Total System Services,'s CEO Discusses Q2 2011 Results - Earnings Call, Jul 26, 2011 Transcript

Jul.27.11 | About: Total System (TSS)

Total System Services, (NYSE:TSS)

Q2 2011 Earnings Call, Jul 26, 2011

July 26, 2011 5:00 pm ET

Executives

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

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

Shawn Roberts - Director of Investor Relations

Analysts

Roman Leal

Brett Huff - Stephens Inc., Research Division

Jason Kupferberg - Jefferies & Company, Inc., Research Division

Glenn Fodor - Morgan Stanley, Research Division

Timothy W. Willi - Wells Fargo Securities, LLC, Research Division

Darrin D. Peller - Barclays Capital, Research Division

Operator

Hello, ladies and gentlemen. My name is Todd, and I will be your conference operator today. At this time, I would like to welcome everyone to the TSYS Second Quarter 2011 Earnings Conference Call. [Operator Instructions] As a reminder, ladies and gentlemen, this conference is being recorded today, July 26, 2011. Thank you. I would now like to introduce Mr. Shawn Roberts, Director of Investor Relations. Please go ahead, sir.

Shawn Roberts

Thank you, Todd, and welcome, everyone. On the call today, our Chairman and CEO, Phil Tomlinson, will provide highlights of the second quarter and 2011 and then turn it over to Jim Lipham, our CFO, who will review our financials. After that, we're going to open it up for Q&A.

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

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

Philip W. Tomlinson

Thanks, Shawn, and I hope everybody's had a chance to receive and take a look at our press release that we sent out about 4:00 o'clock. Obviously, we were pleased to share these results. We think it was a solid second quarter performance, and we did exceed the Street expectations on revenues and EPS. We remain optimistic with the continued progress and overall health of our business, as demonstrated by a 14.7% increase in credit card transactions -- organic growth, which, as you know, is very important to us, 3.9% and the successful acquisition of TermNet in Atlanta, which is a solid, high-quality add to our Direct Merchant business.

While the economy continues, obviously, to have issues, it's on the news everyday, we believe that the increases that we have seen reflect continuing improvement.

Let me share just a few highlights from the quarter in each of our 3 reporting segments. In North America, we successfully converted the accounts of Simmons First National Bank in Pine Bluff, Arkansas. We converted a large retail portfolio for Cap One. And our same client transactions were up 12.7%, which is really the seventh quarter of growth in that area. Internationally, we announced the signing of U.S. Bank's Commercial Card program that will go into Europe, and we renewed the Barclays Commercial card relationship in the U.K. and Rabobank in the Netherlands. In Germany, as you may recall from our announcement, we went live with a very large German acquirer, BNS. We also converted RBTT in Trinidad and Tobago, and we have a strong pipeline of accounts coming into TSYS over the remainder of the year.

I want to go back to BNS, and that's really a significant merchant processing client for us in Europe. It's by far the largest we have ever done, and we believe it's a real watershed event for TSYS. In Brazil, we see good month-over-month new account growth and are preparing for the final stages of the conversion of Carrefour's Visa portfolio, and we believe that will happen in the first quarter of 2012. As I previously mentioned in the Merchant Services segment, we closed the acquisition of TermNet, which is, like I say, a nice addition and expands our distribution channels when combined with our Direct Merchant business out of Omaha.

On the Processing Merchant business. We were pleased to announce our newest Canadian client, Caledon Card Services, which specialize in e-commerce and Card-Not-Present Merchant Services. As you know, when we get Bank of Montréal converted, we believe we'll be in the 60%, 65% market share as far as card issuer processing in Canada.

And with that, I'm going to turn it over to Jim Lipham, our CFO, who has a got a deck that he's going to go through with you, and then I'll have a couple more comments on the very last slide. Jim?

James B. Lipham

Thanks, Phil. Before I get into the slides, I want to cover 2 items that are on the P&L that you have with the press release, and these 2 items are below the operating income line and I don't normally cover those on last slides. But first one has to do with income tax, and you'll see in the second quarter, we had a pretty low tax rate, effective tax rate of 30% as we expanded the deduction that we have afforded ourselves or was afforded to us on qualified production activities, and we did it for tax years 2010 and '11. And we expect, as we go forward, to continue to have these benefits and this tax rate, and we will also continue to look at the prior years to see if we can amend those to effect our tax rate. But we do expect the tax rate for the remainder of the year to stay in the 32%, 33% range, provided we don't have any other returns we can amend on. If we do, we could get it lower than that.

The other item I want to discuss was the equity in income of our equity investments. And I ask you, if you remember third quarter of last year, we had an adjustment we made in CUP Data to get them from China GAAP to American GAAP, so it is throwing our timing off, we did have a little over accrual in the first quarter, so I wanted to concentrate, I ask you to concentrate on the year-to-date numbers and where we're going for the year. They're on course to be up about 19% year-over-year, with annual income of about $6.5 million. So with that, I'm going to switch over to Slide 7 and start the current slides, but did want to clear those 2 items up with you because it looks like our CUP Data was a little low for us but it did have accrual from the first quarter reversed in it.

On the Slide 6. If you look on the left-hand side comparing the second quarter year-over-year, you see total revenues and revenues before reimbursables are up 3.9% and 4.8%, respectively. We did have a $9.5 million termination fee in 2010 that we had to overcome. If you back that out, our revenues would be up 6.2%, and then the revenues before reimbursables would be up 7.6%. We continue, as Phil said, to see good growth in transactions in our account on file numbers. In the Electronic Payment Processing business, we're actually up about 9% year-over-year for the second quarter. Value-added businesses, we've got some good growth there in around 14%. Big item there has to do with the fraud area, which always grows when new cards are added. So anyway, revenues are up real good for the quarter. We feel strong about that. Operating income was down 1.6%, but if you exclude the termination fee in 2010, operating income would be up 11.7%, which is pretty good growth. Our margins, they were at 17.6% of total revenues and 20.7% of revenues before reimbursables. Both of these margins, if you took out the 2010 termination fee, would be up 85 and 75 basis points, respectively. The income from continuing operations, it was up 7.5% and without the termination fee, would be 22%.

Looking at the EBITDA for the quarter. It was $124.5 million, up 8.9% over 2010. So that's great growth there. We did have about $8.7 million of currency that affected our revenues. We had $8 million effect in expense, so the net was about $700,000 on operating income for the quarter. As Phil said, we did finish up $0.08[ph] a share, ahead of the Street a little bit $0.01 a share and then year-over-year, up 10%.

If you look to the right on the year-to-date numbers for 6 months, you'll see that the revenues are up 3.9% and revenues before reimbursables was up 5.3%. Year-to-date, we have $32.7 million of termination fees we had to overcome, and we were able to do that with the acquisition of TMS and also TermNet. It accounted for about $33.7 million of new growth in revenues, and then we have another $50.5 million increase in revenues from just growth organically, it was up 3.9%. Phil mentioned transactions growth on a consolidated basis around 14%. So we just had real good growth there. When you really summarize it, you'll see for the year-to-date numbers, North America's down about $21 million as we had to try to offset all those fees, and International's up about $18.5 million and then the Merchant Business is up 36%, which had the acquisitions in it. Operating income is down 5%. Excluding that termination fee, you'd see it up about 19.5%. So obviously, when you get down to the 0.5%, I mean the termination fee carries down without any cost associated with it.

The Consolidated [indiscernible] at 6 months is $234.6 million is up 14% over 2010 when you exclude the term fee. Our margins, EBITDA margins, were 31.6% of revenues before reimbursables and 26.7% of total revenues. On an annualized, on a 6-month basis, we had $12.2 million in revenues from currencies and then $10.7 million effect in expenses for a net of $1.5 million in operating income. So for the first quarter, I'll flip over to Slide 7, and I just stuck this page in here so you'd have it to look at as a non-GAAP disclosure here as far as our quarter numbers and 6-month numbers without the termination fee in it. And you'll see that on a core basis, we have shown some pretty strong growth here for the second quarter and year-to-date numbers.

Slide 8. This is a picture, gives you a picture of the revenue change of 5.3% and what caused it. Really in total growth, we had about a 3.4% pickup, while new clients contributed 3.7%. And then we had the TermNet acquisition, and we had rest of FNMS for 4.8% and then the currency was 1.7%. All totaled, that's 13.6% pickup, which was partially offset by the lost business. We had about 2.9% or $13 million of lost business. We had term fee of $32.7 million, that's about 4.6%. And then we had price reductions of about 0.8%, which was about $2.4 million.

So we ended up with our reported revenues of up 5.3% and pretty good growth there. We'll say that as we -- this is the last quarter that we think we're going to be facing any type of termination fees. So third quarter we ought to be in good shape, for sure, in comparative operations without having to adjust for anything.

On the next slide is our account on file slide. And each category of account on file showed positive growth in 2011 so far compared to 2010. This is the second quarter in a row that we've had growth in all categories, and it's really the first time since -- I don't know, last time it happened was the second quarter of 2007. So it's been about 4 years that we struggled with no account growth, and this is good to see here. We did break out the prepaid again. We continue to see strong growth there, 53% increase year-over-year, but we won't break that out because if you remember, we have talked about it at the Analyst Meeting and there -- only 6% or 6.1% of these accounts are active. And when you look at that and say "What does that mean in revenues?" Prepaid revenues represent about 2.6% of our revenues. So it just don't -- that kind of growth, I think you need to pay more attention to the subtotal of 300 million accounts, up 6.3%, and this is more indicative of our revenue growth that we reported. So also I'd just say currently, we have about $13 million accounts net of deconversions in our pipeline to convert between now and December of 2012. It's split pretty even between North America and International. So I think we're going to see some good pickups in the first quarter next year as well as the third quarter of next year.

On Slide 10. I'll talk, just about a minute about second quarter for the North America segment. You see there where we've listed out the deconversion fees, termination fees and we've got revenues that we had to overcome. I will exclude the termination fees when I talk about growth year-over-year is the $233.9 million. Both of these, the $198.8 million, excluding reimbursables and the to $233 million, are up 3% for the quarter. We've got health from new business and organic growth of a total of $6.3 million, and that helped to offset those deconverted revenues. And we still had good growth, as we mentioned before, on the value-add business account on file authorizations. All our categories were up over the previous-year quarter.

Organic growth year for North America was at 3.2%. The segment operating income was up 13.1%, and the margins at 32.2% before reimbursables and 27.4%. Each of these increased 279 basis points and 245 basis points each, respectively. Highlight also what Phil was talking about total cardholder transactions, they are up 14.8% here in North America at 1,795,000,000. And then the same-client transactions actually increased 12.7%. It's a good quarter and there again, it's the last time we'd be comparing to a term fee in a quarter. We'll still have the annual until we get through this year but, like I said, the third and fourth quarter would be pretty straight up.

On the next slide. Slide 11 is International. You'll see we had currency of 8.8% I mentioned a while ago, and then we had some good growth in revenues here of being up about 25.2%, including that currency. If you took it out, it would be up 14.1% without the currency. So that's good organic growth there in International, about 6.3% and good growth from our business as far as our TS2 customers over there. We've had some good growth in Japan. We had also picked up the revenues a little bit on Carrefour in Brazil and saw many Service business pick up, as well as projects and the like. So we just had a pretty good revenue growth in Europe for the second quarter. The segment operating income is down 13.3% compared to 2010, and the big deal here is we're about -- our headcount's up about 300 people, more than it was in the second quarter of 2010 as we continue to have a heavy start up cost in these conversions and with no scale. As Phil mentioned, we're still looking at the remainder of Carrefour coming on board in the first quarter of next year. We've got Swisscards scheduled this September. And as these conversions happen, as we go on through 2012, I think we'll see a little dip more in margins, maybe next quarter but they'll start back positive growth sequentially in the fourth quarter and continue on through the third quarter of 2012 until we get ourselves back to where we were last year, around the 15% range. Total transactions for our International, up 14.4%, good growth there. Same clients up 5.7%. So we see some new business created some of that growth.

Next slide dwells on merchant segment, where we did mention acquisition of TermNet, and we have had some decline in revenues from deconverted class, and it's mainly on the TSYS acquiring section in Tempe point-of-sale transactions. Our other business of TMS in Omaha and Atlanta has been positive. Of the $93 million in revenues before reimbursables, approximately 65% of that is transaction driven, predominantly by TSYS acquiring in Phoenix and Tempe and 35% is the Direct Merchant Ownership business. POS transactions are down, as you can see, but if you exclude the deconverted clients, and then they're up about 2.8%. So that's a good signal. The Direct Merchant Volume business of TMS is dollar-volume driven and the volumes for the second quarter increased 9.2% over the second quarter of the previous year. Operating margins on revenues for reimbursables, they're up about 574 basis points over 2010 and good growth there. Organic revenue growth was about 1.4% in this segment. And as you know, we have got to go through the anniversary of the loss of some large merchants there in regards to the Point-of-Sale business. So we'll be looking for that to expand next year.

Next slide, 13 is that cash flow summary. As you can see, we still had very strong cash flow this quarter, with $97 million coming from our operations and $72 million of free cash flow. Year-to-date, cash flow from operation's at $199.3 million and free cash flow was actually up from where it was previous year, is up $27.2 million to $165 million and in June of last year, it was up at $128 million. We continue to generate good evident $469 million. If you remember last year, as far as free cash flow goes, we did have some heavy payments in the fourth quarter for client conversions and some software costs and knocked us down a little bit, but we're still see good growth there. And then if you remember, during the quarter, at the end of the quarter, we had $263 million in cash and we had purchased the remainder of TSYS Merchant Solutions, FNMS. And so we spent close to a little over $200 million with that and TermNet and some share repurchases as we -- we have not bought any more shares since the first quarter of this year, but we still have 9.9 million shares left in our plan to buy about [indiscernible] over the next year.

With that, Phil, I'm going to close my comments and turn it back to you.

Philip W. Tomlinson

Thank you, Jimmy. You'll see one more slide. It says the headline is "TSYS M&A Financial Measures." And Shawn and I just thought after some of the questions we had at our Investor Day and some of the conversations we've had with some of you since then, that it might be helpful to put this, to go over this, as just information for you. We've been asked on several occasions why we would want to make an acquisition rather than lever our balance sheet to buy back stock. Our answer has been very consistent over the years. We really want to add long term, real long-term value. And we certainly have been looking for acquisitions that are one, a strategic fit and we've talked at length about expanding our role in payments and our desire to diversify beyond a credit card processor. We look for growth in revenue, in EBITDA, in operating income. We would prefer any acquisition to be accretive in both cash earnings as well as GAAP earnings. We want our shareholders and investors to have confidence that we do go through a process and prepare the type of analysis that ensures that we're making good common sense decisions. Our decisions are based on research and modeling that clearly, we think enhances the strategic and financial viability of any acquisition that we'd be taking a look at. And that includes evaluation of the current market multiples and conditions, the use of capital as compared to other possible uses, financial metrics such as discounted cash flow, asset valuation and others. We also compare acquisitions versus share buybacks on a regular basis and again, just trying to conclude the best use of our capital and debt capacity.

We believe we've been very transparent with our strategy that includes capturing a greater share of the payments market, and we've talked a lot about issuing and the acquiring space, which we, as you know, have only recently gotten into in the last year and a half or so. Our goal is to grow this company at a faster rate than the payments industry in general and create, again, long-term shareholder value at the same time. I'm not going to go over what we spent on share repurchase but we, as Jimmy said, we haven't really bought any shares back since the first quarter. And, like I say, our message is, has always been, about growing this company. And so we'll continue to look at stock buybacks regularly, and we certainly would hope to have dry powder should we decide to move forward with that option. So if -- you might want to just hold on to that sheet, that slide and just file it away under TSYS.

And with that, I'd like to open it up for questions, Todd.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from Darrin Peller with Barclays.

Darrin D. Peller - Barclays Capital, Research Division

Just a first question is -- Phil, I'm glad you bought up on the last slide, you touched on the potential sort of aspects you'd want for a deal. I mean you now have $260 million of cash on hand. You generate clearly more than $20 million of cash per month. You, obviously, also have extremely low financial leverage. At your Investor Day, you mentioned you'd expected a deal or other use of capital such as more meaningful buybacks to materialize in about 60 days. I assume you've been somewhat tight on the buyer, holding off the buybacks given your work on potential deals, but can you just comment on that a bit? Do you still see that being potentially on the table in terms of near-term opportunities?

James B. Lipham

I think so. I mean we've, obviously, as we talked about in New York, we've been looking at several opportunities, and you just never know how those things are going to go until you dig into them with our people and everything. I would say that just what I said in New York that if we're not in the acquisition business, I would say at a time like this, we would very much like to be in the stock repurchase program. Obviously, we've been out of the market, and we've certainly been in a quiet period here for, I don't know how long that is, about a month or so. And I mean we obviously need working capital but we do generate a lot of free cash, and it is helpful and it allows us to consider some things that maybe other people can't. But we're not trying to be making any mistakes.

Darrin D. Peller - Barclays Capital, Research Division

Look, just as a follow-up on that, I mean just given how much financial leverage opportunities you have, I know in your Investor Day you called out a potential levering up from what's now something like 1/2 of EBITDA to over $1 billion potentially. That, plus your free cash flow, plus your cash on the balance sheet, do you think you're bored, I guess? Which has generally been somewhat conservative in the past couple of years would be open to doing a buyback as well as an acquisition?

James B. Lipham

I think it would depend on the size of the acquisition. I mean if we maxed out. For example, if we were to max out our debt, I certainly don't think we would, at that point, be borrowing money to do it. But I think a lot of it just depends on if we happen to do an acquisition, what's left in the dry powder?

Darrin D. Peller - Barclays Capital, Research Division

Got it, sounds good. Just one follow up, if you don't mind. Most card issuers I think that we've spoken to recently have been suggesting card issuance growth in the second half of the year in '11 and '12 as well should be sort of mild, low single-digits type growth but definitely accelerating from where it's been. I guess do you see data points consistent with that outlook or better on the accounts on file front? And can you just quickly comment, as well, on whether or not you think the Durbin results, what you saw from Durbin, is going to materially impactful towards shifting more issuance on the credit card side than maybe you would have expected in the past?

Philip W. Tomlinson

We've tried to figure this Durbin thing out for a long time. I mean we only have the final rules for Visa and MasterCard and how we'll have to implement all that. But I do think that it will somewhat change. And I've said this before on this call that it will change the dynamics of a debit cards. I do think that debit cards are still a great product and in some ways, it may be less expensive to deal with the debit card than it is a check. But I do think the pricing model is going to change, just too much revenue taken out of the model for it not to change. And so and I think you're starting to see that. We're in a kind of wait and see what Visa and MasterCard come out with to see what is going to take to implement this. We are hopeful that I think we can be ready as quickly as anybody in the world. We've got very flexible systems. The other point about cards, I think we'll continue to see modest growth. I don't think there's a massive run to issue this great amounts of cards. But from where we've come from, any growth is grand. And you saw that our numbers are, I think, improving, albeit slow, they are improving. And that is a really good sign for us, particularly when we start seeing organic growth. I mean when we start seeing growth from customers who have been on board for over a year, that's a very positive sign for us. We are starting, and I think I said this last time, we're starting to see customers now show up with projects, with new products who want to go to market. That hadn't happened in quite some time, and that started around the first of the year, first quarter in that range. And so we're sort of busy with all that. Is it wide open? No. And I don't think it will be for any period of time. I think if we could -- you know me, I have to editorialize on something. I think if we could get issues settle down in Washington, it would help people to gain some confidence and I'm sure everybody on this phone would agree with that. But it's not wide open, it's continuing to improve and we sort of like the position we're in right now.

Operator

Our next question comes from Jason Kupferberg with Jefferies.

Jason Kupferberg - Jefferies & Company, Inc., Research Division

So another solid quarter here, and I guess, it begs the question as you look out to the remainder of 2011, obviously, you guys are continuing to convey confidence in the full year outlook. Would you say that the higher end of the guidance range for both top and bottom line feels more likely now that you have the first half under your belt and it sounds like qualitatively, you're hearing and seeing some pretty decent things from your core client base? So any thoughts there just directionally as far as the guidance range. I can certainly understand you guys not wanting to go too far out on a limb and actually raise the range outright. But does the upper end fuel more likely based on where you are now?

Philip W. Tomlinson

We'd love to raise it, but we're just not quite that confident yet and I think that the guidance is what it is. I mean as I said earlier, I think if the whole market could get a little more confidence, we see what's going to happen on the Durbin and how that's going to affect cards. And I think it'll be a positive impact on cards. But we would certainly want to be at the top end of that. We would really like to exceed it, but we're just not quite there yet.

Jason Kupferberg - Jefferies & Company, Inc., Research Division

Okay, that's fair enough. And I think you've talked a little bit about this in the past. Can you give us your latest thinking on kind of longer-term operating margin potential of the business x-reimbursables? We obviously have a glide path on the international side from margins to expand as you guys outlined and presumably as merchant acquiring continues to increase as a percent of total revenue, that should be a favorable mix shift, I would think, from a margin perspective. So what's your latest thinking if you were to consider a couple of years out or so from now, where you'd like to see the operating margins x-reimbursables?

James B. Lipham

I think I'd like to see them stay in the realm to 20% range, 20% to 22%, 23% range. As we grow in the acquiring space, we will be subjecting ourselves to a little lower margin than what you had in the TSYS acquiring processing, so we might have a little pressure from there. We do think that the International margins over the next year are going to get back up there where they should be. They won't be back to where the U.S. is, and I'd say they'll be in the 13% to 15% range. And so I think where we are today with the 20.7% is probably a pretty good rate. Rest assured though, that's a pressure point for us. We have always liked good margins, so we're working hard on that.

Jason Kupferberg - Jefferies & Company, Inc., Research Division

Okay, that sounds good. And just, last question for me, I think last quarter I think at your Analyst Meeting, you spoke more positively about the pipeline and you seemed to kind of reiterate that on this call. What can you tell us just in terms of the pipeline converting to new wins? Is that happening at kind of a satisfactory pace or do you feel like there's still some elongated decision-making out there that's holding clients back?

James B. Lipham

Well, when we talk about our pipeline, we are really talking about businesses absolutely signed up and we have a contract. We also talk about a prospect pipeline, and I think our prospect pipeline is very good and it continues to be good and that's on a global basis. We feel good about it. And I do think that people are starting to make decisions and some are obviously faster than others. In some of these organizations, it just takes a long time. We've talked for years about a very long sales cycle and that has not changed. It's a very complex sales process, but I think we're making good progress with that. And we would hope to, again, we would hope to see some announcements in the second half of the year that would make us all feel better.

Operator

Next question comes from Julio Quinteros with Goldman Sachs.

Roman Leal

It's actually Roman Leal, sitting in for Julio. I wanted to start off with your commentary on organic growth, especially nice to see a pickup in the account file. But what are some of the things that you're doing to increase the revenue per account?

James B. Lipham

Well, I mean I think we're certainly working on our own efficiencies here. We are still working very hard to control expenses. We are enhancing products. We have just gone through a very significant internal reorganization that we think will make us more lean and mean and more efficient in the way we deliver products and new services. We are trying to push customers to buy more and more value-added products. We have a team of people -- that's their job here is to -- obviously, we've settled the years that the more value-added products we can sell to a client, the bigger our margin becomes. And we still have plenty of runway there that we can sell over to clients. You've heard me talk before that we have a lot of clients coming here and say, "I can't afford any of these value-added products, I'm just going to get the basics." We really do a pretty good job of selling them on those products over time. I mean mainly because it's just so integrated. I don't mean to make it sound so simple, but instead of having to go and build something, a lot of it is just flipping a switch. And they are good products and they're fully integrated and, of course, we have different products that we are continuing to sell into these banks, including Commercial Card and Acquiring Processing. And I think we're doing pretty good at that, I believe. And could we do better? Yes, I'd like to have every product we have in every client we have. And that would take a while to get that done, but it would be a very profitable process for us. Again, this expense control and reorg we think will help us over the long term.

Roman Leal

Great. And as a follow-up, is there anything that you can do on your end to attempt to monetize the prepay opportunity? I know that, you know obviously, a large chunk of the prepaid cards that you process are inactive. But is there anything, maybe even at the pricing scheme that you can do differently to attempt to monetize that?

Philip W. Tomlinson

Phil. We are looking at that really hard right now. We've kind of taking a look at our old strategy on prepaid. I mean we process an awful lot of prepaid accounts. As you see, there are not very many of them active by credit card standards or debit card standards. It's kind of interesting. Only about 35% of our revenue on prepaid is related to the actual card itself, the startup. I mean we sell a lot of products into that prepaid group of customers, such as managing the process and managing customers and all, answering the phones, but it's an interesting area right now and it's changed so much and we've got a group that's really kind of taking a hard look at our strategy there to see where we ought to go. And I just wouldn't be prepared to get any deeper than that today.

Operator

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

Timothy W. Willi - Wells Fargo Securities, LLC, Research Division

Two questions. One is if we go back to the International margins a little bit, at your Analyst Day, you had seem to indicate that margins moving up could be not just a function of revenue but maybe a little bit more proactive review of international operations, products, markets, et cetera. I guess just to be curious if you could provide any more color as to the likelihood of you guys maybe taking a little bit more action there or was that actually part of the conversation you just had about internal reorganization? Any additional thoughts or handicap of that likelihood?

Philip W. Tomlinson

I think that as part of our conversation we just had a minute ago, and I think that you'll see us over the next 90 to 120 days, more active in that area. We, as you know, and Tim you've been talking to us for a long time, I mean what I said earlier is we are really -- we love margins and we are determined to improve those margins. And as Jimmy said, I think you should start seeing something happen in the fourth quarter. And I think you'll see it accelerate through the next year or so.

Timothy W. Willi - Wells Fargo Securities, LLC, Research Division

Okay, great. Second question I had is around Durbin, there's been obviously a lot of pretty well-publicized discussions around the type of margin opportunities that will exist in the merchant acquiring world, even if it's just for a short window of time. Global Payments talked about it last week. Just curious, as you guys look at your Merchant Acquiring business, if you sort of share the same sentiment that within the bounds of good business practices, there will be opportunity for you to improve the margins and that operation for at least a window of time?

James B. Lipham

I think there is some room there. I think that competitively, we will all -- it will go up and will -- I'll bring the margin back down. But I do think there is a window. I don't think it's going to be anything truly material that's going to make a big difference. But I do think there's a window there work on that process, and we're looking at that very hard right now.

Timothy W. Willi - Wells Fargo Securities, LLC, Research Division

Okay. And then just one last one on mobile. To what degree have your card issuing customers asked or indicated that as they think about mobile payment strategies around credit or other vehicles that there seems to be a role for total systems in that ecosystem that would be an incremental revenue opportunity for you? Are people really turning to you and saying, "We're going to need your help on this." Or is it still pretty vague in terms of where you guys might sit the whole discussion of mobile payments and infrastructure?

Philip W. Tomlinson

Sure. We do have several clients that we're working with to try to work through that process. We think we can offer a very good solution, and we're in the process of selling that solution. I would say they are not lined up at the door, to be frank with you, but the ones that we're talking to would make a difference.

Operator

Next question comes from the line of Brett Huff [Stephens Inc.].

Brett Huff - Stephens Inc., Research Division

A couple of questions. First of all, just a question on margin. I think a similar question was asked earlier, but I was a little confused. Jim, I think you said that you're expecting between 20% and 22% EBIT margins on net revenue medium-term. Is that right? I guess last quarter, I thought that those numbers were a little higher and I want to just make sure that I'm squaring them right.

James B. Lipham

No, the quarter, we had 24.7% and we are looking at margins before reimbursables of around 28.1% and 28.4%. I think you had the higher margins last year when you had the termination fees in there and obviously, they're not there now. But I think 21% to 24% is probably a good range.

Brett Huff - Stephens Inc., Research Division

Okay. And then in terms of organic growth, I just want to make sure I got this right, it was 3.4% year-to-date and it was 3.9% for 2Q. Is that right?

James B. Lipham

It was 3.9% for Q2 as far as the percent that organic growth was up about 5.3% growth in revenues, that was 3.4%. Follow that?

Brett Huff - Stephens Inc., Research Division

Yes. The 5.3% being the year-to-date?

James B. Lipham

That's correct.

Brett Huff - Stephens Inc., Research Division

Okay. And then Phil, on the accretion, you went through -- we appreciate the going through sort of your thoughts on how you're evaluating M&A opportunities. But what is the specific -- can you get any more specific on the guidelines around accretion, how you guys think about a deal? I know that there are some deals that might be harder to get accretive with -- if you bought something now by the end of '12, but how do you think about that?

Philip W. Tomlinson

I mean, we'd be talking about -- if we were to buy something today, we'd be talking about accretion for next year, I mean 2012. I wouldn't get into any of the ranges that we try to deal with, because I don't want to have to negotiate against ourselves, but we were just trying to help you understand the things that are important to us.

Brett Huff - Stephens Inc., Research Division

Sure. And then last question from me, the pipeline comment that, Jim, I think you made, there's 13 millions accounts on file coming later this year, and I think, Phil, you referenced that too, those are signed contracts. And then it sounds like you said, I just want to make sure that we're going through this so I get this correctly, one in 3Q and 2012 are going to have some good conversions. Is that what you said?

James B. Lipham

That is what I said.

Brett Huff - Stephens Inc., Research Division

And then what, just -- can you remind me those are?

Philip W. Tomlinson

Let me clarify one thing, though. That 13 million, I think what he said was that some of those will be in 2012. I thought that's what you asked. It was going to be in '12. And we got some this third quarter and this fourth quarter, and then we'll have some in the first quarter of next year and the third quarter of next year.

Brett Huff - Stephens Inc., Research Division

So you've got 13 million basically over the next 6 quarters?

James B. Lipham

That's correct.

Brett Huff - Stephens Inc., Research Division

Okay. That's what I wanted to make sure I understood. I just want to clear that up. Those are the numbers I needed.

Operator

Next question comes from the line of Glenn Fodor [Morgan Stanley].

Glenn Fodor - Morgan Stanley, Research Division

This is the first time we had a chance to talk to you since the final Durbin regs came out. So I just want to get your views on whether -- just the nuance, was there anything in them that changed your views on the whole situation overall?

Philip W. Tomlinson

No.

Glenn Fodor - Morgan Stanley, Research Division

That's an easy answer, okay...

Philip W. Tomlinson

I mean we just -- I personally just have a philosophical issue with the government setting prices like that. But it did come out a tad bit better than what we had been led to believe that it might be. And so I guess that's progress, and I guess as time goes by, we'll see where that falls out. There's still a lot of questions to be answered and hopefully, we'll have those answers here shortly.

Glenn Fodor - Morgan Stanley, Research Division

When we think about the Merchant side as it relates to Durbin, I mean aside from the pricing aspect, have you been talking to merchants about what you can do for them under this new world order? And can you shed any light on what we could see from that angle on a product standpoint?

Philip W. Tomlinson

Well, I mean we talked about what it would mean as far as the interchange sharing or the interchange giveback. I mean, I think it will, as I said earlier, it will helps us -- I don't think it's going to be material, mainly because I think that eventually, most of it, and I say most of it, I don't have a percentage, but a lot of it will certainly go back to the merchants. And I think it just depends on everybody -- anybody that you talk to, whether they're on a Interchange-plus arrangement or they're on a bundled pricing arrangement and the one -- the merchants that are on a bundled pricing -- or is going to happen -- they'll get a give back a little slower than the folks on Interchange-plus.

Glenn Fodor - Morgan Stanley, Research Division

Is there anything you're going to be doing from a product or service standpoint that might change and be an opportunity for you, away from the price but product-wise?

James B. Lipham

I'm not really prepared to answer that today, Glenn. I don't mean to be evasive. I just don't have that answer right in front of me.

Glenn Fodor - Morgan Stanley, Research Division

Okay, that's fine. And just one last one, if you don't mind. At the Analyst Day, you talked about long-term growth rates possibly reaching high-single, low double-digit levels. If you look around at your main regions or your business segments, can you just provide some color for us on the high points as to kind of what has to happen in each of those to get to those overall company high-single, low double-digit levels and maybe some color on what kind of growth rates you'd expect out of each of those?

James B. Lipham

Are you talking about each product line or each segment line?

Glenn Fodor - Morgan Stanley, Research Division

To however you would prefer to do -- geographies, just your main couple -- or your business segments, however you prefer.

Philip W. Tomlinson

Yes. I think that if you start in the U.S., which is our biggest market, I do think that we are starting to see improvement. It's getting better. It's not off-the-chart by any means, but it is getting better. I do think that as a result of the recession that people who are processing in-house will, over time, take a hard look at what someone like us could provide. I think that will be helpful to us. I think that as the economy starts to improve our organic growth in particular will improve and people will begin to issue new cards, new card products. I think that will also carry over to the Commercial side of the house, which is a very strong product that we have here. And today, we process probably 80%, 85% of the Commercial cards in this country. I think we continue to make good progress in Canada. We've got 2 or 3 good bids up there right now that we feel, I won't say confident, but we're sort of liking the position we're in. This time next year, we'll be processing, we will have added Bank of Montréal. That's just a great organization. We're very excited about that. We are starting to sign, as I mentioned earlier, some merchant business in that part of the Merchant Acquiring Processing business in that part of the world. When you go to Europe, we have continued to make really good progress in Germany. You heard me talk about BNS in Germany, huge merchant acquirer. So really it would be, I guess, the largest number of merchants that we process for anybody. That is a really big jump-off point for us. You know that since we signed Deutsche Bank now, we are up to 5 total banks in Germany. We think that will continue in that region. If you go into the U.K. region, I think we'll continue to see -- that's kind of on the same track as the U.S. We need for our 2 Irish banks to continue to improve. When you -- Jimmy talked a little bit about China and China Union Pay. There's not much I can say beyond what he just said there. It is a joint venture, and we'll continue to provide those numbers to you. Japan is a little troubling right now. When you talk about Japan, I think you just have to be realistic that they are still trying to recover from the issues that they have had. If you -- and I think that's just going to take some time, and we would not expect anything really big out of Japan on the near horizon. In Brazil, we're actually starting to see some prospects crop up. We need to go ahead and get this final piece of the Carrefour conversion done. We look forward to getting that done, as I said earlier, in the first quarter. On the merchant side of the house, we would like to add more girth to that business. We think, over time, we will add to that business. We're continuing to get more aggressive on the sales side of the Merchant Acquiring business. Again, it's a process for us, and now I think we're getting better at the process. When you talk about TAS, the acquiring side, we're not expecting tremendous growth there. We would like to see some growth, and we certainly are talking to lots of people about that. But the truth is -- this economy, and I know you guys are just as tired as I am of hearing about the economy, but we are very consumer-driven and as the economy improves, it is really rather magical to watch what happens as this organic growth takes off at TSYS, it becomes very profitable. And so that is the one common theme throughout our Global business, is we need this economy to at least settle down to where people are not just worried about like what's going on in Washington today and why was the President and the Speaker on television last night. It just creates uncertainty and we would like to see that uncertainty get cleared up, as most everybody would. But I think our core businesses are healthy, they are throwing off good earnings. We've got a good prospect pipeline. It's just probably as good as we've ever had in history. People are actually starting to make decisions again. That's very good for us. I think we've got 14, 15 conversions lined up that will happen over the next few years. That's a lot of conversions that we're working on. We talked about 13 million accounts in the pipeline. That's positive. At some point, we will sign on a very large issuer, I would hope, and all of a sudden, the pipeline explodes to some degree. So there's just a lot going on. I think that we have a good chance of maybe winning some business with some of the merger and acquisition talks that you hear. You just read about it and hear in the banking world today. You're never totally confident of anything like that until it happens, but I do think that there's certainly possibilities there that could be what we call a "bluebird," a client that just shows up with a big piece of business. That's always a nice thing to happen and that really didn't happen to us during the recession. We lost 3 really good clients during the recession as a result of the regulators coming in and taking them over and they went to other places. I don't know if that helps you.

Glenn Fodor - Morgan Stanley, Research Division

It does. It's a great round up.

Philip W. Tomlinson

Just kind of what I'm thinking, what we're thinking.

Operator

We have a follow-up question from Tim Willi.

Timothy W. Willi - Wells Fargo Securities, LLC, Research Division

My follow-up was just going back to my question about mobile. Could you elaborate a bit as to where you think you may sit in the mobile food chain? Do you see yourself as something that is collaborative with the companies that sort of talked about being wallets such Isis or working of Citi or MasterCard or Visa?

Philip W. Tomlinson

I did think it will be collaborative. I think they're still -- there's still a lot of sorting out to be done. There's an awful lot of people talking about domination of the mobile wallet. I mean we have interfaces into an awful lot of card issuers. I think that's going to be helpful. We have signed an agreement with Isis. That's happened probably a year ago, I would guess, Tim. We're working hard on getting that product to market. I think we're pretty close. As I said earlier, we are talking to several of our clients, and we think that we'll be in the business. Do I think it will -- I'm just not convinced yet that it's going to be this -- and I think mobile will happen and I think it will be good for the Card business and hopefully, it will help increase the number of transactions that happen and we'll get some fee for being in the middle of all that. And we will certainly get a fee for posting or settling any transactions that happen within our realm of responsibility. And so I think it will help us there. We've got a strategy that we think makes sense. So before we go public to the world, we really like to do it along with a client that we've signed, and we're not quite there yet. And again, I don't know if that helps you or confuses you?

Timothy W. Willi - Wells Fargo Securities, LLC, Research Division

No, no, that's actually very helpful. Clarifies things a little bit.

Operator

And that concludes today's Q&A portion. Are there any closing remarks?

Philip W. Tomlinson

Yes. One, I would like to tell you how much we appreciate your interest and you being on the phone with us today. We are encouraged on our performance to date, and we obviously think we're on track to meet our guidance for the year. There's a lot of moving parts, and like I said, we feel good about most all of the products that we're delivering to our merchants. We are being very careful with cost, and we really would like to grow this thing and we would very much like to improve our margins. And I think you can probably count on that. So again, thanks for being with us today. If you have any additional questions that come up in the meantime, feel free to call Shawn. As I say every time, he's on call 24/7. So call him anytime, he loves it. And again, we appreciate your interest, and we look forward to talking to all of you soon. Good evening.

Operator

That concludes today's conference. You may now disconnect.

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