Vantiv Inc (VNTV) Management Discusses Q2 2013 Results - Earnings Call Transcript

Jul.25.13 | About: Vantiv, Inc. (VNTV)

Vantiv Inc (NYSE:VNTV)

Q2 2013 Earnings Call

July 25, 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

Tien-Tsin T. Huang - JP Morgan Chase & Co, Research Division

David J. Koning - Robert W. Baird & Co. Incorporated, Research Division

Jason Kupferberg - Jefferies LLC, Research Division

Georgios Mihalos - Crédit Suisse AG, Research Division

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

Darrin D. Peller - Barclays Capital, Research Division

Christopher C. Brendler - Stifel, Nicolaus & Co., Inc., Research Division

Bryan Keane - Deutsche Bank AG, Research Division

Glenn T. Fodor - Autonomous Research LLP

Operator

Good day, everyone, and welcome to Vantiv's Second Quarter 2013 Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Nathan Rozof, Senior Vice President for Investor Relations. Please go ahead, sir.

Nathan Rozof

Good morning, everyone, and thank you for joining us today. By now, everyone should have access to our second quarter 2013 earnings release, which can be found at vantiv.com under the Investor Relations section.

During the call today, Charles Drucker, our President and Chief Executive Officer, will discuss Vantiv's second quarter operating performance and address some of our key initiatives. Mark Heimbouch, our Chief Financial Officer, will then review second quarter financial results and discuss our outlook for the remainder of the year.

Throughout this conference call, we will be presenting non-GAAP and pro forma financial information, including net revenue, adjusted EBITDA, pro forma adjusted net income and pro forma adjusted net income per share. These are important financial performance measures for the company, but are not financial measures as defined by GAAP. Reconciliations of our non-GAAP pro forma financial information to the 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 and in our periodic filings with the SEC. Additional detailed information concerning many of the risks regarding our business and the factors that could cause actual results to differ materially from the forward-looking statements and other information that we give you today, can be found in our most recent annual report on Form 10-K 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'll now turn the call over to Charles Drucker, our CEO. Charles?

Charles D. Drucker

Good morning, and thank you for joining today's call.

During the second quarter, our business continued to deliver strong financial results. Consistent with our expectations for the quarter, net revenue grew 14% to $297 million as we continue to win market share. Adjusted EBITDA margin expanded by more than 60 basis points to 51%. Some factors contributing to this margin expansion included efficiencies from our scale, as well as revenue and cost synergies from the Litle acquisition. We also delivered superior earnings growth that exceeded our guidance for the quarter, with pro forma adjusted net income per share growing 25% to $0.40 per share. These results demonstrate that we continue to execute against our growth strategy. Our scale and high level of service are recognized in the market and helped us to secure some very notable wins that will expand our growth in the fourth quarter.

We have also recently renewed several important national merchant relationships, including leading retailers like Nordstrom and Dillard's department store, as well as several important FI clients during this quarter, such as First Niagara Bank.

While we are winning in our traditional markets, we are also expanding into new high-growth segments and verticals like eCommerce and PayFac aggregation. This includes significant investment in emerging technologies like mobile offers that, while not contributing significantly to today's growth, are essential for us to continue to grow at a rapid pace as the payment market evolves and grows. For example, I mentioned that we are investing in mobile. We have already discussed a remote check capture product and Vantiv Accept on prior calls. This quarter, we announced Vantiv Mobile Checkout, powered by our partner, NCR. Vantiv Mobile Checkout will allow us to quickly reach small businesses that are seeking the features and functions of a fully integrated tablet-based solution.

We also continue to exploit data and analytics in an effort to create new product and services that build on our core processing expertise. This quarter, we announced expanded our efforts to include Visa Offers, which is another example of Vantiv bringing the next generation of payment features and functionalities to our client. In May, Vantiv became the first U.S. acquirer to announce they would be providing the unique Visa Offers platform to its clients, which will enable them to drive more loyalty for their brand by delivering customized offer to enrolled customers. Being the first U.S. acquirer to announce our agreement with Visa Offers and many other leading technologies, really help us build our reputation as a payment processor of choice for our clients.

We have also moved aggressively to invest and build our presence in the eCommerce space. Our ability to penetrate the eCommerce vertical, based upon the combined assets of Vantiv and Litle, is processed -- is progressing extremely well. We are integrating Litle into our sales channel and we are expanding our pipeline to win new business that wasn't available to our company before. For example, we recently tied -- signed 2 of the largest eCommerce retailers, as well as a list of others, and the pipeline remains robust. Our heritage at Vantiv has always been winning large clients as we serve nearly 1/3 of the top 100 merchants in the U.S., and we see that trend developing for us in the eCommerce market as well.

Further, we are aggressively expanding into new verticals where we see the potential for increased adoption of electronic payments over cash and check. Increased adoptions will continue the secular expansion of Vantiv's core payment market and provide us further opportunity to win share by aggressively pursuing these opportunities. During the first quarter, we highlighted an expansion into property management verticals where more people are really now using electronic payments to pay their monthly rent. The same is also true in the vending space. As more and more vending machines migrate to cashless solution, Vantiv stands to benefit. During the last quarter, we signed 2 of the largest vending providers in the U.S. These leading vendor companies are upgrading their machines with capabilities to process debit and credit cards as consumers demand the ability to pay in new ways at the vending point-of-sale.

Other verticals that are undergoing changes include gaming, entertainment and healthcare, as well as other areas like small ticket transaction and mobile acceptance. We see the potential for change to drive increased adoption of electronic payments and we are investing in these verticals today in order to position Vantiv for the future.

I also want to touch upon our expanding focus on penetrating the independent software vendors, or ISV space. As you know, merchants are increasingly seeking point-of-sale solutions that provide end-to-end functionality to run their entire business, far beyond the capabilities of the traditional cash register. In the future, the next generation point-of-sale will include inventory, CRM, loyalty, offers, marketing and payment functionality, all integrated into 1 piece of software. ISVs are developing and will continue to develop these solutions. As ISV bundled into their products, we think it creates 2 positive outcomes for Vantiv: First, ISVs will likely choose to integrate with only a few payment providers. Therefore, ISVs will create referral streams for new clients and raise the barrier for entry for processors that are not integrated with them. Second, we believe ISVs will create stickier merchant relationships for Vantiv based upon our integration into the core software that they use to run their business. Further, we expect these trends to accelerate as the cost of computing falls and the adoption of the cloud-based software increases. Transaction process into ISVs is expected to grow significantly faster than the total acquiring market during the next 5 years. Therefore, it's important for Vantiv to be their partner of choice. Deepening our relationships with ISVs has been a key part of our technology partner strategy and has helped us to access more clients and offer even more value to merchants of every size. It also furthers our industry position as a fully integrated payment processor. This is why I'm pleased to announce today that we recently signed an agreement to acquire Element Payment Services. We think that Element will really accelerate our penetration into the ISV space.

Element is a leading -- industry-leading provider of fully integrated payment processing solutions for technology companies, including ISVs and value-added resellers or VARs. As we previously communicated, our strategy has always included M&A as a means to drive growth by expanding into new channels, as well as an opportunity to drive profitability through integration and scale. Both the NPC and Litle acquisition represent great examples of our ability to successfully expand into new channels and diversify our client base through M&A, and we tend to do it again, with Element.

Element will give Vantiv the strategic capabilities to partner with ISVs and other technology partners and will position Vantiv to capitalize on the integrated payment trend. It will add unique capabilities to Vantiv's processing platform and will give us new sales channel capabilities that we can use to accelerate our penetration into high-growth verticals. This transaction is a good example of how we continue to provide payment services that are tailored to our clients' core business management systems. Vantiv has done this effectively for more than 40 years with large merchants and now, by combining the expertise with Element's strength in the small to mid-market space, we will create a powerful sales synergy to serve the full spectrum of merchants. The purchase will be funded by cash on hand, with the transaction expected to close during the third quarter. I'd like to thank all the individuals involved, from both the Element team and Vantiv team, for making this a reality, and we look forward to the combination of the 2 companies.

Now I'd like to turn to the outlook for the remainder of the year. We've done a lot this year already, and I know we will do even more to provide value for our clients, shareholders and employees. We've been investing to expand our business and Vantiv continues to perform very well. I'm pleased to announce that we are revising our EPS guidance for the full year to reflect the impact of the recent share repurchase, as well as the higher adjusted EBITDA margin. However, as Mark will discuss in a few moments, we are slightly adjusting our net revenue outlook for 2013 to reflect the impacts of lower consumer spending trends, as well as it taking us longer to penetrate the merchant bank and VAR channels than we initially expected.

We continue to believe that these channels represent a significant growth opportunity and they remain a priority for us. Therefore, we are making investments to accelerate our penetration in these channels, including the pending acquisition of Element, which will accelerate our growth into the VAR channel.

Finally, new business is expected to increase with the wins in both eCommerce market and our traditional space. As outlined, we believe our strategy to expand into new segments and verticals, our relentless execution and our acquisition of Element will contribute to a very bright future for Vantiv.

Now I'd like to turn the call over to Mark Heimbouch, who will review our financial results and 2013 expectations in more detail. Mark?

Mark L. Heimbouch

Thanks, Charles, and good morning, everyone. As Charles indicated, our business generated double-digit net revenue and profit growth in the second quarter of 2013. Net revenue increased 14% to $297 million, due primarily to 8% growth in transactions and a 6% expansion in our net revenue per transaction. Pro forma adjusted net income increased 22% to $83 million, resulting in a 25% increase in pro forma adjusted net income per share to $0.40. Adjusted EBITDA margin expanded by more than 60 basis points year-over-year to 51%, reflecting the benefits of scale, including the realization of revenue in cost synergies from the integration of Litle, and the efficiency of our superior cost structure. Adjusted EBITDA increased to $151 million in the second quarter, up 15% year-over-year.

With respect to consumer spending trends, same-store sales growth for the quarter was just slightly down to 5.7% on a transaction basis. The lower growth is driven primarily by the effect of Easter being pulled in to the first quarter of this year. Within the quarter, we saw same-store sales growth rates improve in May and June, consistent with trends that other industry participants have provided.

Turning to the segments. In the Merchant business, net revenue grew 19% year-over-year, due primarily to 8% transaction growth and a 10% expansion in net revenue per transaction, reflecting continued contribution from growth in eCommerce, as well as additional debit routing benefits.

eCommerce sales volume increased by 38% year-over-year on a pro forma basis. eCommerce growth was primarily driven by strong new sales and organic growth. As Charles indicated, we have added a number of meaningful accounts thus far. We are winning new clients given Litle's robust payment eCommerce processing capabilities and innovative value-added services, as well as due to our combined scale and distribution.

With respect to our Financial Institution business, net revenue grew 3% and transactions grew 5%. The primary factors influencing net revenue per transaction in the business included mix shift within the client portfolio that resulted in a slightly lower average rate. However, we renewed several important FI relationships during the quarter, as Charles mentioned, and we remain confident in our expectations to draw our FI business mid-single digits.

In terms of expenses, sales and marketing expense increased 8% to $76 million during the quarter. It's also important to note that Litle has a relatively small sales force, so as we consolidate expenses, its impact on sales and marketing is considerably less than the other items on the expense side.

General and administrative expenses increased 11% to $22 million, and other operating costs increased 21% to $47 million. In addition to the larger impacts resulting from our Litle acquisition, growth in these expense items was also due to additional personnel-related expenses and increased infrastructure and professional services costs to support our growth initiatives.

With respect to our capital structure, we refinanced our existing debt and borrowed an additional $650 million during the second quarter. The proceeds were used primarily to repurchase 17.5 million shares in connection with the May secondary offering and the remainder will be used for general corporate purposes. Going forward, interest expense is expected to be between $11 million and $12 million on a quarterly basis.

Our capital allocation strategy remains unchanged. Our priority is investment for growth, including M&A. Element and Litle are good examples of the growth and strategic characteristics that we look for when evaluating an opportunity.

Turning to the outlook for the remainder of 2013. Our business continues to deliver solid double-digit net revenue growth. However, we are revising our full year net revenue expectations to reflect lower-than-expected consumer spending trends, as well as to adjust for the additional time that it is taking to penetrate the new channels that Charles mentioned. While penetrating these new channels is taking longer, we continue to believe that they represent a significant growth opportunity. Therefore, we've reorganized internally and committed additional resources to speed our penetration into these markets. We are encouraged by the pipeline of new client opportunities that we have built thus far, and by some of the new clients that we have recently won, as Charles mentioned. Therefore, we expect growth to expand on the fourth quarter as revenue from these new clients is realized.

We also expect to close the Element acquisition during the third quarter. However, this transaction is not expected to have a material impact on our results in 2013. Including the impact of each of these factors, we are revising full year net revenue guidance to $1.19 billion to $1.21 billion representing 16% to 18% growth for 2013.

Turning to profitability. We now expect EBITDA margin expansion of up to 100 basis points for the year. Synergies being realized both in terms of revenue and scale through the acquisition of Litle, also are contributing to stronger-than-expected margins. As we have grown and added scale within eCommerce, we have increased margins within this business to near our corporate average from significantly lower levels on a pro forma basis 1 year ago.

Consistent with our expectations for accretion related to our May share repurchase, as well as our expectations for adjusted EBITDA margin expansion, we now expect pro forma adjusted net income per share to be between $1.55 and $1.59 per share, versus our prior guidance of $1.46 to $1.50. With respect to quarterly trends, we expect relative normal seasonality for the rest of the year with somewhat greater expansion in the fourth quarter. We expect transactions to be comparable in the second and third quarters and we therefore expect to generate a similar amount of net revenue and pro forma adjusted earnings per share in the second and third quarters, which is similar to last year. We expect net revenue and earnings to increase during the fourth quarter as is generally the case given the holiday period, as well as due to the impact of new business that Charles mentioned.

Now, I'll turn the call back to Charles for closing comments. Charles?

Charles D. Drucker

Thanks, Mark. Vantiv is positioned to win in the market and we are focused on delivering long-term value. In fact, as you may have seen this past month, Vantiv was recently recognized by Forbes Magazine as one of America's fastest-growing tech companies for 2013. Vantiv was ranked alongside some of the biggest technology names in the world including Google, Apple, and LinkedIn in its prestigious top 25 list.

The team at Litle also recently won a prestigious award at the Card Not Present Expo in Orlando, Florida for its effective chargeback management solution. This value-added solution represents the type of supplementary services that help our clients be more profitable and adds to our bottom line. The people at Litle continue to impress us with their dedication and innovation. I'm proud to have them on our team.

In conclusion, we drove double-digit growth during the second quarter. We are revising our EPS outlook for the year to reflect the accretive impact of our recent share repurchase, as well as the higher adjusted EBITDA margins. While penetrating the Merchant Bank and VAR channel is taking longer, they remain a priority for the company. We are investing in the future and expect recent new wins to help drive growth into 2014.

Thanks for your time this morning. And operator, we will open it up for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Tien-Tsin Huang.

Tien-Tsin T. Huang - JP Morgan Chase & Co, Research Division

Just -- I guess I'll ask about the Merchant transactions. I caught the weaker consumer comments, I heard the Easter comment as well. But any certain verticals or channels that stand out as being weaker than the others? Just curious, trying to compare and contrast this to some of the other numbers that we've seen.

Mark L. Heimbouch

Tien-Tsin, it's Mark. Keep in mind that on a transaction basis, that presence of grocery, drug and the retail that we have is 80% to 90% of the same-store sales or transaction volume. So we've just seen it be kind of stable and not see it really move upward or downwards, so those are kind of -- that's kind of how we arrived in our comments. Some of the other things that you see in the market, in particular, like petro, is not a significant vertical in terms of our same-store sales trends. So if you're going to grab some of the other data out there, we would have seen very strong same-store sales growth in petro and some of the other verticals. That being said, there's just not a high concentration given our business. On the other hand, the presence in the everyday spend category, while it doesn't see the big upward swings and downward swings, it's very predictable and very stable over time.

Tien-Tsin T. Huang - JP Morgan Chase & Co, Research Division

Understood. Understood. That makes sense. And then just to comment about taking longer to penetrate some of the new channels. Is it just an issue of adding sales people that can help cure that? What else needs to be done, I guess, to accelerate that?

Charles D. Drucker

Tien-Tsin, so we're getting good traction but it's adding the salespeople, getting the referral channels and training the referral partners to identify leads and move them over to the sales. So as you think about Merchant banks, it's about getting to their branch personnel, their business banking personnel, and educating them to identify the leads. So it's taking a little bit longer. On the VAR side, it's about -- we're signing up the VARs but then the VARs, seeing how we're operating, and then the VARs are focused today, a lot of times on new business, and not always quickly addressing their existing base. So we're seeing more acceleration happen, but it's a little slower than we thought. But we're very confident about these channels' abilities to grow in the future. And Element will play a very good part in helping us accelerate on the VAR side.

Tien-Tsin T. Huang - JP Morgan Chase & Co, Research Division

Sure. No, I like the Element deal. I'm curious, I know you said it's immaterial. Can you give us some sense of the price paid or that you would pay for Element in revenue and transaction [indiscernible]?

Mark L. Heimbouch

Yes. So, just for confidentiality, we haven't closed the transaction, so we'd provide that information after closing. The transaction is expected to close during the third quarter. In terms of how to think about it and in terms of materiality, it's clearly less than 1% in terms of net revenue on a growth basis, so not significant. But like the Litle transaction has been to us in terms of penetrating into the eCommerce business, I would say the Element transaction is similar. So when we talk about how to further penetrate the partner technology strategy ISV, Element is a key component of that.

Charles D. Drucker

And Tien-Tsin, the leadership and the team and the talent that's on that team, and the know-how in that space will really accelerate us. And I just -- this is a transaction I was just extraordinarily impressed with the team that was out there.

Operator

We'll take our next question from Dave Koning.

David J. Koning - Robert W. Baird & Co. Incorporated, Research Division

I guess first of all, I just wanted to talk a little bit about growth and revenue per transaction in the Merchant segment. I know it sounds like right now, it's made up of kind of 3 things; kind of your core business, the debit routing incentive benefits and then Litle. I'm wondering, can you give us a little bit of color on how much each of those are to drive that 10%, and what sort of sustainable and maybe what -- kind of what that maybe goes to longer term?

Mark L. Heimbouch

David, I think -- this is Mark. That's a great question. I think that over time, they have very -- I would put mix in there, too. As we penetrate some of the smaller merchants, I think that mix is also a contributor and I think that they've all played meaningful roles, whether it's each representing a quarter over time. I'm not so sure that, that's the math. But they've all been meaningful in terms of expanding rate. I think that you raised a good point though that people -- for us to kind of spend some time on making sure people understand. Given our transaction base of 15 billion transactions in 2012, and as we expand our portfolio into some of the smaller midsized clients, it's not always going to be the case that we have large national accounts that are going to contribute to the higher transaction rate of growth. On the other hand, the widening diversity in the clients that we serve is having the impact of expanding rate. So it's the net revenue growth that I think is more relevant. Granted we'll add -- we'll continue to add large national accounts and they will contribute lots of transaction volumes, but any time that occurs, you'll actually see rates somewhat decline.

David J. Koning - Robert W. Baird & Co. Incorporated, Research Division

Okay. Now that's a great answer. And I guess just my one follow up. The last couple of years, the Q2 sales and marketing in the Merchant segment has kind of been pretty similar in Q3 and Q4, so you've had reasonably stable sales and marketing from Q2 on. Is that kind of how you expect this year to go too, meaning margins in the Merchant segment kind of ramp in the back half of the year at the same sort of trend?

Mark L. Heimbouch

Yes. I think that's been consistent. Again, it somewhat follows the expansion into some of those new channels and verticals. But I think your assumption is reasonable.

Operator

We'll take our next question from Jason Kupferberg.

Jason Kupferberg - Jefferies LLC, Research Division

So just to talk about the top line guidance a little bit. The tempering here, I don't think, is too surprising since you had already said last quarter, you were trending to the low end of the range. And I just want to make sure we clearly understand the reasons for the revision. Is it all because of Merchant or some of it FI, too? I mean, FI is obviously a lot smaller, but the growth there seems a bit below trend this quarter. And then as part of that answer, if you can clarify what your full year expectations are for Merchant versus FI. And if you can go down to kind of the transaction growth versus the revenue per transaction lines on both, that would be helpful.

Mark L. Heimbouch

So in terms of thinking about the reasons behind tempering the guidance, the same-store sales comment would apply on FI as well. So as we thought about total net revenue growth, it certainly has an impact on both. So the rates of growth going forward, would suggest that the Merchant business, particularly the new -- most of the new client wins that Charles discussed, we'd be applying in the Merchant segment. So the expansion, in terms of net revenue, would principally occur in Merchant in the fourth quarter. With respect to how to think about the FI. I mean, we still think that FI consistently over time, is in that mid-single digits. Mix was a contributor in the second quarter. There were some other things like card production, for example. Card production revenue influences the FI business and for example, in the second quarter, we just had a little bit less card production than we did in the prior year. So you would expect things like that. Those are a little bit lumpy. They kind of come back. They're just not as predictable on a quarter-to-quarter basis. So that also contributed to a little bit of the rate decline that you saw in the FI business.

Jason Kupferberg - Jefferies LLC, Research Division

Okay. and then just on the...

Mark L. Heimbouch

As I throw lot of information, the way I would think about it is I think that generally, we believe that rate continues to expand in Merchant. Two, we think that FI continues to be in mid-single digits. There is a expansion of net revenue growth in the fourth quarter, which, for that quarter, may result in net revenue per transaction not expanding just given some of the size of the business there. There's also some seasonality in the fourth quarter given the holiday periods. But longer term, for midterm, we still expect to see expansion on Merchant rate.

Jason Kupferberg - Jefferies LLC, Research Division

Okay. So it sounds like what you're saying is, when you've talked about sort of medium to longer-term guidance in the past, I think, call it double-digits on the top line in aggregate, no change in that thinking?

Mark L. Heimbouch

Yes. There'd be no change.

Jason Kupferberg - Jefferies LLC, Research Division

Okay. And then just the Merchant transaction growth in the quarter, the 8.3%. Obviously, that included Litle. If we strip that out to get to an organic number, was it more like 6% to 7%? And if so, how does that compare to last quarter if you were to strip out Litle and Discover from Q1?

Mark L. Heimbouch

So I think that Q2, on an organic basis -- so the 6% is just a pure same-store sales metric. It doesn't include the impact of new business. So on a -- but new business including organic would probably be upper single-digits, close to 10%. So again, keep in mind, Jason, that as we add these smaller merchants, they're just not going to come with the same heft in transaction volume, and once again, rate will expand. But as we add large national merchants and that can be lumpy, you're going to see, and you will see that, you're going to see significant growth in transaction volumes, but you'll see rates slightly compress, simply because of the size of that large national merchant, and as you know, the way they're priced.

Jason Kupferberg - Jefferies LLC, Research Division

Right, right. And just last for me. One of the metrics, I think, you've talked a little bit about occasionally in the past is new sales, in Merchant, specifically. So curious to know through the first half of this year, how much new sales are up in Merchant. And if you can give us some context as far as what that metric was looking like when you exited 2012?

Mark L. Heimbouch

Yes, so I think when we talked about it in 2012, we set up over 20%. And it continues to be up over 20%. I think what we've learned, and to Charles comments about it taking longer to develop some of those channels, is getting conversion in some of those VAR-type channels and Merchant bank-type channels is just taking a little bit longer as compared to our historical experience in our direct channel. So new business growth continues to be very strong. New business growth and new business sales.

Operator

We'll take our next question from George Mihalos.

Georgios Mihalos - Crédit Suisse AG, Research Division

Just to start off with the guidance on the revenue side, the 16% to 18% growth you guys were talking about. Does that roughly shake out to about 9% to 10% organic growth or 9% to 10% growth x Litle? Is my math correct there?

Mark L. Heimbouch

It's probably -- no, it would be a little -- it'd more than that. It'd be 10% plus. The other thing is, is, I think, George, what's happening to us in the eCommerce front is given eCommerce is growing 38% to 40% for us, it's not simply a fact of -- or it's not simply due to the result of organic growth of clients that came with that acquisition. So what we're really seeing start to happen is now that we're overlaying our distribution and Litle and Vantiv working as 1 company, is we're winning more new business. And the other thing that we're seeing, as compared to the verticals like VAR and Merchant bank, actually, conversions happen pretty quick. So -- and in my view, that's organic growth. But just to answer your question explicitly, it would probably be kind of on the old traditional business, 10% or just over 10% low-teens. But I would say the ability to win the new business in Litle and the combination of the 2 companies is really helping contribute to the growth. And by the way, as we all know, eCommerce is growing at a much more rapid rate than traditional brick-and-mortar.

Georgios Mihalos - Crédit Suisse AG, Research Division

Okay, great. That's helpful. And then just looking at the transaction growth in 2Q, the 8.3%, can you call out the impact of Litle on that growth? How many points did that influence it?

Mark L. Heimbouch

It's very -- again, it's just -- it's very small. Maybe 1 point or 2 in terms of transaction. Just given -- again, it's a lower transaction base at a higher revenue or pricing point.

Georgios Mihalos - Crédit Suisse AG, Research Division

Okay. And then last question for me. I think you called out the same-store sales growth trending at about 6%, getting, I think stronger, you said, in the latter months of the quarter. Any color you can provide on trends in July thus far?

Mark L. Heimbouch

Actually, watching July, things continue to be pretty stable, I would say. And I think we've taken -- this time, we've taken, I think, a pretty conservative approach on same-store sales trends in terms of how we thought about the guidance. I'd also remind everybody that the comps do get a little bit better here in the second half of the year. We've probably -- we've taken a more conservative approach in terms of how to think about that, particularly given how our presence is in grocery, drug and retail. So just being pretty predictable and pretty stable, but July tends to be holding up pretty well. Comps could get a little bit easier and a little bit better in the second half of the year.

Operator

We'll take our next question from Julio Quinteros.

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

Just in terms of the run rates, just to go back to the revenue per transaction on both the Merchant and the FI side. The rates that we saw this quarter, the assumptions into the back half of the year, do you expect those to be sort of the run rates here? Or could there be some volatility, I guess, a little bit into the fourth quarter with the way that seasonality kicks in? I'm just trying to get my arms around both of those on the revenue per transaction side.

Mark L. Heimbouch

Yes, I was trying to answer that on -- I forget if it was Jason's question. But yes, there is some seasonality. So the way we think about rates is maybe a little bit more on a year-over-year basis because that takes into consideration, the seasonality. And to your point, there is a seasonal, in our business, downward shift on a rate basis in the fourth quarter. I think second and third quarter generally tend to be -- though they can kind of be within the range, they tend to be fairly stable second to third quarter, with the only impact coming from mix. So if you assume at the baseline, it's stable but for the fact that we continue to grow business including the likes of eCommerce, would suggest that there is -- it's flat to up with a more seasonal downward trend in the fourth quarter.

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

Okay, got it. And I guess just thinking about the competitive dynamics as well. We're 47 minutes into the call here, haven't made -- heard one mention yet about the squares and the dongles. I'm curious on any color there about competition, new entrants and anything of that sort that you can sort of qualify in the business itself in terms of attrition or run off of business. Anything along those lines.

Charles D. Drucker

As you see in the margins, our rates continue to be stable. Our attrition continues to be stable, and we're winning business in our new sale -- with our new sales. I mean, I'm very excited about the traction we're getting in the eCommerce space, and I'm equally going to be excited with Element coming in with the VAR space. So we're seeing, as our ability to win share continue moving forward. We have a dongle out there, we're getting traction on some of the smaller end but we're still not focused on the micro side and we haven't seen any evidence of anything coming up stream.

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

Okay. And just on the Element acquisition, I'm having a hard time just getting my head around what it actually is. It helps you with other ISVs. I guess, I'm thinking more about some of the vertically focused integrated payment companies that are out there. But in this case, it actually -- that doesn't sound like that's the functionality it provides. Is it more like an integration software, like an API? Can you just help us understand it? Or is there an explicit vertical at Element that actually goes after?

Charles D. Drucker

Well, there's a few verticals. Mark, can you talk about the verticals that we have? So the few verticals. I mean, they're in -- the retail vertical, they have some veterinary practice verticals, spas and club, self storage. So what they do is they create easy solutions to integrate into these vendors or these VARs, ISV package. The other thing that they bring that we think is very different is the leadership had an extraordinary focus on PCI and security in order to take it out of the ISVs or the merchant's hand. So they've been very innovative around how they approach that market. And similar to Litle, we have a lot of technology people, people that have built things that are great for the market in the ISVs. And what they quite frankly don't have is the capital to invest in the sales force and distribution and also the scale to win. So we think this is a very good complementary side, similar to how Litle came together. So -- but they are in specific verticals, but they have capabilities to be in other verticals. It's just that with them, it was more of a resource type of funding of sales force and scale.

Mark L. Heimbouch

Yes. I'll also add. That second component though is important in terms of being more vertically integrated in the channel. So you have the technology now with the complement of being able to get your channel to work for you. So those were the 2 really key elements to Element.

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

Okay. And is there an integration opportunity with Litle as well, on the Element?

Charles D. Drucker

There are certain things that they're doing across the cloud, there are certain things that they're doing across some ISV providers that can complement Litle. So there are some complements between both of these companies and our core at the same time. So we see it's a good fit. And like I said earlier, what -- in addition to what they're doing, the talent level of the leadership team and their vision of knowing this market impressed me because it's about executing. Bringing the strategies, getting the private features and functions, technologies but also executing. And we picked up some 2 good teams. I expect them to be, as Litle goes forward, similar Element with the type of quality of people.

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

Okay. Mark, one last one. You were asked about the long term or long to mid -- mid to long-term revenue growth expectations. And it sounded like you were comfortable with sort of the same trends. How do you think about the EBITDA margin expansion potential after this big bump up here?

Mark L. Heimbouch

Again, we kind of -- when we get into the end of the year, we'll provide guidance for next year. But I don't think our view has changed in terms of the leverage and scale. In fact, I think that the current year proves it. I think the benefits in terms of how Litle is going and the expansion of margin given that, particularly given the growth despite by the way that growth contributes to margin expansion. So whereas this year, we're saying up to 100 basis points and we clearly have the levers to pull to drive probability. I think my expectation would be we'd still think about it on an annual basis of up to 40 basis points, but it's certainly something that we'd assess on an annual basis.

Operator

We'll take our next question from Darren Peller.

Darrin D. Peller - Barclays Capital, Research Division

Just want to jump in on the channels you've been forming with the different banks, the new referral channels. I think there were about 800 that were being signed on last year. How is that trending right now? I think there was an allusion to it being a little bit slower, but overall, it's still supposed to drive further growth in the second half of the year.

Charles D. Drucker

Yes. I mean it's -- so again, traction in signing the banks, getting the banks up, and we're still are having a lot of positive success in bringing banks on. The slower part of it is we're putting sales force out there but it's retraining the business bankers and the retail bankers and the branches to recognize the referrals and get the referrals over. So we're seeing good traction around that, but initially, we had hoped that it would move -- that trading process with the banks would happen a little bit faster. But it's us being a little bit more patient with the channel, putting the right resources on the channel and the dedicated focus. So we see positive things. I'm very high on that channel that, that's going to produce good long-term results for us.

Darrin D. Peller - Barclays Capital, Research Division

All right. So the tailwind from that hasn't even been in the transaction numbers, yet. That's really something we can still hope to see for the second half.

Charles D. Drucker

That's correct.

Darrin D. Peller - Barclays Capital, Research Division

Just one quick -- that's helpful. Just one quick follow up on these -- on the revenue -- the yield transaction -- I'm sorry, the yield trends. The Merchant yield, as much as I know you were giving a disclosure on Litle and all the different drivers of the yield going up. It jumped a lot sequentially. It wasn't just year-over-year. It was about a 5% increase, which is a materially, pretty -- a little bit of a greater move than I think even we expected. Can you just give us a little more color, specifically on what sequentially did lead to that? Was it still mostly Litle? Was it the smaller merchant mix? Can you just give us a little more comfort or color on the actual sequential change?

Mark L. Heimbouch

Yes, so the eCommerce space is going to continue to contribute on a sequential basis. The benefits that go along with debit routing continue to contribute, kind of getting them to kind of in a ranking, I think. And then mix continues to contribute to that over time. And clearly, the top 2 for this current period would've been eCommerce growth and routing.

Operator

We'll take our next question from Chris Brendler.

Christopher C. Brendler - Stifel, Nicolaus & Co., Inc., Research Division

I wonder if you could give a little more color on the smaller Merchant side of your business. What are you seeing at NPC? The transaction trends, I think we've hit that pretty hard so far in this call. But if you could just focus a little bit more on the smaller side and whether or not you're seeing any sort of impact on pricing at the smaller end from some of the new players out there, it would be helpful.

Mark L. Heimbouch

It's Mark. I think that if you focus just on the ISO, third-party channel-type customer, on average, they're sales volume would be much smaller than our average in the direct business. And it's some of these verticals that Charles talked about, too. So probably around 150,00, 200,000 annual sales volume. I would say we haven't really seen any significant shifts in the trends. But those trends continuing to be -- in terms of a same-store sales-type metric, we've actually seen the smaller merchant for a very long period of time be low-single digits in terms of transaction, same-store sales growth. More recently though, actually, we are seeing a little bit of average ticket expansion, so volume has been growing at a little bit higher rate. Also on the same-store sales basis, mid-single digits. I'd say that's occurred more in the recent past few months. So perhaps the small business is doing -- starting to do a little bit better in terms of average ticket, which I -- is kind of a positive sign. In terms of pricing and attrition, I think the kind of the traditional -- or attrition trends continue to be about the same. And over time, that and the NPC or the ISO business has been 20%, plus or minus, depending upon moves or anything like that. So that's been pretty consistent. And I would say that the pricing implications have been the same. That being said -- when I -- and by the way, when I say the same, the same being that it's always been competitive. So in terms of attrition and compression trends, I've seen them really be consistent since we really own that business.

Charles D. Drucker

And Chris, I'm also seeing ISOs and we're working with them. And they're trying to focus on specific verticals. They're trying to do -- the VAR movement that's happening, that they're working with various VARs as we hook up channels. I mean, I think you're seeing a lot of the ISO stuff that's specialized, whether they get in the veterinary. They're trying to add different values than just a general across the board. So we're helping them refocus and continue to work on them growing their business.

Mark L. Heimbouch

So to the point though, I just think it can be, and is more competitive, given new technologies, given new point-of-sale integrations in different channels versus just being on the street selling at terminal.

Christopher C. Brendler - Stifel, Nicolaus & Co., Inc., Research Division

Yes, we've heard that as well. A quick follow-up. Are you still targeting, I guess, greater than expected or greater than typical growth in that smaller merchant channel? I think you'd highlighted a couple of quarters ago that, that was an area of growth and you leverage your smaller -- I'm sorry, your single platform and your cost advantages to grow in the smaller merchant segment, and then hopefully, put upward pressure on your revenue per transaction given that the wider spread there? Is that still the case? And also, where do you stand on integrating NPC into the -- onto the Vantiv platform?

Charles D. Drucker

So first part is, absolutely. We are looking -- first of all, we're looking to win in the markets we traditionally win in, in the large merchant and getting those large traditional merchants coming over to us. But at feet on the street in sales force and merchant bank strategy is focused around the small mid-sized clients to grab a bigger share of that market, and using a features functionality distribution channel to be able to capture more of that market.

Mark L. Heimbouch

Let me just -- to clarify that. Because I think maybe some of your comments might have actually been a slight contrast to what we've said. We -- and by the way, I'd say we always continue to focus on large, medium and small. So it's more of an increased focus on small to mid versus our past 3 years ago. The other thing is, is that ISO channel has been, and I think we've indicated, has actually been relatively slower growth when you compare it to the new verticals that Charles discussed, as well as the impact in the direct channel. So maybe just to reorganize your thoughts a bit, because I thought what I heard you say was higher growth emphasis in that channel. I would say it continues to be one of our channels, but actually on a relative basis, one of the lower growth channels.

Christopher C. Brendler - Stifel, Nicolaus & Co., Inc., Research Division

No, I think I was just referring to your fourth quarter earnings call comments where you were expecting to gain market share among small and medium-sized merchants.

Mark L. Heimbouch

That's correct, yes...

Christopher C. Brendler - Stifel, Nicolaus & Co., Inc., Research Division

And I had a separate question on NPC, just the integration there. So it was just 2 separate questions.

Operator

Our next question comes from Bryan Keane.

Bryan Keane - Deutsche Bank AG, Research Division

Just wanted to ask about Litle. Did it contribute about 5 points? My math looks like about 5 points of revenue growth in the quarter.

Mark L. Heimbouch

I think it's actually just above 5 percentage points in the quarter. And actually I think, Bryan, the new business wins -- I mean, eCommerce is growing faster, so I'd actually expect it to continue to expand. We are winning some accounts in that business, so very positive thus far.

Bryan Keane - Deutsche Bank AG, Research Division

When we first made the acquisition, we talked about maybe a contribution of $60 million in revenue from Litle. Is that still hold or should it be higher than that now?

Mark L. Heimbouch

It will probably exceed that.

Charles D. Drucker

But I would tell you that with the sales force, we're using our sales force to board the wins that we have and vice versa. So it's kind of -- it's thought to kind of co-mingle very quickly.

Bryan Keane - Deutsche Bank AG, Research Division

Okay. And then Mark, I wanted to go back to some comments you made. When we look at the Merchant Services transaction growth, same-store sales at 6%. Then you said additional wins and things took you up to high single-digit, maybe potentially double digits. And then if I add in Litle there, that would get me clearly into double-digit growth, but yet, transaction growth for the quarter was only 8%. So I was just trying to make sure I understand how that...

Mark L. Heimbouch

Yes, so transaction growth, really -- with the increased emphasis on smaller and mid, and to the extent that new business consists of smaller and mid, transaction growth will never keep up with net revenue growth, right? Because the mix, on a rate basis, the rate being higher, net revenue's going to grow faster than transaction growth. So over time though, we'll have a mix of wins, of large new national type of accounts that will bring lots of transaction volume but compress the rate in terms of net revenue growth. So what you're seeing, Bryan, is the success in new small and mid in eCommerce that's expanding rate and that revenue much faster than transaction growth.

Charles D. Drucker

And also as we bring on national accounts, it then temporarily moves it the other way because of the pricing schemes.

Mark L. Heimbouch

Is that clear?

Bryan Keane - Deutsche Bank AG, Research Division

Well, I'm just thinking out loud. If it's 6% same-store sales plus 1 to 2 points from Litle, that basically would take us to the 8% you reported. It doesn't look like you're getting any ramp up from any new business or some -- in some of that smaller channel because that would have pushed the transaction number higher, unless there's some other negative factor in there.

Mark L. Heimbouch

Yes, I know. I need to clean that up because it's -- Litle is a much smaller contributor from a transaction perspective, so it must be less than 1%. But I can come back to you. But it's much smaller on a transaction basis.

Bryan Keane - Deutsche Bank AG, Research Division

Okay. And then what would you -- is there a normalized, kind of what you've seen historical for same-store, transaction growth? Is 6% below usually normal than you've seen in the last couple of years?

Mark L. Heimbouch

It is. But we've been kind of seeing that 6% range now, really, since the end of 2012. Prior to that, it's been same-store sales growth upper single digits.

Bryan Keane - Deutsche Bank AG, Research Division

And then the guidance going forward, are you still expecting more like 6% now? Or are you expecting that to pick up in same-store sales?

Mark L. Heimbouch

No, we stopped basically with the 6%.

Bryan Keane - Deutsche Bank AG, Research Division

Okay. And then lastly, in the third quarter, it sounds like transaction growth -- should it stick around this 8% and then accelerate as the new business ramps in the fourth quarter? Or what should we think about for third quarter transaction?

Mark L. Heimbouch

No, no, that's consistent with the comments I made in my guidance.

Operator

And we have time for 1 final question from Glenn Fodor.

Glenn T. Fodor - Autonomous Research LLP

Just with respect to bank partnerships. Can you quantify for us, on a relative basis, when you look at total new sales from bank partnerships, what portion of it for you today, comes from non-Fifth Third channels versus Fifth Third? Is it 90-10, 10-90 or 25-75? And do you have any goals you'd be willing to talk about as far as where this proportion can go over the next 3 years?

Mark L. Heimbouch

So Fifth Third, from a referral basis, continues to contribute, I think, less than half -- or is contributing less than half of what's coming through the direct channel in terms of referrals. The thought -- the kind of our thinking now on the Merchant bank, whereas I think the Merchant bank branch count is up to about 1,400. So we've been signing the referral partners. The ramp of that has not really began to occur from a significant -- on a significant basis yet. So when we made the comments that it's taking longer, I would say that most of the ramp on those 1,400 branches is in the future. And so the comments that Charles made around staffing, getting the referral channel, actually spinning up and making the referrals, getting the reporting in place, converting merchants, that's still more to come as compared to being a big contributor on our existing numbers.

Charles D. Drucker

And Fifth Third, we continue to see success in Fifth Third, but we're outstripping them and we would see that percentage continue to go down from Fifth Third, with them still growing, but other channels ramping up.

Glenn T. Fodor - Autonomous Research LLP

How do you -- when you look at these 2 channels, non-Fifth Third versus Fifth Third, is the profitability and yield and the types of customers that you bring -- related to the types of customers you bringing in, is it relatively the same and it's just the growth rates? Or does one have a higher-yielding, more profitable channel than the other?

Charles D. Drucker

No, it's similar with the target, small, mid-size type of clients look and feel of the Fifth Third. I mean, there's different parts of countries that have small businesses growing faster than some of the other footprints of Fifth Third, but it'd be similar profile to what Fifth Third would be.

Operator

And that concludes the question-and-answer session. I would like to turn the conference back over to our speakers for any additional or closing remarks.

Charles D. Drucker

Yes, I just want to thank everybody for joining the call today. I'm extremely excited about our company and the way our people are continuing to execute and perform. I've been fortunate to have a great staff and great talented pool of employees and we're excited about the Element. And then if you have any additional questions after today's call, please reach out to Nate. He will be happy to help you. And thanks for taking the time, and have a great day.

Operator

And that concludes today's teleconference. Thank you for your participation.

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Vantiv (VNTV): Q2 EPS of $0.40 beats by $0.02. Revenue of $297M misses by $2.14M.