Vantiv's (VNTV) CEO Charles Drucker on Q1 2016 Results - Earnings Call Transcript

| About: Vantiv, Inc. (VNTV)

Vantiv, Inc. (NYSE:VNTV)

Q1 2016 Earnings Conference Call

April 26, 2016, 5:00 pm ET

Executives

Nathan Rozof - Head, IR

Charles Drucker - President & CEO

Mark Heimbouch - COO & CFO

Stephanie Ferris - CFO

Analysts

Jason Kupferberg - Jefferies

Ashwin Shirvaikar - Citigroup

Dan Perlin - RBC Capital Markets

Darrin Peller - Barclays

David Togut - Evercore Partners

George Mihalos - Credit Suisse

Tim Willi - Wells Fargo Securities

Bob Napoli - William Blair

Bryan Keane - Deutsche Bank

Tien-tsin Huang - JPMorgan

Dave Koning - Robert W. Baird

James Friedman - Susquehanna Financial Group

Operator

Good day and welcome to the Vantiv First Quarter Earnings Call. Today's call is being recorded.

At this time, I would like to turn the call to Nathan Rozof. Please go ahead, sir.

Nathan Rozof

Thank you. Good evening everyone and thank you for joining us today. By now, everyone should have access to our first quarter 2016 earnings release, which can be found at vantiv.com under the Investor Relations section.

During today's call, Charles Drucker will discuss the competitive position and first quarter operating performance. Mark Heimbouch will then deliver our financial results including our updated guidance for the second quarter and full-year.

Also joining us in the Q&A portion of today's call is Stephanie Ferris, who has been promoted from Deputy CFO to become our next CFO. Throughout this conference call, we will be presenting non-GAAP and pro forma financial information, including net revenue, adjusted EBITDA, pro forma adjusted net income, and pro forma adjusted net income per share. These are important financial performance measures for the company, but are not financial measures as defined by GAAP.

Reconciliations of our non-GAAP pro forma financial information to the GAAP financial information appear in today's press release.

Finally, before we begin our formal remarks, I need to remind everyone that our discussion today will include forward-looking statements. These forward-looking statements are not guarantees of future performance and therefore you should not put undue reliance upon them. These statements are subject to numerous risks and uncertainties that could cause actual results to differ materially from what we expect. Please refer to the forward-looking statement disclosure in today's earnings release and in our periodic filings with the SEC.

Additional details concerning our business risks and the factors that could cause actual results to materially deviate from our forward-looking statements can be found in our Annual Report on Form 10-K under the headings Risk Factors and MD&A and in our other filings with the Securities and Exchange Commission, which are available at sec.gov.

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

Charles Drucker

Thank you, Nate, and thanks to everyone for joining the call this evening. I'm happy to announce another strong quarter for Vantiv and exceptional start to the year. Given the strength of the first quarter, and the high rates of organic growth that we have experienced across that business, we are raising our guidance for 2016.

During the quarter, net revenue grew 15% to $431 million a strong growth trends continue across the business. We're winning share and successfully penetrating the SMB market for our high-growth channels contributing to strong organic growth.

Turning to the bottom-line, EPS grew 24% to $0.56 demonstrating the leverage and scale in our business model, as well as our continued focus on efficiencies. Results exceeded expectations in both segments.

Within Merchant, net revenue accelerated to 17% and our high-growth channels continue to perform well and are becoming a bigger piece of that business. We also continue to see stable same-store sales trends and our sales pipeline remains strong.

Financial institutions also outperformed our expectation this quarter; growth was 7% reflecting continued strong execution as well as contribution from EMV card reissuance.

I'm pleased to announce that we completed the integration of Mercury's backend processing. We migrated over 100,000 merchants to that platform during the first quarter and we did it ahead of schedule which shows the strength of our people and their ability to execute.

It isn't easy to integrate acquisitions and to migrate transactions without disrupting clients but our team has successfully executed the transition. We integrated our acquisition, its part of our DNA, and we continue to prove our ability to leverage our combined scale and distribution to accelerate net revenue growth and to expand that margin. Converting the Mercury backend also enables revenue synergies including OptBlue as a catalyst for future growth.

We're winning market share by building on our core strengths and expanding into high-growth channels and verticals. Our core strength include our scale, a unique portfolio of clients, and our broad distribution capabilities. Scales enables us to make investments in new technologies and to spread the cost over more than 23 billion transactions keeping us competitive on price and enabling us to earn best-in-class margins. We serve more than a third of the top 100 national retailers in the United States, very few of our competitors can claim that and given our scale, we think that it's a very defensible part of the market for us.

We are also penetrating the SMB market. We have added high-growth channels that target these merchants helping us win share. And these high-growth channels continue to outperform growing at above 20% again this quarter. Our breadth of distribution is also unique. We have 3,000 dealers and developer partners in the Integrated Payments. We distribute through more than 4,000 merchant branches and we have to strengthen our traditional direct and ISO channels as well.

We are aggressively expanding into fast growing verticals like healthcare, where we can bring together our assets from across the company to create a unique solution for our clients. Given the importance of technology in managing healthcare's complex revenue cycle, I believe that our expertise in Integrated Payments, combined with our industry leading cycle and breadth of offerings truly differentiate us.

We already processing billions of dollars in volume for a variety of healthcare providers across our distribution channels and we have relationships with several healthcare ISVs. Here again you can see the importance of our disciplined approach to integration. First, we acquired Mercury and ran the business with the focus on maintaining its strong partner and client relationship ensuring that we continue to grow.

Then we took the time to integrate it. We spent 18 months to make sure we got it right and now we're going to expand its capabilities throughout that business to penetrate new verticals and develop unique solutions that our peers can't match.

I mentioned healthcare as an example but we continue to identify other verticals where we see opportunities to leverage our strength and expand our position as a leader in payments.

Our results are compelling, not only in terms of first quarter, but also over the long-term. The Nilson Report recently published its annual rankings of merchant acquirers. According to the data, Vantiv has won more market share over the past five years than any of our peers. We expanded from 13% market share in 2010 to over 19% market share in 2015. That's nearly six points in five years. And while we are the number two acquirer today, we are within a billion transactions of number one and we're growing fast.

We pointed to several catalysts on the fourth quarter call that gives us confidence in our ability to grow the business. Each of these catalysts are intact including the contribution to grow from recent new client wins, as sales pipeline is strong, and we will begin the rollout of OptBlue to the Mercury portfolio later this year.

The last item I would like to update you on is EMV. EMV card reissuance is contributing significantly to the growth in our FI business. We expect this to continue through the first half, and then to trail off in the back half of the year as the segment returns to lower-single-digits organically. In Merchant, we're working closely with our clients to enable EMV and while our conversations typically begin there, they often quickly expand to include security and fraud solutions, as well as other new technologies. The migration to EMV is complex where we have the people; we have put the people and tools in place. Sell side clients upgrade to EMV as quickly as possible and we are seeing good rates of conversions among both merchants and issuers.

Finally, before I turn the call over to Mark, I would like to address the executive appointment that we have announced this afternoon. As you may have seen, we are expanding Mark's role and we are promoting Stephanie Ferris to CFO. In addition to his duties as COO, Mark has taken on increased responsibility within the company to now include our product organization where he will further enhance our ability to bring new products and services to the market.

Stephanie has more than 20 years of financial experience, including several senior finance roles at Vantiv. In addition to her time in finance, she has also stepped into run the merchant bank business from 2013 to 2015, where she significantly accelerated growth. Since return to finance, she has served as a Deputy CFO. So I expect a seamless transition. So congratulations to you both, your appointments are well deserved. Going forward, all three of us will participate on future earnings call.

With that, let me turn it over to Mark, to review our financial results and to update our guidance. Mark?

Mark Heimbouch

Thank you, Charles, and welcome to everyone who is on the call. I would also like to take a moment to congratulate Stephanie on her promotion to CFO. I worked with her now for the past several years, I'm highly confident on her ability to succeed in this role.

Turning now to the results, we had another very strong quarter, net revenue accelerated to 15% reaching $431 million, pro forma adjusted net income grew 23% to $110 million, and pro forma adjusted net income per share increased 24% to $0.56 per share.

Our Merchant segment generated net revenue growth of 17% representing an acceleration from fourth quarter levels, the transactions grew by 10%, and net revenue per transaction increased by 7%. The growth in the merchant segment reflects strong performance across the business including in our high-growth channels which continued to exceed our expectations.

Same-store sales were strong at over 7% as the impacts from the extra day given leap year, as well as the timing of Easter came in at little bit better than expected.

Our Financial Institution segment also had an excellent quarter. Net revenue growth was 7% primarily due to a 2% increase in transactions, and a 6% increase in net revenue per transaction. In addition to continued strong execution, EMV card reissuance, the extra day given leap year, and the timing of Easter holiday all contributed to strong growth within this segment.

Turning to expenses, total operating expenses, including sales and marketing other operating costs and G&A increased by 15% aggregate during the first quarter as we continue to invest in the business for future growth, while maintaining our focus on efficiency.

Below the EBITDA line, depreciation and amortization expense, excluding the impact of the amortization of intangibles related to acquisition declined to $21 million which is consistent with the expectations in our guidance.

Net interest expense was $28 million in the quarter also consistent with recent trends.

Moving to income taxes, our pro forma tax rate was 23.5% including an $18 million tax adjustment related to our TRAs consistent with recent trends. And finally, our average diluted share count declined to 196.8 million shares, down from over 200 million average diluted shares last year. This decline in share count was primarily due to the warrant cancellation transactions that we executed in December and demonstrates our commitment to opportunistically deploy capital in order to maximize shareholder returns.

Finally, I will briefly review our guidance for the second quarter and full-year. Based on the current level of transaction trends and new business activity as well as taking into account our strong first quarter performance, we are raising our guidance for the full-year 2016. We now expect net revenue of $1.82 billion to $1.85 billion representing growth of 8% to 10% and we expect pro forma adjusted net income per share of $2.58 to $2.64 per share representing growth of 15% to 18%. For the second quarter, we expect to generate net revenue of $460 million to $465 million representing growth of 9% to 10% and we expect pro forma adjusted net income per share of $0.66 to $0.68.

We continue to maintain consistent approach in terms of providing guidance setting expectations that we have a high level of confidence in attaining. We continue to expect Merchant to grow net revenue in the upper-single-digits to low-double-digits through the rest of the year primarily driven by our expectations for mid-to-upper teen's rates of growth in our high-growth channels as well as our expectations for same-store sales growth to continue in the mid-single-digits.

We similarly expect the core businesses within our Financial Institution segment to grow in the low-single-digits for the remainder of the year. While growth may again approach the mid-single-digits in the second quarter, due to continued EMV card reissuance, we expect this impact should trail off in the second half of the year, as Charles mentioned.

Finally, our guidance excludes the impact of the potential future capital allocation such as M&A, new TRA terminations, or share buybacks.

I will now turn the call back to Charles for closing remarks.

Charles Drucker

Thanks Mark. As we can tell, we are very happy with our performance in the first quarter. Our business is firing on all cylinders. We have the right assets, we have the right channels, and we are winning market share. Vantiv continues to deliver strong financial results as our team successfully executes our strategy. Our results are compelling and they are attributed to our people. Our people do a great job and they have the power to propel us to new heights.

All these factors gives us confidence in our increased expectations for the full-year and keep us optimistic about our future. Thank you all again, and let operator, we are ready to open up the lines for questions.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions].

And our first question today comes from Jason Kupferberg.

Jason Kupferberg

Hey nice job here guys. I wanted to ask about the integrated channel specifically, obviously continues to grow at a very healthy pace for Vantiv and others in the space and wanted to get your perspective in terms of what inning, if you will, do you think we are in terms of penetration of this channel, just trying to get a sense of how long we might be able to really sustain the kind of 15% to 20% growth rates in this channel?

Charles Drucker

Hey Jason, it's Charles. We are still -- we are in the early innings. I think we have this healthy embedded base and then also with the cost of the hardware and software coming down, the addressable market continues to get bigger. I was just with Matt Taylor today and he is very excited and optimistic about the things that we're going to do. So we are very bullish on this channel and also with the capabilities that we have as a company continue to grow this into the future.

Jason Kupferberg

Okay. And if we reflect back now over the past four to six quarters certainly with the fundamentals in the execution here are both been really strong, so just wondering what sort of challenges do you guys don't worry the most about, because it does feel like both the segments are firing on most if not all cylinders?

Charles Drucker

Like -- so we feel very confident about our business and how the year continues to shape up well. We're excited because we continue to take share and we think we are in the right channels and we are winning in that SMB market. I mean, obviously there is still lot of competition out there and it's really Jason, just keeping up to the pace of change, complexity is good for us because we have the scale to bring across but I always say wait with the complexity of the businesses and the pace of change.

So it's keeping our people motivated and keeping them focused, like I talked about earlier we go for a disciplined approach and I try not to make the lens real wide to chase all the shiny objects and we now are down and our team has done an excellent job of that.

Jason Kupferberg

Understood. Just last one for me on expense growth in the quarter, I know it was 15% match the revenue growth, the expense growth was a bit higher than we were modeling at least and I'm just wondering if this is a situation where you took advantage of the revenue upside in the quarter to accelerate some of your investments or has there been any change in kind of your full-year view of where expense growth and adjusted EBITDA margins will add?

Mark Heimbouch

Hey Jason, it’s Mark, yes. Again if you look back at the first quarter the sales and marketing expenses grew little bit higher than revenue. Some of that's due to continued investment in the channels as well as frankly the high-growth channels coming in above our expectation. So probably came in a couple of percentage points higher in terms of net revenue growth and we would have expected the second quarter and that's just for the high-growth channels set aside the impact of Easter and leap day. So that contributed it out.

If you look below the line actually I think operating expenses while they continue to grow, and we're really driving -- driving drive efficiency in terms of consolidation of technology and platforms. Charles indicated we completed the integration of Mercury towards the end of the first quarter. I mean G&A I think actually has continued to start looking more and more like a fixed cost. So much lower growth. So we continue to expect scale and gain leverage in the business and to expand margins.

But I think we are looking back over the past several years, I believe this is probably the first year and I could be incorrect but I think this is the first year that we've actually seen EBITDA margins year-over-year coming stable. Historically, first quarter is always our lowest year in terms of net revenue performance and you have made some investments in the prior year in terms of technology and people that become somewhat a fixed cost. And so that has always had an impact of putting a little bit more pressure on our first quarter margins with margins subsequently expanding.

Operator

And our next question comes from Ashwin Shirvaikar.

Ashwin Shirvaikar

Thank you guys and congratulations.

Charles Drucker

Thank you.

Ashwin Shirvaikar

And also Mark and Stephanie congratulations to the two of you on your new roles.

Stephanie Ferris

Thanks.

Ashwin Shirvaikar

I guess my question really is with regards to again going back to Integrated Payments and obviously strong growth. You mentioned investing in newer verticals. If you could sort of step back look at the end market and sort of give us an idea with regards to how many verticals remain to be kind of penetrated as you get into these newer verticals, what's the competitive outlook, I mean I would imagine at this point the verticals that you aren't in, somebody else might be in from high-cost perspective. So do you anticipate that market becoming more competitive?

Charles Drucker

So from a disciplined approach the one that right now we're starting to focus on is healthcare. And one of the reasons healthcare, one is the big vertical and it's pretty fragmented. So no one really owns that vertical, so it allows us to help grab that share and utilize the tools that Mercury had. The ability to manage the clients, easy APIs, and we think there is enough that we can grab and quickly take advantage of that share. There is a couple of other verticals on the horizon for us that we will discuss in the future but right now healthcare in addition to going after embedded base is where we think our ability to grab share is more likely and it's not as -- it's fragmented, so we can grab pieces of it that no one really owns that space now.

Ashwin Shirvaikar

Got it, okay. And just a question on one of the high-growth verticals, the Merchant bank referral channel. Obviously you guys done an outstanding job there with regards to signing new distribution opportunities with newer banks. Where do you stand with regards to sort of the again penetration question with regards to that particular opportunity if you could provide us an update in terms of number of branches converted versus new conversations you might be having with future partners?

Charles Drucker

So we feel very strong around that the pipeline and I think Stephanie will provide that, let me let her address where we're at.

Stephanie Ferris

Yes, sure. So we feel really positively around the Merchant bank channelizing though we got into it several years ago, we think we should be much bigger than we are. We think the opportunity is still very, very big for us and for us to take a lot of share over the next couple of years; we're in low-to-mid-single digits in terms of market share there. We have about 4,000 referring branches today, they're all getting up and running and tend to take a time period to do that.

But they're all performing very well and so we expect that that channel to be very strong over the next several years for us.

Ashwin Shirvaikar

Got it. If I can sneak a quick numbers question, the timing of Easter, how much does that -- did that affect numbers in the quarter?

Stephanie Ferris

Yes, so we think about leap and Easter together and thinking about that growing about two percentage points of growth for us in the first quarter.

Ashwin Shirvaikar

Okay. So Easter might be little bit more than half of that?

Stephanie Ferris

Sure.

Operator

And next will be Dan Perlin.

Dan Perlin

Thanks guys. A couple of quick questions. I guess one is on the management change, I'm wondering this -- the concept of new product expansion. Is that I guess one, why now? Is there something that's embedded in that does that kind of suggest that you want to be thinking about something more international and then there is actually more of a bigger M&A theme that we need to be thinking about there as you expand the role and then I will come back with my second question.

Charles Drucker

Just the first question is that we pride ourselves in building bench strength and talent and being able to promote and expand. So this is all about continuing to expand the bench strength in our team giving Stephanie and Mark more opportunities within the organization.

Now within product, within Mark's organization, the closer we put engineering and product and working with the business lines continues to make us more nimble to execute and grab opportunities because what I'm really excited is going to be a lot of various new things whether it's EMV, the security that we want to use those capabilities to be nimble to the market in fast and continue on that.

As far as international, international is always in our site, in our roadmap. But we said we're going to be disciplined for the right opportunity coming up and I think we're good stewards of the money -- of our capital and like Mark said in his closing, our guidance does not include any type of potential M&A, TRAs, or share repurchases.

Dan Perlin

Okay. So the management change doesn't have anything to do with current what's on the horizon in terms of international expansion?

Charles Drucker

It’s about continuing to elevate the people and build benching.

Dan Perlin

Great. Now a lot have been said around the Integrate channel. I don't hear that much about ecommerce anymore from you guys. What's the update there?

Charles Drucker

Ecommerce is performing strong, we're continuing to win share. I guess we talked about the Integrated because it's still the bigger piece of the high-growth channel but it's contributing very well we're going toe-to-toe, we're winning share and we're happy with the performance of that channel and that's a good point maybe we should feature because we sometimes you start focusing on the bigger piece inside of the high growth which has been the Merchant and the Integrated but ecommerce is doing well also.

Dan Perlin

It's a high quality process; you get a lot of good stuff going on.

Charles Drucker

Yes. I thought about that but yes.

Stephanie Ferris

Perfect.

Dan Perlin

The last quick one I had for you, the expansion into healthcare two things kind of can you nail down a little bit the area of focus within the healthcare, I mean that's a huge area. I know a lot of people are focused on it, some big players in particular and then how do you think about the addressable market there when we look at true opportunity and how much time Matt is spending there. Thanks.

Charles Drucker

Yes, so practice management is the first aspect of it. We think there is a lot of Integrated software partners that some Matt have familiarity with and we bought some over that's starting to see volume move. But that's the first aspect you're absolutely right because inside that vertical, there is multiple verticals or practice management is where we're focused first.

Matt's done a great job of hiring people in his organization, so he is able to -- what we do a good job is sometimes people lose track is there is the core engines and the core pieces, you need to make sure the trains run on time and you produce, so. So he focuses amount of time, still mining that embedded base and then as hire good people along with his direction to be able to appoint them. So we try we're but we have a lot of execution on our side. So it’s very important that we continue to take advantage of the base and do that. So Matt is about bringing strong people into the organization, he has done a great job around that.

Operator

And our next question comes from Darrin Peller.

Darrin Peller

Thanks guys. First congrats Mark and Stephanie both of you congrats on your roles. Just wanted to start off just to be clear, I mean you’re running with revenue growth of mid-teens now. Well you haven't obviously tougher compares later in the year; you also have the U.S. growth offers coming on and off real benefit starting in the second half. So I guess I just want if you guys can just walk us through what if any variables may positively or negatively impact your growth rates just understanding there has been a nice conservative in your 8 to 10 guidance. Any sort of items we could be aware of that could pretty outsize impact on the growth potential?

Mark Heimbouch

I think -- Darren its Mark I will take this and Stephanie can kind of chime in. I think our really kind of our longer-term view in terms of Merchant is its upper-single-digits, low-double-digits in terms of growth in FI as we continue to say on organic basis, it’s probably lower-single-digits. So we always kind of try and maintain a balance around those expectations.

But to your point the first quarter, we saw tremendous growth and we try to break it down to everybody to understand some of the reasons for the strong performance in first quarter obviously we pointed to the impacts of the calendar items, and second, the over performance really in our high-growth channels now. That is likely will continue for some period of time and but our approach has been to continue to maintain a pretty steady way in terms of providing guidance and expectations whether you want to reconsider that to be conservative. We've just taken on an approach to be very consistent and set expectations that we're very comfortable with.

Darrin Peller

All right, it makes sense. Look just a quick follow-up on the FI, I mean again the growth has been obviously strong with a big contribution also from EMV but I guess just you can help us understand how much of that is EMV specifically I'm not sure if I missed it before. And then the organic sustainable growth rate there when you start to anniversary that and I know there has been broad products that have helped guys for a little while now couple of years probably. I think you should be filling that obviously with the rollout of some of those broad products. So just help us understand where we really should expect longer-term on that front may be low-single-digits or flat what would be helpful?

Stephanie Ferris

Yes I think I can take that one. So in the first quarter EMV and card related services impacted about 4% of the 7% growth really consistent with what we saw in the fourth quarter if you recall, we got out 3% of an impact there. So 4% of an impact in the first quarter, you're right, we do expect EMV to continue to be strong for us in the second quarter likely not quite as strong as what we've seen in the first quarter and the fourth quarter as we get through the end of our EMV card reissuance for the majority of our portfolio there.

So we would expect a little bit higher growth in the second quarter. But then returning to low-single-digits in the third and fourth quarters as we finish out our EMV card re-issuance and lap a lot of this card related services that we put into the book last year or so.

Operator

And next will be David Togut.

David Togut

Thank you and let me add my congratulations Mark and Stephanie for your promotions. Just a follow-up on the Merchant business, you’ve given a granular sense of growth rates expected on the FI side as EMV card issuance cycle starts to tail off. As you look at the Merchant base what percentage of your Merchants have upgraded the chip card terminals? And then in connection with that, can you give us a sense of how you expect the demand for security and fraud solutions to proceed after sort of the chip card terminals upgrades have finished in your Merchant base?

Charles Drucker

So in terminal we're slightly below half of a terminals or EMV enabled. So we have like I thought before a runway that I think takes you through into '17. So we have more to continue to accelerate that.

From a security piece, I think the combination of our EMV as a catalyst but point-to-point encryption and tokenization continues to increase. So as their clients are converting we are putting the whole in most cases the whole suite together, so we think that demand continues to go because EMV itself does not prevent any type of card breaches and other components. Point-to-point encryption and tokenization is really the safest way. So we're seeing with our clients, the demand. Now EMV has a liability shift that people are just pushing quicker to but that demand to the security products is going to continue to be a stable in what we're selling.

David Togut

How does the sales process for point-to-point encryption work through the Integrated Payments business as compared to your direct sales channel?

Charles Drucker

It all depends upon the provider, it -- a lot of times it depends on when we're picking up the transaction from the swipe or from when the ISV developed a service; some ISVs were we developed from the swipe all the way through, some ISVs from when we pick up the item.

So the integrated side with that is probably more in the early innings where a lot of core retailers are potentially in -- they're still in the early innings but inning or two ahead. So it's working with each individual software developer.

Operator

And our next question today will come from George Mihalos.

Charles Drucker

How are you George?

George Mihalos

Great. Thanks guys and let me add my congratulations on a very nice quarter. Looking at the growth in Merchant in the first quarter, even if we back out Easter and the Leap Year or so, it sort of implies you grew 15% up from the 14% in the fourth quarter, can you maybe dig a little bit more into what accelerated from fourth quarter to in the first quarter was it iPOS, was it non-fifth Third bank channel just anymore clarity you can provide there?

Stephanie Ferris

Sure happy to. So our high-growth channels continue to perform very strong in first quarter and like Charles mentioned on the call up to 20% plus which was above our expectation. In addition to that, we did see across the entire portfolio really strong same-store sales growth a percentage above what we had seen in the fourth quarter. So those two in addition to the benefits of Easter and Leap really help drive the benefits we saw in the Merchant business in the first quarter.

George Mihalos

Okay. So seem pretty broad based.

Stephanie Ferris

Yes, it does.

George Mihalos

And then also the commentary on the market share wins which I think are pretty evident given the type of growth you're posting, can you talk a little bit about what are you seeing in the pipeline both on the SMB side and then also large national merchants kind of what's going on there?

Charles Drucker

I mean we -- our pipeline is strong, we are bidding on in a large national merchant space we are in the mix for lot of clients that we have. I think our ability to bring clients up quickly on EMV, point-to-point encryption, tokenization has really given us we believe compared to some of the competitors advantages because of our platform that we can convert them in a fast manner.

On the SMV we are I mean in the Integrated Space; we are winning business there and continue to shift volume. Our Merchant Bank channel as it ramps up and where these banks are starting to light up because a lot of times the banks have these long-term relationships and as we get that business bankers should call in them, we are winning at middle, small middle market type of clients. So pretty bullish around where new sales are growing and our ability to continue to win share and continue to move up the ranks of being the top acquirers.

Operator

Next question comes from Tim Willi.

Tim Willi

Thank you and good afternoon, congrats everybody. In the internet business or ecommerce, I think that's Charles, Mark could you talk about any particular verticals or areas where you're seeing stronger performance or opportunity open up, what are the small business, large business, the whole marketplace phenomenon which is really be getting legs and can be quite a large market, just any thoughts around those topics?

Charles Drucker

We’re pretty, we've had good success and first of all we have a lot of web-only clients that in digital and some of the other areas that have been growing very well for us. Our omnichannel has actually picked up a lot where we've had the brick and mortar and like I talked about a year or so ago, the contract that with other players are coming up we are able to do the omnichannel capabilities to do the web side of it. So that's actually accelerated well, so I wouldn't there is no anything particular vertical market, Stephanie.

Mark Heimbouch

No, I think it's going to be web-only type of client.

Charles Drucker

Yes.

Mark Heimbouch

In our large national or midmarket, we do continue to process the volume for those guys omnichannel so be it. But it just continued market share gains, I'd say they cannot be little bit larger clients and we haven't had the same focus or haven't focused so much on a smaller client in web-only.

Charles Drucker

Yes so we haven't been downstream as much as midsized to larger and their future intention will be to move it downstream.

Tim Willi

Okay. Great and then just a follow-up, in terms of the discussion around value added products et cetera it obviously security EMV highlighted and those have been good contributors now for quite a while. Are there any other areas or products sets that seem to be showing signs of life for elevated levels of interest that could potentially also come onto the extent that you sort of lap pretty favorable environment around the security discussion et cetera. Is data or marketing any of that kind of stuff improving or is it not?

Charles Drucker

So I know it’s still tradition but gift card and some of the closer stuff that we were able to introduce into the Mercury portfolio and especially now that is on at backend. There were several of our core products that we chose just like the OptBlue not to introduce because it wasn't on our backend. So I think in the iPOS area, gift card and penetrating more in that.

I believe data analytics will be something that we're going to do extraordinary well at in the future but still in the early stages. And then we do a good job of how we route transactions for our clients. We call it a prime routing that we have very analytical views about how transactions move, debit transactions between networks that we do a good job that differentiates us that we're able to share in some of the savings that a merchant may have which helps us maintain the margins that we have and differentiate us.

Operator

And next will be Bob Napoli.

Bob Napoli

Thank you and good afternoon. Question on another question on Integrated but when you bought Mercury years ago and I think you now performed certainly well, we would have expected from the time you bought it on the growth side but the penetration rate, Mercury’' penetration rate of their dealer/developers was hope somewhere around 10% range. And as wondered if you've been able to track that metric and then been able -- have you made a lot of progress in expanding that and what is the remaining opportunity within the penetration of the current dealer/developer base that you do have?

Charles Drucker

Yes I don't know that number and is with Matt and we continue to look -- we are winning more dealers and developers than we have in the past. So we continue to win our share because as is pointed out, there is the end merchant coming but winning the dealer and developer and being easy for them to work with and connect is key. So we had been accelerating that and I mean we talked about embedded base but I don't know if we have a number on the universe and what penetrated into that.

Because it's so fragmented, I mean some of them are very small, so I don't have that and that might be a follow-up question for Nate in the future but all I could say is that we're -- we are winning more than over the last couple of years when Mercury was a standalone.

Bob Napoli

Okay. And then a follow-up question just on obviously your balance sheet is deleveraged continues to deleverage very rapidly and at this point, from an investment perspective what areas are the highest priority to you is it further expansion within the U.S. is it further expansion internationally or is it still just doing more with the tax agreements, what are your thoughts on the balance sheet deleveraging and the priorities for M&A type of investments?

Charles Drucker

So using that balance sheet is to continue to support growth and look for strategic type of acquisitions whether it's international, the U.S. we filled out the strategic products but there could be also opportunities but it's really our first focus is around growth and figuring out how we continue to have this sustainable growth we continue to demonstrate and we think that the assets to continue that but M&A or growth is our first priority.

After that the PRAs are very accretive, it takes two parties, the bank recently sold one last year and if we need on those may come available that would be a good place to deploy, share repurchases would be another place to deploy. I think we have shown discipline in that, we're not prone to just keep the cash on our balance sheet but growth is where our first priority is and will continue to be but we will deploy.

Bob Napoli

Last question just quickly on the tax rate it came in a little bit lower than what we have modeled for the quarter, what would be reasonable number to use for 2016?

Mark Heimbouch

So the way to model taxes is to continue to use a base rate of 36% with the tax adjustment of $18 million for quarter through the remainder of 2016.

Charles Drucker

It's similar to what we had left.

Mark Heimbouch

That's right, yes.

Charles Drucker

It is continued the same, yes.

Operator

And our next question will come from Bryan Keane.

Bryan Keane

Hi guys, lot of my questions have been asked but just a couple of follow-ups. On EMV, I heard it was about four points of the growth in FI, how much is it pushing up growth in Merchants?

Charles Drucker

Surely not in terms of how we think about the revenue, I mean I think we’ve probably taken some market share because we have solutions for the client, but frankly the revenue we generate from terminal sales is insignificant and so it's not as you think about whether it's a question around growth and revenue per transaction or value added services and we're not out charging extra for EMV. It may be contributing to market share gains. But by itself it’s not an important element in terms of rate of growth.

Mark Heimbouch

Now, I would say that EMV that security tokenization point-to-point is will be growing and as we talked about it as clients converge it continues to give us confidence in the back half going into '17 because as they converge, we will start to see value added transactions but it’s all about how we’re maintaining and seeing the margins. So the EMV part, like pure terminal and stuff it’s not really our DNA.

Charles Drucker

And actually the runway for security tokenization encryption that has got a pretty long runway.

Bryan Keane

Right there is some merchant acquiring fees being tacked on for non-compliance on EMV, so I don’t know if you guys are doing that like some of the other acquirers and that [indiscernible].

Charles Drucker

We are so EMV in certain parts of your portfolio is different risk profiles and it's a very minimal amount, is that right Stephanie.

Stephanie Ferris

Yes the amount we charge for that is really not --

Charles Drucker

Improved yet. Yes, we are not -- frankly -- I feel like as acquirer we got to work hard to educate and get our Merchants to get up to the EMV standard, so that they are protected and we eliminate fraud as much as we can in the industry. So in our in our philosophy is not making this but we do make a lot on the terminals, we try to get it out there so that our attrition rates, we do the right thing for our clients and then we will bring other products. But there are some items that's not in the Merchant; it's not a big part of what we have.

Bryan Keane

Okay. And then just in Merchant segment the normalized growth rate is about 15% but the guidance is for going forward is kind for high-single, low-double. What had caused that growth rate to decelerate like that because right now you seem to be pretty hopping along pretty well?

Stephanie Ferris

Yes I think Mark mentioned earlier, our approach to guidance has been consistent, talking about our merchant expectations in the mid-term to be in the upper and low-single double-digits. So if you think about some of the outperformance in the first quarter beyond Easter and Leap day in that two percentage points we did see higher growth in high-growth channels themselves. And so we would expect potentially some outperformance there compared to our guide. But again we continue to be very consistent with our expectations for Merchants and that's probably the reason why you’re seeing a difference between the first quarter and then our quarter expectations.

Bryan Keane

What about revenue?

Charles Drucker

The way out there --

Bryan Keane

I was just going to ask not revenue per transaction in Merchants, does that change much going forward?

Stephanie Ferris

We're expecting slight expansion like you would see in the second quarter compared to the first quarter but then as we talked about we will bring on the United States Postal service in the back half of the year. So you would expect to see the revenue per transaction slower or be flat on a year-over-year basis.

Mark Heimbouch

I'm going to say as the sales force is performing and the company is performing just as we look, it gives us confidence of our ability to deliver.

Charles Drucker

So Bryan we're not just sitting here and pointing to increasing rates of attrition or loss of market share. We feel pretty really confident about the business, it’s doing really well. I mean we have made an adjustment from the first quarter the four percentage points that Stephanie has talked about in terms of the Merchant net revenue growth, we feel highly confident of the business that is doing really well it continues to grow very well.

Bryan Keane

Okay. Very helpful, last question just the OptBlue and that's going on for Mercury, will that be material into second half or when will that start showing up?

Charles Drucker

I mean it will start showing up towards the second half latter part of the year and help us through into '17, so it gives us confidence and continued catalyst to help us have consistent growth rates.

Operator

And our next question comes from Tien-tsin Huang.

Tien-tsin Huang

Hi thanks. Just on the Mercury --

Charles Drucker

Hi, Tien-tsin.

Tien-tsin Huang

Hi, have it on those. I don't bother it changing it by the way so [indiscernible] born a little bit later I would start with it but I think its doing. Just quickly on the Mercury conversion, you cut the number to your platform sounds like a backend stuff and I think that was the hardest part. So what's left to do on the integration and in order for you to hit your targets from here on the Mercury integration side?

Charles Drucker

I mean there are always small parts of the integration, there is always one-off type of things in a big portfolio but the good majority is done and we're now into just general special things that are around on the edges. So I think a good majority of it.

Mark Heimbouch

Yes I mean we are past the biggest part.

Charles Drucker

Yes, yes.

Mark Heimbouch

We will always continue to try and refine and drive efficiency, and CRM type systems back office and some of the frontend work, but we work past the big chunk of that.

Tien-tsin Huang

All right, good, glad to hear. The -- temporarily just on the competitive front with all the consolidation right with Global Heartland closed and pieces transfers. Do you think of this as opportunity in the short run or do you still think of it as status quo because it's always pretty competitive out there?

Charles Drucker

So I have really good competitors and the leaders in the people running those businesses are very strong, they know the business well. However I do know just like when you do any type of acquisition and you have to do consolidation it could distract some of the companies which could leave the door open for opportunities for us to take advantage of market share opportunities. So high respect for those companies, they have really good businesses but we are there is a good amount of disruption happening that we intend on focusing our sales force because we think we are in a great position.

Tien-tsin Huang

Good, okay. Last one just I guess ISO piece of it obviously the growth channels are doing well, they're great, they are doing well as you discussed a lot, what's happening on the ISO side is that other side of the trade versus integrated or is that still holding in?

Charles Drucker

You know ISO, I said at least with their ISO portfolio and the strength of our ISO leaders and how we work with them, EMV continues to give them -- give strength in there that allows them to continue to grow. I do believe that as you flow through 2017 because I think that terminals in the EMV and the opportunity as you go through 2017, it will put some challenging pressure but right now our ISO is the leader there, they are doing a good job and we are seeing positive growth out of that business.

Mark Heimbouch

And the other thing I would add is we are seeing we talk about same-store sales such trend, they have been very stable now for extended period of time. I think you're just seeing that across the business.

Tien-tsin Huang

All right, that's great. Thanks for the update and congrats to Mark and Stephanie. Hats to you both.

Mark Heimbouch

Thank you.

Stephanie Ferris

Thank you.

Operator

And our next question comes from Dave Koning.

Dave Koning

Yes hey guys. Nice job.

Charles Drucker

Thank you.

Dave Koning

Yes and I guess first of all just as it relates kind of the Tien-tsin's question, I guess the Mercury transition, I guess late Q1 it sounds like was the timing, how does that incrementally benefit Q2 is there like a revenue lift across the margin lift like what and may be how big of a Q2 benefit might be relative to Q1.

Stephanie Ferris

Yes, so Dave its Stephanie. So we have been talking about a $7 million to $10 million worth of synergies in 2016, we are on track to hit those. We do believe most of those synergies will flow through net revenue frankly but those benefits are in our expectations for the second quarter. We did nicely integrate in the first quarter and saw a little bit of benefits from that but those second quarter benefits are in the expectations that we set out there.

Dave Koning

Okay and then that's good. Secondly so ISO and traditional channels it sounded like they are both growing is that still kind of low-single-digits?

Stephanie Ferris

Yes the traditional accounts are growing in the low-single-digits. The ISO channel like Charles said, is growing little bit stronger than that and given the ability for them to continue to sell EMV and the terminals but low-single-digits for the traditional.

Charles Drucker

Yes ISO have done a good job in the SMB market, the smaller and then using that and they've been able to win share and take it from other clients, other processes.

Dave Koning

Great. And then finally to clarify a yield question from the Merchant segment it sounded like you said yield should be up I think sequentially in Q2 and then stable the rest of the year do you mean them stable with Q2 in Q3 and Q4?

Stephanie Ferris

I apologize so yes. So I would expect revenue per transaction to be up sequentially in Q2 slightly and then flat effectively in third and fourth quarter.

Charles Drucker

And we are talking about an year-over-year basis.

Mark Heimbouch

Year-over-year comparison.

Stephanie Ferris

Oh yes thank you.

Charles Drucker

So year-over-year growth rate will be positive in the second quarter probably not quite as high as what in the first quarter and then leveling off in the back half.

Stephanie Ferris

Correct.

Operator

And our last question today will come from James Friedman.

James Friedman

I was wondering I know you had some supersized Merchants to stand up in the second half like the Postal Service. Steffy, Mark I was wondering if are there any one-time costs in advance watching a Merchant like that and I just had one quick follow-up?

Stephanie Ferris

We are very successfully onboard large merchants, I mean they have to do it very successfully with respect to Walmart and discover lots of things in our history we don’t have significant one-time costs, Mark’s team is able to do that with the conversion team that we have and IT team. So no, no incremental costs with clients on in the back half of the year.

Charles Drucker

Yes that's Marco for GDP, G&A, we do have both.

Stephanie Ferris

Yes.

James Friedman

Got it. And then Charles I just want to reference some of your market share comments, you decomposed what's been said about Merchants side, I was wondering how you think about market share on the FI side because it seems like and correct me if I'm wrong but you are heavier indebted issuer processing in credit. It is hard to know what is going on with that in market. Any qualitative thoughts about the performance in that market will be helpful. Thank you.

Charles Drucker

Yes you’re absolutely right, we are more, we are debit shop, went out fewer credit shop have a little bit of credit as mostly debit and there is really no good place where that report debit as a whole, a lot of times just report by the number of banks have about 1400 banks then market share and we are holding our own in that market share and one of the challenges, some of the banks they just not, they're not investing at this point it is heavily in debit as credits but we continue to win and hit the numbers that we think is still -- we think it’s a low-single-digit type of grower but it’s very good business that's important. But there is no particularly good market share reference point like the Nilson Report that you have referenced.

Charles Drucker

Well thanks everyone for joining the call today. If you have any additional questions please feel free to reach out to us using the contact information available on our Investor website and we will be happy to help you with those. So thanks again everyone, have a great evening. Bye, bye.

Operator

Thank you. That does conclude today's conference call. We do thank you for your participation today.

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