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Executives

Shawn Roberts - Investor Relations

Phil Tomlinson - Chairman and Chief Executive Officer

Jim Lipham - Senior Executive Vice President and Chief financial Officer

Analysts

Analyst for Brian Keane – Credit Suisse

Analyst for Julio Conntearous – Goldman Sachs

Brett Huff – Stephens Inc.

Darrin Peller – Barclays Capital

Total Systems Services, Inc. (TSS) Q3 2009 Earnings Call October 27, 2009 5:00 PM ET

Operator

Welcome to the TSYS third quarter 2009 earnings conference 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. Sir, the floor is yours.

Shawn Roberts

Thank you and welcome everyone. As you can see we have again 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.

As we start the formal presentation I would like again to call your attention to the fact that we will be making forward-looking statements about the future operating results of TSYS. These forward-looking statements involve risks and uncertainties. Factors that could cause TSYS's actual results to differ materially from the forward-looking statements are set forth in TSYS's reports filed with the SEC.

As you can see on some of the slides we are going to get started on we will have an agenda will include presentations by Philip Tomlinson and Jim Lipham and conclude with our Q&A.

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

Phil Tomlinson

Thank you, Shawn, and welcome to everybody that is joining us today. I know there was some scheduling conflicts at the last minute. We are certainly pleased with our results for this quarter and our CFO, Jim Lipham, is going to cover them in a lot of detail a little bit later.

We are focused on several key things these days. We are working harder than ever on our domestic and international sales pipeline and that is both organically and externally. When I say organically we are talking about value-added products. We are also focused on dealing with overcoming the large loss of several large clients, or the loss of several large clients primarily to financial difficulties and credit issues with the banks. Third is just overall expense management which is certainly something everybody is looking at these days.

Three other areas I would like to talk about are; one, the pending launch and successful delivery of our next generation payment processing system, TS Prime. We are in the process of going live with Carrefour in Brazil later this year with a friends and family type program and are confident it is going to be one of the real keys to our continued success as we continue to expand into other parts of the globe. We expect to complete that total conversion in early 2010.

Second, we have some huge efforts going on to support our clients in regard to the new regulatory changes as they go live, primarily in the U.S. and Canada. Canada recently passed a new regulatory bill in some ways similar to what the U.S. has passed, the two that the U.S. have and they are massive projects and they are going well here at TSYS and we are into the testing phase.

Third is our ongoing M&A efforts. We continue to work overtime and believe the environment is really improving on a day-to-day basis. We are certainly anxious to put together a deal that makes sense both strategically and financially. We are looking for targets that provide long-term growth. We have looked at numerous deals. We have passed on many and we have bid on a few. We don’t have one to talk about today. We believe it is a time of disciplined opportunity and we are certainly disappointed we haven’t run across one that made sense yet.

Some recent events, let me go back to TS Prime in Brazil. First, Carrefour is a huge win and will make an immediate impact on our processing capabilities in Brazil. We think Brazil is one of the prime markets in the world. We haven’t talked a lot about the details of the system. It is a server based, end to end outsourcing model that supports credit, debit, acquiring, loyalty, pre-paid, private label, commercial cards, installments, ATM and consumer finance. That is all on one single server platform and it enables a client to manage its entire card business to a single web interface and then to be securely connected to a TSYS state of the art data center. This one happens to be in Brazil.

It will certainly allow Carrefour to be super competitive the first day they go live and I predict this product is going to be a big success in Brazil and ultimately TSYS will.

We also just recently announced the formation of what we call TSYS Program Solutions which offers turnkey credit card solutions designed for U.S. based community, regional banks and credit unions. We are going to be competing with others in the market to win business in this sector. It represents a large market consisting of thousands of prospects.

You might ask what sets us apart from others as we provide this program development implementation and ongoing delivery to make it easy and certainly cost effective for these banks and credit unions to enter, or re-enter…we believe we are going to see some folks re-entering the card market, or what would cause them to move from another platform. We absolutely believe we can demonstrate to these banks a compelling business opportunity that is an alternative to the traditional agent/bank relationship you are familiar with. That agent/bank relationship certainly exists today by the thousands and we think this is a real win/win deal for TSYS, the banks and the credit unions.

We have hired some very talented people to come in and take this business to the next level. We are very excited about it and we believe we are going to show some progress really soon. I want to give you a quick update on the regions.

First in North America we renewed long-term contracts with Green Dot for prepaid services, U.S. Bank for commercial card customer care and internet services, Trust Mark and Whitney Bank. So we are working hard on finalizing contracts and converting to our systems. Four letters of intent we mentioned last quarter and two new letters of intent that we have received in the last 10 days.

We are now operational with four of the top issuing banks in the healthcare market and our new healthcare clients have all been successful take-aways from other providers and I think it provides a real market validation that our solution in the healthcare sector is a good one. We have also signed on the healthcare side an additional three new letters of intent and certainly we will continue to work hard on these final contracts and then their ultimate conversion to TSYS.

In the merchant services side with total acquiring solutions we expanded the services we provide to Global Cash Access which dispenses cash in over 1,100 casinos around the world. We renewed three acquiring contracts. We are engaged in late sales discussions with over 15 prospects that we look to close by year-end and announce in early 2010. Prospects have certainly picked up in that segment. We have also launched pilots for two self-serve kiosks in two very large shopping malls. Initially these smart kiosks will have basic ATM functions and then we will introduce additional financial services on these machines for our customers in 2010.

Internationally I have already talked about Brazil. In China CUP Data has extended multi-year contracts or agreements with two of China’s top ten banks including the China Minsheng Banc and we will also announce re-up here in the near future. In Japan we have started processing Japan’s first Visa Prepaid Travel card in July. This card is issued by Travel Bank, a subsidiary of JTB. It is the largest travel agency in the market and it is valid for use at point of sale terminals and ATMs outside of Japan. The Japanese are large users of traveler’s checks and we think this is going to be a highly desirable product for our international Japanese travelers.

Also we have a large Japanese digital electronic equipment manufacturer that has adopted a pre-paid product as their company’s corporate T&E card. They have sales and manufacturing locations around the world and they believe this is a way for them to streamline their back office operations and reduce costs for settling travel related expenses with each employee.

In July we talked about internationally we signed four letters of intent in the second quarter. We have since added four new letters of intent for a total of 10 on the international side. So again we have a lot of contracts that we are trying to get negotiated but we have already started on the conversions for most all of those folks.

I know you want to get into the financial details and I am going to turn it over to Jim Lipham for a review of the slides and he will cover the rest of the TSYS financials. Jimmy?

Jim Lipham

Thank you Phil. I will be starting on slide seven. Before I get there just to bring you up to date again like I did in the second quarter that we are still facing some currency headwinds as well as the economic crisis Phil mentioned as it affects our customers as well as their cardholders.

I will say we are really excited about the numbers and the fact that our new customer growth and internal growth has helped offset all our lost customers or the revenue from our lost clients. Then I will probably have to go on to the majority of these slides and talk a little bit about our cash flow which continues to show good strength through the three quarters.

If you look at slide seven, sequentially the first column there you will see the third quarter compared to the second. We have shown improvement in just about every category there. We did on a constant currency basis show total revenues up 3%. One thing of note here is something new with Visa as they raised their merchant access fees during this quarter. They raised it up $0.005 to $0.195 and it is a pass through item for us but it is going to amount to about $12 million more dollars a quarter in reimbursables than what we have had in the past. So that is what you are seeing in this third quarter and going forward. So that is about $40 million a year in revenues we will pick up there.

On a constant currency basis we are up 3% and that is strictly Visa’s fees. The currency improvement for the third quarter was about $7 million over what we had in the second quarter and we will talk a little bit about that in a minute. As you come down to your operating income you will see it is up about 6% sequentially which shows we had some pretty good control over expenses. We are still watching those pretty tight.

Before reimbursables, expenses were up 1.2% so we are proud to have operating income of 6% and when you look at transactions in the third quarter to second they are up 3% so sequentially we are seeing some growth in transactions. On the right side, I will get into some more detail in a minute but if you look at the third quarter versus last year you will see total revenues down. That is currency again of around $10.3 million and then lost revenues from customers of about $17 million so when you put it on a constant currency basis it looks good in light of we were able to show 1% growth which was really the increase we have had on new customers and internal growth helping to offset our lost revenues.

Operating income we are down 8% in addition to the lost revenues we have had increased expenses as you will see in the international arena. As far as our growth in Brazil and Japan and it has negatively impacted that margin over there about 399 basis points. We will talk some more about that too in a minute. Operating income is down 8% and then of course our transactions year-over-year are also down 6%.

If you flip to slide eight this is the P&L first of all showing the third quarter compared to third quarter of 2008. Total revenues before reimbursables were down 3.7%. There again there is currency of $10.3 million and the de-conversions of lost revenues for de-conversions of $12.6 million so those are the big items that affect us there. We did also have good growth in the merchants for the quarter versus last year and also on the international segment as far as revenue goes. We will touch on that a little bit more in a minute.

Total expenses if you look at those they are flat year-over-year and what we have there is kind of a growth in expenses in the international sector as well as a little bit into the merchant sector with Infonox coming onboard. Then we had a decrease in North America as we have managed to reduce headcount and other expenses in North America as we have been lacking on growth of revenues.

During the quarter we completed the sale of TDM and recorded an after-tax loss of approximately $3.3 million. It shows up on the P&L as $2.9 million because we had about $400,000 of operating income for the quarter before we made the sale. As you see here basic earnings per share 28% but if you take out the loss from TDM our earnings per share from continuing operations was $0.29 which was pretty much in line with consensus of where people thought we would end up.

You see on our here our operating profit margins of 24.5% versus 25.6% last year. If we pro forma that number to take out the expansion expenses we are incurring in Europe for future revenue growth that number would be 25.5% so we would be pretty much in line with where we were last year. Right side, sequential basis, as you can see there everything is up pretty good. Of special note is our operating income from continuing operations being up 10.1%. I think that is pretty strong. We did have positive productivity as far as revenues being up 4.9 versus expenses growing at a lesser rate of 4.6.

Flip over to slide nine and give you a little color around our client movement. We have talked about de-conversions and purges a lot in the past. We have decided to come up with this slide and hope it helps. If you look at the top consolidated you will see where what has happened to our account on file numbers from September of 2008 to the end of September 2009 and we have gone from 355 down to 342. You can see off to the right of there the client adds, purges and clients lost. We still see some good gains coming from the Wal-Mart card at Green Dot. However, the additions there are not quite enough to offset the de-conversion of WaMu and Nordstrom out to the right.

When you look at the next category by portfolio you will see it broke out the consumers we have lost year-over-year as well as retail. That is the two I just mentioned; Washington Mutual and Nordstrom. Sequential we are down about 7 million accounts from where we were at the of the second quarter. I want to mention on purges, we talked about that at the beginning of the year. We have purged off 31.3 million accounts so far this year. We are expecting another 6.3 in the fourth quarter but overall the effects on revenue are pretty immaterial. There will be about $3.3 million for the whole year as far as what that has cost us.

Flip to slide 10, this is the currency slide. You can see we made about a $7 million improvement there in the third quarter over second. Year-to-date we are about being punished about $50 million in currency translation. We are expecting the fourth quarter to approach the level it was in the third quarter of last year and get closer to being muted to not having a big effect on us. We will pull for that.

The next slide on page 11 is the segment information starting with North America. I hope this helps. This is a little more info on the slide than we normally give. You will see revenues of $261.6 million. We did lose $17.7 million associated with de-converted clients and lost revenues and that was pretty hard to break away from. You see also there at the bottom of the same client transactions we are excited about that being almost breakeven, down about 2% year-over-year but when you look at operating income at $60.7 million that is a margin of 23.2%. We have controlled some expenses. We have moved out about 404 people in our workforce just by attrition and moving around. The operating margin actually increased 104 basis points over prior year and then of course the margin before reimbursables is up 73 basis points at 27.6%.

Overall, that is good. We have the 5,000 full time employees; 302 million accounts on file for North America and then year-over-year we suffered a cardholder transaction fee in the amount of about 8.1% due to fee conversions.

The next slide is on international. Again revenues are 86.2%. On a constant currency basis they were 96.5% so we had negative currency of 10.3 but we also had revenue growth of 10% on a constant currency basis mainly coming from new business that we signed. We talked about Home Retail Group and Deutsche Bank and we had some Barclay Card commercial accounts came on board during the third quarter. So we have had some good growth in that business.

Operating income at $9.7 million with operating margin of 11.3% and we mentioned here about the expense of Brazil and Japan negatively impacting…the data center in Japan as well as the one in Brazil as we started both of those growth. If you didn’t add 399 on margins excluding reimbursables would be at about 15.7%.

The same client transactions on international are up one but year-over-year they are up 10% and we think that is pretty good and that takes into account all of the account growth we have had there.

The next slide is the merchant side which has also done good also during this quarter. Revenues are $93.8 million mainly coming from internal growth growing at about 4% on the point of sale. New clients offset lost clients so that is kind of breakeven. You had the acquisition of Infonox which brought in some $4-5 million in revenues there. Operating margin decreased 430 basis points. This is mainly attributable to that growth I told you about on the Visa access fees that is on the reimbursable side because when you look at the margin without the reimbursables you will see it has decreased 1.92%. Still at a good rate of 27.4% and it is mainly due to bringing on Infonox and the increase in headcount there with that and purchase accounting adjustments associated with that. Then again POS transactions increased 3.8% so there was some pretty good growth there and we were glad to see that.

Flip to slide 14 and this is a new one that we have been asked to put in to show the transactions by segment; North America, international and merchant. You see good growth in merchants and international. Obviously new business there plus no problem on point of sale as we have in cardholder transactions in general in North America. Third quarter we are down about 8.1% year-over-year. Sequentially North America has been down 6-9% first quarter and second quarter and now 8% so a little bit of improvement but you can see sequentially on the international and merchant point of sale it has been positive this year first quarter through the third.

With that flip over to slide 15 and we will look at the segment of electronic payment processing. As you know this represents 67% of our revenues before reimbursables. Of note here is we have had internal growth of 3%, new clients representing 2% of revenue. That 5% offsets what we lost so we are really faced with a CTA hit we took and the 6% of revenues. There again once we get the CTA out of the way we are breakeven so that is a good sign that new growth is offsetting what we have lost.

If you look at the next slide on merchants you will see internal growth is up 4%, new clients 1% and then the acquisition of Infonox brought on 3%. That is good growth there of roughly 8%. Our loss clients and gain on CTA for the [GP] net in Japan and has offset each other so we ended up with a 8% increase. I will note that merchant represents about 20% of our revenues before reimbursements.

The next slide is our same client quarterly transactions. We like to show this. It is kind of puts everybody on the same, level playing field. What you see here is first quarter and second quarter of 2009 we had pretty good growth of 3% in the second quarter and 2% going on into the third. This is steeper growth than what we have had in the prior year. Then when you look year-to-date we are down 1.5% from the volume levels of the third quarter of 2008 and year-to-date. Then for the quarter we are down 0.2% which is showing we are getting closer to leveling out and having positive growth there.

If you look at first quarter we were down 2.8% year-over-year. The second quarter was 1.6% down and now it is 0.2%. So sequentially going in the right direction.

Now to speak just a little bit towards cash. This is the same chart we have shown before and as you can see there has been good growth in our cash balance. Cash flow from operations was pretty strong. Year-to-date $333 million. We did finish the September quarter at $420 million of unrestricted cash and that along with our revolver of $252 million puts us in pretty good position for needing resources to implementing strategies we have in place. So we feel real good about the growth there in cash.

Chart 19 reflects the trailing 12 months of operating cash flows. You can see still good growth there then EBITDA had a little drop in the EBITDA in 2009 and that is mainly due to about $20 million worth of currency fluctuation we have had there. Overall we still have very strong operating cash flow.

The next chart shows where our cash flow from operations continues to increase. We are now [5]% greater than our net income which is good. Then the free cash flow also continues about 30% greater. So this just shows how the ability to generate cash is in our operations through the 12 months.

The next slide is one we have shown before. We just updated it again to show how efficient we are at generating and turning sales into cash. You can see we at the high end of 28.8 with global payments is pretty close to us at 24.2.

Our free cash flow we reported 3% year-to-date through nine months and our GAAP net income was down 15.7. That is outstanding. I think in closing we feel pretty good about where we are and the sequential quarterly trends we see going on. We continue to see good internal growth in a range of 3-4% of new clients and new clients offsetting revenues and de-converted clients.

The margins we think we will stay in our goal of 24-26% although we will probably be in the low end of that. We hope to pick up a little bit in the fourth quarter as we continue to see good expense controls and hoping for some bumps in revenue. Currency impact we think is going to ease a little bit in the fourth quarter and going forward as the dollar condition improves.

Merchant business is growing good. Infonox is in there pushing the numbers up. We continue to look at acquisitions as we continue to show a good cash balance and with that, I will turn it back to you.

Phil Tomlinson

I think we are ready for questions now, operator.

Question-and-Answer Session

Operator

(Operator Instructions) The first question comes from the line of Analyst for Brian Keane – Credit Suisse.

Analyst for Brian Keane – Credit Suisse

I was wondering if you could comment on any changes or any legislation in the Card Act or whatever and how you think that might affect your business going forward.

Phil Tomlinson

I think it is certainly pretty massive when you have the Federal Reserve come out with a pretty large changes and then you have Congress come back behind them and put in another set of changes. It is pretty large. We are fortunate that our systems are pretty, very capable of handling changes like that mostly with option sets and we feel very good about where we are at. I think what you are going to see is people trying to re-trench and innovate or you will have a lot of this back to the future and I think you are starting to see some new products come out of Chase in particular I have notice…and you have probably noticed also, three new branded cards coming out.

I think as issuers really start to get comfortable with these new regs they are going to come out with new products and new pricing schemes and they will have to adjust to the new environment. I think it has hurt growth. I don’t think there is any question about it. When you lay those new regs on top of what is going on with this market and the credit market and unemployment I think any straw you lay on top of all of that is not good for business. I do think the credit card market will come back. I think there are some very bright, innovative people in this market and the ones who are not aggressive about it will be what I call back to the future. That is what we did 15-20 years ago when we just had pretty high interest rates and annual fees. You will see some of that. It is a very rich product and I think as some of these banks clear out their charge offs they are going to start being more aggressive in this business.

This unemployment right at 10% right now is a huge problem for the card business just because of the law of large numbers. A lot of people that are unemployed are carrying cards around. I think it is a negative up front. I think we will get through it. We had originally felt that it might help us some and I think it would have if we had just had the Federal Reserve Act which is due in early 2010. When we laid the Card Act on top of it, it really forced a lot of issuers to hunker down and focus on nothing but this and we still have a lot of that going on. Our issuers are I think in good shape.

By the way, then Canada came back and did something similar to what we have done in the U.S. so our Canadian issuers are going through some of the same issues; not quite as big but they are going through similar issues. Not quite as much change, I should say. We feel very good about where we are at. We feel good about where our customers are at. We are in the user-acceptance business right now. The user acceptance testing and we think we are going to get through it fine.

Analyst for Brian Keane – Credit Suisse

As long as we are talking about Canada I think last quarter you had said that four firms were supposed to sign sometime this quarter. Did those ever happen or did they…

Phil Tomlinson

No, we are working hard on getting them converted. I don’t know what is going on with getting contracts signed. I think people are more sensitive. They are harder to deal with. Harder to negotiate. I think it is just a sign of the times but we have four new clients in Canada that will be coming on at some point. We may have five. We are close to another one. We feel good where those are at and they will be names that you know. We are moving right along with it. That is one of the big frustrations that we have right now. We have 20 or 21 letters of intent. What we need is 20-21 contracts signed so we can tell the world about it because I think it would be helpful.

Analyst for Brian Keane – Credit Suisse

I think you had also mentioned you had a few pretty good renewals during the quarter. Can you talk about how pricing has been affected or was it just kind of business as usual with no push back?

Phil Tomlinson

I think it has been business as usual. Obviously everybody these day are wanting you to cut prices and we probably are being a little tougher than usual frankly. Primarily because we just don’t have the growth to go with it and we are pushing back and saying what are you going to give me for this? What kind of new business if this is what you really want. We are having some success with that. Sometimes we get in a hurry to renew contracts. I don’t know that we are in a big hurry to renew any right now that are not coming due for another year or two.

I think there are a lot of banks out there and you know it better than I do that are really struggling for every penny and certainly we have always struggled for every penny because we are in the penny business. It is just tough times for issuers and we are doing the best we can. I mean we are trying to barter and like I say you give me something and I’ll give you something. So stay tuned. I think we came out of the ones I just talked about in pretty good shape and that was Whitney, and Trust Mark Green Dot and…I’m going to get in trouble here. I think that was it. We had a couple that don’t want you to use their name. Anyway, we are rocking along there. We don’t have any big ones coming up any time soon.

Operator

The next question comes from the line of Analyst for Julio Conntearous – Goldman Sachs.

Analyst for Julio Conntearous – Goldman Sachs

A quick question on what headwinds you might see going into 2010 that are still out there. Maybe you can give us a little detail on what you are expecting?

Phil Tomlinson

I think I said last quarter that we will just be glad when 2009 gets over. We just want it to be done because there has been nothing pretty about it other than we have signed a lot of business. Or at least we have signed letters of intent for a lot of business. But I hear just what you hear, the recession is over but I don’t believe the consumer believes it and I don’t think our organic growth is going to be a big issue for us until the consumer comes back to the table. This unemployment where it is pushing 9-10% is a real negative for us. I think it is pretty interesting, the U.S. market as far as our business is really fairly dead. I think everybody in the U.S. is worried about getting these regs implemented. We have got some good prospects but I don’t expect any of those guys to make a firm decision any time in the next few months.

So we are moving along there but I don’t know, this economy…I have been with TSYS 35 years and I told the board today every other recession we had been through was a speed bump compared to this. We have never quite seen anything like this. You have seen the other banks report. You have seen Visa and MasterCard, the transactions which are what we get paid by are just not there yet. I think we are going to have to see the consumer get more confidence where people will start feeling like it is safe to go buy something. Frankly I think the consumer has had the hell scared out of them and it is going to take a little while for them to come back. My guess is no better than anybody else’s but I am certainly hoping by second or third quarter it might start improving.

Analyst for Julio Conntearous – Goldman Sachs

To play devil’s advocate, to the world is ending thesis, what sort of positives do you see? Are things like prepaid really going to be a catalyst for the near-term for you?

Phil Tomlinson

I think pre-paid is helpful. We are really delighted with what is going on in healthcare. We are thrilled at this business that we are in the process of getting signed. I am really an optimist but you were talking about the things that would slow business down. We are very excited about what is happening internationally. Prospects are good. We have several things lined up in Japan and the fact we do have the ability to if we can close something on an acquisition we have the ability to do that quickly.

We have the cash. We have the financing. That is not a big issue. This TS Prime is hot as a firecracker. We have prospects all over the world wanting to see that. So we have a lot of really, really positive things going on. We just kind of like a lot of people we want to see the consumer back. We want to see unemployment start to decrease a bit; and I guess you could say it is holding its own now. It is not going up any more I don’t believe. We want to get this regulation behind us. I don’t think the card industry has ever seen this much regulation at one-time in its history. Now if you look back years ago when we did Reg Z that was a pretty big deal. It was all new.

I think the other thing we have been pretty thrilled at is the products we acquired through Infonox they are also really hot. They are allowing us to go into some spaces that we were having a hard time getting in the front door. As we show these products we are getting a welcome, come on in. So we feel good about that. We think we have got everything lined up, ready to go. We are like a football team that has been practicing through spring practice. We are chomping at the bit ready to go and we just need a little help from the economy.

Operator

The next question comes from the line of Brett Huff – Stephens Inc.

Brett Huff – Stephens Inc.

I will reiterate here we really appreciate the new slides, the transparency into the transactions is really helpful.

Phil Tomlinson

I am thrilled that you would mention that. We are trying to give all of you as much as we can.

Brett Huff – Stephens Inc.

We appreciate it. I would like to dig in a little bit. You mentioned 21 LOIs and that I think is up from 14 or 15, correct me if I am wrong, last quarter.

Phil Tomlinson

I think that is right.

Brett Huff – Stephens Inc.

It seems like LOI’s can be very close to actually signing or a little bit far away from actually signing. Can you give us a sense of those 21 you had mentioned you started converting even some of those. Can you give us a sense of the color on that? It isn’t backlog yet but it seems close. Can you give us a sense?

Phil Tomlinson

I think some of it is very close. Honestly I am almost embarrassed that we haven’t signed contracts on some of them. I am looking straight at our General Counsel as we say that. He is not sure how to take that but he knows how to take it. I am surprised that we didn’t finalize some of them in the third quarter. I will say this though, it is a different environment out there today. Truly I think everybody is a little paranoid these days and so there is more lawyers on the deal. There is more service level agreements you have to work your way through. It is just a little bit more difficult than it has been and of course people are….this business is notoriously slow anyway through the sales cycle and through the contract cycle and I think what has happened is this tsunami that we are all sort of wrapped up in has slowed it down a little bit more. I think we are very close to some of this and I promise you there is nobody that wants to announce it any more than I do.

Brett Huff – Stephens Inc.

Can you give us a sense of, I think last time you gave us a sense of what cards or the accounts on file you can see given signed business that have yet to hit the books. I don’t know if you can or want to talk about that.

Phil Tomlinson

I don’t have it in front of me. We will see if we can get it up. I can tell you this, we know this is excluding any of the LOIs, we know we have about 9 million accounts sitting there in the process of getting converted. New accounts.

Brett Huff – Stephens Inc.

You expect that by year-end? Or what is the timeframe on that?

Phil Tomlinson

I probably told you more than I know already.

Brett Huff – Stephens Inc.

On the debit side I know you have been working on some things. If I recall correctly, did some of the Canada opportunities are debit related?

Phil Tomlinson

That is correct.

Brett Huff – Stephens Inc.

Is that sort of the best prospect right now for a meaningful debit entrance?

Phil Tomlinson

Yes, probably so. We have one in the U.K. region.

Brett Huff – Stephens Inc.

I think you had said and I want to make sure I got this the X reimbursable operating margin was 24.5% but X the Europe investments it would have been 100 basis points higher. Is that right?

Jim Lipham

That is correct.

Operator

The next question comes from the line of Darrin Peller – Barclays Capital.

Darrin Peller – Barclays Capital

A quick question on the legislative changes we are seeing across the board can you remind us is the expense associated with that on you or do the issuers bear the expense?

Phil Tomlinson

It is kind of a sharing. We do some of it at our cost. They do have some expense. The truth is, as I said earlier, I wouldn’t want you to think there is no effort here because there is a big effort here. This is something that has got to be right and it has got to be tested so there is a lot of time involved. It is not something that is creating a lot of revenue for us. It is a people expense for both of us and that is just one of the things that we do on Federal regulations as an ongoing way of doing business.

Darrin Peller – Barclays Capital

So I guess this past quarter was that seen at all on the expense lines and where do you expect a peak of that to be?

Phil Tomlinson

Some of it, I can’t give you a number, but we did have some in there. Maybe we capitalized. As time goes by it will be less and less. Certainly we have seen, I believe we have seen the peak of it.

Darrin Peller – Barclays Capital

With regard to just de-conversions and purges just review with me real quickly the Wachovia and Nordstrom. Are those already out of the numbers? Or is that kind of in the fourth quarter still.

Phil Tomlinson

No. No. They go out into the first quarter. WaMu is out. Nordstrom is gone and I think Wachovia goes in February or March. Wachovia is pretty small.

Darrin Peller – Barclays Capital

But Nordstrom accounts are already out of the numbers.

Phil Tomlinson

That went out in late August.

Darrin Peller – Barclays Capital

Wachovia you should see early next year and Carrefour also at the beginning of next year, right?

Phil Tomlinson

Carrefour comes on. They are much bigger than Wachovia.

Darrin Peller – Barclays Capital

I think when you had spoken last quarter on the call you had mentioned that you expected the accounts on file in general to end the year at a higher level than it was in the second quarter. Is that still the case?

Phil Tomlinson

I don’t remember what that was in the second quarter off hand.

Darrin Peller – Barclays Capital

I think it was about 349.

Phil Tomlinson

Why don’t we let some folks figure on that. Do you have another question?

Darrin Peller – Barclays Capital

The sequential increase in technology and facilities expense, that was associated purely with the infrastructure changes in Japan?

Phil Tomlinson

That is correct. We have got a data center and office in Brazil. We have got a significant development going on in Japan taking TS Prime to the point where we can process multi banks in Japan. So a little more difficult than your average development. We think we are in good shape there.

Darrin Peller – Barclays Capital

One question about conversion from letters of intent to contract, after it has already converted to contracts how long does it generally…I just remember going back and looking at Capital One when you had the conversion there it took about a year I would say, right? For the systems?

Phil Tomlinson

That is right. Frankly it depends more on the client than it does us. We have done them in 90 days but you wouldn’t do one that large in 90 days. They have work they have to do. There is a training issue. So again depending on the situation and the knowledge base and everything else as bad as I hate to say it, it is anywhere from typically six months to a year.

Darrin Peller – Barclays Capital

What I am trying to figure out is you have about $30 million or so of purges and about $37 million or so over the past year of fee conversions. So you have lost something like 60 million accounts and new client adds of about 25 or 30 also. With the 21 letter of intent, is there enough expected to offset these kinds of losses you have had or will have over the next year in the domestic market given all the pressure, the purges and the de-leveraging going on?

Phil Tomlinson

We think so. We don’t know what the future holds with the shape of some of these financial institutions. We are hoping that if another WaMu type failure happened we don’t have that plugged in obviously.

I think if you look at our de-conversions this year I don’t know if we will have that high a number of accounts next year. We don’t know of any that you don’t know of.

Darrin Peller – Barclays Capital

Anything else in the next couple of quarters besides what we just discussed with regards to Wachovia and Carrefour that we should be aware of just in terms of modeling?

Phil Tomlinson

No. I think that is pretty much it for the short-term. Like I say, we will certainly announce these as soon as we possibly can.

Operator

There appear to be no further questions in queue. Do you have any closing comments you would like to finish with?

Phil Tomlinson

I do. We certainly appreciate your attendance and interest in the questions. We certainly have been trying to be as transparent as we can. We have seen indications of slight improvement but I don’t think this industry is out of the woods as you could tell. We have some pretty strong headwinds and as I said earlier I really think we will until the consumer returns.

With clients I think I probably talked plenty about that with this regulation and it is taking a lot of effort. I do think that clients are trying to reinvent themselves, re-engineer their strategies and I think that is starting to happen. As we talked about the loss of WaMu, Wachovia, Charming Shops and the eventual loss of the Bank of America merchants. By the way I don’t have any new details I could add to that about a time of departure or anything. We just don’t have that yet. But it does create a big hole for us there. I think everybody in this industry is working harder than ever to ensure strong future growth and strained as the U.S. growth market is the international remains just the opposite. It is really moving fast and we are having great success there.

As I mentioned earlier TS Prime is just a great success story and we think it presents us with virtually unlimited opportunities. We have talked about the numerous letters of intent. I know you are curious about who that is. We were disappointed we didn’t get some of these signed and announced but I am confident you will start hearing about them in the fourth quarter. We are still very positive about our long-term success but certainly we are trying to be realistic. In spite of the issues we believe that we still have many great strengths and we have solid cash flow. We have a pristine balance sheet. We have a passionate, diverse workforce.

We have a very unique service culture here. We have world class technology and products. We have an ability that we have proven to manage expenses. We believe we are recognized for our leadership in this business and we are being really aggressive right now to diversify the company more and as you would expect we are on the prowl for something we could acquire that would make sense.

I think all of these plus others are helping us weather the storm. I have full confidence in our ability to make smart decisions to ensure we stay strong and competitive. I do think that our financial leverage and our strength there is helping us through this. We thank you for your interest. We appreciate your support and we look forward to hearing from you. If you have any follow-up questions Shawn Roberts will be listening out for you. Again, thanks and I hope you have a great week.

Operator

Thank you ladies and gentlemen. This does conclude today’s conference call. You may disconnect your phone lines at this time and have a wonderful day. Thank you for your participation.

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Source: Total Systems Services, Inc. Q3 2009 Earnings Call Transcript
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