June 21, 2011 - 4:45pm EST by
2011 2012
Price: 15.85 EPS $2.10 $2.50
Shares Out. (in M): 25 P/E 7.5x 6.3x
Market Cap (in $M): 404 P/FCF 0.0x 0.0x
Net Debt (in $M): 334 EBIT 0 0
TEV ($): 738 TEV/EBIT 0.0x 0.0x

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We believe shares of TNS are undervalued and will begin to appreciate as the company executes on its guidance and certain catalysts occur over the next few quarters. 

The financial side of this idea is relatively simple. The company has given guidance for calendar 2011 EPS of $2.10 and we believe this is achievable. However, baked into the 2011 guidance is a $.10/share loss from an exciting new acquisition which should positively contribute to earnings next year. Adding this back gets us to core adjusted earnings of $2.20 which we believe is worth at least 10x or $22/share.  In addition, the new Cequint acquisition could potentially be worth another $20/share.

Shares of TNS are currently in the penalty box after missing a few Q's of guidance in 2010 and lowered expectations. While these businesses are somewhat difficult to track, we believe that the problems are mostly under control and, in fact, management makes a good case as to why they can be steady growers again.

The company operates in three segments of data communications providing services to global processors of credit and debit cards, ATM's and secure data/voice networks. Below is a very brief overview of each - we suggest reading the company's 10K for more detailed descriptions.

Point of Sale (POS) - TNS provides data transport to/from payment processors from/to endpoints like credit card machines etc. The US side of this business has been challenged recently but the ROW is growing. Management expects this to grow 1-3% with much of the growth coming from ROW. The US portion of this segment is facing strong headwinds from a new competitor and from potential legislation to lower debit fees.

Financial services (FSD) - Here TNS provided data/voice direct connections to/from financial institutions and its clients. This business was a great growth engine until 2008 and has finally bottomed out. TNS believes this segment could grow 8-10% again with much of that coming from the international side.

Telecommunications services (TSD) - TNS provides network services primarily with their SS7 offering, registry, information/ID (caller ID database) and roam/clearing services.  Some of these segments will see growth (roaming), others decline (SS7, hubs), but overall management expects this segment to grow 4-6% top-line over the long term.

The final piece of the puzzle is Cequint. Cequint was acquired in late 2010 (for $50MM cash plus an earn-out of up to an additional $62MM)  and is a provider of software technology to deliver caller ID to mobile phones. Cequint has two core products, CityID and NameID. CityID provides city and state information to the mobile device and NameID provides the name of person calling. AT&T has already launched CityID for select phones but the company has not yet announced any customers for NameID. The company has guided for Cequint to lose ~$.10/share for 2011 but end the year on at a breakeven run rate.

However, we have recently discovered that NameID is now featured on the T-Mobile website and will be offered at $3.99/month. While we don't believe any T-Mobile phone has the technology yet we assume this means a roll-put will begin shortly. Our estimate is that TNS gets ~40% of the economics and margins should be in the 80% range (software type margins). Over the long term if we assume that just 10% of US mobile customers pick up NameID and pricing is reduced to $0.99/month, this could add ~$4.00/share of EPS (indeed, this feature may well be bundled as part of a carrier's standard monthly services).

It's important to note that a rollout could take a few years as the technology will only be rolled out on new devices but the upside potential here is tremendous. At one point we thought of this as a free option - and while we still believe it's free to investors, the option appears to be in the money.  In any case, if Cequint contributes to earnings in 2012 as management expects, we believe the company can earn $2.50+ of earnings and easily trade at a 12-15x multiple.

The balance sheet has ~$330m of net debt or under 2.5x net debt/ebitda. The company has run at higher debt levels in the past and we believe they are likely comfortable with as much as 3.5x. TNS  repurchased $22m of stock in 2010 and have said they expect to repurchase another $30m in 2011.  If the stock persists at these levels we wouldn't be surprised if the company uses alternatives ways of creating value -  historically the company has bought back stock under a dutch tender and paid out a special dividend in addition to share repurchases. 


In summary:

2011 EPS guidance mid             $2.10

Cequint add back                      $0.10

Core earnings power                 $2.20

Stock Price                               $15.85

Fair value (10x)                        $22.00

Cequint value                           $5.00-20.00(?)

Total TNS                                 $27.00-42.00


Potential return                         70-165%               



POS business continues to decline, particularly pricing pressure in the US

SS7 switch to IP moves faster than expected

Cequint IP breached


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