Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

TNS, Inc. (NYSE:TNS)

Q2 2008 Earnings Call

August 4, 2008 5:00 pm ET

Executives

Jim McLaughlin - Corporate Secretary

Henry Graham - Chief Executive Officer

Dennis Randolph – Executive Vice President and Chief Financial Officer

Ray Low – President

Analysts

Tien-Tsin Huang – JP Morgan Chase

Andrew Jeffrey – Suntrust Robinson Humphrey Capital Market

Wayne Johnson III - Raymond James & Associates

Gary Prestopino - Barrington Research Associates, Inc.

Franco Turrinelli - William Blair & Company

Operator

Welcome to the second quarter 2008 TNS Inc earnings conference call. (Operator Instructions) I would now like to turn the presentation to your host for today's conference, Jim McLaughlin, Corporate Secretary.

Jim McLaughlin

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, 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 future financial performance, and involve known and unknown risks, uncertainties and other factors that may cause our results, levels of activity, performance or achievements to differ materially from those expressed or implied by these forward-looking statements.

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

Finally, I refer you to our form 10-K filed with the Securities and Exchange Commission on March 17, 2008, which is available on our website, for additional information concerning factors that could cause actual results to differ materially from these forward-looking statements.

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

Henry Graham

I will begin today's call with an overview of the quarter's results and accomplishments, and give you an update on our plan for the second half of 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 to you follow along on the slides we will be presenting on our website.

TNS's second quarter topped off a strong first half with the combination of solid performances in our ISD, FSD, and TSD divisions and continued gross margin expansion, putting our adjusted earnings slightly above our expectations. Revenues in the quarter grew 13.6% to $90.1 million and adjusted earnings excluding non-recurring items last year grew 46.5% to $10.8 million. These results produced higher year to date cash flow from operations achieved through our more productive business model. This was a very good first half, putting us in an excellent position to achieve our revised full year growth objectives.

We will start with the quarter review. Our webcast slide number 2. Let us talk about our divisional performance. Our international services division, TNS's largest division, recorded year over year sales growth of 31.6% in the second quarter, and accounted for 47.3% of total revenue. On a constant dollar basis, excluding the effect of foreign exchange, ISD grew 24.7%. ISD margins continued to be strong in the second quarter.

Looking at ISD by geography, in Europe, strong planned for our international POS and financial services continued to drive transaction volumes, and we gained additional share of growing markets.

In the United Kingdom, second quarter growth came from both existing and new customers and from selling additional services to independent sales organizations and terminal distributors. We won a new customer agreement with a mid-sized retailer in Scotland to provide retail-focused broadband services. Our strategy approaching higher end retail business is proving successful over seas and holds strong promise domestically as well.

During the quarter, we launched FusionPoint Lite in the United Kingdom and Irish markets. We developed this high speed transaction delivery product to extend the life of in-store legacy POS terminals and ATMs. It is a simple, cost effective solution that allows customers to migrate legacy terminals to broadband quickly and securely, eliminating dedicated dial lines for POS and the related communications costs without having to replace existing devices. All of our broadband products continued to be well received internationally. Particularly with processors, banks and retailers with over 100,000 wireless and wire line end points now installed worldwide.

In France, we completed the migration of all the customer traffic associated with the JPG acquisition offered in one bank, which is scheduled as planned to be migrated in the second half of 2008. This volume ramp is proceeding well and on schedule and is contributing to ISD growth. In Italy, we renewed [Inaudible], a top 10 ISD customer. In Australia, we completed Dialect integration to TNS. Second quarter revenues remained strong in the pipeline for this product set and the Asia Pacific region is robust.

Our initiatives to expand our internet gateway product are underway and we continue to invest in a development roadmap to expand this product globally through 2009 and beyond. We launched the Dialect product in the UK during the second quarter, which is slightly ahead of schedule and now have our first customer live. Included in the second quarter of 2008 Dialect revenue is in addition two months revenue compared to the second quarter 2007 as it reached anniversary date of the acquisition and a further $1.1 million related to software development services provided to one of our customers.

Our international FSD business continued to expand in the second quarter, primarily in the Asia-Pacific region as customers in emerging financial markets continued to demand electronic trading technologies. One of the sources of growth in the region is in WAN installations that provide connectivity to local customers within countries. This opportunity complements our cross border secure trading extranet connectivity.

Moving on to FSD. Revenue in our domestic financial services division increased 14.5% year over year, and was 12.8% of total second quarter revenue. FSD experienced a growth pickup in the second quarter as we had expected it would, resulting from the completion of the sales process on several large bandwidth installations that were in progress through the end of the first quarter.

As we mentioned last quarter, these installations require longer sales cycles that can create uneven quarter to quarter growth patterns within the strong overall growth trend. During the quarter, we also signed on Chi Ex Canada, which is an advanced alternative trading system that offers its customers a continuous auction market in TSX-listed stocks.

This agreement extends our relationship with Chi Ex Europe into domestic FSD, and will provide customers with reliable secure and low latency trading and embedded connectivity through our secure trading extranet, Chi Ex Canada. We ended the second quarter with 1355 global fiscal end points of which 958 are domestic and 10,781 domestic logical virtual connections.

Moving to TSD. Revenue in our Telecommunications Services Division increased 4.4% from last year and was 18.7% of total second quarter revenue. Second quarter revenue growth was as expected with volumes continuing to increase from cable customers, migrating traffic onto our network and as a large WiLAN customer moved database traffic off of our network.

In the cable vertical, we are ramping up a large cable customer's traffic and as of today have completed the migration of all the customers' markets. This migration went very well with no service disruption to subscribers. We are actively marketing our proven capability in this vertical, which remains a source of future growth for us.

Moving to our POS division, revenue in our domestic POS division decreased 7.8% year over year in the second quarter and accounted for 21.2% of total second quarter revenue. Total POS dial up transaction counts were down 8.2% year over year, as we are still seeing the effects of a large customer losing traffic off our network, which occurred in the fourth quarter last year. Excluding this customer, transaction counts increased slightly.

During the quarter, we added a FusionPoint Lite product to our suite of broadband services in the US market, and are now going through the certification process. In addition to its potential in the POS division, now that our TSV division has established relationships within the cable vertical, we see an opportunity to cross sell our FusionPoint Lite broadband product to both the cable companies and the [Inaudible] to use for their business customers. We continue to focus on improving the installation rate of our broadband product and POS, and have brought a new head of sales into the division.

Additionally, given our international success in selling our broadband products to higher-end retailers, we are beginning to focus domestically on selling to similar retailers that we believe represent better opportunities to TNS. In the second half in POS, we will continue to focus on the coop financial services migration and converting our pipeline of broadband installs. Shortly after the quarter end, we entered into an agreement with Heartland Famous to provide both certain legacy and some new services.

In summary, given our performance in the first half, we are well-positioned to achieve our full year objectives.

Now I will turn the call over to Denny for a review of our financials.

Dennis Randolph

We will start the financial review with income statement highlights beginning with webcast slide 3. Total revenue in the second quarter increased 13.6% to $90.1 million, from $79.4 million in the second quarter of 2007. As Henry has already detailed, the divisional components will move down to the gross margin line. Gross margin in the second quarter increased 380 basis points to 53.2%, from 49.4% in the second quarter of 2007. Improvement in gross margin is the result of increased contributions from ISD and FSD, which are the company's higher gross margin divisions, and to a lesser extent, from an improvement in the gross margin over point of sale division, as we worked to lower costs of services provided to us.

In addition, we benefited from the $1.1 million of software development revenue in ISD related to a card-not-present customer that Henry mentioned earlier. Engineering and development costs in the quarter were $7.7 million, or 8.5% of second quarter 2008 revenue, compared to $6.6 million or 8.4% of revenue in the second quarter of 2007. The increase in E&D results, primarily from investments made by the company to enhance both their IP, FSD, and POS service offerings, as well as investments made to further develop our card-not-present payment gateway.

SG&A expenses were $20.9 million, or 23.2% of second quarter 2008 revenue, compared to $17.6 million, or 22.2% of revenue in the second quarter of 2007. The SG&A rate increased as planned, as we invested in our business development group that is focused on driving revenue growth from our global customers and a sales force to drive sales of our payment gateway applications we acquired through Dialect. In the second half, we will continue to make planned investments to accelerate top line growth.

Depreciation expense in the second quarter was $6.1 million versus $5.4 million last year. The increase in depreciation expense is the result of increased capital expenditures to support the revenue growth, primarily in the international services division. Amortization of intangibles was $6.4 million in the second quarter of 2008, versus $6 million last year, with increases resulting from additional amortization of acquired intangible assets related to our acquisition of Dialect in June of 2007.

Interest expense in the quarter was $2.6 million versus $4.2 million last year. As anticipated interest expense was reduced by $1.1 million sequentially, as we have substantially reduced our debt levels and are now benefiting from a lower effective interest rate. As a reminder, our long-term debt is currently priced at 200 basis points over LIBOR. Other income expense was an expense of $300,000 during the quarter, versus income of $500,000 in the second quarter of 2007.

The decrease primarily relates to lower income from the revaluation of foreign currencies, predominantly the pound sterling and Euro. Equity net loss of affiliates was a net loss of $70,000 during the quarter, versus income of approximately $600,000 in the second quarter of 2007. And last year's quarter, we sold our outstanding holdings in waste systems and recognized a gain of $600,000.

Interest income for the quarter was $148,000 versus $429,000 in the second quarter of 2007. The decrease in interest income is due to the restricted cash we had on hand in 2007, related to the special dividend we paid. Because of the high amount of amortization of acquired intangibles that we record, and the fluctuations in our effective GAAP tax rate, we used two non-GAAP measures to evaluate operating performance. EBITDA before stock compensation expense, and adjusted earnings, both of which are illustrated in today's press release and the accompanying slide presentation.

Let us take a look at slide number 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 second quarter of 2008 was $22.4 million, amounting to 24.8% of revenues, compared to $17.3 million or 21.8% of revenue for the second quarter of 2007, an increase of 29.5%, which represents a 300 basis point increase in operating leverage.

Now let us move to slide 5. 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 noncash items, including amortization of intangible assets and stock compensation expense. The results, of which had historically been tax effective at a 38% rate.

As previously announced, we are now taxing adjusted earnings at a 20% rate and my comments will refer to last year's comparisons at the new rate. Adjusted earnings for the second quarter of 2008 increased 46.5% to $10.8 million, or $0.43 per share from second quarter 2007 adjusted earnings of $7.4 million or $0.30 per share. Excluding the gain on the sale of the way systems investment in last year's quarter, adjusted earnings increased 57.1%. Again, these results reflect our efforts to increase our operating leverage.

Now let us review the balance sheet highlights on slide 6. Our current ratio was 1.38 times, slightly below 1.43 times at the end of last year, and up from 1.3 times at the end of the second quarter. Long-term debt at quarter end was $187.5 million for a total debt to capitalization ratio of 62.8% versus 67.1% last quarter and 72% a year ago. In the second quarter we made voluntary pre-payments on our term B loan of $14 million for a total of $37.5 million prepaid since the March 2007 recapitalization. In addition, we have prepaid $2 million in the month of July for total payments year to date of $20 million. Cash at quarter end was $22.5 million, down $400,000 from last quarter and up $4.7 million from last year.

During the second quarter, we generated $14.1 million from operations, $5.2 million or 27% less than was generated in the second quarter of last year, and that is due primarily to the timing of working capital differences, which we expect to reverse in the third quarter. Capital expenditures in Q2 were $7.1 million compared to $5.4 million in the second quarter of 2007.

Now, let us move to slide 7. The press release that we issued today shows our 2008 financial outlook at the 20% rate and the comparisons from last year as 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, as compared to last year's results taxed at a 20% rate.

For 2008, we have increased our outlook for adjusted earnings and have narrowed our outlook to the upper end of our prior range for adjusted earnings per share. Our outlook is as follows: . Total revenue continues to be for 9% to 11% growth to $355 million to $363 million, versus 2007 revenue of $325.6 million. Our outlook for 2008 adjusted earnings is now $39.4 million to $41.5 million, or $1.55 to $1.63 per share, versus $32.5 million or a $1.33 per share for 2007 on the 20% tax rate.

This outlook assumes an increase in our fully diluted share count of approximately 4.6%. Please note that these numbers do not include any nonrecurring items. For the third quarter 2008, outlook for total revenue is for 5% to 8% growth to $89 million to $91 million versus third quarter 2007 revenue of $84.5 million. Our outlook for adjusted earnings is $10.2 million to $11.2 million, or $0.40 to $0.44 per share versus $9.3 million, again based on the new 20% tax rate or $0.38 per share for the third quarter 2007. Again, please note that these numbers do not include any nonrecurring items. We continue to expect the rise in operating leverage to generate cash at an increased rate. We plan to use our excess cash to fund our growth and continue with our accelerated debt prepayment plan.

With that, I will turn it back to Henry.

Henry Graham

Before the Q & A begins, I want to thank all of TNS's employees and let them know how much I and the management team appreciate your efforts and dedication over the course of the first half of the year.

This concludes our remarks, and we are ready to open the call for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Tien-Tsin Huang of JP Morgan.

Tien-Tsin Huang – JP Morgan Chase

I think it sounds like you will retain the Alliance Data business and even pick up some of the Heartland Legacy business? If that is the case, can you help size that for us and when the new business might come on?

Henry Graham

Basically Tien-Tsin, what we are talking about there, we want to let everybody know, we have entered into an agreement with Heartland to provide them with legacy services, predominantly the 950 traffic that we currently have. Plus we have an opportunity to sell additional products into that. That is really all I want to say about it right now, on this call.

Tien-Tsin Huang – JP Morgan Chase

I guess and I would appreciate you giving the detail on the transactions, ex the migration in POS. But I noted the revenue per transaction actually declined a little bit. Anything to read into there?

Dennis Randolph

No. If you actually looked, transactions are down 8.2%. Also, our pass-through revenue, which is a USF charge is down a couple of percent. So excluding past due revenues, Revenues in the POS division are down 6.2% year over year, with transactions being down 8.2%. Our revenue per transaction year over year is effectively flat. So what you are seeing is incremental contribution from the broadband products that we have sold through the first part of this year.

Tien-Tsin Huang – JP Morgan Chase

Lastly then I will jump off, the gross margins once again came in above our expectations. I think you guys have set a target of 51 or 52%. You are running above that today. Is the current run rate sustainable?

Dennis Randolph

Just to point out one thing. We did have a benefit in the international division of about $1.1 million, which we both pointed out. But our target margins for the year will be between 52% and 53% for the full year.

Henry Graham

But that is a little bit of an increase.

Operator

Your next question comes from Andrew Jeffrey - SunTrust.

Andrew Jeffrey – Suntrust Robinson Humphrey Capital Market

As far as this software sale is concerned, I assume you are calling it out because you think of it as being largely nonrecurring. How unusual was this? And is this something that's going to be this type of revenue is going to be sporadic and occasionally crop up and you are going to call it out all the time?

Dennis Randolph

It will. And to the extent that it does, we will call it out. For example, in the third quarter of 2007, we had $1 million license sale. In that period as well, which is included in IC which was nonrecurring. Although the model that we will adopt, some of this is legacy hangover from the relationships that we acquired through Dialect. We are moving that model for card-not-present to more of a transactional basis. So you will see this happen less frequently.

Henry Graham

We could not exactly call it nonrecurring, Andrew. But it is something that may sporadically occur and yes, we will call it out each time.

Andrew Jeffrey – Suntrust Robinson Humphrey Capital Market

And then just when I look at your overall guidance for the year, it implies that obviously you have got a nice interest savings pickup here as your interest expense comes down. But is it, I mean, I guess the easiest way to ask the question is, should we expect to continue to deliver EBITDA margin expansion as year on year as you have for the last several quarters? As we look out to the second half of 2008?

Dennis Randolph

I think you know our target margins for EBITDA this year are in the 24% to 25% range.

Andrew Jeffrey – Suntrust Robinson Humphrey Capital Market

Despite the $1.1 million, which seems to drop primarily to the bottom line, you would still expect to be in that range?

Dennis Randolph

Yes, our target margins for the year between 24% and 25%, including that benefit.

Andrew Jeffrey – Suntrust Robinson Humphrey Capital Market

Henry, it sounds like you are doing very well in the UK. Obviously some signs of late that transaction credit card volume growth are decelerating there. As well as the rest of the economy. Can you talk a little bit about momentum? It sounds like you have new wins, as well as penetration of existing customers as well as the relatively new retail channel. Can you give us a little more granular sense of where the growth is coming from? It looks like your I.S.D. business, if am accounting for Dialect correctly, actually accelerated organically from the first quarter. How should we think about it for the rest of the year.

Ray Low

I guess the English, the business in the UK is very much the same as everywhere else. We are seeing a transition from our larger merchants toward broadband, off of baseline connectivity, which gives us a better opportunity to sell our product there. We are seeing a lot of up tick in that part of our business. I actually think, though, that in markets such as the UK and in Europe, you see a lot more debit news and debit is still growing. So there is a shift from the credit card usage to a debit card usage, which we still benefit from. It is a mixture of both.

Henry Graham

You mentioned the slow down in transactions. Today, we have not seen that. I am not going to say that it will not happen. But let us remember that we do not really care how big the transaction is, we just care that the transaction happens.

Andrew Jeffrey – Suntrust Robinson Humphrey Capital Market

So you have not seen a slow down in transactions? Even if volume has declined somewhat?

Dennis Randolph

Transaction counts are within our outlook for the year. So they are within a percent of two of what we expected going into the year.

Andrew Jeffrey – Suntrust Robinson Humphrey Capital Market

Point of sale. Are the sequential declines, I guess you were up a little bit. Can we assume from the second quarter that the sequential declines are over?

Dennis Randolph

From a performance standpoint, yes, we should see up sequentially. The only factor here is the Heartland payment on the Alliance Data business in the third and fourth quarters.

Operator

Your next question comes from Wayne Johnson - Raymond James.

Wayne Johnson III - Raymond James & Associates

Following up on the point of sale division. So just to make sure that I heard correctly, so on a revenue absolute dollar value basis that should be sequentially up in the third quarter, versus second quarter and fourth quarter versus third?

Dennis Randolph

Yes. The revenue jump will be more pronounced from third to fourth quarter. The majority of the co-op work that we are doing will take place in the latter half of the third quarter into the fourth quarter.

Wayne Johnson III - Raymond James & Associates

So on an annualized basis for POS only, what kind of year over year growth would we be looking at for the full year.

Dennis Randolph

For the full year we expect it to be down 4% to 6% for the full year.

Wayne Johnson III - Raymond James & Associates

And then, can you talk a little bit domestically also about POS on the broadband side? How successful have you guys been implementing the broadband business? Years ago there was a lot of hope for an accelerated installation rate. And I was just trying to follow-up and see where we are on that.

Henry Graham

We continued to learn how, for lack of a better phrase, learn how to make these sales. I think we have discussed a number of times on these calls that there are really two sales that take place. You sell to the corporate and then, I guess I have learned a very valuable lesson into how much control the actual franchise owners have on how they roll-out different things. We have seen an increased interest and increased amount of orders that we are trying to execute upon right now. But we are still going through our learning process of how we go about that sales cycle itself.

It has been frustrating. We are beginning to see some traction in that particular area, but it certainly has not met our expectations on a year to date basis. But hopefully in the third and fourth quarter, we will begin to see an improvement in our conversion rate of what I consider to be a very substantial pipeline. So it has been disappointing. We have gone through a learning process. Having said that, I think we are at a point now where we have learned a very valuable lesson about exactly how those sales are executed, and we have high hopes that we will begin to convert at an increased pace and a more steady pace than we have in the past.

Dennis Randolph

We are seeing more of an interest in our FusionPoint express and FusionPoint Lite products than we have for the full FusionPoint complete product that we have out there. And the main difference there the FusionPoint complete product, it is a $2000 up front installation where we make very little margins, and the margins associated with the FusionPoint express, which is the more plug and play type application, are comparable. So it is less of an impact up front revenue wise but better for us in the long-term.

Wayne Johnson III - Raymond James & Associates

And then, back on the to the cable business on the TSD side. Could you remind us how many cable companies you currently serve? And how should we think about this? Should we think with like number of subscribers on the system that are going for triple play? Can you give us a range of metrics so we can track the success of those programs?

Henry Graham

Yes, it's about the number of subscribers. Right now we do service two cable companies. If you will, obviously we think, this is a vertical that affords us an opportunity to grow in the future. But it is all about the number of subscribers that are converting to triple play and all of the cable companies have that information available on their website.

Wayne Johnson III - Raymond James & Associates

So you are not going to give us how many subscribers you are serving now?

Henry Graham

I do not know that I know that right off the top of my head. It is millions.

Operator

Your next question comes from Gary Prestopino - Barrington Research.

Gary Prestopino - Barrington Research Associates, Inc.

I assume now, except for this bank, that JPG has annualized, is that correct?

Dennis Randolph

That's correct.

Gary Prestopino - Barrington Research Associates, Inc.

And then Dialect has a couple of quarters. Would you be willing to give us what Dialect and JPG contributed into revenues for the quarter?

Dennis Randolph

Dialect contributed $3.6 million. Now remember, included in that is the $1.1 million we talked about. JPG, we have had that traffic on our network for about a year and a half now. We fully anniversaried it. It is actually running on our network now so the incremental revenue contribution that we got from that is probably somewhere around $1 million.

Gary Prestopino - Barrington Research Associates, Inc.

Then if you look at your international POS and your domestic POS and relative to the percentages that are broadband versus dial up, has that really changed much year over year?

Ray Low

I guess the most knowledge and the most history we have here is overseas again. In the UK, what we are seeing is transition from lease line circuits to broadband, more than anything else. Not necessarily dial because it is the larger merchants that need the extra band width and the extra facilities. So most of what we are seeing is that transition. And I would say it has been pretty steady over the years. One of the things about the US market here is they are still adopting, if you like, the technology. It is much more complicated to implement broadband type services in this country than there are in most of the other countries overseas. And hence that adoption may be slower than we expect overseas.

Gary Prestopino - Barrington Research Associates, Inc.

And then could you just go into a little bit more on this FusionPoint Lite. Exactly what it does and where you are rolling this out?

Ray Low

Yes, it's a small box. It has two ports. So it allows you to plug two traditional legacy dial POS devices into the back of it. And essentially allows those two POS devices to talk IP. So in other words, the merchant does not have to change anything. He just plugs this box in, plugs it into his broadband cable modem, and away he goes.

Gary Prestopino - Barrington Research Associates, Inc.

So you are rolling this out in the UK and the US, or Europe and the US?

Ray Low

Yes. At the moment we are pretty much everywhere. It is as you described. The key markets for us will be UK, Western Europe, Australia, and the US.

Henry Graham

Keep in mind, we have had great real success in the United Kingdom market but we have introduced it here. We are going through a certification process. But yes, it is pretty much a global offering now.

Gary Prestopino - Barrington Research Associates, Inc.

Danny, can you give us an idea of what your stock comp expense should run this year?

Dennis Randolph

It will be right around $12 million, about 3 to $3.3 million a quarter from here on out.

Operator

Your next question comes from Franco Turrinelli - William Blair.

Franco Turrinelli - William Blair & Company

Danny, just to check if I did my math right, internal growth, constant currency, and ISDs around 13%, 13.5%?

Dennis Randolph

About 14% constant currency organic.

Franco Turrinelli - William Blair & Company

I want to drill down into this additional $1.1 million of revenue because I can see us all kind of excluding it. I am not sure we should exclude it. I am assuming this was revenue that you were expecting when you provided your original guidance?

Henry Graham

Yes, it is, Franco. It is just this is more a software type sale, oriented. Those are a little harder to predict exactly when you can recognize that revenue. Again I would not call it nonrecurring. But we did want to make everybody aware that these, I guess as Andrew phrases it, could be sporadic. It is not we do not expect it will ever occur again. It is just that we felt it was important enough to bring it to your attention.

Dennis Randolph

And more so for the sequential comparisons.

Franco Turrinelli - William Blair & Company

But as I said, included in the original thought process on the guidance.

Dennis Randolph

This project, this work was contemplated in the original full year guidance and the second quarter guidance that was given.

Franco Turrinelli - William Blair & Company

And should we want to continue to think of this as sporadic or whatever, I mean, this is revenue where we have real cost associated with it right?

Dennis Randolph

Correct.

Franco Turrinelli - William Blair & Company

Is this really a service or just a license fee that was sold?

Dennis Randolph

Services.

Franco Turrinelli - William Blair & Company

So I mean, we should not think of this as 100% gross or operating margin, right?

Dennis Randolph

No.

Franco Turrinelli - William Blair & Company

Now, because just, just the way some of the questions had gone, I was worried that we were all going to back up $1.1 million.

Dennis Randolph

No we were merely pointing it out. It is for the sequential comparison.

Franco Turrinelli - William Blair & Company

In replying to one of the other questions on sequential progression of the POS business, Denny you started to make a comment about the Heartland/ADS business and I was not sure what you were getting at with that comment.

Dennis Randolph

Heartland payment, we will have a reduction from the Heartland payment's traffic. Again we have a contract on that will retain certain of the legacy products. Primarily the 950 product. So we will see a revenue downturn as it relates to Heartland payments beginning in August of this year.

Franco Turrinelli - William Blair & Company

And your point being that despite that, we should still see a sequential improvement?

Dennis Randolph

Yes it will be more pronounced in the fourth quarter because, as you recall, we are in the process of implementing the traffic from the co-op financial network. And a majority of that work will be underway in the latter half of the third quarter going into the fourth quarter.

Henry Graham

Yes, but the big news here, Franco, is that we have signed and entered into an agreement with Heartland and it concerns the ADS traffic. But it does open up an opportunity, especially for our IP products, with Heartland. Which we are pretty excited about.

Franco Turrinelli - William Blair & Company

Absolutely. I think it is great that you have been able to do that. It was really just clarifying Denny's comment on the sequential growth and hey, this one's probably maybe more for you, Henry. In the TSD division, the sequential slow down in growth is by no means unexpected. You have told us that that was going to happen. Now how should we think of the growth moving forward? I mean, basically, is the traffic from the existing customers kind of done? And now we need to wait for new customer announcements from you? Or how should we think about TSD?

Henry Graham

I think we should think about TSD in the 4% to 5% growth moving forward, if you will. Obviously there was a certain amount it was an anomaly in the first quarter, they had a 19% because we had fully anticipated one of our large wire line customers would begin to move traffic as a direct result of the consolidation effort that is going on in that particular space. So we go back to where I think we originally said somewhere in the 4% to 5% range is what we are looking for, as far as growth in TSD right now. But you should certainly be on the lookout, hopefully, for some new customer announcements.

Operator

The next question is a follow-up question from Wayne Johnson - Raymond James.

Wayne Johnson III - Raymond James & Associates

Just so how, on JPG, how complete are you on a percent of the total? And I think you mentioned that you have one other portion to be converted onto the TNS network system, and I missed the name of that particular institution or bank that you were trying.

Henry Graham

Right now, Wayne, I would have to say that the one remaining bank is quite large. I would say we were around 70% complete.

Wayne Johnson III - Raymond James & Associates

How many POS device does that represent, this 70%?

Henry Graham

The seventy? Is thousands of them, hang on a minute. I will see if I can get a number, real quick. I think it is in excess of 115,000.

Wayne Johnson III - Raymond James & Associates

And then on Dialect, what is the status of the American Express relationship?

Henry Graham

The status? I mean, we are in good shape with American Express. We are on track to deliver, as originally promised. We have both agreed exactly what the product will look like at the end of the, whenever we deliver said product. We have made all the changes and stuff. It would appear that we are on track to deliver that somewhere around in April to June time frame in 2009.

Wayne Johnson III - Raymond James & Associates

And then, the expectation is that at that time is that American Express would be promoting this?

Ray Low

The actual product is a product they use for their own merchants. So they are actually in the process of migrating their legacy platform on to this new Dialect platform.

Henry Graham

So yes, I guess that is a form of promotion.

Wayne Johnson III - Raymond James & Associates

So I guess my point would be so at the end of April to June, then that legacy transition time frame would end? Is that a good way to look at it?

Henry Graham

Well, it means we would have delivered the completed product. How fast they are going to move their existing users over, I have got no control over that.

Wayne Johnson III - Raymond James & Associates

Remind us again please which geographies does this represent?

Ray Low

Well, it is all over the world. Predominantly the business is in the US.

Wayne Johnson III - Raymond James & Associates

Henry, First Data. Any news there? Do they have an RFP on the old POS business? And can you give us any color on that?

Henry Graham

They continue to do business with us at a rate of about $2.5 million or $3 million a year. We continue to try and get additional traction there. But I really don't have anything new to report on that. And I am not aware of any new RFP that is out there right now.

Operator

And your next question is a follow-up question from Gary Prestopino - Barrington Research.

Gary Prestopino - Barrington Research Associates, Inc.

Just a quick question on FusionPoint Lite again. Is that priced on a monthly?

Henry Graham

Yes.

Gary Prestopino - Barrington Research Associates, Inc.

And if you look at that, that is not applicable to the convenience store market like the initial FusionPoint that you talked about with Valero, is that a correct assumption?

Henry Graham

That is correct. Again, as Ray pointed out, this is a small device it has two ports on it, Gary and it would be more toward smaller-type retailers. Ask again, it is generating interest not only in POS but also in cable and in our CLEC customers in the TS based sector.

Gary Prestopino - Barrington Research Associates, Inc.

It is got a price point where it is much more competitive than the merchant having to change out the machine and just go to a total broadband?

Henry Graham

That is correct.

Operator

You have another follow-up question from Tien- Tsin Huang - JPMorgan.

Tien-Tsin Huang – JP Morgan Chase

Just on FSD the results are pretty good there. Hoping to get some color on the monthly trend I guess on bookings or billings in the quarter, any changes there in this spending environment from the clients?

Henry Graham

If you are referring to everything that is going on in the economy, again we monitor that very, very closely. But the increased desire for increased bandwidth and no legacy whatsoever in the data, we continue to see growth in revenue per endpoint and we continue to see logical, virtual circuits added. But like everybody else, Tien-Tsin, we keep a very close eye on what is going on with the economy and in the banking sector.

Dennis Randolph

We still see on a sequential basis we see net adds and the number of end points and we still see growth from the logical virtual connections that we built. To this point we are tracking on plan for the year.

Tien-Tsin Huang – JP Morgan Chase

And did you give guidance at the beginning of the year for FSD in terms of revenue growth?

Dennis Randolph

Fourteen to 16%.

Tien-Tsin Huang – JP Morgan Chase

Fourteen to 16% for FSD?

Dennis Randolph

We still see that being the case.

Tien-Tsin Huang – JP Morgan Chase

There will be a pickup then I guess that the second half of the year?

Dennis Randolph

Yes. 14% to 16%, if that indicates a pickup in the second half of the year, the answer is yes.

Operator

You have no further questions.

Henry Graham

Thanks again, everyone for participating today. We look forward to speaking with you again after the third quarter.

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!

Source: TNS, Inc. Q2 2008 Earnings Call Transcript
This Transcript
All Transcripts