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TNS Inc. Reports Operating Results (10-Q)
Posted by: gurufocus (IP Logged)
Date: November 9, 2009 04:19PM

TNS Inc. (TNS) filed Quarterly Report for the period ended 2009-09-30. TNS Inc provides data communications services to processors of credit card and other card-based transactions. Tns Inc. has a market cap of $651.93 million; its shares were traded at around $25.81 with a P/E ratio of 14.83 and P/S ratio of 1.9.

Highlight of Business Operations:

International services division. Revenues from the international services division decreased $5.8 million, or 14.0%, to $35.9 million for the three months ended September 30, 2009, from $41.7 million for the three months ended September 30, 2008. The adverse effect of foreign exchange translation on a year-over-year basis was $3.7 million. In addition, we had $0.5 million of software development revenue for the three months ended September 30, 2009 compared to $1.7 million for the three months ended September 30, 2008. Excluding the adverse impact of foreign exchange rates and the incremental software development revenue, international services division decreased $1.1 million, or 2.6%, to $40.6 million from $41.7 million for the three months ended September 30, 2009 and 2008, respectively. The decrease was primarily due to reductions in dial-up POS transaction volumes in Europe and to a lesser extent from the loss of two processing customers in the U.K. These declines were partially offset by increased sales of our IP services to POS customers. Revenues from our United Kingdom subsidiaries decreased $3.8 million, or 20.0%, to $15.1 million for the three months ended September 30, 2009, from $18.9 million for the three months ended September 30, 2008. On a constant dollar basis, revenue from the United Kingdom subsidiaries for the three months ended September 30, 2009 would have decreased $1.4 million, or 7.5%, to $17.5 million due primarily to a decrease in dial-up transaction volumes and the loss of two processing customers as mentioned above. This was partially offset by increased revenue from sales of our payment gateway and IP services.

Cost of network services. Cost of network services increased $23.7 million, or 57.3%, to $65.0 million for the three months ended September 30, 2009, from $41.3 million for the three months ended September 30, 2008. On a constant dollar basis, cost of network services increased $25.0 million, or 60.7%, to $66.3 million. Cost of network services were 46.3% of revenues for the three months ended September 30, 2009, compared to 46.6% of revenues for the three months ended September 30, 2008. Excluding the effect of foreign exchange the increase in cost of network services was due to costs related to increased revenue in our telecom services division resulting from the CSG acquisition of $26.2 million, an increase in our international services division of $0.5 million primarily to support additional financial services revenue and an increase in our domestic financial services division of $0.4 million primarily to support the increased number of customer endpoints. The cost of network services in our POS division decreased $1.9 million due primarily to reductions in dial up transaction volumes and to a lesser extent negotiated price decreases from our vendors which was partially offset by an increase in the cost of broadband connections to support the increased revenue from our broadband services.

Engineering and development expense. Engineering and development expense increased $3.1 million, or 43.1%, to $10.4 million for the three months ended September 30, 2009, from $7.3 million for the three months ended September 30, 2008. On a constant dollar basis, engineering and development expenses would have increased $3.3 million, or 46.6%, to $10.6 million. Engineering and development expense represented 7.4% and 8.1% of revenues for the three months ended September 30, 2009 and 2008, respectively. Capitalized software development costs, which are offset against engineering and development costs, increased $0.7 million to $2.5 million from $1.8 million for the three months ended September 30, 2009 and 2008, respectively. The increase in capitalized software development costs is primarily due to investment in our roaming and clearing and IP registry platforms. Included in engineering and development expenses for the three months ended September 30, 2009 and 2008 is $0.3 million and $0.4 million of stock compensation expense, respectively. Excluding stock compensation, the increase in capitalized software and the effects of foreign exchange, engineering and development expense would have increased $4.2 million to $12.9 million, or 9.0% of revenues, for the three months ended September 30, 2009 from $8.7 million, or 9.8% of revenues, for the three months ended September 30, 2008. The increase relates primarily to additional headcount and other costs required to support our acquisition of CSG.

Selling, general and administrative expense. Selling, general and administrative expenses increased $9.9 million, or 47.6%, to $30.9 million for the three months ended September 30, 2009, from $21.0 million for the three months ended September 30, 2008. On a constant dollar basis, selling, general and administrative expenses would have increased $10.7 million, or 51.1%, to $31.7 million. Included in selling, general and administrative expenses for the three months ended September 30, 2009 and 2008 is $2.4 million and $2.7 million of stock compensation expense, respectively. The decrease in stock compensation expense is due to a reduction in performance related stock compensation as a result of fewer grants. Included in selling, general and administrative expenses for the three months ended September 30, 2009 and 2008 is $1.7 million and $0.7 million of severance expense, respectively. Excluding these items and the effects of foreign exchange, selling, general and administrative expenses would have increased $9.8 million for the three months ended September 30, 2009. This increase was primarily attributable to additional headcount and other costs necessary to support the acquired CSG operations and to a lesser extent cost incurred to support the growth or our Canadian ATM processing business.

Amortization of intangible assets. Amortization of intangible assets increased $3.2 million, or 55.1%, to $9.1 million for the three months ended September 30, 2009, from $5.9 million for the three months ended September 30, 2008 and relates solely to intangible assets resulting from acquisitions. On a constant dollar basis, amortization of intangible assets would have increased $3.3 million, or 57.5% to $9.2 million. The increase primarily relates to additional amortization expense of $4.3 million related to the CSG acquisition. This was partially offset by a decrease of $0.8 million as certain intangible assets reached the end of their useful economic lives. For purposes of measuring and recognizing impairment of long-lived assets including intangibles, we assess whether separate cash flows can be attributed to an individual asset. For our customer relationship intangible assets, we recognize and measure impairment upon the significant loss of revenue from a customer. Beginning in 2005, we experienced revenue and transaction volume declines with a major customer. The intangible asset value attributable to the customer relationship was approximately $18.3 million as of September 30, 2009. We assessed the recoverability of this customer relationship asset based upon undiscounted anticipated future cash flows and concluded that no impairment existed as of September 30, 2009.

International services division. Revenues from the international services division decreased $22.1 million, or 18.2%, to $99.4 million for the nine months ended September 30, 2009, from $121.5 million for the nine months ended September 30, 2008. The adverse effect of foreign exchange translation on a year-over-year basis was $19.3 million. Excluding the adverse impact of foreign exchange rates, international services division revenue decreased $2.8 million, or 2.4%, to $118.7 million from $121.5 million for the nine months ended September 30, 2009 and 2008, respectively. The decrease was due to a $3.7 million decrease in POS revenue in the UK primarily due to lower transaction volumes and to a lesser extent the loss of two processing customers, which was partially offset by increased revenue from sales of our payment gateway and IP services, and a decrease of $1.6 million from our Dialect subsidiary due to a reduction in software development revenue. This was partially offset by an increase in international financial services revenue of $1.1 million due to additional customer connections, an increase in revenue from our European subsidiaries excluding the UK of $1.1 million primarily from increased transaction volumes and to a lesser extent sales of our IP services and an increase of $0.3 million due to higher transaction volumes in the Asia Pacific region. Revenues from our United Kingdom subsidiaries decreased $14.4 million, or 25.6 %, to $41.7 million for the nine months ended September 30, 2009, from $56.1 million for the nine months ended September 30, 2008. On a constant dollar basis, revenue from the United Kingdom subsidiaries for the nine months ended September 30, 2009 would have decreased $3.5 million, or 6.2%, to $52.6 million due to a $3.7 million decrease in POS revenue, primarily due to lower transaction volumes and to a lesser extent the loss of two processing customers, which was partially offset by increased revenue from sales of our payment gateway and IP services. UK financial services revenue also increased $0.2 million year over year.

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