Total Systems Services, Inc. Q4 2008 Earnings Call Transcript

| About: Total System (TSS)

Total System Services, Inc. (NYSE:TSS)

Q4 2008 Earnings Call

January 27, 2009 5:00 pm ET


Philip Tomlinson – Chairman, CEO

James Lipham – Chief Executive Officer


Bryan Keene – Credit Suisse

Glenn Fodor – UBS

[Paul Butterlie]


Welcome to the TSYS sponsored fourth quarter 2008 earnings conference call. (Operator Instructions) It is now my pleasure to turn the floor over to your host, Director of Investor Relations, Shawn Roberts.

Shawn Roberts

Before we get started we want to call your attention to the fact that we'll be making some 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 the TSYS's reports filed with the SEC. At this time, I'd like to turn it over to TSYS Chairman and CEO, Phil Tomlinson.

Philip Tomlinson

Welcome everybody to our fourth quarter analyst call. Thanks for joining us today to discuss the fourth quarter and 2008 year end results. As usual, James Lipham, our CFO will discuss our results with you in a few moments, financial results but before he does that, I want to give you a brief recap of 2008 and then talk to you a little bit about 2009.

2008 was our first full year of operation as a stand alone public company subsequent to our spin off from our former parent, Synovus, and frankly, I couldn't be more thrilled in how our team has dealt with that transition. During 2008 we built out numerous functions and systems which had to be shared with our parent in the past and we accomplished this build out below our budget, and most importantly we demonstrated to the world and confirmed to ourselves by our accomplishments that TSYS was ready to stand alone and the time was right for the spin off.

Secondly, our 2008 successes in the market place demonstrated that even as the global economy has been devastated by uncertainty and recession, the market out there remains receptive to the products and services that TSYS offers. We don't spend a lot of time looking in the rear view mirror, but I would like to run down a list of our 2008 successes with you.

First we reviewed processing agreements for longer term extensions with 14 existing clients. We signed 23 new payment agreements across the North American merchant and global services sectors. However, 2008 was not without its disappointments as we experienced the announcement of the end of our long term processing relationship with WaMu when it failed and was subsequently acquired by Chase.

As you know, Chase will process the WaMu portfolio on the license version of our TS2 software starting somewhere around the end of the first quarter of this year.

Wachovia is a great client, as you know was acquired by Wells. We are aggressively trying to sell our capabilities to Wells as they go through their decision process. We don't have any indication as of this conference call about their future plans on that credit card portfolio.

Now let's talk a little bit about 2009. I'm sure that everybody on this call would agree that the world's economies are in a terrible recession and that financial institutions remain under stress, and no one expects 2009 to be an easy year. In fact, we expect 2009 to be a tough year for our customers which will certainly create headwinds for TSYS.

We're certainly optimistic as a group and we anticipate the best outcome in every endeavor we undertake, but in today's uncertain times we try to make sure that we avoid any surprises and we don't want to surprise you, the investment community that owns and follows us. I don't want you to hear that we're not optimistic. We certainly are.

We have great strengths and we have great abilities to retain and continue to attract new customers, but in today's world which every day it seems like brings some new and unanticipated crisis, we plan on continuing to be very transparent with you regarding our assessments and our expectations and you'll hear that transparency today.

We expect our 2009 revenues, both total revenues and revenues before re-imbursables to be flat to up 2% over 2008 levels and our 2009 net income to be from down 3% to flat when compared to 2008. That may be hard to comprehend a little bit of that but you can see this guidance clear in the charts that are behind today's press release that was sent to you about 4:00 p.m. this afternoon.

Certainly we're not totally thrilled with this and this is below what the TSYS norm has historically been, but in today's world when you peel the onion back we feel really good about these numbers and are excited about where we think we're going to be at.

Through this recession, obviously banks are building up capital, reducing exposure to risk. They're seeking opportunities to leverage economies of scale and there is certainly a heightened focus on increasing deposits and reducing expenditures or expenses while also meeting the deadlines for increased regulatory compliance and government intervention.

As you know, the Fed just published the UDAQ rules which will be a massive effort for most any bank processing in house. We have looked at that and we feel very good about being able to do that and it's going to be pretty straightforward to us.

We hear every day that consumer confidence in the financial services sector is at an all time low and we're working to rebuild that loss of confidence in every way we can. If you think about it, you can't buy a plane ticket or book a room or buy anything online without a card. Cards have become a utility of every day life and consumers today are certainly nervous and worried about their jobs and card spending has slowed.

Our clients are working hard to help rebuild consumer confidence and find new and better products to offer, particularly as things begin to improve. And right now is the time for TSYS to make sure we're ready for the next growth cycle and we are convinced that cycle will come and this recession will end.

We know that we bring innovation and value that client's demand in tough times. We believe that we're a trusted partner with our clients and we're helping them focus on profitability so they can retain their good customers. We're helping to mitigate risk and use intelligent information provided by our analytics group to make smart and wise decisions.

Our clients want to evaluate their customer across the enterprise and get the right product to the right customer at the right time and we're committed to and making ongoing investments and enhancements to our services and technology. We're doing everything in our power to help our clients be successful and improve service levels.

While these challenges aren't so unique, let me tell you how they translate to our business. Card issuers are faced with increasing levels of delinquencies and subsequently increasing charge offs. The ever tightening credit environment has reduced solicitations as you can tell by your own mail. It's limited the number of new development in IT projects and we've seen a slowing of card holder transactions at point of sale as evidenced by the recent holiday slowdown.

Issuers are focused on reducing costs and wanting more for less and we have a strong history of being able to effectively manage our expenses. We're managing our costs and driving down expenses in a way like never before and I've said in years past, we're going to win by being faster, better and cheaper.

We continue to be strong financially. We've talked about this a lot in the past. Our balance sheet remains strong and continues to improve every quarter. Our debt is very limited and it certainly is priced right. Free cash flow continues to grow and our margins remain strong.

On the acquisition front which is one of the key reasons for the spin, we certainly have felt pressure to do deals but I think we have been very mature in our ability to know when the time is right as well as the acquisition being right. We certainly have made good progress with our M&A capabilities and we'll talk about that a little bit later.

So let me take just a few minutes and give you a quick sector by sector performance review of our strategy for growth in these areas. I'll talk about North America first. Our pipeline in the America's is as strong as it's ever been. We believe that every major financial institution is being forced to look at reducing cost.

We're starting to see finally, former proponents of in sourcing that have begun to re-evaluate the cost savings of out sourcing. Many of the banks are dealing with 20 and 30 year old systems, card systems that are just patched work. You know, the code is just put together with bailing wire and most of them need pretty much a complete re-write.

The last few that we've talked to that a re-write is anywhere from $500 million to $1 billion in investment and there's just not many people that are going to be able to do that. These new and changing rules from the Federal Reserve that I just talked about, they've got real deadlines and its prompting banks again to look out and see who can help them with something that massive.

We can do that. Today, we're happy to announce a new client in Mexico, Unicard Mexico. It's a subsidiary of Unibanco in Brazil which is one of the largest banks in Brazil, and it's our first Mexican client to run on TS2. We believe that TS2 is going to bring a lot more interest out of Mexico. It's a good win for us.

In our merchant services sector, the acquisition of Infonox in late October has opened new client types for TSYS in the gaming and casino sector. This Sunnyvale, California technology ranks smack in this middle of Silicone Valley adds a new payment, adds great new payment technologies with very fast speed to market capabilities that really our clients need today.

Infonox provides easy and simple connectivity to global, regional and in country networks as well as online networks like PayPal. Infonox also provides us with new channels in the mobile telephone payments business, Smart ATM's and bill pay kiosks around the country.

Global services has been a very exciting sector of ours or segment. It grew by 14% in 2008. This segment was negatively impacted by the currency exchange rates. Today's business outside the U.S. represents almost 17% of the total revenue and we intend to grow this around the 30% mark in revenue by the end of 2011.

We renewed two of our clients in Europe, AIB and the Bank of America business to new long term contracts. The big news in Europe that we've announced today, you seen is, we've signed Duetsche Bank. We're very proud that they've selected TSYS to serve their German charge and credit portfolios. It's a huge win in Germany and I think it absolutely increases our global footprint as well as our credibility across that continent. It is something that we are very excited about.

We're also proud to announce that we've signed processing payment services for PaySquare in the Benelux. PaySquare is the first acquired processing client in Europe for TSYS and represents the first win in an industry with much, much more upside. We've got a long way to go in that business, plenty of room.

In the Asia Pacific region, we're continuing to make great progress with our joint venture with County Union Pay CUP Data and we just recently announced the signing Hong Kong's largest local bank, the Bank of East Asia.

We also recently announced that we had bought a new data center in Okinawa which is a province of Japan or state of Japan, and we have added three clients as a result of that and we recently signed Sony Finance and have gone live with that. I think it's just more indicators that we're winning in the global market.

We also believe that India holds great promise for us in the future. We recently appointed our first managing director for India and we're currently servicing software licensing agreements with ICI, CI Bank, Access Bank and Barclays in this market.

Another big win for us just recently happened in Brazil, and I'm not prepared to give you the name today, but they did say we could talk about them, but we have signed after a lot of hard work by our folks, we've signed a letter of intent with the leading retailer in Brazil to service their private labeling and credit card business.

The current portfolio that has been signed is in the $8 million range and is expected to grow in the 18% to 22% range. Another really big win and another stake in the ground for TSYS.

We are launching numerous pre-paid programs around the globe and we're starting to see interest in these programs from everywhere we turn. That's sort of an update on where TSYS is, and with that I'll turn it over to Jim Lipham who will give you a lot of the financial details.

James Lipham

I want to briefly go over first of all the highlights of the fourth quarter and year to date numbers which will coincide with the financial statement that you have in the press release and then we'll talk a little bit about the segments and conclude with some financial comments in general.

If you look at the consolidated operations for the fourth quarter of '08, the U.S. dollar as Phil mentioned against the British pound dramatically during the fourth quarter, and as a result our Global Services segment was translated into fewer U.S. dollars upon consolidation.

But compared to prior periods and sequentially the fourth quarter results of '08 do not adequately reveal the underlying strength of our Global Services segment so to help isolate the impact of that, we provided in this press release on the last page a GAP reconciliation schedule which will help you see the impacts of this true up on the exchange rates.

We call it "cost of currency' basis so I'm going to make reference to that as we go through here. When you look at the quarter, consolidated revenues before re-imbursables were up $377 million or 4.3% over last year. This is down about 1.6% sequentially over the third quarter and is largely impacted by the swing in that currency translation of our Global Services segment which you can see when you look back on that page.

The increase over last year is a result of really the North American segment has had growth, internal growth of customers and the like and that's helped offset the de-converted customers that we've had since last year.

In the Global Services segment we saw good growth again driven by the new processing business related to Cap One and Nationwide that got converted during the early part of '08.

The Merchant Services segment growth was driven by the acquisition of Infonox as well as other growth in new services to clients. But total revenues for the quarter were $493 million, up 7.6% over last year and the total revenues during the quarter were impacted unfavorably by $18.8 million due to the foreign currency translation difference that we had from '07 to '08.

Internal growth rate of existing clients showed an increase of 6% for the year, and this is in the revenue growth, not just the account on file. The account on file internal growth rate is about 12%, but the actual revenue is up 6%.

Total accounts on file at the end of '08 were $352.5 million which is in the press release, and that's a decrease of 6.1% compared to $375 million a year ago. This net decrease of $23 million results as you can see there adding $22.7 million accounts for new clients and $36.5 million of internal growth of existing clients, all this helping offset the de-conversion of $35.9 million and the purging of another $46.3 million of inactive accounts.

When you look at transactions, our same client transaction volumes for the fourth quarter were $1.91 billion and that's a decrease of 1.8% compared to $1.99 billion for the same period last year. If you look at total card holder transactions volumes for the fourth quarter, they were at $1.97 billion which was a slight increase sequentially compared to the third quarter of $1.965 billion. So there we have pretty flat quarters there.

The head count at the end of December 31 was 8,110 people full time equivalent employees, and that's a 17.2% increase over 6,921 of last year. This increase in mainly attributable as we've said to the European call center growing at the first part of the year and the rest of the increase came from the acquisition of Infonox in the fourth quarter brought on about 100 employees and then we've transitioned quite a few folks during the year from contract labor to employees.

When you look at operating income it's at $91.2 million for the quarter. That's an increase of 13% over last year and a decrease of 4.9% sequentially and this sequential decrease again is a result of ETA, translation adjustment which caused a decrease of approximately $2.5 million.

Our effective tax rate for the quarter was 31.5 and then for the year it was 34.6. Taxes in 2007 in the fourth quarter and end year to date were pretty much higher and as a result of the one time spend cost associated or due to the deconsolidation from Synovus and it was recorded in the fourth quarter of '07.

And then when you look at '08, we had recognition of a full year of research and experimental credits, tax credits that came in in the fourth quarter that had been not allowed up to that point and so you had a pretty good criss cross affect here in taxes compared to '07 to '08.

Net income was $66.3 million. That's an increase of 45.2% on a GAP basis compared to last year, and as I said before, the taxes played a huge part in that big growth.

Earnings per share on a GAP basis were $0.34 versus first calls estimate of $0.33 per share and as we are experiencing decreased levels of spending expenses, each quarter principally pertaining to stock option expense, most of the one time transition costs are now completed. Going forward, we feel there will be no additional one time spend costs so this will become less of an item.

For the year, switch over from the quarter, look at the consolidated total revenues met our guidance as did earnings per share for both GAP and excluding the one time spend expenses.

In spite of the currency headwinds in Q4, we had total revenue growth of 7.4% and operating income growth of 5.10% for the year. On a constant currency basis, consolidated revenues were up 9% for the year and this primarily driven North America reimbursable items was the largest driver and is mainly the attorney commissions and court costs related to our debt collection business.

In Global Services, we had new business from processing related to services that we mentioned about Nationwide and Cap One, and then on the Merchant Services side growth driven by acquisitions and new clients.

For the year we were able to achieve positive productivity by maintaining consolidated total expense growth below consolidated total revenue growth. For the year on non operating income it declined $18 million and that's reflected again when you consider the loss of $18 million in interest income and an increase of $8 million in interest expense along with an offset of around $8 million in other income. But that's the result of turning around to a levered position from where we were at the end of '07 prior to paying our dividend on a spend out.

Our consolidated tax rate for '08 was 34.61 and that's again as a result of the tax credit that we recognized. We do expect our tax rate going forward to be in the 35% to 36% range as we go into '09 and beyond.

Now a few comments on the segments, as you can see on the segment page, total revenues on North America up $342.9 million or 6% and the Electronic Payment Services line there was at $189.2 million or up 1.1% so a little increase there and we've mentioned before about how we have some new client revenues come on to offset the de-converted revenues and they pretty much offset themselves.

We had an increase in the client amortization with the signing bonus we had on the balance sheet for WaMu as we got notification they were leaving in March we had to accelerate the write off of that which came through as a contra revenue account and that was about $2.7 million.

On the other services line, revenues were $49.6 million. That was up 5.6% compared to prior year. We saw pretty strong growth in our commercial printing as well as our domestic call center business and debt collection this quarter compared to last year.

Reimbursable items increased 22.3% to $99.4 million up from $81.4 million. This is a result again of the increased court costs and attorney commissions. And you can see the North America segment as well as consolidated. That's a pretty big item showing an increase of revenues.

Total accounts on file for the U.S. our North America segment is $319 million and that's down 9.4% from prior year. Total cardholder transaction volumes for the fourth quarter were $1.689 billion. That's a slight decrease sequentially from $1.693 billion. When you look at the same client transaction volumes for the fourth quarter they were at $1.684 and that's a decrease of 1.8% when you compare to the same period last year, showing the indication there of lower sales that went on during this fourth quarter.

Our quarterly operating expenses before reimbursable items, they were flat when you compare to the same period last year. Head count at the end of '08 was 5,337 full time equivalents. That's a 4% increase over what it was last year. And again, the growth in head count pertains to the cost center business in the domestic area just like it does in the Global Services segment.

Operating income, it was at $64.7 million and that's up 1.5% sequentially and also 1.5% year over year. Our operating margin was at 18.9% and when you exclude reimbursable items, operating margin was at 26.6%.

On the Global Services segment for the fourth quarter, total revenues were at $80.7 million and down 8.4% sequentially and up 14.4% over last year. On a constant currency basis, these currencies grew 41% over last year for the quarter.

Electronic Processing Services revenues were $54.4 million and that's an increase of 9.6% over the same period last year, and they were negatively impacted also by the currency by $14.3 million. So on a constant currency basis, the Electronic payment processing would have been up 38.4% which is very good growth in our processing business.

The other services revenues were $16 million and that's an increase of $27.9 million. On a constant currency basis, these revenues increased about 63%. These revenues predominantly consist of our international cost center business which dramatically increased as a result of new processing business converted in '08.

Total accounts of file at the end of '08 were $33.5 million and that's an increase of 43.4% compared to $23.4 million last year, so you can see the good growth we've had in accounts. It goes along with revenues.

You look at the volumes for the fourth quarter, there were $282.1 million and that's an increase of 23.1% compared to '08. Sequentially our transactions are up 3.6% compared to $272.1 million last quarter.

Our operating expenses at $68.3 million. They were up 15.4% and were down about 4% sequentially. As we have completed these conversions during the year, the increase in expense growth has stabilized somewhat and the rate revenue growth has resulted in positive productivity.

On a constant currency basis, these expenses grew 40.4%. Head count at the end of '08 was 1,908 full time people. That's a 69% increase and we've mentioned before that big increase came in cost center business and good growth that we had with two big clients that we put on in '08.

Operating income was $12.4 million. That's down $4.3 million or 25.8% sequentially and that's primarily due to the CPA affects, but were up 9.2% over the fourth quarter of last year as we continue to maintain strong growth in our international business.

The net impact of foreign currency on the segments fourth quarter operating income was an unfavorable amount of about $4 million. Operating income was 15.4%, and that's a decrease of 70 basis points compared to last year's 16.1%.

We look now at the Merchant Services segment, we look at the fourth quarter revenues before re-imbursables at $62.7 million. They're up $4.3 million or 7.4%. Total revenues were $78.7 million, up 7.3% compared to last year. The growth here in revenues is a result of the acquisition of Infonox as well as some new client business that came on during '08.

On a point of sale transactions, they were at $1.24 billion. That's an increase of 1% compared to the $1.23 billion last year. Sequentially they were actually down 4%, showing the drop in the Christmas volumes that went on during the fourth quarter.

In head count we finished '08 at 865 full time people. That's a 27% increase over prior year and really equates to the increase in people due to the acquisition of Infonox I mentioned before.

Operating income was down 10% or $1.7 million sequentially and year over year it was down 11.7% or $2 million. The operating margin was 19.5% and then when you see the reimbursable items, it was [inaudible]. The margin at Merchant Services was impacted by purchase accounting adjustments and expenses related to a class settlement issue. That was a one time expense that came at the end of the fourth quarter.

On the balance sheet, I'd like to highlight a few things here about how strong it is and unlevered it is, but we finished '08 with $220 million in cash and that's unrestricted cash and I think if you look at the cash flow statement I think you'll see that we generated another $355 million from cash flow from operations.

And the $220 million that we have in cash is especially good in light of three major deals that we did are significant cash outlays that we had this year that are non recurring. We did the acquisition of Infonox in the fourth quarter for $50.9 million cash and then we were active in our share of repurchase agreement where we bought back $35.7 million worth of stock.

And the debt repayment, we had a debt repayment to the Bank of Tokyo Mitsubishi during the year of $54 million payment for that loan. When you consider that and still have the cash where it was at the beginning of the year and continuing to pay our operating expenses, it speaks well for the strength of the company and the balance sheet itself.

Our notes payable have remained the same, down a little bit from the previous year and as you know the big item there is $168 million note with Bank of America and the consortium of banks that helped with the spin out of TSYS and that's at LIBOR plus 60 basis points, so very good rate.

Speak just briefly about our guidance, and Phil talked some about it, but growth showed zero to plus two, It takes into consideration the weakness of the pound versus the pound and the Euro and the Yen, and we do expect some weakness to continue during the year. In North America we do anticipate growth in '09 that will offset the loss of the anticipated de-conversion.

You remember we talked about the internal growth we had in accounts and this past year in '08 was in excess of $36 million accounts. We do think WaMu's account is going to be around $20 million when the de-convert in March so we're hoping that next year we'll show a positive growth in the accounts.

Global Services, we expect to have six new customers in '09. We anticipate increased head winds related to the currency in '09 to more than double the impact that we saw in '09. If you remember we talked about $21 million was the impact to revenues negatively in '09. We're expecting that to move to about $55 million when you get to '09's revenues.

We do expect the exchange rates to stable out to where they are today. It's just that they'll be compared back to some pretty heavy rate at the first three quarters of this year.

On the Merchant Services segment in our guidance we accounted for some good growth with the acquisition of Infonox and provided expanded services and opportunities to grow with new products and really helps our existing and will also help us with new clients.

In summary, I'd just reiterate again that we've been several years here back to back where we've had some de-conversions going on in lost account growth. We've been able to maintain our bottom line growth or flat rate growth and it's been because of internal growth and some new business that came on and a direct response from our employees and how they've understood what's going on and hold expenses.

We work contracts and here we are forecasting '09 to be flat to down to slightly down and still have a decompression again, but we do have strong cash flow, good balance sheet. We don't have any credit risk. We have a little good will on the books but very small amount and we are excited about our opportunities.

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

Question-and-Answer Session


(Operator Instructions) Your first question comes from Bryan Keene – Credit Suisse.

Bryan Keene – Credit Suisse

I just want to go over some of the pluses and minus of the accounts on file heading into next year. I guess first on the de-conversions, the only major de-conversion right now that you are estimating, is it $20 million accounts from WaMu, is that right?

James Lipham

That's right.

Bryan Keene – Credit Suisse

And there's no anticipation yet or nothing in the estimates for what might happen to the Wachovia business.

Philip Tomlinson

Certainly that is not a huge customer. It's a very valued customer but we don't that decision is anywhere close to be being made. It may or may not be made before the year is over, but we certainly think that we would have a chance to retain what we have and possibly get the Wells business and we're certainly going to give it our best shot.

Bryan Keene – Credit Suisse

Then thinking about purging of accounts, can you give us an update on how that looked particularly in the quarter and how you think about that into 2009?

James Lipham

I think we had roughly as I think I mentioned before, I think it was 40 million something in accounts purged and I think that's going to be I hope pretty much all. You won't see much of that going on into '09 and I just remember for sure how many of the purges went on in the fourth quarter. I'll have to try to get that number for you.

Philip Tomlinson

I miss-spoke a second ago. We are going to de-convert the Nordstrom business and I think that's scheduled for July/August at this point. The date keeps moving on us and that's just the latest I have. We talked about that last year, but that's in the numbers.

Bryan Keene – Credit Suisse

Remind me, how many accounts is Nordstrom's?

Philip Tomlinson

Six million.

Bryan Keene – Credit Suisse

Then on the flip side, just talking about new account wins or new accounts that are going to be converted on the positive side can you talk about any of those clients? For example, Deutsche Bank, are those in the numbers already?

Philip Tomlinson

Deutsche Bank is. Brazil is not. We don't have a firm date on when we're going to convert Brazil yet. We're getting close there. I think Deutsche Bank will convert sometime in June.

Bryan Keene – Credit Suisse

And Deutsche Bank is expected to be about how many accounts?

James Lipham

I think it's initially about 1.5 million. Somewhere in that range.

James Lipham

It's between one and two million. You would make a mistake in comparing that to all retail account. I mean these private label accounts, we don't generate nearly the revenue out of a private label as we would say a Visa, MasterCard.

There were 12 million accounts that were purged in fourth quarter. When we say purged, that's just accounts our clients have had on file and for whatever reason they become inactive and we charge for accounts for on file. So it's a small fee but we do charge for it, and that's one of the ways our clients have been trying to reduce cost over the past year.

We think the purging business is pretty well done. I think most of the people have got as much of that as they want.

Bryan Keene – Credit Suisse

On operating margins when we think about it just as overall for the company, do we still believe we can get a little bit of leverage in the model or should we look flat at this point down margins.

James Lipham

I think what we've been saying is the 24 to 26 range. As the Global Services segment gets bigger, as we have talked about it becoming 30% of our revenue stream, we'll get some economies out of that and we'll see some improvement in that margin, hold the U.S. to where it is and see Europe getting better than they are right now.

Bryan Keene – Credit Suisse

You talked about pricing and have you had a lot of larger clients come back to you and try to get a discount for your services?

Philip Tomlinson

I hate to say this publicly but not really. Jim just said not any more than usual. I mean that's the world we live in, but it's not like anybody's lined up at the door or anything. As we renew contracts, we typically work our way through all of those discussion. But it's not like there's some demonstration out in front of the front door trying to get lower prices. It's just not going on.


Your next question comes from Glenn Fodor – UBS.

Glenn Fodor – UBS

It's Glen Fodor from UBS. Regarding your initial comments that you felt good about the numbers that you laid out there and you don't want to give any surprises to the street, just trying to see how this train of thought represents any change or approach to guidance versus prior years and help us bracket the ranges you put out there. So in prior times when things were better, maybe you would give guidance that's attainable but you'd need to pedal a little bit to get there. That said, is your approach more aimed at laying out the bare minimum forecast and we could thing of these ranges as pretty much bottom line expectations?

Philip Tomlinson

We're not smart enough to do a bare minimum. We always have a little stretch in there. Last year we have probably 125% of the stretch we've got today, but we do have some stretch in there and we think that we'll make it up. But it is not a cakewalk. It's not a lay up. We're going to have to work hard to get where we're at.

Glenn Fodor – UBS

A question on pricing, how does the contract renewal schedule look over the next 12 months? Is it heavily weighted toward the beginning of the year, the end of the year or is it pretty modest?

Philip Tomlinson

I think it's pretty straightforward. We've got one good sized customer that we, they're not our largest customer but we're trying to get them renegotiated and I think we're down to the bottom of the ninth. They're like a lot of banks. They're a little bit preoccupied with some internal issues and I have no doubt we'll resign them but it's just a continuing process.

We don't have a lot of big stuff going on. We don't have a lot of big renewals. We always have small ones going on. I think we've told you in the last 18 to 24 months we've pretty well tried to renew every major customer we've got on the card side and on the merchant side. We think we're in pretty good shape.

Now that doesn't stop them from coming back and asking for a price decrease, but we don't feel required to give them one either.

Glenn Fodor – UBS

With the WaMu contract, I was wondering if you could walk through it in a little more detail on how we should treat this, because I know there are some gives and takes because you're taking away revenue from WaMu but then you're giving some back to J.P. Morgan on the license side and then there'll be some termination payments over several quarters. What are the moving parts here? Can you go through that?

Philip Tomlinson

We can't go through the termination fee. We have an agreement that we would not go into the details of that. They're going to leave as I said earlier in the March/early April is the date right now and we have no reason to expect that will change. We certainly do pick up some revenue on the license agreement, but it would be wrong to think that it's significant enough to make a real difference on the loss of the WaMu revenues.

James Lipham

On the termination fee, it'll be recognized over the remaining months of '09 and that's the way it's paid after the de-conversion in March. So when you get through '09, you'll have the impact of WaMu completely gone as a way of processing fee and '10 will be basically just the license fee coming from Chase.

Glenn Fodor – UBS

And was the net effect in '09 $20 million? Did I hear that right or where you talking about something else?


Your next question comes from [Paul Butterlie]

[Paul Butterlie]

On WaMu was the only thing that hit 4Q the accelerated amort? Is there any termination fees that were paid? I know you're not going to discuss any amounts but were there any termination fees paid in the quarter?

James Lipham


[Paul Butterlie]

So just the accelerated amortization?

James Lipham

[Paul Butterlie]

And then the settlement in the Merchant segment, you talked about a settlement that impacted that segment?

James Lipham

$3 million pre tax. That was on the Merchant.

[Paul Butterlie]

And were those the only one time larger items in the quarter?

James Lipham

I believe that's it.

[Paul Butterlie]

Looking at the guidance, it looks like it assumes a modest decline in margins, somewhere in the 24% range. I'm just wondering if you could discuss what is impacting that. It looks like a lot of it at least in 4Q was on the other operating line. Maybe you could just talk about what happened in 4Q on the other operating expenses and kind of how you're looking at margins in '09.

James Lipham

I think when you look at the margins, if you look at it on a constant currency basis you won't see that decline. I believe what you're look at is the translated numbers and it's drawing that margin way down. I believe Europe on a constant currency would be in the 19% range versus where it is today.

If you look at that constant currency page at the end of the press release you can see the better margins reported if you back out the translation effect.

[Paul Butterlie]

But the currency impact is just kind of a straight margin, right? There's no hedging or anything else that impacts that?

James Lipham

That's correct.

[Paul Butterlie]

So there's really not going to be a huge impact on margins is there? I mean the international business is roughly in line with the corporate average or a little bit below?

James Lipham

As far as the 26% margin that we had here in the U.S. on the North American side, Merchants suffered a little bit but that was mainly because they got hit with that arbitration settlement at the end of the fourth quarter, so it messed up their fourth quarter margins a little bit. But we still believe our margins are going to run in the 24% to 26% range and as we said before, as Europe gets bigger and scales, we'll be able to bring margins up a little bit hopefully.

[Paul Butterlie]

In 4Q, there was other income that looked like it was quite a bit higher. What was that from? About $5 million or so.

James Lipham

Other than CTA I can't think of what it would be. The cost center business and CTA.

[Paul Butterlie]

Looking at the balance sheet, debt was down $50 million in the fourth quarter. Was that the note you talked about paying back?

James Lipham

That's correct.

[Paul Butterlie]

You did buy back some stock but I'm just wondering how you're thinking about the share buy back versus very cheap debt at these levels and given where your stock is trading, I'm just curious about what you think about as far as share buy backs and really why not be more aggressive on the share buy backs here.

Philip Tomlinson

We talked about this on the last quarter call. We certainly do have a stock buy back in place as an ongoing argument as to whether you should buy the stock back or say you try to buy something to grow the business. My theory is, in today's financing environment, we need to save our cash to try to buy something that can add value to the bottom line of this company.

That could change if the financing environment gets worse, but I don't expect it to change any time soon. That's our strategy, and that's what we're looking at now. We can start to buy back when we feel like it or when we think it's required, but at this point in time, we've got a few things we're looking at and we would really like to see if we could make something happen.

James Lipham

I could add to that if you look at the markets today, they're starting to open up a little bit but you're looking at rates that are a lot higher than what we've got debt at. We do have part of our financing facility as you know we put it in place for $420 million at LIBOR plus 60 so we could go get that probably. That's the extent of it.


That appears to be all the time we have for questions. I'd like to turn the floor back over to the speakers for any closing comments they'd like to make.

Philip Tomlinson

I'll close it out. Before I close I'd be remiss if I didn't acknowledge the passing of one of our great directors, Griffin B. Bell. Judge Bell was a former Attorney General. He was a Federal Judge and for years he was a managing partner in King and Spaulding, the largest law firm in the south. He was a TSYS Director for 20 years and helped TSYS and our Board dynamics in more ways than most people would know. Judge Bell would have been welcomed on any Board in the world, and he chose TSYS. And we loved him and we'll miss him so much.

There's not a whole lot we can do about this economic environment. It certainly is a challenge but we do believe that we offer a service that is needed and good in bad times. In fact, I strongly believe issuers and suppliers need TSYS more now than ever. Most all of our products we believe are the gold standard and we can compete and we have shown we can continue to win in this environment.

I'm more optimistic today than ever before about future opportunities here at TSYS. Remember if you walk away with one thing, we love, historically we've loved being associated with banks and we still love banks because a lot of them are our clients, but we're not a bank and we don't make loans.

We process payments, credit, debit, pre-paid and we believe that in times of crisis, opportunities are going to arise for TSYS. We grew up in this business. We know how to manage it in good and hard times. We'll continue to become more diverse with expanded service and product offerings. Our pipeline is growing as evidenced by today.

We have a passionate and driven team with a great will to win and we're in the game and better equipped each day for the next growth stage which will come. We're working hard to ensure that we do everything possible to help our client's weather this storm and we believe we'll succeed in coming out of this for lack of a better term, economic wilderness, and be better for it.

Remember, my goal is to be better, faster and cheaper than anybody else in the world. And with that great technology and our secret sauce, which is our team of people, we believe we'll continue to be successful in this business as we go forward.

I want to thank you for your interest. Thank you for being on the call and thank you for continuing to take a look at TSYS, and we will see you next quarter.

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