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Total System Services, Int. (NYSE:TSS)

Q1 2010 Earnings Call

April 20, 2010 5:00 pm ET

Executives

Shawn Roberts – Investor Relations

Philip Tomlinson – Chairman, Chief Executive Officer

James Lipham – Chief Financial Officer

Analysts

Bryan Keene – Credit Suisse

Jason Kupferburg – UBS

Timothy Willi – Wells Fargo

Adam Frisch – Morgan Stanley

Darrin Peller – Barclays Capital

[Paul Bordelai – PV Investment Research]

Brett Huff – Stephens Inc.

Greg Smith – Duncan Williams

Robert Dodd – Morgan Keegan

John Williams – Goldman Sachs

Larry Berlin – First Analysts Corp.

Glenn Greene – Oppenheimer

Operator

Welcome to the first quarter 2010 earnings conference call. (Operator Instructions) It is now my pleasure to turn the floor over to your host, Shawn Roberts.

Shawn Roberts

Welcome everyone. Before we get started with the formal presentation, I’d like to 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 CEO, Phil Tomlinson.

Phillip Tomlinson

Thanks Shawn and welcome everybody to our first quarter earnings call. I’m going to keep opening comments relatively brief this afternoon so that we can have plenty of time for questions.

Certainly, the most significant event for the quarter was the announcement of our joint venture with First National Bank of Omaha, Nebraska and the creation of First National Merchant Solutions, which is a full service merchant acquiring company. As you know, we do own 51% of it. This new venture really represents the first of what we hope to be many, many steps we’ll take in the continued diversification of TSYS.

As we said in our earnings release, FNMS, we are now referring to it is expected to be accretive to TSYS in 2010 after deal costs and we have modified our 2010 guidance accordingly.

FNMS is led by its President, Diana [Hosko] and she is a very talented leader and a veteran of the merchant acquiring space and she certainly has a very experiences and equally qualified team of real professionals that help her with this business.

Another change joining Diana and I in our merchant services segment of our business is the new President of TSYS Acquiring, which as you know is located in Tempe, Arizona. Mark Pyke is the new President out there, and you may have met Mark or talked to him. He’s been in this business a long time. He’s certainly an experienced executive in the merchant acquiring industry.

Diana’s resume includes experience at Chase Payment Check and NCR and more Marks' includes most recently experience at both NBC and Bank of America Merchant Services. These two executives today oversee a team reviewing the synergies and efficiencies we hope to derive from these two businesses over the next year or so, and Mark’s team is going to focus on the processing side while Diana’s team will focus on growth.

I think it’s important to note that FNMS has a strong and healthy direct sales team and they target large national merchants as well as mid market and small merchants. They also go after ISO’s, independent sales organizations and value added resellers and certainly agent bank referrals. We believe there are a lot of great opportunities to cross sell products and to increase innovation on the product development side now that FNMS puts us much closer to the merchant.

I think one of the other real significant developments in the first quarter was a couple of things. First was the 4.3% increase in same client transaction volume on the credit card issuer processing side of our business for the first quarter of ’10 versus the first quarter of ’09. That is a pretty big move for us given that we’ve seen decreases on this metric for the fourth and third quarters of 2009.

I guess I have to say I’m encouraged that the bottom of this great recession as we call it around here has been reached and we’ve started to move forward, however small it might be. Also at Total Acquiring Solutions, we saw point of sale transactions up 8% for the first quarter of 2010, versus the first quarter of 2009. Again, a positive sign and hopefully it’s a signal that consumer confidence is starting to pick up a bit.

We’ve made and continue to make significant investments in key international markets including most recently Brazil. Today as you probably will remember, we are in the process of the three-phase conversion of the [Carfor] business in Brazil. While this conversion has certainly had its challenges, we expect to have this conversion accomplished and completed by the fourth quarter, and I’m happy to report that last week we successfully converted the first phase.

I think, we’ve talked about it before but we view international opportunities and selected markets as one of the real key paths to the future success of our company. And against that backdrop, I wanted to note that bringing up new processing accounts in new international markets is certainly complete, expenses in time and resource consuming, and as we talked about on many occasions, it’s certainly more difficult than adding a new client to an existing, proven, time tested processing environment like North American or even the U.K.

We’ve stated before, but as we build up our international footprint which we think we have an opportunity to be a dominant player on the international side, it’s going to take some time to grow the scale and markets to make them as profitable as we are used to and historically have enjoyed.

During that build up we have, and as you’ll hear from Jim Lipham, will likely continue to experience some margin compression internationally, but as we’ve said again many times, it will improve with scale.

With that, I’m going to turn it over to Jim Lipham, our CFO and he’s through, we’ll go to questions.

James Lipham

Before I get started on Slide 7, I’d like to add a couple of comments to what Phil said. The positive trends we’re seeing in the consumer side of the credit card transactions in the port of sale transactions in TAS are very encouraging as this is the first time they’ve shown some sparks in increasing.

In addition to that, as you know the first quarter we had a positive influence on currency translation. Last year we were hit something like $22 million. This year we’re up about $5.9 million. Then when you look year over year, we’re still struggling through the de-converted business that we’ve talked about before with Thomas Shops and Nordstrom.

But we do have a large de-conversion fee that hit us in the first quarter that helps offset some of that, so when you look at net of termination, we’re about $12 million down. Also, we had price concessions that are still chasing us and we had about $7.5 million in this first quarter that hit us and we’ll continue to see that through the remainder of the year.

If you look at Slide 7, I’d like to talk a little bit about the two changes we had in our release. We made a change on the income statement in the format to present our operating expenses in the two sections, cost of services and selling, general and administrative expense. This change was done in order to present this and align it more closely with SEC regulations and also with others in the industry.

We did provide schedules for this change and for the next for the 2009 restated numbers, so hopefully you got all those.

Along with the incomes statement change, on the operating segments, we created a new one where we added the corporate and administrative functions. This is the executive finance, accounting, legal, human resources, investor relations, mergers and acquisitions, all these types of expenses in all the segments were pulled out and put into one segment.

The reason this was done was so that the operating managers of these segments can now better control and be in charge of their operating results. It will make a change in the margins going forward, but we’ll talk about that as we go through here.

Slide 8, is the consolidated numbers. I’m not going to go through a whole lot here, but we are at 1.6% in revenues. I mentioned the de-conversion fee. Also, we had the loss of revenues, so it kind of offset each other when you look at revenues before reimbursables were down about 3%.

That’s also showing that in the total revenue number we had a big increase, about $13 million of Visa access fees that were increased last year that hit this quarter, but wasn’t out of the first quarter last year. As you go through and look at the revenues before reimbursable items, you’ve got price concessions, you’ve got de-converted [inaudible] we’ve got volume growth, and we mentioned on the transaction side, and then the termination fee and new business helped offset it all. So overall, we did pretty good in this first quarter.

Look at operating income, we’re up 1.2%. Our margin for the quarter is at 23% compared to the same rate roughly that we had last year, 23%. When you look at the operating income, we did implement a work force reduction during this first quarter where we expect to eliminate 400 positions, and we anticipate half of them are going to come through attrition through the year, but we did get it in place in the first quarter. We did have some severance that hit us in the first quarter.

Go down to our net income attributable to common shareholders, you’ll see we’re up 10.3%. Remember last year we had the discontinued ops in the first quarter but overall we did pretty good.

Our expenses, the SG&A and the cost of sales were pretty flat to down just a little bit, so we had pretty good expense in the first quarter to help us do these numbers and then you can see at the bottom of the schedule the transaction volumes that Bill mentioned awhile ago, from a total transaction deal and same client.

The next page, Slide 9 is the chart we normally do showing our internal growth, how it gets offset and new plants and currency all with price concessions and lost business. I mentioned the price concessions are going to be there for the next three quarters to about the same amount of money $7 million.

Next page is the summary on the portfolio. I’ll mention two things there. First, on the retail section, you can see from last year at this time that’s our biggest drop in this de-conversion obviously related to Charmin Shops and then you also had a big purge that went on with Target.

You look at store value, and it’s the biggest growth that we’ve had since last year, and that’s a results of Green Dot and our Wal Mart card business and it’s grown pretty good since prior year. But overall, we’re down year over year in accounts about $17 million. We did have about $24 million from internal growth. That was an increase and new plants added about $29 million. Overall down due to the de-conversion and purges.

On the next Slide 11, is North America segment. You see revenues at $254 million down 5.4% when you compare them to last year and the comments out there pretty much sum it up with the lost business from de-conversions and the price concessions that we had.

New class pretty flat. Internal growth is up 2%. We did talk about that. Go down and look at the margin. Operating margin excluding reimbursable items at 32.4%. Last year the margin was around 24%, so by moving out those other G&A expenses, our overhead type expenses, we’ve increased that margin now and it should be running in that neighborhood of that percent for the rest of the year.

When you look year over year on the quarter, we actually are up when you restate last year to this year about 46 basis points on that so overall that’s good performance, the de-conversions that we faced.

The next slide on international we had revenues of $79.4 million and they’re up 7.6% when you compare them year over year. This increase came from new business of roughly about 9%. Currency was up at $9 million, up about 8% and internal growth grew about 3%. We did have the Sky card de-conversion which offset it and some price concessions there in Europe on the renegotiated contract which knocked it down about 12% so pretty much revenue was flat for the quarter on a constant currency basis.

Margin is up to 14.8% from where we were because of the new class of the expenses. Last year at this time, we had a margin around 9% on the international front. Made some improvement year over year at 129 basis points. You can see the transaction growth is positive in our international business.

You flip over the Merchants at $89.2 million, pretty flat internal growth. New clients are pretty much offsetting all the lost business we had. Our margin is up at 29.5% which is pretty close to where it was last year and we didn’t have that many overhead expenses allocated in the merchant segment.

We had some lost business. As you remember, we lost NPC last year. Part of the revenue growth you see here is the Visa fees increasing and then again, we had the point of sale transactions up around 8% which was very strong performance.

On the next slide is a little information on First National Merchant Solutions and we did close a transaction on that April 1. The big impacts of this acquisition will show up in the second quarter. We’re expecting to add $95 million to $97 million in revenues which we adjusted guidance for.

Net of acquisition costs we’re expecting to add $2 million to $3 million in net income which is $0.01 a share. The acquisitions cost was actually $4 million but two-thirds of that will come in the second quarter and so you can do the math on that, and if we probably picked up $0.025 to $0.03 a share had we not had the acquisition costs hit and that’s a onetime item.

Operating margin when you exclude the amortization of acquisition intangibles which happens to be about $11.2 million for the remaining nine months of this year. The margin would range between 26% to 29%. We own 51% and there will be a 49% non-controlling interest that will be backed out when we get the net income.

Just to mention a few things about FNMS and that is, the average size ticket for ’09 was $71.00 a ticket and it’s looks like it’s going to be flat to $72.00 to $73.00 a ticket as we go forward into 2010.

Of note I guess on the makeup of their business, about 71% of their revenues come from the small business segment and the acquiring business. Overall, we’re excited about having them. They’ll be accretive as Phil said in 2010 and beyond.

If you flip over to the next slide, it’s the corporate and administration segment which is $19.3 million total expenses for the quarter and as I mentioned in that slide we’ve only got $1.2 million by acquisition adjustments showing up in the first quarter with the remainder coming next quarter, that’s the $2.7 million on top of that.

The next slide has to do with our cash flow, a trailing 12 months dealing with EBITDA cash flow from operations, free cash flow and net income, all in the same ranges of what we’ve had and been showing all along so we’re still generating good cash. We finished the quarter as you can see on the balance sheet a little over $500 million and in pretty good shape there.

The revised guidance that you see, we did put the $95 million to $97 million in revenues in our range. Net income $2 million to $3 million which was net of acquisition cost of $4 million. That $4 million is obviously a pre tax number, but EPS is $0.01 like I said. It could have been $0.025 to $0.03 probably if we hadn’t had the onetime adjustments. With that said, the margins on this business of 26% to 29% and that’s pretty good.

I don’t have anything to add. I’ll close with just currency impact, we’re not sure where that’s going to end up this year. Right now, we did a little worse than the first quarter than we thought we were going to do, but the merchant business is continuing to grow. The acquisition of FNMS is really going to help.

Mark Pike and Diana are really going to form an admirable team in that merchant area. So we’ll continue to look at acquisitions and what to do with our cash as we go forward, and with that, Phil, I’ll turn it back over to you.

Philip Tomlinson

We’re ready to open it up for questions now.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Bryan Keene – Credit Suisse.

Bryan Keene – Credit Suisse

I might have missed it but how big is the non-recurring de-conversion fee in revenue in North America?

James Lipham

$23 million. We had last year around $7 million in ’09, so the net is about $16 million.

Bryan Keene – Credit Suisse

$7 million in the 1Q number?

James Lipham

Right, of ’09. $23 million in 1Q 2010.

Bryan Keene – Credit Suisse

Is that all that $23 million drop to the bottom line or is there a cost associated to it?

James Lipham

Well there’s still some cost on the books for the de-conversion of those customers we didn’t get rid of so obviously that’s replaced the revenue stream that was there, but the cost was still there on the mainframe side so it did have costs associated. I don’t have that broke out.

Bryan Keene – Credit Suisse

But I assume the margin was a lot higher because it was a onetime termination fee than the normal business.

James Lipham

That’s correct.

Bryan Keene – Credit Suisse

And that’s part of the reason EPS was $0.26 but you’re expecting if you back into the guidance you expect that to step down for the next several quarters.

James Lipham

That’s correct.

Bryan Keene – Credit Suisse

Can you talk about, you mentioned there was some purging at Target. Can you talk about what was happening there and is that anything we should know about going forward at Target?

James Lipham

They’ve been doing it for over a year now, just purging some accounts off. I think they’re moving from a Visa card to an internal card and that’s private label card, but they’re mainly inactive Visa cards and this type thing. Very little revenue associated with them.

Philip Tomlinson

It’s the same story that we’ve had now for probably 18 months. As we’ve said before, we have automatic purge programs that are set by the clients and then periodically just because they want to cut some expenses, they’ll come in and get more aggressive with it and these are as Jim said, inactive accounts that have very, very little revenue associated with them and probably have been inactive for at least a year or so.

Bryan Keene – Credit Suisse

Any contract signings? I know we had quite a few LOI’s. Any signings in the quarter or any new de-conversions we should know about going forward?

Philip Tomlinson

I don’t know of any new de-conversions. We did do several press releases. I don’t have that list in front of me here, but I know we had Caterpillar, BNS in Germany, Degussa in Germany. There were several others. I apologize, I just don’t have it with me.

I think I confused the whole industry when I start talking about letter of intent a quarter ago so we’re going to get out of the letter of intent business because at least talking about it, because it’s so confusing about what a letter of intent really is, and as we get these contracts signed and we have a good number coming that we’re working on, and hopefully several others will be signed in the second quarter and certainly more in the third quarter but we have a lot of potential candidates out there to do business with.

Bryan Keene – Credit Suisse

Okay, maybe just the total amount of new accounts signed in the quarter with Caterpillar and the others combined. How many accounts does that account for?

Philip Tomlinson

The new clients were $29 million from a year ago. The pipeline I’m being told is about 11 million to 12 million accounts right now.

Bryan Keene – Credit Suisse

That’s already signed and ready to be implemented. In the process of being implemented.

Phillip Tomlinson

That’s right.

Operator

You're next question comes from Jason Kupferburg – UBS.

Jason Kupferburg – UBS

I wanted to ask a question on the JV looking out to 2011. I know you said you have a team who’s looking hard at the synergies presumably both on the top line and the cost side, but any initial thoughts to how accretive to earnings the JV could be in 2011 even some kind of rough range? I know you’re picking up $0.01 over the last three quarters in 2010 but any framework we can think of for 2011 along those lines?

James Lipham

From 2011 depending on when synergies as I’ve said before, it could be in the $0.04 to $0.05 range earnings per share. I’d hate to have to say what it would be right now with synergies because we don’t have and we don’t give any guidance really on ’11 at this time, but there again, we’ll wait till we see what we’ve got.

There’s some duplicate business in there with terminal business, obviously running the back end accounting systems, settlement systems, so I’d hate to speculate exactly how large that could be at this point.

Jason Kupferburg – UBS

The new share buyback program, 10 million shares. Is that effective – I think your old program was expiring. Did it expire with the seven million shares still open on it so essentially you’re kind of up three million now going forward over the next two years? Is that the right way to think about it?

James Lipham

That’s correct.

Jason Kupferburg – UBS

On the pre-paid side, restored values you guys call it, I wanted to follow up on your comments there. I think you were at about 13% of accounts on file now and it’s probably less than8% a year ago. You talked about Green Dot, Wal Mart. How big could store value get for you over time as a percent of your total portfolio just given a lot of the ins and outs here that are happening in the other parts of your business?

Philip Tomlinson

We think it has an opportunity to be a significant piece of our business. As a matter of fact, we had the pre-paid crowd down here today talking with several of our directors explaining this business. There’s a lot of opportunities out there. There’s a lot of players out there. There will be some rollup in this industry.

We have some very strong software and some very good people running this operation and we probably have been in the store value business about as long as anybody now and I think what we’ve done is build a very clean operation and we feel good about it and we feel like we can add to it.

So while we don’t have a number, a year or so ago I told you that I thought international business could be a big part of our revenue stream. This could be significant and it certainly will never be as large as international because there’s not as many opportunities to build revenue. But pre-paid, we like our position in pre-paid.

Jason Kupferburg – UBS

2010 free cash flow outlook with the JV now onboard, any update on that figure?

James Lipham

We’re still thinking in the range of $300 million to $310 million.

Operator

You're next question comes from Timothy Willi – Wells Fargo.

Timothy Willi – Wells Fargo

Did you talk about the size of any of the severance costs in the quarter and where those were amongst the various segments?

James Lipham

We did not break that down by the segments. I don’t have it by segments, I have consolidated. It was $1.5 million.

Timothy Willi – Wells Fargo

Do you envision any additional or would that probably be it for the year as far as you think about staffing?

James Lipham

That would be close to it.

Timothy Willi – Wells Fargo

In terms of the marketplace, can you talk about where you think your customers are in terms of their business plans? We’re all hearing that solicitation are maybe picking up a little bit. Volumes seem to be coming back and credit, we’ve moved through Card Act and got some resolution around other issues. Just sort of what’s the mood and the conversation look like now versus even the last time we had a call.

Philip Tomlinson

Well at least people will talk about it now. We had an internal meeting Monday and it was pretty encouraging. We sort of talk about a lot of new business opportunities and while we’re not blowing doors off, we’re finally starting to see people wanting to talk again to some degree. I wouldn’t want to mislead you and think that they’re lined up at the front door, but we are talking to people about new products.

We are talking to some potentially new customers in the U.S. and if you recall last time we talked I think I said that the U.S. market was virtually dead. So that’s picking up a bit. Mexico is still, we have good prospects in Mexico and Canada and Europe.

We’ve got a lot going on. We just need to close some and get some contracts signed and we’re slowly making progress on that. I will tell you that people are still fairly cautious, but I’m encourage to see folks like Capital One on television at night. It’s been awhile since I’ve seen anybody other than I guess Chase started about 90 days ago doing some advertising on television.

That’s encouraging. You just saw Bank of America actually make some money on the card business. It has been a rough 18 months or so, but I do get the feeling, and this is more of a gut feeling than anything else, that we’re starting to kind of come up from the bottom a little bit.

Timothy Willi – Wells Fargo

Just to go back to the topic of capital a little bit, obviously First National does use a bit of your excess cash. I know there’s some things out there you probably can’t comment a whole lot specifically on, but are you still very much in the hunt for an opportunity to put a decent amount of capital to work in terms of potential targets out there that have been put out in the press? Just your thoughts on the pipeline on the M&A front.

Philip Tomlinson

One or two deals have been so public it scares me but we’re absolutely in the market and willing to spend some money and we’ve been kind of public about that. We aren’t going to get stupid on it, but we want to be aggressive but at the same time want to be smart.

We think FNMS thing gives us a base. It also gives us some smart and talented people that we needed in this organization on the merchant acquiring side. We know plenty about the merchant processing side, but this Omaha transaction certainly helps our knowledge base and we’ve got some great people there. We’re excited about it.

We’re still in the hunt for a few things and only time will tell what we’ll be successful with.

Operator

You're next question comes from Adam Frisch – Morgan Stanley.

Adam Frisch – Morgan Stanley

We’re considering calendar 2010 to be somewhat of a transition year. We have some de-conversion fees that Brian brought up and some things are getting better. Some things are anniversaring and all that kind of stuff. It seems to me that the key to the stock near term becomes 2011 so in general terms obviously, again as specific as you want, we’d rather have more detail than not, but are you thinking about next year as a significant rebound in growth or margins or both?

Philip Tomlinson

I think it will be – I don’t know how you define significant, but I think it will be a strong improvement. We’re on the end of April here and – I’m not being coy, but as you know, so much depends on this consumer market in our business and we are seeing some improvement and feeling a little bit better about it. But one quarter doesn’t make a trend yet.

Adam Frisch – Morgan Stanley

All the banks or at least the major ones, J.P. Morgan, BofA, US Bancorp, they’ve all reported much more encouraging trends. Is there anything in the devil in the details data which suggests that it is more sustainable like average ticket sizes in restaurants or things like that, electronic stores getting a little bit – maybe a consumer, maybe it is a little bit more sustainable than a one quarter thing?

Philip Tomlinson

My acid test is I go buy something. I went and bought a flat screen television Sunday and had to wait in line for somebody to wait on me, and I thought that was a pretty good indicator. But I don’t have any of those metrics with me today. Ride by your local restaurant tonight about 8:00 o’clock and see what you see.

Again, we’re liking what we see. We’re actually talking to some people about new business in the U.S. We’ve had very good luck. I don’t think it’s like. It’s been hard work internationally. We still have some good announcements coming so it’s – I think at the end of the second quarter we’ll be able to give you a much clearer picture.

Adam Frisch – Morgan Stanley

Anything new on the competitive front with regard to other products catching up to T2 or exorbitant pricing breaks being given by some of your peers or the competitive.

Philip Tomlinson

We’ve got a couple of peers who historically for years have competed strictly on price at least in our opinion, but I think that we’re continuing to win. We continue to win when we come face to face and we like the odds when we have that opportunity.

We have lost some business over the years here and there because of just what I think is insane pricing, but maybe it’s cash flow, I don’t know. But the truth is, I think we’re gaining a very strong reputation here nationally. I think that as bad as this recession has been, it’s probably changed some people’s attitudes in some of these larger banks that have had this I’ve got to do it in-house mentality for the last 25 to 30 years. Only time is going to tell there.

Adam Frisch – Morgan Stanley

The company now has about 7,100 employees if I’m adding it up correctly, somewhere around there. Are there other areas within the personnel category where further cost savings are possible if you need them? I know you spoke to Tim’s question that nothing else was planned for the year, but could that number go down or will operating leverage come from other parts of the business.

Philip Tomlinson

We’re not planning any more layoffs if that’s what you’re asking. We do think that we have a very strict hiring freeze on. We were placing people in call centers and in production jobs, but much beyond that, we’re letting attrition take over. We do think that we’ll probably lose overall another 200 people before the year is over which will get us down to where we want to.

We don’t like being in the layoff business. It’s painful and it’s certainly not much fun. But the truth is, we think a big part of what you’re seeing in some of these results is driven by expense control. But we are investing. It’s not like we quit investing. We’re investing a lot of dollars into the TSYS of the future and its going to pay off for us long term.

You heard me talk the last five years about this clustering thing and as we go into these different countries and once we get established and set up and get these operations running, we tend to do very well, and we’re hoping that – we’re certainly hopeful that will be the case in Brazil and some of these other areas that we’re headed into.

You’ve seen that in Germany already when we converted Deutsche Bank, and since then we’ve announce DNS, we’ve announced Degussa, and I think we’ll see that in these other countries as we get established into them.

By the way, we have 7,433 people as of March 31.

Operator

You're next question comes from Darrin Peller – Barclays Capital.

Darrin Peller – Barclays Capital

Other than the well publicized deal that we know about, are there other meaningful deal opportunities in the U.S. market or just other international deals that without being specific that you think you have on the near term radar?

Philip Tomlinson

We’d like to think so. We don’t really comment on deals like that, but obviously, you read the papers. You read the trades. And there’s other deals out there that have not been in the news lately that we’ve been working hard on several things over the past year or so. I couldn’t comment on what they are.

Darrin Peller – Barclays Capital

Outside of one of the major ones that’s been often discussed, there are other opportunities.

Philip Tomlinson

Yes.

Darrin Peller – Barclays Capital

Also can you comment a bit more on where you really see growth coming from in sort of the new merchant acquiring business you’re heading into. Not necessarily the merchant processing side by the actual acquiring side, and may just give us some color on the opportunity for referrals to your new JV versus maybe having historically had to push out referrals to some of your customers.

Philip Tomlinson

Historically we have referred actually hundreds and hundreds and maybe thousands of banks over the years over the years to other people where we weren’t in the business. We’ve actually referred some that have turned out to be pretty good size that we just didn’t feel like we could take on at that point because they were just so small.

And really, it didn’t make a lot of sense. The truth is, if somebody wants to get in these businesses, chances are they’re going to call us and a couple of other people, at least us and a couple of other folks that are in the business.

So we think there’s lots of opportunities for referrals. We think there’s more opportunities for rollups in this business. We think there are other processing companies that could be had over some period of time.

Honestly the best example I could think of is this merchant acquiring business over at what was our sister company Sinovis, and they just sold that merchant acquiring business before we announced the FNMS deal. They sold that merchant acquiring base to Merchant Solutions who is also a customer of ours, and that’s a piece of business we really would have liked to have gone after had the timing been more appropriate, but it just didn’t work for us.

We think we have a great processing solution. We finally now have a compete merchant acquiring business who knows how to sell. They have been constrained over the last few years in their selling efforts primarily because like most people that were really into the banking business, their bank was having a lot of issues. I can’t tell you any details, but all the banks have struggled over the past couple of years. We feel pretty good about our opportunities here.

Darrin Peller – Barclays Capital

Would you say given the opportunity for potential revenue synergy or cross selling, do you expect above industry average growth for your merchant acquiring business?

Philip Tomlinson

I would say we expect at least industry average growth. There are some opportunities between the base of business at TAS and our new merchant acquiring business that we’re going to explore. I hope you’ll see the results of that over the next couple of years.

Darrin Peller – Barclays Capital

On the international card issuer side, when we talked about it last, it’s clearly a big opportunity, very, very low penetration by third party outsourcing companies such as yourselves to take business. What kind of trends and traction are you seeing there and what do you expect going forward from the international card issuing side?

Philip Tomlinson

Our trends, I can’t help but be excited about where we are on the international side. The truth is, we’ve signed more business than we can get negotiated and we’ve ramped up that negotiation process. But you still have the factory back home to get it converted and what I was saying earlier in my opening comments, every country that you go into is like starting up a new business.

But once you get there, and once you get that first issuer converted, then you’ve got something to really go sell to the rest of that marketplace. And again, I go back to the example I just used in Germany. You can go back to the U.K. You can go back to Ireland. You can go back to Canada. You can go back to Mexico and you can go back to the U.S.

As we go into those countries, we do exceptionally well. But I do think while the opportunities, we don’t have these mega issuers like you have in the U.S., but you have a lot of really nice size issuers out there and we’re talking to all of them.

Operator

You're next question comes from [Paul Bordelai – PV Investment Research]

[Paul Bordelai – PV Investment Research]

On the termination fees, I think you had talked about the $32 million was the expectation for the full year. Is that still the case?

James Lipham

Yes, that’s still the case.

[Paul Bordelai – PV Investment Research]

Is the balance of that mostly BofA that will hit in 2Q?

James Lipham

No, but it will be in Q2.

[Paul Bordelai – PV Investment Research]

Is there any update on BofA in terms of what’s going on with that business and any plans to do things differently?

Philip Tomlinson

How much did we have, $12 million. We took about $10 million of revenue. We still don’t have a date on that. We’re enjoying it while we can and as that gets figured out, it’s big enough to let you know about it.

[Paul Bordelai – PV Investment Research]

In terms of the revenue guidance, I think you mentioned the currency and that’s moved quite a bit from your guidance which I think included about $1.65 on the pound and $1.45 on the Euro. Has there been any change to your guidance based on currency yet or are you just kind of waiting to see how that shakes out?

James Lipham

We’re kind of waiting to see how it comes. We had about $13.9 million or so picked up in currency for the whole year. We have $5.9 million here in the first quarter and it’s just too early to tell really.

[Paul Bordelai – PV Investment Research]

Again, on the guidance, I think the expectation was for $60 million to $80 million for new business to contribute to guidance in fiscal ’10. Is that kind of tracking so far? I know it’s early but is that kind of tracking on plan to where you expected?

Philip Tomlinson

We feel pretty good about where we came out with guidance and what we’ve seen so far we feel like we’re still on track for that.

[Paul Bordelai – PV Investment Research]

It looked like the transaction growth picked up pretty nicely in your existing business, I think 8% in the quarter. Just trying to reconcile that with the revenue growth which I think was kind of flattish. What is the offset there, mostly pricing or what’s driving that relationship?

James Lipham

We had good growth in there but you do have a loss of revenues from APC last year and so that lost business plus we’ve had some price concessions that figured in there also. But we think that the volume is going to start showing up.

[Paul Bordelai – PV Investment Research]

In looking at the First National acquisition, I’m just curious. It looks in some instances you may be now competing against current customers. Just curious if you’ve seen any reaction if you’re seen processing customers in terms of TSYS now being an acquirer as well and how that relationship might play out.

Philip Tomlinson

We told our customers several years ago that we felt like we had no choice long term to get in this business and we’ve got one or two that are not happy, but we have a pretty strong Chinese wall between those two businesses and we’ll have to continue that.

The truth is though, we were the last person on earth that was a pure processing company and I don’t think it surprised anybody. We’ve been talking with clients talking about that like I say for about two years and really haven’t had a lot of push back. We’ve had, one comes to mind right now and they’re a very good customer, but there are certainly no threats to leave or anything like that.

[Paul Bordelai – PV Investment Research]

Now that you’ve been at First National for a couple of months just curious any thoughts on what you’ve seen, if you’re happy, anything surprised you and kind of what your thoughts are in terms of having to invest in the business to maybe get it to where you want it to be.

Philip Tomlinson

We’re still trying to figure out how to get to Omaha quicker. I don’t think there’s been any surprises or anything. We have been talking to these folks a long time. They have a very good company. It’s a very online bank with a lot of the same culture and values that we try to instill over the years and we like the way they do business. We like the way they sell.

As a matter of fact, we had our first board meeting yesterday and reports were that it was very good. So again, we don’t have very much experience. We just closed it on April 1, but we like what we see. We like their attitude and we like the business that they have.

Operator

You're next question comes from Brett Huff – Stephens Inc.

Brett Huff – Stephens Inc.

Can you give us any more detail on the transaction mix associated with the first data. You were talking about $10 million of revenue. I want to understand if that came off in 1Q or is expected now to come off in Q2 and about how many transactions in that segment you think that will result in.

James Lipham

That was mainly the revenues associated with that were for the clearing and settlement backend piece of the processing we did for BofA. That can be moved pretty quick if they decide to do that, but I think what we’re seeing more is they’re just not boarding merchants with us right now.

But where it’s going from de-conversion, like Phil said, we’re still in discussion on that.

Brett Huff – Stephens Inc.

So the $10 million -

James Lipham

That was ratable over the last three quarters.

Brett Huff – Stephens Inc.

So the $10 million was ratable over the last three quarters.

James Lipham

That’s correct.

Brett Huff – Stephens Inc.

On FNMS, my understanding is they kind of – did they break their business out in both acquiring and process or do they process for other folks as well and can you break out that business a little bit so we know kind of what animal that is?

James Lipham

We can probably do it better once we start putting them in there, but what we saw in some of our due diligence I think was around 25% processing versus 75% for the acquiring.

Brett Huff – Stephens Inc.

Can you give us just a little more detail on the same store sales growth. You must have some clients that are still being pretty aggressive in growing. Can you give us a little bit more color on that in addition to what you shared with us on the slides and is that sustainable going forward or where is that going to come from going forward?

James Lipham

From the same clients I think it’s pretty sustainable going forward. [Uwam] is gone which was a big player. That would not be in the same store sales now and I think you had Charmin Shoppes and some of these people that are not here anymore were big players of it. You get down to now your top ten, top twenty are pretty solid citizens.

Philip Tomlinson

By the way, Wachovia did convert. I told you I would tell you that and I can’t recall the date, but it was 30 days ago or so.

Brett Huff – Stephens Inc.

To drill down a little bit on the margin, the $23 million term fee, usually that drops 100% to the bottom line but you said there was still some cost associated with that so is it still sort of the 80/90 type percent margin?

Philip Tomlinson

It’s pretty high because – but you still have our expenses. When you stop your de-conversion, when you do your de-conversion, you still have your fee costs and people costs, but there again, you get a big payment all at one time so it’s pretty profitable.

Brett Huff – Stephens Inc.

Any bookmarks on the number?

James Lipham

I don’t know what that would be. It’s bigger than the margin though.

Operator

You're next question comes from Greg Smith – Duncan Williams.

Greg Smith – Duncan Williams

On the balance sheet, the cash end of the quarter was $535 million but on April 1 we need to take out $150 million, right? You use straight cash for the FNMS deal?

James Lipham

That’s correct.

Operator

You're next question comes from Robert Dodd – Morgan Keegan.

Robert Dodd – Morgan Keegan

On the change in the reporting structure, is this just cosmetic or have you changed anything about how the business units are organized or run, in particular you’re not spitting out the service piece and value added services. So has there been a change in approach to selling those or any color on that?

Philip Tomlinson

No, there’s no real changes. Breaking out the costs was more cosmetic. Cost of services was something we needed to do for the SEC and to be comparative with our peer group and the other was we just wanted to realign these business segment with more management control of what they’ve got to manage.

Robert Dodd – Morgan Keegan

On the cash flow as well, were there any timing – it looks like you got almost $40 million out of working capital in Q1. Is that going to be sustained through the year or was there a one time or short-term rather timing issue in Q1?

James Lipham

I think you had, it’s timing with account receivable, payable and then you obviously had your big termination fee in the first quarter.

Operator

You're next question comes from John Williams – Goldman Sachs.

John Williams – Goldman Sachs

In looking at your guidance on the FNMS business it appears unless there’s some seasonality that we’re missing that you’re expecting some pretty substantial growth year over year just based on what you had said last year’s revenue number looked like. Could you give a little more detail on the expectation for the full year. I presume you’re only going to get three full quarters of impact in 2010.

James Lipham

You get three quarters in 2010 obviously four in 2011 but our forecast for 11 we don’t have clue what that is at this point. What you’ve got this year, you’ve got some onetime costs that you won’t have next year and that’s close to $4 million worth of transaction costs that’s going to hit here in the second quarter.

John Williams – Goldman Sachs

But on the top line it looks like you’ve got in the range of $95 million to $97 million that you expect in 2010 so on an annualized basis it implies that the year over year growth rate is going to be pretty substantial in that business.

James Lipham

$25 million or $26 million or so in the first quarter.

John Williams – Goldman Sachs

The seasonality then in the business, is it pretty typical from what we’d see in the other acquiring businesses or at least is that what you expect?

James Lipham

I think so. It seems to run pretty good. It’s pretty flat. Not a whole lot of seasonality there.

John Williams – Goldman Sachs

The $4 million that you just referenced, that’s the impact of the $2.5 million that you talked about in the release?

James Lipham

Right.

John Williams – Goldman Sachs

When you look at implied margin in the acquiring business it comes out to be in the 14T or 15% range just given what you said in the release. Is that pretty much how we should think about it going forward obviously without the impact of that $4 million being in there. Do you expect it to get up into the 20% to 25% range at any point in the near future?

James Lipham

It will get up a little bit higher, around 20% but you’ve got the purchase accounting adjustments as I mentioned. That’s about $15 million a year you’re going to have that gets knocked off in that number. But honestly if you didn’t have that purchase accounting you’d be facing 26% to 29% margins if you didn’t have it. We’re in the process of determining how big that number is right now. It’ll last for a few years.

John Williams – Goldman Sachs

In terms of the U.S. your core issuing processing business, are you seeing any indications that the U.S. banks are a little bit more willing to go out and maybe upgrade their services or just sign contract generally or is there anything more specific that you can give than what you said a little bit earlier?

Philip Tomlinson

I don’t think there’s anything more specific. It just seems to be a little bit of an attitude change. As I said, there’s nobody at least when I looked, there was nobody outside banging on the door to get in here, but the truth is, the U.S. issuer, it’s a huge business. It’s a very profitable business. I think they’ve been, with this great recession, with this Card Act, they’re pretty well had their engines on hold.

I don’t think that will continue and as this economy loosens up I think you’ll see people start to come out with more products and become more aggressive. It’s a product that’s not going away. It’s a very important product. It makes a lot of money and I think people are going to learn to deal with this Card Act.

I talked to a very big issuer the other day and I thought it was interesting. Last year this time, he really thought the world was coming to an end with the Card Act, and this year he was really wanting to talk about golf, so I think that shows great improvement.

That’s sort of like when I went to buy the TV Sunday, but I do think there is life out there. In the last quarter I told you, it was dead as a hammer but it’s not even close to where it was as far as activity, but it’s an improvement.

Operator

You're next question comes from Larry Berlin – First Analysts Corp.

Larry Berlin – First Analysts Corp.

On the total fees that your got for de-conversion, just want to make sure I have my number right, so what number do you have for the quarter?

James Lipham

$23 million.

Larry Berlin – First Analysts Corp.

On Target, if Target de-converts from a bankcard to private label card, as I recall the revenue associated with a private label card is reasonably less than on a co-brand Visa. Is that correct with them and you?

James Lipham

Historically as far as retail as compared to consumer cards, that has been correct but I tell you, we don’t know enough about that decision yet to give you a good answer on that. It just happened.

Larry Berlin – First Analysts Corp.

Given the way you’re reporting now, if I subtracted my reimbursables from your cost of services, can I then calculate a gross margin by your reckoning and is that meaningful in any way, shape or form because a lot of times gross margin is not that meaningful.

James Lipham

I don’t think it’s meaningful.

Operator

You're next question comes from Glenn Greene – Oppenheimer.

Glenn Greene – Oppenheimer

I guess the first question, you sort of acknowledge there’s some price concessions that you probably already granted that are going to continue for the balance of the year, but what are you seeing currently on the pricing on renewals? Has it kind of stabilized? It is it kind of static or are you still being pushed back on pricing?

Philip Tomlinson

I think the contracts that we’ve renewed we’ve seen some pressure but you’ve heard me say before, we’ve been seeing pressure for 25 years on new contracts, but I do think people after all is said and done have certainly pushed harder over the last year or so than any time in my history, which goes back to day one.

We don’t have any major contracts we’re trying to renegotiate right now. We’ve got some smaller ones that we’re working on. We have any de-conversions that we’re looking at. We are trying to sell some new products and some new value added products that might make sense and will certainly help revenue.

I hope all of you read about this new Hybrid card that we have announced. We’re getting some traction there. It’s created a lot of conversation and hopefully we’re going to have some people buy into that. I believe we will.

It’s not like we’re sitting here renegotiating daily with people. We do have typically a five-year contract.

Glenn Greene – Oppenheimer

Just to remind me on the de-conversion I heard Wachovia, Charmin Shoppes, Sky Card all did de-convert in the quarter. Can you just remind us what’s left that was disclosed in the fourth quarter?

James Lipham

I don’t remember.

Glenn Greene – Oppenheimer

You had announced a number of client losses that were going to impair your revenue in 2010. It was a number north of $100 million in aggregate, but I don’t remember what it was exactly.

James Lipham

It was about one million accounts total out there.

Glenn Greene – Oppenheimer

A million accounts that are left?

James Lipham

That are in the process of being sold by somebody. It’s insignificant.

Glenn Greene – Oppenheimer

That’s all that’s left is what you’re saying to de-convert.

Lames Lipham

By the way, Wachovia converted about mid April. Sorry.

Glenn Greene – Oppenheimer

So we should be at a reasonable other than the termination, at a reasonable static –

James Lipham

I think we’re pretty static right now.

Operator

There are no further questions.

Philip Tomlinson

I wanted to close this out and tell you I appreciate you being on the phone with us and asking those good questions and I hope we were able to answer them satisfactorily.

Our strategy is really straightforward. One, we want to return to double-digit growth in both revenues and net income. Two, we want to continue to diversify our business beyond this core card processing services that we have become very known for and become closer to the merchant and consumer at point of transaction.

And three, we want to capture a greater share of this core business where do we business and to expand our services by investing in key markets and key opportunities, really around the world. This may sound a little corny to you, but we have a belief here at TSYS that you never know what kind of character or integrity a person or a company is made of until you see them go through a crisis, particularly a financial crisis.

I don’t think there’s any doubt that we’ve been through a crisis and hopefully we’re on a good road to recovery and I hope that you believe in spite of all the difficulty associated with the past 18 months we’ve been transparent and we’ve managed through it and we’re gaining strength.

We strongly believe the banks will resume lending and people will slowly go back to work. Spending is going to increase and consumer’s preference for electronic payments will continue to grow because they’re safer, they’re more secure, they’re more convenient.

I have to be honest, I don’t believe that we’ll see double digit organic growth any time in the near future or maybe ever like we saw before the recession, but we’ll grow in this card business and that along with our diversification and new products and services is going to serve this company well.

Somebody said it and I said it earlier this year that 2010 is a year of transition and we intend to come out of this recession much stronger, learner and more diversified. We have totally committed and believe we have the people and the technology to continue to win and grow in this business.

In closing I wanted to remind you of the upcoming analyst day in New York, May 17 and if you haven’t already, I’d invite you to contact Shawn Roberts for more details, and hopefully we’ll see you there.

I’d like to say thank you for your attention and your interest and we hope to see you in New York. Thank you.

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