Total System Services' CEO Discusses Q4 2013 Results - Earnings Call Transcript

Jan.28.14 | About: Total System (TSS)

Total System Services, Inc. (NYSE:TSS)

Q4 2013 Earnings Conference Call

Jan 28, 2014 05:00 PM ET

Executives

Shawn Roberts - Director of Investor Relations

Philip W. Tomlinson - Chairman of the Board and Chief Executive Officer

M. Troy Woods - President and Chief Operating Officer

James B. Lipham - Senior Executive Vice President and Chief Financial Officer

Analysts

Adam Carron - Barclays Capital

Brett Huff - Stephens Inc.

Timothy W. Willi - Wells Fargo

David J. Koning – Robert W. Baird & Co.

David Togut - Evercore Partners Inc.

Bryan Keane - Deutsche Bank

James E. Friedman - Susquehanna Financial Group

Ashwin Shirvaikar - Citigroup

Operator

Good afternoon. At this time I would like to welcome everyone to the TSYS earnings conference call. All participants are in a listen-only mode until the question-and-answer session.

I would now like to turn the conference over to your host, Mr. Shawn Roberts, Senior Director of Investor Relations.

Shawn Roberts

Thank you, Jasmine, and welcome, everyone. On the call today, our Chairman and CEO, Phil Tomlinson will begin his opening remarks; then turn it over to Troy Woods, our COO, who is going to provide business highlights on our four segments; then turn it over to our CFO, Jim Lipham, who will review our consolidated financials. After that we'll open it up for Q&A.

I'd like to now call your attention to the fact that we'll be making some forward-looking statements about the future operating results of TSYS. These forward-looking statements involve risks and uncertainties. Factors that could cause TSYS' actual results to differ materially from the forward-looking statements are set forth in TSYS' reports filed with the SEC.

At this time I'd like to introduce TSYS CEO, Phil Tomlinson.

Philip W. Tomlinson

Thanks Shawn and good evening everybody. It’s been a while since my vocal cord problems allowed me to participate in the call. I am certainly happy to be back in the saddle and have my voice with me today. We seem to find ourselves today in the middle of a freak ice storm that is beginning to present some real challenges, and as you can imagine this type of weather is pretty hard to us.

I am proud of how we closed out 2013 with a strong fourth quarter. Our team is executing at a high level and they are meeting or exceeding our clients’ expectations. We are thrilled about the fact that our total shareholder return was up 57.2% as compared to the S&P 500 return of 32%. And I think that most would agree that we spend our capital in a shareholder friendly manner by reducing debt and in December we repurchased 3.1 million shares of TSYS’.

Certainly the acquisition of NetSpend is already proving to be a really smart decision in our opinion. NetSpend came with an excellent business model and an outstanding team of experienced professionals and is a really worthy fourth reporting segment for TSYS. It presents some real growth opportunities for us.

2014 has started just as you would expect, it’s been really busy. We have many positives that we are looking forward to in ’14 and feel good about our goals of delivering strong shareholder value, exceeding client expectations and being a great place to work for our team.

Before I turn it over to Troy and Jim I want to take just a minute and talk about the Target situation, because I know that questions on your mind. And as you know Target is a wonderful long term TSYS’ client and we have great respect and empathy for them during what must be a very, very difficult time. But I do want to make it very clear that TSYS has no involvement in the Target issue or any of the other breaches that seem to be announced almost daily.

Now I will turn it over to Troy Woods to review our four lines of business and then as Shawn said we will come back to Jim and when Jim finishes we will open it up for questions. Troy?

M. Troy Woods

Thank you, Phil and good evening. Last quarter I took the opportunity to provide updates on several corporate-wide initiatives currently underway that will help position our company for next generation capabilities.

All of these initiatives are on schedule and to a large degree are the direct result of our reinvigorated confidence in ours and our customers’ businesses and have led to significant investments in people via hiring and market salary adjustments; facilities via upgrades and expansion around the globe; and technology via our Surround project, which is our next generation technology framework and new consumer servicing platform, the FNBO back-end conversion which takes place this weekend, the NetSpend integration, and the building of innovation labs and products like the Authorization Control product which we announced two weeks ago.

We believe these investments are essential, and we have invested significant capital and resources in each of these segments to ensure our success. As a matter of reference in 2014, these investments represent a P&L impact exceeding $13 million over 2013. We're also convinced that these investments and commitments will differentiate TSYS from its peers and will return significant dividends to us and our clients over the long-term.

I now would like to begin our segment reviews with an overview of North America on Slide 6 and 7. The North America segment turned in another strong quarterly performance with revenue growth of 4.5% to $223.3 million. This revenue increase was driven by increased transactions, authorizations, and growth in accounts on file. Also during the quarter, we saw improved sales in both our fraud and customer care services as well as increases in our card production services.

I might also add that for the first time in our history, total revenue for the segment exceeded $1 billion for the year. This revenue growth and excellent expense management during the quarter resulted in an adjusted operating income of $85.2 million, representing an increase of 8.1% over the same quarter last year. These metrics resulted in an adjusted operating margin of 38.2%, which is 130 basis points over the fourth quarter of 2012 and the third straight quarter of margin expansion.

On a full-year basis, the North America segment produced a 36.6% adjusted operating margin. Based on our current projections and the conversion schedules that we have in place at this time, we expect 2014 adjusted operating margin for the North America segment to be in the 34% to 36% range.

With respect to conversions we now have approximately 96 million accounts in the conversion pipeline with approximately 90 million of these accounts scheduled to convert in the third quarter. Once we complete these conversions, we estimate we will process for approximately 40% of United States credit card market and 80% of the Canadian credit card market.

Also during the quarter, we implemented a credit card launch for Rogers Communications, the largest wireless carrier in Canada in support of the Rogers Bank credit card program. We also renewed our relationships with Banco Popular and Commerce Bank of Kansas City to include the addition of Commerce Bank Kansas City’s pin debit card business.

All-in-all, it was another very good quarter for the North America segment and we're all very excited about many opportunities and conversions ahead of us for 2014.

I now would like to move to slides 8 and 9 for a review of the international segment. Revenues for the quarter were $108.3 million, which represented a 5.8% increase over the same quarter last year. As we had experienced in previous quarters, we encountered a negative impact on currency of $4 million in the fourth quarter which was a modest improvement over the third quarter. Excluding the impact of currency for the quarter, revenues were up 9.6%. For the full year, the international segment experienced $20.6 million currency headwinds.

Adjusted operating income for the quarter was $19.5 million, resulting in an 18% adjusted operating margin. Fourth quarter margin was higher than usual as a result of booking one-time, non-recurring revenue and associated cost for a major client project with respect to project fees and advisory services for a conversion that has shifted out about one year from the original date. Normalizing this unusual item would have generated 15.7% adjusted operating margin for the quarter.

As we have communicated throughout the year, our margin improvement program continues to produce excellent results. We ended 2013 with 11.8% adjusted operating margin compared to 7.4% for 2012. Gaylon and his leadership team have done an excellent job on executing their plan. Certain areas of our international business saw double digit growth that included the processing and related services in Europe, our licensing business, and our GP Net partnership in Japan.

During the quarter, we also went live with a new debit launch in Ireland. We now support over a 90% market share of both credit and debit card processing in Ireland, and this provides us with a solid foundation to actively pursue opportunities in the growing debit markets across Europe. From a growth perspective, we’re currently working on three conversions and five new launches that should deliver approximately 2 million new accounts to the segment over the next 15 to 18 months.

In summary, we continue to see pockets of an improving global economy, additional TS2 and licensing opportunities, opportunities to expand our product reach like debit, and continued margin expansion as we strive to reach our goal of an adjusted operating margin of 18% by year-end 2015.

Our review of the merchant segment begins on slide 10. As I have said on several occasions before, the merchant segment is a tale of two cities. Our merchant segment presently operates in two very different businesses. Direct merchant acquiring and indirect acquiring or third-party processing for other merchant acquirers. While the direct and indirect businesses are related, they are also fundamentally distinct businesses with very different industry and competitive dynamics. Direct acquiring is a large $12.5 billion U.S. addressable market which is growing, and third-party processing is a relatively small $500 million U.S. addressable market that is shrinking.

In 2010 we began our journey to transform our merchant business from being exclusively a mono line third-party acquirer processor to being primarily a direct merchant acquirer. One of the primary driving forces behind the strategy shift was that it had become clear to us that the third-party acquirer processing industry was declining with no real long term prospects for growth. We came to the conclusion that one of the best ways to maximize the value of our third-party processing business would be to leverage it in support of an acquisition driven expansion into the much larger and growing direct acquiring business. We have made solid consistent progress in executing on this strategic transformation.

In 2013 we achieved a significant milestone. Direct revenues now constitute the majority of our merchant business for the first time. However our journey is absolutely not complete. We remain focused on executing the business transformation we started in 2010. Our goal is to have at least 80% of the merchant segment’s revenues come from direct acquiring in the near term and to deliver industry leading organic growth rates and our strategy for execution has not changed, to execute this transformation through a combination of organic growth initiatives and additional strategic acquisitions.

Bottom line, our direct business is growing. We have successfully completed four accretive acquisitions since 2010. The collection of these businesses that we have assembled are organically growing although not near quite as fast as we’d like. On a combined pro forma basis this collection of direct businesses organically grew revenues 5.2% for 2013 versus 2012 and we are projecting to organically grow in the mid to high single digits for 2014 over 2013. We remain intentionally focused on continuing to improve our growth results.

Our indirect business reflects a different story and continues to decline which should not come as a surprise to anyone. The addressable market the third-party processing continues to shrink primarily as a result of industry consolidation as many acquirers have outsourced or acquired companies with in-house capabilities. Because the end rate business still comprises about 40% of our merchant segment’s revenues the decline is driving down the growth for the segment as a whole, and will continue to do so until it comprises a smaller portion of our segment’s revenue.

The same 40% indirect composition of our merchant segment also creates confusion when comparing our “merchant results” with other publicly traded direct merchant acquirers, none of which have over 5% of their business in third-party indirect processing. We would suggest a more equitable comparison going forward would be our direct business not the entire merchant segment.

Moving to slide 11, consistent with this trend for the fourth quarter our direct revenues were up 21.8% and our indirect revenues were down 12.2% resulting in a 4.3% increase in revenue for the quarter. Even with mid to high single-digit growth forecasted for our direct business, due to the loss of several large indirect customers in 2013 we do not expect to show positive quarter-over-quarter growth in the merchant segment until the fourth quarter of 2014. And the entire segment’s revenue will be down 1% to 2% for the year.

As a result of this overall revenue decline we expect our merchant adjusted operating margins to decline to the 31% to 33% range for 2014 with the first two quarters being our most difficult comp quarters. TSYS remains committed to growing the merchant business, both organically as-well-as through continued acquisitions in the direct acquirer space. Our stated goal has been to become a top ten global acquirer and we have not backed away from our pursuit of that goal.

And finally our NetSpend review begins on slide 12. NetSpend demonstrated an exceptional performance in the fourth quarter and for 2013. Revenue for the quarter was $104.1 million, 16.1% higher than fourth quarter last year and revenue for the year was $430 million, an increase of 22%. This revenue growth is directly attributable to an increase in direct deposit cards and the contributions of all four of our channels.

On slide 13, you can see that our direct deposit cards were up 22.1% ending the year with slightly more than 1.3 million active direct deposit cardholders. NetSpend maintains strong margins and operating leverage for the quarter with adjusted operating income of $28.5 million and an adjusted operating margin of 27.3%.

On a like-for-like basis when taking into consideration the effect of corporate administration expenses being moved out of the segment, the fourth quarter 2012 adjusted margin would have been 23.3% versus the 19.9% shown on slide 12. This represents a 400 basis-points improvement in operating margin since last year.

NetSpend completed its first very successful year offering its prepaid card as an option for saving tax refunds to the millions of consumers to use into its TurboTax software. We exited the year with an established base of active debit cardholders and were off to a very strong start for 2014 tax season.

As a reminder we experienced the impact of seasonality in this part of our business. But you will see marketing investments we made in the first quarter drive results throughout the remainder of the year.

During the quarter we also added 4,000 new retail locations giving us 14,000 new additions for the year. The total number of retail locations now supporting the NetSpend product are more than 64,000. Also during the quarter we launched the Brink’s money payroll card program and signed over 80 new paid card clients. This brings our total number of employers who pay their employees with the NetSpend issued card to more than 1,800 businesses.

Today we support and partner with a host of marketing clients that include ACE Cash Express, 7-Eleven, Intuit, PayPal, BET, CVS, [World Range], Regions Bank, Dollar General and Family Dollar to name just a few. Today almost half of all NetSpend cards are now on direct deposit and the majority of spend on these cards also come from these customers, a very critical source of predictable recurring revenue.

Slide 13 reflects our gross dollar volume for the quarter is $4 billion representing a 21.5% increase over the same quarter last year. For the year gross dollar volume exceeded $17 billion representing a year-over-year increase of 30%. On the innovation front we recently overhauled our mobile architecture, are now home board brand and get-to market with new partner programs faster than ever and accelerate the development and delivery of new features.

On the integration and synergy front all initiatives are on schedule and we expect to meet our previous commitments. We have a very impressive pipeline of new partnerships leveraging the North America and merchant segments demonstrating the cross-selling across the enterprise segments does indeed work. This then continues to be a high growth results driven business for us and we are expecting great things from them in 2014 and beyond.

Now I would like to turn it over to Jim Lipham for a more in-depth financial review for the fourth quarter and guidance for 2014. Jim?

James B. Lipham

Thank you, Troy. Starting on slide 15 we are extremely pleased with our reported results for 2013. In terms of our guidance we achieved the high end of adjusted cash earnings per share with $1.72. Phil mentioned earlier about shareholder value growth, we purchased 3.1 million shares of stock for $97.6 million as well as investing $1.4 billion in acquisitions and returning $57 million in dividend to our shareholders during the year.

This all contributed greatly obviously to the shareholder returns being up 57.2%. A transformational acquisition of NetSpend added $104.1 million in revenue for the quarter and $207.9 million year-to-date and helped push total revenues over the $2 billion mark for the first time in our history.

Revenues before reimbursable items increased 29.7% for the quarter and 16.9% for the year. For the quarter our revenue increase was a result of acquisitions of new business and increased volumes. In the fourth quarter we did have a non-recurring revenue of $5.5 million and expense of $2.2 million in our international segment.

For the year revenues from new clients and internal growth helped offset lost business and currency translation. We continue to experience negative headwinds from currencies of $3.9 million during the quarter and $20.3 million year-to-date.

The growth in year-to-date revenues was mainly the result of the acquisitions. We have now anniversaried the 2012 acquisitions of CPAY and ProPay. Our operating income for the quarter increased 22.9% and operating margin was 20.3%, excluding reimbursable items. During the quarter we had $2.2 million of M&A expense associated with the acquisition in NetSpend.

We do anticipate these expenses to continue in 2014. Also included in operating income was $24.8 million of acquisition and tangible amortization. Excluding the acquisition in tangible amortization and the M&A expenses our operating margin was 25.3%.

Our adjusted operating margin in the fourth quarter of last year was 23.2%. Adjusted EBITDA increased 32.2% for the quarter and 16% for the year and as I said before we are very pleased with our adjusted cash earnings per share at $1.72 which was a high end of our range.

On the next slide a recap of about 16.9% growth in revenues before reimburses, and total growth or the value increase from our same-store class represent 5.8% growth in revenues while new clients added 3.5%. We had six new clients in North America and one new client in international making up this growth. The acquisitions of ProPay, NetSpend and CPAY added 16.7% of growth there and the currency translation we were negatively impacted 1.3% or $20.3 million.

The net positive increase of 24.7 million from these four items was offset by the 7.8% in last year’s price concessions. Price concessions totaled $31.4 million for the year. North America contributed to 67.9% of this, international was 10.2% of the price concessions and merchants accounted for 21.9%.

As we go forward into ’14 we’re expecting the price concessions to drop down to around $24 million. Lost business at $85 million; North America they contributed 29.3% of that, international was at 22.2% and merchant at 48.5% but of note there over half of that 48% growth comes from the normal merchant attrition business that we have that goes on the direct acquirer space. Overall we think lost business next year which includes the Chase license scenario is going to drop down to about $64.8 million from this current level of $85 million.

On the next slide is just a -- shows acquisition of NetSpend has transformed the organization and diversified our revenue stream whereas we now have North America representing 40.7% of our revenues versus 50% in 2012 and now with the new segment of NetSpend. The other segments all three are contributing close to 20%.

The next slide has bridged our quarterly segment margins for our top two through our consolidated margin and you can see the adjusted segment margins for the quarter, North America is 38.2, international at 18, merchant is 32.2 and NetSpend at 27.3.

On a total segment basis the adjusted operating margin 31.1%. All-in our consolidated operating margin or revenues before reimbursables is 20.3% for the quarter.

The next slide just shows the same reconciliation of our year-to-date margin and I am not going to go over those numbers, you can read those later but all in all operating margin, revenues before reimbursable was 20.4%.

Our next slide is our normal slide on the accounts on file consolidated. This slide only accounts for the accounts on file for North America and international. It does not include the NetSpend accounts. As you can see we saw strong year-over-year growth 14.6% in what we consider as traditional accounts on file and with the big conversion there being the HSBC accounts Capital One but good growth there and total accounts on file at 12.9%.

This next slide shows our cash balance and rollforward from last quarter as we had a big decrease of $119 million for the fourth quarter. Our operating activities continue to generate strong cash of $145 million and we spent $75 million of this cash in CapEx, the majority of which was in investment in systems support software that we extended the contract for a term of 36 months.

We continue to deploy our cash by paying down debt of $84 million as well as we purchased 3.1 million shares of stock for $97.6 million. We also had a normal quarterly dividend of $19 million. The uptick of cash inflow in the other category at $12 million mainly came from proceeds from the stock option exercises, leaving us with $278 million in cash at year-end.

On the next slide is our cash flow, the trailing 12 months. As you can see stronger cash flow from all business, EBITDA for 2013 at 634 million. We generated $452 million in cash from operating activities. For the year our CapEx was $193.8 million, an increase of 64.1% over 2012. The increase of $75.7 million was driven by $31.7 million increase in software licenses and $21 million in contract acquisition accounts, mainly Bank of America conversion.

Our CapEx was also impacted by the increase in our software which was mainly for the Surround project and the Fiji project on the acquiring business. In the fourth quarter we were able to take advantage of favorable pricing and acquire these software licenses similar to what we did last year in the fourth quarter. Our contract acquisition costs are higher due to conversion activity we are doing primarily for Bank of America and this work will continue until the conversion in 2014.

Our average monthly free cash flow for 2013 was $21.6 million. Excluding the impact of the software acquisition in December of 22.7 in bond interest expense of approximately $18 million. Our average monthly free cash flow was approximately $25 million.

We expect our CapEx for 2014 to be in the range of $200 million to $210 million. And we believe our average free monthly cash flow will be in the $35 million to $37 million range. This schedule, next schedule is our update on our EBITDA ratio. As you can see at year-end we were at $1.5 billion which also includes a new vendor financing arrangement of $20 million in the fourth quarter. With our scheduled debt payments in 2014 of $34.3 million in home notes and $21.6 million in capital lease and I expect with growth in EBITDA we moved much closer to our desired level of debt to EBITDA of two times.

As a result we will look to deploy our capital for strategic acquisitions as-well-as share repurchases as we go forward. On the share repurchase slide during the fourth quarter, you can see we did buy the 1.3 million shares and at this time we are excited about expanding our share repurchase program to 28 million shares and now have available 12 million shares for buyback from now through April of 2015.

As we have done in the past we will opportunistically look to repurchase shares especially at times when we don't have material acquisitions in the works. As you can see in the last four years we have bought 16 million shares for $338 million over those past four years.

The last slide is our 2014 guidance and before we get into the actual metrics I thought I’d spend a minute on several key assumptions that went into this guidance. One item I want to emphasize and pay special attention to and understand is the tax line item. In 2013 we benefited from the recognition of discreet tax items of $8.8 million or for an earnings per share impact of $0.05 a share mainly coming from section 199 in tax deductions. We do not see these discreet items recurring in 2014.

As we look at the tax rate for 2014, we would expect it to be in the range of 34% to 35%, roughly $0.03 per share impact on the higher rate. In addition to the discreet items I just mentioned we are also seeing a slight uptick in our tax rate due to NetSpend acquisition.

On a GAAP basis we would also see an additional six months of NetSpend related acquisition, amortization bringing our total consolidated for the year of $97 million in 2014. And an additional 4.5 months of bond related interest expense which is approximately $8.8 million per quarter.

We continue to see strong earnings growth from our joint venture in China, CUP Data and expect them to grow in the 12% to 15% range for 2014. You can see our total 2014 guidance on total revenues is expected to increase 17% to 19% and revenues before reimbursables are expected to increase 19% to 21%.

Adjusted EBITDA is expected at 17% to 20%. As-well-as our debt-to-cash earnings per share of 11% to 13% growth. Our currencies that we have used in our guidance as the Pound is at the 1.60, the Euro is at 1.35 and the Yen is 1.05. With that I will open it up for questions.

Shawn Roberts

Jasmine, we will take questions here.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Darrin Peller from Barclays.

Adam Carron - Barclays Capital

Hey guys how are you, this is actually Adam for Darrin.

Philip W. Tomlinson

Hey Adam, how are you?

Adam Carron - Barclays Capital

Good, so just the first question just around the delta on the guidance between adjusted EBITDA and adjusted cash EPS, you kind of mentioned the tax stuff there which was pretty helpful, but just in terms of looking at it from an apples-to-apples standpoint, should we be thinking about it on like a 167 type number versus the midpoint of 192 this year?

James B. Lipham

Yeah, part of the midpoint.

Adam Carron - Barclays Capital

Okay. I am just wondering just because of the growth in EBITDA, even if we use that the 192 over 167 or so, it's still kind of below the adjusted EBITDA guidance. I mean is there anything, anything else that we should be thinking about there as a share count having an impact?

James B. Lipham

I didn’t mention on the guidance slide, but the shares that we think we're going to have on next year is 188.4 million, and yeah, the shares have had an impact in the analyst numbers that are out there for 2013.

Adam Carron - Barclays Capital

Okay. And then secondly, I guess in terms of North America, we continue to see somewhat of a gap here between your kind of core accounts on file growth and the transaction growth even looking at same-store clients, and I know that there is obviously some price concessions in there and some loss business, but in terms of that spread given that lower amount of pricing pressures going forward, where should we kind of expect that to kind of fall over the course of 2014, I would expect it to narrow quite a bit, right?

James B. Lipham

It should narrow quite a bit, right.

Adam Carron - Barclays Capital

Okay. And is there any way you could walk through kind of the difference between that 5% revenue growth and the 16% core account growth?

James B. Lipham

It's kind of hard to do it. When you see the 16% account growth, we have roughly 35% to 40% of our transaction growth or 30% of these accounts roughly have bundled pricing on transactions, so it never will equate, it will always be a growth higher than our revenue growth.

Adam Carron - Barclays Capital

Right, okay. And then I guess last one from me. Just in terms of potential capital deployment going forward, you still continue to talk about opportunities in the acquiring space. Just in terms of where you guys feel comfortable from a leverage standpoint, is there going to be more of a focus on de-levering going forward or are these -- at these levels would you feel comfortable bringing out leverage ratio back up for what could be an attractive acquisition?

James B. Lipham

Yeah I thought I mentioned on the slide that going forward we have some scheduled payments that we have to make on debt next year, but outside of that we are comfortable with where we are and we’ll go forward looking at strategic acquisitions and share repurchases.

Adam Carron - Barclays Capital

Right, thanks guys.

James B. Lipham

Thank you.

Operator

Your next question comes from the line of Brett Huff from Stephens Corp.

Philip W. Tomlinson

Hey Brett, how are you?

Brett Huff - Stephens Inc.

Hey guys, how are you, can you hear me okay?

Philip W. Tomlinson

Yeah. We hear you great.

Brett Huff - Stephens Inc.

Great. My only little question is Jim you had mentioned on the free cash flow, I think you said 35 to 37 monthly for '14, was that right?

James B. Lipham

That's correct.

Brett Huff - Stephens Inc.

Okay. And then as we think forward, and think probably about lower CapEx spending, the Surround project and some of these important projects maybe tapering a little bit, maybe getting a little more leverage on the margins, what kind of growth should we expect as we look out on a normalized basis on your free-cash flow per year per month? I mean it seems like it will go up, but can you characterize how you think about that beyond '14?

James B. Lipham

Well, we have to go past '14, but I would say we’ve got a pretty high CapEx for '14 again, and it should be tapering off quite a bit going forward to get back to some normal levels.

Brett Huff - Stephens Inc.

Is that -- midpoint in '14 of 205, I mean are we talking $50 million less or just can you just size it a little bit for us?

James B. Lipham

I don't know how to really size it I would just say we are up probably what $75 million in CapEx in 2013, and it looks like we are going to hold that level in ’14. So we’ll be coming back somewhere close to that by the time we get to ’15.

Brett Huff - Stephens Inc.

Okay and then -- can you just rearticulate the assumptions around the annual expectations for ’14 for the purchase amortization, and I think you also articulated the stock-based comp. I just didn't get those details. Can you reiterate those for me?

Philip W. Tomlinson

I think I said we’ll have $97 million worth of amortization of intangibles consolidated, and then $8.8 million was the related interest expense per quarter, so we’ll have about four and half months lower interest next year.

Brett Huff - Stephens Inc.

Okay, that’s fine. Thank you.

Philip W. Tomlinson

Thank you, Brett.

Operator

Your next question comes from the line of Tim Willi from Wells Fargo.

Timothy W. Willi - Wells Fargo

Yes, thanks. Good afternoon. Just couple of quick questions. First on merchants, curious about your thoughts around investments, and I guess joint-ventures or partnerships with some of the newer technologies and “disrupters” that have sprung up in the last couple of years, and obviously we’ve seen Hartland make some moves and others, just quite curious how active you have been there that maybe have not been publicized or what are your thoughts on it about that with the merchant business and whether or not that’s all part of sort of the strategy to get that ramp back up again and I have a quick follow-up?

M. Troy Woods

Hi, Tim, Troy. Let me take a shot at that one. You know I think even in my opening remarks I made a comment that we’re clearly committed to becoming the top 10 global acquirer. I think to get there we’re going to be committed to investing and partnering to probably meet that goal and from our perspective either domestic and/or international we’ll look at anything that can help us grow and expand and if these technologies and product offerings of these partners can get us there then I clearly think we would have an interest to work with them.

Timothy W. Willi - Wells Fargo

Okay, great. I appreciate it. And just my follow up maybe you hit on it earlier; I apologize but around the NetSpend acquisition and again just sort of the -- you mentioned cross-selling across the platform, North American customers and merchants. Has the pipeline of discussions or the signed commitments for card issuance within financial institutions, how has that progressed since you have acquired that? Does that continue to escalate in terms of interest levels or actual pen on paper with contracts for banks to issue prepaid cards and just your thoughts around that?

M. Troy Woods

Well we continue to see get enquiry from the banks and FIs about interest in the NetSpend prepaid cards. As a matter of fact working with North America segment we probably have a good handful of cases, customers that have expressed very keen interest in the NetSpend product. So yeah we’re still getting interest. The cross selling has worked again primarily in the North America segment. Just last quarter also the NetSpend area Tim we signed a 700 branch banking network out on the West Coast that helps to expand our footprint. So yeah I think we still are getting a lot of good interest from the FIs.

Timothy W. Willi - Wells Fargo

Great, that’s it. That’s all I had. I will let somebody else jump on here. I appreciate it. Thanks Troy.

M. Troy Woods

Thanks, Tim.

Operator

Our next question comes from the line of Dave Koning from Baird.

David J. Koning – Robert W. Baird & Co.

Hey guys. I guess, just a couple of things the first one the free cash flow if we just assume that $35 million is the low-end and we just multiply it by 12 it’s $420 million of free cash flow, that gets to like $2.25 of free cash flow per share. Should it really be that much better than earnings this year?

James B. Lipham

Yeah that’s what we are anticipating for ’14.

David J. Koning – Robert W. Baird & Co.

Okay, and is there is some working capital benefit that you are getting maybe something negative that happened in ’13 that somehow reverses in ’14?

James B. Lipham

No. I can’t think of.

David J. Koning – Robert W. Baird & Co.

Okay, just the reason I ask is total CapEx was I think just under 200 million in 2013 pretty much the same as what you are guiding to ’14 but I think free cash flow is in the $250 million ballpark in ’13 and I know NetSpend you had a full year, it adds up but it just seems like a big variance from '13.

James B. Lipham

You got that and the M&A expenses also.

David J. Koning – Robert W. Baird & Co.

Yeah, that's a good point. All right and I guess just my other question what do you assume for the timing of Bank of America coming on within the guidance is it kind of the beginning of Q3 be under Q3 just to get a flavor because that is a big swing factor.

M. Troy Woods

David, [you are not] a Bank of American consumer.

David J. Koning – Robert W. Baird & Co.

Yeah.

M. Troy Woods

No it’s still on schedule for the third quarter of 2014 and it's on schedule, it's scheduled to come in that quarter and when we look at our guidance for the North American segment for 2014, with those conversions as well as the other conversions that we talk about the 90 plus million in the pipeline we're looking at 8% to 10% of growth rate for that segment in '14.

David J. Koning – Robert W. Baird & Co.

All right, great. Thank you.

M. Troy Woods

Thank you, David.

Operator

Your next question comes from the line of David Togut from Evercore.

David Togut - Evercore Partners Inc.

Thank you and good evening. You mentioned strength of the new business pipeline. Can you elaborate on what some of the largest opportunities might be in the North America segment and in NetSpend?

M. Troy Woods

Well I think for the North America segment we have said on several occasions I think there are no secrets who are in the conversion pipeline, Bank of America being the largest in the third quarter that I just mentioned. We still have Toronto -- and Bank of Montreal as we talked about on several occasions coming in also in 2014. So they make up the bulk of the 96 plus million accounts in the conversion pipeline.

Second case you mentioned NetSpend?

David Togut - Evercore Partners Inc.

Yes, I am sorry just to clarify my question. I was really asking about may be the new prospect pipeline i.e. contracts you haven't signed. I thought you were highlighting the strength of the prospect pipeline, perhaps I misunderstood.

M. Troy Woods

I don't recall say anything. I did say that on NetSpend we had a very robust pipeline of prospects. If NetSpend signs up obviously we can go in and lay those out. But it is a very impressive list of some of these trial launches being going on for quite some time and hopefully we can get some across the go live real soon, but it is a very impressive list.

David Togut - Evercore Partners Inc.

And then just as a follow-up could you quantify unit pricing trends in the merchant segment, both on the direct and indirect side in the fourth quarter?

M. Troy Woods

Yes I can. If you look at it and break it down into direct and indirect for the most part the unit pricing for direct is holding up really good for bundle, actually it's up about a penny. The unbundled is found about a penny. So all-in the unit pricing is holding up quite well. What really hurt is something I mentioned last quarter is the shift that we are seeing from bundle to unbundle on the direct side so it's more of a mix shift unit pricing shift.

But the good news there is from what I mentioned last quarter we only saw about 200 basis points drop in the shift bundle to unbundled on volume. So some of the mitigation controls that I mentioned last quarter that Mark Pyke and his team working on are beginning to may be payout some good dividend. I think it's too early to declare a victory after one or two quarters but it is a very positive trend.

David Togut - Evercore Partners Inc.

Just finally any client traction in Brazil beyond your large contract with Carrefour.

M. Troy Woods

No we do not -- I think we really should think about it, lot of activity as I mentioned before most of its been on the retail private label side but no, I think to sit here and bribe about today.

David Togut - Evercore Partners Inc.

Thank you very much.

M. Troy Woods

Thank you.

Operator

Your next question comes from the line of Bryan Keane from Deutsche Bank.

Bryan Keane - Deutsche Bank

Hey guys, how are you doing?

M. Troy Woods

Good, you?

Bryan Keane - Deutsche Bank

Good, I just want to follow up on that question Troy just on the prospect pipeline post BofA, is there any large fish out there either on the domestic or international side that you guys are kind of -- for 2015 and beyond?

M. Troy Woods

Brian I would had this conversation before when you said out rolling anyway it's not process thesis we are eyeballing. So you know who they are, both in-house players, players in process with our competitors really I just really could go beyond that.

Really, factors really can go beyond that point, some of that dialogue is a lot further than others. So we just have to see how they all play out.

Bryan Keane - Deutsche Bank

Yeah. We can -- we will wait and see on that. I just wanted to ask on the prepaid business I might have missed this. But what's the annual fiscal year '14 revenue expectations for the prepaid NetSpend business? And then what kind of margin profile should we expect?

M. Troy Woods

We are looking at the high change on revenue growth and we are looking at adjusted operating margins of high 20% to low 30%.

Bryan Keane - Deutsche Bank

Okay. So even a maybe little bit of acceleration in the growth rate. I guess you saw what 16% revenue growth this past quarter, at 27% adjusted operating margin. So in that ball park if not a little bit better?

M. Troy Woods

Yes, sir.

Bryan Keane - Deutsche Bank

I guess the worry I add is maybe the Intuit business comes off and because that was a big client, does that slow down the business or is there other things that slow that pipeline?

M. Troy Woods

It comes off at a standpoint of our anniversary?

Bryan Keane - Deutsche Bank

Yeah. Anniversary, right.

M. Troy Woods

Well. Yeah. It’s certainly going to anniversary. But as I mentioned earlier the taxation is expected to be another good one. There is some other businesses that I have mentioned with the addition of the PayCard additions, the extra 4,000 that we have added on retail locations and when all of that will kick in but you are right, Intuit does anniversary this year.

Bryan Keane - Deutsche Bank

Okay. That's all I had. Thanks guys.

M. Troy Woods

Thank you, Bryan.

Operator

Your next question comes from the line of James Friedman from Susquehanna.

M. Troy Woods

Hey Jamie.

James E. Friedman - Susquehanna Financial Group

Hey. Thanks guys for taking my questions. I had just a couple to ask about. So Troy thanks for your eloquent description of the movement in the merchant segment. I was wondering when you look at kind of the tale of two cities to use your language. Would there be any consideration to divesting a lesser setting any in the indirect business so that you could really focus management’s attention and assets on the direct, that's my first question.

The second question Jimmy, you sounded more confident about the trends in pricing on North America in your assumptions for '14. I was wondering if you could elaborate as to what's behind that? So those are my two. Thank you.

M. Troy Woods

I will take the first one Jamie, [inaudible] didn't you. We clearly are having some headwinds, some real headwinds on the indirect side about to go back to - . But at the end of the day we really do not have any interest in divesting the indirect business. It- produces extremely good margins, the cash flow is very significant in that business. As I mentioned also this coming weekend we will finish that back end conversion of it.

When we look at it, it gives us a very powerful platform with a lot of scale to leverage and to also leverage the investments that we have made. And look when you look at the acquisitions that we made over the past few years, most of them are indirect customers. And so we also look at it as a good source of low risk M&A target.

So all-in-all we don't have any interest to disband and divesting the indirect business. We got to get it turned around, we got to get back some of these things for anniversaries and till that happens you are going to see as I said a continued drag on that segment. - I think you have the second. Jim I think you have the second question.

James B. Lipham

I think your question was on the pricing in North America and being optimistic about the increased pricing and what not. But I think the biggest fear for us is the renewal cycles going on. We did have an increase going on in our value-added services, the crowd services like that, that are be going on and it’s pretty hard margin type business or revenue sources. So anyway we have renewals are slowing down as we go forward but they are still awesome. We should have a better year on pricing.

James E. Friedman - Susquehanna Financial Group

Thank you very much.

Operator

Your next question comes from the line of Ashwin Shirvaikar from Citigroup.

M. Troy Woods

Hi, Ashwin.

Ashwin Shirvaikar - Citigroup

Hi. Good evening gentlemen. Phil, good to hear your voice again.

Philip W. Tomlinson

Good to be talking again.

Ashwin Shirvaikar - Citigroup

I guess one question I had was with regards to North American segment margins being down in '14 or '13 is that mostly a second half event because of micro conversion as those comps come on?

James B. Lipham

Ashwin last quarter I mentioned that we're probably looking at the 34%, 35% margins for North America. We're up that slightly so yes down on the fourth quarter but actually no I would say as a result bringing on the back end when we look at our numbers for 2014 we're probably looking at the margins of that segment probably ramping up in the third and fourth quarter I would like going down. So third and fourth quarter margins would probably be higher than the first and second.

Ashwin Shirvaikar - Citigroup

Okay, understood. And just to clarify the system conversion that you had, that will happen this weekend I guess was supposed to have a financial benefit associated with it is that already incorporated in your merchant segment margin guidance that provided?

James B. Lipham

Oh yes, just on the guidance that we provided it is.

Ashwin Shirvaikar - Citigroup

Okay. Third question as I guess again about guidance, to your guys include buyback in there and if so to what extent I might have missed that if you commented?

James B. Lipham

This is not included in our guidance.

Ashwin Shirvaikar - Citigroup

Okay. So if I -- from what might prove as the midpoint, call it $0.03 for tax and let’s call it $0.03 to $0.05 for buyback is that reasonable to kind of get to?

James B. Lipham

It's reasonable but we wouldn't commit to it today, Ashwin.

Ashwin Shirvaikar - Citigroup

Okay, understood. My last question if I was looking at that release for the waterfall chart that you flagged Jim, if I was looking at that for 2014 you provided some very good color on the negative shrinking potential on percentage points. And some of that’s sort of eaten away it seems to me like the some of the positives with a model number what kind of came out based on your guidance?

James B. Lipham

Excuse us. It's snowing pretty hard here. We don't know if we've got a bad connection with you really broke up there if you could try that again.

Ashwin Shirvaikar - Citigroup

Sure I am also calling in from overseas so that might be the main reason, the waterfall chart that you provide Jim, if I was to look at that perceptively for 2014 what might that look like you already provided some pretty good color on the shrinkage going down but let's call it about three percentage points.

If the other pieces remain the same then your overall growth rate should have gone up by three percentage points but it's not doing that so I am looking for where the offset is?

James B. Lipham

You talk about the revenue change, what drives that?

Ashwin Shirvaikar - Citigroup

Yes.

James B. Lipham

And I did mention that last business will go down as far as a percentage and so will price concessions.

Ashwin Shirvaikar - Citigroup

Right.

James B. Lipham

Also acquisitions will go down as a percentage as we go forward.

Ashwin Shirvaikar - Citigroup

Okay, got it. So the organic piece remains about what it is this year.

James B. Lipham

Yeah it has been pretty close in that range.

Ashwin Shirvaikar - Citigroup

Okay, got it. Thank you guys.

James B. Lipham

Thank you.

Operator

And your final question comes from the line of Kevin McVeigh from Macquarie.

Philip W. Tomlinson

Hello? We may have lost him.

Operator

Mr. McVeigh your line is open. If you have your line muted can you unmute it?

Philip W. Tomlinson

Jazz I think you need to move along.

Operator

Okay. There are no further audio questions at this time.

Philip W. Tomlinson

Well good. Thank you so much for your questions. I hope you will agree that our game plan is solid and our team is ready to execute on the challenges and we are looking forward to 2014. I think that 2013 will really be the year that we remember as a transitional year with NetSpend acquisition, which was a really big deal for us. And we are thrilled with what we’ve got there.

I am starting to believe that 2014 will be remembered as the year the industry really ramps up and gets serious about security. As you know EMB would not certainly -- would not have created the breaches that we are seeing. It certainly would help and we are starting to see some activity in that area. It’s ramping up a little harder than it has in the past.

I also think it’s worth mentioning when we get to this time in 2015 this time next year in 2015 we will be processing close to 700 million accounts and that’s where we are mapping and I don’t think anybody’s ever been there before. So we are excited about that. Remember Shawn Roberts in Investor Relations, he’s here to serve your needs of quality transparent answers. So don’t hesitate to call him. We appreciate your time, your interest and hope to see you soon and Jasmine that will conclude our call. Thank you very much.

Operator

Thank you. This concludes today’s conference call. You may now disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Total System Services, Inc. (TSS): Q4 EPS of $0.48 beats by $0.01. Revenue of $600.8M (+25.4% Y/Y) misses by $15M.