Total System Services (NYSE:TSS)
Q3 2010 Earnings Call
October 20, 2010 5:00 p.m. ET
Philip Tomlinson – Chairman of the Board and Chief Executive Officer
James Lipham – Senior Executive Vice President and Chief Financial Officer
Shawn Roberts – Director of Investor Relations
Jason Kupferberg - UBS
Bryan Keene – Credit Suisse
Greg Smith – Duncan Williams
Glenn Fodor – Morgan Stanley
Craig Maurer – CLSA
Tom McCrohan - Janney Montgomery Scott
John Williams – Goldman Sachs
Good afternoon. At this time I would like to welcome everyone to the TSYS third quarter 2010 earnings conference call. [Operator Instructions.] I would now like to introduce Mr. Shawn Roberts, director of investor relations. Please go ahead sir.
Thanks operator, and welcome everyone. On the call today Chairman and CEO Phil Tomlinson will provide highlights on the third quarter events, and then he's turn it over to Jim Lipham, our CFO, who will review the third quarter financials. After that, of course, as you already heard, we’re going to open it up for Q&A.
I’d like to remind everyone of our Safe Harbor, 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’ actual results to differ materially from the forward-looking statements are set forth in TSYS’ reports filed with the SEC. At this time I’d like to introduce TSYS CEO Phil Tomlinson.
Thank you Shawn and welcome everyone. Good evening. We're delighted to be reporting to you today and think we have a good report. We believe we're seeing improving trends and we have some really positive news to share with you.
First, I want to talk about the third quarter of 2010 versus the same quarter of 2009. Same-client account on file growth increased 7.3%. That's a real high quality number for us. Same-client transactions increased 5.1%. On a year-to-date basis, same-client revenue growth increased 3%.
Now I want to take a few minutes and talk about some new wins and some successes in each of our reporting sectors for the quarter. In our international sector, we announced earlier today that we've signed a contract to process the credit card portfolio for SwissCard, in Switzerland. We expect to convert these accounts from their in-house systems in mid-year 2011.
SwissCard, if you're not fully aware of it, is a joint venture between Credit Suisse and American Express, and is the only company in Switzerland to offer its cardholders American Express, MasterCard, and Visa credit cards.
I want to bring you up to date on Brazil. The second state of the three-stage conversion for Carrefour was completed August 15, with the last stage scheduled for mid-year 2011. The conversion was very successful, and the subsequent daily processing is going very well.
I think it's important to understand that we've delivered to Carrefour, and to the whole Brazilian market, a completely new server-based outsourced card system. We're confident that this strong relationship that we have built and continue to build with Carrefour will open additional opportunities and help us introduce new products and services, not only to our client there but other regional prospects as well.
As you know, Brazil is the fourth largest card market and is enjoying really strong growth. Also, we believe that pre-paid is a huge opportunity for us to expand beyond credit. Brazil is predicted to be the second largest pre-paid market in the world, growing at a 20% rate over the next 10 years.
Additionally, on the international front we previously announced we had won the Tesco retail business in the U.K. and Tesco Bank is the U.K.'s most successful supermarket bank, with more than 6 million customers. And they're the sixth largest credit card provider in the U.K., with over 2 million accounts in circulation.
Even though it was already on TS2 with another client, their decision reaffirmed the value that we think we bring to our clients over a competitor, and of course that decision as they went on their own was to stay with TS2 or TSYS.
We also just announced a contract renewal with the Bank of Ireland for its consumer and commercial card portfolios, and we'll continue to focus on Italy, which is the seventh largest card market in Europe with about 70 million credit and debit cards and over 8 million pre-paid cards. We think that is going to be a good market for us.
One I meant to tell you about when we were talking about Ireland was I'm also happy to report - and it hasn't been released yet, but they've agreed to let us talk about it - that we've just signed an agreement with Permanent TSB, which is a bank located in Dublin, Ireland. Our first European debit client, and we'll process both their credit and debit business and believe this will prove to be a watershed event for us that hopefully will lead to even more debit processing in Europe and the U.K.
Now back to Italy, you'll remember that earlier this year we announced the signing of Cedacri. You might think of Cedacri as an aggregator model providing a host of payment related services to Italian banks and retailers and we're leveraging our newly formed relationship to provide a full end-to-end solution in this market and that should ramp up in about mid-2011.
In the North America sector, we're seeing traction in our end-to-end card offer of community banks and credit unions through the TSYS program solutions, or TPS is what we call it, which we formed this time about a year ago and we talked about it on this call about a year ago. We have just recently signed a partnership agreement with BancVue in Austin, Texas, to provide credit card products and related services to its nearly 700 community bank and credit union clients.
We already have four, five agreements into the final negotiations and they're principally startups, but one is a conversion from someone else. We expect to have these banks on our books by mid-2011.
We think it's a terrific opportunity for us, and we're confident we have the technology and a market differentiating offer that's unavailable to this sector today. These volumes that we're dealing with are obviously smaller, but we believe that we can sell more services in a bundle package offer if you will. I think this is an area of potential growth of TSYS that you ought to keep your eyes on.
Another win in the U.S. that I'm very proud of and want to talk about is the recent signing of Simmons First National Bank in Pine Bluff, Arkansas. Simmons First is a super-prime issuer whose customers have some of the highest credit scores in the country, and the reason I'm so happy about this one - we've been trying to sign them for about 25 years. They've been in house that entire time and they'll be coming out.
We have an enterprise-wide relationship with Simmons and we'll process their issuing and acquiring as well as their loyalty card production, statement production, some of their fraud work, as well as the online customer service.
Going up to Canada, Walmart Canada successfully launched its credit card program with us in the third quarter and certainly we expect big things out of this mega-retailer in Canada. Just to remind you, we signed a similar deal with Walmart in Mexico a little over a year ago.
Also, you probably saw Monday's CIBC Visa debit card announcement and TSYS will be processing all of those new debit cards. Today I hope you also saw an announcement where we have signed a multi-year agreement with Bank of Montreal, one of Canada's top five banks and the largest MasterCard issuer in Canada.
The Bank of Montreal conversion process will start in mid-2011 and will continue into the first quarter or two of 2012. With the completion of that conversion, TSYS will enjoy what we believe to be a 60%+ share of the Canadian card market.
Now if I can talk just a minute about our acquiring services. I know you're curious about the latest update on Bank of America Merchant Services, or BAMS as we call it. We have continued to work on a long-term contract and in the meantime continue to service BAMS and we have every reason to believe this service agreement will be agreed to in the very near future. So we're comfortable that we'll continue to process that business and if anything to the contrary happens we'll be in touch.
We renewed an agreement with Sage Payment Services out of McLean, Virginia to provide authorization, settlement, and terminal services to its 155,000 merchants. In addition, we signed Cynergy Data out of New York City, which is a leading ISO with approximately 120,000 merchants to our authorization settlement and dispute resolution services.
Of course, FNMS, our merchant acquiring joint venture with First National Bank of Omaha, continues to exceed our expectations and we're delighted with their performance, energy, and the new opportunities they bring to the table.
Now, with that I'd like to turn it over to Jim Lipham who will give you much more detail on the financial side. Jimmy?
Thank you Phil. Couple things I wanted to discuss. First of all is in the press release you saw where we announced the sale of TPOS our point of sale business in TSYS Acquiring, and we sold it right at the end of the third quarter.
It was immaterial as far as the amount of revenues as was stated in the press release, but we did book a loss in the quarter of $2.3 million and year-to-date it's going to be $3.1 million. And those will be losses that will be showing up in the discontinued operations on the P&L, but I did want to cover those.
Phil mentioned that we had great same-client growth in our transactions and our accounts and we continue to see good improvement there, so as we go through these slides I'll try to pull some of that out to you.
Also of note is the way we were able to, in this quarter and year-to-date, we have now overcome the loss of the de-converted revenues and the termination fees associated with clients that we've lost. When you look at the third quarter numbers on slide seven, you'll see the revenues were both up. Revenues before reimburseables as well as total revenues.
We did have $24.4 million of termination fees and one-time revenues in the third quarter of '09, and during this third quarter of '10, we suffered about a $2.5 million loss in currency translation. But if you go down to the operating income you'll see we're down 10.6%.
We did book in the third quarter this year $26 million more in expenses associated with FNMS that we didn't have next year, but if you removed all that you'd see about a 9.2% decrease in expense this quarter-over-quarter. So overall we're continuing to do good expense controls and obviously the addition of FNMS has helped us on the revenue side.
Operating income - if you went in and adjusted the FNMS as well as these termination fees you'd be up 12.9% instead of down 10.6%. So this is all just part of trying to get to our core business and get rid of some of these one-time items between quarters that seem to cloud what's really going on with our company.
If you get down to the bottom you see the growth in accounts and it's up, cardholder transactions I mean, it's 6.8%. If you remember, in Q2 we were up 3.8%, so we're continuing to show positive growth and increases there. Year-over-year you see it up 3.8% and at $5.582 billion. So great cardholder transactions, and in our same-client Phil mentioned a while ago for the quarter up 5.1%. During the second quarter that was 4.9%, so it's continuing to pick up.
If we go to the next slide, just to highlight the impact on FNMS, and I say impact because we pick up in the third line there the acquisition fees, which as you know are on TSYS' books. They're not on FNMS'. But with that said, their operating profit for the quarter is $7 million and $11.8 for year-to-date.
Now both of these numbers have amortization of intangibles in it. The quarter has $3.6 million and the year-to-date has $7.4 million of intangibles taken out of it. If you put those back you'd be running in the 30% to 31% margin on FNMS, which is very good and as Phil said we're pleased with where they are and in line with our guidance.
I will mention that - it's not on the slide - but their transaction volumes year-over-year when you look back at '09 for them, they're up 5% and their dollar volumes are up 6.2% year-over-year. So they're showing some good growth also in the direct acquiring market.
If you flip over we have a graph here that just shows our growth in revenues year-over-year. We're up 2% on a year-to-date basis and this is the breakout. Internal growth is still 3%. That’s the same percentage it was in the second quarter and continues to be a real positive force and something we look forward to seeing grow back into the high singles and low doubles like it used to.
New clients added 2%, acquisitions added 6%, and then you've got the normal column of lost clients and price compression with lost clients making up the biggest portion of that 9% decrease, being roughly 7.8%.
But the internal growth is still the key there. We hope as you all know we've got two quarters next year [inaudible] some of this lost business. But we do anticipate the first quarter being somewhat similar to what we've just come through here in the third quarter, because we'll have one quarter there that we didn't have FNMS in 2010 and it will help us offset the termination fees we got first quarter of 2010.
Flip over to the next one it's our account on file summary. Not a whole lot to say here other than that we are pretty close to where we were last year at this time. We're down 2.9 million accounts from that point. When you look to the consecutive sequential quarters you'll see we're actually up 6.4 million or 2% over where we were at the end of the second quarter, so still seeing some good account growth to offset what we've lost in these deconversions this year, so we're very proud of that.
Flip over to the first segment, North America. You'll see revenues $231.5 million, it's down 11.5% year-over-year. Same thing with revenues excluding reimburseables. They're down 12.3%, there again the big item being the $20.6 million loss in revenues associated with your deconverted clients and lost business.
Margin, down 27.3%. That's a pretty good margin where we think we're going to be there. I know we're down a lot from where we were in '09 but that's because of those termination fees. It boosted the margin up quite a bit. I think it was up 32.8% back in the third quarter of '09.
But I will highlight the same client transactions again, growing at 5.3%, $1.582 billion. This is roughly the sixth quarter in a row that we've shown improvement in the same-client growth quarter-over-quarter. So sequentially we're doing real well in seeing the transactions grow.
Over to the right, total cardholder transactions, $1.658 billion. That's also an increase of 6.6% and very good there.
Flip over to the international segment. Sequentially we're at $85 million. We're up 9.4%. That's actually down 1% from year-over-year and again we had about $2.7 million worth of negative currency there and the operating margin decreased 205 basis points. But if you'll note, operating margin down at 15%, excluding reimburseables, is where we had anticipated it would be.
Some of the highlights for the quarter had to do with Japan. We had roughly about $3 million or $4 million pickup there based on base-one, base-two volumes as well as a little new business, new products.
Our new clients in Europe added about $6 million. If you'll remember we had Skycard de-convert the end of fourth quarter last year, and that cost us about $4 million on a comparison basis. But the same client growth was up 1.7% year-to-date and if you excluded the price reductions it would be up 3.2% so still feel real good about our international.
We did have a growth in our operating expense of about 2.1% and it's mostly associated with the technology spend and infrastructure we've built up for Brazil, which Phil mentioned that Carrefour has now started being converted and look forward to that being finished and growing our presence in Brazil to get some scale out of this infrastructure that we've built.
Total same-client transactions up in the international 4.3% and see good growth there, and then 7.7% for the total cardholder accounts.
Flip over to the merchants. Big numbers here. We're up 38.4% of revenues, up 57% in revenues before reimburseables there again. FNMS represents $33 million of the increase. We did have a good internal growth here in the acquiring space, 6.1%, and feel real good about that. If you look at the same-client point of sale transactions [inaudible] we're at $1.3 billion, an increase of 0.5%. If we bring in the FNMS transactions, they're up 5%. I mentioned that a while ago. In dollar volume, transactions were up 6%.
The point of sale transaction's a little bit distorted as you know. They went up about 3% last quarter and if you go back and look at the same client point of sale transactions we've lost a very big merchant in this quarter and a lot of transactions there, but if you restated those transactions for then and the loss was clients that we had and the new ones that came on, you'd see a 4% increase in what I'd call same client point of sale transactions. So good growth here in the acquiring space and as we mentioned before the FNMS acquisition has proven to be in line with what we thought it would do.
The last segment. Corporate administration. Nothing really to add there. It's just up $400,000 over last year and no real changes.
The last slide here has to do with cash flow. In the trailing 12 months it's $489 million, down just a little bit from what we have had in the past. When you look at the cash flow from operations at $375 million, we are down about $32 million. It had to do with some pre-pay growth, prepaid accounts, and we did have an adjustment out of our deferred taxes from long-term into short-term which caused us a problem there, but we still feel good about where we are with cash flow from operations.
So free cash flow down $217 million. We have spent around $158 million on capital expenditures in the last 12 months and that's what brought that down, and this just happens to be the same number as net income. But overall we continue to have good cash and as you saw in the press release we did get it back in the market and bought our shares back starting on the first of September and I will tell you that one of the reasons that happened is we didn't have any active M&A activity going on at that time and we thought it was a great opportunity to get in there and buy some stock. And we did until we had to get out before the quiet period.
With that, I will add one more thing that you probably saw on the equity and income line. It was down a little bit for the quarter and it had to do with [inaudible] data, and we had a fluctuation there and we had an adjustment in the third quarter that we made bringing them in line with GAAP on some of their revenue recognition this year but it will be just a timing issue. But it did knock it down a little bit in the quarter. But we don't see it, [inaudible] see year-to-date it's pretty close, so we feel pretty good about that.
So Phil, I'll just turn it back to you.
Thank you Jimmy. We'd like to open it up for question and answers now if we could, operator.
Yes sir. [Operator Instructions.] And your first question is from the line of Jason Kupferberg with UBS.
Jason Kupferberg - UBS
Just a question on the full-year guidance. I know you're notching it up here on the EPS side by a couple of pennies and obviously we've just got one quarter left. It looks like if you back into the high end of your range at a buck for the year, maybe your Q4 EPS might actually be down a little bit versus Q3. So just hoping you could talk a little bit about some of the puts and takes there. Maybe you're just being a bit conservative, or was there anything one-time in the Q3 results, or any other explanations you might point to there?
As you know, at the end of the second quarter we talked about, when we were $0.02 above also, that we were going to be booking some employee benefits things that we hadn't done in a couple of years, and we will continue that through the fourth quarter. We also had some revenues that we had originally thought would come about in the fourth quarter that got accelerated into this third quarter. There's obviously a $0.02-plus for the quarter and we're not real sure that this can hold up. We did have some good volumes, and if the Christmas season comes in it might be on the low end.
Okay, that's fair. And I guess just starting to think beyond Q4. I know it's a bit premature to actually offer formal full '11 guidance, but can you give us a general sense - how do you feel about your prospects for revenue growth acceleration, margin performance next year? You've got some sizable termination fees this year to still grow over, but you've got a good amount of new work rolling on next year, and probably a continued undercurrent of some pricing pressure. So again, not giving us hard numbers, but just directionally how should we start to think about what you guys are expecting '11 to shape up for the company?
Quite a long question, Jason. [Laughter.]
Are we going to get a long answer?
I'll tell you, we're working on '11 as we speak and I mentioned that about the first quarter because it's closer and it's very visible and the FNMS revenues will be there. They'll help offset the $25 million that we had in the quarter this year, in first quarter of 2010, but obviously we're excited about outgrowing the termination fees and as we look at internal growth and if this account growth continues to happen we'll feel pretty good. It's just not there yet to give you a number.
We typically give that number in January and I don't know that we can give you much beyond that today.
And your next question is from the line of Bryan Keene with Credit Suisse.
Bryan Keene – Credit Suisse
So the margin in the quarter, the operating margins, kind of surprised me a little. I recall last quarter I think there was almost an $11 million termination fee that helped boost the margins and yet the operating margin was relatively the same without that big fee. So I guess my question is was there anything one-time that boosted third quarter margins to reach the second quarter level, or -
I'm not sure what you're looking at. I know North America for the second quarter had a margin of about 32.8% compared to our 27% this quarter, and that's because of those one-time fees. But if you look at the year-to-date margin we're at 22% versus 23.9% last year, and what we're seeing a little bit is a drop in our margins because of an infrastructure build that we've had on the international front as well as the drop that we had - we were picking up good margin growth off of these termination fees, because they were going straight to the operating income line.
Yeah, I'm just looking at operating margin of 18.3% in 2Q and then of 18.2% in 3Q '10, so it didn't move much. So it probably has to do with some of those fees.
That's in the fees in that third quarter of '09.
Bryan, I told our board today it was just superior management. [Laughter.]
And going forward, though, in the fourth quarter it looks like just backing into the guidance the margins will drop back down, and some of that sounds like there'll be some benefits and things that will be in that fourth quarter number. Is that correct?
Okay, and the minority interest balance that I think up a little to $4 million. I think you might have mentioned something about that Jim. Is that one-time in nature, or should we see that $4 million continue as we go forward?
It will continue. You're talking about year-to-date I guess, and we did have a one-time adjustment this month for getting CUTDATA on an accrual basis on some of their fees for revenues, and so it's a timing issue.
So we'll see that bigger minority interest expense going forward as well?
Well, the minority, that's not it. I was talking about the equity and income line. On the minority interest that's just a piece that belongs mainly to FNMS, and it will grow as we go forward, because that's the 49% that we don't own of FNMS. And then we have [inaudible]. So that's what's in the minority line.
Your next question is from the line of Greg Smith with Duncan Williams.
Greg Smith – Duncan Williams
Just on the equity income, again, with CUPDATA - you're saying there was some one-time adjustment to get that in line. So are we going to recoup any of that, or as we think of 4Q and going forward can we get back to the $2 million plus number you put up in 2Q?
It was just a matter of the way they had booked something and it happened to happen in the same month of August. It was right there in August and September, they booked in two months, and we had to go in and change some of it.
All we did was defer it.
One month amortization instead of a one month recognition.
And then are there any large deconversions still pending? Can you remind me?
Didn't think so. But just wanted to make sure. Glad we're past that. And then you talked a little bit about the debit opportunity in Europe with that win in Ireland. Can you talk a little bit about that opportunity and why is that emerging for you at this point?
The truth is, we've been trying to sign debit business for years and just have not been very successful and we've talked about it on this call three out of four times. We now have some debit business going in Canada. We have our first debit customer in Ireland. And we've got something to sell and we're hopeful that this will be the reference point or the reference, whatever you want to call it, to where we can use these organizations as a sales tool. We've got a good product and we're hopeful that it will grow.
It's not like that's going to happen overnight. That's going to be somewhat of a slow process, because we just don't have the big reputation in the debit business. But we can do anything that anybody can do in the debit business. So we feel good about it.
Your next question is from the line of Adam Frisch with Morgan Stanley
Glenn Fodor – Morgan Stanley
Hi guys it's Glenn Fodor for Adam Frisch. Congratulations on the nice stream of recent wins. In your eyes, does this signify that things are finally loosening up from a decision making perspective, and should we read into these as a trend that should continue, or -
I don't know if this constitutes a trend, but we have seen some increased activity in North America in particular. If you think about it, over the last three years we've been fairly successful signing new business on an international basis, but the U.S. market just sort of dried up and the card issuers were typically in such bad shape that they certainly didn't want to take any risk, particularly with this CARD Act that has recently been implemented, by the way, which I'm happy to tell you went - I guess you would say - flawless here. I do think people are at least willing to have a conversation with you about doing something like this, like we do, where in the past couple of years it was just hard to engage anybody because I'm sure a lot of them were worried about whether the organization was going to survive, much less worry about whether they should do a card conversion of some sort. But I don't know if it's a trend. We're seeing a little light. It's not fantastic yet, but it's better than it has been.
Presumably these wins have come from your pipeline. How is the backfilling going of those now? Are you bringing in more that will move through the pipeline?
We've got a pipeline today of 12-13 million accounts as best I understand it and that's signed. And we've got, again, a long, long list of prospects, some very large, some pretty small. And as you know, thank goodness all of them don't take as long as Simmons did, but it's not a quick sell. It's a long, complicated process and that's why people are very careful about the decisions they make.
And if I can just go with one more, I'd appreciate it. In our research we've laid out some alternative products banks may be exploring for a post-Durbin world. Recently we heard BofA come out with some vague comments that they're working on some things. Have you been actually working with the banks on some of these scenario analyses they've been doing? And if so could you -
We're working with several banks on some new products that hopefully will be coming out before year end that I think will be attractive to the consumer market out there and we're pretty excited about them.
Can you give any color on what they might be?
Well, one that we talked to earlier, maybe a couple of quarters ago, was this hybrid product that we have which is you can sort of direct how you want your payments to be handled, whether it be a pay now or pay later kind of product. It's got a lot of different ways for the consumer to be able to manage their credit or their now account if you will. Again, it's the first time in a while we're starting to see people want to bring out new products. I'm always checking my mail. As I've said earlier, I'm one of the few people that look forward to getting these credit card solicitations in the mail so I can see where they're coming from and how many are coming, and read them and see what's going on and they're picking up, which is a good thing.
Your next question is from the line of Craig Maurer with CLSA.
Craig Maurer – CLSA
I was hoping you could comment - you mentioned you lost a large merchant and I was wondering if you can comment on the circumstances around that.
I can't. It was a pretty large one.
Was it price driven?
Service and price. What it was was a large merchant, national merchant.
Your new debit win in Europe - I just hope you can comment on when you look at the margins you'll earn on debit versus credit in the same customer relationship how do those compare?
The debit would be much less. There's a lot of activity on a debit account, but when you compare it to what we actually do on the backside of it other than authorizations and passing those transactions back to the bank you don't have a lot of the activity that you would have on a traditional consumer credit card account. And so while it's important and the transactions are very easy to add on, I don't think you could seriously compare the two. I think credit would be a much more robust product as far as generating revenue for TSYS. And for the issuers too by the way.
And the last question I had was in relation to a lot of the changes that we're seeing out there and proposed changes. From your perspective do you think merchants will be successful in steering transactions from one product to another and as an acquirer are you looking into how you could help facilitate that steering? And does that in a way make you a foe to your biggest customers, which are the banks if you were to do that?
We're certainly looking at those options but I'll answer that question as a consumer. And I think that's what I will certainly be at the point of sale is a consumer. And when I pull out my card that's the card I want to use, and typically I have a reason for using that card - I don't know, it's top of my wallet for some reason. It might be a loyalty program. It might be a great rate. It might be my best friend's bank. There's no telling. But there's typically a reason that I would pull out that card for that particular transaction. And I use several different cards as a consumer so I think it all sounds good but I think it will be difficult and you might be able to do it with some pricing incentives or something like that but - I don't have the answer to that to be frank with you.
Right. It just seems that the merchant risks too much by turning off the consumer.
I just want to get through the cash register line and get out, and I think most consumers are that way.
Your next question is from Tom McCrohan with Janney.
Tom McCrohan - Janney Montgomery Scott
Did you mention who you sold the point of sale business to and any kind of pricing around that?
No, we didn't.
I just mentioned that we had the loss recorded in the third quarter of $2 million.
It was just a private sale to a private company.
And the Simmons First win, is there any way that you can size that up in terms of number of cards, revenues, or both?
I don't want to give the size of the cards. It's not a mega-issuer. They're just a very high quality, high end issuer. It's one we've been after for a long time and it's not going to move the needle a great deal but it's important to get those kinds.
And Jimmy, just an administrative question for you on amortization of intangibles. The pro forma 38% margins in the merchant segment kind of imply over $5 million of amortization of intangibles this quarter in that segment. I think it was like half that amount last quarter if I'm correct. I'm just kind of curious what the phasing is, what we should be modeling for intangible amortization going forward =
The intangibles you had for the quarter - $3.6 million would be what you'd look for going forward per quarter.
[Operator Instructions.] Your next question is from the line of John Williams with Goldman Sachs.
John Williams – Goldman Sachs
Had a question for you sir - a little bit of a housekeeping point, but on your merchant services business I was just curious to know why the point of sale transaction seems like a low growth rate just given what you've seen and I was curious if there was some sort of mix impact or if it was combining FNMS with the indirect business. What's the driver of that relatively low growth rate on the [POS].
I assume you're talking about the 0.5%?
That was the one I was talking about with TSYS acquiring, where we've lost some business and added some business. When you take that out you'd see a 4% increase, which we'll see going forward as -
Sorry, I missed that.
John, I think it's important to understand, too, when we talk about TSYS acquiring, we don't own those merchants direct, so when Jimmy says we lost a big merchant, one of our clients lost a big merchant. Just want to make that clear.
Sure. No, that makes perfect sense. The other question I had was on the accounts on file it looks like your growth other than in the consumer business seems to have stabilized reasonably well with commercial and [stored] value. Just wanted to get some color and I think I asked a similar question last quarter on the [stored] value side in the prepaid relationships. What are you seeing, and perhaps in the way of additional color, for demand in that channel. Obviously Green Dot and NetSpend now both out there. Pretty substantial news flow around those names. But are you expecting that that's going to continue growing at the rate that you've seen the growth in the last two or three quarters?
I think it's going to continue to grow. I think these issuers will have to deal with this idea of who they can clear those transactions through, and obviously that was part of the issue on the NetSpend thing. And we know all those guys well and they're all good people. But we think it's a product whose time has come and when you start looking at where the government is headed with regulations and particularly how the financial services industry is dealing with the unbanked segment of the population prepaid is the answer. I think the thing that's hit us also is the fact that in a lot of these developing countries prepaid will be huge. I predict to you it's going to be huge in Brazil. It's going to be particularly large in China and India. It will be the card of choice I believe for some period of time until these systems to allow people to have credit or debit are really better defined in some of those countries.
So do you think that you see any difference in what the bigger banks are requesting in the way of prepaid support? Thus far, I know a lot of the questions you've gotten on the prepaid space is how long it's going to take for the bigger banks really to start to push up their demand and push up just providing an attractive product to people.
The truth is John, when we got in the prepaid business our strategy was that we would sell it to the banks that we process for. And that just proved to be impossible. Banks just were not very interested in selling that product. That is beginning to change a bit. I know that we are starting to have some conversations with some of the larger banks about actually doing prepaid work, and that has been a very frustrating thing for our prepaid group because it seemed like a natural process for us. But we were just unable to sell it. Now I think as we've gone through this recession and continue to go through it I think people, particularly banks, are starting to see some of the real pluses of a prepaid card on an ongoing basis. Of course, you've seen what has happened with Green Dot and they're our largest prepaid client. So we've got some great experience in that industry.
And Mr. Roberts, I'm showing that there are no further questions in queue. Would you like us to continue fielding for questions?
If there's no further questions we'll just turn it to Phil for a summary.
Thanks Shawn, and thank you operator. You've done a great job today.
Our vision continues to be a leading global payment solutions provider. That's where we are headed, and that's what our goal is. And I think today we're far more than a credit card processor, but obviously card processing will continue to be a real cornerstone of our business.
Jim covered the quarter's performance and I think that's great. But that's a quarter. I still think that you should view TSYS from a long-term perspective as we've begun this diversification that we've been talking about really since we spun out from Synovus and as we've all tried to get through this recession.
This joint venture with FNMS was the first step in that diversification and now we're in the direct merchant acquire business in the U.S. and through their Smart One program we're also in the prepaid issuer business and a program manager for payroll cards.
We've got the cash to invest and the determination to pursue acquisition opportunities not only in the U.S. but certainly on an international basis. We are continuing, every day, to mine for additional opportunities, to diversify this footprint in the payments business. We will always continue to grow and perfect our domestic business here in North America.
We continue to expand our business in the international markets, and I think we have really had some great successes, even during this terrible recession. And we'll continue to move on those home markets like the U.K., Ireland, Germany, and the Netherlands. And I think it's interesting that a year ago I couldn't have said Germany was a home market, but I can today. We're going to continue to focus on the emerging growth markets, particularly Brazil, India, Italy, and even Switzerland.
We will continue to repurchase shares as the opportunities come about, and it makes good sense to us. We will always have a strong balance sheet and a service culture that serves us well with our clients.
We appreciate the confidence you have in TSYS and I want to share with you year-to-date, including capital expenditures on equipment, software, and contract acquisitions, the investment into FNMS, into the direct acquiring business, and the stock repurchase program, we've plowed $314 million back into TSYS this year.
These investments, along with a great team, world-class products, and service are keys to our continuing to win in these industries. Frankly, it's easy to get caught up all the bad news, the recession, the financial reforms, etc., etc., but the truth is our news is brighter today than it's been since early '08. We're not out of the woods yet, but we believe we're starting to see a little bit of daylight.
I believe we paid a tough price to get our expense base prepared for what we believe will be the next growth surge that is coming sometime in the next year, so we believe. So again, thanks for your interest. Thanks for your time. Thanks for your questions, and feel free to call us if we can clarify anything and we again appreciate your time and being on the phone with us. And operator, with that we will sign off.
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