Total System Services' CEO Discusses Q4 2010 Results - Earnings Call Transcript

Jan.26.11 | About: Total System (TSS)

Total System Services (NYSE:TSS)

Q4 2010 Earnings Call

January 25, 2011 5:00 pm ET

Executives

Philip Tomlinson - Chairman, Chief Executive Officer and Member of Executive Committee

James Lipham - Chief Financial Officer and Senior Executive Vice President

Shawn Roberts - Director of Investor Relations

Analysts

Robert Dodd - Morgan Keegan & Company, Inc.

Greg Smith - Duncan-Williams, Inc.

Brett Huff - Stephens Inc.

David Scharf - JMP Securities LLC

Thomas McCrohan - Janney Montgomery Scott LLC

Bryan Keane - Crédit Suisse AG

Darrin Peller - Barclays Capital

Ramsey El-Assal - UBS

Paul Bartolai - Credit Suisse

Glenn Greene - Oppenheimer & Co. Inc.

Operator

Good afternoon. My name is Jeremy, and I will be your conference operator today. At this time, I would like to welcome everyone to the TSYS Fourth Quarter 2010 Earnings Conference Call. [Operator Instructions] I would now like to introduce Mr. Shawn Roberts, Director of Investor Relations. Please go ahead, sir.

Shawn Roberts

Thank you, Jeremy, and welcome, everyone. On the call today, our Chairman and CEO, Phil Tomlinson, will provide highlights on the fourth quarter and 2010 year-end events, and then turn it over to Jim Lipham, our CFO, who will review our financials as well as our 2011 guidance. After that, we'll open it up for Q&A.

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

Philip Tomlinson

Thanks, Shawn, and good afternoon, everyone. We appreciate you being with us today. I hope your weather, wherever you're at, is better than it is here in Georgia. It's pretty rainy, and they're talking about snow in Atlanta tomorrow. I'd like to start off by saying that I really believe we ended a very challenging 2010 stronger than originally expected. We are seeing a gradual improvement in the economy, and frankly, I'm very proud of the way our team has performed during this very difficult last two and a half year period.

Our 2010 revenues remained strong despite a couple of client losses in the first quarter. We've continued to show we can manage our expense base during very difficult times. We announced several new wins in 2010. The new business we signed in Canada will increase our share of the market there to about 64% when we get Bank of Montréal converted. With our wins in Germany, we now consider this a home market. We've secured three new wins there, one of which is, as you know, our biggest win there is Deutsche Bank in that market. We've also signed deals with iCARD in the prepaid business. We've signed a deal with BNP Paribas, which is our first contract in France for their home cash card, used for money transfer. And we did renew the BAMS Merchant Processing agreement. We also launched a new processing system in the world's fourth largest card market, with a new client, Carrefour, in Brazil. They are really our anchor tenant there, and we believe that, that's going to serve us well going forward.

We entered into a joint venture with First National Bank of Omaha in the merchant-acquiring business by buying a 51% stake back in the March-April timeframe. And then on January 4 of this year, we announced we purchased the remaining 45% in FNMS, which is the 10th largest merchant acquirer in the U.S., and we have rebranded that to TSYS Merchant Solutions. We're very excited about that, and I think that's going to bode well for us, long term.

Lingering economic indicators like unemployment, home foreclosures, slipping consumer confidence index, continue to cast a shadow on this economy. And ultimately, recovery has been slow, and yet our business model is showing signs of strength that we're very excited about. We've aligned our multiple business units that operate as P&L units into three business reporting segments, and I want to kind of go through those very quickly to let you know what we were thinking about.

The number one is North America. We want to continue to expand our outreach and really dive deeper into the community bank and credit union space, as we've talked about in several conversations earlier. And we want to focus more on large debit issuers, in addition to the traditional business that we've been working on for 30 years. Certainly, the challenges included in the North American segment would be the current regulatory environment and ongoing industry consolidation, but our prospect list continues to grow in North America. We're pretty excited about what it looks like.

The second segment is the international segment, and we will focus on margin improvement. We've got to push to achieve operational excellence in our newly launched outsourced platform. And we've got to increase our leverage on both the TS2 Prime and TS2 in our target markets. We continue to grow revenue in both our Processing and Licensed businesses, and both are doing well. Our challenges, internationally, are really focused on successfully executing 14 conversions this year and improving the economies of scale, which ultimately will improve our margins.

And then third, and certainly not least, but in the Merchant Services segment, we're focused on growing this business and expanding our distribution and capabilities through the TMS or TSYS Merchant Solutions, as well as our Processing business, what we call TAS, TSYS Acquiring Solutions. We'll continue investing in new technology to enhance new products and to expand into select merchant verticals. We will continue to build scale as a direct acquirer, with more focus on sales, and we hope to continue to have meaningful acquisitions in that area. It's an area that we want to continue to grow. Obviously, challenges around further consolidation, data security, and again, never-ending regulation.

Jeremy, with that, I'm going to turn it over to Jim Lipham, our CFO, who's going to review the financials and share our guidance for the year 2011. Jimmy?

James Lipham

Thank you, Bill. As Bill mentioned, as we went into 2010, it was going to be a real challenging year. Just to put it in perspective, just to refresh your memory a little bit, we had roughly $73 million of revenue we knew we were going to lose. This is net of termination fees and everything as we went into 2010. So we went into the year looking to recover quite a bit of dollars in revenue and finish the year with double-digit growth in cardholder transactions, which hadn't happened in quite a while. So good momentum going into 2011.

We would go to the first slide, I guess Slide 6 on the consolidated financial highlights. Looking at the quarter, you can see revenues are up a positive 1.7% for the quarter, revenues before reimbursables up 3.7%. The story here is the TSYS Merchant Solutions acquisition has helped offset the lost revenues and price compression and deconversion fees that we had in both North America and the International during the fourth quarter. When you look at the revenues being up 3.7%, if you added back the lost revenues of $12 million and the deconversion fees of $17 million that we had in 2009, revenues would be up 12.9%. That was the outstanding growth. Also, in operating income, you see the same thing. We're down 24% there, but once you restated those numbers for those lost revenues and termination fees, that would be up 10%. So we did have a positive growth there from when you took out those one-time items that we had for '09. I mentioned the cardholder transaction growth of 10.2% for the fourth quarter, and that's the first time since the second quarter of '07 that we've had double-digit growth in transactions, and that's just outstanding fourth quarter.

When you look at the year-to-date, the same story is there for TSYS Merchant Solutions helping offset the lost revenues that we had for the year. The year-over-year, if you added back the deconversion fees and the lost revenues, we'd be up about 8.4% in revenues instead of the 2.5% you see there for revenues before reimbursables.

Transaction growth there for the year is up 5.5%. And there again, that's outstanding growth. We haven't had a positive year-over-year increase since 2006, so it's good to see that starting to happen again. But overall, we had good results. We went a little out of consensus and, as you know, we raised our target at the end of the third quarter, $0.02 a share, and we did successfully make that.

Flip over to the next slide, I want to go over just briefly the effects of TSYS Merchant Solutions. What we had for nine months there and, well first of all, for the quarter. Revenues for the quarter are $34.9 million, operating profit is $6.9 million. As you know, we have amortization of intangibles there of 3.6%. So our GAAP margin is showing up at 19%, whereas if we added back the intangibles that we have that were amortized, and then we'd be running about a 30% margin, and that's what you would have year-to-date also. For the nine months, it was running about 15% on a GAAP after amortizing intangibles, and 30% prior to that.

We'll note down there the non-controlling interest of $9,122 million. Make sure you remember that next year this will not be there. It will be in our net income line because we completed the acquisition of FNMS on January 1. I will mention too, on the fourth quarter, year-over-year transactions were up 6.7% and their dollar volumes were up 8.6%, so they had a good fourth quarter also.

Next slide is the one on our year-to-date for 2010, what made up our revenues. As you may have saw, 2.5%. Of course, we rounded to 3% here. And what made that up is 4% internal growth, which is the highest we've had here lately, and we finished the third quarter, if you remember, it was up about 3%. So we have actually improved a little bit during the fourth quarter. New clients being up 2%, and then the acquisition of FNMS making up 7% there. When you get to the lost business, it was roughly about 7.2% of this 10% reduction. Price compressions represented around 1.8%. So that got us down to the 2.5%, roughly the 3% that we have year-over-year.

When you look at the next slide on account on file, you'll see sequentially we're continuing to see good growth. We're up $3.7 million accounts for the fourth quarter over the third. We're going to finish the year at $1.9 million shy of where we started the year out. So we've had pretty good growth in account on file, and look forward to next year to turning that around to be positive year-over-year growth. And obviously, we've had a little -- the guard [ph] of that pick-up is in the Commercial card area, year-over-year and store base, so good account growth and look forward to the next year when we can talk less about lost clients.

Next slide is our fourth quarter segment information on North America. A couple of key drivers there. You see that we lost $10.2 million of revenues from deconverted clients and lost business. And we had a termination fee in '09 of $8.4 million, which -- both of those total $18.6 million. Revenues of $234 million and revenues before reimbursables at $198.7 million. They're down about 7.1% year-over-year, and obviously, without the $18.6 million, we'd be up 2%. So from an operation basis, without the one-time items, we'd be up about 2%. Operating income is $56.3 million is down 20.9%. Would be up 7% without the effects of the lost revenues and termination fees. Margin, we are at 24.1%, we're up from where we were the third quarter, a little over 1%. And same thing for operating margins after reimbursables, we're up about 1% from where we were at the end of the third quarter.

On the transaction, same growth, same client transaction growth. It increased 7.2% to a great number of $1.651 billion, with seven quarters in a row that this has grown, and we feel very good about where we were for the fourth quarter. And then it brought the year-to-date of the total cardholder transactions up by 9.7%, which is just outstanding growth. Organic growth in the North America segment was around 2.6% for the year, and looking forward to that picking up as we go into next year.

For the segment on International, the next page is -- there your key drivers are. And we had very little impact on the currency for the quarter. We did have some lost revenues of $1.7 million, to go along with the deconversion fee of $8.9 million. So roughly $10.6 million lost revenues when you compare the two quarters.

Revenues, they're down 9%. But when you add back the $10.6 million, you'd be looking at revenues up by 2%. Operating income is really down for the quarter at $7.4 million. What’s happened here is the infrastructure costs. We've had less capitalization on software development for Carrefour, Orrville [ph], Swisscard, some of these other development projects that we had going on in the fourth quarter of '09 that we didn't have in '10. As you know, Carrefour has started revenue generation, which caused us to have to start amortizing the infrastructure costs that we have in place, and this conversion is going to go on through 2011, and we will have a lot of infrastructure costs going against not a full load of revenue as we go through 2011, and that's caused this margin to drop.

The total capitalization that we don't have is about $6.9 million, and we've got about $2 million worth of increase amortization. So in total, about $9 million when you compare the two quarters year-over-year. So margin drops down now to about 8.1%. We anticipate, through the first half of the year, at least that barge is still going to run at that level. And as we get the conversion schedule on Carrefour and some of these others in place, we'll start offsetting some of this infrastructure cost. The incremental buildup of revenues will be quite good as we go forward and add business.

The organic revenue growth here for the International segment for the year was like 4.3%, so that was good. We have the cardholder transactions, we really had good growth there, and the total cardholder transactions up 12.8%. And that's coming off of a third quarter where they were up 7.7%, so good growth there.

Merchant segment continues to still look good as FNMS has come in. Internal growth for the year is at 8.4%. Our operating margin, without FNMS, is 39%. So revenues were up 43%. Revenues before reimbursables are up 66%. Just outstanding operating income and margin production there.

Just make mention, on the TSYS Acquiring Solutions, their same-store for sale transactions are up 8.6% for the quarter, so that's really outstanding. Margins suffered just a little bit in the fourth quarter. We did have a one-time charge of about $900,000 hit in that quarter. So one-time won't recur, and outside of that, we would've been at the same level we were in the third quarter, around 25% margins there.

Next slide, Corporate Admin is up $4.6 million. Nothing much to say there. I did mention during the third quarter that if our strength continued in our operations, we would now continue to book some incentives and employee benefits, which did happen here in the fourth quarter, and that's a good portion of this increase here.

You flip that the page to the cash flow summary. As you can see, EBITDA is at $472 million, and cash from operating activities at $389 million, still real strong. We did suffer a slight decrease in our free cash flow, and it was mainly driven by about $39 million purchase of licensed software during the fourth quarter. And we also had some acquisition costs of around $40 million over what we had in 2009, but overall, without that, again, we're still generating a lot of cash, where big cash flow is running around $20 million a month, and we feel real good about the way we're generating some cash here.

If you flip the page, you'd see what happened to our cash during the year, as we were very active and started out at around $450 million, and then operating, as I mentioned, created $389 million. CapEx, $217 million. That's about $96 million more than we normally do, and that was that software, as well, as we had a little hardware in the fourth quarter from Hitachi that we acquired, and that created a little higher CapEx than we normally run. Acquisitions of $144 million, as we did the FNMS. We had dividends, $55 million, and then we did the share repurchase we had in the third quarter for about $46 million. So we generated a lot of cash, spent a lot of cash, ended the year at $395 million, and then we, of course, on January 1 bought the remaining 49% interest in FNMS, and that took us down about another $169 million. So we are starting the year off with around $225 million in cash and continuing to grow.

If you look over to the next page, we'll start with our 2011 guidance, and I thought we'd do a little chart on the revenue assumptions that we have. Internal growth, at 2% to 3%, represents about $36 million. New client revenues between the 5% and 8% is around $88 million, somewhere in that neighborhood. And then acquisitions, 2% to 3%, and currency at 0% to 1%. Makes up all the positive pickups for the year, and then we still have lost business. We had about $68 million of lost revenues, and then $33 million on top of that was termination fees that we have to -- price compression is not that strong for '11. We're only anticipating around $12 million, $13 million there. So our guidance is up in the 3% to 5% range. Obviously, if we took that termination fee out, we'd be up 6% to 8%, which would be some outstanding growth for 2011.

The last page is the ranges that we have for revenues and revenues before reimbursable items. We will anniversary the 2010 deconversion fees in the first and second quarters, and we expect to have more favorable comparisons as we go in to the second half of 2011. I mentioned that revenues would've been up 6.8% without the deconversion fees or termination fees. And net income from operations would've been up 20% to 21%, which is just -- would be an outstanding growth for us, as we prepare to see some good growth in 2011.

With that, I will make one mention on -- that I haven't talked about, is CUP Data. And their fourth quarter was outstanding. Their revenues are up 23%, their operating income was up around 21% and continuing to show good growth in China.

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

Philip Tomlinson

Thank you, Jimmy. I hope everybody read and heard what Jimmy said. If you adjust out the termination fees from primarily Wachovia and Charming Shoppes. Jeremy, I think we are ready to open up the Q&A period if you will.

Question-and-Answer Session

Operator

[Operator Instructions] And your first question is from Bryan Keane. [Crédit Suisse]

Bryan Keane - Crédit Suisse AG

I guess my first question, Jim, just looking at 2011, I see the guidance here. But how will that progress throughout the year? Specifically, I know we had some term fees in the first quarter and second quarter, so I assume the second half of the year is going to be much stronger than the first half? Maybe you can give us a little bit of guidance on what we might expect, or where we should be for earnings?

James Lipham

We don't normally give quarterly guidance, but you are right. I think the second half of the year is going to be the -- you'll see it gradually growing up through the third and fourth quarter. But we don't normally give guidance on the quarters.

Bryan Keane - Crédit Suisse AG

Any guidance on the tax rate for the year?

James Lipham

Yes, we're looking at 34% for this coming year. 34% to 35%.

Bryan Keane - Crédit Suisse AG

And just a couple other quick ones. Free cash flow for the year, I guess, $20 million a month. Is that a good number to use, or probably even a little higher than that?

James Lipham

It would be just a little bit higher than that, probably around $250 million.

Bryan Keane - Crédit Suisse AG

And then just on your latest thoughts on Durbin. What are you hearing from clients, and do you expect to see any benefits from the move towards more credit and prepaid?

Philip Tomlinson

Bryan, this is Phil. I'll try to answer that. They've got a pretty wide open comment period going on right now, and I think we have a chance to win either way. I mean, an awful lot of our transactions are debit card transactions. I was stunned to see, I think last week, or maybe it was early this week, where Barney Frank had indicated he'd be willing to work with the Republicans to reconsider that amendment. So I think there maybe -- I don't think all this is totally final yet, but we're feeling pretty good about some of these changes. We're not a big debit card processor, but I think I would say at least 55 or so percent of our transactions that we process on the merchant acquiring side would be debit transactions. And I do think that the reward programs for debit will certainly have to come down, the profitability will certainly come down. When you look at an average interchange of $0.44 versus somewhere between 7% and 12%, it makes it much less profitable. But there are some other -- I don't believe, and I said this last time, I don't believe banks are considering getting out of the debit business. It's still a great product, but I think they're just going to have to figure out a way to reprice it if it stands as it is today. And I think that some people will move to prepaid and to credit cards, primarily because it's just a better package, if you're not interested in having a debit card. It's really still pretty early in this game to tell, although the Fed is really into the details of the debit business. We had a presentation last week that -- it showed us the depth of detail that they're going into, and it was a little surprising, really. But I think we're going to be fine in this thing. Our transaction flow may move a little bit here and there, from debit to credit to prepaid, but we're in all three businesses and we don't really see the transactions slowing down.

Bryan Keane - Crédit Suisse AG

The accounts on file has very little exposure to debit, if I remember correctly.

Philip Tomlinson

That's absolutely right.

Operator

Your next question is from David Scharf. [JMP Securities]

David Scharf - JMP Securities LLC

Maybe a couple of things digging into 2011. The new client growth that's anticipated, looking at revenue, I guess, 5% to 8% of it. Is that concentrated in the couple -- is most of that considered Deutsche Bank and Carrefour, for example, or how broad is that span of new customers that are starting to contribute more materially?

Philip Tomlinson

It's pretty broad. I mean, we haven't signed some mega deal as you know. I mean, it started last year with President's Choice, Carrefour -- and I don't have the dates in front of me, but we're looking at Swisscard, DNS Merchant Services in Germany, Cedacri in Italy, the rest of Carrefour in Brazil, Bank of Montreal, I just don't have the dates here in front of me. And there's been others. Caterpillar is an example, Simmons First National, they all just add up. And we would certainly like to sign a mega issuer, and we're always working on that, but it's just good, clean business.

David Scharf - JMP Securities LLC

Following up on the last line of questioning, in terms of new products, where debit's going and the like. Given so much of the discussion out there on prepaid, health savings accounts, other alternative payment vehicles, can you give us a rough sense maybe, now that it’s sort of the beginning of the year, just how the revenue per account, on average per card, per month kind of stacks up for credit versus debit versus Stored Value versus Commercial, just to kind of refresh us? I know it's not as -- you'd think that they disclosed, but...

Philip Tomlinson

I've said before, Commercial is probably generates the most revenue for us on a per account basis. And then the traditional consumer, Visa or MasterCard, and certainly debit would be maybe the lowest, because it's just -- you really don't use much of these systems that we have built on a debit card, other than just authorizing and producing cards. Jimmy?

James Lipham

Yes. I can add a little color to it on a consolidated basis. I mean, we're running around $250 revenue per account. Just like Phil said, I think the lowest one that we got in here has to do with the prepaid world, as far as revenue per account, with the highest being your Commercial card.

David Scharf - JMP Securities LLC

But on a relative basis, the way they stack up against one another, is it fair to say it hasn't changed much over the last 12, 18 months?

Philip Tomlinson

Yes, yes. That's fair.

David Scharf - JMP Securities LLC

One last question, thinking about sort of bigger picture, other avenues of growth. How does all the talk of mobile payment play into TSYS? On the one hand, obviously, it's just another secular trend towards more electronic payments, but is there any risk that you can get this intermediated by mobile payments? Some of the announcement's with Verizon and others? I mean, how do you all see that playing out in the next few years? And you're thinking of a generation of consumers and kids that are walking around with just a phone and not a card in their wallet.

Philip Tomlinson

Sure. I mean, we process in Japan, and they've been doing that for 10 years in Japan. We do think it will certainly generate more transactions. I think that probably this Durbin Amendment has slowed down some of this discussion, at least on a big scale, with the likes of Verizon and AT&T and others, because -- they've got to figure out a way to make money. I think you'll see us involved. I think we feel good about where we are with mobile. As I said last time we talked about this, there's probably 600 mobile schemes out there today, and there are probably two or three that will survive, and we don't think that we will get this intermediated with on the transaction side. But now, will it do away with some portion of the actual plastic card? I think it will, at some point. I don't think it will happen anytime soon, because I believe that there's a transition period. If you took your mobile phone, if it was activated today, there are very few places that you could go use it. And so there's a cart before the horse sort of process that's got to go on. And it's going to take a lot of investment in the merchant community to initialize all of these terminals, if you will, to be able to accept some kind of mobile phone standard acceptance program. Do I think it's going to happen? Absolutely, I think it's going to happen. Do I think it's going to help us? I really do. And I do think we'll be involved in several programs.

Operator

The next question is from Brett Huff. [Stephens Inc.]

Brett Huff - Stephens Inc.

A couple of quick questions on large customers and renewals coming up. Can you refresh our memory on anything going on with Target, J.P.Morgan, Cap One? We haven't talked about renewals in a while. I know those guys are important customers. Can you give us an update on them?

Philip Tomlinson

They are important customers, and none of them are renewing this year.

Brett Huff - Stephens Inc.

Are any of them in '12?

Philip Tomlinson

Brett, you always ask these really hard questions. Yes, I think Cap One comes up in about 18 months or so. I don't believe Target does. And who's the other one you. . .

Brett Huff - Stephens Inc.

J.P.Morgan?

Philip Tomlinson

Well, that goes through 2013, I believe. Of course, we did a commercial card for those guys too. And I don't have that date in front of me, but we got some big ones out of the way last year.

Brett Huff - Stephens Inc.

And is that -- because you have the big ones out of the way, is that the reason the price compression is less severe this year?

Philip Tomlinson

Yes.

Brett Huff - Stephens Inc.

Employee incentives that you mentioned were $4.6 million, I think, over the last year. How will those continue to flow through? I mean, I know you guys were tight on expenses for a while, like everybody else. Will that be a recurring-type cost, would go up, down, one-time?

Philip Tomlinson

We're still tight on expenses. We think it's kind of business as usual any more, but Jimmy, I'll let you answer that.

James Lipham

No, I think we're going to try to keep them and not be up and down like a yoyo, because we just had those tough years, and that was just kind of what we held back on. We did, I guess the best way to put it is we put about 66% or so of our normal incentives and benefits in this year, and we'll try to at least hold that going into this next year.

Brett Huff - Stephens Inc.

And so does that mean that -- is the $22.5 million operating expense for Corporate the right number, or should it come back down?

James Lipham

I think that's pretty close to what it should be.

Brett Huff - Stephens Inc.

And then in terms of -- as you guys look out internationally, Jim, you mentioned -- you've talked a little bit about just the changes in accounting that are going on, given go live dates. When we think about those margins getting better, particularly, I think, in the second half in some of the international business, the revenue, the transactions are coming on more, what's the kind of ramp we should expect in international? Will it be a bit of a step function or gradual? And where in the medium term, I mean, like late '11 to '12 do you see those EBIT margins going?

James Lipham

I guess, the best way to answer that is I think you're going to see a pickup in the fourth quarter, and this is providing that the conversion schedule is met. And then you'd probably see margins back in the 11% range fourth quarter, if that happens. If not, it'll be the first quarter of '12 before it does. Then it'll work its way back up to the 15%, 16% range during the latter part of '12 as these conversions continue.

Brett Huff - Stephens Inc.

And then the North American EBITDA margins, or EBIT margins, were nice. Was there any particular driver there?

James Lipham

No, I don't think so. It's just transactions were really good, and good growth there.

Brett Huff - Stephens Inc.

And then last question. The tax rate seemed low. Was there anything, I think I calculated 31% or so, any comment on that? It sounds like you'd still expect 34% or 35%. But wasn't there some one-time stuff that happened this quarter?

Philip Tomlinson

Well, we did have the, as you know, the RNE [ph] credits that got a pass, that were going to be disallowed, I guess. But anyway, they got passed. So that got booked all in the fourth quarter, it's about $1 million there. And then we had some international pickups that we had, about $1.7 million. So it all got booked here in the fourth quarter, at least enough to make it come down to 31%. But we should be in the 34% range next year.

Operator

Your next question is from Greg Smith. [Duncan-Williams]

Greg Smith - Duncan-Williams, Inc.

Just to start, the second First National Merchant purchase, the price was actually higher than the initial purchase, which gave you a controlling interest. I just thought it was a little odd that the second purchase was actually higher. Can just you give us the rationale for that?

James Lipham

Well, we had good growth, and it was tagged to an EBITDA number. And the growth indicated that, that's the best price. It was a pre-agreed-upon deal.

Greg Smith - Duncan-Williams, Inc.

That makes sense. It was already sort of pre-established. So there wasn't any real negotiation around it then?

James Lipham

Right. The negotiation was to talk them into go ahead and let’s finish the deal.

Greg Smith - Duncan-Williams, Inc.

And what is the real rationale why you so quickly did that?

James Lipham

Because, as we've been saying, for about three years, we really want to be in the merchant-acquiring business, and we've been working pretty hard to try to get there, and this was a great opportunity for us. And we've got a great team, and it's a really fine bank to be. They've built a good program out there, they've been in business 56 years, I think, in the merchant-acquiring business. We just couldn't ask for a better way to start.

Greg Smith - Duncan-Williams, Inc.

And then, Jimmy, as we think about -- the balance sheet at quarter-end does not reflect the cash coming out for that second purchase, is that correct?

James Lipham

That's correct.

Greg Smith - Duncan-Williams, Inc.

So that's really the only adjustment that we need. And then going forward, the minority interest line will no longer have FNMS in there. What's left in minority interest? Is that the GP Net in Japan?

James Lipham

Yes, and managed services over in the U.K. is in there.

Greg Smith - Duncan-Williams, Inc.

Any idea whether or not the minority interest line is going to be significant in 2011?

James Lipham

No, it won't.

Greg Smith - Duncan-Williams, Inc.

And then just -- you guys obviously did the first merchant deal. I would argue your balance sheet is still under levered at this point, given your recurring strong free cash flow. How are you thinking -- it looks like you have no buybacks in the guidance. How are you thinking about acquisitions versus buybacks, and what can we possibly expect over the next 12 months?

Philip Tomlinson

Well, I think -- we had a board meeting today, and when I told our board, well, we still have a buyback in place. And I think we have the ability to buy back 7 million shares back through April, and I'm sure we'll put another one in place at our next board meeting. I would say you can look for us to be back in the market if we don't feel like there's a target that could happen this year.

Greg Smith - Duncan-Williams, Inc.

And as you stand right now, is there a target this year that looks acquirable in the next 12 months?

Philip Tomlinson

Yes, we're talking to several people, and we had one fall out of about three, four weeks ago. I don't want to say that there's definitely one there, but we're certainly talking to people. But I would say there's, frankly, there's probably a good chance of us getting back in the market anyway. Because we still think it's a good buy.

Greg Smith - Duncan-Williams, Inc.

And then it's fair to say any significant buyback is not baked into your guidance, is that correct?

Philip Tomlinson

That's correct.

Operator

Your next question is from Darrin Peller. [Barclays Capital]

Darrin Peller - Barclays Capital

Bottoming out and trends improving. Just had a quick question. There was a comment, I think it was made earlier on CUP Data. I was just curious. I mean, I saw some of the -- there was an increase in non-controlling interest on the balance sheet. Was that related to an investment in CUP? Or maybe just give some more color on kind of the opportunities that you see CUP Data playing into your business?

James Lipham

Well, CUP just had an outstanding fourth quarter, and they've had a good year, and they continue to grow. And obviously, we're looking for them to continue to bring us some good earnings out of China.

Philip Tomlinson

Darrin, this is Phil. I think you will also see -- I mean, we've really, with CUP Data as our partner, won the vast majority of banks that have put outsourcing RFPs out in China over the last three or four years. I do think that the next thing you're going to see is a big rush in the Prepaid business in China. And I think we're in a very good place there, and I think we'll benefit from that. So we're hopeful that some good thing is going to happen in China this year. I don't predict anything on China anymore, because it just doesn’t work very well when you do that. But we're very hopeful that China is going to have some good things happen.

Darrin Peller - Barclays Capital

It seems like you guys are pretty well-positioned in that area.

Philip Tomlinson

I think we are.

Darrin Peller - Barclays Capital

We'd just seen an article around Kohl's. The Kohl's private label portfolio apparently is being acquired by Capital One. I think they have about 20 million accounts on file. I think I saw an article saying that was going over to First Data. And so just curious, I mean, is that...

Philip Tomlinson

The Kohl's process is in-house, and First Data has a, and I'm not speaking for First Data, but they have a big portfolio of private label business in -- I say, I'm not sure who have the ownership of the receivables work. Kohl's could tell you that. I just don't have any idea, but...

Darrin Peller - Barclays Capital

Capital One, I think, is the receivables ownership, and Kohl's manages the program.

Philip Tomlinson

I think that's right.

Darrin Peller - Barclays Capital

But there's no -- I mean, they wouldn't imply any risk associated with Capital One's relationship with you though, right?

Philip Tomlinson

No, I don't think so.

Darrin Peller - Barclays Capital

Obviously, a fair amount of the growth on the accounts on file is coming from prepaid. And that's -- I mean, again, you seem to be fairly well-positioned there, given your exposure with Green Dot. Can you talk a little bit about the economics on prepaid, specifically versus per se and perhaps the traditional consumer card or maybe the Commercial?

Philip Tomlinson

Well, that's what Jimmy was talking about a little earlier. It is not in the league with -- at least on the processing side. Our side, it is not in the league with the consumer and/or the Commercial card processing. It's more of a debit card-type transaction.

Darrin Peller - Barclays Capital

Last question, just on cash EPS. I mean, you guys still report on GAAP. A lot of your competitors tend to report cash or some sort of adjusted number. Is that something you see in the near term?

Philip Tomlinson

Well, I wish we were reporting adjusted numbers today. Like I say, when you adjust out the termination fees, this 2011 looks absolutely wonderful. Jimmy?

James Lipham

I think as we continue to have increased amortization from intangibles and the like, we'll be probably moving to a cash...

Operator

Your next question is from Jason Kupferberg. [UBS Investment Bank]

Ramsey El-Assal - UBS

This is Ramsey El-Assal for Jason Kupferberg. What's your optimal long-term revenue mix between card processing and merchant acquiring, kind of on a go-forward basis?

Philip Tomlinson

I don't know that we think there's an optimal. I mean, we would certainly -- I think the last I looked, when you take the FNBO acquisition, it takes our Merchant business up to about 26%. We would like for our International business to continue to grow, and we've said several years ago, one of the goals we had was to get our international revenues to 30%. But the U.S. is such a huge market, and it's continuing to grow. So it's been difficult to do that. But we -- I mean, I think we would love to see it a third, a third, a third. It probably will never be that, but...

Ramsey El-Assal - UBS

Can you give us an update on Canada, where you are in terms of ramping up on some of the large new deals that you've announced there, like Bank of Montreal and President's Choice and Walmart?

Philip Tomlinson

Well, President's Choice is on the books. It was converted last year. Walmart has started up. It's on the books. And Bank of Montreal will probably go on the books early in 2012.

Ramsey El-Assal - UBS

And I wanted to follow up on something you said a little earlier, the Durbin-related question. It seems like no matter how the Fed interprets the Durbin Amendment, that issuers might de-emphasize debit and double down on credit and prepaid. Have you already detected this type of shift occurring with your customers? Are you sensing that issuers are sort of waiting for a final set of rules before they actually start changing course that way?

Philip Tomlinson

We haven't seen any big shift, if that's what you're asking. Frankly, I think the banks are just digesting the sticker shock on what the Fed initially proposed, and I'm sure that most of the major issuers are submitting strong comment letters, as we will be doing ourselves. But again, as I said earlier, I think we are in a pretty good position regardless. Now we would -- our biggest problem in the deal, and this is more of a philosophical one, we don't think the government ought to be -- the Federal Government ought to be setting prices between two commercial entities.

Operator

Our next question is from Magna Lata [ph].

Unidentified Analyst

Just one quick question. We have seen an increase in card solicitations recently. I mean do you have any color as to how successful have your bank customers been in converting these potential customers?

Philip Tomlinson

I think that solicitation is certainly picking up speed, as you heard me said before. A lot of that I gauge on a personal basis, and I'm averaging about one solicitation a day now. And this time last year, I hadn't had one in probably six months. So it's a lot of the usual suspects, and I'm feeling better about that. I don't have any specific numbers that I could give to you, Magna. But it certainly has picked up. And I think as a result -- we have to be a beneficiary of that.

Operator

And the next question is from Tom McCrohan. [Janney Montgomery Scott LLC]

Thomas McCrohan - Janney Montgomery Scott LLC

Can you just give a little more color about terms and conditions of the renewed contract with the Dna Merchant Services?

Philip Tomlinson

I can't go into any real detail, Tom, other than it has been done. It's for a five-year period. We don't expect those guys to stay with us forever. They've got their own joint venture. We're thrilled that we could do something at least for that term. And we're going to do everything we can to make sure they stay happy.

Operator

The next question is from Robert Dodd. [Morgan Keegan & Company]

Robert Dodd - Morgan Keegan & Company, Inc.

On your target of looking at more of the small banks and credit unions, et cetera. Is there an opportunity for you to get one of the two aggregators like CSCU or PSCU? Are there contracts there that you're aware of up for renewal and an opportunity in the next 12 to 18 months?

Philip Tomlinson

Well, Robert, I wouldn't comment on their contracts, but I can tell you we've been trying to sell into PSCU and the independent bankers for about 25 years, so we know them well and we're certainly continuing to think that would be a wonderful way to enter that business in a big way, and we're certainly going to continue to give that our best shot. They're a major aggregator, and anybody in that business would be crazy not to be thinking about them.

Robert Dodd - Morgan Keegan & Company, Inc.

On the contract acquisition payments as well. In the quarter, it was elevated again -- I mean, honestly, it was high in Q3, but much lower in Q1, Q2. I mean, are we seeing a new higher level, or is this just timing of when particular renewals and new business has been won?

Philip Tomlinson

I think it's timing. It's about new business that is won. We haven't seen any big change in that.

Operator

The next question is from Paul Bartolai. [PB Investment Research]

Paul Bartolai - Credit Suisse

First one, just on FNMS. It seems like the momentum is going pretty well there. Just curious if you can make any comments on the pace of customer signings? And then, just as far as you look at '11 in terms of the accretion, I mean. Is that, given the momentum there, I mean, it's something like maybe $0.04 to $0.05 accretion in '11 given the buying in the other half. Is that about in the right ballpark?

James Lipham

That's in the ballpark, right.

Paul Bartolai - Credit Suisse

$0.04 to $0.05?

Philip Tomlinson

Yes.

Philip Tomlinson

And then in terms of just any general comments on signing new business in competitive FX of that market?

Philip Tomlinson

I don't have any comments today, Paul. We probably don't -- or Paul, we're in the process of learning what we need to report there.

Paul Bartolai - Credit Suisse

And I just want to clarify a comment earlier on the margins. Jim, did you say for international margins getting back to around 11% by 4Q?

James Lipham

I think we've got a good chance of being there, with the conversion schedules being completed and all the time schedules laid out now.

Paul Bartolai - Credit Suisse

So first half, still staying kind of single digits and then kind of creeping double digits in the back half?

James Lipham

Correct.

Paul Bartolai - Credit Suisse

And then just kind of looking at the guidance. I'm just kind of trying to figure out the offsets there, given the investment spending. Any comment you can give on North American margins? I mean, is the 4Q kind of a decent run rate, or it almost seems like you have to kind of ramp up from there to get to the guidance range?

James Lipham

Well, I think the margin rate there in the fourth quarter is probably pretty good. As you remember, we've had lost revenues and deconversion fees and all. And I think in the fourth quarter there, we did have the termination fee and, what, about $18 million there that we had to take into account. But I think the margins in North America are going to maintain that level, going forward.

Paul Bartolai - Credit Suisse

Then Merchant, kind of the 32% to 33% as well for next year?

James Lipham

Yes.

Paul Bartolai - Credit Suisse

And then just a couple of more question on guidance real quick. As you look at kind of -- particularly in the Merchant business, I mean with BAMS, I'm assuming, you're just kind of assuming, that you keep kind of the existing base and the new stuff goes away. But what about just other situations like you have NPC, which seems like there's some issue around that contract. Just curious about any contracts like that, and kind of what you're assuming in guidance for next year?

James Lipham

We assumed on BAMS that we will have a reduction in revenues. It's not that material, but it will go down from where it was in 2010. And as far as NPC goes, I don't have any changes there at this point.

Paul Bartolai - Credit Suisse

And have you disclosed the other side of that business for you guys? I know it was a customer of TSYS Acquiring and FNMS.

Philip Tomlinson

No, we haven't, but it was immaterial.

Operator

Your next question is from Glenn Greene. [Oppenheimer & Co.]

Glenn Greene - Oppenheimer & Co. Inc.

A couple of questions. The first one is the new client, the growth from new clients. That 5% to 8%. Is that clients that have already signed and just need to be converted, or is it part of that new clients that you need to win?

Philip Tomlinson

Part of it is already signed.

Glenn Greene - Oppenheimer & Co. Inc.

So part of it's signed, but part of it's new as well?

Philip Tomlinson

Right.

Glenn Greene - Oppenheimer & Co. Inc.

Could you, and maybe, Phil, you could give us sort of a follow-up to that, a sort of -- what's the pipeline looking at, looking like, what does it look like relative to a year ago? Are deals getting won and signing? Have things loosened up, and maybe sort of contrast North America versus international? Just sort of the quality of the pipeline.

Philip Tomlinson

I think the North American pipeline is bigger. I don't have that in front of me. I think we've got $7 million in North America. And this is the conversion pipeline, these are the people that are signed. And then we've got about $6.5 million internationally.

Glenn Greene - Oppenheimer & Co. Inc.

And those are already signed deals?

James Lipham

Yes.

Glenn Greene - Oppenheimer & Co. Inc.

And how about prospect pipeline? I mean, obviously, you've signed a lot of deals during 2010. It sounded like it was a good year for signings, but have you replenished the pipeline going into '11 for new prospects?

Philip Tomlinson

Well I think the prospect pipeline is massive, but I wouldn't want to give you a number there.

Glenn Greene - Oppenheimer & Co. Inc.

And then just one more question, and sorry, it's related to Durbin as well. But there's some conversation theory out there that merchant acquirers could actually benefit as it relates to Durbin. Perhaps benefit from part of the fee chain reduction? Do you foresee that as an opportunity, or do you think 100% of the rate reduction on interchange will be passed directly to merchants?

Philip Tomlinson

Well, I think the vast majority of it certainly will. I don't -- typically, when you're pricing Interchange-plus, it is Interchange-plus. These merchants, they know what the Interchange rates are. And the merchant-acquiring business may pick up a few points there, but I don't think it's going to be anything significant.

Glenn Greene - Oppenheimer & Co. Inc.

So certainly nothing that you're counting on or contemplating in terms of the growth prospects for your merchant-acquiring business.

Philip Tomlinson

No.

Operator

Ladies and gentlemen, we've reached our allotted time for questions. I'll now turn it back over to Shawn Roberts for any closing remarks.

Philip Tomlinson

This is Phil. I'm going to close this out. One, we appreciate you being with us today. You could tell, we're pretty enthusiastic about where we're at. It's really kind of fun to be looking at -- or at least to have tailwinds as opposed to headwinds. Certainly, we've still got issues, unemployment, regulation, you name it. But we are starting to feel better about our business. And you've heard me talk many, many times about our strengths, and why you should be interested in us, and I think what this shows, again, is we're a very resilient company. We have a great team of people here. I told our board this morning that we have people that the devil hates to see get out of bed every morning, because he knows they're going to do some good things. The other thing that I told our board, and some of you are going to think this is really corny, but this period that we're in sort of reminds me of when I was a kid, and my mother -- we'd have dinner, and she would say -- as she was picking up the plates, she would say, "Now save that fork. Hold onto your fork." And to me, that always meant something better is coming. And so what I told our board this morning is we are holding on to our forks, because something better is coming, and we're starting to feel it. So we hope that you feel that way. We want to thank you for your continued interest in TSYS. If you have any additional questions, certainly feel free to contact Shawn Roberts in our Investor Relations area. We thank you for being with us tonight, and we will sign off.

Operator

And that does conclude today's teleconference. You may now disconnect.

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