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Total System Services, Inc. (NYSE:TSS)

Q2 2009 Earnings Call

July 28, 2009 5:00 pm ET

Executives

Shawn Roberts - Investor Relations

Phil Tomlinson - Chairman and Chief Executive Officer

Jim Lipham - Senior Executive Vice President and Chief financial Officer

Analysts

Jason Kupferberg - UBS

Julio Conntearous

Timothy Willi

Darrin Peller

John Williams

James Friedman

Craig Maurer

Robert Dodd

Operator

Good afternoon, ladies and gentlemen and welcome to the TSYS Second Quarter Earnings Call. At this time all participants have been placed on listen-only mode and we will open the floor for your questions and comments after the presentation.

It is now my pleasure to turn the floor over to your host, Shawn Roberts, Director of Investor Relations. Sir, the floor is yours.

Shawn Roberts

Thank you, Anthony, and welcome everyone. As you can see we've provided slides with our call in an attempt to better communicate our story to investors and explain what we believe are the key metrics that drive TSYS.

I'd like now 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 TSYS's reports filed with the SEC.

As you can see on slide four, our agenda will include presentations by Philip Tomlinson and Jim Lipham and conclude with our Q&A.

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

Phil Tomlinson

Thank you, Shawn, and thank all of you for being on the call today and for your interest in TSYS. We are pleased with the results of the second quarter as we met or exceeded most all of the consensus expectations, and we certainly believe it was a critical quarter to get behind us and we are happy to reaffirm our guidance for the year.

Also, I know you are curious about any updates on the B-of-A Merchant Services JV announcement, and frankly, we don't have anything to add to that other than what we've sent out in our press release earlier this month. So, I just want to talk just a bit about the quarter and some of the things that we have going on. We certainly saw some improvements in our overall operating margins and our international operating margins on a sequential quarter basis. Certainly, I don't have to tell you the economy continues to be a challenge and Jim Lipham is going to give you a lot of details about that later.

Overall, we are pleased with our progress. We think we are making good progress. We're focused in four key areas. One, we are aggressively addressing the new regulations, their impact on our clients and prospects. We're working hard with them to help sustaining their profitability. We don't expect any issues in implementing these regulations. We are on track with those and moving forward.

We are also working hard to continue growing revenues through signing and converting new clients, plus cross-selling value-added products to our clients and as you'll hear about later. We'll continue to pursue an acquisition strategy that makes sense and one that will move the needle. Four, we'll continue to do what we feel is necessary in the expense management area.

Now, I want to talk about North America just a bit. We continue to expand our Canadian footprint in the banking, retail and debit sectors. We today are in contract negotiations with four Canadian firms that we expect to sign as long-term clients, with announcements in the third quarter. We have letters-of-intent from those clients, but we typically announce on the execution of a contract.

We're making good progress in the Healthcare front with competitive wins of quality accounts. As you saw, we just announced signing Consumer Healthcare Technologies down in Fort Lauderdale. We are excited about that. We also have six letters-of-intent, and as we sign these contracts, we'll announce the details in the coming months and hopefully we can get that done fast.

I thought it was interesting that last Tuesday, July 21, on the FOX News show on the record with Greta Van Susteren, she asked Newt Gingrich, "What does the government need to do in order to reduce fraudulent Medicare and Medicaid fraud," and his answer was, "You have to have an electronic healthcare system, and you need to hire a company like TSYS or American Express who specializes in monitoring transactions." I'm glad to hear that Newt is thinking about us, and hopefully, we can talk to the government one of these days about that. But we are making progress in healthcare.

If you move on over to Europe, we have successfully completed the Deutsche Bank conversion. It's gone very well. I'm happy to report that we have also signed LOIs or letters-of-intents with four different European banks, all in different countries, which will certainly increase our footprint in the European region.

In France, we did announce a network branded prepaid money transfer card with TransCash Corporation and this card will be sold through Midi France Telecom. It will allow consumers to purchase the card in supermarkets and use them for international transfers to target markets like Morocco, Algeria, and Indonesia.

Going down to Brazil, the Carrefour card conversion is fully underway. We've got about 24 people stationed in Brazil now. This MasterCard hybrid card, if you’ll recall, act like a private label card when used at the Carrefour stores and the general purpose card when used at other retailers around the world. We absolutely believe that this announcement will continue to open new opportunities in the payment area for issuing and acquiring prepaid and retail services in Brazil.

In Japan, we announced the signing of Travel Bank for a Visa prepaid program. Travel Bank has been advertising and aggressively increasing their sales agents for the product, for the use over the summer holiday season. Toyota Finance issued a new Tressa Style Plus Card, which is a hybrid reward prepaid contactless and micro payment card. We are working with Sony Finance to launched four new credit card products starting this coming November.

I hope you saw the press release this morning, our joint venture with CUP Data continues to show very strong market penetration and we announced new contracts with Yaodu Credit Cooperative, Shandong Provincial City Bank, and Yunan Rural Credit Union, as well as Guangxi Beibu Gulf Bank, and also a cargo card, which is a stored value, reloadable gift card retailer out of Malaysia.

There was a lot of other information about progress that we made in China included in that press release, and I would urge you to read it. I think it gives you a feel for what we have going on in that part of the world.

Also, I would like to, just in a general statement say that, over the past six months of 2009, we have quietly converted eight new clients, with over 8 million new accounts added to the overall portfolio here at TSYS. On the acquiring services that business is growing transactionally. We are working with a number of large major merchants in their organizations to improve the profitability of those organizations through efficiencies. With this new Infonox technology we are engaged in late-stage discussions with 12 significant prospects. I think that gives you a feel for we are continuing to win. We are feeling good about where we are at, and we do think that we are starting to see maybe just a little light at the end of the tunnel.

So, with that, I'm going to turn it over to Jim Lipham, who is going to give you some updates and he will go through the slides with you.

Jim Lipham

Okay, thank you, Phil. Before we get started on the slides I thought I would just refresh you from where we were at the Analyst Presentation back in May. But there are two main things that we're going to be talking about, and the first one being from an operating perspective. As you know, we continue to face the headwinds of currency translation, as well as the economy and where it's at.

But the good part about the current quarter is that our new clients, revenues from that as well as our internal growth are more than exceeding the loss of the revenues from clients that de-converted since last year. So, from an operating perspective we are seeing growth there. Obviously the strength in our cash flow continues to be impressive and we'll talk a little more about that in a minute.

I will start on slide 7, and on that particular slide, what we are looking at here is a comparison both sequentially and year-over-year for the second quarter. As you noticed in the press release, we did have growth on the sequential quarter basis. Total revenues increased mainly due to a slight easing in the exchange rate and you can see on the constant currency basis we were pretty flat, but it was up 1% prior to the currency change.

When you look at operating income, we were up 6%, and that's just an indication of how well we've done so far this quarter, this past quarter controlling expenses as they remain flat quarter-over-quarter. Total transactions you see have increased 4% for the first quarter and mainly due to seasonality. When you look at the same client transactions per billing days that we talked about previously, they are up 6.5%. So we got some good growth going on in our transactions.

When you look year-over-year on the right-hand side, you will see revenues are down. This impacted by negative currency translation of 17.8 million and we also lost about 12.3 million in revenues from de-converted customers. These will offset the loss in the de-conversion customers were offset by international growth from new clients as well as our internal growth in North America. Also the Merchant segment Philip mentioned a while ago is showing growth of roughly 8% for the quarter and for the year-over-year numbers.

Operating income, it decreased as we continued to accept the short-term risk on our margin targets as we continued to expand in the international front. Transactions, for the second quarter compared to last year is down 8.1%, but when you get to same client transactions, they are down 1.5%. That takes out the effects of any conversions and de-conversions.

So, overall a good second quarter and very good numbers sequentially. If you look at slide 8 you can see the numbers themselves for the sequential quarters, revenues being up 1.5% at 350.7 million and operating income, it increased 6% as expenses were basically flat as [we say], they are basically 329 million. Our operating margins increased quarter-over-quarter 100 basis points up to 23.6% from 22.6 in the first quarter.

Our basic earnings per share as you can see there is and Phil mentioned at $0.27 a share it's inline with what most consensus was.

I didn’t want to mention here as a result of an accounting pronouncement back at the first of the year there is some confusion amongst analysts and investors as to the number of shares to use in calculating our earnings per share. Effective 1st of January, the new regulation required companies to treat non-vested awards of stock that received dividends as participating securities.

So the impact of that announcement resulted in an increase in our number of shares to approximately 197 million shares, which is 1.5 million more than the average common shares outstanding. I'll call your attention to page 6 of the press release where there is more information on that, but I did want to get that cleared to you out there.

As we go to slide 9, you take a look and see how we've been impacted by the negative currency for the first six months, little over $40 million. We did have some easing in the second quarter about 5 million coming off of that. So, hopefully it is going to continue to ease as we go through the rest of this year.

On slide 10, this is our second quarter '09 compared to '08 by segments. North America you does represent about 63% of our revenues and the revenues were impacted by the lost clients to about 12.3 million as I stated before. Our segment headcount has been reduced by 70 people, not including discontinued operations. As we continue to control and reduce expenses in the second half, we expect the margin in this segment to increase. Our same client transactions, as you can see there at 1.5 billion, decreased 1.6%.

On the international front, revenues were impacted by currency translation of 17.8 million, as I stated earlier. On a constant currency basis our revenues internationally were up 17.9%, very strong growth in the second quarter. We added 468 people in this segment, mainly due to a combination of new business, such as Deutsche Bank and Carrefour, (inaudible). We converted contract labor to employees and then we had international expansion in Russia, as well as India. As you can see in the international our same client transactions, they decreased 0.6% as they came in at 263.1 million.

On the Merchant segment, revenues increased mainly due to the acquisition of Infonox, an approximately 2 million, and then we had increased charge back and debit network volumes coming from a large customer we put on the first part of this year.

Operating income was impacted as we continue to integrate Infonox, both with their people and their systems that we brought on, as well as purchase accounting adjustments, such as amortization of goodwill. We did add about 105 people and these are basically from Infonox and with pulling out of their point-of-sale transactions at 1.3 billion are up slightly about 0.4% year-over-year.

Just flip to slide 11, you'll see a sequential quarter. There is lot of good things going on this page in all of the segments, mainly North America first of all is showing a down revenue, but that's mainly reimbursable revenue, which has no profit margin to it and that's about down about $3 million.

(inaudible) the margins all improved. We expect them to continue to improve in the second half of the year, as we continue to monitor our expense growth and put some things in place to control that growth in expenses.

International, revenues increased as a result of conversions late in the first quarter. We had Home Retail Group come onboard and in the second quarter we converted Deutsche Bank. We did add 47 employees in this segment, half of which were added in Brazil and also impacting our margins here was the build up of other new business such as Carrefour prior to our [process] of revenue starting in 2010 with those guys.

From a Merchant perspective, revenue increased mainly due to POS volumes. They are up 7%. It's mainly due to the seasonal fluctuations and we did not add any new employees there. I might add, last year, the sequential quarter growth from first to second for '08 was 8%. Then if you look at all of the margins there, all of them were up, and as I said before, we continue to move toward our target, those for the year of 24 to 26%.

We move to slide 12, this chart is - I wanted to fix our internal growth, new clients, lost customers and CTA impact. As you can see from new clients and internal growth, that was a 6% increase in the electronic payment process and this is North America, (inaudible) electronic payment process and represents 67% of our total revenues. But that was up 6% and then we lost clients so fast, so we showed that we were able to grow our sales past what we lost in customers, and obviously, look forward to these lost clients anniversaring of them being gone.

Let's see on price concessions, if you remember back in New York, we talked about, first quarter we had 6 million negative impact on price concessions and we said it'd cut down in half for the second quarter which it did. It came in about $3 million, down from the 6 previously. But, overall, without the lost clients we'd be break-even. The CTA is down 6%, [costing us] 6%.

Flip over to slide 13 and this is a follow-up from the slide we had for the first quarter and showing our same client average card holder transactions per billing day. As you can see here, we talked about how we had a bigger drop of 8% in the first quarter of '09, sequentially from the fourth quarter of '08, bigger than what we had in previous years, but the seasonality of this chart shows that we did rebound in the same percentage. It's just that we are about 1% below where we were a year ago. So, as economy is impacting people's uses, though, we still see the same seasonality growth from quarters and expect that as we go forward.

Flip over to slide 14, we'll talk about the cash balance and spin off and this chart shows sequentially our changes in our cash balances for the last seven quarters. Operations continued to generate very strong cash flow as we did year-to-date $219 million. Our free cash flow year-to-date is $163 million, which increased 60 million or 58% compared to last year.

With, this total balance of cash is around 344 million unrestricted and we also have available to us the 252 million. We borrowed a portion of that credit facility, which is priced at LIBOR plus 60, which is now at about 0.98%. So we have the financial resources to fully support the executing (inaudible) strategies and include acquisitions and/or stock repurchases.

Chart 15, slide 15 operating cash flow to sales ratio. I want to show that again. It improved from where we were at the first quarter. It's now at 27.7% compared to the 24.3 in the first quarter and this does show the ability of the company to turn sales into cash and it continues to improve and exceed those people in our group.

We'll note for the year-to-date numbers free cash flow grew 58% while our GAAP net income decreased 16.5, which shows us some good growth in cash there.

In closing, I'd like to mention the positive trends again that we are seeing in our business and there is good internal growth, which combined with a new client is offsetting our revenues from de-converting clients and the trends sequentially are very been favorable. Our margin goals that we have are achievable by year end. International expenses are truly an investment for future revenues as Carrefour comes on in the first of 2010, and we see the currency impact is starting to ease.

Also our merchant business is growing 7 to 8% and there again our cash balances continue to increase. So, our strategy as I mentioned in New York we plan on strategically using our cash for operations and dividends and then looking at acquisitions and also any stock buyback.

With that I will turn it back over to you Phil.

Phil Tomlinson

Thanks Jimmy. Anthony we are ready to answer any questions.

Question-and-Answer Session

Operator

Thank you. Ladies and gentlemen the floor is now open for questions. (Operator Instructions) Our first question is coming from Jason Kupferberg. Your line is live.

Jason Kupferberg - UBS

So it's encouraging to see that the worst may be over here. Just wanted to delve into a couple of questions. First of all, I was hoping you could give us an update on a couple of specific accounts. First of all the fate of Wachovia if you have any update there and I think last quarter you had mentioned that there was one fairly large customer renegotiation that you were budgeting for from a pricing perspective. I wanted to find out if that's actually been completed and if so how did the outcome play out versus your expectations?

Phil Tomlinson

Sure. It's nobody's surprise. Wachovia has told us that they will move that business to Wells and I think it's about a 1.5 million accounts, somewhere in that range. So on the large customer that we were talking about last time, we think it's down to getting the signature page done now. It has been a long drawn out process, but we feel good that we are there. It's not something that I am losing sleep about anymore. I think it's done. It's just a matter of getting the final as dotted and the [Tees] crossed and getting the signature.

Jason Kupferberg - UBS

Okay. That’s helpful. Any color you can offer on July transaction volumes based on what you've seen so far relative to how you exited the June quarter?

Phil Tomlinson

Not on July, Jason, but we are certainly just like you. We are hopeful, but there's nothing I can really tell you on July at this point.

Jason Kupferberg - UBS

Okay. Then finally any update on your debit strategy going forward? I know it's a relatively small piece of the business, but I think last quarter…

Phil Tomlinson

Well, I will tell you that one of those Canadian customers that we hope to get a contract out of that I was talking about earlier is a pretty significant debit deal. It's not signed yet, but we are hopeful that that's going to happen and as soon as we do get it signed, we'll be the first to talk about it if we can.

Jason Kupferberg - UBS

Okay. Thanks for the color. Good luck guys.

Phil Tomlinson

Thank you.

Operator

Our next question is coming from [Julio Conntearous]. Your line is live.

Julio Conntearous

Hi, guys. Really quickly just on the updated guidance and the Bank of America comments that you guys had made a couple of weeks back. Does the updated guidance which is unchanged include that or are you guys still not incorporating that into the numbers?

Jim Lipham

[Julio] this is Jim. The bank's deal will have no effect on '09. Now the contract as we said was up in 2010. I mean, we are still waiting on is a meeting I think in August coming up to sheer up some transition plans, but we don't envision having any problems before our guidance in '09.

Julio Conntearous

Okay, got it. Then, you watch your couple of pieces on the $3.2 million loss. I think you said that that was revenues in clients. But then you were able to offset that with new clients and I think you mentioned merchant acquisition growth. There's a really nice chart that shows the accounts on file changes. Can you just walk back through that, the offsets to the revenue losses if you will, with the growth that you saw either in new clients, merchants or some of the other areas?

Jim Lipham

The merchants are up about $8 million. Then under our internal growth we saw roughly $12 million pick up there. Then the new clients in Europe is up 23 million, it is an array of those things and makeup whatever the drop from de-converted clients, but I don't have all those numbers just laid out.

Julio Conntearous

Okay. Then just to be clear, the constant currency revenue number up 1%, does that include or exclude Infonox?

Jim Lipham

It includes it.

Julio Conntearous

Okay. The contribution from Infonox was how much?

Jim Lipham

For the year-to-date around 3.9 million.

Julio Conntearous

Year-to-date?

Jim Lipham

Right.

Julio Conntearous

Got it. Okay. Great. Thanks guys.

Jim Lipham

Thank you, William.

Operator

Our next question is come from Timothy Willi. Your line is live

Timothy Willi

Thanks and good afternoon. A couple of things, just going back to your earlier comments about the regions and the letters-of-intent that, that you've secured or feel real good about, as you move through Canada, Europe, et cetera. You talked about one large customer in response to the first question. Are there any of those others, you talked about Canada, four firms Europe's four letters-of-intent. Are there any of those that you would definitely say would catch people's attention in terms of size or would these be more sort of garden variety retailers or banks that bring a couple million cards, but nothing that would bring sort of double digits in terms of the number of cards on file any single contract?

Phil Tomlinson

Tim, I might as well just tell you who they are with that question. I think that you would be very pleased to - they will be names that you would know very well.

Timothy Willi

Okay. In the US, any updated thoughts around conversations you are having with issuers that are currently your customers or not as they have had a little bit more time to look at the landscape, look through the legislation, think about the strategic direction of their card businesses and their propensity to either deepen relationships with you or decide to just give up the ghost and out source it? Have you seen any kind of shift in conversations over the last handful of months?

Phil Tomlinson

Not particularly. We are still having lots of conversations, but I think people are really trying to figure out, one, what this new card law means and how they are going to deal with it, and we spent a lot of time, we just had a webinar the other day, where we went through, where we are at. It is a huge project and I think a lot of people who were processing in-house I'd have to say are struggling with it. I think we would be struggling with it if we didn't have the technology that we have with TS2 in particular, but we are moving forward with it, feel good about it. There's always a lot of conversation going on in the US marketplace, but I'd have to say that you notice I didn't say much about the US. I mean, it's almost like the US business, it's so beat up right now that nobody is really making any serious decisions on anything like that at this point in time.

Timothy Willi

Okay. Then last question, just in regards to the M&A environment, the cash flow and your capital structure, again didn't buy back any stock this quarter, assuming, we should take that as the M&A pipeline is very active with potentially large deals that would keep you from buying back stock, can you make any comments around that?

Phil Tomlinson

Well we - as a matter of fact, we had a Board meeting earlier today and I talked at length to the Board about that issue, that we had had some questions about why wouldn't you buy back stock? We do have an M&A discussion process that's going on. It is very busy, and we would certainly need the cash. I think we've said on several occasions in the past, several quarters, that one, we felt like it was prudent to hold on to cash right now, but at the same time we truly had rather spend it on something that would add new product and new value to this company. But we are not ruling it out. We still have a plan in place, but we don't have to -- you are just going to hold on to that one. We have not made a decision there. At this point we are not in the market I'll tell you that.

Timothy Willi

So our M&A pipeline is pretty active I mean I think.

Phil Tomlinson

Yes, that's pretty active and nobody has rather closed a deal than we have right now.

Timothy Willi

Okay. Thanks I'll drop out of the queue and let somebody else have a turn.

Phil Tomlinson

Thanks Jim.

Operator

Our next question comes from Darrin Peller. Your line is live.

Darrin Peller

Just a quick question. If you could first just walk us through a little more detail on the announced additions in the conversions over the next few quarters, we talked - I mean we know about WaMu, we know about Wachovia , maybe just a timing around those and just anything we are missing. I Know Deutsche Bank, Nordstrom, just help us understanding exactly how many accounts on file, when and how much they will come in and out?

Phil Tomlinson

Well WaMu is gone.

Darrin Peller

So that was about 20 million right?

Phil Tomlinson

Yes.

Darrin Peller

That was at the end of the first quarter or...

Phil Tomlinson

I'm trying to see if I've got that information with me. I'm looking for some advice, we've got about 6.5 million accounts that we hope to de-convert this year.

Darrin Peller

Okay. Is that Nordstrom or …?

Phil Tomlinson

Yes that's Nordstrom. Predominantly most of that is Nordstrom. That's Nordstrom.

Darrin Peller

Wachovia I guess?

Phil Tomlinson

Wachovia. We've got a debit card program.

Jim Lipham

(inaudible) in 2010.

Phil Tomlinson

Yeah. Wachovia goes out in 2010. I'm sorry.

Darrin Peller

Okay. That's right.

Phil Tomlinson

I apologize.

Darrin Peller

So this year all that’s remaining in terms of terms of -- sort of…

Phil Tomlinson

Most all of that, right at 5 million of that is Nordstrom. That goes out in August.

Darrin Peller

Okay, that goes out in August. Then what about the, you know everything else. The additions when is Carrefour, that’s third quarter or…?

Phil Tomlinson

It should be in late '09, really early '10.

Darrin Peller

Okay.

Phil Tomlinson

I would say you could count on that in the first quarter of '10.

Darrin Peller

All right. So net-net as far as you know, I mean, all we see now is 6.5 million kind of moving out and then from an addition standpoint you have Carrefour, you have -- anything else that I'm missing?

Phil Tomlinson

We've got about 10 million that's in the pipeline that is signed and ready to go.

Darrin Peller

The only name we know is the Carrefour. Is that Carrefour all right?

Phil Tomlinson

Right. I will tell you this, Darrin, we tried very hard to get several of these clients to -- I might as tell you who it is and they wanted to wait till after the conversion had gone well or …

Darrin Peller

I understand.

Phil Tomlinson

They had for several different reasons.

Darrin Peller

When we look at the sequential change in accounts on file, what I found interesting, an interesting increase from in the stored value cards. I know you guys went in general for about 340 million to 349, but it looked like about eight of that was stored value. Can you just explain what those were and how kind of sustainable those are, how long lasting they could be in these numbers?

Phil Tomlinson

Well, a lot of that is, as a result of this Wachovia -- not Wachovia, I've got it on my mind today but the Wal-Mart prepaid card that is issued through Green Dot. That card has turned out to be very successful, and they've had a good deal of growth there. I can't get into a lot of detail about our clients, but in the digital, the analog digital conversion from --

Darrin Peller

The cable cards you are talking about?

Phil Tomlinson

Yeah. That was a -- part of that earlier in the year.

Darrin Peller

I guess the question though was all right, so does eight million increase the stored value. I mean especially if some of these are the cable cards. How long are these going to last in your numbers?

Phil Tomlinson

Most of that is, you know, we pretty well have played out with the cable business. Those cards were used and gone.

Darrin Peller

Okay, so next quarter at least some of that eight million increase will be gone?

Phil Tomlinson

It may already be gone.

Darrin Peller

Okay.

Phil Tomlinson

I forget when that program ended, but it is over, and I think most of that is through continued growth in the prepaid business through our clients like the ones I've just talked about.

Darrin Peller

Okay so at least some of it can be sustainable?

Phil Tomlinson

Right. I don't know if you've ever gone out and bought a prepaid card like that. I did it about a month ago. I just wanted to do it, and you do wind up with a reloadable card. In about a week you get a regular Visa and/or MasterCard. You can take it back into the stores reload it and so I think time will tell as to how, what kind of usage we'll get with those and what percentage of them will be reloaded, but they will be on file. I mean, they'll come and go just like regular credit cards will.

Darrin Peller

Okay. Just if you don’t mind, really if you can just touch a little bit more on the margin improvement internationally. I mean, obviously there's been some cost controls. Can you just give us a little more color on which costs are being pulled out? Will you still expect to be pulled out from a cost standpoint? Maybe granulize the operating expense line which dropped?

Phil Tomlinson

From the international perspective, I don't think we'll see much drop in costs, as well as we will see an increase in revenue as these conversions take place. We mentioned Deutsche Bank came on this quarter and then we had home retail group and there's a couple of others coming on during the year, but by the time we get to the fourth quarter we'll see some improvement there. I think the margin was up about 400 basis points for the quarter. So I think more revenue additions.

Jim Lipham

The big ramp-up of course was some of this credit and customer service or customer care in collections work that we do. Some we do it all [form] others we do partial work and starting up a center like that has got a pretty heavy front end cost.

Obviously in Brazil we've got some startup cost to make the software work in Brazil and do all the things that the Brazilian market has to have, which is in every country that we go to, there's on the initial client there is a startup cost. I mean, just like with Deutsche Bank in Germany, we had to do some things to make those cards work, to make our systems work in Germany.

We've done that now and so the next person that we sign in Germany will be much easier for us to do and the same way with Brazil and the UK. If you look at TSYS's history, you'll see that we grow in clusters as we go into a country, as you can see in Canada, we just continue to grow once we get into a country. The same thing has happened in the UK and Ireland and starting to happen in Europe and you'll see a lot more color on that in the third quarter and I'll predict to you that it will also happen in Brazil.

Darrin Peller

Okay. All right. Just lastly then when we look at the margins, I guess looking at the whole first half the margin was roughly 23%, if you think about the two quarters versus your guidance of 24 to 26 for the year. Just to verify, you are really looking to get there by scale more than anything else. No more cost cutting or really -- very little of that, it's really more just revenue growth?

Phil Tomlinson

We like what we've got coming onboard, so we certainly have cut cost where appropriate, but we do think we can get down scale.

Operator

Our next question is from John Williams. Your line is live.

John Williams

Good evening, guys. Two questions, just first in terms of modeling, I noticed the subtle difference in the way you are framing your guidance. In the past you've talked about reimbursables a bit and this time you just used revenue and net income. Should we assume that the guidance or the color surrounding reimbursables is still the same or should we just really go with just the revenue and net income being as the thing that you are sort of pointing us towards to right now?

Jim Lipham

On the reimbursables we have seen a drop obviously in the first part of the year with the loss of WaMu and some other things, but the postage is the biggest issue there. We still like to talk about revenues before reimbursables, because they just don't make anything on the other piece of revenues. But then, of course, GAAP makes you talk about revenues with them in there, so we are trying to cover both ends of the spectrum.

Phil Tomlinson

We are trying to keep the lawyers and the accountants happy. We hate talking about reimbursables honestly, because it is true, it's just a past through.

John Williams

All right. So, that implies then that we should just take your guidance right now as being what is out there and in effect, just the two lines that you - revenue net income that you talked about in this quarter's earnings release?

Phil Tomlinson

That's correct.

John Williams

Okay. The other question I had was on Brazil. I know you guys have talked about that opportunity. I was hoping you could frame it a little bit more clearly what you see as some near-term issues in that market? Also, if you see that as an opportunity to really do mostly in-house conversions over to your platform versus really going out and competing with other large processors?

Phil Tomlinson

Well, I think we'll be competing with other large processors. We are not going to Brazil just to try to get the guys that are processing in-house. Obviously, we are confident in what we can do as it relates to competition, but the truth is, we've to go to Brazil get our feet wet, make sure that Carrefour is happy, and then, I think that overtime I am very hopeful you'll see us have some success there.

John Williams

Is it your sense that the regulatory environment there being a bit potentially more interesting now given the government's desire to get more companies involved? Do you see something that you perhaps will move a little more aggressively to take advantage of?

Phil Tomlinson

I think that could be helpful, but the truth is, I mean whatever the regulatory environment is in any country that we go into, we just have to deal with it, particularly, as it relates to how you can charge for cards and merchants.

John Williams

Okay. Thank you, guys.

Phil Tomlinson

Thank you.

Operator

Our next question is come from James Friedman. Your line is live.

Phil Tomlinson

Jamie?

Operator

Hello, Mr. Friedman, your line is live.

Phil Tomlinson

He must have dropped off.

Unidentified Analyst

This is [Meghna] on behalf of Jamie. Just a question regarding with your bank customers, have you seen any pricing pressure there? I mean, just trying to compare it from the last quarter. Has it increased, has it stabilized? Just some color on that front.

Phil Tomlinson

I think it's fairly stable. I mean, we've said before, we are always under price pressure, but I don't think it's any worse than it was this time last year, two years ago. I mean, we've gone through and dealt with a couple of customers, and we've baked that in into the numbers, and we've said in the first quarter we had $6 billion worth of price concessions compared to prior year and the second quarter is down to three. So it's getting better.

James Friedman

Maybe if I could just tag team with Meghna here, this is Jamie. Another way of asking that Phil might be, are new customers more profitable than old customers or is the revenue contribution (inaudible) rates, let me phrase it that way, that the bill rates for new customers are higher than the bill rates for the old customers?

Phil Tomlinson

Jamie, there is just no way. Every customer is different. I will tell you this as customers have been on the books for a while, we typically can cross-sell them new services and new products which helps the profitability issue, things that they probably didn't think they needed when they first came on board, but now they've had a chance to look and see in value-added services, new products, new programs. So, maybe they are more profitable after they've been here for a while, but there is just no way to compare them. It just depends really on what people buy.

James Friedman

Yes. Okay, if I could segue over to the accounts on file for a second, I'd like to compliment you on the increased disclosure in the deck is really fascinating and helpful.

Phil Tomlinson

Good.

James Friedman

I guess this subtext in some of the questions that seem to be on this call is, you had 349 million accounts on file, I am sorry - yeah, 349 million accounts on file and analysts are always looking for more detail. Could you take a grander as to what number the international accounts on file might be? As a related question, do you think that 349 is going to go up or down by year end?

Phil Tomlinson

I think it's going to go up, but just based on what we've said is going to happen, we do have a hold here. I mean look at this piece of paper. About 74% of our business is -- of those accounts are domestic and about 25% and there are some basis points there, but is international.

James Friedman

Okay. Then the last question with regard to Canada that you had alluded to is if I could just probe there, is there interact related or is that part of the new initiates that we read about from visa and master?

Phil Tomlinson

I don't think I could answer that.

James Friedman

Okay. Maybe that's too much detail. All right. Well, thanks for taking my questions guys..

Phil Tomlinson

Thank you, Jamie and [Martha].

Operator

(Operator Instructions) Our next question is coming from Craig Maurer. Your line is live.

Craig Maurer

I'd just like to follow-up on John's question. More specifically will you compete in merchant acquiring in Brazil now that that market is clearly going to be opening up following the dissolution of exclusivity at visa [net joys] of visa coming next July? Thanks.

Jim Lipham

Craig, good question. It is not something we would very much like to do but it's a gleam in our eye right now.

Craig Maurer

Okay. Thank you.

Jim Lipham

Thank you.

Operator

Our next question is coming from Robert Dodd. Your line is live.

Robert Dodd

Hi, guys. Two questions, first on, looking at the revenue per account, I know there is a huge mix issue here, if we looks domestically, I mean it was up very modestly on the net basis from what I can tell. Given that you have a lot of growth is coming -- way your growth is coming from the store value which is typically lower price cards. Could you give us a little bit more color on kind of what's driving your pricing mix and are those Green Dot cards without naming the cards much more profitable than a typical store value card, for example?

Phil Tomlinson

I wouldn't say that they are more profitable than a typical stored value card. I mean, I've said before I think the most profitable cards that we would you know its economy and order and I hope I get this right would be commercial card, consumer card, consumer branded cards, and then private label cards, and we are certainly fairly new to the prepaid business, but prepaid would probably be somewhere between the consumer and the private label cards.

Robert Dodd

Okay, got it. Then if I can ask you about the Bank of America First-Data Deal. When you gave the update a couple of weeks ago I guess, it was revenue impact 50, 55 million and the earnings impact only $0.02 which was obviously lower than I thought it would be. Can you give us an idea that would imply that you got to reduce the cost base by 45 to 50 million almost automatically with that revenue going away? Is it something different about the cost structure of that contract in terms of much more variable versus fixed cost or can you give us a little bit more color on exactly how you come up to that low contribution?

Phil Tomlinson

Well, the lower contribution was what the effects were for '09 and obviously as you go into '10, there would be some fragment termination there. But, yeah.—the transaction cost comes from TSYS for them because we process for them, but we'll have to make some cuts in the and we'll have time to do this and the equipment arena as well as the client service reps that deal with Bank of America, obviously the size of the analyst are large number.

Robert Dodd

Okay, got it. Thank you

Operator

(Operator Instructions)

Phil Tomlinson

Anthony?

Operator

Yes, there are no questions in queue at this time?

Phil Tomlinson

I was about to say these folks are not bashful. So I would really like to go ahead and close out and tell you how much again we appreciate you being on the phone with us. We know there is a lot of earnings calls going on right now and it means a lot to us. We want to assure you that we are working harder than we've ever worked in our life to make sure this company continues to be successful and we believe it will. So keep your eye on us and keep your eye on the press releases coming and thanks for being with us today and good night.

Operator

Thank you, ladies and gentlemen. This does conclude today's teleconference. You may disconnect your lines at this time and have a wonderful day. Thank you for your participation.

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Source: Total System Services, Inc. Q2 2009 Earnings Call Transcript
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