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Vantiv (NYSE:VNTV)

Q1 2014 Earnings Call

April 30, 2014 4:30 pm ET

Executives

Nathan Rozof

Charles D. Drucker - Chief Executive Officer, President and Director

Mark L. Heimbouch - Chief Financial Officer, Principal Accounting Officer and Director

Analysts

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

Georgios Mihalos - Crédit Suisse AG, Research Division

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

Bryan Keane - Deutsche Bank AG, Research Division

Jason Kupferberg - Jefferies LLC, Research Division

David Togut - Evercore Partners Inc., Research Division

Ashwin Shirvaikar - Citigroup Inc, Research Division

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

Darrin D. Peller - Barclays Capital, Research Division

Tulu Yunus - Nomura Securities Co. Ltd., Research Division

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

Glenn T. Fodor - Autonomous Research LLP

Smittipon Srethapramote - Morgan Stanley, Research Division

Operator

Good day, and welcome to the Vantiv Q1 2014 Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the call over to Nathan Rozof, Senior Vice President, Investor Relations. Please go ahead, sir.

Nathan Rozof

Good afternoon, everyone, and thank you for joining us today. By now, everyone should have access to our first quarter 2014 earnings release, which can be found at vantiv.com under the Investor Relations section.

During the call, Charles Drucker, our President and Chief Executive Officer, will discuss Vantiv's first quarter operating performance and provide an update on our strategic initiatives. Mark Heimbouch, our Chief Financial Officer, will then review our first quarter's financial results and address our outlook for the second quarter of 2014.

Throughout this conference call, we will be presenting non-GAAP and pro forma financial information, including net revenue, adjusted EBITDA, pro forma adjusted net income and pro forma adjusted net income per share. These are important financial performance measures for the company, but are not financial measures as defined by GAAP. Reconciliations of our non-GAAP pro forma financial information to the GAAP financial information appear in today's press release.

Finally, before we begin our formal remarks, I need to remind everyone that our discussion today will include forward-looking statements. These forward-looking statements are not guarantees of future performance, and therefore, you should not put undue reliance upon them. These statements are subject to numerous risks and uncertainties that could cause actual results to differ materially from what we expect.

Please refer to the forward-looking statement disclosure in our earnings release and in our periodic filings with the SEC. Additional details concerning our business risks and the factors that could cause actual results to materially deviate from our forward-looking statements can be found in our annual report on Form 10-K under the headings Risk Factors and MD&A and in our subsequent filings with the Securities and Exchange Commission, which are available at sec.gov.

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

Charles D. Drucker

Thank you, Nate, and thanks to everyone for joining today's call. Our traditional merchant and financial institution businesses continue to benefit from the core advantages we have built including a single integrated processing platform, which allows us to quickly deploy new products and services, as well as maintain superior margin; a comprehensive suite of solutions, which allow us to develop very deep long-term relationships with our clients by really acting as their trusted adviser; and a diverse distribution channel, which allows us to penetrate small- to mid-size clients through our new strategic channels, as well as serve a traditionally large client base. These assets give us a unique competitive advantage, allowing us to consistently win market share while generating superior margins.

According to recent data from the Nielsen report, we again won acquiring market share during 2013 as we have done for each of the past several years. Since 2009, we have increased our market share by more than 3 percentage points to just under 16%. We have done this each year while generating adjusted EBITDA margins near 50%. At the same time, we're strengthening our presence and capabilities in the highest growth segments of the payments business, including ecommerce, merchant banks and integrated payments, and we will continue to be disciplined in terms of allocating capital, supporting our goal of consistent high earnings growth.

With this as a background, let me comment on our performance for the quarter and update you on the progress of our strategic growth initiatives. During the first quarter, net revenue grew 6%, in line with our expectations to $289 million, while pro forma adjusted net income per share grew 26% to $0.39 and exceeded the top end of our range. Our scale and cost structure, as well as benefits from our capital allocation initiatives, contributed to our strong earnings performance.

The Merchant segment grew net revenue 7%. As we indicated on the fourth quarter call, consumer spending trends were sluggish during the quarter as adverse weather and the timing of Easter impacted growth. Consumer spending trends have steadily improved through April and we expect trends to improve for the rest of the year as compared to first quarter.

Last, within the Merchant segment, the conversion of Walmart to our platform is progressing very well, and we expect it to be completed by the end of second quarter. We're excited to be processing for the largest retailer in the world and look forward to working with Walmart.

In the Financial Institution segment, net revenue increased 2% year-over-year which is an improved -- improving trend as compared to fourth quarter. We continue to win new business with transaction growth stepping up to 7%.

Contributing to new sales in both our Financial Institution and Merchant business is our client's increased focus on security and EMV solutions following the recent industry data breaches. We are working with a number of clients, including some of our largest to provide our security solutions including point-of-sale encryption and Tokenization. In addition, we are consulting with our clients to help them meet the EMV requirements. As we've indicated before, we were the first to be certified for EMV by Visa and MasterCard, and we have subsequently been certified by the rest of the major card brands.

As an acquirer, we are, in fact, processing a small amount of EMV transactions. As an issuer processor, we have EMV credit cards in the market today and we will be issuing some of the country's first debit EMV cards this summer. Our capabilities for merchants and issuers are proven to be a differentiator in the market. These capabilities provide a competitive advantage contributing to the stickiness of our client relationships, as well as winning new business. We have had early success and expect new business from our security products to contribute to our growth.

I'd like to now update you on the progress on our strategic initiatives. In addition to our success within our traditional business, our expansion into the high-growth channels and verticals is also contributing to our success in gaining market share. Our strategic channels delivered another quarter of solid double-digit growth. Within ecommerce, our business benefits as consumer spending migrates online and as we continue to win new clients. Consistent with the past several quarters, our ecommerce business had 30% volume growth during the quarter, demonstrating that our technology and solutions have gained strong traction in the marketplace.

We also continued to increase our penetration within the merchant bank channel. We continue to win new banks and grow a network of referring branches including signing 3 of our existing FIs. As we've discussed in the past, one of our core advantages within the merchant bank channel is our ability to cross-sell Merchant Services to our traditional FI-processing clients. Our new branch count has expanded to approximately 1,600 referring branches and we expect this number to continue to grow as we further penetrate the channel.

Finally, our technology partner channel is generating strong double-digit growth. Within this channel, our integration of Element is going very well and we see the potential to significantly expand our integrated payment business as merchants are demanding greater integration at the point-of-sale. Element has leading technology capabilities, including differentiated security solutions, providing a strong catalyst for growth.

Element's EMV technology frees its ISV partners and developers from the need to pursue burdensome device development and certification requiring significant time and expense. Our solution enables ISVs and developers to focus on providing best-in-class solutions. This is a key differentiator for us in the market and reinforces our position as the partner of choice. I continue to believe that small- and mid-sized -- medium-sized merchants will increasingly look to integrated payment solutions to help them run their business. By leveraging our leading technology and security capabilities to sign new ISPs and deal with partners, we see significant potential for us to grow and win share.

As the market continues to evolve to new technologies and payment alternatives, our investments are paying off. We've been successfully expanding into new channels and diversifying our client base through acquisitions. We've also proven our ability to integrate acquisition to our platform. This has clearly become a core competency of ours, and one that will continue to be a platform for the future.

In conclusion, our business continues to perform well, and I'm proud of our double-digit EPS growth. We are leveraging our strengths like security in EMV to expand our existing client relationships, as well as compete for new business. In addition, our technology capabilities are differentiators for us within strategic channels like our integrated payments and ecommerce, which allows us to outperform and grow these channel's double digits. We are capitalizing on strong secular trends in the payment industries by not only focusing on the traditional business, but also by pursuing high-growth channel verticals. Therefore, I'm confident in our ability to consistently win market share as we have done over the past several years.

Now I'll turn the call over to Mark Heimbouch, who will review our financial results in more detail and provide you with an outlook for the second quarter. Mark?

Mark L. Heimbouch

Thanks, Charles, and good afternoon, everyone. As Charles indicated, net revenue increased 6% to $289 million, in line with transaction growth. Pro forma adjusted net income increased 15% to $78 million, and pro forma adjusted net income per share increased 26% to $0.39. The scale and efficiency of our business continues to lead to superior profitability as the business generated an adjusted EBITDA margin of approximately 46% for the quarter, expanding by about 40 basis points on a year-over-year basis.

Turning to the segments. Our Merchant segment generated net revenue growth of 7%, growth was driven primarily by 6% transaction growth and a 1% increase in net revenue per transaction. Charles described the impacts on consumer spending due to the weather and the Easter holiday, I'll also remind you that this was the first quarter that we fully lapped the acquisition of Litle in terms of year-over-year growth.

In our Financial Institution segment, net revenue growth trends improved sequentially growing 2% year-over-year in the first quarter primarily due to transaction growth of 7%. Net revenue per transaction declined due to the client mix impact that we have described on prior calls, but we continue to expect net revenue per transaction to expand over the course of 2014 as we roll out new value-added services, including new fraud management solutions.

In terms of expenses. Sales and marketing expenses increased by 3% to $78 million during the quarter. Sales and marketing expenses increased by 2% in the Merchant segment and by 15% in our FI business. The higher increase in the FI segment was due primarily to personnel-related costs associated with our product initiatives.

Other operating costs increased 11% to $54 million, partially due to incremental expenses associated with the Element acquisition. We continue to focus on profitability and are in the process of implementing additional efficiency initiatives that will lead to further leverage in our already superior cost structure. As a result, we expect quarterly other operating costs to be generally flat to down on an absolute dollar basis for the remaining quarters of this year.

Finally, general and administrative expenses declined modestly to $23 million. In aggregate, total expenses increased just 5% during the quarter, contributing to EBITDA margin expansion. Depreciation and amortization expense, excluding the impact of amortization of intangibles related to acquisitions, increased by 37% to $18 million.

As we stated on the fourth quarter call, depreciation expenses continue to grow at elevated levels since our separation from Fifth Third, as our assets have effectively been acquired within the last 5 years. Following 2014, the rate of growth is expected to slow significantly to the single-digit range, more in line with CapEx as a percent of net revenue.

Net interest expense increased 9% to $11 million, partially due to our debt refinancing and new issuance in the second quarter of 2013. We continue to delever very quickly due to our strong earnings growth and free cash flow generation reducing our leverage ratio to 3x on a gross basis.

Finally, you'll note a slightly lower tax rate in the first quarter. Our rate was primarily influenced by the recognition of tax benefits under Internal Revenue Code Section 199, which provides a deduction related to domestically produced computer software, contributing less than $0.01 to EPS for the quarter. For purposes of calculating pro forma adjusted net income, we estimate that our effective tax rate for 2014 will be 36.5% as compared to 38.5% in 2013. This rate is exclusive of the $11 million in quarterly cash tax benefits.

Before I hand the call back to Charles, I'd like to address our outlook. For the second quarter, we expect net revenue of $315 million to $320 million, representing growth of 6% to 8%. In terms of EPS, we expect pro forma adjusted net income per share of $0.45 to $0.46 for the second quarter, representing growth of 13% to 15%. Finally, based on the current level of transaction trends and new business activity, our business continues to perform in line with full year expectations that we provided on our fourth quarter call.

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

Charles D. Drucker

Thanks, Mark. So to conclude, I am pleased with the start to the year and believe that we are well positioned for the remainder of 2014. We are winning market share by leveraging our strengths including security and EMV to expand our existing client relationships, as well as to compete for new business. Our investments in the high-growth channels and verticals, including integrated payments and ecommerce, will further improve our competitive position. In addition, our leading technology capabilities allowing us to outperform and grow our strategic channels at strong double digits.

So with that, I'd like to thank you for your time this afternoon. And I hope that we share -- you share my optimism about Vantiv's future.

So with that, operator, let's open up the line for questions.

Question-and-Answer Session

Operator

[Operator Instructions] We'll take our first question from Tien-tsin Huang with JPMorgan.

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

This is pretty straightforward. I wanted to ask about the, I guess, the 1% increase in net revenue per transaction in Merchant. Anything unusual driving that? I assume it's mix and Walmart didn't move the needle, is that fair?

Mark L. Heimbouch

This is Mark. Yes, I mean, that's pretty much fair. And the other thing to keep in mind is obviously coming out of 2013, you saw the impact of the year-over-year impact of Litle also contributing to that. So when we lapped that in the first quarter, it has less of an impact. And keep in mind when we were thinking about the full year 2014, we kind of view net revenue per transaction stable to up. From this point forward, the conversion of Walmart is going to impact that as you're aware. So nothing unusual there.

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

Understood. So 2Q, we won't see a full year of -- a full quarter of Walmart, but would you probably expect that metric to decline?

Mark L. Heimbouch

Yes. I mean, it's -- the conversion is up and the volume is ramping, so it will have a measurable impact in the second quarter.

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

Just a couple of quick other ones. Just on the debit side. I'm curious how debit performed in the quarter relative to credit. Visa on their call sort of suggested that structurally maybe the Target breach may have -- or now has softened some of the debit trends. Did you observe that in the first quarter?

Charles D. Drucker

This is Charles. We did see a slightly low performance in debit versus credit during the first quarter. However, consistently with April, we saw those trends improve and debit trends steadily improve. So we did see a slight movement in debit versus credit.

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

Last one for me. Just maybe a pipeline question both in Merchant and FI, it looks like you are spending some money on the sales and marketing side in FI, but how does it feel today, the pipeline?

Charles D. Drucker

I mean, I think depending on the channel, the pipeline feel strong. Our merchant bank channel feels very strong and the pipeline, talking to a lot of good clients, and we feel good about that. The ecommerce continues to be strong. We've boasted [ph] our employees brought some additional sales strength into that to really try to capture even more of that channel. And the ISV channel feels very good, we're winning share there. So we're optimistic about the success that will happen.

Operator

We'll take our next question from George Mihalos with Crédit Suisse.

Georgios Mihalos - Crédit Suisse AG, Research Division

Just looking at the 6% transaction growth in the first quarter. Can you kind of parse that out between sort of the same-store sales growth and the new business that came on in 1Q?

Mark L. Heimbouch

Yes. So George, it's Mark. So we really, I think, if you think about 2013 kind of quarter-to-quarter, we were experiencing mid-single digits in terms of same-store sales type growth. First quarter, just given some of the dynamics, Mark, weather and the impact of Easter, really declined to low single-digits. And I would say that it was kind of a theme throughout the quarter. Fortunately, what we've seen, in fact, I was just looking at the numbers for April prior to the call, we've seen a pretty significant rebound in same-store sales growth. Now mind you, there's Easter in there, but even making adjustment for our expectations on the impact of Easter, we've seen a pretty strong rebound in same-store sales and total volume trends. So it's early, but pretty optimistic going into the second quarter.

Georgios Mihalos - Crédit Suisse AG, Research Division

Okay, great. And that low single-digit figure, that includes both National Merchants and small merchants rolled into that figure, right? Just so that...

Mark L. Heimbouch

Yes, that's a combined figure.

Georgios Mihalos - Crédit Suisse AG, Research Division

Okay. Okay, great. And then just sort of looking at the revenue per FI transactions sort of, what gives you confidence that you're going to be able to ramp that up toward the back half of the year, maybe some examples on some of the stuff that you're rolling out?

Charles D. Drucker

So George, this is Charles. We are rolling out some fraud management solutions, replatforming our fraud group and bringing more tools. That's one of the avenues that we have a lot of demand acceleration. The EMV side and security aspects are picking up across the portfolio. And we're very well positioned with our single processing platform to take advantage of that as that ramps up. So those are a couple of things.

Georgios Mihalos - Crédit Suisse AG, Research Division

Okay, great. And just last question for me. You guys did 6% growth in the first quarter. I think your outlook for the second is 6% to 8%. How conservative is that 6%? Because it sounds like you're more upbeat based on what you're seeing in April, just trying to get a sense of conservatism that you baked into the 2Q number?

Mark L. Heimbouch

I think that's a tough question to always answer. I mean, I think that I'd kind of finish the call saying we're confident in terms of our expectations for a full year, and leave it at that. There's been -- as you're aware, there's been a fair amount of volatility, I think in terms of consumer spending over the past couple of quarters. So it's good to see April performing as strong as it is, let's see that continue.

Operator

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

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

And I guess my first question, so on the Financial Institution business, transactions actually accelerated in Q1 despite a tougher debit market. I'm wondering, is that sustainable? It sounds like trends, if anything, have gotten better in April. I'm just wondering if that business continues to do well on the transaction side kind of through the rest of the year.

Charles D. Drucker

Yes, we think that business, the business, in general, we're seeing the acceleration -- we saw the acceleration in both sides of the business in April. And I'm optimistic that, that continues to come through. But just like Mark said, with the volatility around consumer spend, having April rebound is positive. We want to make sure that Mother's Day and all the other holidays that fall into the next couple of months perform as well.

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

All right, good. And then I guess on the organic growth side, how big was Element's contribution in Q1?

Mark L. Heimbouch

Element's -- this is Mark. Element is, on a transaction basis, is pretty small actually. But it represented I would say -- 2% for the year.

Charles D. Drucker

It's on track to be still 2% for the year.

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

% 2% of revenue or transactions?

Mark L. Heimbouch

Revenue.

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

Yes, okay. That makes sense. And finally, just buyback appetite. The stock has been kind of under 30, I guess today was a little above 30. But are we at levels still were you feel pretty good about the business and the buyback activity?

Mark L. Heimbouch

Yes. So we completed the share authorization that was made last year. We have outstanding a $300 million authorization that was made on the last quarterly -- we announced in the last quarterly call. But I think our capital allocation methodology remains the same, continue to invest in growth in the business, including M&A and being opportunistic as it comes to buybacks. So we continue to view that as opportunity. But to date, we have not used the $300 million.

Operator

We'll go next to Bryan Keane with Deutsche Bank.

Bryan Keane - Deutsche Bank AG, Research Division

Just wanted to ask about Walmart. What percentage are we complete so far of the rollout?

Charles D. Drucker

Walmart, it's transitioning, all the stores are attached to us, so -- and we have transaction running on different type of card -- card types, and we'll continue to ramp and complete within the quarter. So all the stores are connected now to us with different card types starting to come to us.

Bryan Keane - Deutsche Bank AG, Research Division

Okay, yes, I'm just trying to get a sense. I mean, was 50% of the volume you expect to be ramped or just give us a sense of how much more is left to go so that we can try to model out 2Q, I guess, is what I'm trying to say.

Mark L. Heimbouch

Bryan, I'd look at it this way. I mean, all the stores are connected and the volume is ramping, as we speak.

Bryan Keane - Deutsche Bank AG, Research Division

Okay.

Mark L. Heimbouch

So it's the end of April.

Charles D. Drucker

I mean, we said by the end of the second quarter, we should be at full pace.

Bryan Keane - Deutsche Bank AG, Research Division

Okay, and then on -- just looking at Element, I know last quarter, it was about $10 million in revenue. I think it was. And so is there any seasonality to expect in Element? Obviously, I don't know if retail sales in Element are higher in the fourth quarter than they would be on the first quarter?

Mark L. Heimbouch

I mean, in terms of thinking about the revenue outlook, they continue to ramp. So you have a couple of things going on in terms of Element. One, just the high double-digit rate of growth. So their fourth quarter will obviously be the biggest in terms of production, that's due to some seasonality, but it's also just due to new business growth.

Bryan Keane - Deutsche Bank AG, Research Division

Okay. And then when looking at the numbers on the Merchant side, if same-store sales were low single-digits and you have Walmart ramping, I'm just trying to figure out, is there a lot of new business in that transaction count that we're looking at as well? I'm just trying to figure out how much is in addition to Walmart and same-store sales that we're seeing right now in the current transaction run rate?

Mark L. Heimbouch

So same-store sales is coming in about half the rate of transaction or revenue growth. Right, and you have to consider some attrition being in there, too. The difference has to be new business. So that will be new business signed and on our platform, revenue producing over the last few quarters.

Bryan Keane - Deutsche Bank AG, Research Division

And then there were couple large Litle wins, if I recall, on the ecommerce side in the fourth quarter. So that's probably also supplementing the first quarter?

Mark L. Heimbouch

That will contribute to that, too.

Operator

And we'll go next to Jason Kupferberg with Jefferies.

Jason Kupferberg - Jefferies LLC, Research Division

Just wanted to make sure I heard you right on the tax rate for the year. Is the expectation on the full year tax rate coming down a couple of points to the 36.5%?

Mark L. Heimbouch

Yes. So we -- given our legal entity structure, we give a rate to provide you guys in terms of how to get the cash net income. So instead of using 38.5% from the prior year, it would be 36.5% for the current year, as well -- in addition to that, you would include $11 million of cash tax adjustments.

Jason Kupferberg - Jefferies LLC, Research Division

Okay, to get down to what you guys call the adjusted cash tax rate?

Mark L. Heimbouch

Yes, yes.

Jason Kupferberg - Jefferies LLC, Research Division

Okay, all right. So I guess we'll just have to throw that to our model to see how it compares because -- have you guys given guidance on the tax rate last quarter for the full year '14, I couldn't recall. My people are just using the same as last year.

Mark L. Heimbouch

Actually, I think we gave a blended -- I think we gave kind of a rate after all that, our effective tax rate. So we did talk about it. I'm not sure in the same level of detail, but we did talk about it.

Jason Kupferberg - Jefferies LLC, Research Division

Okay, okay got it. And then if we just look, I guess in the kind of the middle of the P&L, the pro forma EBITDA growth this quarter. I mean, it's been decelerating a bit. I think it was about 7% this quarter, obviously your net income and EPS growth is a lot higher given the tax rate work and the capital deployment with the buybacks. But I mean, how do you feel guys kind of on a normalized basis around the pro forma EBITDA growth, I guess there will be some easier comparisons later this year. So do you think we're kind of seeing the bottom here in Q1 in terms of year-over-year growth in that metric?

Mark L. Heimbouch

Well, it's tied to -- EBITDA growth is tied to revenue growth, right? And we've been getting leverage on the margins. So I think our expectation is continue to get leverage on the margin. We think about our cost structure, talked a lot about G&A, and I think we've -- a year or so ago, we've been predicting that G&A becomes much more like a fixed cost. I think they're starting to see that come to realization. I also made comments in the script in terms of how to think about OpEx. So in addition to what we believe to be a very competitive cost structure today, Carlos Lima and team, our COO, have really been executing on additional initiatives. Therefore, we expect actually OpEx to be stable to down on an absolute dollar basis over the remaining part of the year. So revenue growth with EBITDA margin expansion should deliver higher EBITDA growth.

Jason Kupferberg - Jefferies LLC, Research Division

Yes, yes, okay. And then just lastly. Again on Walmart, can you guys parse out for us the revenue and/or transaction growth contribution to Merchant in Q1, and/or what you're expecting for Q2?

Mark L. Heimbouch

It was insignificant in Q1. It wasn't measurable.

Jason Kupferberg - Jefferies LLC, Research Division

Okay. How should we be thinking about quantifying it for Q2?

Mark L. Heimbouch

I think on the second quarter call, we kind of gave -- on the first, on the year-end call, we actually tried to give some view on transaction growth, expecting transactions, I think, to be in the teens. So granted the second quarter won't be fully ramped, so you'll start to see a ramp going into -- during second quarter, fully ramped by third quarter. So we should see pretty strong teens growth in the third and fourth quarter. But we would expect to be in the low teens in the second quarter, low- to mid-teens in terms of transaction growth.

Operator

And we'll go next to David Togut with Evercore.

David Togut - Evercore Partners Inc., Research Division

Charles, you referenced your focus on the merchant bank channel. Could you update us on the productivity of your bank partners. Where it is today and where you'd like to get it over the next couple of years?

Charles D. Drucker

Yes, well, we haven't given specific numbers per branch. But we're at 1,600 and continuing to grow fast. We're seeing the referrals. So if you go back 6 -- to a couple of quarters ago, when it took us longer to get them ramped, the new clients that are coming up, we're seeing the revenue and referral stream a lot faster in the existing clients. So the type of traction and focus we have, we have -- we have a very strong leader with Stephanie Ferris in that channel. It's a very strong leader driving that charge for us and we're seeing these referrals ramp much faster than they were before.

David Togut - Evercore Partners Inc., Research Division

What are you doing to continue to increase productivity, is it a matter of more training at the branch level or more services?

Charles D. Drucker

It's a combination of, first of all, getting the right sales rep in place, and we've done a really good job getting that, and we've got a good job getting the branches in place. Sometimes, you are under how fast that particular bank is growing and new clients they're getting. But we're working with the bankers and continuing training them and doing programs. And quite frankly, the sales people that we're hiring to work with the branches have been a good complement because we have the philosophy to not only have them refer our way as we drive business checking and business lending back to the banks. And as we're more successful in that and identifying opportunities in our merchants, we -- it really lights up the bank and our partnerships have been very good.

Operator

And we'll go next to Ashwin Shirvaikar with Citibank.

Ashwin Shirvaikar - Citigroup Inc, Research Division

I guess I wanted to talk about the FI business and you mentioned security and [indiscernible] solutions to focus. Within security, could you talk about sort of the importance of encryption and Tokenization. How do those projects sort of flow through your P&L? And down the road, is there going to be a different split of transaction versus product just building up that segment?

Charles D. Drucker

Yes, so let me break out [ph] with it. So in the FI side, there is still the security monitoring, the fraud monitoring, the real-time type of alerts monitoring that come to your phone. Those are the types of products with some enhanced analytics from the fraud replatforming that we're doing. We're bringing to the mid-size and our large clients and continuing to enhance their fraud experience. So that's -- it's one section with the FI clients. We're also guiding the FI clients around chip [ph] and how to think about reissuing, how to think about how the merchant environment, when the liability shifts and where they have to be and their risk reward and timing associated with that on the FI side of the house. On the merchant-acquiring side of the house, a lot of activity around end-to-end encryption and Tokenization that you're trying to get that data at rest out of the environment and making their PCI compliance easier, leading into getting them certified as they think about upgrading their point-of-sale machinery into a EMV-capable compliant. So it’s kind of a stage and Tokenization and end-to-end encryption is really moving fast with EMV moving as the next stage. From the small bank side, it's about a P&L hit about upgrading the cards and the risk rewards. So it's kind of balanced on both sides. The other thing that's out there and there's a lot of conversation is around the control of the token and where does the token happen and we worked very closely with both our merchant clients and bank clients, and we think we're positioned as a trusted agent of the unique tokens.

Ashwin Shirvaikar - Citigroup Inc, Research Division

That's very useful. Is there a break out, though, of transactions versus product? Is that one way to think of the FI business?

Charles D. Drucker

Mark?

Mark L. Heimbouch

Actually, we have that -- I mean, we have that today, we have additional product and solutions in our FI business. We always kind of try and talk about the impacts on revenue per transaction. I think what historically had been the case in the FI business is counter to the rest of the industry, revenue per transaction, particularly at the beginning in 2013 was expanding. That was the influence of value-added services. What we've seen over time is that tends to be a little lumpier in the FI business as compared to the Merchant business. But going into the second half, and again, more so in the second half of 2014, we would expect the relationship between transaction growth and net revenue per transaction growth to be closer aligned whereas today, you're seeing what looks like a little better rate compression. So those value-added services would continue to contribute in the future to higher revenue per transaction rates of growth.

Operator

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

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

I can't remember in the past, have you guys broken out kind of the aggregate benefit, either in points, transactions, revenues, however you want to do it, from the strategic initiatives channel? I think you've done that in the past and if you have, will you do it again?

Mark L. Heimbouch

I think we've thrown out and continued to indicate on the Merchant business that kind of the combination of merchant bank, ecommerce and partner are roughly about 20% of net revenue in the Merchant business today. So continued to become a bigger part of our business.

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

Okay. And the -- as we think about the benefits of Element throughout the year, you mentioned that your winning share in the ISV market. Are you telling us that your winning share from more traditional, just merchant acquiring competitors, or also those competitors that have similar integrated payment solutions?

Charles D. Drucker

A combination of both. I would say, Element -- what Element brings is the security aspect and EMV capability and some unique technology. And where other clients have great distribution and we're trying to work on Mercury's distribution, but their technology is a distribution. Their technology is a differentiator, and Element really makes those things happen.

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

Okay. And is that -- is it important in this context, that you're pulling it through your common technology platform and that's why you're kind of your speed to market with EMV is so critical or is there something else that we're missing?

Charles D. Drucker

I mean, I would say, first of all, the technology is strong over at Element, and using our common scale that we have, just makes it -- it's the API, how we work with the ISVs and it really makes that move quickly and they're very nimble as an organization.

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

Okay. And then I just wanted to circle back on the tax rate for just one second. Just so I'm clear, the tax rate that we're using is, I guess, 200 basis points lower than what the original plan was and we're keeping guidance the same on earnings. Is that the message that we're supposed to take away?

Mark L. Heimbouch

Yes, so kind of our approach on guidance would be to continue to update you guys on quarterly -- or provide updates in terms of the next coming quarter in terms of guidance and affirming annual guidance. So...

Operator

We'll go next to Darrin Peller with Barclays.

Darrin D. Peller - Barclays Capital, Research Division

Just quickly on the tax again. I mean, so you guys are saying you're going to give us more color through the year. But I mean, if we're coming off a 38.5% rate, now 36.5%, I guess looking at that, obviously we assumed margin was going to be a driver to help make some of your EPS guidance. So now it looks like tax rate is really what's plugging that hole. Is this the rate that we should be thinking normalized in the long-term into '15 as well? Is this a normal rate now that we can count on or...

Mark L. Heimbouch

Yes, it feels like it. I mean, we'll continue to make -- to give you a view if we believe it changes. But we would use that going forward.

Darrin D. Peller - Barclays Capital, Research Division

And then quickly on the margin side. Last quarter, there was I guess there was some pressure on margins on a year-over-year basis. At the time you had talked a lot about investments being made in the business being the driver of that. Although this quarter, we saw margins expand, I think it was about 30 or 40 basis points year-over-year. So can you just talk a little bit about what you're seeing in terms of -- what we should expect in terms of incremental investments being made in the business in certain areas? And are there any other key variables we should think about for the margins for the year? Obviously, they're starting off the year pretty well.

Mark L. Heimbouch

Yes, I mean, I'm trying to think about how to give you more color on that. I mean, sales and marketing, I think as the business grows and some of the new channels grow, we'd expect sales and marketing to continue to grow. So I think that continues to grow probably a little bit higher than the Merchant business. FI is going to -- after we kind of get over the lapping of the product costs that we've continued to talk about which I think is going to occur second half of the year that should continue to be pretty low in terms of rates of growth, so single-digits. It's a little bit more growth on the sales and marketing side. OpEx, you're going to start to see a lot of leverage come through. And some of that begins really in the second quarter. So I think I made a comment on the call that on an absolute dollar basis, operating expenses should be flat to down. And then I think you've seen the impact of G&A starting to behave much more like a fixed cost. So we'll invest as needed. But I'm not -- saying to you today, I'm not thinking -- I'm not aware of anything significant in terms of dollar amounts above and beyond what you've seen historically in terms of capital or run rate expenses.

Operator

And we'll go next to Tulu Yunus with Nomura.

Tulu Yunus - Nomura Securities Co. Ltd., Research Division

Actually staying on the topic of margins. For this quarter, could you share what margins would have been actually excluding the impact of Element? And I ask only because I'm assuming in that question that Element is still a driver in your margin?

Mark L. Heimbouch

Yes, I actually don't have that in front of me, I have to follow up with, but margins -- EBITDA margins would have been lower -- I mean higher. Element was a slight drag on EBITDA margins.

Tulu Yunus - Nomura Securities Co. Ltd., Research Division

Right. Okay. And then just on the merchant bank line of questioning actually. Could you share with us what as a percentage of revenues or transactions, or whatever you want to talk about it, what that is representing? And whether that's moved up? I get that the branch count is going up and it sounds like it's getting more productive. But are we starting to see it in the revenue numbers I suppose is what I'm asking?

Mark L. Heimbouch

Yes. So when we -- in terms of -- it is. It's actually seeing very solid double-digit rates of revenue growth. And earlier I provided a comment that the strategic channels as a whole are about 20% of -- in fact, they're just over 20% in net revenue in Merchant business. Merchant bank is -- and if you think about the rest of that pie, ecommerce is about half of that and it's not evenly divided. The partner channel represents more than 25% of that half, and merchant banks starting to grow. So did I cover that? So of the strategic channels, ecommerce is about half. It's almost divided evenly between partner and merchant bank.

Tulu Yunus - Nomura Securities Co. Ltd., Research Division

I got you. Okay. And then I guess just lastly. I know you mentioned that April looks encouraging, even once you make that adjustment for Easter. Do you happen to have -- or could you share, I guess, if we looked at the year-to-date through April either transaction or revenue growth in Merchant versus last year, just to normalize for the impact of the shift in Easter, just curious what the growth rate may look like if you have it?

Mark L. Heimbouch

Yes, so last year we were kind of seeing mid-single digits in terms of same-store sales trends. Through April and again, I'll remind you, it's kind of early, I would say same-store sales is running a little bit above that. So through April year-to-date, again, transaction trends, same-store sales trends look pretty strong.

Operator

We'll go next to Tom McCrohan with Janney.

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

The last 2 years, the quarterly EPS cadence was very similar. A step up in Q2, kind of same EPS in Q3 and another step up in Q4. Should we expect any difference in the cadence this year given you got to push out the Easter holiday and the on-boarding of Walmart?

Mark L. Heimbouch

So there is a difference between adjusted net income and EPS, and that's a product of the share buyback principally. So there was a large share buyback in May of last year, so that will have some impact in terms of how you're thinking about rates of growth. And -- you need to calculate your net income and then come up with your share count.

Tulu Yunus - Nomura Securities Co. Ltd., Research Division

Okay. And adjusted for acquisition and integration expenses, other operating costs were up year-over-year over 10% relative to the other line items on the expense side. Was there anything you can call out there to prove [ph] the double-digit growth there?

Mark L. Heimbouch

I mean, yes, on the integration merger or transition, et cetera line?

Tulu Yunus - Nomura Securities Co. Ltd., Research Division

Adjusted for that, other operating costs were up double digits, more than SG&A, I'm kind of wondering if there's anything to call out there?

Nathan Rozof

So it's Nate here. So the other operating expense, one of the primary drivers of that 11% growth in that line is that the contribution and consolidation of Element expenses to our P&L.

Tulu Yunus - Nomura Securities Co. Ltd., Research Division

Okay, and so do you expect that to continue or is there some synergies there that growth rate is going to taper off as the year progresses?

Nathan Rozof

Yes, so consistent with Mark's comments, he obviously focused on cost containment and the efficiency initiatives. So we'd expect on an absolute dollar basis that line to be flat to down for the remaining quarters of the year.

Tulu Yunus - Nomura Securities Co. Ltd., Research Division

Excellent. And then one last modeling question. How should we be thinking about income to noncontrolling interests, the negative 13 this quarter, how does that kind of flow for the rest of the year?

Mark L. Heimbouch

That's a good question. That's obviously dependent upon Fifth Third's ownership percentage. So hence, why we -- obviously we provide GAAP information, but the adjustments we make to arrive at adjusted cash net income or pro forma adjusted cash net income are to adjust for that minority interest impact and the taxes associated with that minority interest impact. So if Fifth Third Bank were to sell a portion of their ownership, the minority interest item would be a smaller number in the P&L. So it's completely subject to how much equity they own.

Operator

And we'll go next to Glenn Fodor with Autonomous Research.

Glenn T. Fodor - Autonomous Research LLP

I just want to clear up on the same-store sales. Mark, you said that in the first quarter, it was low single-digits. And then in your latest comments to a recent question, you said year-to-date, same-store sales through April is tracking better than last year's. I think you're probably talking about the range mid-single digits.

Mark L. Heimbouch

Yes, and that comment was April month to date.

Glenn T. Fodor - Autonomous Research LLP

Okay, got it. So April was better than last year's mid-single digits?

Mark L. Heimbouch

Yes.

Glenn T. Fodor - Autonomous Research LLP

Okay, thank you. And then when you think about the bank referral channel, it seems like you're making progress there, continuing to add, continuing to increase productivity. But how close are you to where you think you need to be on the branch count and then at that point at all it becomes about increasing the productivity from your existing base?

Charles D. Drucker

The branch count that we've added, the 1,600, is strong. But we think that pipeline is very strong behind it. And we'll get more movement. So it's a combination of both, Glenn. But we think we have a lot of traction of adding banks and switching banks over to us that will increase that count while the productivity goes up. So I think it's going to be a fast-growing channel, one of our -- along with the other 2 strategic channels we have.

Glenn T. Fodor - Autonomous Research LLP

And then last question. Maybe I'm splitting hairs here. Just looking at the comment from the last call, there was a nuance that you alluded to when you were talking about the impact in the Merchant yield due to Walmart. And you said excluding Walmart and, "other large national merchants". So just maybe reading between the lines, too much, is that implying that there could be another large win out there? I mean I know you're always looking for new wins obviously, but is there some RFPs that we should be aware of on the large Merchant side?

Charles D. Drucker

Yes, I thought we have, a couple of quarters ago, we talked about different large clients and we win large clients regularly. But to the degree of a Walmart, we were referring to Walmart as the client. But we do win -- regularly we're bidding on large merchants space and it's part of that regular cadence that we're winning clients in that space. But Walmart was the key win. And then ecommerce, we continue to get good traction on those clients.

Operator

And we'll take our last question from Smitti Srethapramote with Morgan Stanley.

Smittipon Srethapramote - Morgan Stanley, Research Division

Target recently announced that they'll be moving their co-branded card portfolio to Chip and PIN early next year. Based on your conversations with your other clients, do you expect more retailers to take the Chip and PIN trial versus chip and signature as a switch to EMV over time? And then given your relationship with Target and you're leading market share in PIN debit processing, should we view these as an incremental positive for your revenue growth prospects?

Charles D. Drucker

So a lot of the conversation we have with the large clients, Chip and PIN is strongly supported by a lot of clients. We're going to have to see how it unfolds. I think Target with MasterCard is taking the Chip and PIN side which we'll have to see how it unfolds. I mean, there's a lot of story that continues to be written. We're going to be -- it's going to be a beneficial change because of a single processing platform and our ability to be nimble allows us to do what our clients need quickly and get them the best security systems.

Smittipon Srethapramote - Morgan Stanley, Research Division

Okay. And maybe just a quick follow-up on your international expansion plans. I think you'd given hints in the past that you were looking at expanding outside the U.S. sometime in the future. Can you just sort of give us an update in terms of where you are on that process?

Charles D. Drucker

Yes, so I think we continue to, first of all, Mark prioritized there how we're looking at our capital and we continue to think about how we expand internationally. So it's expanding our business through M&A is key to us. International expansion, is really -- it's on our roadmap for growth. The expansion will be likely opportunistic and it could be a partnership, it could be through an acquisition and it could be through ecommerce is something that is very exciting to us internationally. So we're still putting the roadmap out there and focused on growing our business in all growth channels.

Operator

And that concludes our question-and-answer session. I'd like to turn things back to our speakers for any closing remarks.

Charles D. Drucker

Well, thank you. Thanks for the questions today, and thank you for joining our call today. If you have any additional questions after today's call, please feel free to reach out to Nate. He will be happy to help you. Thank you again for being on our call. And have a great night.

Operator

Thank you, everyone. That concludes today's conference. We thank you for your participation.

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