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Total System Services (NYSE:TSS)

Q4 2012 Earnings Call

January 22, 2013 5:00 pm ET

Executives

Shawn Roberts - Director of Investor Relations

Philip W. Tomlinson - Chairman, Chief Executive Officer and Member of Executive Committee

James B. Lipham - Chief Financial Officer and Senior Executive Vice President

Analysts

David Togut - Evercore Partners Inc., Research Division

James E. Friedman - Susquehanna Financial Group, LLLP, Research Division

Darrin D. Peller - Barclays Capital, Research Division

Bryan Keane - Deutsche Bank AG, Research Division

Jason Kupferberg - Jefferies & Company, Inc., Research Division

Brett Huff - Stephens Inc., Research Division

Timothy W. Willi - Wells Fargo Securities, LLC, Research Division

Craig J. Maurer - Credit Agricole Securities (NYSE:USA) Inc., Research Division

Kevin D. McVeigh - Macquarie Research

Glenn Greene - Oppenheimer & Co. Inc., Research Division

Gregory Smith - Sterne Agee & Leach Inc., Research Division

Roman Leal - Goldman Sachs Group Inc., Research Division

Operator

Good afternoon. My name is Lucy, and I will be your conference operator today. At this time, I would like to welcome everyone to the TSYS Fourth Quarter 2012 Earnings Conference Call. [Operator Instructions] As a reminder, ladies and gentlemen, this conference is being recorded today, January 22, 2013. Thank you.

I would now like to introduce your speaker, Mr. Shawn Roberts, Director of Investor Relations. Please go ahead, sir.

Shawn Roberts

Thank you, Lucy, and welcome, everyone. On the call today, our Chairman and CEO, Phil Tomlinson, will provide highlights on the fourth quarter and year-end 2012. And then he'll turn it over to Jim Lipham, our CFO, who's going to review our financials. After that, we'll open it up for Q&A.

I'd like to now call your attention to the fact that we'll be making forward-looking statements about the future operating results of TSYS. These forward-looking statements involve risks and uncertainties. Factors that could cause TSYS's actual results to differ materially from the forward-looking statements are set forth in TSYS's reports filed with the Securities and Exchange Commission.

At this time, I'd like to introduce TSYS's CEO, Phil Tomlinson.

Philip W. Tomlinson

Thank you, Shawn, and good evening, everybody. As I'm sure you've already seen in our earnings release, we ended 2012 with a very solid fourth quarter in every respect. We reported a $0.33 EPS for the fourth quarter and achieved the high end of our '12 earnings per share guidance of $1.30. It is a 13.1% increase over 2011. We're at the high end of our net income guidance as a result of strong growth in same client transactions.

Transactions from our North America and international same client issuer processing businesses were up 12% year-over-year. Point-of-sale transactions in our indirect merchant or processing businesses, excluding deconverted clients, were up 9.9%, and sales volume in our direct merchant business was up 12.9%. Although '12 ended with a lot of uncertainty with the government handling of the potential fiscal cliff, holiday spending certainly improved, at least from what we saw of it. The holiday season, the TSYS card issuing clients were ahead of 2011 by 15% if you take North America and internationally together.

You may know it or you may not, we have just entered 2013 as our 30th year as a public company, and we believe we're one of the more tenured companies in the payment industry, and I'm proud to say we lead the market with a passionate and experienced leadership team and about 8,700 team members who consistently deliver on great quality and developing long-term relationships and continuous quality improvement. You've heard me say before that we believe this is what distinguishes TSYS among its peers in this payments business.

Our tagline for the 30th anniversary is "Looking back but moving forward". And while we reflect and celebrate our success and lessons that we've learned over the past 30 years, we're certainly building on that past and looking forward to the future, working with clients to identify the innovations that are going to drive this business forward and continue to ensure our success along with our clients.

Before I move into these 3 segments, I'd like to mention our '13 guidance. This is the second year in a row that we've guided to a double-digit EPS growth and strong topline revenue growth coming from improved economic confidence and growth into card and merchant segments. '13, we believe, will be an exciting year for us. We have the previously mentioned conversions of approximately 30 million accounts in the second half of the year, and we'll continue to build toward a conversion of the Bank of America consumer portfolio in 2014. We were also planning on implementing new products and services provided from our -- that came with our 2012 acquisitions in our merchant business and continue to build our international footprint.

Let me share some fourth quarter news within our 3 reporting segments. In North America, we renewed our contract with a top 5 major retailer and signed an agreement for their Canadian business during the fourth quarter. We successfully converted the consumer portfolio of Scotiabank in Mexico from a competitor. We signed an agreement with First American State Bank and experienced growth in new accounts from several community, regional and credit unions that were -- regional banks and credit unions that were not on our systems a year ago.

And as we shared last quarter, our conversion pipeline is approximately 102 million accounts on file. I've talked about adding the 30 million in the second half and then, of course, BofA in the summer of '14.

Transactions for North America were up 12.7%, the 11th quarter in a row of year-over-year quarterly growth.

In international, we focus on delivery to existing clients, securing new prospects to build our conversion and pipeline and ongoing effort to improve future margins. Jim is going to talk about margins in a little bit, and we'll answer your questions on that.

In Europe, we renewed 2 existing client contracts and are finalizing a third which represents almost 40% of the existing revenue now under contract over the next 5 to 7 years.

We're also proud that we launched our first credit card in France through Advanzia on a cross-border basis and will continue to broaden our commercial card footprint through multiple U.S. issuers as they expand their programs across Europe and Asia.

As you'll recall, we think we have a very large market share of the commercial card business that's branded Visa and MasterCard. Last week, we announced an innovative payment technology solutions we're providing for Visa in India. This pilot, the Saral Money program, was launched in the fourth quarter and provides Indian consumers with access to financial services and electronic payments for the first time by linking Visa accounts to the Indian Unique Identification Accounts. Our technology is used to authenticate account holders by transporting biometric information such as fingerprints from the point-of-sale to the Unique Identification Authority of India.

In the market segment, in December, we completed the acquisition of ProPay in Utah. It's now a wholly owned sub of TSYS that provides simple, secured and affordable payment solutions for organizations that range from small home-based entrepreneurs to billion-dollar enterprises. And they do a lot of it with a square-like-dongle product offering that is doing very well, and we're very excited about this new acquisition. We believe we can sell their products, not only for our own direct merchant business but into our processing business as well.

With our indirect merchant business, the processing business, we signed new agreements with Priority Payments and renewals with BBVA Compass, Payments Alliance International and Columbia Bank. We also were fortunate that we signed a major U.S. theater chain and deployed several thousand encrypted terminals into that theater chain.

Now I want to turn it over to Jim Lipham, our CFO, who will review the quarter's financials, and then we'll open it up for questions. Jimmy?

James B. Lipham

Thank you, Phil. As Phil said, we're extremely pleased with our quarter results for 2012. In terms of our guidance, we achieved our revenues before reimbursable guidance and slightly exceeded our total revenues and net income and earnings per share. So we're very proud of where we finished in 2012.

We continue to add shareholder value. During the year, we purchased 3.2 million shares of stock for $75 million. We used $190 million to invest in acquisitions, and we returned another $94 million in dividends to our shareholders. Our total return -- shareholder return for 2012 was 11.55%. So very good year, we've invested a lot of capital.

If you look at the first slide on the quarter numbers. For the quarter, our revenues before reimbursables were up 2.7%. This was achieved by new business, the CPAY acquisition and internal growth adding about 5.7% revenue growth. And then that was offset by price concessions and lost business of about 3%. So that's how we got to the 2.7% growth.

Our operating income was flat at $89.8 million, which was influenced heavily by these price concessions and the delays that we discussed previously and the timing of conversions for the fourth quarter.

We also had an adjustment for our share-based comp charge of about $2.5 million during the quarter. Our operating margin or revenues before reimbursables was 21.46%, that's down 55 basis points from 2011. And you get into net income, you see us up 1.7% as we benefited in our equity income line due to the U.S. GAAP adjustments in 2011 that we made on the CUP Data. And I think I mentioned last quarter that, that was going to be the last time we will have a misrepresented -- or an uncomparable quarter, but it did have some adjustments in the fourth quarter. So next year, in '13, it will be a very favorable comparison.

Also our effective tax rate for the quarter was 33.5% which was up slightly from the fourth quarter of '11 where it was at 32.8%. And this is mainly due to the delay in the passing of the R&D credits for 2012 which got pushed into 2013. Phil mentioned that cardholder transaction grew at 13.2%, earnings per share for the quarter at $0.33, up 3.7%, and just a great quarter.

When you look at the year-to-date revenues before reimbursables, we're up 5% or $77.8 million. Internal growth was 5.1%, and we'll talk about that on the next slide a little bit, which was about $77 million. So we had operating income grow at 10.9%, it's mainly because of our revenues growing at 5% and expenses being held at 3.5% growth. But our margins at 22.1% are up about 117 basis points, so over where they were in 2011. And we finished the year again at $1.30, up 13.1%.

As I flip through the chart on the revenues change, you can see the 5.1% growth, that's from internal growth. New clients added 3.2%, and then the acquisition of TermNet and CPAY added 1.8%, for a total increase of about 10.1%.

The ProPay acquisition that Phil mentioned, we did acquire it at the end of December but it had no operating results for us in 2012. So it'll be a complete addition in '13. The 10.1% growth that you saw with revenues here is offset again by 4.7% from our lost business and price concessions. So that's how we get back down to our 5% growth in the revenues for the year.

Next slide is our consolidated accounts on file. The summary shows growth in all areas year-over-year. Growth in our major revenue-producing accounts was at 4.8% as you can see right there in the middle the subtotal, and which pretty much mirrors our revenue growth of 5%. The less active accounts shown in the yellow also had good strong growth, pushing our total account on file growth to 18.6% for the year. That's good growth of 75 million accounts. And as we go forward, Phil mentioned the pipeline of 102 million accounts and the 5.25% coming on in the third and fourth quarter of '13 and remainder in '14.

As we move on to the segments, North America. You can see the drivers there, strong internal growth increased volumes, price concessions and the like. Revenues before reimbursables were up about $4 million at 1.9% to $213.6 million. This increase was driven by new clients as internal growth was offset by the loss in revenues associated with deconverted clients and price concessions. The segment operating income of $77.8 million is up 16.9% or $11.2 million. The margin was at 36.42%, an increase of 466 basis points over last year's fourth quarter.

Remember, in this year, we have had the effect of dedicating less internal resources to North America as we move them to international, and this is an effect that made the margin as high as it is. If you -- on a pro forma basis without those reallocation, we'd have a margin in North America of 32.9% compared to 31.7% last year. So just remember, those expenses were just allocated. It has nothing to do with growing our expense base.

Accounts on file, volumes. You can see there growing at 20.9% and 16.2% if you take out prepaying single-use accounts. Good growth in transactions at 12.7%.

The international services, you can see revenue before reimbursables was flat at $102.4 million. New client revenues were offset by price concessions and lost business, total of about $9 million. Operating income was $6.1 million, that's down 49.3%. And the operating margin was 5.9% on revenues before reimbursables. This is a decrease of 572 basis points over last year's.

When you affect the change in the international resources that were allocated, if you took those back out, the margin in the international would be at 13.1%, which would compare favorably to the fourth quarter of '11 at 11.7%. So outside of the realignment of resources, I think we had a little improvement of a little over 100 basis points in our margin in international. We should see that continue to improve in a little faster pace as we go forward.

You can see the transactions account on files up 3.5%, transactions were up 18.6%, so pretty good quarter for the international segment.

On the merchant side of the house, revenues before reimbursables increased 5.5% or $5 million. When you exclude CPAY, CPAY was in there for a little over $11.7 million, the revenues were actually down mainly because of the BAMS deconversion that's still going on and some Durbin revenues that we had in the fourth quarter that we didn't carry through.

Of the $105.9 million of revenues, approximately 50% are direct -- or associated with the direct business and 50% with the indirect. In the Q4 of last year of '11, that ratio was 43% in the direct and 57% in the indirect. So you can see we've had a shift, a pretty large shift here, of what makes up the revenues in the merchant side of the house. I will mention at this point that the margins associated with the direct aspect of the merchant business are a lot lower than what they are from the indirect. And you'll see that when I talk to you briefly about -- or you can see that in the margin when you get in there, this is 28.8%. And that's down roughly 400 basis points from where it was last year at this time.

But anyway, the POS transactions were up 9.9% without BAMS, as Phil mentioned. And then the direct acquiring transactions were up 16.6%. Sales volume was up 12.9% on the direct.

But the margin, as I said, is down to 28.8%. We do expect that to continue in 2013. We've had one other going on in the merchant segment that hit us with about $2 million worth of expenses in the fourth quarter, and that is the conversion from FNBO's back end to a consolidated platform on TAS increased our cost in the fourth quarter and for the year. This work is going to continue on through 2013, with roughly $10 million to $12 million in incremental operating expenses, and the project will be completed in 2014, and I'll talk some more about this when we get to our 2013 guidance.

Next page is our cash flow. We have very strong cash flow for the quarter, with $121.8 million from operations and $88.2 million of free cash flow. On a year-to-date basis, our cash flow from operations at $456 million, the free cash flow was at $338 million. We continue to generate good cash with EBITDA at $528 million, that's up $36.6 million or 7.5% from prior year. Cash at the end of the year was down $248 million -- to $248 million, a decrease of $68.4 million mainly driven by the acquisitions, dividends and debt payments. During the fourth quarter, we did obtain a 5-year software license and maintenance arrangement for approximately $36 million, and these are licenses. They help support our core processing system. You will see that in the fourth quarter.

During the quarter, we did purchase 600,000 shares of stock for $13.4 million. And I mentioned, it brought our total to 3.2 million shares for the year or $75 million. We currently have about 7.1 million shares remaining in our buyback plan through April of 2014. And as I mentioned before, we'll continue to deploy capital either through acquisitions or share repurchases as we go forward.

The last couple of slides have to do with our guidance for 2013. I thought I'd just give you some assumptions behind that. As you know, we -- reimbursable items are pass-throughs and we tend to -- the management focuses on revenues before those items. And here, we're estimating we'll grow in the 6% to 8% range in 2013. This growth in revenues is going to include internal revenue growth in the 5% to 7% range. Our currency rate exchanges used in the guidance are 1.60 for the pound and 1.40 for the euros. We continue to see BAMS migrate off our systems in our merchant segment, and our guidance assumes an additional $9 million to $10 million in revenues before reimbursables will be lost in 2013.

The migration of the back end from the First National Bank of Omaha, the migration to a new platform, I discussed earlier, will continue in 2013 and is projecting we complete it to reduce our future processing expense by $5 million to $6 million a year compared to our current expense, but, obviously, will going to impact our current margins in the short-term and return for the long-term value of our direct acquiring profit margins.

We expect our operating income margin to be in the 22% to 24% range on calculated with revenues before reimbursables. 2013 will also see a full year impact of the noncontrolling interest for our CPAY acquisition. As a result, we anticipate the noncontrolled and interest lines to more than double. For 2013, we expect the noncontrolling interest net income to be approximately $12 million to $13 million in 2013, which on a per-share basis would be about $0.067 per share compared to the $0.03 that we had in this year.

Our net income growth is in the 9% to 11% range. Earnings per share is 10% to 12%. Obviously, it's positively impacted by the net income growth and the share repurchase program. And we have estimated our average shares for the year at 187 million shares to assist you in developing your EPS.

And with that, the last slide is just a picture of the makeup in -- of the growth and revenues as well as the lost business. And you can see the acquisitions play the bigger part, internal growth can possibly be a bigger contributor. But overall, we're looking for 6% to 8% growth in revenues before reimbursables.

And with that, Phil, I'll turn it back over to you.

Philip W. Tomlinson

Lucy, we'll now open it up to questions.

Question-and-Answer Session

Operator

[Operator Instructions] And your first question comes from the line of David Togut.

David Togut - Evercore Partners Inc., Research Division

Evercore Partners. The CEO of First Data, just over a week ago, announced he was retiring. Does this have any impact on any of the business that you're competing for, either on the merchant or the card issuer side?

Philip W. Tomlinson

I'm not sure I know how to answer that, David. The way I read it, it was for health reasons. I mean, we obviously are competing with them on a lot of business, but I can't say that it has any impact on anything.

David Togut - Evercore Partners Inc., Research Division

Just shifting gears for a minute. 102 million accounts in your pipeline, does that include HSBC North America?

Philip W. Tomlinson

Yes.

David Togut - Evercore Partners Inc., Research Division

So you have a firm conversion date on that business?

Philip W. Tomlinson

We do. It is in the third quarter.

David Togut - Evercore Partners Inc., Research Division

Okay. How many accounts is that?

Philip W. Tomlinson

We don't give exact account number. We just give ranges. And I've said it's -- we have a total of about 30 million we should add in the third quarter and fourth quarter of this year. But it's more than that. I mean, there are several conversions we're working on.

David Togut - Evercore Partners Inc., Research Division

Okay. And then just finally, in your 2013 outlook, what's the organic North American consumer and commercial credit card account on file number embedded in that?

Philip W. Tomlinson

We don't have those actual account numbers out there. We just figure it on the revenues and sales.

Operator

And your next question comes from the line of James Friedman.

James E. Friedman - Susquehanna Financial Group, LLLP, Research Division

So the first one is with regard to the operating expenses. Jimmy, they -- typically, SG&A is typically run about 13% of revenue. It was a little bit higher than that. I know you alluded to some in your prepared comments. Can you just repeat why it trended a little bit higher this quarter?

James B. Lipham

Well, we really had 2 things that were pretty large in the quarter. It was in the development of the new platform for the merchant segment, we had roughly $2.5 million there -- excuse me, $2 million there. And then we had an adjustment that were made in the share-based compensation that was around $2.5 million that came in the fourth quarter. And then on top of that was [indiscernible] our incentive plans, which normally happens in the fourth quarter. But those were the 2 biggest things.

James E. Friedman - Susquehanna Financial Group, LLLP, Research Division

So in terms of 2013 as a whole, what should we be thinking about SG&A as a percentage of revenue just for our modeling purposes?

James B. Lipham

I think we'll still going to end up with a margin of 22% to 24%, so continue to use the same.

James E. Friedman - Susquehanna Financial Group, LLLP, Research Division

Got it, okay. And then last thing for me, so it sounds like China UnionPay is certainly becoming more meaningful here, $3.2 million in equity income this quarter, up from $2 million, I think it was last quarter. How should we be the contemplating modeling that in 2013 and beyond?

James B. Lipham

Well, they have been growing at a pretty good clip for the last couple of years, and we think that they're going to continue to do that as we go forward. I think it's about 12%, let me see. It's 15% year-over-year growth, $15 million to $20 million next year.

Operator

Your next question comes from the line of Darrin Peller.

Darrin D. Peller - Barclays Capital, Research Division

Just first question is on the North American segment. You have about 5.5% growth in your AOS for the quarter, excluding prepaids. I was talking about the non-onetime type of cards. You have 12% same client transaction growth, but you have 2% revenue growth. And even if you were to exclude the $4 million or so impact from pricing concessions that we know about from last quarter becoming evident, it still would have only been 4%. So what's the difference between the underlying 12% drivers in transaction growth, the 5.5% AOF growth, and the 4% even -- or 2% to 4% revenue growth we're seeing in North America?

James B. Lipham

Well, if you remember, we talked about transactions and roughly 35% of them are bundled. We also had 3 extra billing days in this fourth quarter than we had the prior year, so that inflated the 12% a little bit.

Darrin D. Peller - Barclays Capital, Research Division

That doesn't carry forward to revenue as well?

James B. Lipham

No, well, 35% of it, like I said, is bundled, so that doesn't affect. But it wouldn't -- I think if you took the 3 days out, you'd be probably at a 9% growth in transactions, and then 75% of that would be billable, roughly 6%, you might say.

Darrin D. Peller - Barclays Capital, Research Division

All right. And so I guess going forward, I mean, what kind of growth rate should we be thinking about for the North American segment in terms of the underlying drivers relative to revenue? I mean, what kind of spreads should we count on?

James B. Lipham

I think we're going to continue to see this 5% growth. And without the economy really picking up more, I think you're still going to have, count on 5% growth, in the 5% to 6% range. And you're going to have -- if transactions continuing to be, I'd say, in the 9% to 10% range.

Darrin D. Peller - Barclays Capital, Research Division

Okay, all right. And let me shift gears over to the entire guidance now for 2013. You're talking about revenue guidance of basically 6% to 8%, that's versus 5% revenue growth in 2012. And yet you're also guiding only a 10% to 12% EPS growth versus 12%, 13%-ish type of growth in 2012. So in other words, you were able to generate a much higher growth rate on EPS with a much lower revenue growth in this year. Yet, for next year, it's a different kind of guidance, showing somewhat less operating leverage unless there's an element of that $10 million to $12 million of expense for the conversion over -- of the network for the merchant acquiring at some part of that I get. So where can we expect -- are there other expense increases coming? Because I know that you have new business being added, whether it's Capital One or others, are incrementally accretive to margins. So you really should have a benefit there in terms of EPS growth. And then I'll just carry on, there's another question as a follow-on, on the capital structure and buyback implications.

James B. Lipham

Okay. The guidance out there, we did say the $10 million to $12 million having to do with the TAS platform development, and that is a big contributor and more expense. I can't think of anything else that is of any real size as far as increased expenses. Well, there may be a few internal projects but -- that will be, I will say, $5 million. But outside of that, that's pretty much all the unusual stuff.

Darrin D. Peller - Barclays Capital, Research Division

All right. Look, bottom line, I mean, I guess where we're getting at is that if you were to drive a similar operating margin expansion even after excluding the $10 million, $12 million as we saw this year on your 5% revenue growth, you'd still have a margin, an implied margin that's somewhat higher than what you were guiding towards. I'm just wondering if there's anything we are missing on the expense side or if it's really just conservatism built into your outlook.

Philip W. Tomlinson

Well, I think you know we're always fairly conservative. But I think what Jimmy said was $10 million, $12 million on the merchant side, another $5 million development on some development we're doing on the cardholder side.

Darrin D. Peller - Barclays Capital, Research Division

Okay, all right. Well, just last question for me. On the capital allocation strategy, if I look at your guidance again, it looks like you have an -- a guide towards net income growth that's only 1 percentage point lower than your EPS growth rate, suggesting maybe 1% or so of your shares outstanding bought back or taken out on a year-over-year standpoint. I know you gave some guidance on that too. That equates to about a $40 million repurchased level unless there's a little more, maybe $40 million to $60 million. You generated $300 million -- over $320 million of free cash, still have an extremely attractive and healthy balance sheet. You're probably going to trend, based on your guidance, at around $340 million of free cash flow in the year. And so $40 million or even $60 million, $40 million to $60 million of free cash applied towards buybacks, I mean, is that enough? Or should we, as investors, expect more than that?

Philip W. Tomlinson

Well, I'll give you the same answer. I know you get tired of it, Darrin, but I'll give you the same answer. We've said before that -- I think I've said it before, and Shawn will probably flip when I say this, but I think it's -- unless we have a significant acquisition, you ought look to us for about $0.02 a share on buybacks.

Darrin D. Peller - Barclays Capital, Research Division

Well, just to -- look, again, I'll go back in the queue after this. But when you're saying $0.02 per share, again, that doesn't seem like it's really more than what we just discussed, right? It's maybe another $60 million, $70 million in total, I mean, of share repurchase applied. And why would it only be -- that's only $60 million, $70 million out of your $340 million to $350 million of free cash. Again, you have a huge amount of debt capacity which you could always use for deals if need be. So what's the reluctance, really? I mean, again...

Philip W. Tomlinson

Well, the reluctance right now is there's a lot of things going on, Darrin. I mean, that we have a lot of balls in the air that obviously we can't tell you about. But I think I would say that if we don't make some progress with some acquisitions that are meaningful, you'll see us get more aggressive in the buyback business.

Operator

And your next question comes from the line of Bryan Keane.

[Technical Difficulty]

Bryan Keane - Deutsche Bank AG, Research Division

Sorry about that. My question is just on looking at the overall revenue guidance, which is I have -- I think you guys are saying 6% to 8%, which revenue before reimbursable items. That compares to the fourth quarter of 2.7%. So we're looking for quite a bit improvement yet accounts on file really don't kick in probably much until -- really until 2014 because by the time you get those accounts on, it's not going to have much of an impact. So I guess moving from the 2.7% that you did in the fourth quarter to the 6% to 8%, what accounts for that improvement in the growth rate?

James B. Lipham

A lot of it will be the anniversary of price concessions that went on and the pickup of, obviously, those conversions, will help, and hopefully we have no more lost business.

Bryan Keane - Deutsche Bank AG, Research Division

So when we think about the big price compressions by quarter, maybe you can help us through that. When did those anniversary? And then kind of a part of that is how should we think about the sequential progress by quarter? I assume maybe the first half of the year is going to have a lot lower revenue growth than the second half. How do we think about the progression?

James B. Lipham

The anniversary of the price concessions, the big ones, will be over after the first half of the year. And I think you've got to consider, also, during next year, we'll have a full year of the acquisitions that we've made. ProPay came in right here at the end of December with nothing. Then you'll have, I don't know, 5 more months of CPAY.

Bryan Keane - Deutsche Bank AG, Research Division

And how big is -- how big of an annual contribution will ProPay be?

James B. Lipham

We didn't disclose that yet.

Bryan Keane - Deutsche Bank AG, Research Division

Okay. I guess combined, we can figure out...

James B. Lipham

Yes, you'll see it. We got -- acquisitions are going to contribute 3% to 4%. So...

Bryan Keane - Deutsche Bank AG, Research Division

Yes. We can get back into the number. All right, final question for me. Just by segment margins, how do we think about segment margins, either increase or decrease in the margin in 2013? I guess you commented international margins should increase quite a bit. But just thinking about if you can quantify that and then maybe also on the international, in the North American segment as well -- or the merchant segment as well.

James B. Lipham

We don't really -- the idea that we mentioned that the international was going to improve, and merchants, obviously, is going to go down, to roughly what you saw in the fourth quarter, and that will be what you'll see for the whole year next year in the merchant side. North America will continue to run close to where it was in the fourth quarter.

Operator

The next question comes from the line of Jason Kupferberg.

Jason Kupferberg - Jefferies & Company, Inc., Research Division

So just wanted to come back to the FNBO conversion over to the TAS platform. I guess the $10 million to $12 million number is pretty material. I mean, is this something that you guys fully anticipated would happen just in terms of its timing and its magnitude?

Philip W. Tomlinson

It's a little larger than what we thought it would be from the get-go, but we really have expanded the project, Jason. We decided since we were rewriting to go ahead and clean up some things that we had been wanting to do, that's why the price tag has gone up a little bit. And we will absolutely -- it will pay great dividends once we get it operating. We feel good about where we're at with it. It's taking a little bit longer, honestly, than we had hoped, but it's a pretty big project.

Jason Kupferberg - Jefferies & Company, Inc., Research Division

Right, right. Okay, that's helpful. And can you give us some specifics around what you are expecting for free cash flow in 2013?

Philip W. Tomlinson

Yes. Jimmy?

James B. Lipham

Yes. I mean, we're expecting it to be pretty close to where it is now, and around $300 million, $330 million, $350 million.

Jason Kupferberg - Jefferies & Company, Inc., Research Division

$330 million to $350 million. Okay, understood. And then just in terms of inter-quarter in Q4, can you talk about month-to-month transaction growth trends you might have seen in the U.S. in Q4, October versus November versus December? Just wondering if the hurricane or the timing of the holiday shopping season moved those numbers around materially. Anything that jumped out at you guys?

James B. Lipham

We had a few more shopping days in December so it moved it up a little bit from where it was in November.

Jason Kupferberg - Jefferies & Company, Inc., Research Division

So December actually accelerated versus November?

James B. Lipham

It did. That was the shopping days.

Jason Kupferberg - Jefferies & Company, Inc., Research Division

Okay. And just lastly for me. I know last quarter you sounded fairly optimistic on the Brazil front just in terms of trying to drive some other near-term wins now that you've got Carrefour up and running. Any update there?

Philip W. Tomlinson

We don't have an update specifically, but we certainly have a lot of prospects there, and we remain very optimistic there.

Operator

Your next question comes from the line of Brett Huff.

Brett Huff - Stephens Inc., Research Division

A quick -- couple of quick follow-ups. I'll try and run through them quickly here. To follow the line of questioning from a couple of guys ago, the big -- I was surprised about the step function on the cost, and so you talked a little bit about how you'll go ahead and bite off a little bit more of that while you're in the middle of the rewrite.

Philip W. Tomlinson

Right.

Brett Huff - Stephens Inc., Research Division

What other step functions in terms of that kind of investment should we expect? I'm not talking this year, maybe next year, but sort of over time?

Philip W. Tomlinson

Over time, I mean, you'll see us rewrite systems. We're looking at -- I explained it to some of our folks the other day, it's sort of like if you remember years ago when we had the Star Wars initiative, we're always trying to build something that makes it harder for anybody to compete with us, and we've got several things that we're working on, on the card overside. We're doing some really nice things on the merchant software side that will be very helpful to us and will give us some advantages in the marketplace out there. I think you heard me say that we're looking to spend an extra $5 million or so also on the cardholder side, $5 million to $6 million there in developing some black boxes, if you will, that will make our systems work a lot better and a lot more efficient and will make it a better experience for our customers.

Brett Huff - Stephens Inc., Research Division

Is that -- I know it's probably hard to think about it this way, but $10 million to $12 million and $5 million to $6 million, I mean, call it roughly $17 million or $18 million, is that -- that seems high. I mean, over time, would you expect that number to be sort of a $10 million -- how to keep competition...

Philip W. Tomlinson

We had hoped to be able to be through with the -- with the merchant rewrite a little earlier, and we just decided that the smart thing to do, we just, let's go ahead and do it and do it right. So it did add some there. But yes, that's probably a little high but I think you ought to count on $10 million or so a year. I mean, it's a constant process that goes on.

Brett Huff - Stephens Inc., Research Division

Yes, that's helpful. And then in terms of just thinking about Bank of America again, and, again, kind of following with this investment. I think the last time we all talked that there wasn't going to be a significant incremental investment to handle the Bank of America cards as they come on. Is that still generally true? I think that -- at least that's I recall, correct me if I'm wrong.

Philip W. Tomlinson

Well, that will be a pretty good investment, but the conversion process we will capitalize quite a bit of that and we'll, obviously, have to add computers and people, but it will be very positive.

Brett Huff - Stephens Inc., Research Division

And so will those incremental margins sort of be about what you would expect from another client even though it sounds like given the pricing concessions that...

Philip W. Tomlinson

Well, I think they would be probably in the same range as these very large clients. I mean, when you got as many accounts as these guys have got, they get very good pricing, they can demand very good pricing just like some of the other large clients that we process for. But again, there are some economies of scale that we're able to take advantage of which is a good thing.

Brett Huff - Stephens Inc., Research Division

And then the $36 million in licenses, I think, Jim, you mentioned that. And I was just -- can you just say again what those are for, and kind of how that's represented in the balance sheet -- or in the income statement balance sheet?

James B. Lipham

It's mainly in our operating systems, and we had a good deal come through, so we signed the contract at the 8-year in and about, I guess, a little over half of that $36 million is maintenance and the other part is software license.

Brett Huff - Stephens Inc., Research Division

And that's capitalized?

James B. Lipham

Yes. On the balance sheet, amortized over 5 years.

Brett Huff - Stephens Inc., Research Division

Okay. And then just a quick thought on CapEx guidance for '13.

James B. Lipham

Yes. I think it's still going to be -- this is only one unusual item that we had, but I think we'll still going to be around the same level as we were this year.

Brett Huff - Stephens Inc., Research Division

And then last time -- lastly, thanks for the incremental info on kind of where we are on the Bank of America merchant roll off, I think you said $9 million to $10 million coming off this year. How much is left after that, and how do you see that -- sort of that tail working?

James B. Lipham

I don't know, it's a couple of more years. And it's not -- we have been, all along, for the last couple of years, talking about $10 million a year.

Philip W. Tomlinson

Brett, if that changes, we'll let you know. I mean, we -- it's not really in our control, other than just the minimums that we've signed up for, or they've signed up for, so they could -- we count on the minimums.

Operator

Your next question comes from the line of Tim Willi.

Timothy W. Willi - Wells Fargo Securities, LLC, Research Division

I just wonder if you could talk maybe a bit about sort of Europe. Did you notice any change, I guess, in optimism, caution, tones of conversation you were having with financial institutions as the quarter progressed? It seems everybody fears the worst over there, but then it seems when results come across for companies that have businesses in Europe, it sounds like the tone of business has always been a little bit better than maybe the news headlines would lead you to believe. And I'm sort of curious how you guys -- what you're...

Philip W. Tomlinson

Well, you've heard me say before, we've been very surprised to see the transactions and authorizations in Europe on a percentage basis higher than what they are in the U.S. I'm pretty optimistic about Europe. We've got some good new prospects that are happening that I hope we'll be able to announce here in the next 60, 90 days if we get a contract signed, or 2 signed. So I mean, I don't know how you reconcile it, Tim, it seems to me like people are out buying. And one thing that we did see that was in our numbers to some degree is, if you recall a year or so ago, we announced that we had signed some debit business in Europe, really in the U.K. and Ireland, and we -- the second half of the year, we did pick up some debit authorizations from that -- it's not a huge debit business, but at least it's a good start for us. But I feel optimistic. I mean, we have pretty much resigned all of our large customers there. We feel good about it. We had one of our large customers in Europe in today who've -- and they gave a -- we try to do this once a month, we have a customer come in and speak to our people about what they're looking for. And while I can't tell you who was here, I was -- I thought they were very optimistic about what they had going on, and so we feel very good about Europe. It's -- but I don't know, I've been trying to reconcile it for over a year now, because every time you turn on Bloomberg or CNBC or look at the Wall Street, you think the sky is falling, but it's apparently not. And I do think that one of the things that has helped us is the fact that we're principally in Northern Europe. We don't have anything in Spain or Portugal or Greece or -- I mean, we're in Ireland, the U.K., Germany, the Netherlands, countries that have at least not been at the epicenter of all the problems.

Timothy W. Willi - Wells Fargo Securities, LLC, Research Division

Yes, yes. Great, I appreciate that. And the second question I have, and then I'll hop off, is just around the acquiring business in North America. As you guys think about that business and what's going on in the marketplace between stuff around mobile and a sluggish economy, there seems to be a lot more talk about the need of acquirers to be more than just payments companies and bring more to the table for merchants to protect margin and pricing and market share. I guess I'm curious about your thoughts on that topic, or if you feel like this is still just scale, scale, scale around the pricing for payments. And also...

Philip W. Tomlinson

Well -- I'm sorry.

Timothy W. Willi - Wells Fargo Securities, LLC, Research Division

No. But I was just going to say, and to whatever your answer is there, how do you guys feel about the money you're spending on truly bringing differentiated products that are maybe not necessarily payment-centric that are purely logical for you to be selling to merchants to protect the margins, the revenue, the market share of your acquiring operation?

Philip W. Tomlinson

Well, that was one of the reasons we went after ProPay and acquired it. But I do think the scale and price are always going to be incredibly important. This mobile thing is going have to play out. I cannot -- there's so many people offering a mobile product or a mobile solution that you just cannot keep up with them. And as I've said before, a lot of those folks will fall out to the wayside. I mean, we have a mobile product that is working. As a matter of fact, we just had a celebration here last week. It's working up at CIBC. We're proud of it. We like it. Is it where we want to be at the end of the day? No. And I think you'll probably see folks like us...

[Audio Gap]

...multiple options. Mobile has got -- there are some issues there that the issuers are worried about. There are issues there that the -- I mean, you can do a lot of really neat things. There's some liability issues, and you can really spend a lot of time talking about mobile, but it's going to happen and I certainly -- we have no doubt about that and we want to be a player in it. And I think every day that goes by, it sorts itself out a bit. But we're not there yet. And we're certainly trying our very best to stay on top of it. And we think we're making progress, but we're not where we would like to be. And I do think that there's ways with mobile to really differentiate yourself and bring new products to the table. And you're seeing it on us. The transactions are small, but you're seeing it. And this time next year, they will probably be doubled. But I don't have the total answer there, Tim. I mean, it's -- we've got some people around here that I think are certainly more expert than me, and thank goodness for that.

Operator

The next question comes from the line of Craig Maurer.

Craig J. Maurer - Credit Agricole Securities (USA) Inc., Research Division

Quick question. Two questions, actually. First, follow-up on the last question. With this whole mobile commerce idea, do large merchants actually want you playing in that space? Or are they just focused on, TSYS, get us the best price, best product you can around core processing, we'll figure out the other stuff? Because it seems to me that with what Square brought to Starbucks, it was -- it remains to be seen whether that could ever mean anything to Starbucks. Starbucks got it right themselves, from the mobile side of things, and Square is buying a beta on beta, from what I could see. So did the large merchants even ask TSYS for that, or are they going to...

Philip W. Tomlinson

I don't think the large merchants are knocking down the doors, but I do think the consumer is going to want it.

Craig J. Maurer - Credit Agricole Securities (USA) Inc., Research Division

But the question is who provides it? Does something like MCX develop something in-house and do it themselves?

Philip W. Tomlinson

Yes. No, I mean, that's been the issue the whole time. I mean, the story with Isis and MCX, and, I mean, but we do know that our customers, that TSYS issuing customers want solutions. So whether you provide them on the merchant side or the cardholder side, we're going to have to provide both sets of it.

Craig J. Maurer - Credit Agricole Securities (USA) Inc., Research Division

Okay. Secondly, if I could ask again on Brazil more of a philosophical question. Down in Brazil, we have one major card operator that's fully integrated from the acquiring side to the issuing side. From your point of view, what does a Bradesco want to do to compete with that? Is it outsourced processing to get more efficient at it? I mean, or they will -- do you think they work to buy something over time and emulate it? I'm just curious.

Philip W. Tomlinson

That's a very good question. I certainly wouldn't presume to answer for them, but I mean they're -- they're huge, and I think you probably know them better than I do. But I think they would probably look to buy something or to -- we would hope they would take the time to chat with us and maybe there's something we can do together, you just never know. We're not talking to them about that, but I mean, we'd certainly like to.

Operator

And the next question comes from the line of Kevin McVeigh.

Kevin D. McVeigh - Macquarie Research

I wonder if you could just give us a sense. It looks like the range of guidance on the top line, the range was $55 million in 2012. This year, we're narrowing that down to $35 million. Is it just better visibility and more conviction in the economy? Are there other variables that kind of help us narrow that range? And just a very impressive range given it's a full year's worth of guidance.

James B. Lipham

I think we've got more clarity into next year with the conversions where they are, and with the anniversary of pricing and the like. I think that the lost business -- I mean, it is just a lot clearer to us.

Kevin D. McVeigh - Macquarie Research

Super. And then just it sounded like last quarter we're starting to see some solicitations come back for the first time in a while. Has that continued, and do we expect that to continue as we think about 2013?

Philip W. Tomlinson

I think it's going to continue. I think people are -- again, as I said last quarter, it's a very profitable product for the issuers. And although I think probably in some issuers, the past due, the delinquencies have gone up a bit, but that's to be expected in a high-yield product.

Operator

The next question comes from the line of Glenn Greene.

Glenn Greene - Oppenheimer & Co. Inc., Research Division

Just a couple of questions, kind of just follow-ons from previous questions. But the first one, sort of thinking about the 2013 guidance, the Slide 14 and the lost business, the 5% to 7%, and it sounds like from all of Jimmy's comments that we're kind of getting past that and cycling through stuff. And I guess it surprised me, the magnitude of that, and it's higher than what it was in '12. Can you just remind us the major piece-parts making up that 5% to 7% headwind for '13?

Philip W. Tomlinson

You got it there?

James B. Lipham

Yes, I mean, you got a -- continue to see some Bank of America, and now we've got new contract with Navy Federal, Target, a few others, and...

Philip W. Tomlinson

RBS.

James B. Lipham

RBS is still there. Merchants have got a few customers that have been renegotiated also with pricing issues.

Glenn Greene - Oppenheimer & Co. Inc., Research Division

Okay. So this is a pretty good number. So it's kind of like known stuff that you were already renegotiating...

Philip W. Tomlinson

Oh, yes, yes. We've consciously renegotiated several -- Jimmy just told you, 3 or 4 big contracts that we have. And I think you'll recall, we were really excited when we told you, in I think the third quarter, that we had re-signed Royal Bank of Scotland through 2023 which is -- and you know about the hit we took on commercial card to finish out the Bank of America business and get that signed and get on with it. Target was a big renewal for us. And the other thing is, we -- sometime, what, about midyear, we get out of the Chase licensing business.

Glenn Greene - Oppenheimer & Co. Inc., Research Division

So that cycles through being -- getting in the third quarter?

Philip W. Tomlinson

Yes. We've been collecting that now for about 5 years.

Glenn Greene - Oppenheimer & Co. Inc., Research Division

So will you -- so how does that -- that's actually -- I forgot about that, but does that mean you won't be getting revenue from Chase after the second quarter?

Philip W. Tomlinson

Well, it means we won't be getting it on the licensing. They're still a large customer of several products, but the licensing fees will go away.

Glenn Greene - Oppenheimer & Co. Inc., Research Division

I got you, okay. Different topic and it's a very similar question to one that Darrin asked on North America, but it's basically the revenue growth in international is essentially flat year-over-year, but the transaction growth was about 18%. And is it the same phenomenon that you have bundling in international, or is there some other phenomenon that we should be thinking about as relates to transaction revenue growth?

Philip W. Tomlinson

That's part of it, that's part of it. And again, I talked about Royal Bank of Scotland, and we had several smaller ones. That's, by far, our largest customer internationally. And of course, ABN AMRO went away, and that was -- I think that was about $3 million.

Glenn Greene - Oppenheimer & Co. Inc., Research Division

Okay, okay. So it sounds like it's more of the pricing issue or renegotiations rather than...

Philip W. Tomlinson

Renegotiation. And we talked about losing somebody, I mean, ABN AMRO -- well, you know the story on ABN. They were acquired and...

Glenn Greene - Oppenheimer & Co. Inc., Research Division

Okay. And let me just squeeze one more in, in the interest of time. I know you gave some good guidance by segment on the margins. And I think you talked about North America being sort of mid-single digit revenue growth. Just a little bit of help in terms of how to think directionally about international and merchant services revenue growth in the context of that 6% to 8%.

James B. Lipham

I don't have it broke out here with me by segments on the guidance, so -- and we normally don't really give guidance by the segment. But obviously, the biggest piece of our revenue is North America and the international piece on the issuance side.

Operator

The next question comes from the line of Greg Mahalus [ph] -- I'm sorry, that was George Mahalus.

Unknown Analyst

Just wanted to get some color on the ProPay acquisition, and I know it's early days. But can you give us a sense as to the size of the merchants that ProPay is signing up, maybe in terms of purchase volume?

Philip W. Tomlinson

George, I can't off top of my head. I don't know the answer to that question. And typically, we don't get into that kind of detail, but -- I mean, they have some very large merchants, but I couldn't tell you that kind of volume. Sorry.

Unknown Analyst

Okay, no problem. Let me just shift gears then. With the BofA win, are you sensing that there are any other large in-house card issuers who are, perhaps, a little bit more willing to explore outsourcing going forward?

Philip W. Tomlinson

Sure, absolutely. I'm the eternal optimist. I think they all want to explore doing business with us. And I do predict that over the next 12 to 24 months, we'll have some success with that. It is a very, very long sales cycle. And I think as these banks have gone through some of these really difficult times, they are starting to feel like they have to look at every alternative, whether it's us or someone else. And we certainly are pushing as hard as we can to have that opportunity. But there certainly are banks out there that do it themselves, do it with our competitors, and we think we'll get a fair opportunity at any of those that decide to look around.

Unknown Analyst

Got you. Just quick follow-up on that. Do you envision that those would be traditional outsourcing partnerships or more licensing deals to get them in?

Philip W. Tomlinson

I would predict they would be more traditional processing arrangements.

Operator

The next question comes from the line of Greg Smith.

Gregory Smith - Sterne Agee & Leach Inc., Research Division

Quickly, what's the tax rate you're modeling for 2013?

James B. Lipham

In the 31% to 33% range.

Gregory Smith - Sterne Agee & Leach Inc., Research Division

Okay. And then just a question about leverage. I think you're still looking for opportunities on the acquisition side. Do you have -- what's your latest thinking as far as maximum amount of leverage you'd be comfortable with as a multiple of EBITDA or absolute dollars or something?

James B. Lipham

Probably 2% of EBITDA.

Philip W. Tomlinson

2x.

Gregory Smith - Sterne Agee & Leach Inc., Research Division

You mean 2x?

James B. Lipham

2x, yes.

Gregory Smith - Sterne Agee & Leach Inc., Research Division

Okay. So over $1 billion you'd be comfortable deploying if the right opportunity came along.

Philip W. Tomlinson

Right.

Operator

The next question comes from the line of Roman Leal.

Roman Leal - Goldman Sachs Group Inc., Research Division

Basically all my questions have been answered. I'll ask 2 quick follow-ups. First on international, I realize that margins there have been somewhat depressed by the reallocation. But given those resources there, help us think through how you're going to improve margins in 2013. How much of that will come from the potential wins you see in the pipeline versus pure cost reductions?

James B. Lipham

Well, I think you're going to see the improvement of probably 300 basis points. And I'd say it's probably 2/3 on the expense side and 1/3 in revenue.

Roman Leal - Goldman Sachs Group Inc., Research Division

Okay, that's helpful. And then the last one is just on capital allocation, just to get a follow-up on what's previously been asked, get to know kind of the ranges of leverage that you're comfortable with. Obviously, we all see the headlines and we see that there's a lot, especially in the merchant acquiring space, a lot of potential acquisition opportunities for you. It seems like you've been executing on some tuck-in acquisitions domestically, there are obviously some attractive opportunities internationally as well. Help us think through where you really want to focus on in expanding your merchant acquiring business.

Philip W. Tomlinson

Well, I think what we're looking for is to initially continue to expand in North America. We would love to have an opportunity to be in Canada. We're doing merchant processing in Germany. There's some countries in Northern Europe that we think would be a good match for us. Although we think there's still a lot to -- for us to look at here in the U.S., we're not going to try to be everything to everybody in the merchant acquiring business, and have never wanted to be. We're in the process of expanding our footprint in North America as well as expanding our product lines. And that's what we'll continue to do there. And I think you'll see us take advantage of opportunities that come across our table here or our desk here, and just like we did in 2012 with a couple of opportunities that we really liked. We want to be a top 10 player in the merchant acquiring business, and we think that we can. Now at some point, it would probably make sense to move on to Europe with the right opportunity, and we just, frankly, have just not come across the right opportunity yet. We've had some chances, we've had some deal opportunities and we've just passed on them. It just didn't make sense to go anywhere else. I don't know if that helps you any, but that's sort of what we're thinking now.

Listen, we've gone over our time. We hate to keep you late. There's no one else in the queue, and I just wanted to go ahead and close out and tell you that we remain focused on growing our business through value-added acquisitions or if that won't work for us, we plan on being aggressive with our stock buyback program.

I think we're very thrilled that we've made it 30 years. A lot of people in this industry have not made it 10 years. So I think that you can look for trends to continue to change in '13 and beyond, but I think that, when you think about TSYS, I want you to, if you will, know that we are committed to our clients and team members and shareholders, and we're thinking proactively how to get things done in our -- in a high-touch customer service environment that really gives us an advantage.

If anybody else has any additional questions, you can certainly reach out to Shawn Roberts, and I know you have his number.

And with that, we really do appreciate you taking time to be with us and asking us the questions, and we look forward to having a really good year in 2013. So again, thank you, and good night.

Operator

This concludes today's conference call. You may now disconnect.

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