Vantiv Management Discusses Q3 2013 Results - Earnings Call Transcript

Oct.24.13 | About: Vantiv, Inc. (VNTV)

Vantiv (NYSE:VNTV)

Q3 2013 Earnings Call

October 24, 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 Huang - JP Morgan Chase & Co, Research Division

David Togut - Evercore Partners Inc., Research Division

Georgios Mihalos - Crédit Suisse AG, Research Division

Thomas C. McCrohan - Janney Montgomery Scott LLC, Research Division

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

Kartik Mehta - Northcoast Research

Daniel R. Perlin - RBC Capital Markets, LLC, Research Division

Bryan Keane - Deutsche Bank AG, Research Division

Glenn Greene - Oppenheimer & Co. Inc., Research Division

Jason Kupferberg - Jefferies LLC, Research Division

Operator

Good day, everyone, and welcome to the Vantiv Third Quarter 2013 Earnings Call. Today's conference is being recorded.

At this time, I would like to turn the conference over to Mr. Nathan Rozof, Senior Vice President for Investor Relations. Please go ahead, sir.

Nathan Rozof

Good morning, everyone, and thank you for joining us today. By now, everyone should have access to our third 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 third quarter operating performance and address some of our key initiatives. Mark Heimbouch, our Chief Financial Officer, will then review third quarter financial results and discuss our outlook for the rest 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 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.

Now I'll turn the call over to Charles Drucker, our CEO. Charles?

Charles D. Drucker

Good morning, and thank you for joining today's call. We had another good quarter, with net revenue growth of 14% to $294 million, and solid double-digit earnings growth, with pro forma adjusted net income per share growing 25% to $0.40, our business continues to grow above market rates.

Our traditional merchant and FI business continued to benefit from the cost -- from the core advantages we have built, including our single processing platform, which allows us to quickly enable new capabilities to meet the requirements of our clients in new channels, as well as maintain superior margins. To penetrate both existing and new channels, we have built a highly productive sales force, and we have developed very deep, long-term relationships with our clients.

We have also been successful at expanding into new channels through acquisitions. The identification and successful execution of acquiring opportunities such as Litle, and now Element, represents great examples of our ability to expand into new channels and diversify our client base. We've also proven our ability to integrate acquisitions, including most recently, completing the NPC conversion to our platform, as well as the success we've demonstrated in expanding our eCommerce business with Litle. Expanding our business through acquisition has become a core competency of ours and one that will continue to be a platform for future growth.

As the market continues to evolve to new technologies and payment alternatives, our new investments are really beginning to pay off. The eCommerce business we've created with the acquisition of Litle is growing volume at 38%, as we've added new clients and as the business benefits from tailwinds experienced by the sector. Furthermore, our direct business is growing in the low- to mid-teens, with growth in our traditional channels, as well as by expanding into new channels. Technology is reshaping the payments industry, and we have developed relationships with key technology partners, including ISVs, VARs, and PayFacs. Our business with these technology partners is generating very high growth by more than doubling in terms of net revenue, which is now further strengthened by our acquisition of Element.

Results continue to be strong, both in the absolute terms and relative to the market. Our direct merchant and eCommerce channels are significant drivers of our growth. On the second call -- second quarter call, I mentioned that we signed 2 of the largest eCommerce retailers. We are also winning with innovators like Uber, who began processing with us recently. We are also excited to announce that we've recently signed an agreement with Wal-Mart to process a portion of their volume beginning in 2014.

Our heritage at Vantiv has always been winning large clients as we serve nearly 1/3 of the top 100 merchants in the United States. We will continue to compete and win in this market, and we have a very strong pipeline of additional large, mid-market and national accounts in process as well, all contributing to future growth. We are also aggressively expanding into verticals where we see the potential for increased adoption of electronic payments. For example, recently -- we recently entered the gaming and entertainment space with Vantiv Gaming Solutions. Recent regulatory and legislative changes created significant new opportunities for gaming, including Internet gaming, fantasy sports, online lottery and social gaming.

We've been increasing our penetration across the gaming industries, and we now process payments for online lottery transactions with the State of Illinois and the State of Georgia. We have also teamed with Ultimate Poker to provide payment processing for licensed online poker in Nevada.

The gaming industry is traditionally known for primarily using cash and check, and we believe that Vantiv can enable the adoption of electronic payment for cashless gaming by offering innovative products like our prepaid loyalty debit card. Our debit card solution is one of the first of its kind to be permitted to be used in the gaming space, and we believe that it will help accelerate the movement towards cashless gaming by providing a richer consumer experience.

Notwithstanding these very positive aspects of our business, we have been negatively affected by the deceleration in transactions trend, given the lower consumer spending trend that began towards the end of September. In addition, we signed a large retailer, which we expected to convert in the fourth quarter, but has now been delayed until next year. Previously, we expected net revenue growth to accelerate in the fourth quarter. Unfortunately, the cumulative effects of these events, as well as the slower ramp of new sales and related impacts, makes us more cautious about the fourth quarter. And now we expect net revenue of $303 million to $308 million, representing net revenue growth that is consistent with the past few quarters.

Our superior cost structure provides flexibility to manage expenses and deliver strong earnings growth. We therefore forecast fourth quarter pro forma adjusted earnings per share of $0.43 to $0.45, which represents mid to teen EPS growth -- mid- to high-teen EPS growth. We will continue to invest in high-growth opportunities, including merchant direct, eCommerce and our technology partner channel, which are becoming a larger part of the mix and will position us for further growth as the trends improve.

With respect to driving shareholder value, we remain confident in our ability to grow the business, particularly as trends improve. In growing our business, we've been prudent about building the balance sheet to drive returns, having deployed over $500 million of capital for strategic acquisitions, as well as returning $400 million in capital to shareholders through a shareholder repurchase. Today, we announced that our Board of Directors approved a $250 million authorization to return additional capital to shareholders through a new stock repurchase program and the termination of certain tax receivable agreements. The authorization represents a significant return to the shareholder.

In conclusion, our strong growth continues to demonstrate the strength of our business model. We continue to win new business and invest for growth, including the success in our direct merchant, eCommerce and technology partner channels. Therefore, Vantiv will continue to grow and win share in the payments market.

Now I'll turn the call over to Mark Heimbouch, who will review our financial results and outlook in more detail. He will also describe our plans for the $250 million authorization that we announced today. Mark?

Mark L. Heimbouch

Thanks, Charles, and good morning, everyone. As Charles indicated, our business once again generated double-digit net revenue and profit growth. Net revenue increased 14% to $294 million, due primarily to 9% growth in transactions and a 5% expansion in net revenue per transaction. Pro forma adjusted net income increased 17% to $80 million, resulting in a 25% increase in pro forma adjusted net income per share to $0.40. Our adjusted EBITDA margin remained very strong at 50.8%.

As we discussed on our second quarter earnings call, the third quarter in our business is similar to the second quarter in terms of transactions, net revenue and earnings. As Charles indicated today, the cumulative effect of the recent events -- of the recent deceleration in consumer spending, along with the new business impacts that Charles described, makes us more cautious, and therefore, we are revising expectations for the remainder of the year, as we do not now expect an acceleration of net revenue growth in the fourth quarter.

I'll walk you through some of the trends that we've seen in consumer spending during the third quarter, as well as thus far through October. Overall, the second and third quarters were consistent, with same-store sales growth of just under 6%. For the month of August, same-store sales growth trends peaked at about 6.5%. During the month of September, we then saw same-store sales growth trends decline to about 5%. To give you an example of what occurred during September, same-store sales growth on a volume basis for the first half of the month was approximately 6%, but then we saw it decelerate to approximately 4% for the second half of the month.

Same-store sales trends have continued to remain relatively low through October. Over the past week, trends have begun to improve somewhat, but we continue to expect same-store sales growth for the month of October to remain relatively flat at the lower trend. Though lower, trends seemed to have stabilized, and we've seen average ticket improve modestly over the past week or so, as compared to being down by about 1% for the month of September. Our business continues to perform very well in what appears to be a sluggish economy. These trends, though, do make us cautious with respect to the remainder of the year as we approach the holiday spend period.

Turning to the segments. In the Merchant business, net revenue grew 18% year-over-year, with organic growth in the high-single digits. Growth in this segment was due primarily to 10% transaction growth and an 8% expansion in net revenue per transaction, reflecting beneficial changes in our customer mix, including increased contribution from our eCommerce and technology partner channels. Contributing to this growth was a 38% year-over-year increase in sales volume with our eCommerce business. eCommerce growth was driven primarily by strong new sales and organic growth as we continue to win market share. Growth within the Financial Institutions business remain mid-single digits. Net revenue grew 4%, and transactions grew 5%.

In terms of expenses, sales and marketing expense increased 15% to $80 million during the quarter. Other operating costs increased 16% to $46 million, and general and administrative expenses increased 9% to $19 million. In aggregate, total expenses increased by 14% in the third quarter, primarily due to the impacts of our acquisitions. When excluding these costs, total expenses increased by 4% year-over-year. Depreciation and amortization expense increased $17 million, primarily due to recent capital expenditures, as well as depreciation and amortization expense related to our acquisitions. Interest expense also increased to $11 million for the quarter, due to our second quarter debt refinancing and new issuance.

As Charles discussed, we received authorization from the board to return $250 million in capital to shareholders. The authorization includes $113 million to terminate certain of our tax receivable agreements that were established at the time of our IPO. The agreements, which represented a $254 million liability on our balance sheet, were terminated at approximately $0.44 on $1. Termination of the respective tax receivable agreements generates $0.11 in annual earnings accretion to pro forma adjusted net income per share. The remaining $137 million of this authorization will be used to repurchase stock.

Turning to the outlook for the remainder of 2013, our business will continue to deliver double-digit net revenue growth. We are encouraged by the successes we have achieved in the direct merchant, eCommerce and technology partner channels, as well as the pipeline of new client opportunities that we have built thus far, and by some of the new clients that we have recently won. However, as we've stated, some of the most recent trends make us more cautious.

For the fourth quarter, we expect to generate net revenue of $303 million to $308 million, representing net revenue growth of between 12% and 14%. This outlook assumes that recent trends continue through the fourth quarter. Consistent with this outlook, we expect to generate pro forma adjusted net income of $0.43 to $0.45 per share. To the extent that consumer spending improves or further erodes going into the holiday season, there could be potential upside or downside to our results. We will provide guidance with respect to 2014 net revenue and pro forma adjusted EPS on the fourth quarter call after we've had more opportunity to assess the recent changes to consumer spending behavior and to progress with large conversions.

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

Charles D. Drucker

Thanks, Mark. To conclude, our double-digit growth in the third quarter demonstrates the strength of our business model. We continue to win in the market and invest for growth, including the successes in our direct merchant, eCommerce and technology partner channels. Looking ahead, we continue to set a high bar for success. By executing our growth strategy, Vantiv will continue to lead and win share in the payments market.

Thank you for your time this morning. And operator, let's open up the call for questions.

Question-and-Answer Session

Operator

[Operator Instructions] And we'll go first to Tien-tsin Huang from JP Morgan.

Tien-tsin Huang - JP Morgan Chase & Co, Research Division

Just a couple of questions. Just wanted to clarify, I guess, on the consumer trends. I guess we've been hearing that maybe the government shutdown did have some impact on the same-store. Would you agree with that? And also, I thought your business was a little more nondiscretionary, so that the consumer weakness might be a little bit more muted at Vantiv. Just curious, was it broad-based across some of your verticals? Can you give us some color on that?

Mark L. Heimbouch

Tien-tsin, it's Mark. Yes, I mean, actually, we've tracked trends over the last several years. And I think, actually, the trends that we've seen, I think, are consistent with some of the trends that you've seen come out, particularly the MasterCard data that's come out, and even some of the other trends, with respect to deceleration in transaction trends that you've seen from others. I think your comments are very -- are correct in terms of defensibility. Our base does tend to be more resilient, particularly in sharp downturns. What we saw with respect to the trends I discussed on the call in September, and then somewhat continuing in October, were really fairly broad-based. And as you're also aware, we also have a significant portion of volume in the department store retail space. I would say that area was probably impacted more severely, but we did see it generally across the entire base -- or broad-based, maybe not the entire base. The other thing is that I would say is it was more dramatic towards the very end of September and then continuing into early October, than it was, really, even for the first part of September. So I think in August and September, actually, trends felt and looked pretty good.

Tien-tsin Huang - JP Morgan Chase & Co, Research Division

Got it. Yes, that's consistent with others we've seen. Okay, that's good to know. Just on the Wal-Mart processing, was that something you were counting on for the fourth quarter? Was this always a 2014 conversion? I'm curious, is this a PIN debit win? And I guess, just to keep asking questions on this, I guess, winner's curse is always something that's tied to Wal-Mart, is this good business to be had? Obviously, I'm sure you're going to say it is, given that you've talked about it, but talk to us a little bit more about how this could expand down the road.

Mark L. Heimbouch

Yes. We hope not, to sign bad business. The -- just to be clear, it's not just PIN, so it's for a portion of their total processing business. It's a big conversion. From our perspective, it's -- we think it's relatively less complex to connect to our system, but they have some things to do on their side. Therefore, I think, going into the holiday period, they weren't -- I'm sure they weren't looking to go through a conversion early going into the holidays, so that's a 2014 conversion. Could it have possibly have happened earlier? Sure. But I think as you get into the middle of fourth quarter, things like that, like other conversions, tend to slip to the first quarter.

Tien-tsin Huang - JP Morgan Chase & Co, Research Division

Last question, just to clarify then, it sounds like one other retailer that you talked about, that wasn't Wal-Mart, right, Mark and Charles? There's something else that was expected and that didn't ramp in front of the holidays, similar sort of explanation?

Mark L. Heimbouch

Without giving specifics on particular clients, we saw some impacts. I mean, that was part of our algebra, actually, but we did see some other impacts from other issues, too.

Tien-tsin Huang - JP Morgan Chase & Co, Research Division

And what's driving that? Is it a systems-related issue or just cold feet in front of the holidays? Just trying to understand it a little bit better. And when might that come back in?

Mark L. Heimbouch

It's just delays. So we would look for that to be first quarter type of activity.

Operator

And our next question comes from David Togut with Evercore Partners.

David Togut - Evercore Partners Inc., Research Division

You cited 8% growth in net revenue per transaction in the quarter, I think, in part, given the strength in your eCommerce business. Can you give us a sense of what net revenue per transaction growth will be once you've lapped the acquisition of Litle & Co.?

Mark L. Heimbouch

David, it's Mark. Yes, we -- I don't think we've really put other guidance out other than continuing to expect that net revenue per item is stable to up. The other thing I would say is the growth that Charles talked about in the technology partner channel is actually doubling to tripling on an annual basis. And as you know, that includes a fair -- that includes primarily small merchants, so they're also relatively higher on a yield basis as compared to our large base. That being said, the client that we just talked about will have an offsetting impact on a revenue-per-transaction basis, much like other large processing contracts. So we would expect that, along with eCommerce and continued growth in some of those higher channels, that rate is still stable to up. You will see sequentially, quarter-to-quarter rate move around, so when I make that comment it's on an annual basis, quarter-to-quarter on a sequential basis, seasonality can impact the rate.

David Togut - Evercore Partners Inc., Research Division

I see. And Total System Services on its earnings call recently cited pricing pressure in its direct channel, given a significant move toward unbundled pricing. Are you seeing that trend? I mean, you probably deal with more larger merchants than they do anyway, where unbundled is more common.

Charles D. Drucker

Yes. I mean, unbundled is very common in our large merchant. In the small mid -- in the midsized clients, where we're going downstream, we are seeing more unbundled. But our system -- our single processing platform and the products we bring, has allowed us to probably be more of a disruptor in that market than as challenged.

Mark L. Heimbouch

And I wouldn't say that, that's a recent change. I mean that migration from bundled to unbundled has been occurring over the past -- since I've been around here at Vantiv.

David Togut - Evercore Partners Inc., Research Division

I guess quick final question for me. On the second quarter call, you cited, I think, some issues with the development of new channels. Can you give us a quick update on where you are with new channels, in particular, some of the geographic expansion that you've been undertaking since the spinoff from Fifth Third?

Charles D. Drucker

Yes. So I think the new channels continue to progress very well for us. As we've talked about, the merchant bank channels, we're winning banks. It's just the ramp-up of getting the underlying business once the banks, or when we sign new ISVs, getting the existing base moved over, as far as working with those clients to get those to happen. So not a technology or anything on our side, it's just really a timing of getting people to understand and recognize sales. And we put in strategies to continue to ramp that quicker. We're seeing progress as far as how that moves quicker. But these are long-term channels. And we're very optimistic that we have the right channels, they're the right growth profiles for the future. It's just taking slightly longer to get there.

Operator

And we'll take our next question from George Mihalos from Crédit Suisse.

Georgios Mihalos - Crédit Suisse AG, Research Division

Just looking out into the fourth quarter guidance, if you can maybe parse out for us the expectations or rough ranges for merchant and FI. Should we be looking for a similar rate of FI growth and just a lower rate of transaction growth, maybe something closer to 7% or so, for merchant? Is that how we should be thinking about it?

Mark L. Heimbouch

So I think, with respect to FI, our view that it would be somewhat consistent with what you've seen, at least over the last quarter, so in that mid-singles area in terms of growth. With respect to merchant, actually, I think we've been running about 8% to 9% in terms of transaction growth the past couple of quarters, so we would really kind of expect it to be in that area as well, so could be a little bit higher. But I would think about merchant transactions in terms of upper-single digits or perhaps 10% for the fourth quarter.

Georgios Mihalos - Crédit Suisse AG, Research Division

Okay. And then in terms of like the revenue per transaction, that should be down slightly sequentially?

Mark L. Heimbouch

Yes. Sequentially, it typically comes down given the presence in the big box retail and grocery and the high-volume spend during the fourth quarter. So typically, it would come down some on the fourth quarter.

Georgios Mihalos - Crédit Suisse AG, Research Division

Okay. And then just to drill on one final point. The sequential decline in revenue per merchant, which is in line with what we've seen over the last couple of years, just would have thought maybe that would have been a little bit flatter relative to 2Q given the inclusion of Litle. Is there anything going on there that we should be thinking about?

Mark L. Heimbouch

Well, yes, I mean, what -- perhaps one thing we didn't talk about is the small merchant. So we've seen -- while we discussed overall same-store sales organic trends, actually, what we've seen in the very small merchants, more typical of our ISO base, is much lower rates of growth, same-store sales trends running more like 1% to 2%. So although overall rates have come down, we're seeing it being more severe in smaller merchants.

Georgios Mihalos - Crédit Suisse AG, Research Division

Okay, that's helpful. And just last question for me. Just looking at the landscape here in the U.S., does that make you more interested in an international acquisition or international expansion?

Charles D. Drucker

Yes, I think as we said before, we're going to start looking towards international and picking the right opportunity for us to be able to expand in the future internationally. So I think with Vantiv, our size, the type of clients we have, our eyes in the future will be to be a global provider.

Operator

And our next question comes from Tom McCrohan with Janney Capital Markets.

Thomas C. McCrohan - Janney Montgomery Scott LLC, Research Division

I'm just trying to reconcile the guidance that you trimmed about 3% on the high end to the slowdown that you saw in same-store sales. So you had a 1%, whatever delta, deceleration in same-store sales growth, but you took the revenue guidance down on the top end, about 3%. I'm not sure if the 2 numbers are comparable enough. If you can just kind of talk me through that, that would be helpful.

Mark L. Heimbouch

Yes. I wouldn't -- I'm not sure that's the way to think about it. That's interesting math. I hadn't -- we hadn't really looked at it that way. I would say that the -- so sitting here, third quarter, fourth quarter, really, we're kind of viewing what's not going to happen, as compared to the prior quarters, is the acceleration. On top of that, being a little bit more conservative just coming out of the late period, September and early October, in terms of what might occur with consumer spending. I think Charles walked you through some of the new business impacts, including the delayed conversion of a large client. So I would say that it's almost probably somewhat comparable in terms of impacts between the 2 different items.

Thomas C. McCrohan - Janney Montgomery Scott LLC, Research Division

Okay. And then in the past, you've talked...

Mark L. Heimbouch

Relative to our prior guidance.

Thomas C. McCrohan - Janney Montgomery Scott LLC, Research Division

Okay. And in the past, when you've talked about your success getting into the small to midsized segment, I think it was last year, you talked about 80-something percent of new volume -- new sales was attributable to that segment. Do you have an updated number for that, just to kind of give us a sense of the progress you're making there?

Mark L. Heimbouch

That's a good point. We didn't put that chart up, but I would suggest it's actually comparable. So that chart, as you recall, also had a high level of concentration for merchants $250,000 and above, so -- and as I recall, roughly $400,000, $350,000 to $400,000 of average sales size. I would say that, that trend still continues, and a bulk of that still continues to be in the direct channel.

Thomas C. McCrohan - Janney Montgomery Scott LLC, Research Division

And just to help me, just on this -- some of these metrics, just trying to get my head around it, so given that you're still trending new sales activity, penetrating that space, proportionally more in the small to mid, which has a higher revenue per transaction, how should we think about the deceleration in revenue per transaction, given that usually, you would think, it would go the other direction?

Mark L. Heimbouch

You mean from third quarter to fourth quarter?

Thomas C. McCrohan - Janney Montgomery Scott LLC, Research Division

I was talking about this current quarter relative to Q2, 10% to 8%.

Mark L. Heimbouch

The influence of our large guys on a per-item basis is -- can be very significant sequentially quarter-to-quarter. So think about it this way, 90% of our volume is large national merchants. So to the extent that they outpace growth of the smaller merchants, it can have -- it can create some anomalies from quarter-to-quarter in terms of revenue per transaction. So relatively -- significantly higher growth, or relatively higher growth from the great big guys can push the rate down from one quarter to the next, even in lower growth. So we cited that number of, call it between 4%, depending on the period, to 6% same-store sales growth, over that same period of time, small merchants, more resident in our ISO base, are growing 1%, maybe 2%, over that same period of time on a same-store sales type metric.

Thomas C. McCrohan - Janney Montgomery Scott LLC, Research Division

That's helpful. One last question, and I'll jump off. The large retailer that you've signed that was being pushed out, as far as the conversion, was that an eCommerce merchant or was that a brick-and-mortar merchant?

Mark L. Heimbouch

Brick-and-mortar.

Operator

And we'll go next to Dave Koning from Baird.

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

And I guess, first of all, just another way maybe to think about the Q4 revenue guidance. I think the midpoint of the old implied range would have suggested something like $330 million of revs in Q4, and now the midpoint is more like $305 million. So within one quarter, it got brought down about 7%. And I know same-store sales, maybe we could give that credit for 2% or 3% of that 7% reduction, because I know you mentioned a lot that, that's slowing. Is that new client delay? I mean, is this a material enough client that we're just pushing out maybe a 4% impact from this year into next year, which would then imply some acceleration next year?

Mark L. Heimbouch

Yes. It's probably -- by itself, that one client is not that large, but your thesis is correct in terms of pushing acceleration and growth out into the first part of next year.

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

Okay, good. And then, I guess, the second thing, just on the tax benefits going forward. The 2 things I'm wondering: first, is that $0.11 benefit, should we expect $0.03 already in Q4, just a quarter of that? And then, secondly, how many years does that go for, that $0.11 benefit?

Mark L. Heimbouch

Yes. So it's not quite $0.03 in the fourth quarter, just given the timing. But it goes on for a very long period of time. Those attributes run out to between 2022 and 2025. So just to be clear, the $0.11 of accretion is annual accretion each and every year for a very long period of time.

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

Okay. Maybe $0.01 to $0.02 in Q4?

Mark L. Heimbouch

Yes, something like that.

Operator

And we'll go next to Dan Perlin from RBC -- I'm sorry, we'll take Kartik Mehta from Northcoast Research.

Kartik Mehta - Northcoast Research

I wanted to get your thoughts. You've had good success in winning some very large merchants, which is a little unusual. You don't see large merchants switch over that quick. So I'm wondering what it is that maybe you're offering that's allowing you to win some of these large merchants?

Charles D. Drucker

I'd say a couple of things, first of all, our reputation around how we service and help them navigate the environment. The environment -- even though larger merchants have expertise, the environment, as far as EMV, how to navigate interchange, how to navigate Durbin, we have systems and abilities to help them work through that. The second thing is our single processing platform that, as new features and functions come up, they're able to get it immediately. The third thing is around the things that we're helping them through data analytics. We're helping them look through their numbers and trends a little bit differently. So those are some of the key things that they see coming across. And quite frankly, our system is -- our system availability, because we've been doing large customers a long time, is always up.

Kartik Mehta - Northcoast Research

And then, Mark, is there a way -- you talked about same-store sales and 90% of the volume being from large national merchants. So is there a way to say that if you were to recover 1% in same-store sales, that's equivalent to 50 basis points of net revenue? Is there some kind of metric to look at that, that would give us an idea as to what to anticipate in terms of net revenue growth, if same-store sales started improving, if consumer spending started improving in the fourth quarter?

Mark L. Heimbouch

Yes. I think almost a percentage point of growth on a same-store sales metric, which kind of correlates to organic growth -- which correlates to organic growth, would really be about a percentage point of growth in the quarter. So every percentage point of gain there is pretty darn close to a 1 percentage gain in terms of revenue growth.

Kartik Mehta - Northcoast Research

And then just last question. Have you had or have you been successful in getting some pricing on smaller merchants? Or has the strategy been to maybe not continue pushing price on them and just trying to win market share as a way to grow revenue?

Mark L. Heimbouch

I don't think our pricing strategy has really changed much. It depends on the channel in some cases. But I think we've always kind of tossed back and forth in terms of, does low price attract a number of merchants, and we haven't seen that really be effective without having an effective distribution channel. So I -- no, I wouldn't leap to a conclusion that we've dropped pricing on small merchants.

Charles D. Drucker

I'd say pricing is a component of it, but our strategy has been around the merchant bank distribution channel and the ISV channels, to create value for them and stickiness. Now obviously, we're a company that has a good cost structure. So compared to someone who doesn't process their own transactions or use many middle people or third party, the pricing when comparable could be -- could look slightly lower, but we have great margins on that business. But pricing is one component of it.

Operator

And we'll go next to Dan Perlin with RBC Capital Markets.

Daniel R. Perlin - RBC Capital Markets, LLC, Research Division

The question that I have is -- Well, I've got a couple of them, actually. So one on kind of small merchant ISO. You're talking about 1 to 2 percentage points of same-store sales growth. I'm wondering what kind of attrition you saw in the quarter. Was it better, same, worse than what we've seen in the past couple of quarters?

Mark L. Heimbouch

About the same. I mean, it's continued to be upper-teens to around 20%, so it's been relatively consistent for a period of time.

Daniel R. Perlin - RBC Capital Markets, LLC, Research Division

Okay. And you talk about 90% of your volume coming from large merchants. Can you talk about how we should be thinking about, really, this kind of profitability mix shift with smaller merchants? So if 90% of your volumes are large, what kind of profitability is derived from small?

Mark L. Heimbouch

Well, so the -- when we talk in terms of ratios, in terms of revenue, whereas bulk of our volume comes from these very large merchants from a transaction or volume basis, actually, more than 50% of the net revenue swings the other way, to be small to midsized merchants. So as we continue to expand in even the partner technology channels and other channels, our expectation has been, and continues to be that, that's accretive in terms of rate and that, that's accretive in terms of margins. Offsetting that, clearly in the near term here, is we have been making some investments in some of those channels, so it's probably put a little bit more pressure on the margin.

Daniel R. Perlin - RBC Capital Markets, LLC, Research Division

So when we look at the sequential margin in merchant in particular dropping quite a bit in this quarter, is that -- would you explain that as a function of incremental investments or would you explain that more as a result of your mix shift changing, in terms of total volumes being driven by large merchant versus small?

Mark L. Heimbouch

I think it's actually -- when you look at the P&L for the quarter, it's more of an impact in terms of investment in the channel, on salespeople. So I think we're running -- merchant is roughly close to 500 in terms of salespeople now, somewhere either close to or just below that number. So it's more of just an investment in the channel. And it takes a while to continue to spin that revenue up.

Daniel R. Perlin - RBC Capital Markets, LLC, Research Division

Okay. And we should expect that going into the fourth quarter as well, this kind of pace of investment?

Mark L. Heimbouch

I think in terms of the fourth quarter, I would say that sales and marketing costs are probably fairly comparable. If they're up, it's not a lot.

Daniel R. Perlin - RBC Capital Markets, LLC, Research Division

Okay. And then the incremental revenue kind of implicit in your guidance, the midpoint is about $10 million going into fourth quarter. My assumption is that's pretty much all Element, and everything else you're holding kind of constant on a same-store basis. Is that fair?

Mark L. Heimbouch

Can you restate that question? I'm not sure I understood it.

Daniel R. Perlin - RBC Capital Markets, LLC, Research Division

Okay. So as we think about kind of the incremental bump going into the fourth quarter, and I think Element was running around $40 million annualized revenues, something to that effect, it looks to me like the kind of midpoint of your range would put you at $10 million sequentially. And I'm just wondering, if we hold everything else kind of all else equal for same-store, it would seem to me that Element is what's driving that sequential bump. And I was just trying to get a sense if you thought that was true or not.

Mark L. Heimbouch

No, that's not reasonable. I mean, Element certainly has an impact, but it's really very minimal in terms of net revenue impact. It represents less than 1% or about 1% of net revenue. So the impact is -- going from third quarter to fourth quarter, our business typically does have a sequential step-up. So fourth quarter, just given seasonality, is higher than third quarter. Interestingly enough, one of the reasons why we think about our outlook for the fourth quarter is the big months in the fourth quarter, for us, given our presence in everyday spend, actually turn out to be October and December. So November, we actually don't see -- November relative to the other 2 months actually tends to be lower in terms of volume transactions and revenue. So October going into Halloween tends to be a very big month for us, hence why we're a little bit cautious around the holiday spend period. But the trends are -- if you went back and looked at the prior couple of years, you'd also see that fourth quarter compared to third quarter steps up basically about 5%, principally due to volume transactions, et cetera, 5% sequentially as compared to the third quarter.

Daniel R. Perlin - RBC Capital Markets, LLC, Research Division

Right. And that was -- I guess that was my point. I would have thought that the acquisition would have added something more to that. All right. The other just quick one. You did, in fact, convert the 2 large eCommerce clients in this quarter. You said you signed -- I want to make sure what we meant by that was convert.

Charles D. Drucker

Yes, they're up and running, up and running.

Daniel R. Perlin - RBC Capital Markets, LLC, Research Division

Okay. And then just one last one, the push from this other large client, and I think it might have been asked, but it wasn't clear to me. The -- that was their issue, not your issue, which is to say, they had the technical problem, not you guys, to push it into the first quarter?

Charles D. Drucker

We don't comment on that. It was not necessarily technical, it was just the time of the year, so it was not a technical issue on our side.

Daniel R. Perlin - RBC Capital Markets, LLC, Research Division

Okay. So it was just signed late, and as you start to shut these things down going into the holiday period, they just didn't want any part of it?

Charles D. Drucker

I mean, there was a lot of activity going on around the country during that period of time, then you come into the holiday season, so you want to lock down your holiday season.

Daniel R. Perlin - RBC Capital Markets, LLC, Research Division

Yes, okay. Did you say -- would you say you've locked down the holiday season earlier this year?

Charles D. Drucker

I would say each customer locks it down a different way. We typically lock our holiday season down coming up, but each customer has their own way.

Operator

And our next question comes from Bryan Keane with Deutsche Bank.

Bryan Keane - Deutsche Bank AG, Research Division

Just a couple clarifications. I guess, first on the third quarter, the revenue was a little lighter than ours and Street expectations. Just trying to check, versus your guys' expectations, how did the third quarter revenue track?

Mark L. Heimbouch

Bryan, it's Mark. It came in a little bit lower. I mean, we -- like I said earlier, I think, to one of the questions, August and even early September, looked really, really strong. And then we just saw things kind of shift down towards the end of September, and I think that contributed somewhat to the miss.

Bryan Keane - Deutsche Bank AG, Research Division

So it was all consumer spending transaction growth that caused the miss?

Mark L. Heimbouch

For the most part in third quarter, that's correct.

Bryan Keane - Deutsche Bank AG, Research Division

And then moving into the fourth quarter. Obviously, I understand the lower consumer spending trends. The delays in client conversions, I guess I was under the expectation that those 2 eCommerce clients were the key for the ramp-up to that fourth quarter, but this sounds like there's at least one other, maybe more, contracts that were key to get that ramp-up into the fourth quarter?

Charles D. Drucker

Yes. There was -- yes, that is correct. So outside of the eCommerce ones that executed and converted, there were some brick-and-mortar ones that would have impacted that quarter.

Bryan Keane - Deutsche Bank AG, Research Division

And how many are we talking about, 2, 5? Just trying to get a sense, because it doesn't sound like that one client that -- we were talking about one client, but it doesn't sound that big.

Charles D. Drucker

It was a small number of clients.

Bryan Keane - Deutsche Bank AG, Research Division

Okay. And then just looking at the overall margins, EBITDA margins were down year-over-year. I know Vantiv hopes to expand margins. Can you just talk about that outlook, Mark?

Mark L. Heimbouch

Probably, for the year -- so actually, with respect to the expenses, and I kind of tried to cover it in my section, expenses are a little bit higher at the end of Q3 and Q4. That's more really in line with the impacts of an Element transaction. So Element's expense base and their margins tend to be quite a bit lower than ours, so that impacts our expense run rate in the fourth quarter. If you adjust for all of that, I think even including the impacts of those higher expenses, we're still probably looking at 20 to 30 basis points of EBITDA margin impact or growth over the year, as compared to the higher rate that we guided to. And excluding that -- excluding the impacts of an Element-like transaction, it would be above 20 to 30 basis points. That acquisition in the fourth quarter and late in the third quarter is having an impact on, slightly pulling EBITDA margins down.

Bryan Keane - Deutsche Bank AG, Research Division

And then starting in first quarter, will it start to be at least to company average or how long does that take?

Mark L. Heimbouch

No, I think it's beyond that. So first quarter, as you recall, actually, margins drift down. So whereas we finished the year, call it, at 51%, for example, I think first quarter tends to be 2 to 3 percentage points light of that, just given the lower revenue base, the seasonality. So I would expect that, and we -- granted, we haven't given guidance for the full year, but I would expect that's more of a second half of next year type of benefit.

Bryan Keane - Deutsche Bank AG, Research Division

Okay. And then just last question from me. Total acquisitions, how much did they drive revenue or transaction growth in the quarter? And then how much is expected in fourth quarter? Because I'm not sure when Element actually closed.

Mark L. Heimbouch

So it closed middle of third quarter. In terms of transactions, I don't have the exact transaction number here, but it's not a significant number of transactions. In terms of net revenue, I would say over the year, it's probably about less than -- it's 1% of net revenue effectively.

Bryan Keane - Deutsche Bank AG, Research Division

For both -- for all acquisitions?

Mark L. Heimbouch

No, just for Element.

Bryan Keane - Deutsche Bank AG, Research Division

What about Litle in the quarter?

Mark L. Heimbouch

Litle is still running consistent with what we've previously provided, around 5%.

Operator

And our next question comes from Glenn Greene with Oppenheimer.

Glenn Greene - Oppenheimer & Co. Inc., Research Division

I just want to go back to the sort of the delayed large conversions. I guess I'm a little confused. So it sounds like beyond the eCommerce ones that did convert, you've got Wal-Mart that you alluded to, which it sounds like you knew about, but maybe 1 or 2 other large retailers that you were expecting to convert in the fourth quarter. I guess what I'm trying to get a sense of is the visibility toward when they were going to convert, or your sort of, your confidence level that these are sort of first quarter type conversions. And obviously, everyone's kind of thinking through the pretty implications for fiscal '14. So that's kind of the first question.

Mark L. Heimbouch

Yes. So again, just to be clear, we have conversions quarter-to-quarter. I think what's relevant here is to -- there is the one large conversion that we've spoken about. That would be expected to slip to the first quarter. It is a large contract that will include a lot of transactions and a meaningful amount of revenue. So that would -- our anticipation would be that, that acceleration would start to begin during the first quarter.

Glenn Greene - Oppenheimer & Co. Inc., Research Division

Okay. And then, secondarily, it might be helpful to sort of -- at least for me, to walk through the reconciliation of the 10% transaction growth in merchant, your sort of thinking through the same-store transaction, call it, 5% or so, and then sort of the benefit from Litle, and then maybe the benefit from new sales activity, but whatever way you think is most appropriate to sort of parse that.

Mark L. Heimbouch

So the -- so you're trying to walk from same-store sales growth to, call it, 9% or 10% transaction growth?

Glenn Greene - Oppenheimer & Co. Inc., Research Division

Exactly.

Mark L. Heimbouch

So same-store sales growth is kind of an indicator we use in terms of thinking about overall organic growth trends and how healthy consumer spending might be, particularly in our given verticals, in terms of how that correlates between same-store sales growth really up to total transaction growth. Clearly, new business, or even expansion by our merchants, will contribute to growth above same-store sales growth. So Litle being eCommerce, any new business coming through eCommerce is going to contribute to a higher rate of transaction growth. Any new business coming from either our direct channel, principally from our direct channel, is going to contribute to higher transaction growth. Keeping in mind that, that's -- to the extent that those rates of growth are exceeding same-store sales growth, clearly, our attrition is manageable and therefore, not pulling down that rate of growth, leading us to be able to get to the 10%. That's probably a confusing way, but above same-store sales growth is expansion by our merchants, as well as new business.

Glenn Greene - Oppenheimer & Co. Inc., Research Division

How much did Litle contribute to the incremental transaction growth?

Mark L. Heimbouch

I think, on a transaction basis, acquisitions in total, principally driven by Litle, is around 3% to transactions.

Glenn Greene - Oppenheimer & Co. Inc., Research Division

Okay. And then the final one is maybe you could just give us a little bit of color around new sales activity in the quarter, new business wins.

Mark L. Heimbouch

So new business is -- continues to be good. New business sales still continues to be up by more than 20% year-to-date. I think that's -- what's important to understand there is as we've moved into some of these more nontraditional channels, that the sales ramp has just taken longer.

Charles D. Drucker

And we've also been happy with how the pipeline -- I mean, we said in the script that Uber moved over to us, which is more of an innovative technology move, working with the Litle group. So we're -- the pipeline is a strong pipeline. We're winning. And when it comes to conversion, we have a long-term view of our clients. We want to work with them. We want to make it easier for them to convert with us, but we work on their timetable to move things over, because it's a long-term relationship. And once we get a client, we keep them a long time.

Operator

And our next question comes from Jason Kupferberg at Jefferies.

Jason Kupferberg - Jefferies LLC, Research Division

So obviously, you've got some near-term challenges here, but you continue to express what seems to be a pretty good amount of optimism about the longer term. What I'm trying to get a sense of is if we're stuck in kind of this mid-single-digit same-store sales range for the foreseeable future, is that good enough to keep your top line in the range of your medium-term guidance of 10% or so on the top line, especially since some of the initial year-over-year benefits of Litle will have anniversary-ed. But obviously, you do have Wal-Mart and then this delayed retailer ramping next year, so how might all that net out?

Mark L. Heimbouch

Yes. I mean, I think we'll come out and talk about that in fourth quarter, guidance, but I think we're still optimistic in terms of the growth. So as you see these new business -- or sorry, these new partner channels and other nontraditional channels start to ramp up, and merchant bank, which I think we, we're pretty optimistic on, I mean, clearly, to achieve market rates of growth, which I would say is fairly close to same-store sales type metric, it comes from taking market share. And so I think our expectations in terms of our ability to take market share remain as strong as they've been. Charles?

Charles D. Drucker

Yes. I think the economy plays the part, but it's about share shift and how the ISV channel, the merchant channel and -- we continue to win in the large space and board [ph] them, gives us good optimism as we move forward.

Jason Kupferberg - Jefferies LLC, Research Division

Okay. So in other words, this 10%-ish number is a general medium-term target, still intact in your mind, but premature to commit to that for 2014 specifically?

Mark L. Heimbouch

Yes. I think that's right. I mean, we're a little cautious, just given the spending pattern that we've been seeing.

Jason Kupferberg - Jefferies LLC, Research Division

Yes, understandable. Can you give us a sense of what percent of your merchant volume is up for renewal over the next 12 months?

Charles D. Drucker

They -- I mean, we have a normal renewal process with our large clients. They typically -- the initial contracts are typically 5 years in length, and renewals are typically between 3 and 5. So you got a normal amount every year. There's a -- on one of our other calls, we renewed our largest client this year, and I don't think there's anything out of the ordinary normal renewal cycle happening this coming year.

Mark L. Heimbouch

Yes. Again, Jason, it's going to be 20%, 25% every year.

Charles D. Drucker

Yes, yes.

Jason Kupferberg - Jefferies LLC, Research Division

Right. So it's a normal year for you, okay.

Mark L. Heimbouch

Actually, thinking about '14, I'm not even really aware of any large ones, but I'm sure there are some.

Charles D. Drucker

Yes. This year, we had our largest client that we announced, a call or 2, that we renewed for a longer term.

Jason Kupferberg - Jefferies LLC, Research Division

Right. And just lastly for me, just those comments you'd made around the slower ramping of the new business and some of the sales channels developing, I just want to get a sense. You'd talked about that last quarter as well. So is this just kind of reiterating what you also saw and said last quarter? Or was there kind of another step-down in the slowness, if you will, of those ramps?

Charles D. Drucker

No. I mean, I think it's -- similar to what I said last quarter, I think we actually have employed things to help continue to accelerate that, but it just takes a little bit of time. And the overall -- when you think about these new channels, we're connecting to more of these ISVs, adding more of the VARs, adding more of the major -- the merchant banks. It's the underlying -- and getting the underlying merchant converted. And I think we've put in tactics to accelerate them. These new channels spinning up take time. We're a little bit more optimistic, and we see improvements. So nothing has changed. If anything, the tactics that we put in are starting to show some improvement, but it takes a little bit of time.

Operator

And I'd like to turn it back to you for any closing remarks.

Charles D. Drucker

Yes. So I want to thank everyone for taking the time on the call and joining us. And if you have any additional questions after today's call, really, please reach out to Nate, who will be really happy to help you and give you the -- answer any questions. So thanks again, and have a great day.

Operator

That concludes our call for today. Thank you for your participation.

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