $3.7 million versus $4 million a year ago and included in interest expense for the first quarter of 2007 was a charge of $1.4 million, which was related to the acceleration of deferred financing costs from the recapitalization supporting our special dividend. We anticipate a sequential reduction in interest expense in the second quarter of approximately $1 million.

Other income was $100,000 during the quarter versus $600,000 in the first quarter of 2007. The decrease primarily relates to lower income from the re valuation of foreign currency, predominantly the pound sterling and euro, and in addition we recognized the gain of $300,000 in the first quarter 2007 related to the sale of a non-strategic asset.

Interest income was $200,000 in both periods. Because of a high amount of amortization of acquired intangibles that we record and the fluctuation in our effective GAAP tax rates, 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 and the accompanying slide presentation.

Now let's take a look at slide 4. 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 first quarter of 2008 was $19.7 million amounting to 23.5% of revenue compared to $13.4 million or 18.4% of revenue for the first quarter 2007. This is an increase of 47.8%. Excluding the pre-tax items from both quarters, EBITDA before stock comp expense grew 31.8% to $18.8 million from $14.3 million. Our EBITDA contribution margin in the quarter improved to 22.4% from 19.7% last year, excluding non-recurring charges for 270 basis point improvement in operating leverage.

Now moving to slide 5, adjusted earnings are calculated by taking pre-tax earnings to 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 had historically been tax effected at 38% rate. As previously mentioned, we are now taxing adjusted earnings at 20% rate, and my comments will refer to last year's comparison at the new 20% rate.

Adjusted earnings for the first the quarter 2008 increased 78.6% to $8.3 million or $0.33 per share from first quarter 2007 adjusted earnings of $4.6 million or $0.19 per share. Excluding the pre-tax items from both quarters, adjusted earnings increased 40.1% to $7.5 million or $0.30 per share from $5.4 million or $0.22 per share. These results reflect our efforts to increase our operating leverage. Now let's review the balance sheet highlights on slide six.

Our current ratio was 1.45 times, slightly above 1.43 times at the end of last year and up from 1.23 times at the end of the first quarter last year. Long term debt at quarter end was $201.5 million for a total debt-to-capitalization ratio of 67.1% versus 68.9% last quarter and 73.6% a year ago.

In the First quarter we made voluntary pre-payments on our Term D loan of $4 million for a total of $28.5 million pre paid since the March 2007 recapitalization. In addition, we pre-paid $2.5 million to date in the month of April.

Cash at quarter end was $22.9 million, up $5.1 million from last quarter, and up $4.1 million from last year. During the first quarter, we generated $15.7 million from operations, $7.2 million or 86% more than we generated in the first quarter of last year. Capital expenditures in the first quarter were $6.7 million compared to $4.9 million in the first quarter 2007. Now let's move to slide seven.

The press release that we issued today shows our 2008 financial outlook at the 20% rate and in comparison from last year is taxed on both the former 38% and at the new 20% tax rate. The slides we are showing today reflect a 20% rate we have adopted for this year compared to last year's result taxing at 20% rate.

For 2008, our outlook for total revenues continued to be for 9% to 11% growth, the $355million to $363 million versus 2007 revenue of $325.6 million. Our outlook for 2008 adjusted earnings continues to be $37million $40.2 million or $1.50 to $1.63 per share versus $32.5 million or $1.33 per share for 2007 on the 20% tax rate. Please note these numbers do not include any non-recurring items.

For the second quarter 2008, outlook for total revenue is for 11% to 13% growth to $88million to $90 million versus second quarter 2007 revenue of $79.4 million. Our outlook for adjusted earnings is $9.7million to $10.7 million or $0.39 to $0.43 per share versus $7.4 million, again, based on the new 20% tax rate or $0.30 per share for the first quarter 2007. Again please note that these numbers do not include any non- recurring items.

We continue to expect the rising operating leverage to generate cash at an increased rate and our outlook for free cash flow defined as operating cash flow less Capital Expenditures remains approximately $40 million in 2008. We plan to use our excess cash flow to fund our growth and continue with our accelerated debt prepayment plan. With that, I'll now turn it back to Henry.

Henry Graham

Thanks, Denny. Operator, this concludes our remarks and we're ready to open the call for questions.

Question-and-Answer Session

Operator

Thank you very much, sir. (Operator instructions) Our first question will come from the line of Wayne Johnson of Raymond James. Please proceed.

Wayne Johnson – Raymond James

Hi, good afternoon.

Henry Graham

Hi, Wayne.

Dennis Randolph

How you‘re doing, Wayne?

Wayne Johnson – Raymond James

Hi. Just a couple of quick questions here on the JPG acquisition , can you give us a sense of the timeline for when you think that's going to be fully integrated, number one, and number two, what is the margin implications of that to ISD?

Henry Graham

Wayne, we would expect the JPG should be fully converted some time in the third quarter, late second, early third quarter of this fiscal year. Maybe a little longer because we continue to run into different types of terminals as we go through this but quite frankly, it has been moving at a speed that we anticipated. As far as margins in the second part of the question was gross margin, in ISD?

Wayne Johnson – Raymond James

Yes.

Henry Graham

Okay. Around 63% to 65%.

Wayne Johnson – Raymond James

And that's the ISD gross profit margins or that’s the JPG's gross profit margins?

Dennis Randolph

No. That's ISD gross margins in total.

Wayne Johnson – Raymond James

Okay. And so then how do you, like when JPG is fully integrated, it's going to be within that bandwidth? Is it going to be higher or is it going to be lower?

Dennis Randolph

It’ll actually be higher than that. You have to remember the model that we operate in France. It’s a little bit different than in some of the other jurisdictions, so at a gross margin, our cost in France are relatively fixed in nature and we do have the capacity in the network today and prior to the acquisition, so adding this additional traffic there's very little cost for us to add into the network.

Wayne Johnson – Raymond James

Right. And what kind of revenue contribution does JPG represent?

Dennis Randolph

On an annualized basis once it's fully migrated it's between $8million and $9 million.

Wayne Johnson – Raymond James

Okay, that's great. And can you talk a little bit about the Dialect revenues? Can you give a sense of proportion there and the ramp, what's driving the ramp and can you talk about American Express as well?

Dennis Randolph

Dialect revenues right now, Wayne, our average is somewhere between $700,000 and $800,000 a month, which is pretty consistent sometimes a little more, sometimes a little less. We continue to work with AMEX, just try and complete the project. I think we have with AMEX identified all of the components of that and hopefully we are well under our way to satisfying that requirement. We hope to have that done some time during the course of this fiscal year. All in all Dialect continues to do as we expected that it would and we still hold to the prediction that it will in fact be accretive in June of this fiscal year.

Wayne Johnson – Raymond James

Okay. All right, that sounds good. And then just two top-down questions. First, have you guys seen any signs of economic weakness flowing through TNS, either in the first quarter or quarter to date in the POS business or any of the other segments? That's the first question.

Dennis Randolph

No, we have not, Wayne. Quite frankly, we keep evaluating this over and over and we're probably, we're not going to run behind the economic conditions right now because quite frankly we're just not seeing that.

Wayne Johnson – Raymond James

And as you guys look out to the second half, then it seems like if you beat consensus in the first quarter, it appears that you're raising earnings guidance for the second but you're still maintaining guidance. Is that just conservatism?

Dennis Randolph

Yes. We'll reevaluate the guidance for the entire year at the end of the second quarter. If you recall last year, we had a similar phenomenon at the end of the first quarter. We'll revisit that again at the end of the second quarter.

Henry Graham

Wayne, there's also areas in the business that we are actively looking to invest in. One of the main areas of investment that you'll see in the second half of the year will be to invest in the Internet payment capabilities that we have through the Dialect acquisition.

Wayne Johnson – Raymond James

I see, terrific. Okay, great. I'll get back in queue, thank you.

Operator

Thank you very much, sir. Ladies and gentlemen, your next question comes from the line of Gary Prestopino of Barrington Research. Please proceed.

Gary Prestopino – Barrington Research

Hi, how are you guys doing?

Henry Graham

Good. How are you, Gary?

Dennis Randolph

How about you, Gary.

Gary Prestopino – Barrington Research

Good. Just a couple of housekeeping questions. What was the benefit to operating income from currency?

Dennis Randolph

About $500,000.

Gary Prestopino – Barrington Research

500,000 currency. All right and then internal growth in ISD, what did that run this quarter?

Dennis Randolph

Internal growth, in constant dollar?

Gary Prestopino – Barrington Research

Yes.

Dennis Randolph

Constant dollar growth was 24%.

Gary Prestopino – Barrington Research

No, I'm talking about just internal growth without the acquisitions there, Dialect and JPG.

Dennis Randolph

Constant dollar organic growth was 14%.

Gary Prestopino – Barrington Research

Thank you. Sorry about that. And then in terms of another bigger picture question, as you look at what's going on in Europe where you're gaining some good share and traction, especially on the continent, could you possibly maybe break out how much of your ISD revenues come from the UK, and then beyond that, on the rest of the continent, what would be your overall market share position ex the UK, just to give us an idea of how much more growth you possibly could have just in the base business there?

Henry Graham

The first quarter revenues that we disclosed this in all of our quarterly reports, but first quarter revenues in 2008 for the UK were $17.3 million and the first quarter 2007 they were $15.2 million. So the UK as a percent of total is about 46% of our overall international revenues.

Dennis Randolph

Yes, and as far as market share, Gary, we've talked in various trends. Market share for the products that we can identify, we would tell you that in the UK, we have about 90%, 95% of the dial-up market but we continue to sell additional services into that market. In France, we are on record as saying that we have probably somewhere between 45% and 50% of the market in France and then we have a lesser percentage in Italy, Spain and some of the other places. There are ample growth opportunities grow from increasing size of the market in the countries that we're in and also us gaining market share of any existing market share.

Gary Prestopino – Barrington Research

Okay, great. Then lastly, SG&A as a percent of sale, obviously you talked about how that jumped up here in the quarter. Would you expect that as a percentage of sales to continue to trend between 23% and 24% for this year?

Dennis Randolph

What you'll see it’ll go down as a percent to sales and as we go through the year, one other things that we have done is we've invested in the business development group to go after the global opportunities that we have in front of us now. We've made that investment earlier in the year and hope that it will drive growth in future quarters.

Gary Prestopino – Barrington Research

Okay, thank you.

Operator

Thank you very much, sir. Ladies and gentlemen, your next question comes from the line of Franco Turrinelli of William Blair. Please proceed.

Franco Turrinelli – William Blair

Good afternoon, gentlemen.

Dennis Randolph

Hi, Franco.

Franco Turrinelli – William Blair

Let's see. I was actually curious, I guess Wayne sort of asked this question, are you seeing any real difference in tone of business domestically versus internationally as a result of macro factors?

Dennis Randolph

When you say tone of business, could you –

Franco Turrinelli – William Blair

Well, I think Wayne was digging in the same direction. There's been so much talk about a weak macroeconomic environment; it's great that you guys aren't seeing it. I’m just trying to get a sense if you're seeing meaningful regional differences in the transaction volumes or growth for people's interest in talking to you guys?

Henry Graham

Not really, Franco. Obviously this is something that we're very acutely aware of and we've heard a lot of people that talk about the economy and pockets of disturbances, particularly surrounding the housing market and some of the other things but thus far, we’ve not seen really any change in the patterns that we see other than the typical seasonal patterns that we see as far as transaction accounts are concerned, and this is something that we monitor on a routine basis. So we've just not seen that thus far in the business. I'm not saying that it couldn't possibly happen. Now, we have seen it by certain customers but we've seen it both ways, some up, some down, but overall, it's no real issue for us thus far.

Franco Turrinelli – William Blair

I mean, I don't want to find an issue, for there is no one. On the POS, you commented the transactions were down 9% but you're basically telling us that really isn't entirely attributable to this customer migration and not to any end market trends and transactions; right?

Henry Graham

Now if you actually normalize customers who have migrated traffic or diversified traffic on the network, what we see for the domestic point of sale business is transaction, (inaudible) transaction growth of around 1%.

Franco Turrinelli – William Blair

Great. Just a big picture question for you, one of the things that you've done so effectively and seems to be so successful for you over the last I guess 12 months to 15 months or so internationally has been to really focus laser-like on a few countries and a few opportunities and that's obviously resulted in pretty impressive performance. I'm wondering if you're ready to stop broadening that focus again and start to look at new countries, new opportunities that previously you've not been willing to spend some resources on?

Henry Graham

Well, Franco, don't misinterpret me. Although we are focused where we think we can get the biggest bang for our buck, we have not walked away from places like India, Korea, things of that nature, and during the second half we will begin to make investment and that's anticipated in all the guidance that we’ve given you. In the second half of 2008, we will begin to invest some monies in doing some of those exact things. What we have found is that a lot of opportunity comes from the focus on these geographical regions that we talked about and in some instances we're actually particularly in the FSD product been taken them into adjacent countries. We're also seeing a lot of globalization by the countries here in North America and that has opened up opportunities as our domestic customers look to grow abroad. It's also presenting opportunities for us to possibly grow a broad. So although we are focused and it has been very successful for us and it will continue to do so through 2008, we have not walked away from opening up or planting the flag in other countries. We're just a little more deliberate about where we are going to plant those flags at.

Franco Turrinelli – William Blair

And one final question, I don't know how much you can say at this point but this new business development team or increased resources there, what do you really have them focusing on? What are their marching orders right now?

Henry Graham

Well, their marching orders is to deal with larger size deals. There are opportunities that present themselves. This is a group that can in fact be mobilized specifically to deal with large deals not only with new customers but also with existing customers. Also they're very focused on cross border type transactions in the SEPA move if you will. We're trying to make sure we're prepared for that because knowing the history of the company, we're well positioned to be able to translate whatever protocol that's currently in place with a particular customer into one of the standardized format it dictates. So it's just a little, it's an insurance policy and also allows us to take advantage of what we continue to believe SEPA will be a very huge opportunity for us, taking advantage of the fact that we do have a pan-European network and really a global network in place.

Franco Turrinelli – William Blair

Great. Thank you. Thank you, both. Congratulations.

Henry Graham

Thank you.

Operator

Thank you very much, sir. Ladies and gentlemen, your next question comes from the line of Reggie Smith of JP Morgan. Please proceed.

Reggie Smith – JP Morgan

Hi, guys, nice quarter.

Dennis Randolph

Thanks, Reggie.

Reggie Smith – JP Morgan

Just a question on gross margins, if you guys could help. They came in a lot higher than what we were modeling. I’m just trying to get a sense for what's driving the year-over-year increase? How much of that is mix shift and how much of that is just enhanced margins within the different segments, if you could break out the sources of the increase?

Dennis Randolph

Well obviously, it's a combination of a couple different things and is really all of the above that you just mentioned. Obviously, the scale of our ISD and FSD continues to help us with the increase in gross margin. Certainly the move into the cable vertical has helped with the profit mix associated in our telecom services division, but just as important or maybe mostly important is the fact that in the first quarter of last year, we took the full brunt of the increase in access charges in the POS division, and what you're seeing now is a profit shift back towards the improved profitability went into POS division as a result of the mitigation efforts that we made in the Dialect’s charges. So it's really a combination of all of those things that's contributing to the first quarter, but in large part, it is really all of the things that you mentioned.

Reggie Smith – JP Morgan

Got you. Is it I guess safe to assume a similar gross margin profile throughout the year where we can expect it to increase or is that a little too aggressive at this point?

Dennis Randolph

Well, what we would like to say is that we will run the company with a gross margin somewhere had in the 51% to 52% range.

Reggie Smith – JP Morgan

Got you. Okay. Is there any update on the FDC business that was I think up forbid? Has that been resolved yet?

Henry Graham

The only update that we have is we have ongoing conversations going with FDC right now. We always hold out hope that some day we would do additional business with FDC, but that's all I can say about that right now.

Reggie Smith – JP Morgan

Okay.

Dennis Randolph

But be clear, our 2008 guidance does not anticipate any additional revenues other than what's currently – than what we currently provide in today’s – in our forecast.

Reggie Smith – JP Morgan

Okay. FusionPoint, any update there?

Henry Graham

We have seen some increase in conversion in FusionPoint, the pipeline remains very robust. We install some 125-130 in the first quarter. We continue to see an increase in activity as a result of some additional marketing activities that we've done but it's still slow going, Reggie.

Reggie Smith – JP Morgan

So the backlog is still there? You are not losing any accounts?

Henry Graham

No, we're not losing any accounts. Again, it is a sales process that is relatively new to TNS in that once you sell the overall corporate sponsor, you didn't have to make the deal with the individual franchise owners, but we're learning and hopefully we'll see that ramp through the year but as far as the pipeline it's still very robust, the opportunities are there, we just need to convert those into real contribution.

Reggie Smith – JP Morgan

Got you, sounds good. And if I can get one last question in there, the interest expense acceleration, was that in your guidance before?

Dennis Randolph

It was in our guidance.

Reggie Smith – JP Morgan

It was? Okay. Thank you.

Operator

Thank you very much, sir. (Operator instructions) We do have a follow-up from the line of Wayne Johnson from Raymond James. Please proceed.

Wayne Johnson – Raymond James

Hi, yes.

Henry Graham

Hi, Wayne.

Wayne Johnson – Raymond James

Could you just comment on the competitive landscape for the domestic POS business? Have you seen any new technologies out there that are potentially disruptive to what you guys are offering and I have one quick follow-up to that.

Henry Graham

One thing that we have seen, Wayne, is that this alleged flight of dial over to IP, we're just not seeing that happen. Most of the dial-up we're converting now are from older like frame relay, lease line type connections, if you will. I don't know the technology that we don't have in our suite of products currently that's causing us a problem.

Wayne Johnson – Raymond James

So you’re not seeing any outside of for domestic POS, you are not losing customers to a new technology that you guys aren't offering?

Henry Graham

That's correct.

Wayne Johnson – Raymond James

Okay, and on the ADS' network services did you ever quantify what that means to TNS?

Henry Graham

No, I did not quantify that.

Wayne Johnson – Raymond James

Okay, but and I apologize if I'm asking a question you've already answered, did you say that it was, what is the impact to TNS?

Henry Graham

Well right now, Wayne, what I did say is I don't know there will be an impact either positively or negative but we do not feel it will be a material impact on 2008 revenue or earnings wise. We're evaluating, we look forward to conversations with ADS and Heartland Payments and as these things develop, we'll keep you posted.

Wayne Johnson – Raymond James

All right. Great. Thank you very much.

Operator

Thank you very much, sir. (Operator instructions) At this time, gentlemen, we do not have any further questions in queue.

Henry Graham

Okay, well, thanks again, everyone for participating today, and we look forward to speaking to you again in the second quarter. Have a good evening. Goodnight.

Operator

Thank you very much, sir. Thank you, Ladies and gentlemen, for your participation in today's conference call. This concludes your presentation for today. You may now disconnect. Have a good day.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!