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Total System Services Inc. (NYSE:TSS)

Q3 2006 Earnings Call

October 18, 2006 8:30 am ET

Executives

Phil Tomlinson - CEO

Jim Lipham – CFO

Analysts

Tony Wible – Citigroup

Greg Smith – Merrill Lynch

Tim Willi – AG Edwards

Greg Moyer – Soleil Securities

Paul Bartolai - Credit Suisse

Roger Smith – Fox-Pitt Kelton

Tony Davis - Ryan Beck

Presentation

Operator

Good morning, ladies and gentlemen and welcome to the TSYS third quarter 2006 earnings conference call. (Operator Instructions) It is now my pleasure to turn the floor over to your host, Phil Tomlinson. Sir, the floor is yours.

Phil Tomlinson

Thank you, Michelle and good morning to everyone on the phone. Before I get started, I wanted to call your attention to the fact that we'll be making forward-looking statements about future operating results of TSYS. These forward-looking statements involve risks and uncertainties. Factors that could cause TSYS' actual results to differ materially from these forward-looking statements are set forth in our reports filed with the SEC.

We are very excited about our third quarter. In the first nine months of 2006, we really met and in a lot of ways exceeded our expectations. For the third quarter, EPS increased 13% to $0.28 per share. Total revenues increased 4.7% to $441.8 million; and for the first nine months our earnings per share increased 12% to $0.82. Total revenues increased 8.5% to $1.283 billion.

On another positive note, we also announced that we increased our 2006 and 2007 earnings guidance. We now expect to have earnings growth in the 26% to 28% range versus the 21% to 23% range that we had given you at the first of the year; and a decline in the earnings growth in the range of 9% to 7% versus a decline of 16% to 14% for 2007. So I think you can see that we're making good progress on our plan to deal with the loss of a couple of very large customers. We think it's impressive considering the challenges we faced with those losses and the size of those losses.

We take a lot of pride in telling you that we've had a very productive and successful quarter with the conversion of several new large, core portfolios and the positive moves we've experienced in some of our international markets. I'm proud to report that we have now have moved, as of last weekend, the majority of Capital One’s portfolio to TS2 and have had a very successful conversion of approximately 46 million accounts. There are several more million accounts that will be converted in the first quarter of 2007.

In addition, we've also converted, very recently, Banco Popular out of Puerto Rico; Toronto Dominion, and Crosstown Traders, which is a retail card based out of the Charming Shoppes Group; and also, the branded cards of a major retail client that we've chatted about before. All of that is done.

Obviously on the negative side of the scale, the Bank of America, at least as far as we know, their deconversion is scheduled to begin tomorrow.

Some highlights for the quarter as we have mentioned before, we continue to expand with our global footprint with the acquisition of Card Tech Limited, now known as TSYS Card Tech. It gives us a great reach that we have not previously had. We're now serving 76 countries worldwide. This acquisition enables us to support financial institutions of all sizes and complexity in a lot of countries it would have taken us years to gain entry into.

We also increased our equity interest in China Union Pay, cut data to 44.5%. We really do believe that the Chinese market is on the verge of explosion. It's going to be a great market to be in long term. I think we're starting to see some activity as a result of the 2008 Olympics that will be held in Beijing. We believe that's going to push the Chinese market to be more aggressive, particularly on the merchant side of this business which will help the cardholder side.

TSYS Acquiring Solutions also announced a deal with Discover Financial Services and they plan to integrate the Discover Network Card acceptance into the offering for our merchant acquirers and the ISOs, or the independent sales organizations. Our objective is to offer our clients the ability to include the Discover Network brand across its product suite, along obviously with Visa and MasterCard. Full support for Discover products will be available on our systems including integrated merchant billing, reporting, statements, servicing, settlement processing, and exception and chargeback management.

We also several weeks ago announced our first processing deal with a card issuer in Japan. As you have heard me talk about in years past, we've been in Japan a little over five years now and we have had no success in breaking the code, if you will, for the processing market. We now think we have done that. We will offer a new multi-function co-branded Visa card offered by Toyota Finance and Nikko Cordial Securities.

If I could take just a second and talk to you about this. Toyota will issue the Visa Platinum cards for Nikko Securities. The Nikko is one of Japan's largest security companies. The card will be linked to the customer's brokerage account and it will facilitate the cash access to the domestic ATMs and purchase transactions in Japan. Given the fact that many Nikko Cordial customers hold accounts in more than two currencies, cardholders can settle with a Yen-based account for domestic transactions and the U.S.-dollar based account also for overseas transactions. And when I see overseas, I am talking about outside of Japan.

We're excited about this and we do think that it really is sort of like getting the Good Housekeeping Seal of Approval. We think it's a real break in the Japanese market. Japan is the third-largest card market in the world and we see a lot of opportunities there. We are determined that we will be successful in that market long-term.

We've also just recently announced an agreement with United Cinemas in Japan and will process the Cinema gift card, which is a prepaid card that can be used in the theater, in the ticket offices of the theater and museum shops. So stay tuned for more and more happening Japan.

We think we had a very good quarter from a financial perspective. We had some surprises that Jimmy Lipham is going to talk about. I'm going to turn it over to Jim Lipham, our CFO now, for more details.

Jim Lipham

Thank you, Phil. I would like to direct everyone to the highlight page of the P&L that we sent out with the press release. I'll try to cover some of these large changes that you see, or one-time items that Phil has talked about.

First of all, in the electronic payment processing revenue line, it is our core business, it was up 3.5% for the quarter and 6% for the year. As you know, most of the increase came for both of these from the additional customers that we added last year in the Chase, the Fleet business with BofA, Fifth Third, ABN AMRO and the like. We also added 25 million accounts during the quarter with Toronto Dominion being a large one there; and a large retailer that we're still not disclosing the name of. We had 25 million accounts for the quarter, obviously that offset the loss of the Sears revenue. We also picked up Card Tech and recorded for the full quarter about $6 million in revenue there.

Our internal growth in accounts were solid again, with a growth rate of around 11.56%. Our accounts on file are 400 million at the end of the quarter, we're down 30 million from a year ago and that's the result, obviously, of the deconversion of Sears; around 85 million accounts. We have made up quite a bit of that loss.

International, when we look at the revenue, it increased $18 million for the quarter, $29 million for the year-to-date. The revenues generated in Mexico are continuing to show good growth, as well as Europe. We're very excited about that. I mentioned Card Tech, it is in that international arena for $6 million both for the quarter and year-to-date.

The revenues in Europe mainly were impacted positively by the currency translation adjustment during the quarter of about $1.5 million and on an annual basis we're still being negatively impacted by about $2.5 million.

As Phil mentioned in the release, we announced two relationships in Japan with Toyota Finance and United Cinemas. We continue to see good solid growth from our international clients, and also part of our story for '07 is the growth and revenues we're anticipating there.

Year-to-date, our value-added service revenues grew 15%, 10% from '06 to '05. Still showing double-digit growth there. In terms of our volumes, our quarterly comparisons to the third quarter of '05 are impacted by the anniversary of Chase who converted last year, during the beginning of the third quarter. We saw our authorizations grow close to 9% for the quarter and 19% year-to-date.

Our transaction growth was 6% for the quarter and 18% year-to-date. That equates to total authorizations in the nine-month period of about 6.6 billion and transactions around 7.3 billion for the year.

With the completed conversion that Phil mentioned on capital this month, we are expecting these volumes to return back on a quarter basis to double-digit growth levels again.

We'll drop down to the merchant services line, this of course was vital. They're down when compared to last year. The decrease mainly comes from the closing of the POS terminal business in San Diego we had mentioned previously. If you remember, it's about a $4 million decrease in revenues, but there was no margin in this business to speak of. It was just a decrease in revenue, but it also helped our operating income.

They are also experiencing a little reduction in reselling of the Visa and Amdex products. In the third quarter of '05, we also had about $5 million one-time termination fees associated with Hartland leaving, Citi leaving on the back end of South Trust. So the third quarter of '05 was positively impacted by that $5 million.

TSYS Acquiring Solutions front-end transaction volumes for the third quarter grew 16% and for the year 14.6%. Very good growth, and as Phil mentioned they did announce plans to put the Discover Network card acceptance into their line of services at the acquirers and the ISO organizations.

I might mention also that Vital during the quarter signed five new start-up clients, and that's very positive also. Sequentially the revenues in Vital are stabilized. I think going forward we can expect the revenues from the merchant services to stay in the same dollar range for the near term.

TSYS Acquiring, they continue to focus on making the business as efficient as possible and growing earnings through expanded product offerings and continued expense controls. They've made a lot of progress this quarter with lower telecom rates, lower inventory costs, lower bad debt charges. They redid their contract with TNS and got some lower rates. So the operating margin for the quarter, when you compare it back to last year, was up to 26% this year over 19% operating profit margin last year. So we're very pleased with the direction that TSYS Acquiring is headed and we continue to expect great things out of them.

We’ll drop down to the other services. Revenue for the third quarter increased 3%, $1 million. We've had some increases there in all of our lines of business, TDM as well as ESC. Loyalty, we did experience under this Capital One contract a decrease in revenues for the quarter where we reclassed close to $6 million in pass-through revenues, and that will continue. The revenues from reimbursable items, they're up 25% for the quarter and 18% year-to-date. We've talked about that being the postage and now the reimbursable items that are associated with the attorney and court costs at TDM.

So total revenues for the third quarter increased 5%, as Phil said. Excluding reimbursables, we were relatively flat. The growth in new clients and services helped offset the decrease of the loss of revenues associated with Sears.

As we continue down the page, talking about expenses, our expense growth in employment was up 15%. Very unusual, obviously for the quarter. We expect that to drop back to the 5% range of growth in the fourth quarter. But any way for the quarter, we had the adoption of the 123 R for fair value of stock options; that resulted in about a $5 million increase year-over-year in expense. We also had normal merit increases and the acquisition of Card Tech. We added about $3 million there in employment expenses. But on a sequential basis, employment expenses are up approximately $19 million. Contributing to the sequential growth outside of the merit increases and Card Tech, we also had increases in contract labor, which we use in our call center business.

Then as a result of our revised earnings estimates from the original plan, we subsequently revised our at-risk estimates or performance-based incentives and that includes our 401K, profit sharing, annual bonuses. These increases, we booked nine-twelfths of them during the quarter, it was about $8 million that will be considered a one-time or catch-up expense here in the third quarter.

During the quarter we also made plans for the closure of our Jacksonville office, which required us to book around $1.5 million in severance pay and termination benefits. That's scheduled to close in November and that's roughly 74 people.

So this year we've made a concerted effort to make efficient use of people and redeploy resources. Our headcount at the end of September is approximately 80 people, down from where it was in December of last year. Excluding the employees gained through Card Tech which was around 204 people, we're down approximately 120 people. I mentioned the Jacksonville office, that will also reduce our headcount 70-plus in November.

If we drop down to the equipment category, it's actually down 2% to $76 million. During the year, as you know, we've added leased equipment and software expense to meet the necessary capacity we would have to have for the bringing on of Capital One and continuing to process Bank of America and Chase. We were, this quarter, operating at our highest production capacity in our history.

As you recall, some of our software licenses are on the process and capacity or MIPS arrangements where we amortize based on the units of production method. When these deconversions are scheduled this month, our future MIPS will decline, resulting in a decrease of software amortization for the periods. I'll make mention here that in this fourth quarter you will see a pick-up of our normal occupancy and equipment expense as we prepare to charge off a piece of software that we will no longer be using. It's going to be roughly around a $10 million pick-up in the fourth quarter and expense above what level you see it at right now. But that will be a great benefit for us as we won't have expenses as we go into '07, and that's also a part of our guidance for '07.

Other expenses decreased 23%, $16.2 million. The main driver there for the decrease relate to the decrease in transaction delivery services at TSYS Acquiring, which I mentioned before, and the treatment of court costs as reimbursable items at Total Debt Management, that's about $1.2 million for the quarter.

Sequentially, other expenses decreased $6.8 million. The main drivers still being the delivery services and we had some decreased errors during the quarter from where we were in the second quarter. When you exclude the reimbursables, our operating profit margin for the third quarter of '06 and '05 are both at 21%. For the first nine months, our operating profit margin is 22.6%. We still expect at year end it will be around 25.3% in profit margin after we take on the big termination fee of Bank of America.

Other income increased 1.8 for the third quarter and 6.3 year-to-date. We have increased amounts of cash during this year and obviously with the higher rates we picked up more interest income than we had originally forecasted or thought we would have.

Income taxes, I know it’s a concern, it’s down roughly 6% to 8%. The effective tax rate for the quarter ended at 29.4% compared to 36% last year. For the first 9 months, our effective tax rate was 32.8% compared to 35.3% in '05.

As our business has continued to develop in the European Union region, it was desirable for us to create a structure that mirrors our growth this that region and facilitate future expansion. The statutory structure provides us with marketing and personnel hiring advantages when compared to the branch operation we originally had, as well as provides us with certain U.S. and U.K. tax benefits.

So in the third quarter of '06, we completed the restructuring from a branch office to the new structure and as a result of the U.K. restructuring we had an adjustment to previously established tax reserves that no longer required were required under the new structure and it was a pick-up of about $5.6 million.

We do anticipate our effective tax rate for the year to be approximately 34% and for '07 it will grow back to 35% to 36% range, somewhere in-between there.

So the net income for the quarter is up 13% or $7 million. As Phil mentioned we had earnings per share of $0.28 for the quarter and $0. 82 year-to-date.

With that I'd like to ask you to move forward to the balance sheet just to make a few comments there about major changes. The cash is at $295.5 million and it has increased $18 million since December. We've had the acquisition of Card Tech and the increased investment in CUP Data as well as it shows the increase in our goodwill and our equity investment. Those are the major changes there; as you can see, we have been amortizing software quite rapidly and that's showing a big decrease.

On the cash flow page, if you turn there, we had a significant contribution to cash from operating activities, $231.5 million. So we're continuing to show good growth there. We invested $21 million in property and equipment, mainly in hardware; and $23 million in software, $9 million for purchased and of course $14 million for developed. We don't anticipate any major capital expenditures by the end of the year and expect to stay in the range of $60 million to $70 million for '06.

During the quarter we used around $75 million to acquire TSYS Card Tech and the additional interest in CUP Data. We also used close to $22 million to repurchase 1.1 million shares of stock under our share repurchase plan. That leaves us with about 900,000 shares remaining to be acquired. Of course, we paid dividends of 13.8. So if you look at our free cash flow analysis for the year, it stands around $69 million.

In summary, from the operations with a continued focus on controlling expenses and redeploying headcount, we believe we're on target to make our revised '06 earnings forecast of 26% to 28%. With that, I'd like to give you a little bit of support behind our '07 guidance as to why it increased. We're still in the midst of our budget and process for '07, but we felt it was necessary to raise the guidance for '07 as a result of these cost savings being generated in '06 and that are expected to carry over into '07.

We believe the savings generated during '06 of managing headcount will have a significant impact on '07 as these savings will be experienced for the entire year. Our headcount totals in '07 will be flat with the headcount totals we anticipate to end this year with.

We're also anticipating savings between $30 million to $40 million in occupancy costs in '07 as a result of reducing the processing capacity. The anticipated cost savings, combined with the expected growth in Europe, the expected growth in TSYS Acquiring solutions all contribute to the new guidance for '07.

With that, Phil, I'll turn it back over to you.

Phil Tomlinson

Thank you, Jimmy. Now I'd like to just open it up for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Tony Wible – Citigroup.

Tony Wible – Citigroup

Good morning, guys. A couple of questions. That growth that you're looking for in Europe, the acceleration that you're now seeing, what's driving that outside of just foreign exchange? Because it looks to be a little bit more material.

Secondly I had a question on Bank of America, just given that we're right ahead of the holiday season is there any chance that they're going to delay? It sounds like you're actually pretty confident that it's going to start relatively soon.

Jim Lipham

From the growth in Europe, Tony, what we're seeing there is just good internal growth and they are actively engaged in some new customer agreements. So we're seeing some good prospects there.

Phil Tomlinson

Tony, on the Bank of America side, our belief is that they will start this conversion tomorrow and it's going to take several days to get it done; but we fully expect that to happen, and we would be surprised -- we'd be surprised, but delighted, if they delayed but we don't expect that.

Tony Wible – Citigroup

Okay, great. Just a housekeeping question on Chase. Is it still too early to break out what you would anticipate for the timing of a Chase move to in-house and the revenue and operating income?

Phil Tomlinson

Well, it's too early on the revenue and operating income, but the timing we think is in the July/August/September timeframe, 2007. Sometime in that timeframe is what we're talking about.

Tony Wible – Citigroup

Okay, great. Thank you very much guys.

Phil Tomlinson

Thank you.

Operator

Your next question comes from Greg Smith – Merrill Lynch.

Greg Smith – Merrill Lynch

The software write-off you talked about that's going to happen, can you just explain exactly what that's coming from, and then what's the annualized savings from that specifically you're expecting in '07?

Jim Lipham

Greg, it's a piece of software that we're replacing with another product from IBM that's going to save us roughly $10 million in '07, and that's really the $10 million that's accelerated here into the fourth quarter.

Greg Smith – Merrill Lynch

Then with MasterCard now public, Visa talking about going public, I am just wondering what your guys' reaction is. Has MasterCard been treating you any differently? Are there any new threats or frankly opportunities you anticipate from the change in their ownership structures?

Phil Tomlinson

Well, I don't think they've been treating us any differently. Obviously we've had a very close relationship, particularly with Visa and MasterCard, but you know, we were business partners with VISA, with Vital for ten years I think there are some opportunities for us, and we have discussed a few of those opportunities, but I think these guys are starting to get their sea legs now, and it is no surprise to anybody the news about Visa.

We get a lot of questions about whether they will compete with us or not. I do not expect that to happen, but I think we can do more together in a commercial sense, as time goes forward. There is nothing imminent there and we are not having any serious conversations at this point.

Greg Smith – Merrill Lynch

Okay, and then just one last question. Fidelity National formerly Certegy announced the win with DB&T. It seems outside of their core. Do you see them as a bigger competitive threat?

Jim Lipham

Well certainly they are a competitor. We competed with Certegy for years. As you know, they own them. I mean, I think what they have been trying to do is leverage their larger relationships particularly on the mortgage processing side. I think we are going to have to keep a very close eye on those guys. They are smart folks and we treat them as a very aggressive competitor.

Operator

Your next question comes from Tim Willi – AG Edwards.

Tim Willi – AG Edwards

A couple of quick questions here. First of all, Jim could you just restate the annual occupancy savings you would expect in '07? I could not write fast enough to get that down.

Jim Lipham

It is going to be in the $30 million to $45 million range.

Tim Willi – AG Edwards

Second is, I just wanted to clarify that this about $10 million of software that you expect to write off in 4Q, is that included in your guidance of 26% to 28% growth?

Jim Lipham

Yes it is.

Tim Willi – AG Edwards

A related question to Greg's about customer losses. First Data announced a big contract with Barclay’s. Does that impact anything that you are doing with them right now?

Phil Tomlinson

We don’t think it impacts anything right now and certainly we think, as we understood it that was for their international processing. International, it was really for their partnership programs. We continue to do a lot of work Barclay’s. I think we are optimistic that we will do more work with Barclay’s. There are still a lot of opportunities there.

Tim Willi – AG Edwards

Just a last question, sort of a two-part one, but could you first maybe characterize domestic pipelines? Whether that be just an aggregate or sorted between prepaid, retail and consumer? Also, could you just give us an update on TSYS Acquiring and where it is at in terms of getting ready to be rolled out in the European market?

Jim Lipham

Well, I do not have those pipeline numbers here, I should have gotten it from our board meeting that we had yesterday, but we have some strong letters of intent that we have not announced yet and we will try to work on our pipeline. I thought about that this morning, because we usually talk about pipelines. But on the international side, we have –

Phil Tomlinson

Have we announced this?

Jim Lipham

I was about to get myself in trouble. We think we're very close to announcing a merchant processing contract in Europe which will be our very first one, so we're excited about that. But I would say within the next six to 12 months you should look for some success, particularly in the European arena on the merchant side.

Tim Willi – AG Edwards

Just back to the domestic pipelines, I understand that you don't have any info in front of you, but is there a way, Phil that you might be able to characterize if it's more traditional Visa/MasterCard driven pipelines or is it more in the prepaid and the retail card space?

Phil Tomlinson

I'm looking at it here. Today our domestic pipeline is about 14 million accounts.

Jim Lipham

That's after the Capital One that we just finished.

Tim Willi – AG Edwards

That's before the strong letters of intent that you mentioned?

Phil Tomlinson

Yes.

Operator

Your next question comes from Paul Bartolai - Credit Suisse.

Paul Bartolai - Credit Suisse

First question is on the TSYS Acquiring business. Could you give us some sense given the transaction growth and where revenue growth was adjusted for the one-time factors, just what you are seeing on the pricing front and if that's changing at all?

Phil Tomlinson

I think the pricing, frankly, has remained fairly stable. We have, over the last 18 months we've renegotiated all of the large contracts and feel good about where we are there. Obviously that is a price-driven market from the merchant side of the house and I think that will always be under pressure; but from the processing side we believe it's stable.

Paul Bartolai - Credit Suisse

It looks like the contract acquisition costs have been increasing steadily the past few quarters. Are you seeing anything different in the competitive environment or the terms that are needed to sign new business?

Phil Tomlinson

I was trying to think on the contract acquisition costs, I guess the prepaid stuff with Capital One, Banco Popular was a new customer we brought on and then the Cap One. So it was related to new conversions.

Paul Bartolai - Credit Suisse

And you're not seeing anything different in terms of what you need to do to sign new business or the terms?

Phil Tomlinson

You're talking about like upfront payments and that sort of thing? No. Now we certainly wouldn't be surprised if that were to happen, but we have not seen any increase there.

Operator

Your next question comes from Greg Moyer – Soleil Securities.

Greg Moyer – Soleil Securities

One question, more of an overview question on the single Euro payment area initiative. Visa just discussed that they're going to leave their European entity alone because they feel political issues in terms of an American company competing for new processing contracts there and taking jobs from European companies could have posed a significant risk to their ability to grow in the markets. I'm wondering if you're approaching things any differently or if you view those risks as serious or not?

Phil Tomlinson

That has not been a big issue to date. We obviously process all of our European business out of the U.K. Obviously there's a lot of nationalism in Europe and people are very sensitive about jobs but at this point, we just haven't run into that as big issue. I mean it's an issue; it's an issue in the States. It's an issue everywhere you go. But I don't think that we've run into and feel like it's a more serious issue in Europe than it is anywhere else.

Operator

Your next question comes from Roger Smith – Fox-Pitt Kelton.

Roger Smith – Fox-Pitt Kelton

I just have a couple of questions really on the expenses here. Did you say that the compensation expense in the third quarter was $5 million higher because of the FAS 123 R? And is that really not going to be recurring going forward and that really brings you down to that 135 or 134 range that you're implying for the fourth quarter?

Jim Lipham

The 123 R was compared to last year, the $5 million was. It will go forward.

Roger Smith – Fox-Pitt Kelton

So then it looks like were going to have a sequential decline by about $5 million from the third quarter to the fourth quarter. Is that primarily the temporary workers that you talked about?

Jim Lipham

Well it's that and we booked nine-twelfths of those benefits during the third quarter. Jacksonville was a write-off in the third quarter.

Roger Smith – Fox-Pitt Kelton

Then on the occupancy and expense, you said it was going to be down $30 million to $45 million. Is that primarily going to be just the change in amortization or is there really some kind of real cost that's going down there as well?

Jim Lipham

The change in the amortization will be about half of it and then you'll have another change due to this software we're writing off here in the fourth quarter.

Roger Smith – Fox-Pitt Kelton

Lastly on the other expense line, it looked like it was down nicely in the quarter and you talked about that being due to Vital. Is that a run rate number that we can look at going forward?

Jim Lipham

Right now we're looking at their profit margins to mirror TSYS now and in the 24% to 25% range as we go forward.

Operator

Your next question comes from Tony Davis - Ryan Beck.

Tony Davis - Ryan Beck

A couple things, versus the current run rate at TSYS Acquiring, any comment or call you can give us on the impact of the Discover agreement here? I presume that should have a salutatory impact on their margins.

Phil Tomlinson

I don't think we can give you any numbers on it Tony, just common sense tells us it's going to increase transactions and that's got to be good for the Acquiring company and TSYS.

Tony Davis - Ryan Beck

Another thing you did last year, I believe Phil, was you had a write off of DoubleByte software investment. I wonder if you can comment on the impact of that treatment in terms of margins for the business in Japan versus the domestic business.

Phil Tomlinson

I'm not quite sure how to answer that, but obviously we were wrote the $10 million off on DoubleByte, we had just decided that we probably got ahead of ourselves trying to write that software and it was inadequate for what we ultimately found ourselves doing. We have figured out a better, more unique way to do it in Japan that is not nearly as expensive. Frankly, we think we can do a lot of the Asian processing, if you will out, of Columbus, Georgia if we can get past the cultural issues. We've been able to do that to this point.

We are very excited about what's happened in Japan with Toyota and Nikko. I mean we were the only people in Japan that can do this dual currency product. They're very excited about it. As a result our discussions with other issuers have picked up. Again it's a very unique market. Nobody wants to be first and now we have someone who has gone first and it takes the pressure off of the decision an awful lot.

So I think that we found the Japanese to be very difficult and tough negotiators but at the end of the day they understand that we need a fair margin, and we believe we've gotten that. Obviously those margins would increase dramatically if we were processing about half the Japanese market.

Tony Davis - Ryan Beck

All right. Finally, Phil, I sense incrementally much more optimism about Europe post-Card Tech. Can you give us any color in terms of market response to this, let's say more easily adoptable product set than TS2?

Phil Tomlinson

Well, I think it's been a very positive response in the marketplace. The Card Tech customers, while somewhat surprised, are very optimistic about what has happened. The people who work at Card Tech, we are very, very impressed with them as we told you last time.

Any large international bank that's doing business in Europe, they are also trying to go into these emerging and developing countries. It certainly allows us to go into those countries with them very quickly. But it's not just in Europe. I mean we've got customers in Africa now and in the Middle East, in the former Soviet satellites. It’s really all over the world and I think it's going to help us culturally. I think it's going to help us become a global company more easily. It's been good for us as a company in helping us understand that there's a lot of this world that we don't really understand. So we've had a very good response out of that. Frankly it's been better than what we had expected.

By the way, it's a great product on top of that. As we told you last time it's not only a card-processing product; it's a merchant processing product, it's a debit card processing product. So it gives us a lot of opportunities that we didn't have prior to that acquisition.

Operator

Sir, there appear to be no further questions in the queue. Do you have any closing comments you'd like to finish with?

Phil Tomlinson

Well, yes I would like to just say thank you for showing your interest this morning. It means an awful lot to us. This is a business that is changing every day, I think we’re continuing to make good progress, not only in our core business but with our affiliates. Our loyalty company is booming right now. Our product, our GUI front-end profit product is working incredibly well; it’s with several of our very largest customers. So a lot of things are starting to come together.

We’re bracing for a big holiday season, we’re ready to go and we’ll continue to sell into all these markets and are very optimistic about our future. So, we look forward to chatting with you in January and talking about 2006 and 2007 beyond. Thank you so much for being with us this morning.

Operator

Thank you, ladies and gentlemen, this does complete this conference call.

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Source: TSYS Q3 2006 Earnings Call Transcript
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