TNS (NYSE: TNS), a global provider of networking, communications, and value added services to many of the leading participants in the financial services, retail and telecommunications industries, today reported its second quarter 2007 results.
Total revenue for the second quarter of 2007 increased 9.2% to $79.4 million, a record second quarter for TNS, from second quarter 2006 revenue of $72.7 million. Gross margin in the second quarter of 2007 was 49.4%, an increase of approximately 50 basis points from second quarter 2006 gross margin of 48.9%.
Second quarter 2007 GAAP net income was $0.5 million, or $0.02 per share, versus second quarter 2006 GAAP net loss of $0.9 million, or $(0.04) per share. Included in the second quarter of 2007 is a pre-tax gain of approximately $0.6 million, or $0.02 per share, related to the sale of TNS' investment in WAY Systems. The second quarter of 2006 included a pre-tax charge of $0.8 million, or $0.02 per share, related to legal expenses incurred by the special committee of TNS' board of directors and severance.
Earnings before interest, taxes, depreciation, and amortization (EBITDA) before stock compensation expense for the second quarter of 2007 increased 24.4% to $17.3 million versus $13.9 million for the second quarter of 2006. Excluding the above-mentioned pre-tax charge from the second quarter of 2006, EBITDA before stock compensation expense was $17.3 million versus $14.7 million.
Adjusted earnings for the second quarter of 2007 increased 58.6% to $5.7 million, or $0.24 per share, compared to adjusted earnings for the second quarter of 2006 of $3.6 million, or $0.15 per share. Excluding the above-mentioned gain and charge from each of the second quarters of 2007 and 2006, respectively, adjusted earnings for the second quarter 2007 was $5.3 million, or $0.22 per share, versus $4.1 million, or $0.17 per share, for the second quarter 2006. (EBITDA before stock compensation expense, adjusted earnings and adjusted earnings per share are non-GAAP measures. See "Financial Measures" below for a discussion of these metrics.)
Henry H. Graham, Jr., CEO, commented, "TNS' second quarter 2007 performance was very strong. Operating results exceeded our outlook range as a result of consistent execution in all divisions, higher than expected volumes in our international, telecommunications and financial services divisions, and continued focus on cost control. Given our results year-to-date, our confidence level going into the second half of the year is high. TNS' schedule of new implementations from recent customer wins across all divisions remains strong and we are in the process of integrating our Dialect acquisition. With our suite of products increasingly well positioned to capture demand in our target markets and our entire team focusing on the job at hand, we are on track to achieve our 2007 operational objectives."
Second Quarter 2007
Second quarter 2007 total revenue increased 9.2% to $79.4 million from second quarter 2006 revenue of $72.7 million. Included in revenue are the following components:
- Revenue from the International Services Division increased 25.1% to $32.4 million from second quarter 2006 revenue of $25.9 million. On a constant dollar basis, second quarter 2007 revenues would have increased 15.5% to $29.9 million. Excluding the benefit of foreign exchange, ISD revenue increased primarily through higher transaction volumes from POS customers in Europe and Asia Pacific and to a lesser extent from the inclusion of one month of Dialect revenue.
- Revenue from the Financial Services Division increased 17.3% to $10.1 million from second quarter 2006 revenue of $8.6 million as a result of increases in new customer endpoint installations as well as increases in connectivity between existing customers.
- Revenue from the Telecommunication Services Division decreased 3.7% to $16.1 million from second quarter 2006 revenue of $16.7 million. Included in TSD revenues for the second quarter of 2007 is $1.4 million in pass-through revenues compared to $2.4 million for the second quarter of 2006. Excluding pass-through revenues, revenues increased $0.4 million or 2.4% through continued demand for our database access and validation services which offset pricing compression due to customer consolidation in our call signaling business.
- Revenue from the POS Division decreased 3.1% to $20.8 million on 1.51 billion transactions from $21.4 million in second quarter 2006 on 1.57 billion transactions. Included in POS revenue for the second quarter of 2007 is $0.7 million in pass-through revenues compared to none in the second quarter of 2006. Compared to last year, POS division revenue decreased resulting from lower transaction counts and price per transaction. Compared to last quarter, POS division revenue grew sequentially through increased contribution from higher transaction volumes from our traditional dial-up POS product and additional endpoints from our broadband service offerings.
Second quarter 2007 gross margin increased approximately 50 basis points to 49.4% from 48.9% in the second quarter of 2006 and increased approximately 290 BP sequentially. Excluding $2.2 million and $2.4 million in total pass-through revenues for the second quarter of 2007 and 2006, respectively, gross margin would have been approximately 50.8% compared to 50.6%. The year-over-year improvement in gross margin is a result of increased contribution from the international services and financial services divisions, the Company's highest gross margin divisions. This is partially offset by margin declines in the POS and the telecommunications services divisions as a result of increased access charges and price compression, respectively. The sequential increase in gross margin resulted from higher transaction volumes, primarily in the international services division and improvements in access charges in the POS division as TNS begins to lower these costs by diversifying its provider relationships.
First Half 2007
- Total revenue for the first six months of 2007 increased 9.7% to $152.0 million from first half 2006 revenue of $138.6 million.
- Gross margin in the first half of 2007 of 48.0% decreased approximately 140 basis points from first half 2006 gross margin of 49.4%. Excluding $4.1 million and $3.7 million in total pass-through revenues in the first half of 2007 and 2006, respectively, first half 2007 gross margin was 49.3% compared to 50.7% in the first half of 2006.
- GAAP net loss for the first six months of 2007 was $2.7 million, or $(0.11) per share, versus first half 2006 GAAP net loss of $1.4 million, or $(0.06) per share. Included in operating expenses for the first six months of 2007 is a pre-tax charge to earnings of approximately $0.9 million for severance and a gain on the sale of the Company's investment in WAY Systems of $0.6 million. Included in operating expenses for the first six months of 2006 is a pre-tax charge to earnings of approximately $1.5 million, including $0.6 million in expenses related to the special committee of our board of directors, $0.5 million in legal expenses associated with a class-action lawsuit and $0.3 million in severance. Excluding these items, net loss for the first six months of 2007 was $2.5 million, or $0.10 per share, versus net loss for the first six months of 2006 was $0.5 million, or $0.02 per share.
- EBITDA before stock compensation expense for the first six months of 2007 increased 11.3% to $30.6 million from first half 2006 EBITDA before stock compensation expense of $27.5 million. Excluding the above-mentioned pre-tax charges , EBITDA before stock compensation expense for the first half of 2007 was $31.6 million versus $29.0 million for the first half of 2006.
- Adjusted earnings for the first six months of 2007 increased 29.1% to $9.3 million, or $0.38 per share, from $7.2 million, or $0.30 per share, from first half 2006. Excluding the items mentioned above, adjusted earnings for the first half of 2007 was $9.5 million, or $0.39 per share, versus $8.1 million, or $0.34 per share in the first half of 2006.
Based upon TNS' performance in 2007 to date and the Company's current expectations for the second half, TNS has increased its Fiscal Year 2007 outlook as follows:
- Total revenue growth of 10-13% to $316-$324 million versus $286.2 million for the year ended December 31, 2006, increased from TNS' prior outlook of $312-$320 million;
- Adjusted earnings growth of 16-30% to $22.0-$24.5 million versus $18.9 million, excluding nonrecurring charges, for the year ended December 31, 2006, which includes an estimated $6 million, or $0.15 per share, in incremental interest expense for the year, increased from TNS' prior outlook of $19.5-$21.9 million; and
- Adjusted earnings per share growth of 15-28% to $0.90-$1.00 versus $0.78, excluding nonrecurring charges, for the year ended December 31, 2006, increased from TNS' prior outlook of $0.80-$0.90.
For the Third Quarter of 2007, TNS anticipates:
- Total revenue growth of 11-15% to $81.0-$84.0 million versus $73.2 million for the third quarter of 2006;
- Adjusted earnings of $5.4-$6.4 million versus $2.4 million for the third quarter of 2006; and
- Adjusted earnings per share of $0.22 - $0.26 versus $0.10 for the third quarter of 2006.
Dennis L. Randolph, Jr., Executive Vice President and CFO, commented, "During the second quarter, we generated over 58% growth in adjusted earnings despite incurring $2 million in incremental interest expense versus last year. During the quarter, TNS put new agreements in place that will enable us to partially offset the previously mentioned increase in toll-free access costs in the POS division, improving our consolidated gross margin in the quarter and expanding operating leverage going forward. Further, TNS' increased ability to generate strong cash flow has enabled us to prepay $13 million in debt since the recapitalization four months ago. We have incorporated the second quarter's strong performance, Dialect's revenue and adjusted earnings-neutral contribution and slightly lower interest expense into our revised 2007 outlook, leaving our second half adjusted earnings expectations essentially unchanged. Our first-half performance underscores our confidence in our outlook for the year."
In addition to the results presented in accordance with generally accepted accounting principles, or GAAP, in this press release, the Company presents EBITDA before stock compensation expense, adjusted earnings and adjusted earnings per share, which are non-GAAP measures. EBITDA is determined by taking income from operations and adding back certain non-cash items, including amortization of intangible assets, depreciation and amortization of property and equipment and stock compensation expense. Adjusted earnings is determined by taking pretax income or loss after equity in net loss of unconsolidated affiliates and adding back certain non-cash items, including amortization of intangible assets, stock compensation expense and the write-off of debt issuance costs, and the result is tax effected at a 38% rate. The Company believes that these non-GAAP measures, viewed in addition to and not in lieu of the Company's reported GAAP results, provide useful information to investors because these metrics provide a more focused measure of operating results. These metrics are an integral part of the Company's internal reporting to measure operations of the Company and the performance of senior management. A reconciliation to comparable GAAP measures is available in the accompanying schedule. The non-GAAP measures presented herein may not be comparable to similarly titled measures presented by other companies.
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