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TNS, Inc. Announces Second Quarter 2012 Financial Results
- Q2 Revenues of $136.9 Million; GAAP Net Income of $0.09 per Share
- Q2 Adjusted Earnings of $0.54 per Share
- Updated 2012 Outlook of $540 - $550 Million in Revenue and $2.17 – $2.32 in Adjusted Earnings per Share
- Aligning Management Structure with the Transition to Growth Services
- Board of Directors Authorizes $30 Million Share Repurchase Program
RESTON, Va.--()--TNS, Inc. (NYSE: TNS), a leading provider of business-critical, cost-effective data communications services for transaction-oriented applications, today reported its second quarter 2012 results.
Henry H. Graham, Jr., CEO, commented, “Second quarter 2012 revenue was slightly below our outlook while adjusted earnings achieved the midpoint of our outlook range. However, there are a number of factors affecting our business that have caused us to reduce our 2012 outlook and take decisive action. These factors fall into three categories: the global economy and its effect on transaction volumes and on the financial services industry; timing changes in the recording of revenue and in the launching of mobile applications products; and areas of challenge, particularly in the Telecommunication Services Division, that we have already begun to address. We are now making changes to our management structure to better navigate the transitions in our business and more effectively sell into our markets. TNS’ suite of network, gateway and applications solutions remains very well positioned across the payments, fraud and mobile markets. We are focused for the remainder of the year on realizing the opportunity of our product investments, continuing to manage our costs and growing earnings. We are confident in our ability to achieve annual adjusted earnings increases going forward while we manage these transitions and gain further traction in growth services.”
Second Quarter 2012 Results
Total revenue for the second quarter of 2012 decreased 3.3% to $136.9 million from second quarter 2011 revenue of $141.6 million. On a constant dollar basis, revenues for the second quarter of 2012 decreased 1.5% to $139.5 million.
Second quarter 2012 GAAP net income was $2.3 million, or $0.09 per share, compared to GAAP net income of $1.1 million, or $0.04 per share, for the second quarter 2011.
Adjusted earnings before interest, taxes, depreciation, and amortization (adjusted EBITDA) for the second quarter of 2012 decreased 6.9% to $32.3 million, or 23.6% of revenue, from $34.7 million, or 24.5% of revenue, for the second quarter of 2011. On a constant dollar basis, adjusted EBITDA for the second quarter of 2012 was $33.3 million, or 23.9% of revenue.
Adjusted earnings decreased 3.1% to $13.4 million, or $0.54 per share, for the second quarter of 2012 compared to adjusted earnings of $13.8 million, or $0.54 per share, for the second quarter of 2011. On a constant dollar basis, adjusted earnings increased 8.8% to $14.1 million, or $0.57 per share, for the second quarter 2012.
Adjusted EBITDA, adjusted earnings and adjusted earnings per share are non-GAAP measures. See “Non-GAAP Measures” below for a discussion of these metrics.
The table below discloses adjusted earnings and adjusted earnings per share. Amounts for 2011 exclude results from discontinued operations.
(In millions, except per share amounts)
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| Revenues | $136.9 | $141.6 | (3.3)% | $139.5 | (1.5)% | |||||||||||||||||
| After tax adjusted earnings | $13.4 | $13.8 | (3.1)% | $14.1 | 8.8% | |||||||||||||||||
| Adjusted earnings per share | $0.54 | $0.54 | 0.6% | $0.57 | 12.9% | |||||||||||||||||
| Shares Outstanding | 24.8 | 25.7 | (3.6)% | 24.8 | NA | |||||||||||||||||
Additional Financial Review:
Second Quarter 2012
Second quarter 2012 total revenue decreased 3.3% to $136.9 million from second quarter 2011 revenue of $141.6 million. On a constant dollar basis, revenues for the second quarter of 2012 decreased 1.5% to $139.5 million. Excluding the reductions of $0.8 million in pass-through revenues and $0.8 million from the restructuring from an FSD customer agreement as mentioned below, second quarter 2012 revenue was approximately flat at $141.1 million.
Included in second quarter 2012 revenue are the following components:
- Revenue from the Telecommunication Services Division decreased $0.8 million, or 1.0%, to $70.7 million for the three months ended June 30, 2012, from $71.5 million for the three months ended June 30, 2011.
- Revenue from mobile applications (Cequint) increased $0.8 million, or 29.9%, to $3.6 million due to an increase of $1.1 million in TNS’ wireless caller name product that was introduced in partnership with a tier one mobile operator in the third quarter of 2011. This was partially offset by a $0.3 million reduction in CityID revenues primarily from another tier one mobile operator that is transitioning to TNS’ wireless caller name product.
- Revenue from identity and verification services increased $0.2 million, or 1.0%, to $30.2 million due to $1.8 million from caller name storage contract wins and $1.7 million due primarily to market share gains and volume growth in our caller name access business. These were partially offset by decreases of $1.5 million due to an anticipated peering partner contract price concession as the wireless caller name model transitions, $1.2 million due to lower queries to wireless data, $0.3 million due to the renewal of certain customer contracts, and $0.3 million from lower volumes in legacy payphone fraud and validation services.
- Revenue from network services decreased $1.3 million, or 4.6%, to $26.5 million. Included in this decrease was a reduction of $0.8 million of pass-through revenues from regulatory message signaling unit charges (MSUs). Excluding this decrease, network services revenue decreased $0.5 million, or 1.9%, due to $1.4 million related primarily to price concessions on call signaling routes from industry consolidation. This was partially offset by increased revenue of $0.9 million due to higher demand for connectivity and wireless transport services from mobile customers.
- Revenue from roaming and clearing products increased $0.3 million, or 6.2%, to $5.1 million due primarily to increased demand for data services. This was partially offset by a reduction in traffic from certain customers entering into direct peering relationships.
- Revenue from registry services decreased $0.9 million, or 14.7%, to $5.2 million due to $0.2 million related to the expiry in May 2011 of a transition services agreement acquired through the CSG acquisition and $0.7 million due to price concessions on the renewal of certain customer contracts due primarily to industry consolidation.
- Revenue from the Payment Services Division decreased $3.5 million, or 6.5%, to $49.7 million for the three months ended June 30, 2012 from $53.2 million for the three months ended June 30, 2011. The negative effect of foreign currency translation on a year-over-year basis was $2.4 million. Excluding the effect of foreign exchange rates, revenues decreased $1.1 million to $52.1 million as follows:
- Network services decreased $1.1 million, or 2.7%, to $40.7 million, as follows:
- North America: revenue decreased $0.9 million, or 6.7%, due to $0.5 million in lower average transaction pricing from the renewal of certain customer contracts at the end of the second quarter 2011 and $0.4 million of reductions in dial transaction volumes.
- Europe: revenue decreased $0.2 million, or 0.7%, primarily due to $0.9 million decrease in dial-based network services in the UK, France and Spain, partially offset by an increase of $0.7 million in market share gains for dial services and IP-based network services, primarily in the UK, Spain and Romania.
- Asia Pacific: revenue was flat due to $0.6 million of expansion of a global customer’s agreement to provide dial services in multiple markets in Asia beginning in Taiwan, offset by $0.6 million in lower transaction volumes in Australia.
- Payment gateway services increased $0.6 million, or 6.6%, to $9.6 million. Certain 2011 amounts have been reclassified to the North American region from the Asia Pacific region to conform to current-period regional presentations of revenue. The increase is due to the following:
- North America: revenue increased $0.2 million, or 7.9%, to $2.8 million. Included in second quarter 2011 results was an additional $0.3 million related to the timing of revenue recognition associated with the expansion of an existing customer’s contract; the year-to-date positive revenue change from this contract expansion was $1.1 million. Excluding this timing difference, revenue increased $0.5 million from market share gains in cardholder-not-present services.
- Europe: revenue increased $1.0 million, or 45.7%, to $3.3 million due primarily to $0.6 million in market share gains and to a lesser extent from increases in transaction volumes of cardholder present services from existing customers in the UK and an increase in development revenue of $0.4 million in France.
- Asia Pacific: revenue decreased $0.6 million, or 15.0%, to $3.5 million, due to a $1.0 million decrease in development revenue, partially offset by an increase of $0.4 million related to increased volumes from new and existing customers.
- Payment processing and other services decreased $0.6 million, or 23.8%, to $1.8 million, due primarily to decreases in transaction volumes and to a lesser extent lower average transaction pricing.
- Network services decreased $1.1 million, or 2.7%, to $40.7 million, as follows:
- Revenues from the Financial Services Division decreased $0.5 million, or 3.2%, to $16.5 million for the three months ended June 30, 2012, from $17.0 million for the three months ended June 30, 2011. The negative effect of foreign exchange translation on a year-over-year basis was $0.2 million. Excluding the impact of foreign exchange rates and the impact from the restructuring of an FSD customer agreement mentioned below, FSD revenue increased 2.7%, or $0.5, million to $17.5 million on a constant currency basis as follows:
- North America: revenue decreased $0.9 million, or 8.6%. On October 1, 2011, TNS restructured an agreement with a customer which resulted in a reduction of both revenue and commission payable (which was included in sales, general, and administrative expenses) to this customer by $0.8 million. Excluding this change, revenue decreased $0.1 million, or 1.5%, due to $0.8 million from the loss of endpoints and market data access services believed to be attributable to negative economic factors impacting the financial services industry. This was partially offset by $0.7 million in sales of bandwidth-based services marketed primarily to participants in the foreign exchange community.
- Asia Pacific: revenue increased $0.4 million, or 14.8%, due to the continued expansion of the number of customer endpoints connected to the network, partially offset by disconnects of customer trading connections as the financial services industry consolidates in certain markets in this region.
- Europe: revenue increased $0.3 million, or 7.6%, due to market share gains of $0.4 million which were partially offset by $0.1 million related to the loss of customer endpoints.
- The primary driver was a decrease in the Telecommunication Services Division contribution margins as a result of increased costs in identity and verification services primarily from increased revenue share costs related to the addition of a new wireless storage contract in the second quarter of 2011, and to a lesser extent price compression from network and registry services. This is partially offset by a beneficial product mix shift toward wireless service offerings and, to a lesser extent, from cost saving initiatives to reduce network services costs.
- In addition, Financial Services Division contribution margins decreased primarily due to the loss of equity trading partner connections and, to a lesser extent, to investments to expand the reach and capacity of the network.
- These declines were partially offset by increases in the Payments Services Division contribution margins due primarily to increased scale of the payment gateway services and, to a lesser extent, from cost saving initiatives to reduce network services costs.
Aligning Management Structure with Transition from Core Services to Growth Services
TNS is evaluating its organizational structure with the intention of more directly matching management responsibilities and skill sets to the transition of its business model. As part of this realignment, Dan Dooley, President of the Telecommunication Services Division is leaving TNS, effective immediately, to pursue other opportunities.
Separately, Ray Low, President of the Payment Services Division will, after a transitional period, be leaving TNS. Mr. Graham stated, “During his more than 15-year tenure at TNS, Ray Low was a partner in management and a catalyst for our development and growth in key markets, and was instrumental in establishing our gateway strategy. TNS’ board and management team join me in thanking him for his depth of expertise and service.”
During the abovementioned evaluation, Michael Keegan, President and Chief Operating Officer, will assume day-to-day oversight of TSD and Payments in order to drive further alignment between the two divisions, with these divisions’ product and sales teams reporting to him.
Mr. Graham stated, “TNS is working through the evolution of our business to capture the long-term growth opportunities in the payments, fraud, and mobile markets. A successful transition requires a divisional management structure that properly supports this strategy, matching end market skill sets to our sales and marketing efforts. We are evaluating our organizational structure to streamline and facilitate these plans.”
Board of Directors Authorizes New Share Repurchase Program
TNS’ Board of Directors has authorized a share repurchase program for up to $30 million of the company's common stock subject to compliance with financial and other covenants of the company’s senior secured credit agreement. The program will have a term of three years, expiring July 31, 2015. Under the repurchase program, TNS will repurchase shares from time to time in open market transactions or in privately negotiated transactions in accordance with applicable federal securities laws. TNS plans to fund the repurchase program using excess operating cash flow.
