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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

For the quarterly period ended March 31, 2011

OR

For the transition period from                to                

Commission File Number: 001-32033

TNS, INC.

(Exact name of registrant as specified in its charter)

11480 Commerce Park Drive, Suite 600

Reston, VA 20191

(Address of principal executive offices)

(703) 453-8300

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirement for the past 90 days. Yes x  No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o  No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o  No x

Indicate the number of shares outstanding of each of the issuer’s classes of Common Stock, as of the latest practicable date.

Shares Outstanding as of April 1, 2011

25,465,046 Shares of Common Stock, $0.001 par value

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TNS, INC.

INDEX

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PART I—FINANCIAL INFORMATION

Item 1.  Condensed Consolidated Financial Statements

TNS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(dollars in thousands, except share and per share data)

See accompanying notes to condensed consolidated financial statements (unaudited).

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TNS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

(dollars in thousands, except share and per share data)

See accompanying notes to condensed consolidated financial statements (unaudited).

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TNS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(dollars in thousands)

See accompanying notes to condensed consolidated financial statements (unaudited).

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1. Description of Business and Basis of Presentation

TNS, Inc. (TNS or the Company) is one of the leading global providers of data communications and interoperability solutions. TNS’s global secure network and innovative value added services enable transactions and the exchange of information to many of the world’s leading retailers, banks, payment processors, financial institutions and telecommunication firms.

Founded in 1990 in the United States, TNS has grown steadily and now provides services to customers in over 40 countries across the Americas, Europe and the Asia Pacific region, with our reach extending to many more. TNS has designed and implemented a global data network that supports a variety of widely accepted communication protocols and is designed to be scalable and accessible by multiple methods.

TNS reports its results by revenue generated in three industry verticals.

Payments

TNS’ Payments division delivers a broad portfolio of secure and resilient transaction delivery services as well as innovative value added solutions to many of the world’s leading banks, retailers, Independent Sales Organizations (ISOs), transaction processors and automated teller machine (ATM) deployers. TNS’ Payment Card Industry Data Security Standard (PCI DSS) certified global backbone network and multi-channel payment gateways securely deliver billions of card present and card not present transactions each year from the Point-of-Sale (POS) to their destination. Protocol/message conversion, ATM and POS processing, payment encryption and file settlement form part of the comprehensive payment solutions that TNS provides around the world.

Telecommunication Services

TNS’ telecommunication services division provides innovative communications infrastructure services to fixed, mobile, broadband and VoIP operators around the world. TNS collaborates with customers, sharing expertise, resources and infrastructure to leverage rapidly evolving technologies. TNS’s suite of services includes the largest independent SS7 network in North America, intelligent database and registry services, identity and verification services and hosted roaming and clearing solutions that simplify the Company’s customers’ operations, expand their reach and provide a foundation that helps them facilitate their profitability.

Financial Services

As one of the industry’s leading electronic connectivity solutions, TNS’ Secure Trading Extranet brings together an extensive global financial community of interest and delivers mission-critical low latency connectivity solutions to some of the largest and most prominent financial organizations in the world. The private TNS Secure Trading Extranet ensures low latency to support Direct Market Access, algorithmic trading and market data distribution. Organizations utilizing the TNS community of interest can benefit from a range of value added services, including co-location and hosting services, interoffice WAN solutions and connectivity to the Company’s large community of interest.

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with United States generally accepted accounting principles (GAAP) for interim financial information and in conjunction with the rules and regulations of the Securities and Exchange Commission (SEC). Certain information and note disclosures normally included in the annual financial statements, required by GAAP, have been condensed or omitted pursuant to those rules and regulations, although the Company believes that the disclosures made are adequate to make the information presented not misleading.

In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect adjustments (all of which are of a normal and recurring nature) that are necessary for the fair presentation of the periods presented. The results of operations for the three months ended March 31, 2011 are not necessarily indicative of the results to be expected for any subsequent interim period or for the fiscal year. It is suggested that these unaudited condensed consolidated financial statements be read in conjunction with the Company’s annual report on Form 10-K filed with the SEC on March 16, 2011, which includes audited consolidated financial statements and the notes thereto for the year ended December 31, 2010.

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Capital Structure

During the three months ended March 31, 2011, the Company issued 694 shares of common stock following the exercise of stock options and 158,728 shares of common stock following the vesting of restricted stock units, of which 53,631 shares were surrendered by employees to satisfy payroll tax withholding obligations and held by the Company as treasury shares. The Company retired 1,206,462 treasury shares during the three months ended March 31, 2011. During the three months ended March 31, 2010, the Company issued 69,145 shares of common stock following the exercise of stock options and 301,871 shares of common stock following the vesting of restricted stock units, of which 102,499 shares were surrendered by employees to satisfy payroll tax withholding obligations and held by the Company as treasury shares. The Company retired 205,497 treasury shares during the three months ended March 31, 2010.

On September 1, 2010, the Company’s Board of Directors authorized a share repurchase program of up to $50 million of the Company’s common stock over the period ended March 31, 2012, subject to extension. The Company commenced repurchasing shares on October 1, 2010 and during the fourth quarter of 2010 repurchased 1,050,247 shares for a total cost of $19.1 million. The Company did not repurchase any shares of its common stock during the three month period ended March 31, 2011. The Company’s November 2009 Credit Facility has been amended to authorize such repurchases (see Note 2).

Acquisitions

Cequint, Inc

On September 8, 2010, the Company entered into the Agreement and Plan of Merger (the Merger Agreement) which provided for the merger of Cequint, Inc (Cequint) with and into Thunder Acquisition Corp., a wholly owned subsidiary of the Company formed for the purpose of the acquisition. Cequint provides carriergrade caller ID products and enhanced services to tier-one U.S. mobile operators and has been integrated into the Company’s telecommunication services division. On October 1, 2010, the Company completed the merger in accordance with the terms and conditions of the Merger Agreement. The initial purchase price for the acquisition was $49.8 million consisting of $46.7 million in cash, subject to a post-closing working capital adjustment, and $3.1 million in Company stock issued to certain management shareholders of Cequint. The stock consideration consisted of 178,823 shares at a fair value of $17.11 per share, which included restrictions on transfer that expire as follows: one third of total shares issued on the first anniversary of the date of acquisition; one third of total shares issued on the second anniversary of the date of acquisition; and one third of total shares issued on the third anniversary of the date of acquisition. The purchase price may be adjusted in the future by an additional $52.5 million in cash based upon the achievement of four specific profit-related milestones, during the period commencing on the earlier of June 1, 2011 or the date on which Cequint’s Name ID product is successfully launched with a tier-one U.S. mobile operator and not to extend beyond May 31, 2014 (the Earn-Out Period), for a potential total purchase price of $102.3 million. In addition to the contingent consideration of up to $52.5 million, there is an additional $10.0 million of performance payments which may be payable to certain executives and key personnel, based on the achievement of the same four profit-related milestones. To the extent the additional $10.0 million is payable, it will be recorded as compensation expense as described below.

The four profit-related milestones must be met for two consecutive months during the Earn-Out Period. These criteria are set out in the following table:

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(1)                                  Defined in the Merger Agreement as revenues for such month (excluding any non-recurring revenues) less licensing, depreciation and other direct costs incurred in providing Cequint products and services

(2)                                  Defined in the Merger Agreement as the Monthly Gross Margin for such month less any direct research and development (including capitalized research and development), sales, marketing, finance, operations and indirect costs (including costs allocated to Cequint) incurred in connection with Cequint’s products and services for such month.

(3)                                  For further details in relation to the Agreement and Plan of Merger, please refer to the Form 8-K filed by the Company on September 14, 2010.

As of the acquisition date, the Company recorded a liability of $31.8 million representing the estimated fair value of the contingent purchase consideration of $52.5 million based on a probability weighted scenario approach to determine the likelihood and timing of the achievement of the relevant milestones. In calculating this liability, the Company applied a rate of probability to each scenario, as well as a risk-adjusted discount factor, to derive the estimated fair value of the consideration as of the acquisition date. This fair value is based on significant unobservable inputs, including management estimates and assumptions, and accordingly is classified as Level 3 within the fair value hierarchy prescribed by ASC Topic 820, Fair Value Measurements and Disclosures. This liability will be re-measured each reporting period and changes in the fair market value will be recorded as a separate line item in our consolidated statements of operations. Increases or decreases in the fair value of the contingent consideration liability can result from changes in discount periods and rates, as well as changes in the timing and likely achievement of the relevant milestones. Since the date of acquisition, the Company has recognized a $1.7 million increase in the fair value of the contingent consideration related primarily to the change in the discount period (accretion due to the passage of time).

The potential $10.0 million of performance payments will be recognized in a systematic and rational manner over the Earn-Out Period to the extent it is probable the milestones will be met. These costs will be treated as compensation expense and will be included in operating expenses in the Company’s consolidated statement of operations.

The Company funded the acquisition of Cequint through a new $50 million term loan facility using the accordian feature of the November 2009 Credit Facility (see Note 2). The condensed consolidated statements of operations include the results of the Cequint acquisition from October 1, 2010.  The acquisition of Cequint has been accounted for as a business combination under FASB ASC 805, Business Combinations.

The fair values of the assets acquired and liabilities assumed were determined using various valuation techniques, primarily based on significant inputs that are not observable in the market and therefore represent Level 3 measurements as defined in FASB ASC 820, Fair Value Measurements and Disclosures. Developed technology was valued using the relief from royalty method which values the subject technology by reference to the amount of royalty income that could be generated if the technology were licensed in an arm’s length transaction to a third party. Customer relationship intangibles were valued using the multi-period excess earnings method which is based on the operating profit from existing customer relationships, less applicable charges for the use of assets such as working capital, fixed assets, identified intangible assets and the assembled workforce. Covenants not to compete were valued using the comparison of economic income approach under which the projected cash flows of the business with the covenants in place are compared to the projected cash flows presuming the active competition of the individuals against the Company.

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The purchase price for Cequint was allocated, on a preliminary basis, as follows (in thousands):

Reconciliation of Cequint purchase price to cash consideration, as follows (in thousands):

The amounts allocated to property and equipment are being depreciated on a straight line basis over their weighted average estimated useful lives of 2 to 4 years. The intangible asset related to developed technology is being amortized on a straight line basis over 7 years, the intangible asset related to customer relationships is being amortized on a straight line basis over 17 years and the intangible asset related to covenants not to compete is being amortized on a straight line basis over 5 years. The intangible asset related to covenants not to compete is expected to be deductible for tax purposes. The intangible assets related to developed technology and customer relationships, and the goodwill, are not expected to be deductible for tax purposes.

The weighted average amortization period by each major class of assets and in total is as follows (in years):

The allocation of the purchase price for Cequint has not been finalized as of March 31, 2011 as certain information required to confirm the assumptions used in the initial valuation of the acquired assets and liabilities remains outstanding.

Unaudited pro forma results of operations assuming the Cequint acquisition had taken place at the beginning of the period are not provided because the historical operating results of Cequint were not significant and pro forma results would not be significantly different from reported results for the periods presented.

During the three months ended March 31, 2010, Cequint contributed revenue of $2.6 million and a net loss of $2.8 million. These amounts have been included in the Company’s consolidated statement of operations for the three months ended March 31, 2011. As of March 31, 2011, the Earn-Out Period had not commenced.

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Goodwill, intangible and other long-lived assets

The Company accounts for goodwill and intangible assets in accordance with FASB ASC 350, Intangibles—Goodwill and Other (ASC 350). Under this standard, goodwill and intangible assets deemed to have indefinite lives are not amortized and are subject to annual impairment tests. The Company has elected to perform the impairment test annually as of October 1 of each year. An interim goodwill impairment test is performed if an event occurs or circumstances change between annual tests that would more likely than not reduce the fair value of a reporting unit below its carrying amount. If facts and circumstances indicate goodwill may be impaired, the Company performs a recoverability evaluation based upon a determination of fair value.

In accordance with FASB ASC 360, Property, Plant and Equipment (ASC 360) and ASC 350, the Company reviews long-lived assets including property and equipment, capitalized software development costs and definite-lived intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be fully recoverable. To determine the recoverability of long-lived assets, the Company evaluates the probability that future estimated undiscounted net cash flows will be less than the carrying amount of the assets. If the Company estimates that assets are impaired, the assets are written down to their fair value. For purposes of measuring and recognizing impairment of long-lived assets, the Company will assess whether separate cash flows can be attributed to the individual asset. The Company groups long-lived assets where separately identifiable cash flows are available. In the event that long-lived assets, including intangibles are abandoned or otherwise disposed of, the Company recognizes an impairment charge upon disposition. For the Company’s customer relationship intangible assets, the Company evaluates impairment upon the significant loss of revenue from a customer. The fair value measurement of a customer relationship intangible is primarily based on an income approach using significant inputs that are not observable in the market, therefore representing a Level 3 measurement as defined in FASB ASC 820, Fair Value Measurements and Disclosures. The income approach indicates value for a subject asset based on the present value of cash flows projected to be generated by the asset. Projected cash flow is discounted at a rate of return that reflects the relative risk of achieving the cash flow and the time value of money. During the three months ended March 31, 2010, the Company accelerated amortization on a portion of its customer relationship intangible asset by $1.9 million, from a carrying value of $2.8 million to  a fair value of $0.9 million, due to declines in expected revenues. No impairment or accelerated amortization charges were recorded during the three months ended March 31, 2011.

During the three months ended June 30, 2010, the Company made a decision to phase out $6.2 million of surplus network monitoring assets that are no longer required following the acquisition of the CSG and are therefore being removed from service. The Company recorded additional depreciation and amortization expense related to these assets of $0.7 million during the three months ended March 31, 2011, and $5.5 million during the year ended December 31, 2010. As of March 31, 2011, the net book value of these assets had been written down to zero.

The calculation of fair value in accordance with ASC 350 and 360 contains uncertainties due to judgment in estimates and assumptions, including projections of future income and cash flows, the identification of appropriate market multiples and the choice of an appropriate discount rate. The Company’s estimates of anticipated future income and cash flows used in determining fair value contain uncertainties due to uncontrollable events that could positively or negatively impact the anticipated future economic and operating conditions. Therefore, those estimates could be reduced significantly in the future due to changes in technologies, regulation, available financing, competition or other circumstances. As a result, the carrying amount of the Company’s long-lived assets could be reduced through impairment charges in the future. Additionally, changes in estimated future cash flows could result in a shortening of estimated useful lives for long-lived assets including intangibles.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of certain assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements.  We consider the accounting policies related to revenue and related cost recognition, valuation of goodwill, other intangible assets and contingent consideration related to business combinations, stock based compensation and accounting for income taxes to be critical to the understanding of our results of operations. Critical accounting policies include the areas where we have made what we consider to be particularly subjective or complex judgments in making estimates and where these estimates can significantly impact our financial results under different assumptions and conditions. We prepare our financial statements in conformity with U.S. generally accepted accounting principles. As such, we are required to make certain estimates, judgments and assumptions that we believe are reasonable based upon the information available. These estimates, judgments and assumptions affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the periods presented. Actual results could be different from these estimates.

Revenue Recognition

The Company recognizes revenue when persuasive evidence of an agreement exists, the terms are fixed and determinable, services are performed, and collection is probable. Cash received in advance of revenue recognition is recorded as deferred revenue.

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Payments revenue is derived primarily from per transaction fees paid by the Company’s customers for the transmission of transaction data, through the Company’s network, between payment processors and POS or ATM terminals and monthly recurring fees for broadband and wireless offerings. TSD revenue is derived primarily from fixed monthly fees for call signaling services and per message fees charged for database access, call validation and roaming and clearing services. FSD revenue is derived primarily from monthly recurring fees based on the number of customer connections to and through the Company’s network as well as dedicated bandwidth usage.

The Company considers the criteria established primarily by FASB ASC 605-45, “Reporting Revenue Gross as a Principal versus Net as an Agent,” in determining whether revenue should be recognized on a gross versus a net basis. Factors considered in determining if gross or net basis recognition is appropriate include whether the Company is primarily responsible to the client for the services, has discretion on vendor selection, or bears credit risk. The revenues for which there are gross vs. net considerations include regulatory network charges levied on our customers. Regulatory network charges include messaging signaling unit charges related to the Company’s Signaling System No. 7 (SS7) network and Universal Service Fund charges applicable to interstate telecommunications services approved or imposed by the Federal Communications Commission. The Company believes that the indicators under ASC 605-45 support gross revenue presentation since the Company is the primary obligor in the arrangement and carries the underlying traffic over its data communications network and has sole discretion over whether to include such regulatory charges in the amounts invoiced to customers. Included in revenue for both the three months ended March 31, 2010 and 2011, are $2.9 million related to these pass-through charges and cost of network services.

In certain of our international locations, the Company enters into revenue sharing arrangements with third parties related to data communications services it provides to the payment processing industry. Certain of the Company’s international payment processing customers elect to configure end-user POS terminals with a caller-paid number. In this type of POS terminal configuration, the end-user is responsible for paying a regulated charge for each call to its underlying telecommunications carrier with which it contracts directly. The telecommunications carrier collects the regulated charge from the end-user and bears the credit risk in the transaction. The telecommunications carrier then remits the charge to the Company, withholding a fee for the use of its network in delivering the call to the Company. The Company then will pass these charges through to the payment processor, withholding a portion of the amount as a fee. Based on the Company’s contractual arrangements with its payment processing customers, it has no obligation to remit cash until and unless the cash is remitted to the Company by the telecommunications carrier. The end-user looks to the telecommunications carrier for the provision of data communications access to the POS device and the payment processer for the processing of card-based payments. The Company believes that the indicators under ASC 605-45 support net revenue presentation since the telecommunications provider and payment processor, not the Company, are the primary obligors in the arrangement and the Company does not bear the credit risk. For the three months ended March 31, 2010 and 2011, revenue share was $5.6 million and $8.2 million, respectively.

Incentives granted to new customers or upon contract renewals are deferred and recognized ratably as a reduction of revenue over the contract period to the extent that the incentives are recoverable against the customer’s minimum purchase commitments under the contract. In addition, the Company receives installation fees related to the configuration of the customers’ systems. Revenue from installation fees is deferred and recognized ratably over the customer’s contractual service period, generally three years. The Company performs periodic evaluations of its customer base and establishes allowances for estimated credit losses.

Cost of Network Services

Cost of network services is comprised primarily of telecommunications charges, which include data transmission and database access charges, leased digital capacity charges, circuit installation charges, activation charges and compensation paid to the providers of calling name and line information database records. The cost of data transmission is based on a contract or tariff rate per minute of usage in addition to a prescribed rate per transaction for certain vendors. The costs of database access, circuits, installation and activation charges are based on fixed fee contracts with local exchange carriers and interexchange carriers. The compensation charges paid to the providers of calling name and line information database records are based on a percentage of query revenue generated from the Company’s customers accessing those records. The cost of network services also includes salaries, equipment maintenance and other costs related to the ongoing operation of the Company’s data networks. These costs are expensed by the Company as incurred. The Company recognizes a liability for telecommunications charges based upon network services utilized at historical invoiced rates. Direct costs of installations are deferred and amortized over the customer’s contracted service period, generally three years.

Fair Value of Financial Instruments

The fair value of the Company’s long-term debt is based upon quoted market prices for the same and similar issues giving consideration to quality, interest rates, maturity and other characteristics. As of March 31, 2011, the Company believes

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the carrying amount of its long-term debt approximates its fair value since the variable interest rate of the debt approximates a market rate.

Stock-Based Compensation

The Company accounts for stock-based compensation under FASB ASC 718, Compensation-Stock Compensation. FASB ASC 718 requires all stock-based compensation to employees be measured at fair value and expensed over the requisite service period and also requires an estimate of forfeitures when calculating compensation expense.

Stock-based compensation expense has been included in the following categories in the accompanying condensed consolidated financial statements of operations (in thousands):

As of March 31, 2011, there was a total of $9.3 million of unrecognized compensation cost related to stock-based awards, which is expected to be recognized over a weighted average period of approximately two years.

Time-Vested Awards

Time-vested awards are subject to a vesting period determined at the date of the grant, generally in equal installments over three or four years. The Company uses the Black Scholes option pricing model to determine the grant date fair value of any time-vested stock options. The Company uses the market price of the Company’s stock on the date of grant to determine the fair value of any time-vested restricted stock units. The Company recognizes compensation cost on these time-vested awards in equal installments over the vesting period.

During the three months ended March 31, 2011 the Company granted 178,400 restricted stock units at a weighted average estimated fair value of $18.43. During the three months ended March 31, 2010, the Company granted 669 stock options and 11,561 restricted stock units at weighted average estimated fair values of $11.43 and $24.02, respectively. As of March 31, 2011, there was a total of $8.7 million of unrecognized compensation expense related to these awards, which is included in the $9.3 million total unrecognized compensation cost mentioned above.

Performance-Based Awards

Performance-based awards are tied to the Company’s annual performance against pre-established internal targets for revenues and adjusted earnings per share, based upon the Company’s actual performance over the performance period. The Company uses the Black Scholes option pricing model to determine the grant date fair value of any performance-based stock options. The Company uses the market price of the Company’s stock on the date of grant to determine the fair value of any performance-based restricted stock units. Performance-based awards are also subject to vesting requirements, and generally vest in installments over three or four years. Compensation cost is based on the expected payout level that will be achieved and is adjusted in subsequent periods as changes in the estimates occur until the performance criteria have been satisfied. The Company recognizes compensation cost on these performance based awards using an accelerated attribution method.

In April 2009, the Company made certain long-term performance-based stock compensation awards (the 2009 Equity Performance Awards). The 2009 Equity Performance Awards were granted under the Company’s 2004 Long Term Incentive Plan. Based upon the Company’s performance in 2009, the results of which were approved by the Company’s board of directors in February 2010, the plan participants earned 100% of the potential payout under the Company’s 2009 Equity Performance Awards. The total number of awards issued under the Company’s 2009 Equity Performance Awards was 311,500 restricted stock units which represented 100% of an employee’s target payout. The weighted average grant date fair value of restricted stock units granted was $16.85. As of March 31, 2011, there was a total of $0.5 million of unrecognized compensation expense related to these performance based awards which is included in the $9.3 million total unrecognized compensation cost mentioned above.

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In February 2010, the Company made certain long-term performance-based stock compensation awards (the 2010 Equity Performance Awards). The 2010 Equity Performance Awards were granted under the Company’s 2004 Long Term Incentive Plan. The total number of awards that would be issued under the Company’s 2010 Equity Performance Awards, assuming that the target payout level was achieved, would be 235,086 restricted stock units. Based on forecast achievement levels, the Company expects to award 8,104 restricted stock units. The potential payout under the 2010 Equity Performance Awards will range from 0% to 150% of an employee’s target payout. The weighted average grant date fair value of restricted stock units granted was $23.66. As of March 31 2011, there was a total of $0.1 million of unrecognized compensation expense related to these performance based awards which is included in the $9.3 million total unrecognized compensation cost mentioned above.

Income Taxes

The Company accounts for income taxes in accordance with FASB ASC 740, Income Taxes. Under FASB ASC 740, deferred tax assets or liabilities are computed based upon the difference between financial statement and income tax bases of assets and liabilities using the enacted marginal tax rate. The Company provides a valuation allowance on its net deferred tax assets when it is more likely than not that such assets will not be realized. Deferred income tax expense or benefits are based upon the changes in the underlying asset or liability from period to period.

Effective January 1, 2007, the Company adopted an amendment to FASB ASC 740, Income Taxes, which prescribes a method of recognition and measurement of a tax position taken, or expected to be taken, in a tax return, and provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. The adoption of the amendment did not result in a cumulative adjustment to the Company’s accumulated deficit.

The Company’s effective tax rate for the three months ended March 31, 2010 and 2011 of 75.4% and 47.7%, respectively, differs from the U.S. federal statutory rate primarily due to the application of a valuation allowance against certain U.S. tax attributes, and profits of our international subsidiaries being taxed at rates different than the U.S. federal statutory rate.

With few exceptions, the Company remains subject to examination by U.S. Federal, state, local and foreign tax authorities for tax years 2003 through 2010.

2. Long-term Debt

Debt consists of the following (in thousands):

November 2009 Credit Facility

On November 19, 2009 the Company entered into a new secured credit facility (the November 2009 Credit Facility) and refinanced the May 2009 Credit Facility primarily to take advantage of a more favorable interest rate environment. The November 2009 Credit Facility initially consisted of a senior secured term loan facility in an aggregate principal amount of $325 million (the “Term Facility”) and a senior secured revolving credit facility in an aggregate principal amount of $75 million (the “Revolving Facility”). The November 2009 Credit Facility included the option to request additional Term Loan Commitment and Revolving Loan Commitment up to an aggregate amount of $100 million (the accordion feature) with the aggregate of any new Revolving Loan Commitment not exceeding $50 million.

On October 1, 2010 the Company entered into an amendment related to the November 2009 Credit Facility in connection with the closing of the acquisition of Cequint, Inc. (see Note 1). The amendment provided for a new term loan in an aggregate principal amount of $50 million (the “Incremental Term Loan”), an increase to the existing Revolving Facility by an aggregate principal amount of $25 million to a total of $100 million and amends certain debt covenants and restricted payments baskets including those related to share repurchases and acquisitions. The Incremental Term Loan was incurred to

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finance the purchase price for the acquisition, to pay fees, costs and expenses relating to the acquisition and for working capital purposes.

Payments on the Term Facility and Incremental Term Loan are due in quarterly installments over the term, with the remainder payable on November 18, 2015. Voluntary prepayments on the Term Facility and Incremental Term Loan are applied as directed by the Company. The outstanding balance on the Revolving Facility is due on November 18, 2014. In February 2011, the Company made repayments of $15 million on the Revolving Facility. At March 31, 2011, borrowing availability under the Revolving Facility was $65.2 million.

The total scheduled remaining payments on the November 2009 Credit Facility, which includes the Incremental Term Loan and additional amounts borrowed from the Revolving Facility to date are as follows (in thousands):

Interest on the outstanding balances under the Revolving Facility is payable, at the Company’s option, at a rate equal to the higher of the prime rate announced by SunTrust Bank, the federal funds rate plus 50 basis points, or the one-month London Interbank Offered Rate (“LIBOR”) rate plus 100 basis points (the “Base Rate”), in each case, plus a margin of 3.0% or at LIBOR, plus a margin of 4.0%. Interest on the outstanding balances under the Term Facility and Incremental Term Loan is payable, at the Company’s option, at the Base Rate plus a margin of 3.0%, or at LIBOR plus a margin of 4.0%. Additionally, in no event will the LIBOR rate be less than 2.0%. The applicable margins on the Revolving Facility, Term Facility and Incremental Term Loan are subject to step-downs based on the Company’s leverage ratio. The Revolving Facility is subject to an annual commitment fee in an amount equal to between 0.375% and 0.50% (based on the Company’s leverage ratio) per annum multiplied by the amount of funds available for borrowing under the Revolving Facility. Interest payments on the November 2009 Credit Facility are due biweekly, monthly, bimonthly or quarterly at the Company’s option.The terms of the November 2009 Credit Facility require the Company to make an annual prepayment in an amount that may range from 0% to 50% of the Company’s “excess cash flow” (as such term is defined in the Credit Agreement) depending on the Company’s Leverage Ratio for any fiscal year. Prepayments are also required to be made in other circumstances, including upon asset sales and sale-leaseback transaction in excess of $2 million. The Company is permitted to repay borrowings under the November 2009 Credit Facility at any time in whole or in part without premium or penalty.

The obligations under the November 2009 Credit Facility are unconditionally and irrevocably guaranteed, subject to certain exceptions, by the Company and each existing and future direct and indirect domestic subsidiary of the Company. In addition, the November 2009 Credit Facility is secured, subject to certain exceptions, by a first priority perfected security interest in substantially all of the present and future property and assets (real and personal) of the Company and a pledge of 100% of the Company’s capital stock of its respective domestic subsidiaries and 65% of the Company’s capital stock of its respective first-tier foreign subsidiaries.

The terms of the November 2009 Credit Facility require the Company to comply with financial and nonfinancial covenants, including maintaining a maximum specified leverage ratio at the end of each fiscal quarter and a minimum consolidated fixed charge coverage ratio and complying with specified annual limits on capital expenditures. As of March 31, 2011, the Company is required to maintain a leverage ratio of less than 3.25 to 1.0. The Company’s leverage ratio as of March 31, 2011 was 2.8 to 1.0. The maximum leverage ratio declines over the term of the November 2009 Credit Facility. Also the Company is required to maintain a consolidated fixed charge coverage ratio of not less than 1.2 to 1.0. The Company’s consolidated fixed charge coverage ratio as of March 31, 2011 was 1.7 to 1.0. The November 2009 Credit Facility also contains nonfinancial covenants that restrict some of the Company’s corporate activities, including its ability to dispose of assets, incur additional debt, pay dividends, create liens, make investments, make capital expenditures and engage in specified transactions with affiliates. Effective October 1, 2010, the restricted payments covenant was amended to permit stock repurchases of up to $50 million until 18 months after this date, with such repurchases exempt from the minimum consolidated fixed charge coverage ratio covenant. Thereafter, stock repurchases are subject to a minimum required excess cash flow availability of $40 million and if the Company has a pro forma maximum leverage ratio of greater than 2.50 to 1.00, the Company is permitted to purchase shares at an amount equal to 50% of cumulative reported excess cash flow. If the Company has a pro forma maximum leverage ratio of 2.50 to 1.00 or greater but less than 3.00 to 1.00, the Company is

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permitted to purchase shares at an amount equal to the lesser of $30 million and 50% of cumulative reported excess cash flow, or if the Company has a pro forma maximum leverage ratio of 3.00 to 1.00 or greater, the Company is permitted to purchase shares at an amount equal to the lesser of $20 million and 50% of cumulative reported excess cash flow. Non compliance with any of the financial or nonfinancial covenants without cure or waiver would constitute an event of default under the November 2009 Credit Facility. An event of default resulting from a breach of a financial or nonfinancial covenant may result, at the option of the lenders, in an acceleration of the principal and interest outstanding, and a termination of the Revolving Facility. The November 2009 Credit Facility also contains other customary events of default (subject to specified grace periods), including defaults based on events of bankruptcy and insolvency, nonpayment of principal, interest or fees when due, breach of specified covenants, change in control and material inaccuracy of representations and warranties. The Company was in compliance with the financial and non-financial covenants of the November 2009 Credit Facility as of March 31, 2011.

In connection with the closing of the November 2009 Credit Facility, the Company incurred approximately $2.9 million in financing costs. In connection with the closing of the amendment to the November 2009 Credit Facility in October 2010, the Company incurred approximately $1.9 million in financing costs. These financing costs were deferred and are being amortized using the effective interest method over the remaining life of the November 2009 Credit Facility.

3. Comprehensive Income (Loss)

The components of comprehensive income (loss), net of tax effect are as follows (in thousands):

4. Net Income Per Common Share

FASB ASC 260, Earnings Per Share, requires the presentation of basic and diluted earnings per share. Basic earnings per common share is computed by dividing income attributable to common stockholders by the weighted average number of common shares outstanding for the period. The diluted earnings per common share data is computed using the weighted average number of common shares outstanding plus the dilutive effect of common stock equivalents, unless the common stock equivalents are anti-dilutive.

The treasury stock effect of options to purchase 602,282 shares of common stock that were outstanding as of March 31, 2011, and options to purchase 41,400 shares of common stock that were outstanding as of March 31, 2010 were excluded from the computation of diluted net income per common share for the three months ended March 31, 2011 and 2010, respectively, as their effect would have been anti-dilutive.

The Company’s basic and diluted earnings per common share are presented below (amounts in thousands except number of shares and per share amounts).

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5. Segment Information

The Company’s management evaluates revenues for three business divisions: telecommunication services, payments and financial services. The Company operates as one reportable segment since the chief operating decision maker allocates resources based on the consolidated financial results.

Revenue for the Company’s three business divisions is presented below (in thousands):

Management evaluates the Company’s performance on EBITDA before stock compensation expense. The Company defines EBITDA before stock compensation expense as net income before depreciation, amortization, stock compensation expense, interest expense, other income (expense), equity in net loss of unconsolidated affiliate, contingent consideration expense and provision for income taxes. EBITDA before stock compensation expense is not a generally accepted accounting principle measure, but rather a measure employed by management to view operating results. The Company believes that this measure, viewed in addition to and not in lieu of the Company’s reported GAAP results, provides additional useful information to the investors regarding the Company’s performance and overall operating results exclusive of selected significant non-cash items. This metric is frequently requested by investors and is also an integral part of the Company’s internal reporting to measure the performance of senior management. The Company’s definition of EBITDA before stock compensation expense may not be comparable to similarly titled measures used by other entities.

EBITDA before stock compensation expense was approximately $31.6 million for the three months ended March 31, 2010 and 2011. Management evaluates performance before consideration of certain intercompany transactions. Accordingly, these transactions are not reflected in EBITDA. In addition, certain corporate expenses are reflected consistent with information reviewed by our chief operating decision maker.

EBITDA before stock compensation expense differs from net income reported in the condensed consolidated statements of operations as follows (in thousands):

Geographic Information

The Company sells its services through foreign subsidiaries in Australia, Austria, Bermuda, Canada, France, Germany, Hong Kong, India, Ireland, Italy, Japan, Malaysia, Mexico, the Netherlands, New Zealand, Poland, Romania,

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Singapore, South Korea, Spain, Sweden, Thailand, Turkey and the United Kingdom. Information regarding revenues and long-lived tangible assets attributable to each geographic region is stated below.

The Company’s revenues were generated in the following geographic regions (in thousands):

The Company’s long-lived assets, including goodwill and intangible assets, were located as follows (in thousands):

6. Litigation and Claims

We are from time to time a party to legal proceedings, which arise in the normal course of business. We are not currently involved in any material legal proceedings or litigation, and management is not aware of any legal proceedings or material litigation threatened against us that could have a material adverse effect on the financial condition or the future operating results of the Company.

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Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

You should read the following discussion of the financial condition and results of operations of TNS, Inc. in conjunction with the consolidated financial statements and the related notes included in our annual report on Form 10-K filed with the SEC on March 16, 2011 and available directly from the SEC at www.sec.gov and the condensed consolidated financial statements and the related notes of TNS, Inc., included elsewhere in this quarterly report.

There are statements made herein which may not address historical facts and, therefore, could be interpreted to be forward-looking statements within the meaning of The Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on current expectations, forecasts and assumptions that are subject to risks and uncertainties that could cause actual results to differ materially from those set forth in, or implied by, the forward-looking statements. The Company has attempted, whenever possible, to identify these forward-looking statements using words such as “may,” “will,” “should,” “projects,” “estimates,” “expects,” “plans,” “intends,” “anticipates,” “believes,” and variations of these words and similar expressions. Similarly, statements herein that describe the Company’s business strategy, prospects, opportunities, outlook, objectives, plans, intentions or goals are also forward-looking statements. Actual results may differ materially from those indicated by such forward-looking statements as a result of various important factors, including: the Company’s reliance upon a small number of customers for a significant portion of its revenue; competitive factors such as pricing pressures; increases in the prices charged by telecommunication providers for services used by the Company; the Company’s ability to grow its business domestically and internationally by generating greater transaction volumes, longer than expected sales cycles, customer delays in migration, acquiring new customers or developing new service offerings; fluctuations in the Company’s quarterly results because of the seasonal nature of the business and other factors outside of the Company’s control, including fluctuations in foreign exchange rates and the continuing impact of the current economic conditions; the Company’s ability to identify, execute or effectively integrate acquisitions; uncertainties related to the updated international tax planning strategy implemented by the Company; the Company’s ability to adapt to changing technology; the Company’s ability to refinance its senior secured credit facility and its ability to borrow funds in amounts sufficient to enable it to service its debt or meet its working capital and capital expenditure requirements; additional costs related to compliance with any regulatory changes such as Securities and Exchange Commission (SEC) rule changes or other corporate governance issues; and other risk factors described in the Company’s annual report on Form 10-K filed with the SEC on March 16, 2011. In addition, the statements in this quarterly report are made as of the date of this filing. The Company expects that subsequent events or developments will cause its views to change. The Company undertakes no obligation to update any of the forward-looking statements made herein, whether as a result of new information, future events, changes in expectations or otherwise. These forward-looking statements should not be relied upon as representing the Company’s views as of any date subsequent to the date of this filing. The forward-looking statements in this document are intended to be subject to the safe harbor protection provided by Sections 27A of the Securities Act and 21E of the Exchange Act.

Executive Overview

Financial Highlights

Total revenues increased $4.1 million, or 3.2%, to $133.7 million for the three months ended March 31, 2011, from $129.6 million for the three months ended March 31, 2010. Foreign exchange translation increased revenues by $1.2 million. Excluding the positive effect of foreign exchange rates, total revenues increased $2.9 million, or 2.3%, to $132.5 million for the three months ended March 31, 2011.

Revenues from the telecommunication services division increased $3.0 million, or 4.6%, to $68.5 million for the three months ended March 31, 2011, from $65.5 million for the three months ended March 31, 2010. Revenue growth in this division was primarily driven by the contribution of revenues from the acquisition of Cequint, Inc., a transaction which we closed on October 1, 2010 (see Note 1 to the condensed consolidated financial statements included elsewhere in this Quarterly Report).

In connection with the Communication Services Group (CSG) acquisition, which we closed on May 1, 2009, we acquired several customer contracts that contained pricing

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in excess of then current market prices. We re-negotiated these contracts to current market rates during the second half of 2009 and through the first quarter of 2010. In addition, through the CSG acquisition we acquired certain assets that enabled us to compete directly for caller-ID services rather than using a third party service provider. As a result, the third-party provider with whom we contracted to deliver caller-ID services to our customers prior to the CSG acquisition began to remove its traffic from our network during the first quarter of 2009, completing the migration by the end of the first quarter of 2010. We also subsequently lost a customer to this provider in May 2010. Finally, we acquired a contract through the CSG acquisition to provide services to Alltell which, prior to our acquisition of CSG in May 2009, had been acquired by Verizon in January 2009. Verizon completed the migration of the services we provided Alltell off of our network by the end of the first quarter of 2010.

As a result of the above mentioned factors, the revenues that we reported in our telecommunication services division decreased from the third quarter of 2009 through the second quarter of 2010 (see table below). We believe we have taken the appropriate actions to stabilize the revenues in this division and have made and will continue to make selected investments in our wireless roaming and clearing platform, IP registry platform, identity and verification services and next-generation IP network services that we believe will help drive future revenue growth in this division. In addition, by the end of 2010 we substantially had completed the integration of the legacy CSG network into our network and stabilized and enhanced the roaming and clearing and IP registry platforms that we acquired through the CSG acquisition. As an example, revenues from our roaming and clearing products in the first quarter of 2011 increased $1.6 million, or 59.4%, compared to the year-ago period.  As part of our strategy to develop solutions that drive revenue for our telecommunications carrier customers, we acquired Cequint and have integrated this business into our telecommunication services division. Cequint provides carrier—grade caller ID products and enhanced services in partnership with top U.S.-based mobile operators through an embedded software client on certain of our customers’ mobile phone handsets. Cequint will leverage the caller-ID capabilities that we provide to wireline operators through our identity and verification services.

The table below shows the revenue we recognized in our telecommunication services division from the third quarter of 2009 (the first full quarter of the inclusion of CSG’s results) through the first quarter of 2011 (in thousands):

Revenues from the payments division increased $0.9 million, or 1.9%, to $48.6 million for the three months ended March 31, 2011, from $47.7 million for the three months ended March 31, 2010. The positive effect of foreign exchange translation on a year-over-year basis was $0.9 million. Excluding the positive effect of foreign exchange rates, payments revenue was flat with the year ago period. We continued to see growth in our European markets driven primarily by growth in our IP-based network services in the UK and market share gains  for our network services, primarily dial-up connectivity, in Italy, Spain, France and Romania.  This growth was offset by declines in our North American  and Asia Pacific businesses. In North America, as we have previously disclosed, we continue to see declines in our dial-up network service as a result of increased competition and transaction volume declines. These declines were partially offset by growth in our IP-based network services and card-not present payment gateway, which we introduced in this region in the second half of 2010.  In Asia Pacific, we are facing challenges to our business in the first half of 2011 primarily because, as we have previously disclosed our telecommunications partner in the region lost one of its larger dial-up customers and they migrated the traffic off of our network during the second half of 2010. This decline was partially offset by growth in our IP-based network services.  Our card-not-present payment gateway services in this region decreased slightly in the period from lower custom development revenue as we continue to migrate our business model towards a more  transaction-based and recurring fee model. As part of our strategy to accelerate growth in this division, we have made selected investments in our IP-based network services as well as our payment gateway offerings and plan to introduce these product sets across all of our key markets over time. For example, in the second half of 2010 we introduced our card-not-present payment gateway into the North American market and plan to introduce this offering in Europe in the second half of 2011.

Revenues from the financial services division increased $0.2 million, or 1.2%, to $16.6 million for the three months ended March 31, 2011, from $16.4 million for the three months ended March  31, 2010. Foreign exchange translation increased revenues by $0.2 million for the three months ended March 31, 2011. Excluding the positive effect of foreign exchange rates, financial services division revenue was flat.  Throughout 2010 we faced challenges in our

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financial services business following the economic downturn in the financial services industry in 2009 which resulted in consolidation among our existing customer base as well as a reduction in the number of market participants (e.g., hedge funds) that utilize our secure trading extranet. In addition, due to changes in the competitive environment for providing low-latency market data exchange services in North America, we have experienced significant declines for this service offering. These factors resulted in year-over-year revenue declines of $1.9 million in North America and $0.4 million in the UK during the first quarter of 2011. Excluding these declines, revenues increased $1.5 million in North America, $0.4 million in Europe and $0.4 million in Asia Pacific. Revenue increased in North America primarily through growth in endpoints and bandwidth based services to participants in the foreign exchange markets. Revenue growth in Europe was primarily driven by market share gains and the introduction of our bandwidth based services offset by price compression for market data services. Revenue growth in Asia Pacific was primarily driven by our expansion efforts to capture the growth opportunities in this region for electronic trading.

Net income decreased $0.4 million to $0.7 million for the three months ended March 31, 2011 from $1.1 million for the same period in 2010. Diluted net income per common share was $0.03 for the three months ended March 31, 2011 compared to $0.04 for the same period in 2010. Adjusted net income (a non-GAAP measure) decreased $4.6 million to $10.4 million for the three months ended March 31, 2011 compared to $15.0 million for the same period in 2010. Adjusted net income per common share (a non-GAAP measure) was $0.40 per share for the three months ended March 31, 2011 compared to $0.56 per share for the same period in 2010. Included in other income (expense), net in our consolidated statements of operations are a pre-tax loss of $1.1 million for the three months ended March 31, 2011 compared to a pre-tax gain of $2.6 million for the same period in 2010 related to the revaluation of certain foreign currency denominated assets and liabilities.  EBITDA before stock compensation expense (a non-GAAP measure) was $31.6 million for both the three months ended March 31, 2011 and 2010.

Adjusted net income and related per share amounts, EBITDA before stock compensation expense and revenue comparisons at constant exchange rates are not measures prepared in accordance with U.S. GAAP. See Additional Information for an explanation of management’s use of these non-GAAP measures. The following is a reconciliation of our results of operations prepared in accordance with U.S. GAAP to those adjusted results considered by management:

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Business Overview

We are an international data communications company which provides network managed connectivity, data communications and value added services to many of the world’s leading retailers, banks and payment processors. We are also a leading provider of secure data network services to the global financial services industry. We operate the largest unaffiliated Signaling System No. 7 network in the United States capable of providing services nationwide, and we utilize this network to provide call signaling and database access services to the domestic telecommunications industry. We also provide roaming and clearing services to both domestic and international mobile phone operators. Our data communications services enable secure and reliable transmission of time-sensitive, transaction-related information critical to our customers’ operations. Our customers outsource their data communications requirements to us because of our substantial expertise, comprehensive customer support and cost-effective services. We provide services to customers in the United States and increasingly to international customers in over 40 countries, including Canada and Mexico and countries in Europe, Latin America and the Asia-Pacific region. We currently maintain operations and/or employees in 26 countries.

We provide services through our data network, which is designed specifically for transaction oriented applications. Our network supports a variety of widely accepted communications protocols and is designed to be scalable, interoperable and accessible by multiple methods, including dial-up, dedicated, wireless, fixed broadband and internet connections.

We generate revenues through three business divisions:

·                  Telecommunication services.  Our telecommunication services division provides innovative communications infrastructure services to fixed, mobile, broadband and VoIP operators around the world. We collaborate with customers, sharing our expertise, resources and infrastructure to leverage rapidly evolving technologies. Our suite of services includes a reliable, nationwide SS7 network, intelligent database and registry services, identity and verification services, and hosted roaming and clearing solutions that simplify our customers’ operations, expand their reach and provide a foundation that helps them increase their profitability.

·                  Payments.  We deliver a broad portfolio of secure and resilient transaction delivery services as well as innovative value added solutions to many of the world’s top banks, retailers, ISOs, transaction processors and ATM deployers. Our PCI DSS certified global backbone network and range of payment gateways securely deliver billions of card present and card not present transactions each year from the Point-of-Sale (POS) to their destination. Protocol/message conversion, ATM and POS processing, payment encryption and file settlement form part of the comprehensive payment solutions that we provide around the world.

·                  Financial services.  As one of the industry’s leading electronic connectivity solutions, our Secure Trading Extranet brings together an extensive global financial community of interest and delivers mission-critical low latency connectivity solutions to some of the largest and most prominent financial organizations in the world. Our private Secure Trading Extranet provides low latency to support Direct Market Access, algorithmic trading and market data distribution. Organizations utilizing our network can benefit from a range of value added services, including co-location and hosting services, interoffice WAN solutions and connectivity to our large community of interest.

Our most significant expense is cost of network services, which is comprised primarily of the following: telecommunications charges, including data transmission and database access, leased digital capacity charges, circuit installation charges and activation charges; salaries and other costs related to supporting our data platforms and systems; and compensation paid to providers of calling name and line information database records. The cost of data transmission is based on a contract, or in the United States potentially a tariff rate per minute of usage in addition to a prescribed rate per transaction for some vendors. The costs of database access, circuits, installation charges and activation charges are based on fixed fee contracts with local exchange carriers and interexchange carriers. The cost of accessing database records from external providers is based on a per query fee for the use of that data. The compensation charges paid to providers of calling name and line information database records are based on a percentage of query revenue generated from our customers accessing those records. Depreciation expense on our network equipment and amortization of developed technology is excluded from our cost of network services and is included in depreciation and amortization of property and equipment and amortization of intangible assets in our consolidated statements of operations.

Our engineering and development expenses include salaries and other costs related to product development, engineering, hardware maintenance and materials. The majority of these costs are expensed as incurred, including costs

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related to the development of internal use software in the preliminary project, the post-implementation and operation stages. Development costs we incur during the software application development stage are capitalized and amortized over the estimated useful life of the developed software.

Our selling, general and administrative expenses include costs related to sales, marketing, administrative and management personnel, as well as external legal, accounting and consulting services.

Acquisition of Cequint, Inc.

On October 1, 2010, we completed the acquisition of Cequint, Inc. (Cequint) in accordance with the terms and conditions of the Agreement and Plan of Merger dated September 8, 2010 (see Note 1). The purchase price, subject to working capital adjustments, included an initial payment of $49.8 million, consisting of $46.7 million in cash and $3.1 million (178,823 shares) in TNS common stock issued to certain Cequint shareholders, and may be adjusted in the future for a potential additional $52.5 million in cash based upon the achievement of four specified profit milestones not to extend past May 31, 2014, for a potential total purchase price of $102.3 million. As part of the $49.8 million purchase price, Cequint paid off approximately $6.8 million in debt and we assumed approximately $0.4 million in cash. We funded the transaction through a new $50.0 million term loan facility using a portion of the accordion feature as part of our November 2009 Credit Facility (see Note 2). Cequint provides carrier—grade caller identification products and enhanced services to top U.S.-based mobile operators. We have integrated Cequint into our telecommunication services division. This acquisition has been accounted for as a business combination under FASB ASC 805, Business Combinations.

Share Repurchase Plan

On September 1, 2010 our Board of Directors approved a share repurchase plan authorizing the repurchase of a maximum of $50.0 million of our common stock over the period expiring March 31, 2012. We commenced repurchasing shares on October 1, 2010 and as of May 4, 2011, have repurchased 1,050,247 shares for a total of approximately $19.1 million. The company did not repurchase any shares of its common stock during the three months ended March 31, 2011.

Results of Operations

We completed the acquisition of Cequint on October 1, 2010, and have included its results since that date in our statement of operations for the three months ended March 31, 2011. Therefore, our results for the three months ended March 31, 2010 are not comparable. The following table sets forth, for the periods indicated selected statement of operations data (dollars in thousands):

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Three months ended March 31, 2011 compared to the three months ended March 31, 2010

Revenues.  Total revenues increased $4.1 million, or 3.2%, to $133.7 million for the three months ended March 31, 2011, from $129.6 million for the three months ended March 31, 2010. The positive effect of foreign exchange translation on a year-over-year basis was $1.2 million. Excluding the effect of foreign exchange rates, total revenues increased $2.9 million, or 2.3%, to $132.5 million for the three months ended March 31, 2011.

We generate revenues through three business divisions; the telecommunication services division (TSD), the payments division, and the financial services division (FSD).

Telecommunication services division.  Revenues from the telecommunication services division increased $3.0 million, or 4.6%, to $68.5 million for the three months ended March 31, 2011, from $65.5 million for the three months ended March 31, 2010. Included in first quarter 2011 were revenues of $2.6 million from Cequint, Inc. Excluding the contribution from Cequint, revenues increased 0.6%, or $0.4 million, as follows:

·                  Revenue from identity and verification services decreased $1.3 million, due to the following: $1.2 million from the loss of caller name storage contracts; $0.7 million due to a loss by one of TNS’ caller name wireline customers of a portion of its wholesale business; $0.3 million in revenue from fraud and validation services due to the loss of a customer which became a competitor following the acquisition of the CSG business; and $0.1 million primarily due to price concessions on certain contract renewals. This was partially offset by an increase of $1.1 million related to increased usage of caller name services.

·                  Revenue from network services increased $0.3 million, due to $2.2 million related to increased demand for signaling services from new and existing customers, which was partially offset by a reduction of $1.9 million due to price concessions on the renewal of certain customer contracts.

·                  Revenue from registry services decreased $0.1 million, due to $0.4 million related to lower volumes in our local number portability and service order administration businesses which was partially offset by increases of $0.2 million from increased demand for IP registry services and $0.1 million from toll-free number database services.

·                  Revenue from roaming and clearing products increased $1.6 million, due to market share gains and increased demand for services from new and existing customers.

Future revenue growth in the telecommunication services division depends on a number of factors including the number of database access queries we transport, the number of call signaling routes our customers purchase, and the success of our new product offerings, which potentially may be offset by customers seeking pricing discounts due to industry consolidation or other reasons, as well as the successful integration of the business acquired through our purchase of Cequint (see Note 1).

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Payments division.  Revenue from the Payments Division increased $0.9 million, or 1.9%, to $48.6 million for the three months ended March 31, 2011 from $47.7 million for the three months ended March 31, 2010.  The positive effect of foreign currency translation on a year-over-year basis was $0.9 million. Excluding the effect of foreign exchange rates, revenues remained flat at $47.7 million as follows:

Network services:

·                  Europe: revenue increased $2.1 million due to $1.1 million in market share gains and increased demand for our IP-based network services, primarily in France, Italy, Spain and Romania and $1.0 million in the UK due to growth in demand for IP-based network services.

·                  Asia Pacific: revenue decreased $0.4 million due to a decrease of $1.0 million relating to the loss by one customer of a significant portion of its dial business, as previously disclosed, partially offset by an increase of $0.6 million due to increased demand for our IP-based network services.

·                  North America: revenue decreased $1.1 million due to a decrease of $1.4 million relating to the dial business resulting from lower average transaction pricing and transaction volume declines related to certain dial customers as previously disclosed, partially offset by an increase of $0.3 million in IP-based network services. We have recently seen an increase in the competitive environment for our dial-up services in the United States and as a result in 2011 it is likely our revenue per transaction will decrease and depending upon the number of dial-up transactions we transport our dial-up revenues may continue to decrease.  We currently estimate the impact of these pricing concessions to reduce our annual U.S. dial-up revenues by $4 million – $5 million in 2011.

Payment gateway services:

·                  Europe: our payment gateway revenue in Europe is derived from card-holder present services provided through our UK subsidiary. This revenue remained flat on a year-over-year basis.

·                  Asia Pacific: revenue decreased $0.1 million, due to a decrease of $0.6 million in development revenue partially offset by increased transaction volumes of $0.5 million from our cardholder-not-present services.

·                  North America: revenue increased $0.1 million due to the launch of our North American cardholder-not present platform in the third quarter of 2010.

ATM processing and other services:

·                  Europe: revenue, which is derived from our ATM business in the UK, remained flat on a year-over-year basis.

·                  North America: revenue decreased $0.6 million due to the following: $0.2 million from our ATM software product which we ceased selling, as previously disclosed; and $0.4 million due a decision made by one of our customers in the second quarter of 2010 to exercise its right under its contract to in-source its processing services. This resulted in the sale of this customer’s dedicated processing platform for $1.4 million which was recognized in the three months ended June 30, 2010.

Future revenue growth in the payments division depends on a number of factors including the success of our IP-related network services and payment gateway applications, the success of our payments products in countries we have recently entered, the total number of dial-up transactions we transport and global economic conditions. Smaller merchants, which represent a large portion of the user base for our dial-up services in the U.S., in our opinion have been more adversely impacted by recent global economic conditions than the larger merchants and may take longer to recover if and when the economy improves. We have continued to see a reduction in the growth rates of our dial-up transaction volumes in many of the markets in which we operate, which we primarily attribute to the overall weakness of the global economy.

Financial services division.  Revenues from the financial services division increased $0.2 million, or 1.2%, to $16.6 million for the three months ended March 31, 2011, from $16.4 million for the three months ended March 31, 2010. The positive effect of foreign exchange translation on a year-over-year basis was $0.2 million. Excluding the impact of foreign exchange rates, financial services revenue remained flat at $16.4 million as follows:

·                  Europe: revenue was flat year over year due to market share gains of $0.5 million which were partially offset by $0.4 million related to the loss of endpoints and market data access services in the UK, and $0.1 million due to price compression of market data services in Europe.

·                  Asia Pacific: revenue increased $0.4 million, due to the continued expansion of the number of customer endpoints connected to TNS’ network.

·                  North America: revenue decreased $0.4 million, due to $1.9 million of loss of endpoints and market data access services, which was partially offset by $1.5 million of growth in new endpoints and bandwidth-based services primarily through participants in the foreign exchange community.

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Future revenue growth in the financial services division depends on a number of factors including the number of connections to and through our network as well as the success of our new product offerings. We have continued to see a decline in demand for legacy low latency exchange data connectivity for the major global exchanges in the U.S. and no longer generate significant revenue from these services in North America.

Cost of network services.  Cost of network services increased $3.1 million, or 4.7%, to $67.5 million for the three months ended March 31, 2011, from $64.4 million for the three months ended March 31, 2010. On a constant dollar basis, cost of network services would have increased $2.6 million to $67.0 million. This was due to the following increases: $1.3 million to support our revenue growth in Europe and Asia Pacific; $0.9 million from higher dial access rates in our North America payments division; $0.8 million in payroll related costs and overhead expense primarily to support our IP registry, roaming and clearing and payment gateway platforms; and $0.4 million from our acquisition of Cequint. These increases were partially offset by a decrease of $0.8 million in costs related to our telecommunication services division, due primarily to cost reductions from integration synergies.

Future cost of network services depends on a number of factors including total transaction and query volumes, the relative growth and contribution to total transaction volume of each of our customers, the success of our new service offerings, the timing and extent of our network expansion and the timing and extent of any network cost increases or reductions. Due to an increase in the fourth quarter of 2010 in the rates charged by the providers of toll-free access services we use to transport domestic dial-up POS transactions, we anticipate that the cost of network services associated with the payments division will increase between $2 million and $3 million in 2011. The actual amount of this increase will depend upon a number of factors, including the number and average length of domestic toll-free POS transactions we transport in 2011 and our ability to find alternate providers of toll-free access services at lower costs.

Gross profit. Gross profit represented 49.5% of total revenues for the three months ended March 31, 2011, compared to 51.3% for the three months ended March 31, 2010. On a constant dollar basis, gross margins for the three months ended March 31, 2011 decreased to 49.4%. This decrease was due primarily to margin declines in our North American payments dial business and investments in personnel and systems to support our payment gateway offerings, IP registry services and roaming and clearing platforms and to a lesser extent from pricing concessions and volume reductions related to legacy CSG customers.  This was partially offset by a reduction in fixed network expense from the integration of the legacy CSG network with TNS’ network and a product mix shift in TSD including Cequint.

Engineering and development expense.  Engineering and development expense increased $1.1 million, or 12.7%, to $10.6 million for the three months ended March 31, 2011, from $9.5 million for the three months ended March 31, 2010. On a constant dollar basis, engineering and development expense increased $1.0 million and represented 7.9% and 7.3% of revenues for the three months ended March 31, 2011 and 2010, respectively. The increase in engineering and development costs was primarily due to the following: $1.8 million in costs resulting from our acquisition of Cequint; $0.5 million in additional headcount related costs and $0.8 million in system maintenance costs to support our growth initiatives. This was partially offset by an increase in capitalized software development costs, which are offset against engineering and development costs, of $2.0 million due to incremental investments in our growth initiatives, which include Cequint.

Selling, general and administrative expense.  Selling, general and administrative expenses decreased $1.2 million, or 4.6%, to $25.1 million for the three months ended March 31, 2011, from $26.3 million for the three months ended March 31, 2010. On a constant dollar basis, selling, general and administrative expenses would have decreased $1.5 million, or 5.7%, to $24.8 million and represented 18.7% and 20.3% of revenues for the three months ended March 31, 2011 and 2010, respectively. This was due to the following decreases: $1.2 million in headcount and other cost synergies related to the integration of CSG; $1.0 million in stock compensation due primarily to a decrease in performance related stock compensation; $0.9 million in variable cash incentive compensation; and $0.2 million in severance charges related to restructuring activities in North America. These decreases were partially offset by increases, required to support our growth initiatives, including Cequint.

Contingent consideration income.  Contingent consideration income of $(0.1) million for the three months ended March 31, 2011, represents the change in the fair value of the liability recorded for the additional consideration which may be payable in relation to the acquisition of Cequint, Inc. See Note 1 for further details regarding the Cequint contingent consideration. This liability will be re-measured each reporting period and changes in the fair value will be recorded through this line item in our condensed consolidated statement of operations.

Depreciation and amortization of property and equipment.  Depreciation and amortization of property and equipment increased $1.3 million, or 12.7%, to $11.6 million for the three months ended March 31, 2011, from $10.3 million for the three months ended March 31, 2010 and represented 8.6% and 7.9% of revenue for the three months ended March 31, 2011 and 2010, respectively. The increase in depreciation expense was primarily due to an accelerated depreciation charge of $0.7 million following the decision made in the second quarter of 2010 to phase out $6.2 million of surplus network assets and office equipment following the integration of the legacy CSG and TNS operations by the end of the first quarter of 2011.

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Excluding the accelerated charge related to surplus assets, depreciation and amortization of property and equipment increased $0.6 million due to capital expenditure investments in our growth initiatives, including Cequint.

Amortization of intangible assets.  Amortization of intangible assets decreased $1.2 million, or 10.6%, to $10.1 million for the three months ended March 31, 2011, from $11.3 million for the three months ended March 31, 2010. Included in amortization of intangible assets for the three months ended March 31, 2011 was $1.8 million related to the acquisition of Cequint. Included in amortization for the three months ended March 31, 2010, was $1.9 million related to the impairment of certain customer relationship intangible assets. Excluding these items, amortization of intangible assets decreased by $0.9 million primarily due to certain intangible assets reaching the end of their economic useful lives.

Interest expense.  Interest expense increased $0.5 million to $6.6 million for the three months ended March 31, 2011, from $6.1 million for the three months ended March 31, 2010. Amortization of deferred financing fees and original issue discount for the three months ended March 31, 2011 and 2010, was $0.5 million and $0.7 million, respectively. Excluding these charges, cash interest expense increased $0.7 million to $6.1 million, primarily due to the impact of increased borrowing levels as a result of our acquisition of Cequint on October 1, 2010.

Other (expense) income, net.  Other (expense) income was a loss of $1.1 million for the three months ended March 31, 2011 compared to a gain of $2.8 million for the three months ended March 31, 2010. Included in other income (expense) was a loss of approximately $1.1 million compared to a gain of $2.5 million for the three months ended March 31, 2011 and 2010, respectively, related to foreign currency revaluation. These revaluation amounts were due to fluctuations in the value of the U.S. dollar, principally against the Euro and Australian dollar.

Income tax provision.  For the three months ended March 31, 2011, our income tax provision was approximately $0.6 million compared to $3.4 million for the three months ended March 31, 2010. Our effective tax rate was 47.7% and 75.4% for the three months ended March 31, 2011 and 2010, respectively. Our effective tax rate differs from the U.S. federal statutory rate primarily due to the application of a valuation allowance against certain U.S. tax attributes and profits of our international subsidiaries being taxed at rates different than the U.S. federal statutory rate.

Additional Information

Non-GAAP Measures

To supplement our consolidated financial statements presented on a GAAP basis, we disclose certain non-GAAP measures, including EBITDA before stock compensation expense, adjusted net income and adjusted net income per share. These non-GAAP measures are not in accordance with, or an alternative for, generally accepted accounting principles in the United States. Reconciliations of each of these non-GAAP measures to the corresponding GAAP measure are included elsewhere in this Annual Report.

EBITDA before stock compensation expense is determined by adding the following items to Net Income, the closest GAAP financial measure: equity in net loss of unconsolidated affiliate, income tax provision, other income (expense), interest expense, depreciation and amortization of property and equipment, amortization of intangibles, contingent consideration expense and stock compensation expense.

Adjusted net income is determined by adding the following items to Net Income, the closest GAAP financial measure: provision for income taxes, certain non-cash items, including amortization of intangible assets, stock compensation expense, the change in fair value of contingent consideration and the amortization of debt issuance costs, and the result is tax effected at an assumed long-term tax rate of 20%, which excludes the effect of our net operating losses. The assumed long-term tax rate of 20% takes into consideration the following primary factors: the income generated outside of the U.S. which is taxed at substantially lower rates than U.S. statutory rates; the cash benefit of our tax-deductible amortization of intangible assets and tax-deductible goodwill; and the cash benefit of tax-deductible stock compensation expense.

We believe that the disclosure of EBITDA before stock compensation expense and adjusted net income and related per-share amounts are useful to investors as these non-GAAP measures form the basis of how our management team reviews and considers our operating results. We also rely on adjusted net income as the primary measure of our earnings exclusive of certain non-cash charges. By disclosing these non-GAAP measures, we believe that we create for investors a greater understanding of, and an enhanced level of transparency into, the means by which our management team operates our company. We also believe these measures can assist investors in comparing our performance to that of other companies on a consistent basis exclusive of selected significant non-cash items.

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EBITDA before stock compensation expense, adjusted net income and adjusted net income per share have limitations as analytical tools, and you should not rely upon them or consider them in isolation or as a substitute for GAAP measures, such as net income and other consolidated income or other cash flows statement data prepared in accordance with GAAP. In addition, these non-GAAP measures may not be comparable to other similarly titled measures of other companies. Because of these limitations, EBITDA before stock compensation expense should not be considered as a measure of discretionary cash available to us to invest in the growth of our business. Adjusted net income and adjusted net income per share also should not be considered as a replacement for, or a measure that should be used or analyzed in lieu of, net income or net income per share. We attempt to compensate for these limitations by relying primarily upon our GAAP results and using EBITDA before stock compensation expense, adjusted net income and adjusted net income per share as supplemental information only.

All references to the effect of foreign currency exchange rates on a constant dollar basis were determined by applying the prior year foreign currency rates to the current year results.

Liquidity and Capital Resources

Our primary liquidity and capital resource needs are to finance the costs of our operations, to make capital expenditures and to service our debt. Based upon our current level of operations, we expect that our cash flow from operations, together with the amounts we are able to borrow under our amended November 2009 Credit Facility, will be adequate to meet our anticipated needs for the foreseeable future. The covenants in our amended November 2009 Credit Facility do not, and are not reasonably likely to, limit our ability to pursue strategic acquisitions as part of our growth strategy to a material extent. To the extent that we are not able to fund a strategic acquisition through cash flow from operations or additional amounts that we are able to borrow under our existing 2009 Credit Facility, we would need to undertake additional debt or equity financing.

Our operations provided us cash of $21.0 million for the three months ended March 31, 2011, which was attributable to net income of $0.7 million, depreciation, amortization and other non-cash charges of $23.2 million and an increase in working capital of $2.9 million. Our operations provided us cash of $27.9 million for the three months ended March 31, 2010, which was attributable to net income of $1.1 million, depreciation, amortization and other non-cash charges of $24.2 million and a decrease in working capital of $2.7 million.

We used cash of $8.8 million and $8.0 million in investing activities for the three months ended March 31, 2011, and 2010, respectively, which was related to capital expenditures required to support our revenue growth.

We used cash of $20.8 million from financing activities for the three months ended March 31, 2011. This consisted primarily of a $19.7 million repayment on the November 2009 Credit Facility. In addition, $1.1 million was used to repurchase stock to satisfy employee tax withholding requirements on the vesting of restricted stock units. We used cash of $16.6 million from financing activities for the three months ended March 31, 2010. This consisted primarily of a $15.0 million voluntary pre-payment on the November 2009 Credit Facility. In addition, $2.5 million was used to repurchase stock to satisfy employee tax withholding requirements on the vesting of restricted stock units and we received $0.9 million from the exercise of employee stock options.

Seasonality

Credit card and debit card transactions account for a major percentage of the transaction volume processed by the customers of our payments division. The volume of these transactions on our networks generally is greater in the third and fourth quarter vacation and holiday seasons than during the rest of the year. Consequently, revenues and earnings from credit card and debit card transactions in the first and second quarter generally are lower than revenues and earnings from credit card and debit card transactions in the third and fourth quarters of the immediately preceding year. We expect that our operating results in the foreseeable future will be significantly affected by seasonal trends in the credit card and debit card transaction market.

Effects of Inflation

Our monetary assets, consisting primarily of cash and receivables, and our non-monetary assets, consisting primarily of intangible assets and goodwill, are not affected significantly by inflation. However, the rate of inflation affects our expenses, such as those for employee compensation and costs of network services, which may not be recoverable in the price of services offered by us.

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Item 3.  Quantitative and Qualitative Disclosures About Market Risk

Interest rates

Our principal exposure to market risk relates to changes in interest rates. As of March 31, 2011, we had $387.8 million outstanding under our November 2009 Credit Facility with interest rates tied to changes in the lender’s base rate or the LIBOR rate. Interest on outstanding balances under the November 2009 Credit Facility is payable, at the Company’s option, at the base rate plus a margin of 3%, or at LIBOR plus a margin of 4%. Additionally, in no event will the base rate be less than 3.0% or the LIBOR rate be less than 2.0%. At March 31, 2011 the one-month LIBOR rate was 0.24%. Based upon the outstanding borrowings on March 31, 2011 and assuming repayment of the Term Loan in accordance with scheduled maturities, each 1.0% increase or decrease in these rates, once the LIBOR rate exceeds the 2.0% minimum, could affect our annual interest expense by $3.9 million.

As of March 31, 2011, we did not hold derivative financial or commodity instruments and all of our cash and cash equivalents were held in money market or commercial accounts.

Foreign currency risk

Our earnings are affected by fluctuations in the value of the U.S. dollar as compared with foreign currencies, predominately the Euro, the British Pound and the Australian dollar due to our operations in Europe and Australia.

We primarily enter into arrangements with our customers in the currency of the markets we operate in. As a result, our reported results are affected by fluctuations in the value of the U.S. dollar as compared to foreign currencies, predominantly the British Pound, the Euro and the Australian dollar. The following table shows the currency composition of our revenues for the three months ended March 31, 2011 and 2010 and the weighted average exchange rates used to translate our local currency results to the U.S. dollar:

A $0.01 change in exchange rates for each of the major foreign currencies we operate in would have the following annual impact on:

·      Revenue: British Pound, $0.4 million, Euro, $0.4 million and Australian Dollar $0.3 million; and

·      Total operating expenses: British Pound, $0.3 million, Euro, $0.2 million and Australian Dollar $0.3 million

We provide services to customers in the United States and increasingly to international customers in over 40 countries including Canada and Mexico and countries in Europe, Latin America and the Asia-Pacific region. We currently maintain operations and/or employees in 28 countries. We provide services in these countries using networks deployed in each country. We manage foreign exchange risk through the structure of our business. In the substantial majority of our transactions, we receive payments denominated in the U.S. dollar, British Pound, Euro or Australian dollar. Therefore, we do not rely on international currency markets to obtain and pay illiquid currencies. The foreign currency exposure that does exist is limited by the fact that the majority of transactions are paid according to our standard payment terms, which are generally short-term in nature. Our policy is not to speculate in foreign currencies, and we promptly buy and sell foreign currencies as necessary to cover our net payables and receivables, denominated in foreign currencies. However, in December 2009 our subsidiary in Ireland entered into a $25.8 million loan agreement with our subsidiary in Bermuda to provide it with the ability of making loans and working capital funding to our subsidiaries. This loan is denominated in U.S. dollars and therefore fluctuations in the euro to the U.S. dollar exchange rate were recorded as revaluation gains or losses in our income statement prior to January 1, 2011. On January 1, 2011, the Company’s management no longer intends to settle this specific loan amount for the foreseeable future, and as such in accordance with ASC 830, Foreign Currency Matters, from this date, fluctuations in the euro to the U.S. dollar exchange rates are recorded to other comprehensive income in our balance sheet.  For the three months ended March 31, 2011, we recorded a loss on foreign currency revaluation of approximately $1.1 million compared to a pre-tax gain of $2.6 million for the same period in 2010 which is included in other income (expense) in the accompanying condensed consolidated statements of operations. The $1.1 million loss during the three months ended March 31, 2011, was primarily due to the revaluation of a U.S. dollar denominated loan balance between our subsidiaries in Ireland and Australia. This loan relates to amounts advanced by our subsidiary in Ireland to fund our card-not-present development activities in Australia.

Item 4.  Controls and Procedures

The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Company’s reports under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

Evaluation

The Company carried out an evaluation, under the supervision, and with the participation, of the Company’s management, including the Company’s Chief Executive Officer and the Company’s Chief Financial Officer, of the effectiveness of the Company’s disclosure controls and procedures as of March 31, 2011. Based on the foregoing, the

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Company’s Chief Executive Officer and principal financial officers concluded that the Company’s disclosure controls and procedures were effective as of March 31, 2011 at the reasonable assurance level.

Changes in Internal Controls

There have been no changes during the most recently completed fiscal quarter that materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

PART II—OTHER INFORMATION

Item 1.  Legal Proceedings

None.

Item 1A.  Risk Factors

None.

Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3.  Default Upon Senior Securities

None.

Item 4.  Removed and Reserved

Item 5.  Other Information

None.

Item 6.  Exhibits