Total Systems Services Inc. Q4 2009 Earnings Call Transcript

Jan.20.10 | About: Total System (TSS)

Total Systems Services Inc. (NYSE:TSS)

Q4 2009 Earnings Call

January 20, 2010 5:00 pm ET

Executives

Phil Tomlinson - Chairman & Chief Executive Officer

Jim Lipham - Chief financial Officer

Shawn Roberts - Investor Relations

Analysts

Adam Frisch - Morgan Stanley

Bryan Keane - Credit Suisse

Jason Kupferberg - UBS

Tim Willi - Wells Fargo

Glenn Green - Oppenheimer

Paul Bartolai - PB Research

Craig Moore - CLSA

Greg Smith - Duncan Williams

John Williams - Goldman Sachs

Robert Dodd - Morgan, Keegan

James Friedman - Susquehanna

Adam Snyder - Loews Corporation

Operator

Good afternoon ladies and gentlemen and welcome to the fourth quarter 2009 earnings conference call. At this time all participants have been placed on a listen-only mode and we’ll open the floor for your questions and comments following 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 Dan and welcome everyone. We’re going to do the call a little differently today. First, our CFO Jim Lipham will review the 2009 financials and 2010 guidance with the slide show presentation provided. Our Chairman of the Board and CEO, Phil Tomlinson will then add color to both 2009 and 2010 and then of course we’ll open it up for Q-and-A.

I would like to now call your attention to the fact that we’ll 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.

At this time I’d like to introduce TSYS CFO Jim Lipham.

Jim Lipham

Thank you, Shawn. Before I get started on the deck I’d like to go over just a few things that are themes of this 2009 year for those that have not participated before in the call, but obviously you will hear a lot about the negative currency exchange we’ve had and face this had year, the economic crisis on the credit card industry in general.

As well as our customer base where we have lost customers to acquisitions and just sometimes programs just get canceled, but overall we have pretty pleased with ‘09, it ended up inline with our guidance and also inline with consensus both for the quarter and year-to-date, and I think you will also see as we go through here that we had another great year in generating cash flow, about $253 million from operations, and we ended the year at cash at $450 million unrestricted and that’s more than double from what it was at the year end of December of ‘08.

With that I’ll get started on slide six where we’re got analysis here for quarter-to-quarter comparison ‘09 to ‘08 and also year-to-date, just some highlights there. If you look at the quarter for total revenues, you will see that it is up 1%. We did have positive currency during the fourth quarter for the first time in several quarters. It was up about $3.9 million and on the constant currency basis that made us basically flat. Of note during the quarter is we lost $16.1 million in revenues associated with client deconversions.

We offset it with growth in new business as well as some internal growth and we also had a termination fee around $9 million, in our international business that helped us there. When you drop down to operating income you’ll see we’re up 3% or $2.8 million for the quarter and currency played about $700,000 impact of that $2.8, but the non-recurring fee helped and as you will see going forward in here, we continue to have infrastructure build out on the international front as we keep expanded in Brazil, Japan and U.K.

This is all preparing ourselves for the future in Brazil to get up and running here in 2010 and we’re pleased to have that happening. Also, you will see here transactions for the quarter they’re up 4%, and if you look at our same client transactions, which we talk about a lot, meaning they were customers here in the fourth quarter of ‘08 and the one that is are here now, we take out the normal these of new customers coming on and some of the customers leaving, but if you looked at that for the quarter, first time it has been up year-over-year in a little over 2%.

As you know, we started the year with those quarters being down on same client transactions of about 2%, but overall good quarter. We’re up at $0.31 a share and feel pretty good about where we ended up. When you look at the year-to-date 4 to 12 months, total revenues, we’re down 2%. We were suffering through $46.8 million of currency translation in addition to the lost business.

We lost approximately $69 million due to deconversion of portfolio sales, so overall we did pretty good in coming up and offsetting that and getting on the constant currency basis we actually up 1%. So, felt good about holding our own during the year. Operating income, we’re down 7%. We had a negative impact of currency there of a little over $7 million, so that took a little stanch out there.

When you look at transactions for year-over-year were down 6% on a just transaction basis, total transactions, but when you look at same client for the year were slightly down 4.9% after starting the year down 2.78%, so pretty good growth on internal revenues and new customers to help offset the loss.

If you go to the next slide seven, you will see slide on our client movement since last year. First column you have Client Adds summary of 352.5 million accounts at the end of ‘08 and how that figure has changed during the year with internal growth at $25.2 million, 8.7% growth there. We had new clients of $28.1 million and you can see out to the right there some of the adds that we had with retail group Barclays and Deutsche Bank.

Purchases and sales lost $34.1 million. We’ve talked about that before. We did have 6.5 million accounts purged off in the fourth quarter and just to let you know, the overall impact in ‘09 of purged accounts is really immaterial, about $3.6 million as we said before. Those accounts usually when they get purged they’re not very active at all.

Deconversions, $26.9 million; you can see to the par right there clients lost to Washington Mutual and Nordstrom. Those are the two big ones and we talked about that. On the summary down below by segment you’ll see consumer is the biggest loss we had during the year of 18 million accounts from deconversions and retail group was followed up 10 million accounts from deconversions and purges.

Now these are the two high dollars per account categories that we have. The big offset coming in there is from stored value, which doesn’t carry quite the revenue stream these others do. Sequentially of importance is since September, we’ve grown 2.3 million accounts, and that’s a good story there from the growth in new business.

On the next slide if you look at the currency, just a good graph to show you what’s happened to us over the last two years. Obviously, ‘08 we were hurt $21 million and currency exchange, and this year we finished out at $46.8 million and you can see for the fourth quarter we were up $3.9 million, which is first time in five quarters, we’ve been there six quarters. You finished ‘09 at average exchange rate on the pound at 1.63 and we do have in comparison to ‘08 that was 1.58, so 5.9, so pretty close. As we go out into ‘10 and I’ll talk about it again later, but we’re using 1.65 as our exchange rate for 2010.

On the next chart on the fourth quarter just a segment for North America just talk briefly about that. Revenues $253.6 million, represents 59% of our total revenues. We went through a loss of $16.1 million there for deconverted clients. We were able to maintain our operating margin by reduction in headcount and managing expenses down 230 people in this segment, and that’s not including the discontinued ops that we did with TDM. There was another 170 people we lost in that. So overall, out of these numbers you saw in year-over-year comparison 230 people reduction.

Operating margins at 22.7%, as I said maintained what it has been. When you exclude the reimbursements, we’re actually went down 35 basis points to 26.9, but year-over-year excuse me for the quarter same client transactions year-over-year $1.57 billion, they’re up 1.9%. Total card holder transactions are down 6.6, which takes into account the loss of Wamu and Nordstrom.

On the next slide, looks at international revenues of $101.4 million; on a constant currency basis, we dropped down to $97.5 million. We did have a positive currency there of $3.9 million. These revenues represent 20% of the total revenues, and this growth here in the international is about a 21% growth on constant currency basis, which is very good for the new business we put on there in international segment.

Operating income at 18.3, currency played a part there for about 700,000 as I mentioned earlier. One thing of note on this segment this quarter, we did have the $10 million fee roughly for termination fee on a customer that canceled a program that they had going and that came in the fourth quarter.

If you took out the fees operating margin with the fee in it is 18.1% without the fee it would be 11.6% and Europe or the international sector has been struggling a little bit with their margins as we build the infrastructure you will see more about that and hear more about it as we talk about 2010.

If you look at the same client transactions in Europe, $286.8 million up 2.9% or 2.8%, and then year-over-year we got transaction growth of 12.6 which shows effects of the new business coming on board. We did cut about 27 people during this year in this segment. This is in light of the fact we have added people for growth in Brazil and for Carrefour and Deutsche Bank in Germany.

We flip to the next page and look at the merchant segment revenues are $88 million. We had internal growth increasing revenues about 3% and our new clients we have had several of those come onto help offset the lost class that we had with some business would be a value in NPC, but the operating income is 17.4, very good number again was operating increased 24 basis points.

Infonox is in these numbers that helped grow the revenues also and if I look at the operating income, excluding reimbursables, we’re up 29.6% there or at 29.6%. If you remember, reimbursables is a pretty large number as a result of Visa changing their access fees structure and it pumped a lot of reimbursable revenues into our merchant segment.

Point-of-sale transactions at 1.3 billion up about 6% for the quarter which is very strong, and a lot of that is coming from new business with GLC and new customer of theirs and the SA side of the point-of-sale traffic, and this segment here we dropped 64 people down with 800 employees.

With that we’re going to the next slide, just gives you an idea on the electronic payment processing fees about what the make up is it represents 67% of our total revenues before reimbursables and we have shown this the last three or four quarters and if you look at the chart we’re finished the year 1% internal growth, which is historically quite low for us, but that’s what it ended up in ‘09.

We had new clients come on board to create about 3% and then we saw lost clients 5% and CTA 4% was drop of about 9% to get us down to our 5% reported change down year-over-year. I’ll say purges in the fourth quarter I mentioned that a while ago of a little over $6.5 million and then we had the termination fee that came into help also on the electronic payment side, but with that we’ll flip over to the merchant side and you will see internal growth there is a little stronger at 3%, point-of-sale traffic is good.

New clients on board at 1% and the acquisitions, which is Infonox of 2%, some of the new clients are really ISOs with Merit bank and you had Aruba bank stuff that’s new for ‘09. Lost business, lost clients 2% I mentioned that awhile ago, NPC and banks transactions before they do the deconversion next year, and then that’s positive pick up of CTA with GP that in Japan.

So, overall they’re reported change year-over-year is up 6% and pretty good growth, and I think we continue to see growth in our merchant segment into 2010. Talk a little bit about cash on this next slide, if you look at the growth in the cash and pretty good through ‘08. We bought some things at the end of ‘08 and paid off a loan, bought Infonox for $50 million and then will paid off a loan for $54 million and finished up the year at $450 million I mentioned the cash flows from operations at $238 million.

Free cash flows at $302 million it increased $92 million or 44% compared to last year which is very good. Might mention here that in light of this cash we still have our undrawn revolver portion of credit facility of $252 million and today that debt would be at line or plus 60 basis points, which would now be about 0.88%. So we have the financial resources really available to us to execute the strategies we’re looking at and in the acquisition world and if need be any stock repurchase.

We do have 6.9 million shares left on our stock repurchase brand, which is set to expire in April, and we will continue to remain active in the world of acquisition opportunities in looking at those things as we go forward.

Next slide is cash flows measurements, operating cash flows, as I mentioned $423 million at the end of ‘09, ‘08 was $353 million, so pretty good growth there year-over-year. We continue to show good EBITDA numbers also. The drop from ‘08 to ‘09 really resulted from the change in our operating income year-over-year. So we hope that will pull itself backup pretty quick. Currency also played a part there in $13 million worth of currency.

Flip over to the next page. We have cash flows again chart on operating activities of free cash flows. If you look at the operating cash flows, they continue to increase about 97% greater net income, and if you look at the free cash flow, it also continues to increase and is about 40% greater than net income, so very good. Free cash flow, as you know is amount without the property and equipment and all of the CapEx and stuff that we have there. So these are pretty good numbers on cash flow side.

Last chart on cash flow had to do with amount of cash flow to revenues numbers, and we have shown this before. We roughly bring to cash about 29.8% of each dollar of revenue, which pretty good compared to the industry and the other players in the unit. When you look at free cash flow growing at 44% for the year in December ‘09 and our GAAP net income is declined 13.9%, it’s just speaks well for how we’re able to grow our cash.

With that, I will move into our 2010 guidance and start off with the some of the assumptions that we have in this 2010 guidance, concerning the changes with our customer base. We don’t see any dramatic changes from what we have seen lately. We’re pretty optimistic last year as we went into ‘09 and had to go in and change our guidance at the end of the first quarter. So this year we’re really watching what is going on with the customer base and we’re just not certain when that economy is going to change.

We anticipate for 2010 as I mentioned before, the pound exchange rate is we’re going to use 165 in our guidance, and then the euros we’re going to use a 1.45. These are inline with what we’ve been seeing here at the end of the fourth quarter. Also, the forecast is not going to assume any acquisitions, although we still remain active in that area, but if they come, they will come.

We continue to be impacted by lost revenues from deconverted portfolios, and the customers sold and also a difference in onetime nonrecurring fees and I talk a little bit about the revenue side of this in the next two slides. From an expense perspective, we continue to build out of infrastructure needed for our planned conversions in 2010 and ‘11 on the international front as well as the US, but the main part being in the international and continue to be somewhat of a headwind on the international operating profit margin. We do anticipate a benefit of favorable currency, but it isn’t going to have a huge impact at all on our operating income.

On the next chart as far as the revenue change just gives you kind of a graph of what we’re facing in 2010 with internal growth. We’re using 1% or 1% to 2%. We’ve been more aggressive in the past as I mentioned and we ended up having to come in and adjust guidance for things kind of not turning around like we thought it would in the mid year.

We’re estimating the new clients’ growth of 3% to 4%, and as I mentioned currency would be favorable next year, but only to the tune of 1%. Then you get into the lost business of non-recurring items, price compression that are build in next slide, but that’s cost us 11%. That’s how we get down to the 6% to 4% down in revenues for reimbursable.

If you flip over to the next slide, you’ll see how that’s made up. We start the year off at a $1.418 billion and we have lost business of $114 million. We’ve talked about these before. You got Charming Shoppes, Nordstrom, Iowa WaMu, CLC, RBSG, just a multitude of customers there that are going to affect us during 2010. We also have some non-recurring onetime fees of $10 million. We had termination fees from WaMu and Scott Card and in ‘09 we’ll have Charming Shoppes in Wachovia in 2010, but the net will be we’ll be down $10 million.

Then we have price concessions of $29 million with pretty large number with one big piece of that coming in the fourth quarter as far as us finding out or getting knowledge of that. I will say that during this fourth quarter we had about $22 million we were notified of lost business, about $22 million of this number during the fourth quarter, and then we had another $14 million due to timing on deconversions or not deconversions, but timing of conversions getting pushed out, took longer to sign the contract and delayed the timing on the conversion.

When you look at the additional customers, or add on new business in internal growth, I mentioned we had 1% worth of our internal growth or organic growth in there that’s about $14 million. We talked about in the past back before ‘08 our organic growth averaged 10% to 14%, it could be a lot to do with the customer base we had with WaMu, B of A.

It’s fast growing business, but irregardless of that if the internal growth was 7% I think we would be at what I think what consensus has in the market of $1.21 a share, but we feel like 1% is better for us as to what we’re seeing right now and depending on when the economy turns. With that said, if we’d used internal growth instead of 1% of $14 million and used 7% would be $95 million more dollars in here than what we had.

Currency we mentioned this going to be around $13 million, somewhere give or take there, so we got a range of $10 million to $16 million. So overall, you’re look at revenues being down $54 million to $81 million or 4% to 6% for 2010. With that we’ll flip over to the next page.

You can see the guidance is in the press release itself and the margin that we’re looking at consolidated 21 to 23 is less than what we’ve been doing in the 24% to 26% range, but there again we got infrastructure build. I will tell you that in the 2010 guidance what you’ll see as a reduction in the salary category of roughly $30 million from the level we had at ‘09. We also had other category will be down about $11 million from ‘09’s numbers.

Both of those were in the 5% down range, but you’ll see technology and the occupancy side of the house being up $28 million, which is indicative of the buildup in the infrastructure that we are having to do for the plant growth in the latter part of 2010 and ‘11 as well as continuing to enhance what we have in the Europe and Brazil. Brazil will be roughly about $5 million of that.

I think with that I mentioned that the margins are going to be kind of depressed as we go forward in the international arena. We do see continue to see modest internal growth. Our trends sequentially have still been modestly better, but as we get into the drop off of these customers in the first, second quarter of next year, we’ll see some pressure on our margins also, but the merchant business continues to grow.

We continue to look at acquisitions as our cash balance continues to grow and feel pretty good. I mean if the economy turn or the organic growth would improve, obviously it comes with very a little costs associated with it. With that, Phil I’ll turn it back over to you.

Phil Tomlinson

Thank you, Jimmy. Obviously, the guidance is less than stellar and I can assure you that we’re not satisfied with that. As a 30 year veteran of this industry, this recession continues to rock the core foundation of the banking and card industry among others. From a macroeconomic level there’s obviously far or less credit available and far fewer cards in the market. Consumers are spending less in general, and certainly on credit cards and they’re saving more, which is a good thing.

We believe until we see unemployment start to fall in people regaining jobs and feeling more secure and beginning to spend again. We expect some level of continued constriction. It is no surprise that we now believe and you’ll recall last year about this time I made a statement that I thought we would see improvement in third and fourth quarter of the 2009, me and a lot of other people said that, “I’m not going to say that again this year.”

We believe it’s going to be a slow recovery and as the economy and the card industry in the economy and the card industry is reset to some new baseline, probably going to be somewhat different than what our historical numbers have been. As Jim described, entering 2010, we face a significant revenue hole unlike everything we have ever faced, and we faced some pretty big ones over the years.

In the simplest terms we start the year with a reduction in revenues of $153 million. The add back somewhere between $72 million and $99 million in 2010 and that is with no growth and no acquisitions, and that represents a net revenue decline in the $54 million to $80 million range. There’s a number of reasons that we find ourselves in this situation.

As you know, revenue loss has come from several areas and we’ve experienced unexpected client losses through deconverted portfolios. As a result of bank failures and portfolio sales like Charming Shoppes, every year and we did it in 2009, we made price concessions client renewals and those have averaged pretty well into the norm, about 2% of company revenue before reimbursables, which 1% to 2% is what we look for. Those are in historic range.

We have reductions from onetime termination fees, which is a good trend, but as Jimmy said, it has a negative effect in 2010, and of course the currency impact. As a result of this regulation of this industry and the continued economic problems clients have, they continue to delay projects or they stopped them altogether and organic growth has been anemic at best. We talked to all of you for years about organic growth over the past ten years prior to 2008 and 2009 as Jimmy said again it ranged from 10% to 14%.

At the end of 2007, it was better than 13.50, and I can’t recall exactly what the number was, but it was the best organic growth we’d ever had. You heard what would happen if it just were to move from one to seven. It cures a lot of problems. The infrastructure and investment in development to position us to grow this thing internationally has certainly placed expenses ahead of revenue growth.

This is normally a great problem to have, but it’s a financial negative in 2010. We’ll refill this revenue hole to some degree in 2010, but we won’t refill it completely this year. For transparency, I want to try to review North America, international and merchant segments separately.

So, let’s start with North America. North America accounts for right at $93 million of the total revenue loss that we have been discussing. While we have always been at risk with bank consolidation, the current crisis as facilitated even greater consolidation, with the very largest players dominating much of the payment business, but now as everybody in this industry and I think you would note TSYS is perfectly suited for these largest of issuers.

Some of them prefer to do it in house or in sourced, and operate multiple systems with what we think would be high over head, but we’re approaching these guys of very largest with customized solutions, flexible options that they can choose from or they can select a combination to fit their specific operational needs.

For example, we do the processing for probably the top 20 commercial card users in the world and that would include the very largest financial institutions. The problem we had is the US market for all practical purposes has been dead in 2009. We had no significant wins in the US which will contribute to 2010 revenues. We do have some wins coming that you will that hopefully you will see soon.

In some respects we do believe that market conditions offer smaller players an opportunity to get back into this business or start their own card program or to be a little bit more aggressive than they’ve been historically and when I am talking about the smaller players, I am talking about smaller community banks and regional players, credit unions. Most all of those, particularly the credit unions that appear have been exempt from these massive losses and they seem to manage their customers pretty well.

We have a solution for this sector in two of the 21 LOIs that I referenced last quarter from this group and hopefully we can announce those soon. We’re continuing to make good progress I believe signing clients in Canada. This market represents four of those 21 letters of intent.

We have two of the four contracts signed, which are well recognized brands, but we have not announced them yet and two of those have decided that we go through this all the time they do not want to announce until the program is live or two of them want to do that and we think we’ll be able to announce the others in some reasonable timeframe we’ve just signed those contracts.

So, we’ll be able to partially refill the revenue hole in North America after these additions, but most of this will come later in the year. We will include the onetime termination fees to be received in 2010 and with a very minor organic growth number like 1%. Many of the funded sees base or predict to pickup in consumer confidence in the third quarter just like we predicted last year and we just going to really wait and see because we’re just not sure any more.

On the international front we gave price concessions to a couple of large existing customers as we extended and renewed contracts out through 2014. We have talked about that before. We also lost a large co-branded deal from a large bank partner in the U.K. and but we will still serve the bank partner, but we did lose a probably one of the largest co-branded deals in the U.K. So we do have a nice pipeline of additions let me go back and say so internationally we going to enter 2010 with a $33 million revenue hole.

So we have these new additions we have currency, some organic growth, and we expect revenues for international services to be up slightly. We recently announced the signs of Degussa Bank in Germany and if you recall last quarter I talked about how history indicates that we have a success in a region or country, we tend to add new clients and create clusters of business like Ireland and the U.K. and the Netherlands and we’re certainly hopeful about and the U.S. and Canada and Mexico, and we’re hopeful about Brazil and China and Japan.

So we’re looking forward to that. I think you’re going to see more to come in Germany. We’ve also signed the most successful internet bank in Japan for a card program. We’re going to announce several new clients signed in the coming weeks and months of the 21 I referenced earlier nine of these are international. We won every single competitive bid that we were involved in internationally.

When we won those in a two-month period, we received confirmation on all nine of these prospects and frankly we completed the analysis on the development and infrastructure required to bring this business on. We realized the effort will be greater than we had anticipated, and we’ve had to recalibrate or adjust our conversion schedules. The worst thing we can do is have a bad conversion.

Last quarter, we talked a lot in 2009 about Carrefour down in Brazil, and we talked about the conversion plans scheduled for early 2010. I just want to clear that up. The date has been pushed out by about four months, and we’ve scheduled, we and they together have scheduled a staged approach beginning in March. We do have several hundred accounts friends and family out now with a major push in May and the final push to be converted in the fourth quarter.

We have key milestone dates coming up, and we’ll keep you up to-date if anything changes on that. We got a great team dedicated to this project, and we think as this Carrefour conversion becomes successful, and we make those folks happy, it’s going to lead to again a cluster in Brazil. I want to take just a minute and talk about Card Tech which is where this prime software has come from.

We acquired Card Tech in 2005. We have a software licensing business in over 70 countries today. We took Prime, which was the software that was designed to be licensed to issuers anyway we took Prime, the licensed payment software and we have created a server based multi-card management outsourcing model for new and emerging markets.

We’re creating a fully integrated system that manages debit, credit installments, prepaid merchant acquiring retail services, and we’re coupling on top of that other support services such as customer care, fraud, risk, reporting, and internet based reporting tools and reports.

The amount of work invested in this infrastructure requirement and the development of ours to get TS Prime ready or market ready has taken longer than we first estimated, because we’re building a completely new system for new markets and new clients, and we are convinced we’re going to do it right. The technology investment necessary to support TS Prime in new markets will be incremental costs spread over years.

We’ll continue to invest as we deploy this model on a country by country approach. What we have found and what we talked about on earlier calls with you is every country is pretty dramatically different in the last one.

On the merchant processing side overall revenue growth will be down slightly. We enter 2010 with a revenue shortage on the merchant front of approximately $26 million. As Jimmy said, about half of that is, Bank of America and their new agreement. Again, we will be adding new client additions, have new client additions. We have some organic growth built in, very little, and it is going to partially refill that revenue gap in this processing sector.

So with decreasing revenues, our challenge becomes how to balance the need for near term results that meet the demands of the street while not sacrificing muscle that’s needed for future growth expansion, diversification, and so on. We just have to figure out how to balance that, and we’re in the process, we’ve been in the process of doing that. We’re doing it today.

We have announced here internally that effective immediately bonuses, salaries, and discretionary retirement plan contributions or frozen until we see some improvement in this economy. New hiring is frozen indefinitely, again until we see improvement. Through attrition and a reduction in force in 2009, we reduced our overall workforce by approximately 5% in the U.S. and we plan to doing the same thing in 2010.

So when you add 2009 and 2010 together, we will reduce our headcount by about 10%, which is headcount makes up 54% of our expense base. We will also realign and redeploy a greater position of our technology workforce from mainframe to server based technologies.

We will focus even more markets outside the U.S. and accelerate the deployment of our PRIME solution and when I say that, we’re doing that primarily because while there is some activity going on in the U.S., and it is by far the largest card market in the world. We still have not seen the U.S. market pick up to historic prisoner organizations.

Now, we do believe it will pick up after the UDAP settles down and all of this re-regulation settles down. I’m sure you’re asking why after all talk about international expansion, the great success we’ve achieved internationally, why haven’t the international wins refilled revenue bucket, creating a global company is difficult it takes time.

It’s got a lot of obstacles, but we’re confident the payoff is there. It’s just going to be slower than we expected in this $150 million plus deficiency is very, very hard for us to overcome in a year and so 2010, if nothing else is going to be a year of transition for TSYS, but we believe that the recession and employment will make some progress. We’re not predicting it is going to cure itself.

We are certainly hopeful that banks and retailers health will get better. We don’t know of any clients that are close to the tipping point as compared to last year, we did know for example that Wamu was in serious trouble. So delinquencies are running through this cycle and charge offs are going to have to run through this cycle and reset to a new norm that banks can tell you better than I can when that cycle kind of flushes itself out.

Our industry is certainly going to have to adjust to this new regulation and develop new schemes to improve profits and products, and I certainly believe that we will do that. We do have the flexibility to do most anything you want to do on a credit, debit, prepaid, any kind of card like that. We’re going to continue to win in the marketplace, and the U.S. opportunities will improve at some point and we believe that we have a compelling option.

The consumer’s preference for electronic payment will start growing again because it ‘is easier, it’s more secure than cash or checks and I have no doubt that activity will pickup. Several things I wanted to assure you of today. We hate giving this guidance. We’re tired of sounding like we’re offering excuses on how hard things are these days in spite of the fact they’re hard.

We’re tired and I am tired personally of no salary increases or bonuses and we’re totally committed to getting this off side of the ditch. The TSYS team will manage through 2010 and we’re going to come out 2011 stronger, leaner and much more diversified.

In closing I want to leave you with three things. One is our pipeline of new business continues to improve over the next several months you will start seeing a string of announcements that will bring more comfort. The second is our balance sheet and cash flow continues to be strong and it really provides us with the ability to do most any acquisition we want.

We made really good progress on several fronts regarding acquisitions and I would be badly disappointed if we’re going to make some positive announcements on this front early later this year. No acquisitions as Jimmy said are included in the 2011 guidance. We continue to have the gold standard in technology, a great team with a will to win, I recurring revenue model and an aggressive expense reduction plan.

So, we believe with what we’re doing we can be an even stronger force in this industry that we know and love. I regret any disappointment in today’s guidance and we hope we have been as transparent as we know how to be and that you’re able to see the future opportunities on our plate.

So, with that I will open it up for questions-and-answers.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Adam Frisch - Morgan Stanley.

Adam Frisch - Morgan Stanley

Let’s get into the numbers a little bit trying to get a sense of normalized run rate here. In the last few years what kind of negative impact with the lost business non-recurring items and price compression of add on rest versus the 11% you’re forecasting for 2010?

Jim Lipham

Probably, Adam this 5% or less in prior years I mean it and never been this big.

Adam Frisch - Morgan Stanley

Is there anything we’re seeing now in terms of regulation or secular changes in the industry that may not be coming back where you would expect that number to not be restored hopefully when things normalize a little bit in the future?

Phil Tomlinson

Adam, I mean I would be kid you if I thought I could tell you exactly what the effects of this re-regulation, this UDAP as we call it will be I think it will put a cloud over the card business for sometime, but the card business is a very profitable business for the issuers, and as I said earlier, I believe that we will come up with new schemes and well projects and products that the consumer will want.

I think that our customers are just dealing with these and you have seen the results of some of these credit card programs here in the last few days and just continue to deal with this rash of pretty massive losses and they’re really having a hard time thinking about growing much of anything right now.

I don’t I hope and pray that the position that this economy is in is not the norm, and I just don’t believe that I believe it will improve although its obviously going to improve a lot slower than most everybody on this globe had predicted.

Adam Frisch - Morgan Stanley

On the 11% again, how much of that number is already known and announced versus new challenges that may not be public yet? Are you expecting other losses or know of other losses that may have not been announced yet?

Phil Tomlinson

We don’t know of anything else. We have told you everything that we are aware of.

Adam Frisch - Morgan Stanley

I’m assuming BAMs is in that 11% as well?

Phil Tomlinson

Part of BAMs is in that 11%.

Jim Lipham

All the back end on BAMs has been taken out at the end of April. I think we took about $9 million roughly.

Phil Tomlinson

We took some front end out. We took twelve out.

Adam Frisch - Morgan Stanley

We’ll follow-up with Shawn after the call on this one. Two quick last ones because I know it’s getting late here. Can you give us a sense how long the growth rates will progress through the course of the year because the comps do get easier as we go through, but are we going to start out low and get higher as we go through or is it going to be a steady negative four six throughout the whole.

Jim Lipham

It gets better in the third and fourth quarter as far as recurring business goes.

Adam Frisch - Morgan Stanley

Then I know it’s a touchy subject, but I have to bring it up, Phil, because speculation has been out there now for a while. You talk about you doing the acquiring, but aside from the obvious answer of it depends on the price, would you consider at this point partnering up with someone? Do you feel like you need to offset more weakness you’re seeing with maybe partnering up with somebody of size?

Jim Lipham

Listen, we like our independence, and I wouldn’t want to get into that today.

Operator

Your next question comes from Bryan Keane - Credit Suisse.

Bryan Keane - Credit Suisse

Just hoping to get some color on the international term fee in the quarter, was that a surprise or did you guys already have that factored into the quarter?

Phil Tomlinson

It was a surprise as far as when we gave guidance at the early part of the year. We did not know it.

Bryan Keane - Credit Suisse

The term fee was $9 million. How much in annual revenue and earnings will be lost heading into 2010 from that client?

Jim Lipham

We had roughly $13 million of revenue that we’ll lose in 2010 outside of that fee that we had in ‘09.

Bryan Keane - Credit Suisse

So that’s net then?

Phil Tomlinson

That’s before the termination fee, that’s right.

Bryan Keane - Credit Suisse

Then is there an earnings impact there?

Phil Tomlinson

There will be. Obviously, I don’t think that it’s going to be offset. I think a lot with growth as far as the infrastructure with this program. The computer equipment stuff like that probably nothing will leave and I mentioned earlier that we had 24 headcount reduction and international, and that’s part of it. We do have to hire some people for Carrefour and Deutsche Bank, but overall headcount is down in Europe for next year.

Bryan Keane - Credit Suisse

Just wanted to look at those 21 LOIs that we were talking about last quarter, you talked about a few of them, but just looking to get a total sum above of where we are in terms of how many LOIs are still out standing and how many were actually closed in the quarter?

Phil Tomlinson

Let somebody add that up. I thought we went through most of that, but we let somebody try to add it up as of daily use.

Bryan Keane - Credit Suisse

I know nine international and then two in Canada and two in the U.S.

Jim Lipham

Four in Canada, two in the U.S., and I think I accounted for 15. I didn’t try to give a status all of them.

Bryan Keane - Credit Suisse

As the others still out standing and hope to be closed about…?

Jim Lipham

We still have the LOIs in effect, yes, I am sorry.

Bryan Keane - Credit Suisse

When we look at the guidance, when you talk about new business, how much of that is from these LOIs or does some of this from these LOI account conversions, there are accounts conversions spill over to 2011?

Bryan Keane - Credit Suisse

What was that again?

Phil Tomlinson

Say that again. I miss that question.

Bryan Keane - Credit Suisse

I am just trying to get a sense of are all of these LOIs that we know have closed, I guess how many accounts is that and are they all in the 2010 revenue guidance or is only some of that in 2010 and then a part of it gets pushed into 2011, Just trying to get a sense of that.

Phil Tomlinson

Most of it will be pushed into 2011. I mean, as we talked about before, it takes six months to a year to get these conversions done. We’re trying to get the contracts signed. As we get the contracts signed, we get aggressive in trying to put these conversions processes together, but I think most of it will rollout to 2011. Better than 75% I would guess, and I’m waiting for some nod either not they head and tell me that is right.

Bryan Keane - Credit Suisse

Last question for me, it sounds like because of getting ready to ramp up these contracts internationally, margins will be depressed in this segment. Can we expect to get back to more normalized operating margins as we head into 2011, especially in the international segments?

Phil Tomlinson

You’ll get better than what you’re going to get in 2010, because we’re looking in the high single digits in the international. It will get better when it gets into 2010, but it won’t reach the margin levels of the U.S.

Bryan Keane - Credit Suisse

We’ll get back to historical international margins?

Phil Tomlinson

Probably not that quick, Bryan.

Bryan Keane - Credit Suisse

The goal is to eventually even beat those original margins?

Phil Tomlinson

Yes, because that’s the long term goal, but the truth is, we think there are a huge amount of opportunities you outside of the U.S. and we’re going after them, and it’s going to cost us some margin short term, but we believe we need to strike while the iron is hot, we’ve got the systems, we’re spending the money on the infrastructure, and it’s time to move on forward.

Jim Lipham

Bryan, you know the mix over in the international world in the U.K., a lot of its managed services, which is not the margin of the credit card processing fees itself.

Phil Tomlinson

As we expand internationally, if we get into Japan and get doing some processing there in a little bigger way, it’s just a lot of influences on that margin.

Operator

Your next question comes from Jason Kupferberg - UBS.

Jason Kupferberg - UBS

Wanted to hone in a little bit on which piece of the guidance equation for 2010 has kind of taken you guys most by surprise? I know you talked about the loss that you were notified of in Q4 and that’s $22 million if I’m not mistaken. The other losses I think were generally known already.

It sounds like some of the conversions the LOIs that you’ve closed are perhaps progressing slower than expected. Then you’ve got the cost of the international infrastructure build out. Maybe that’s a bit more than you envision, so is it really a combination of those three factors that in aggregate have taken you most by surprise or…?

Phil Tomlinson

It is an absolutely a combination of those, and some of it has taken us by surprise, honestly. It has taken us by surprise to some degree. We are moving with our Canadian customers’ right on target. Those are no issue. We’ll be in great shape with the Canadian wins Brazil we have a little set back there. I talked about it earlier. We’re going to be about four months late there.

We obviously had never expected to win nine out of nine in Europe, and we have had to kind of step back in adjust and figure out a conversion process for that. As we finish this software and as we get better at TSYS Prime and as we understand these countries better, I think this process may pick up some, but I certainly wouldn’t want to promise that today.

As we said a second ago, we don’t know of anybody that is teetering on the edge. You guys know more than we do. I don’t know of anybody that’s about to get bought by somebody who would want to move the business. So we think we’re past that cycle. Jimmy talked a little bit about purges, pretty well purged all you can purge. We do have some retail guys that will probably purge some stuff this year, but its not a massive number, its not a massive amount of dollars.

Most all of it revolves around it was a good surprise, but it has created the European thing was a good surprise, but it has created some problems for us that we will overcome because I have no doubt we’re the very best in the world at doing this and too, this organic growth thing is just so bad. I mean if we could get 5% organic growth, you would see a different set of numbers as Jimmy talked about earlier.

Jason Kupferberg - UBS

Right and can you talk a little bit about the circumstances around the Q4 termination did the customer go back in house or was it a vendor switch or what occurred there?

Phil Tomlinson

We process this Affinity Group for a bank and them for whatever reason, I just I can’t get into the details, but they had a falling out and decided they would separate their relationship and they have basically shut down that program. Nobody was made at us if that’s what you’re asking. We didn’t have it one a service problem or somebody upset with us. It just I think a sign of the times, honestly.

Jason Kupferberg - UBS

Then free cash flow outlook for 2010 relative to net income and maybe in conjunction with that can you talk about how big of an acquisition would you realistically be willing to consider based on your capital structure strategy and obviously you have been building up a lot of cash on the balance sheet and clearly the strategic intent seems to be there but wanted to get a sense of how big could a realistic acquisition be?

Phil Tomlinson

After today we would consider a really big one.

Jason Kupferberg - UBS

How would you define really big?

Phil Tomlinson

Well, we’ve talked about that before. I mean, we think we can go up to, what, Jimmy?

Jim Lipham

We’re looking at I think we’re comfortable with 2 to 2.5 times EBITDA.

Phil Tomlinson

Generally there is a lot of things out there that are for sale and I know that we’re a conservative company and you can say, well you guys have just not been willing to pull the trigger, but we just haven’t found anything I mean, it takes just as much discipline not to buy something as it does to buy something.

Jason Kupferberg - UBS

Fair enough and 2010 free cash flow outlook and then I am done.

Jim Lipham

Should be inline with what we’re seeing today. I don’t have that number here about $302 million.

Operator

Your next question comes from Tim Willi - Wells Fargo.

Tim Willi - Wells Fargo

One on expenses Jim, could you go over your commentary about how you think about the expense lines in 2010? I think you talked about other would be potentially down a little bit but then you made comments around the FTEs and occupancy and technology?

Jim Lipham

The headcount reductions that Phil talked about and where we are with attrition going forward, you should see a decrease of $30 million in the total for 2010 compared to ‘09 in the personnel side and then we’ll have roughly $28 million increase in technology, which in occupancy, which is the huge infrastructure we have we got it in India.

We got it in Russia, we got it in Japan, we got it in Brazil, we go some in the U.K. as far as disaster recovery and things that we had to build up there, but overall that’s going to be the real Achilles Heel is $28 million hitting the international area, and then we’ll have about an $11 million reduction in the other category, which is where our professional fees, and travel, and this kind of thing are.

Tim Willi - Wells Fargo

Then on the technology and occupancy equipment, is there anything there in terms of that incremental 28 that you would view as maybe a cyclical or onetime kind of spend or is that going to be a permanent part of the expense structure going forward?

Phil Tomlinson

We know the $5 million with Brazil is going to be a recurring item going forward. For me to say about the other $20 million as far as onetime or not, I’d have to really take a little harder look at that, some of the disaster recovery which will be going forward. I just don’t have that breakout.

Tim Willi - Wells Fargo

Then going back to B of A, you guys had articulated about a half a year ago, what their revenue contribution was and EPS contribution or anticipated EPS contribution for ‘09. So just sort of as you think about this 12 million-ish that you said was in the sort of the revenue goal, I guess if you had any additional discussions with them and what’s your comfort level that by the time we’re done with ‘10 that your estimation will be accurate and just sort of thinking about the rest of all that revenue, which I think is sort of towards $70 million based upon the press release you guys put out awhile ago?

Phil Tomlinson

In looking at what we did with the $12 million, obviously we said about $3 million of that is from the front end point of sale and the other has to do with the back end piece of the processing and then obviously that $9 million is a lot of that to go straight to the bottom line, I mean after taxes obviously, but we feel good about what we’ve done there. We know they can pull the back end as soon as they want to do in April and the contract termination date at this point.

We’re in negotiations on the front end as to whether we already do, they are a customer of TSYS already on the front end point-of-sale or at least FDC is I’m talking about, and if it’s just very hard for them to move the terminals, especially the dial terminals out there. So we know we’re probably lose incremental business coming on board after April, but as far as point-of-sale, but it will be very hard for them to take away from us what we already have. It will be very slow.

Tim Willi - Wells Fargo

So if your original commentary was roughly around $70 million, I think you said 4% of the ‘08 revenue, 12 million you’re expecting to leave, which leaves another 58 sitting out there and you’re saying that that seems pretty sticky or…?

Phil Tomlinson

Pretty sticky.

Tim Willi - Wells Fargo

You really think that once they put this thing together you’re still pretty important vendor to that joint venture?

Phil Tomlinson

I think so.

Jim Lipham

At least for some period of time, probably not forever, it is a strange world we live in these days, they’re already a customer.

Tim Willi - Wells Fargo

I know that it is. Can I just ask one last thing going back to Bryan’s question about letters of intent and contract try to keep all of these numbers straight? Did I hear you say, Phil, you have signed nine of those letters in Europe into actual contracts?

Phil Tomlinson

No. We have nine letters of intent. We’ve signed several of them in the contract. I know we’ve signed two in Canada in the contract. That’s eight LOIs and two contracts and then four contracts internationally.

Tim Willi - Wells Fargo

I guess it would be helpful if you had any color at point in time, whether it’s this call or the next one of what you actually contracted…?

Phil Tomlinson

We can give you a slide on it.

Tim Willi - Wells Fargo

What’s you contracted and what sort of a base run rate might be, and obviously ‘10 is a challenge, but I think it would be helpful on the visibility thinking about the likelihood much ‘11 showing growth is to what sitting out there that signed, but you won’t really comment for a while directly, but at least giving us a feel for it?

Phil Tomlinson

That’s fair point.

Operator

Your next question comes from Glenn Green - Oppenheimer.

Glenn Green - Oppenheimer

I guess just the one question I want to drill down is sort of the revenue hole for 2010. I kind of looking at the three piece parts, the price compression makes sense and I think that was inline with historical, about $29 million, the non-recurring fee grow over that makes sense as well. I guess I am having trouble reconciling in the 114 million deltas on the lost business.

We’ve talked about a few of the piece parts being roughly 12 million which is manageable and then the 13 million on the international client the way you alluded to from the fourth quarter loss. Obviously Nordstrom you have another half year run off. WAMU I would have thought you would have lost the bulk of that in 2009, so I guess the big question I am getting at is trying to understand the order of magnitude of the lost business.

Phil Tomlinson

Let me see if I can help you with Charm Shops is about 26 million.

Jim Lipham

Its Nordstrom, Wachovia, WAMU, still there. Sky Card, Charming Shoppes, CLC which is discount card for the TVs; RBSG is in there, a bunch of smaller ones.

Glenn Greene - Oppenheimer

Are there any other big ones beyond Charming Shoppes? Which are the big ones beyond Charming Shoppes that we haven’t early addressed.

Phil Tomlinson

Sky Card, Nordstrom, Wachovia.

Jim Lipham

Wachovia I thought was only perhaps 1.5% of revenue, that order of magnitude. Alright since basically you sort of add these all up and kind of get there basically a bunch in the 1% to 2% of revenue range?

Phil Tomlinson

Glenn that was I may have misspoken there. I think that may have been the cards. I can’t tell you the number of cards.

Jim Lipham

1.5 million cards is what it was.

Glenn Greene - Oppenheimer

For Wachovia.

Jim Lipham

Yes.

Glenn Greene - Oppenheimer

Any idea percentage of revenue directionally, the only reason I ask is I heard different numbers overtime.

Jim Lipham

It is small. I don’t have it in front of me.

Glenn Greene - Oppenheimer

I thought it was small. Okay. Thank you.

Jim Lipham

Trust me it adds up to 114.

Glenn Greene - Oppenheimer

I believe you.

Operator

Your next question comes from Paul Bartolai - PB Research.

Paul Bartolai - PB Research

Just some of the termination fees, just a lot of moving parts. I’m wondering if you guys could quantify the term fees in fourth quarter and for 2009 that you recognized.

Phil Tomlinson

Quantify the term fees? Termination fees?

Paul Bartolai - PB Research

Termination fees, right, just help to get a comparison to understand kind of what the run rate is in 2010 and how much impact we’re going to see next year.

Phil Tomlinson

Did roughly about $42 million in ‘09 we’ll do about $32 million in 2010.

Paul Bartolai - PB Research

So and in that’s included in the guidance, the $32 million?

Phil Tomlinson

Yes, it is.

Paul Bartolai - PB Research

Then the price compression you talked about I mean is that something that’s been increasing in magnitude in recent months or is that something that remained pretty steady?

Phil Tomlinson

Well, we’ve always been in the business of price compression and I think it probably has increased somewhat, particularly as the big guys started to renew. They’re under tremendous pressure and we’re under pressure to keep it to a reasonable amount, so that’s one reason we signed long term contracts and these contracts do have pricing trenches in most of them and so as they that are given out as a growth incentive. Yes, I think everybody is under price pressure.

Paul Bartolai - PB Research

Then the Charming Shoppes I think is probably decent chunk of the term fees. Is that going to be kind of spread out like we saw with WAMU or kind of a one timer in the first quarter? The Charming Shoppes termination fee, the termination fee related to Charming Shoppes, I am guessing that’s a big chunk for the total for 2010 because that going to be onetime fee that’s you recognize or spread out throughout 2010 like we saw with WAMU?

Jim Lipham

It is going to be onetime in the first quarter.

Operator

Your next question comes from Craig Moore - CLSA.

Craig Moore - CLSA

A couple questions first, to follow up on the previous question, looking out as issuers sort of process how they’re going to deal with Card Act? Then the possibility of a tax on the banks coming on, I mean, wouldn’t you think there could be an increase threat down the road further price taking by the banks?

Jim Lipham

Further price taking?

Craig Moore - CLSA

Basically, the banks trying to push even further on pricing to try to recapture some of the profitability, whether it’s Card Act or possibly a tax on bank earnings for the next twelve years?

Phil Tomlinson

You mean pushing us?

Craig Moore - CLSA

Yes.

Phil Tomlinson

I don’t know that they could push any harder. We’ve been negotiating with issuers for 30 plus years now, and while it’s not that easy, it’s something that we are accustomed to as best you can become accustomed to that, and I don’t think the numbers wouldn’t make a big difference with them whether they got a 5% decrease or a 10% decrease in the scheme of things.

It’s not a huge number when you start looking at what these programs generate in revenue. Certainly, they’re going to continue to press, I mean that’s just the way everybody is in, and we fully expect that, and we’re willing to own some of these, move some, and others we’re not willing to.

Craig Moore - CLSA

So are you expecting to complete any renegotiation on large contracts this year that might have an incremental effect on the following year?

Phil Tomlinson

We have one that is in process, but it’s already been factored in.

Craig Moore - CLSA

I’d like to shift fronts. In Brazil, obviously you built infrastructure around Carrefour. With the dissolution of exclusivity down there on the merchant acquiring side, is there any opportunity you see, or is it still a question of being restricted by lack of scale and the need for a large banking partner for merchant acquiring in Brazil?

Jim Lipham

Well, I think you would have to have a banking partner. I don’t know how large they would have to be, but I think it’s a credibility issue for us right now. We’ve got to get there.

We’ve got to make Carrefour happy, and as that happens, as they become satisfied with what we’re doing, we are absolutely convinced we will gain more market share whether it be in the card processing side and we certainly think there’s some opportunities in the merchant acquiring side whether it be processing or even possibly be Internet business. Let me clear that up. That is not something we’re worried about right now. We are worried about getting Carrefour converted and happy and being a great reference site for us down there.

Craig Moore - CLSA

Back in the U.S. in terms of what you’re building into guidance for this year, what kind of estimates you’re looking for in terms of volume rebounds basically in a same store sale for credit cards?

Jim Lipham

Minimal, low organic growth and we don’t have currently outside of some of the business and LOIs Phil talked about, we’ll have new business come onboard. You still got to overcome these lost customers that we have in North America.

Craig Moore - CLSA

That wasn’t necessarily what I was asking. Beyond lost customers, I’m talking about in terms of same-store sales year-over-year and in terms of credit card volume, do you expect any type of rebound in 2010 excluding lost customers?

Phil Tomlinson

We have not built in any significant rebound.

Operator

Your next question comes from Greg Smith - Duncan Williams.

Greg Smith - Duncan Williams

I don’t think you’ve given this, but do you have an estimate you can give out for accounts on file at year end 2010?

Phil Tomlinson

We don’t have the international at this point.

Greg Smith - Duncan Williams

Do you have a domestic estimate? North America?

Phil Tomlinson

No, the thing I got here is consolidated, but I don’t have the breakout by international in the U.S.

Greg Smith - Duncan Williams

Then looked like commercial accounts. I don’t think you talked about this. Commercial accounts fell pretty significantly sequentially from $46 million to $41.1 million. Was there a single large client responsible for that or something else going on there?

Phil Tomlinson

It was an account purge on B of A was the big drop.

Jim Lipham

GSA, I believe, their accounts that dropped off.

Phil Tomlinson

Let me try to explain that. As you may recall reading last year, we processed all of the GSA work for the government and the government services administration, and so B of A decided they were going to get out of that business and all of the banks that we processed forbid on it, and it was awarded to a bank, and so for a short period of time we just kept the accounts on file and those accounts transferred over to the new bank that won the bid.

Operator

Your next question comes from John Williams - Goldman Sachs.

John Williams - Goldman Sachs

Wanted to just drill down a little deeper, when you look at your revenue versus your EPS guidance, it implies that you guys aren’t really able to chop out the expenses quickly enough to keep up with what you’re seeing on the revenue line, which is a bit surprising. We’re trying to figure out how we need to think about the expense leverage in the model going forward. I think the sense was that it was higher than it seems to be, so maybe you can give a little more color on that?

Phil Tomlinson

We historically have been able to plan ahead for some of this as we would lose a piece of business and on a couple of occasions we had some big business setting in the wings, but it is just like these computers. I mean, if you don’t know well ahead of time, you cannot just turn this stuff back in.

We have leases and we have to stay with them until the leases are up. Jimmy can probably add more to it than I can. We haven’t had organic growth and we kept thinking that based on everything that we read and heard that organic growth would start returning to some degree more so than it has and of course we have put in a lot of new infrastructure, particularly really all in international.

Jim Lipham

I think I’d add to that on the part about that as soon as and equipment stuff. The more you get in business, I mean it’s scalable. I mean, when you start one up, you don’t get to scale it. So it’s distorts your cost obviously and then Phil mentioned organic growth. Organic growth goes straight to operating income. It doesn’t have any cost really associated with it to speak of and then you’ll have a little mainframe costs, but not much.

John Williams - Goldman Sachs

So it’s a function of the scale that you’ve built in anticipation of adding future accounts?

Jim Lipham

In the scale you can go up just as easily as it can go down. We talked about 10% or 7% organic growth we used to experience 10%, if we used to do just about $120 million, when you look at that on your bottom line and you all of a sudden up 20% next year instead of being down.

John Williams - Goldman Sachs

Actually to your point, Phil, when you think about the last few years where growth rates you could arguably say that growth rates were a little higher than they really should have been or at least sort of bolstered by everything else going on in the market, when you think about long term trends and what your long term run rate is going to be on growth. Are you thinking low to mid single digits or is it something above that back towards the 7%? Do you think that’s doable again?

Phil Tomlinson

I think that’s doable again, but I do think that we’ve got to get back to some normal economy where the consumer has some degree of confidence. We’re very consumer driven, I mean if you look at these retailers or airlines.

We have a lot of the same problems those guys would have because if the consumers not out spending, that’s where the vast majority of these transactions are generated as well as we are the largest by far commercial card processor in the world and as you know and probably in your own organization businesses have cutback on travel and entertainment and so while we’re fortunate in some ways that we don’t make a fee on the amount of the transaction. The transactions themselves have slipped down a lot.

John Williams - Goldman Sachs

When you’re thinking about your account breakdown by type, is there one particular area that we should think about focusing on in terms of where your growth is going to be over the next few years I know you’ve talked about commercial card, but debit obviously is something that growing pretty high generally. Where do you see most of the growth coming from that do you think it will be at least when you look at the whole big picture is consumer still going to be what drives you guys or are you going to able make that up in the other segments..?

Phil Tomlinson

I think consumer will return to help as the economy improves. I think we’ll do better in stored value. I think that this international business will continue to grow and I think we’ll probably do better in the retail business. I think you will see some interesting things there over the hopefully the next several months that will be announced. We would like to be a very large debit processor and if you know anybody like to sell a big debit processing company, we would love to talk to them.

Operator

Your next question comes from Robert Dodd - Morgan, Keegan.

Robert Dodd - Morgan, Keegan

Thanks for the granularity on the guidance by segment. I wonder if you gave us kind of a headline number in response to an earlier question on free cash flow that are you looking for it to be about the same level as ‘09 if you can give us a bit more granularity on that, obviously in 2010 you will loosing $20 million, $25 million in net income. So what are the offsets there do you expect lower CapEx, lower capitalized software expense and any items you can point to that offset that kind of $25 million?

Phil Tomlinson

I don’t want to get into the details, but I can tell you EBITDA is going to be down about down to around $450 million from $490 million, so I don’t ever all the details here in front of me, but...

Robert Dodd - Morgan, Keegan

On the fourth quarter, there is a couple of items that did step up in the cash flow. I mean one that is capitalized software. We have been running kind of 6 million bucks a quarter for a while looks like it came in about 12. I mean was that project work in the fourth quarter or is that a new run rate?

Phil Tomlinson

This just project work mainly in the fourth quarter. That’s usually when a lot of the capitalization goes on for those things. I mean, on the length of the project, how long it takes, but we did have a spike up in the fourth quarter.

Robert Dodd - Morgan, Keegan

Right and then the other item that picked up, contracted acquisition costs, is that been a theme in these contract renewals you mentioned pricing pressure, but are you seeing demands for more contract renewal bonuses or is that just new accounts that are getting those contract acquisition payments?

Phil Tomlinson

I don’t know that we have seen any we got prepaid conversion costs and stuff that we have that we see with new clients, but renewals we don’t have payments. We’re not making that I know of.

Jim Lipham

A lot of that CapEx in the fourth quarter I believe and somebody correct me if I’m wrong is all this development we’ve done for these new regulations UDAP. We have more to do for Canada. We don’t have all the details yet for Canada, but we believe they’ll be similar to the U.S. in there’s discussions in other places like the U.K. that some things like it might happen, and we don’t know for sure.

Operator

Your next question comes from James Friedman - Susquehanna.

James Friedman - Susquehanna

I just wanted to ask as we try to quarter eyes our models that means to make the year into quarters, of that $114 million, how much should we assume was going to peel off in the first quarter?

Jim Lipham

I hadn’t broken it down. I don’t have anything with me that break that down, but I think you can see on a consolidated basis like I said I think your margins and all on the first quarter are going to be around 20%, and we’re going to head toward 23% by year end. So maybe you can build something there to deal with your, I told you we had a big termination fees.

I think overall, you would see a lot of hits in the first quarter outside of that termination fee, but because of the termination fee you’ll see still our margin being in the 20% range.

James Friedman - Susquehanna

What seemed like a brighter note, the equity investment, equity and income of equity investments, I think that’s China Union pay that did seems to tick up sequentially there may be other things in there, but if you can give us color around that. That’s all for me.

Jim Lipham

There are some other things in there in regards to Mexico was in there, and the which is China investment is in there also, and I think in both cases we had better revenues this year and their earnings were up, but I would anticipate both of those increasing next year.

Operator

Your final question comes from Adam Snyder - Loews Corporation.

Adam Snyder - Loews Corporation

It seems like there’s more than one way to increase shareholder value. I know that you guys clearly have looked intently at making a number of acquisitions, but you’re looking at least according to the guidance that you’re giving here today of roughly $1.50 per share in free cash flow this year. If you’re lucky your stock tomorrow might be trading in a near $15.

You have over $1 per share in net cash on your balance sheet, it seems like you could go out and buy a tremendous amount of stock right now. Why don’t you consider that or have you considered that at all? Secondly, what type of returns on capital are you potentially looking at when you’re going out and making one of these acquisitions? What kind of hurdle rate do you have? How does that compare to what you can potentially get just by simply going back into the market and buying back some shares?

Jim Lipham

Well, I think I mentioned earlier, we have about 6.9 million shares left in our buyback program to terminates in 2010, and we obviously talk about that quite a bit, and as the cash has built up as you said, in the 450 range, all that’s been growing at the same time these acquisitions are getting closer and closer, and we have always thought that the value of the stock.

I mean at the right time we would buy some, but we would rather spend the money on an acquisition that can return on the investment much like what we have today in our business, which is something that will grow going forward. We do realize that stock purchase is a onetime fix. If you can’t grow your earnings after that, you’re going to end up in the same boat eventually and deploying the cash for long term future growth…

Adam Snyder - Loews Corporation

It’s a permanent fix, at least in terms of what it does to the total incremental economics that accrue to me on a per share basis? It is a onetime transaction.

Jim Lipham

As you go through these acquisitions, all of them that you’re looking at are cash deals and you’re going to be highly levering your company and cash will be a key important thing going forward.

Operator

There appear to be no further questions in queue, but if anybody should have any remaining questions or comments please indicate. (Operator Instructions) We appear to have no further questions.

Phil Tomlinson

Okay. Thanks, Dan and thanks to all of you, who are on the phone. We appreciate it and we look forward to making some great progress in 2010 and beyond. Thanks again. Bye, bye.

Operator

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

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