Vantiv Management Discusses Q4 2012 Results - Earnings Call Transcript

Feb.20.13 | About: Vantiv, Inc. (VNTV)

Vantiv (NYSE:VNTV)

Q4 2012 Earnings Call

February 20, 2013 8:00 am ET

Executives

Nathan Rozof

Charles D. Drucker - Chief Executive Officer, President and Director

Mark L. Heimbouch - Chief Financial Officer and Principal Accounting Officer

Analysts

Bryan Keane - Deutsche Bank AG, Research Division

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

Georgios Mihalos - Crédit Suisse AG, Research Division

Reginald L. Smith - JP Morgan Chase & Co, Research Division

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

Wayne Johnson - Raymond James & Associates, Inc., Research Division

Nathan J. Novak - Robert W. Baird & Co. Incorporated, Research Division

David Togut - Evercore Partners Inc., Research Division

Julio C. Quinteros - Goldman Sachs Group Inc., Research Division

Andrew W. Jeffrey - SunTrust Robinson Humphrey, Inc., Research Division

John T. Williams - UBS Investment Bank, Research Division

Operator

Good day, everyone, and welcome to the Vantiv Fourth Quarter and Full Year 2012 Earnings Conference Call. [Operator Instructions] Also as a reminder, today's call is being recorded. And at this time, I would like to turn the call over to Mr. Nathan Rozof, Senior Vice President for Investor Relations. Please go ahead, sir.

Nathan Rozof

Good morning, everyone, and thank you for joining us today. Our fourth quarter and full year 2012 earnings release can be accessed on our website under the Investor Relations section at vantiv.com.

During the call today, Charles Drucker, our President and Chief Executive Officer, will discuss Vantiv's 2012 achievements and outline some of our key initiatives for 2013. Mark Heimbouch, our Chief Financial Officer, will then review our financial highlights and discuss our guidance for 2013.

Throughout this call, we will be presenting non-GAAP financial information, including net revenue, adjusted EBITDA, cash net income and adjusted cash and income per share information. These are important financial performance measures for the company, but are not financial measures as defined by GAAP. Reconciliations of our non-GAAP financial information to our GAAP financial information appear in today's press release.

Finally, before we begin our formal remarks, I need to remind everyone that our discussion today will include forward-looking statements. These forward-looking statements are not guarantees of future performance, and therefore, you should not put undue reliance on them. These statements are subject to numerous risks and uncertainties that could cause actual results to differ materially from what we expect. Please refer to the forward-looking statement disclosure in our earnings release.

Additional detailed information concerning many of the risks regarding our business and the factors that could cause actual results to differ materially from the information we give you today can be found on our most recent quarterly report on Form 10-Q under the headings risk factors and MD&A, and in our subsequent filings with the Securities and Exchange Commission, which are available at sec.gov.

I will now turn the call over to our CEO, Charles Drucker. Charles?

Charles D. Drucker

Good morning, and thank you for joining today's call. Our fourth quarter results capped an outstanding first year of Vantiv as a public company, demonstrating the strength of our business model and the execution capabilities of Vantiv's team.

Vantiv is well positioned to generate superior growth and profitability as we continue to broaden and deepen our distribution channels, expand into high-growth markets and increase our small to mid-sized client base. Executing on these initiatives provides us a clear runway to expand that business and to leverage the scale and efficiency of our single integrated processing platform.

At the time of our IPO, we established mid-term expectations for 10% or more net revenue growth and 15% or more cash net income growth. Our 2012 net revenue growth of 18% and cash net income growth of 41% exceeded those expectations, and we expect to do it again in 2013. With respect to 2012, we generated $1.023 billion in net revenue and we earned $1.22 in adjusted cash net income per share.

Over the past few years, we have aggressively invested in new channels and new products, positioning us for growth. Today, we are taking market share by competing in new geographies, as well as emerging channels and verticals, where we had limited access just a few years ago.

I want to take a few minutes to connect some of the strategic initiatives to our operating performance in 2012, as well as discuss why we are confident that we will exceed our mid-term growth targets in 2013.

At the time of the IPO, we said that we were going to drive superior growth and profitability by broadening and deepening our distribution channels, expanding into high-growth segments and verticals, developing new products and services and increasing our small to mid-sized client base. We continue to execute on these strategies.

First, we broadened and deepened our distribution channel primarily through our merchant bank and value-added resellers, or VAR initiative. We signed nearly 800 new branches to our merchant bank program in 2012, which are just starting to ramp. Our new merchant bank relationships in 2012 include Trustco Bank and Washington Federal, which alone added over 300 new branches.

On the FI side, we have signed a number of new clients, including the independent community bankers' associations, or known as the ICBA. Within our VAR channel, we formed several new partnerships focused on key verticals such as government, health care and gaming.

For example, a new partnership with official payments in the government vertical will enable us to process payments for universities, utility companies, federal, state and local governments. We formed relationship with Renew Advantage, an intelligent corporation, during 2012 to expand our reach into health care verticals. And in the gaming vertical, our growing list of partnership includes CAESARS Online.

Second, we expanded into the eCommerce segment with our acquisition of Litle & Co., which closed late in the quarter and positions us as a leading player in a high-growth segment, with a focus on becoming one of the largest processors of online transactions. Given Litle's expertise and market position, that business grew well in excess of the market in 2012, with processing volume growth of 28%. The combination of Litle's best-in-breed technology and talented team, combined with Vantiv's scale, extensive distribution and support capabilities, will enable us to differentiate our offering, capture our market share and drive superior growth, managized [ph] by the future successes that Vantiv and Litle will enjoy together.

Third, we said we'd grow by developing new products and services to meet the evolving needs of both merchants and financial institution customers. We introduced several new products in 2012, including our new mobile solutions, mo [ph] check deposit, Vantiv Analytics and our suite of prepaid products including reloadable, gift, rebate and reward.

Finally, we continue to increase our merchant base in both large national, as well as in the small to mid-sized client base. In 2012, the majority of our new sales and merchants were in the small to the mid-sized segment, and we expect that shift to continue. Serving small to mid-sized clients creates an opportunity for us to win additional market share. So what I want to do is take the opportunity to address potential concerns regarding new entrances and the potential for disruption or pricing pressure in this space.

This is an important issue to understand, as some may interpret the source of Vantiv's strong margin as their fees, which some think may be unsustainable given increased competition. This is absolutely not the case.

The source of our competitive advantage is our superior cost structure. Despite concerns about pricing, these new entrances are not creating pricing pressure for us. Most of these new companies are serving small merchants and are focused on monetizing loyalty and marketing program, not on displacing merchant acquirers, as they all connect to traditional mentioned acquirers to process their transactions.

In comparison, Vantiv has a diverse client base including a strong position in the large national client segment. While large national clients provide scale, we generally make just a few basis points for processing their transaction. Our industry-leading scale and cost structure provides us with a competitive advantage. For example, we processed over $503 billion in merchant sales volume in 2012, and given the efficiency of our single integrated processing platform, we've generated superior EBITDA margins.

With our scale and cost advantages, we are positioned to take market share, particularly among the small to mid-sized merchants. We expect our net revenue per transaction to expand towards the level of our peers, which will benefit our margins.

In summary, the combination of new entrances and new technology in the small to mid-sized merchant segments represent more of a net opportunity than it does being a threat. Increased transaction growth through the conversion of cash and check through electronic transactions in the micro merchant space, as well as the introduction of alternative payment types, ultimately increases the total addressable market that we may serve.

Moving on to sales and relationship management. We believe our clients, both new and existing, choose to work with us not only because of the breadth of technology and efficiency of our platform, but because of our consultative approach to the service. Payment technology continues to change rapidly, and it's easy for clients to get confused. For example, what are the new rules around debit routing mean? Surcharging, PCI, EMV? Our clients want to know whether they need to invest in mobile wallet right now, NFC or tablets.

We help our clients answer these questions and navigate the emerging payment landscape, and our team of experts work to provide clients with the right solutions. Because of this, we rarely lose a large client, which contributes to our attrition being one of the lowest in the industry. In fact, we renewed over 30 of our largest merchants last year including Kroger's, Macy's, Kohls, Wegmans, Office Depot and OfficeMax. Most of these renewals resulted in contract extensions of 3 or more years, and in many cases, extended client relationships that span 2 decades or more.

With respect to new business, 2012 was a great new sales year. New sales were up by over 20% year-over-year with significant growth in both our merchant, direct channel and FI business. Looking forward, we see significant runway ahead. We will continue to drive superior growth and profitability in 2013 and beyond by executing our strategic priorities. Our strong growth performance this past year increases our confidence that we will be successful in 2013.

In order to drive the business in 2013, we will first extend our leadership position in the eCommerce space. As I noted last quarter, we've been growing our business at strong double-digit rates prior to the Litle acquisition without a significant eCommerce presence. Now with the acquisition of Litle, we are poised to take additional share in this high-growth market.

We will also expand our distribution beyond eCommerce with our merchant bank and VAR channels. As I mentioned earlier, we signed nearly 800 new bank branches in 2012, but most of these will ramp and begin producing revenue for us in 2013.

We will continue to partner with emerging technology companies and enable independent software vendors or ISPs as they're known as, to leverage our payment processing capabilities and expand our market presence. As the payment market evolves, we will see these partners as key to our success in this fast-growing vertical. Therefore, using tools like Vantiv Solution Builder and our easy to use integration points, we look to become a preferred partner for these new players.

We will continue to leverage our scale and our capability to innovate and enable new alternative payment technologies, as evidenced by PayPal In-Store checkout, which provides a new payment alternative for our clients. We will invest so that we can maintain world-class service for our clients and ensure we have the emerging technology capabilities to meet their needs.

For example, I'm proud to say that we are the first U.S. acquirer to certify to process both Visa and Interlink EMV transactions.

Finally, we will continue to deploy capital to support our growth initiative and to do it in a very disciplined and strategic manner to drive shareholder value. We believe that the acquisition of Litle is a perfect example in which we strategically expanded our business.

I'm proud of our company's ability to continue to execute on our commitments. At Vantiv, we take pride in the fact that we deliver on our commitments and always put the client first. That means living our core values: taking action, taking ownership, doing the right thing and working together. Our people go the extra mile for our clients, contributing to strong growth and driving shareholder value.

With that, I'll turn the call over to Mark to review our financial results and our 2013 guidance. Mark?

Mark L. Heimbouch

Thanks, Charles, and good morning, everyone. As Charles noted, our business generated strong net revenue and profit growth in both the fourth quarter and full year for 2012. Specifically, in the fourth quarter, net revenue increased 12% due primarily to 20% growth in transactions and adjusted cash net income growth of 39%, resulting in adjusted cash net income per share of $0.38.

For the full year 2012, our business generated a 19% increase in transactions and 18% net revenue growth. Further, the scale and efficiency of our single, integrated processing platform grew a 50% adjusted EBITDA margin, which is a level of profitability that is superior among our peer group. The combination of our growth and profitability resulted in cash net income growth of 41% to $260 million, or $1.22, in adjusted cash net income per share for the full year.

In the merchant segment, transactions grew by 23%, and net revenue grew by 12% in the fourth quarter. Transaction growth exceeded net revenue growth as the large national processing contract that we converted in the second quarter drives relatively more transaction growth than net revenue growth. In addition, we also lapped the net revenue benefits related to the Durbin Amendment that began in the fourth quarter of 2011 resulting in lower net revenue growth in the fourth quarter 2012, as compared to the prior 3 quarters.

Our Financial Institution's business continues to perform very well. In the fourth quarter, net revenue increased by 10%, which was primarily driven by a 7% increase in transactions and growth in value-added services revenue. In both segments and consistent with other retail and spending data release for the fourth quarter, we did see consumer spending slow during the quarter. As we said last quarter, we will continue to invest in growth while maintaining superior profitability. Our adjusted EBITDA margins remained strong at 53% for the fourth quarter and 50% for the full year.

Two other important factors also impacted earnings for the quarter and the year. First, interest expense declined by 62% or $15.9 million in the fourth quarter, as compared to the year-ago period, due primarily to lower debt balances and lower debt cost following our financing for the first quarter of 2012.

With respect to cash net income, during the fourth quarter, we recognized a $6.5 million reduction in income tax expense, or $0.03 on an adjusted cash net income per share basis. This benefit is recurring and is attributable to the amortization of intangibles and other tax attributes associated with acquisitions, including Litle, and to the tax basis step-up associated with our separation from Fifth Third Bank and their subsequent sale of shares. These tax benefits will recur over a period of approximately 15 years and are expected to reduce our income tax expense with respect to cash net income by approximately $4 million per quarter in 2013 and beyond.

Going forward, income tax expense with respect to cash net income will reflect our long-term effective tax rate of 38.5%, plus the impact of these cash tax benefits. Further, it's important to note that these tax benefits will increase in the future if Fifth Third Bank sells its shares.

Finally, this morning, I will provide guidance for the full year 2013 expectations. Based upon our sustained performance and significant success in driving new sales during 2012, we remain confident in our ability to generate double-digit growth. We expect net revenue to be between $1.21 billion and $1.23 billion in 2013, which represents growth of between 18% and 20%.

Litle is expected to generate approximately 5 percentage points of that growth with our core Vantiv business growing at 13% to 15%. The amount of new business that has been signed as well as our expectations for new business to be signed in 2013 gives us confidence for our growth in 2013 and beyond. Incremental new business signed in 2012 should contribute approximately 2 percentage points of growth in 2013.

Strong net revenue growth, combined with expectations for up to 40 basis points of adjusted EBITDA margin expansion in 2013, contribute to full year adjusted net income per share guidance of $1.46 to $1.50.

With respect to quarterly trends, we expect quarterly net revenue growth to expand as we progress through the year with relatively higher growth expected for the second half of 2013, given the conversion of new business and expectations for consumer spending to strengthen through the year. Cash net income growth will be significantly higher during the first quarter as compared to the remaining quarters, due primarily to lower net interest expense as a result of our debt financing, which closed at the end of the first quarter of 2012. In subsequent quarters, cash net income growth should track closer to net revenue growth.

In summary, we generated superior growth and profitability in 2012, exceeded our midterm targets and captured market share shown by our strong transaction growth. Our execution and the performance of the business, including the strength of our new sales, the ramp-up from these new sales that is still to come and the potential upside that we see in our pipeline of new opportunities gives us confidence as we enter 2013.

With that, I'll hand the call back to Charles.

Charles D. Drucker

Thanks, Mark. So in conclusion, 2012 was an outstanding year, and we are positioned to win in 2013 and beyond. Remember that we are a processor of payments. We benefit from anything that increases payment velocity or transactions. Most of the innovation and the payments will result in substantial transaction growth. The increase in the number of payment alternatives and form factors will make it easier for consumers to shop and drive more transactions, which means Vantiv will benefit.

So before I open the call to questions, I'd like to thank our employees for a great year. Our employees truly make a difference for our clients and shareholders every day, and none of Vantiv's success would've been realized without their hard work and dedication.

Thank you again for taking the time this morning. Operator, let's open up the call for questions please.

Question-and-Answer Session

Operator

[Operator Instructions] And first, we'll hear from Bryan Keane with Deutsche Bank.

Bryan Keane - Deutsche Bank AG, Research Division

Just wanted to ask about the segments, the merchant and the FI group. Maybe, Mark, if you could break out for us the growth rates you would expect for 2012 for both?

Mark L. Heimbouch

The expectations, I think, around our merchant business and our FI business will be consistent with what we previously expressed in terms of growth. Our expectations for the FI business in '13 will still be in that mid-single digit in terms of net revenue growth. Business continued to do really well. As you've seen in the second half of 2012, somewhat performed above our expectations, but I think we're still taking kind of a -- somewhat conservative approach, but reasonable approach given expanding and expectations in the space. So mid-single digits for the FI space with the merchant business growing in the teens.

Bryan Keane - Deutsche Bank AG, Research Division

Okay. No, that's helpful. And then, I might have missed it, but did you comment on what you thought about adjusted EBITDA or adjusted operating income margins, what that comes out to, to get your guidance for fiscal year '13?

Mark L. Heimbouch

Yes. So I actually made a comment in the script. The expectations for EBITDA margin, which is the metric we really measure, would be up to 40 basis points of margin expansion when you compare '13 over '12.

Bryan Keane - Deutsche Bank AG, Research Division

And is that going be pretty typical, Mark, as we go forward? Is that a good -- 40 basis points is the kind of the right thing -- leverage that the model can have or should it be more or less? And I don't know if Litle in 2014 would have a bigger impact on that number.

Mark L. Heimbouch

Yes, I think the targets that we set when we -- back at the time of the IPO, when we set the 10% plus and 15% plus, incorporated 20 to 40 basis points of margin expansion, I would say it's in line and continue to be in line with those expectations.

Bryan Keane - Deutsche Bank AG, Research Division

Okay, super. And then just last question for me, just kind of a big picture thing. It sounded like there was a little bit of a slowdown you saw on the macro front. Do these assumptions take into consideration any further slowing or just kind of a similar environment? And maybe you can just summarize the overall environment in the U.S.

Mark L. Heimbouch

Yes, what we saw in the fourth quarter was some slowing in consumer spending, I think, consistent with other trends that you've seen out there, and certainly more impacted by the month of December. So it slowed as you went through the quarter. We've seen it somewhat improve early in 2013. But in terms of our guidance expectations for '13, we've actually assumed somewhat soft consumer spending for the first half of the year and some improvement to that in the second half of the year.

Operator

Next, we'll hear from Jason Kupferberg with Jefferies.

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

So just on the 2013 outlook, how much cash EPS do you expect Litle to contribute?

Mark L. Heimbouch

I think in the guidance, we actually -- maybe I didn't talk about it, we're expecting it to effectively be approximately $0.03 on a cash net income EPS.

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

Okay. And then can you talk about what sort of free cash flow you guys anticipate for full year '13, and within that, what you're assuming for CapEx?

Mark L. Heimbouch

Yes, Jason, so consistent with what we said there before to cash net, our free cash flow tends to be about 100% of cash net income. So it's a very, very good approximation. We could have provided the schedule for 2012, it came in exactly at that number, and I would expect that to continue for '13. Our CapEx continues to be in the rate of 5% of net revenue.

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

Okay, that's helpful. And just when we look at the revenue per transaction metric for the merchant business, and I think it was very clear in terms of what the drivers were in Q4 there. When you think about where that metric could potentially trough, do you think we've seen the trough here in Q4? Or do we really need to get to the anniversary-ing of Discover in Q2 of '13 to really see this metric back towards kind of neutral-ish territory?

Mark L. Heimbouch

Yes, I think that's right. So Discover will continue to impact the trend through the first quarter. You're correct, we'll lap at the beginning of the second quarter. So our expectation, when we provide guidance on expansion on a net revenue basis, would be that it's an annual metric, because there can be some seasonal fluctuations quarter-to-quarter.

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

And then just lastly for me. I know the new sales growth across the board in merchant and FI was really solid in 2012, as you outlined. What are you expecting for merchant and FI new sales growth in '13? I mean, I realize that won't have much of an impact on revenue growth until '14, but curious what you guys are expecting, whether or not it'll be kind of a similar growth rate in 2012? Or you continue to penetrate the SMB channel or a little faster, a little lower?

Mark L. Heimbouch

Yes, so a couple things. Let me clarify your one comment in terms of the expectation around business being signed in '13 being more productive in '14. Actually, on the merchant side, even on the large merchant side, the conversions can actually occur pretty quickly. So obviously, you're not going to see 12 months of revenue in 2013. But they are productive generally in the year they're signed, unless, of course, they're very late signings, which does happen. I would say that over the past 2 years, maybe even 3, that our growth in new sales has been mid-teens to upper teens, so I would say that those trends have been consistent. Certainly, the 20% this year is probably up a little bit. And some of that, by the way, is due to the success on the FI business. FI business really did -- was very successful this year in terms of adding new business particularly in terms of growth. So I think our expectations would still continue to be in that mid teens to 20% in terms of growth.

Operator

Next we'll hear from George Mihalos with Crédit Suisse.

Georgios Mihalos - Crédit Suisse AG, Research Division

Can you guys talk a little bit about the growth you saw in the quarter in the direct versus indirect channels of the merchant acquiring business?

Mark L. Heimbouch

Yes. So the merchant direct business, as you recall, has tended to be, by far, the fastest channel of growth for us, having gone -- grown in excess of 20% over the past few years. Certainly, what happened in the fourth quarter is what you saw, I think, in overall retail was just lower same-store sales growth, and it still seems to be that small business can certainly be more affected. But the expectations, looking forward, would be for our direct business to continue to grow at the higher rate of growth, and that indirect merchant channel growing in single digits, upper single digits.

Georgios Mihalos - Crédit Suisse AG, Research Division

Okay, great. And then, you guys obviously mentioned the weaker spending environment in December. Vantiv overall skews very much to the nondiscretionary spend category, so I would think almost you had to be a little bit more insulated than maybe some of your competitors. Is that kind of thinking of it the right way?

Mark L. Heimbouch

Yes. I would say that in terms of resiliency, our business has performed very well in downturns. But again, we did see some same-store sales type of declines in the fourth quarter.

Georgios Mihalos - Crédit Suisse AG, Research Division

Okay. And then just last question for me on the FI side, the revenue per FI transaction moved up nicely year-over-year. Anything to read into that and how sustainable is it going forward?

Mark L. Heimbouch

Our goal is to continue to make it sustainable. It's really about new products and services, and Royal bringing new -- Royal Cole bringing new FIs into the mix. So I think that should that continue, we still have the opportunity for expansion. We've been somewhat more conservative in 2013 in terms of our expectations as compared to the expansion that you saw in the first -- in the second half of '12.

Operator

Next we'll hear from Reggie Smith with JPMorgan.

Reginald L. Smith - JP Morgan Chase & Co, Research Division

I guess the question on Litle. So obviously, you guys are getting into eCommerce, which is huge, growing a lot faster than brick and mortar. But my question is, when thinking about Litle, what are you guys going to do or how do you guys think about increasing the growth trajectory? So why is that asset more valuable with Vantiv than -- as an independent company? So what are the kind of synergies, whether it is revenue, expense side that you guys are going to extract?

Charles D. Drucker

Reggie, a couple of things. First of all -- this is Charles, a couple of things. First of all, distribution channels. So Litle has done an excellent job with technologies, bringing features and functions and product, but they haven't invested as much in the distribution channel. And we bring distribution channels so our sales reps, our partners, our bank distribution channels for -- to bring clients to them. That's one. Two, they're cross-selling opportunities that we're currently working on and continue to work on with our existing clients who -- we did their brick and mortar, but their eCommerce was done somewhere else because we didn't have the solution. So as you think about us integrating with Litle is bringing a combined back-end reporting solution for these clients to bring over their eCommerce business. Three, the scale, Litle -- we bring a lot of scale to Litle that allows us to be competitive on some larger deals, one; and two, a lot of the mid-sized clients where Litle would win on the technology solution, they chose not to go with a smaller company, because they were a larger company and they were -- they wanted to be with a more substantial company. So some of that shift didn't happen. So those are some of the advantages that we bring to Litle.

Reginald L. Smith - JP Morgan Chase & Co, Research Division

Perfect. And then, I guess, just kind of looking at your marketing expense kind of sequentially throughout the year. Just curious, like what's driving that kind of civility there? Like your market expense has been flat to down kind of quarter-over-quarter despite growing your revenue pretty well in the back half of the year. What's kind of driving that?

Mark L. Heimbouch

So Reggie, I think you're referring to sales and marketing expense on the P&L? So actually, what happened if you -- you probably don't have the numbers. If you look back and looked what really happened as we expanded sales force towards the end of last year 2011, excuse me. And so, you saw a slower build over the course of 2012, hence the stability or the consistency that you've mentioned, our expectations would be that, that continues to grow in 2013 more in line with net revenue growth. So a number of the branches that Charles mentioned in his piece, we'll be putting sales force around. In fact, we would expect in '13 that sales force increases somewhere in the range of 10% to 20% in terms of headcount.

Reginald L. Smith - JP Morgan Chase & Co, Research Division

Got it. And then if I could sneak one last in. I think Jason kind of touched on it with the free cash flow. But did you guys talk at all about uses for that cash? Is it still to pay down debt? Is it additional acquisitions? Is it stock repurchase? How are you kind of thinking about the uses of your cash?

Mark L. Heimbouch

I think the strategy has stayed pretty much the same there in terms of priorities, first being growth as well as delevering. So from the growth side, clearly, Litle will be a good example of that. By the way, we funded Litle at the end of the year with $50 million that we've drawn on the revolver. We actually ended up paying that down in January. So as quickly as we generate cash, it actually provides us a fair amount of flexibility. So I think those will be the priorities. Two, you clearly know that we have some 2 large shareholders. I think that as we look forward, and to the extent that they would reduce their holdings, to the extent we have excess capital, at that point in time, we would certainly address return of capital.

Reginald L. Smith - JP Morgan Chase & Co, Research Division

Right. And I guess, bandwidth for another acquisition, is it there? Or should you -- should we just think about you guys integrating Litle at this point and that kind of being the story for 2013?

Charles D. Drucker

Look, we have the right -- we have enough bandwidth to do other acquisitions, so we're able to integrate and work with the Litle team and we're able to look at future acquisitions. I mean, I think we take a very disciplined approach to the acquisition to make sure it's strategic to us and drives shareholder value. So we look at opportunities in the market.

Operator

Next we'll hear from Tim Willi with Wells Fargo.

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

I had 2 questions about your earlier comments. Charles, about the mobile environment, et cetera. I guess I was curious, could you talk about how Vantiv thinks about the hardware side of the equation in terms of the debate about tablets versus traditional cash registers, the cloud, sort of -- obviously large retailers can make moves on their own around these issues, but to the extent that Vantiv is trying to help empower the mid and small merchants around these topics, can you just talk a bit about that environment aside from the traditional payment processing you offer?

Charles D. Drucker

Yes. So let's talk -- so devices or entry devices are form factors. Vantiv is going to enable whether it's the dongle, the tablets, the connections to the ISV. Part of that strategy is that as the cost of software and different form factors like the tablets start to come around, the cloud will start to come into place probably more towards '14, '15, it starts to take hold the cloud a little longer in the future. We see us working with ISVs and the VARs very aggressively over the course of the next couple of years to work with them, enable technology. We historically haven't made our money on selling terminals or tablets. It's really been enabling that technology and having the long-term processing transactions. So we do see tablets come into the market more aggressively. We see different form factors or devices, and then we see the cloud in the future taking hold to come downstream to some of the smaller clients.

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

And do you think -- is there anything about the service channel or the resources to be reallocated within Vantiv as you build out that channel that we should think about beyond '13 in terms of sort of the service side you would provide to the ISVs or the VARs versus the kind of service organization you provide to the branch referral network or your direct channels? Anything along those lines you got to sort of configure?

Charles D. Drucker

Yes. When I think about -- we have runway, we think, as we go into the small to mid-size clients still using our regional sales force and ability to grow our channels and regional sales forces that have both feet on the street, telesales. But I think you'll see, in certain areas, us emerging on how you work with ISVs differently or the VAR dealerships through referral channels or through telesales more actively in the future. So we think we have runway in multiple channels. And since we are emerging -- like what we said, if you went back couple years ago, we couldn't go into geographies, we couldn't add sales forces, when you went back, when we were part of the bank organization, so we still think we have runway in multiple channels.

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

Okay. And my last question is, I appreciate the comments at the beginning about your position relative to all the new entrants. I'd be curious if you could maybe expand upon that a bit further. Just give us a sense for how many people are actually coming to Vantiv trying to strike partnerships and sort of deleverage, or your position at that negotiation in terms of people wanting access to your distribution. I mean, do you feel like, clearly, Vantiv's got the upper hand, people are coming to us, trying to figure out how to partner with us, we control our discussion? Or how would you characterize that?

Charles D. Drucker

I think we are well positioned. I think people have realized that the scale that we have, that we can bring to the market, the nimbleness of having a single processing platform, we just demonstrated that with EMV, that we're able to move quickly with different processes and prioritize that. I think our success in sales, the way we're approach and keep our customers. Remember, these players want not only to sell their products, but to satisfy their customers and they like to like the right player that goes with that. So I don't want to call -- we approach things as partnerships, so not upper hand, but we are well positioned, because there are only a few players in the market that have the type of scale that we have. And every day, we're seeing more and more people come to us, and we're dealing with that. We have teams that are working with the emerging technology players. So we're seeing that continue to grow, and then we'll take hold and ramp up as we get into the future years.

Operator

And next, we'll hear from Wayne Johnson with Raymond James.

Wayne Johnson - Raymond James & Associates, Inc., Research Division

I was wondering if you could just give us a little bit of an update. I think you mentioned that in your press release and earlier comments just how you see EMV rolling out in the U.S., what the barriers are to greater acceptance? And when do you guys think a reasonable timeline is for utilization of that form factor domestically?

Charles D. Drucker

Yes. So like I said, we've certified and there was the first mandate that will hit in April and we're ahead of that. We're ahead of that because we want to make sure that our clients have the choice and opportunity if they choose to move quicker to EMV. I mean, I think, part of just the normal upgrade and cycle time will drive some of the EMV and then also the liability shift that happens in '15 will be key factors. We're not seeing today an overwhelming demand from our clients that we need EMV today, but the conversations are happening on how to position them in the future as they upgrade and change their system. So we think it's still going to track to where the liability shift tracks.

Wayne Johnson - Raymond James & Associates, Inc., Research Division

Understood. Okay, that's helpful. So if I could just dig a little bit deeper on that. Is there any indication of resistance or outright refusal from the larger retailers to not want to engage in EMV?

Charles D. Drucker

Right now, I think they continue to evaluate and they have to see what the cost on their systems are. A lot of our large merchants purchase want the Chip and PIN solution. They want the full solution. So we haven't had -- everyone's in the evaluation stages and they have to look at their individual companies on what the fraud impacts are to them, plus what does it cost to upgrade and spend the capital in time. So we haven't had anyone at this point. We haven't had clients. There still in the evaluation stages.

Wayne Johnson - Raymond James & Associates, Inc., Research Division

And one other strategic question, if I may. Any updates on thoughts on expanding internationally and how you view your opportunity overseas?

Charles D. Drucker

Yes. We continue to think of our ability -- we're going to have the ability to expand internationally in the future. We still think there's a lot of good opportunity domestically, but we're open to looking in the future in both the U.K., Latin America, those type of areas. eCommerce, internationally, with other gateways worldwide would be attractive to us also.

Operator

And now we'll hear from Nathan Novak with Robert W. Baird.

Nathan J. Novak - Robert W. Baird & Co. Incorporated, Research Division

Regarding the Merchant Services yield, you mentioned you had the lapping of the Durbin benefit this quarter. Are you seeing any of that benefit being given back? Or is the year-over-year impact just pretty much that lapping?

Charles D. Drucker

Yes. We're not seeing the -- basically the answer to your question is yes. We're seeing it's more of the lapping. We're not seeing pressure from the market as far as giving back the Durbin impacts.

Operator

And now we'll hear from David Togut with Evercore Partners.

David Togut - Evercore Partners Inc., Research Division

A couple of quick questions, if I might. Charles, in your opening remarks, you referenced the contract signing with the ICBA -- for many years, FIS has also had an ICBA contract through its Certegy relationships. Can you clarify what you're doing with the ICBA versus what FIS might be doing?

Charles D. Drucker

I'll clarify what we're doing. We're focused on -- there'll be 3 parts to the ICBA. First will be the credit card processing, and then the merchant area and then we'll look towards the FI debit card processing. I think in the ICBA, like anything else, banks have -- or financial institutions have choices to move and we have -- we'll be an alternative to them and recommended by them.

David Togut - Evercore Partners Inc., Research Division

So it's a nonexclusive relationship then?

Charles D. Drucker

Yes.

David Togut - Evercore Partners Inc., Research Division

Okay. And then on the sales force expansion, I think, Mark, you talked about 10% to 20% increase for this year, and you're also guiding to 40 basis points, or up to 40 basis points, of adjusted EBITDA margin expansion. Can you take a step back and tell us where you are in terms of kind of longer term with the sales force expansion? And is there more meaningful margin expansion to come in '14, once most of the build-out is complete?

Mark L. Heimbouch

Yes. The way we think about sales force expansion is dependent upon our geographic and channel expansion. So in the case of adding the number of merchant banks, we would expect to continue to add more in 2014 and beyond, so that will also result in additional sales force expansion. I think the way to think about it is it can be somewhat lumpy, because our view is you've got to have a channel in place, whether it's merchant bank or VAR or something else, it's got a referral channel in place prior to expanding the sales force up. So I would expect to see some expansion still beyond 2013. That being said, we know that when we achieve certain productivity levels, there is actually some leverage on the sales and marketing line. Just 2 points to make, though, I think with respect to EBITDA expansion. Actually Litle's, we think, is a really great opportunity for us, but actually presents a little bit of a drag on the EBITDA margin in 2013. So the expansion that I cited up to 40 basis points is net of that, somewhat modest drag in terms of EBITDA margins. So that'll also be helpful in 2014 as we continue to spin that business up. The other thing is other expense items, particularly G&A. Post 2012 start to behave more like a fixed cost, so they're growing at lower rates of growth than they had in the prior couple years.

David Togut - Evercore Partners Inc., Research Division

So if I extrapolate your comments, once we get into '14 and beyond, we could potentially see more meaningful margin expansion once you've integrated Litle -- once the Litle headcount expansion is done on the sales force side and you have more scale?

Mark L. Heimbouch

Yes, provided that -- to kind of give you some sense or clarity in terms of ways, I think we're still focused on the 20 to 40 basis points. So in our view, it's continued to build and develop growth, support growth in the business, which does require investment from year to year. So offsetting some of that other margin expansion opportunity is investment via channel, via product.

David Togut - Evercore Partners Inc., Research Division

Got it. Just a couple of quick housekeeping questions. What was the mix of PIN and SIG debit and credit for Q4 in terms of transactions?

Mark L. Heimbouch

Actually, like we saw last year, in the fourth quarter, people tend to borrow a little bit more and -- i.e., use their credit cards. So we actually saw a shift just like we saw in the fourth quarter of last year, such that the percent of our total debit volume declined by about 1 percentage point. So from effectively what was 74% prior to fourth quarter to about 73% in the fourth quarter. That's consistent with the mix shift that we saw fourth quarter of prior year as well.

David Togut - Evercore Partners Inc., Research Division

Got it. And then just finally, what was the mix of direct and indirect revenue in merchant in the fourth quarter?

Mark L. Heimbouch

That's -- now, I got to look at my -- the total revenue?

David Togut - Evercore Partners Inc., Research Division

Per merchant. Yes.

Mark L. Heimbouch

Yes. It's got to be -- I'm looking at my schedule. Let me come back to you on that. It's got to still be still in the range of 60% direct versus 40% indirect.

Operator

And now we'll hear from Julio Quinteros with Goldman Sachs.

Julio C. Quinteros - Goldman Sachs Group Inc., Research Division

Mark, real quickly, you had a couple of call-outs in terms of the expectations for the timing on merchant pricing in the second half. Part of that had to do, obviously, with the Discover. But I think on the back half of 2013, you also signaled some expectations for higher growth. If you sort of normalize out the pricing situation, what are the other call-outs on the expectation for the second half ramp or the faster growth that you guys are expecting there?

Mark L. Heimbouch

So the amount of new business that we signed in 2012 that hadn't fully converted or been reflected in the 12 months of 2012 actually provides 2 percentage points of incremental growth in 2013, so -- that being one. Two, expectations for continued sales growth in '13 -- so as that business converts in the second half of the year. Last thing would actually be the comment that I made regarding consumer spending. Same-store sales, rates of growth are down kind of in the mid-single digits rates really over the past few months, as compared to expectations for that to be a bit higher in the second half of the year. So as consumer spending would improve, we would expect to benefit from that.

Julio C. Quinteros - Goldman Sachs Group Inc., Research Division

Okay. And are there any large client call-outs that you're expecting to ramp up that could offset the merchant improvement, the pricing side?

Mark L. Heimbouch

Is your question -- should we add a large national that it could put pressure on the rate, is that your question?

Julio C. Quinteros - Goldman Sachs Group Inc., Research Division

Correct. Correct.

Mark L. Heimbouch

I mean, each and every year we've added large customers. So your point is valid to the extent that we had another large contract like we did in the second quarter of the year. Certainly, it could affect the average rate. I mean, should that occur, we'd clearly -- we'd provide you the color around that. I mean, that's a good example of kind of a mix shift that would impact the rate. But beyond our expectations are that as we continue to expand the mix, that we still see upward movement in the rates.

Julio C. Quinteros - Goldman Sachs Group Inc., Research Division

Okay. And then just a clarification on the contribution, if you sort of think about the buildup of EPS guidance for 2013. You called out $0.03 of benefit from Litle. There's also a 38.5% tax rate that you're -- that I think you talked about in your script, but then $4 million of quarterly benefit. Can you just walk through kind of the buildup, if you will, in terms of the Litle component and the tax benefit that you're expecting for the full year?

Mark L. Heimbouch

Yes. Let me just walk -- kind of take those 2 pieces and walk backwards for you, because I think it's pretty straight forward to do that. One, Litle is approximately $0.03. The tax benefit that we discussed reflected in the fourth quarter in 2013 is expected to be $0.08, so effectively, $0.02 a quarter. The remainder is really core growth in the business.

Operator

And now we'll hear from Andrew Jeffrey with SunTrust.

Andrew W. Jeffrey - SunTrust Robinson Humphrey, Inc., Research Division

Could you speak at a high level about the competitive environment in Merchant Services, both with regard to larger merchants as well as down market? Anything that you'd call out as having changed in a meaningful way, pricing-wise, in the last few quarters?

Charles D. Drucker

I'd say -- if we talk about the large space, it's been pretty stable, the pricing, and pricing is one component of it. I think you'll see a lot of large clients looking to players like us that can provide the scale and nimbleness with the changes happening, whether it's -- they're thinking about new entry devices, form factors or how they understand different compliance. So it's been pretty stable. And then in the small to mid-sized market, as we go downstream, our scale and our cost structure allows us to be very competitive, so we haven't seen big moves in pricing or anything that are squeezing our margins more than they had typically in prior quarters.

Andrew W. Jeffrey - SunTrust Robinson Humphrey, Inc., Research Division

Okay. And just to ease out the point a little more, one of your advantages, clearly, is the diversification of your distribution. Are we hearing you talk about an incremental emphasis on small and mid-sized businesses versus larger at this point? Or is that -- am I misinterpreting some of your comments in that regard?

Charles D. Drucker

Yes, so we are focused on winning in the national large space and we continue to win, and there's a few players we'd go up against with every type of deal. So we're in the mix in every deal. Our focus has been to continue to win in the national space but come downstream, where the revenue per transactions are higher per transactions, and with that cost structure, allows us to win aggressively in that space. We're doing it through the merchant bank channel. You're hearing in our comments that utilizing ISVs and VARs more aggressively and interfacing with them is another channel that we're going to use. So we plan on continuing to aggressively win in the national space, bring business, but also put our resources in areas both geography or new channels that we haven't before. Last thing is eCommerce. We have not played in eCommerce aggressively before and Litle brings us into that space.

Andrew W. Jeffrey - SunTrust Robinson Humphrey, Inc., Research Division

Okay. So maybe a modestly greater emphasis down market due to economics, but nothing that you consider as a structural shift or philosophical?

Mark L. Heimbouch

I would actually say it's the same. We've not really increased. It's consistent with VAR we stated before.

Andrew W. Jeffrey - SunTrust Robinson Humphrey, Inc., Research Division

Okay. And then the last one for me. Just could you opine a little bit on prepaid as a category? We obviously saw one of your acquiring competitors make a pretty big splash in that space last night. Any thoughts on desirability, positioning, et cetera?

Charles D. Drucker

Yes, we have a prepaid product that we've used to really focus into the Financial Institution, both in gift card, we do in the merchant side, we do rebate programs and we do prepaid reloadables. So we think there is, for us at least, with the product that we have and selling it to the financial institutions and into our merchant base, we think there's new value-added revenue coming for us. So as far as how well the competitors look at it, that's something that I'm not going to comment on at this point.

Andrew W. Jeffrey - SunTrust Robinson Humphrey, Inc., Research Division

Okay. But it sounds like you view it more as a product expansion opportunity rather than a standalone.

Charles D. Drucker

Yes. That's how we're viewing it, yes.

Operator

And our last question will come from John Williams with UBS.

John T. Williams - UBS Investment Bank, Research Division

Just a couple of quick follow-ups, a lot of the questions we had have been answered. I just wanted to make sure I understood the composition of the revenue guidance. It sounded like it was 13% to 15% core, new business was 2% and I assume that Litle is the balance of that, is that fair to say?

Mark L. Heimbouch

The new business is included in the 13% to 15%.

John T. Williams - UBS Investment Bank, Research Division

Sorry. Okay. So Litle -- okay, so is a little bit bigger piece.

Mark L. Heimbouch

[indiscernible] Litle will be 5 percentage points.

John T. Williams - UBS Investment Bank, Research Division

Got it. What was the 4Q contribution from Litle revenue that you closed during the quarter? Was there -- can you break that out just so we can properly think about for this year?

Mark L. Heimbouch

No, it was very small given the late closing. I would say, it was somewhere between $4 million or $5 million of net revenue.

John T. Williams - UBS Investment Bank, Research Division

Okay, so pretty small. Okay. The other question I had is a follow-up on the international question from earlier. Just thinking about your potential approach if you were to look at international opportunities in different markets, what would be the approach? I mean, it seems like a lot of the bigger market -- Brazil, particularly, has already really been spoken for in a lot of ways. Would it be a JV type of purchase that you guys would really lean towards? Or does it really depend on the market?

Charles D. Drucker

I mean, it depends on the market where we go. I think -- one of the things that, with the Litle part, have in the U.S., it's getting gateways and potentially acquisitions international in the future that we look at. We'd be open to JVs as banks still shed some of their assets and do different things.

John T. Williams - UBS Investment Bank, Research Division

Okay. And just one other question on the slowdown you had mentioned or the growth shifts intra-quarter. Were there any specific segments or verticals that you've seen year-to-date that have either materially accelerated or decelerated relative to what you were expecting?

Mark L. Heimbouch

When you say relative to what we were expecting, I guess we kind of took into consideration what we had seen in the fourth quarter to establish those expectations, so not necessarily compared to what we saw in terms of expectations, but what we have seen is some of the general retail trends improve modestly in the first part of the year as compared to Q4, particularly December.

John T. Williams - UBS Investment Bank, Research Division

Was it more discretionary or nondiscretionary that you saw pick up?

Mark L. Heimbouch

Yes, I'd say that's probably accurate. But we've talked really over the course of -- since we've been public in terms of different trends between small and large, what we've seen in terms of same-store sales growth for smaller merchants, they tend -- they could be different or different changes period to period, but it seems like the small merchant tends to struggle a little bit more over a longer period of time than large business. And that's, again, from a same-store sales growth type of metric. Just one last point, I think it might have been -- I think it was George who asked the question about the mix of direct versus indirect on the merchant business. Actually, for the fourth quarter, it was closer to 66% or 2/3 of our net revenue in the fourth quarter. So if you kind of think about that going forward into 2013 from the growth in the direct business, I mean, the direct business, including Litle, is becoming meaningful majority of our net revenue.

Operator

Okay. And that does conclude our question-and-answer session. I'll turn the call back over to our speakers for any additional or closing remarks.

Charles D. Drucker

Great. This is Charles. Thanks for joining the call today. As you can tell, we are extremely proud of the way that Vantiv and our employees have performed since becoming a public company. This has been a very strong year for us, and we look forward to another strong 2013. If you have any additional questions, please reach out to Nate and he'll get you what you need. So thanks, again, for joining the call. Have a great day.

Operator

Thank you. That does conclude our conference call. We do thank you all for your participation.

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