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TNS, Inc. (Transaction Network Services)
(703)
453-8300
11480
Commerce Park Dr.
Suite
600
Reston, VA 20191
www.tnsi.com
Sales
$223
million
Business Description
TNS,
or Transaction Network Services, is a leading provider of business services
to processors of credit card, debit card and ATM transactions. We are also a
leading provider of secure data and voice network services to the global
financial services industry. We provide services through our multiple
data networks, each designed specifically for transaction applications. Our
networks support a variety of widely accepted communications protocols and
are designed to be scalable and accessible by multiple methods, including
dial-up, dedicated, wireless and Internet connections. In the year ended
December 31, 2003, we transported approximately 7.9 billion transactions for
more than 115 point-of-sale/point-of-service, or POS, processing customers
in the United States and Canada, including nine of the ten largest payment
processors in the United States, making us, on the basis of total
transactions transmitted, a leading provider of data communications services
to processors of credit card, debit card and ATM transactions. In addition,
as of December 31, 2003, we provided network services to more than 400
financial services companies. Based on the total number of connections these
companies have to our networks and the total messages transmitted among them
using our services, we are a leading service provider to the financial
services industry. Our revenues are generally recurring in nature, as we
typically enter into multi-year service contracts that require minimum
transaction or revenue commitments from our customers.
Our
POS services
Our POS division markets our data communications services directly to
payment processors in the United States and Canada. The following chart
illustrates the route of a typical POS transaction using our data
communications services. The route of a typical off-premise ATM transaction
is similar except that the card associations are not involved.
POS Credit Card Transaction
We also market our POS communications services to entities responsible for
the transmission of state lottery transactions, federal and state electronic
benefits transfers, purchases of programming from home satellite providers
and healthcare transactions. We currently transport lottery transactions for
two states and data for electronic benefits transfer programs for 31 states.
Our private, secure data networks were designed specifically to address the
data communications requirements of the payment processing industry. Our
data communications services provide customized routing technology, built-in
redundancy and geographic diversity and are configured to provide fast and
reliable call connection and efficient network utilization. Our data
networks connect a merchant's POS terminal or an off-premise ATM to the
payment processor's host computer.
We provide multiple means for the POS terminal or ATM to access our data
networks. Merchant POS terminals and off-premise ATMs can connect directly
to our network using our TransXpress dial-up service, which utilizes
telephone services obtained from interexchange carriers and local exchange
carriers. To complement our TransXpress service, we offer TNS Connect, a
leased line service that utilizes our secure Internet protocol, or IP,
network. Leased line services are attractive to operators of off-premise
ATMs and merchants that either manage their own in-house networks or
transmit large volumes of transactions. Our customers primarily choose to
access our networks using our dial-up and leased line services. However, we
also provide alternative methods of connecting to our networks, including
wireless and Internet.
In response to the declining transaction volume per off-premise ATM, we
configure and provide modems that enable off-premise ATM operators to
convert leased line ATMs to ATMs that use dial-up connections. This allows
the ATM operators to avoid the incurrence of additional costs associated
with the need to replace or refit the ATM. Because our modems allow the ATM
and the payment processor's system to operate as if they are connected by a
leased line, off-premise ATM operators retain the functionality and speed of
existing leased line ATMs while reducing monthly recurring
telecommunications expenses.
We generally enter into multi-year contracts that require minimum
transaction or revenue commitments from our POS customers. For dial-up
access services, we typically charge our customers a fixed fee per
transaction plus a variable time-based charge for transactions that exceed a
specified period of time. Generally, our contracts provide for a reduction
in the fixed fee per transaction as our customers achieve higher monthly
transaction volumes. We typically charge our customers fixed monthly fees
for leased line services. We also generate POS revenue from usage charges,
circuit charges, charges for access to real-time transaction monitoring and
charges for ancillary services. For the year ended December 31, 2003, we
transmitted approximately 7.9 billion domestic POS transactions and
generated $122.9 million of revenue in the POS division, which represented
55.0% of our total revenues.
Business Overview - POS
POS and off-premise ATM (an automated teller machine at a location other
than a branch office of a financial institution) transactions require the
two-way transfer of information over a secure, reliable data network.
Typically, at any POS or off-premise ATM location where a credit, debit or
ATM card is accepted, the customer's account information and transaction
amount must be electronically transmitted to a payment processor. The
payment processor then electronically communicates with the financial
institution that issued the card to determine whether to authorize the
transaction. After this determination is made, the processor returns an
authorization or rejection response to the POS or ATM terminal. Financial
institutions in the United States and Canada increasingly outsource the
processing of credit and debit card accounts to payment processors who are
able to leverage technical
expertise and capitalize on economies of scale. Payment processors, in turn,
typically have outsourced to third party service providers such as TNS the
data networking services used to transport transaction data between the
processor's host computers and the POS or ATM terminal.
According to The Nilson Report, the percentage of total United States
consumer payment transactions in which card based payment methods such as
credit or debit cards were used increased from 22.2% of a total of 92
billion transactions in 1997, to 30.6% of a total of 121 billion
transactions in 2002. This percentage is expected to increase to 41.4% of a
total of an estimated 151 billion transactions by 2007. In addition, total
card based payment transactions are projected to grow at a compound annual
growth rate of 11.1% from 2002 to 2007. We believe these trends will apply
to the transactions our customers process using our data communications
services.
POS or off-premise ATM terminals access data network connections to payment
processors through a variety of methods, the most common of which are
dial-up and dedicated, or leased line, services. Dial-up access services
allow merchants and off-premise ATMs to connect to payment processors by
dialing a telephone number each time a transaction is initiated. A leased
line is a dedicated connection provided to a merchant or ATM location for
the exclusive purpose of connecting the POS terminal or ATM to the payment
processor. Dial-up services are less expensive than leased line services
because leased line services impose greater fixed monthly communication
service charges, making a leased line economically viable only in
high-volume merchant or off-premise ATM locations.
According to ATM & Debit News, the number of ATMs in the United States has
grown from 122,700 in 1995 to 352,000 in 2002, a 16.2% compound annual
growth rate. The number of off-premises ATMs has grown from 37,800 in 1995
to 220,000 in 2002, a 28.6% compound annual growth rate. However, the growth
in the number of ATM terminals has been greater than the growth in ATM
transactions. As a result, the average monthly volume of transactions per
ATM declined from 6,580 in 1995 to 2,509 in 2002. The trend of declining
transaction volume per ATM has reduced ATM profitability because the cost to
own and operate an ATM is largely fixed. This trend in declining transaction
volume per ATM terminal is leading off-premise ATM operators to seek more
cost-effective methods of operating their ATMs, including the replacement of
leased line service with dial-up services. We believe this trend will
increase the number of ATM transactions we transmit.
In addition to the payment processing industry, other industries, such as
electronic benefits transfer, healthcare and state lottery operators, are
expanding their use of electronic transaction processing in an attempt to
reduce costs and to increase the reliability and efficiency of data
transmission. We believe we will be able to increase the number of
transactions we transport as these and other industries look to outsource
the data communications requirements necessary to transmit transactions
electronically.
Our
telecommunication services
We operate one of four unaffiliated SS7 networks in the United States
capable of providing call signaling and database access services nationwide.
Our SS7 network is connected with the signaling networks of all of the
incumbent local exchange carriers and a significant number of wireless
carriers, competitive local exchange carriers and interexchange carriers. We
believe that our independence and neutrality enhance our attractiveness as a
provider of outsourced SS7 services.
We offer the following data communications services to wireless and wireline
telecommunication services providers:
• SS7 network services. We provide telecommunication services providers with
SS7 connectivity, switching and transport services throughout the United
States. Our SS7 network is connected to the SS7 networks of local exchange
and wireless carriers through more than 25 mated pairs of signal transfer
points deployed throughout the country. By connecting to our SS7 network,
our customers eliminate their need to implement, operate and maintain
numerous, complex connections linking their SS7 switches to the signaling
networks of other telecommunications carriers. We believe that our SS7
network enables us to offer our data communications services more
cost-effectively and reliably than our competitors.
• Database access services. We have combined our SS7 network services with
our expertise in data transmission to offer our customers access to
databases maintained by telecommunications carriers and other third parties.
These databases are used to provide subscribers intelligent network services
such as local number portability, line information database, caller
identification and toll-free number services. Our SS7 network provides
access in the United States to the following types of databases:
–Local number portability databases. Wireline telecommunications carriers
are required to provide local number portability, a service that enables a
subscriber to change wireline service providers within a particular location
and keep the same phone number. The FCC has mandated that wireless local
number portability be provided in some locations in the United States
beginning in November 2003. Our SS7 network will provide access to the
wireless local number portability databases as these databases become
available.
– Line information databases. Telecommunications carriers develop and
maintain databases that store subscriber information, including names and
addresses. This information is necessary to provide enhanced services such
as validating subscriber and billing information.
– Toll-free databases. Each time a subscriber calls a toll-free number, the
telecommunication services provider must access a national database of
toll-free numbers in order to route the call.
– Calling name delivery databases. A telecommunication services provider
must access a database containing the name and other information about the
subscriber for the telephone number placing the call in order to offer
caller identification services.
– Validation and fraud control services. Our CARD*TEL validation and fraud
control services combine our access to line information databases with our
proprietary fraud control technology to provide interexchange carriers,
operator services providers and payphone service providers real-time
telephone call billing validation and fraud control services for calling
card, credit card, third-party billing and collect calls. Our services
assist our customers in determining whether telephone company calling cards,
credit cards, travel and entertainment cards and telephone numbers
constitute valid accounts and billable telephone numbers.
• Other telecommunication services. Our LEConnect data services provide
telecommunication services providers with a fast and reliable method of
transmitting billing and collection data to and from local exchange carrier
data centers over our secure IP networks. Our LEConnect data service
minimizes the data transmission errors and time lags associated with a
traditional billing and collection system, which requires numerous
interexchange carriers and information service providers to send billing
data on magnetic data tapes to local exchange carriers. We also offer short
message service offload services, which allow telecommunication services
providers to avoid the incurrence of additional costs, relieve message
congestion and preserve network capacity by offloading short message traffic
from SS7 signaling networks to our IP networks.
We generally enter into multi-year contracts with our telecommunication
services customers, many of which agree to minimum volume commitments. We
charge fixed monthly fees for SS7 network services and LEConnect services
and per-query fees for our database access and validation services. For the
year ended December 31, 2003, we generated $31.2 million of revenue in the
telecommunication services division, which represented 14.0% of our total
revenues.
Telecommunications opportunity
Every wireless or wireline telephone call consists of the content of the
call, such as the voice, data or video communication, and the signaling
information necessary to establish and close the transmission path over
which the call is carried. Substantially all telecommunications carriers in
the United States and Canada use Signaling System No. 7, or SS7, as the
signaling protocol to identify the network route to be used to connect
individual telephone calls. SS7 networks are data networks that transport
call signaling information separate from the public switched
telecommunication network over which the call content is communicated.
Telecommunications carriers require access to an SS7 network connected to
the signaling networks of other carriers to be able to provide
telecommunication services to their customers. According to the FCC, at the
end of 2002 there were 85 wireless carriers with a total of 136 million
subscribers and over 540 wireline providers with a total of 36 million
access lines in the United States.
SS7 networks also are used to retrieve information from centralized
databases maintained by telecommunication services providers and other third
parties. By accessing this information, telecommunication services providers
are able to offer services that enable intelligent network services such as
local number portability, line information database, caller identification
and toll-free number services, and credit card, calling card, third-party
billing and collect calling. Wireless carriers also use SS7 networks to
exchange and maintain subscription and location data on subscribers to
support wireless roaming services. Competitive pressures are also
encouraging telecommunication services providers to develop and offer
additional services that utilize the signaling services provided by an SS7
network. For example, wireless carriers have recently begun to offer content
delivery such as video and ring tones, short message service and Internet
browsing and commerce capabilities.
The deployment, operation and maintenance of a nationwide SS7 network
connected to all of the major signaling networks and database providers
require significant capital and specific technical expertise. For these
reasons, many telecommunication services providers have chosen not to build
the networks necessary to satisfy all of their SS7 signaling requirements.
Rather, they are increasingly turning to outsourced telecommunication
services providers such as TNS to obtain the call signaling and database
access services critical to their business, yet remain competitive on a
cost-effective basis.
Our
financial services
Our fast, private, secure and reliable IP data networks were designed
specifically to address the data and voice communications requirements of
the financial services industry. Our IP network services allow our customers
to access multiple financial services companies through a single network
connection, thereby eliminating the need for costly dedicated
institution-to-institution leased line connections. Additionally, these
services facilitate secure and reliable communications between financial
services companies by supporting multiple communications standards and
protocols, including FIX.
Our primary financial service offerings are:
•Secure Trading Extranet. Our Secure Trading Extranet service links more
than 400 financial services companies through our IP network. Through a
single network connection, a customer can communicate with any other entity
connected to our IP network. Given the large number of industry participants
connected to our network, including commercial banks, mutual funds, pension
funds, broker-dealers, alternative trading systems, electronic
communications networks and securities and commodities exchanges, a single
customer can use its connection to our IP network to conduct seamless,
real-time electronic trading and access a variety of content, including
news, research and market data.
• Trader Voice. Our specialized voice services provide secure, customized
voice telecommunications between brokers, investment banking firms and
securities and commodities exchanges. These services permit calls that
originate over traditional phone lines to be connected over our secure,
private IP network. The primary applications of our voice services are: a
dedicated, always available voice link between specific domestic-to-domestic
or domestic-to-international locations, which financial industry
participants refer to as "hoot & holler"; an instant voice connection
between two locations that is established as soon as a telephone receiver at
either location is lifted, which financial industry participants refer to as
"automatic ring down"; and a direct voice connection between two locations
which requires a manual signal, usually the push of a button, from the
telephone at either location to initiate the call, which financial industry
participants refer to as "manual ring down."
As of December 31, 2003, we provided our financial services to more than 400
financial services companies. Our financial services customers may have one
or more access points to our IP network, depending on the location of their
offices and other factors. For the year ended December 31, 2003, we
generated $20.8 million of revenue in the financial services division, which
represented 9.3% of our total revenues.
Financial services opportunity
The securities trading and investment management industry is increasingly
requiring high-speed, reliable, secure data communications services to
communicate information among industry participants, including commercial
banks, mutual funds, pension funds, broker-dealers, alternative trading
systems (ATS), electronic communications networks (ECN) and securities and
commodities exchanges. Transaction volume in the United States equity
markets has increased rapidly over the past decade. For example, average
daily shares traded of NYSE, AMEX and Nasdaq securities has increased at a
21.9% compound annual rate, from approximately 302 million in 1990 to 3.3
billion in 2002. During the same period, the emergence of new electronic
trading venues such as ECN and ATS and regulatory requirements such as the
shift to decimalization have placed increasing emphasis on trading and cost
efficiencies. To meet these needs, market participants are increasingly
using outsourced data communications services that provide industry
participants with access to other participants through a single, managed
access point on the service provider's network. These services allow
participants to cost-effectively connect to each other to conduct
time-sensitive transactions and communicate real-time information.
The need for these financial communication services is being facilitated by
the adoption of new technologies and standard transmission protocols for the
exchange of financial data, which has reduced the complexity associated with
establishing communications between industry participants. The Financial
Information eXchange (FIX), protocol has become the industry standard
electronic communication language. According to the Tower Group's "The New
FIX Networks: Adding Value Beyond Connectivity" report, 43% of small-sized
brokers (less than 100 employees), 77% of medium-sized brokers (100-4,000
employees) and 100% of large-sized brokers (greater than 4,000 employees)
were FIX enabled at the end of 2001. This is compared to 3%, 26% and 62% for
small, medium and large-sized brokers, respectively, in 1999.
Ticker
TNS
SIC Code
7389
- Services-Business Services, NEC
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