Total System Services (TSS) CEO Troy Woods on Q1 2016 Results - Earnings Call Transcript

| About: Total System (TSS)

Total System Services, Inc. (NYSE:TSS)

Q1 2016 Earnings Conference Call

April 26, 2016 05:00 PM ET


Shawn Roberts - Senior Director, IR

Troy Woods - Chairman, President and CEO

Paul Todd - SEVP and CFO


Darrin Peller - Barclays Capital

Brett Huff - Stephens Inc.

Ashwin Shirvaikar - Citigroup Global Markets Inc.

Ashish Sabadra - Deutsche Bank

Ryan Kerry - Jefferies

David Scharf - JMP Securities

Tom McCrohan - CLSA

Glenn Greene - Oppenheimer & Co.

Steven Kwok - KBW

John Davis - Stifel Nicolaus


Good afternoon and welcome to the TSYS’s First Quarter 2016 Earnings Release Conference Call. All participants will be listen-only mode. [Operator Instructions] After today’s presentation there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded.

I would now like to turn the conference over Shawn Roberts, Senior Director, Investor Relations. Please go ahead.

Shawn Roberts

Thank you, Amy and welcome everyone. We will begin this evening’s call with opening comments by TSYS’s Chairman and CEO Troy Woods followed by TSS’s CFO, Paul Todd who is going to review first quarter segment highlights and consolidated financials. After that we’ll open the call up for Q&A.

I’d like to remind those of you participating in the Q&A that each person will have the ability to ask two questions before the operator is going to place you back in the queue.

I’ll now draw your attention to that we’ll be making forward-looking statements about the future operating results of TSYS. These forward-looking statements involve risks and uncertainties factors that could cause TSYS’s actual results differ materially from the forward-looking statements are set forth in TSYS’s reports filed with the SEC.

At this point I’ll turn the call over to Troy Woods.

Troy Woods

Thank you, Shawn good evening and welcome to our first quarter 2016 earnings call. This has been a terrific first quarter for TSYS and a very busy start of the year for all of us. By almost any measure the first quarter exceeded our expectations. Some of the highlights for the quarter that I would like to call out are net revenue of 12.7%, adjusted EPS increased 22.8% and overall margin expanded 178 basis points. These results are further confirmation that executing on our strategy is delivering exceptional results.

On another high note, we were delighted to complete the acquisition of TransFirst on April 1st, just 64 days from our announcement. I’m very proud of the teams who worked tirelessly to make this happen. And the more time we spend with John and his team at TransFirst the more impressed we are.

TransFirst is willing to provide us the additional scale and reach in merchant acquiring to approach that of our issue of processing and prepaid businesses. Combining TSYS’s merchant business with TransFirst positions us as the 6th largest U.S. merchant acquirer and the third largest integrated payments provider. John and his leadership team were well underway with integration positioning our new merchant segment to deliver on dynamic strategies that will be implemented over the next 6 to 18 months. With our exceptional performance in the first quarter, and with the addition of TransFirst, we are increasing our guidance for 2016. Paul will provide additional details on all of our revised guidance metrics later in our presentation.

Since our fourth quarter call, Paul and I have had the opportunity to connect with many of you directly to hear what’s on your mind. I thought it might be appropriate to take a moment to share my perspectives on a few of the topics that have been shared with us. The three most discussed topics have been one, capital allocation plans; two, go forward growth in our North America issuer segment; and three the potential impact of the proposed CFTB prepaid rules with respect to overdraft.

In terms of our capital allocation strategy, we as previously discussed our principle of returning approximately 75% of our available free cash flow to shareholders in the form of dividends and share repurchases. In 2014 and 2015 we returned 94.4% and 92.3% respectively. This principle has always been balanced against the need to deploy capital to fund M&A opportunities.

Our immediate priority and plan over the next 24 months is to use our strong free cash flow generation to delever our balance sheet until we get back to our long-term target leverage ratio. Stock buybacks, M&A activities along with ongoing investments to drive exceptional business results are all part of our capital allocation strategy to drive long-term shareholder value.

As to our North America issuer processing growth prospects, in 2015 we performed a strategic analysis of our business and corporate strategy for long-term sustained growth. Among other things, we determined that we have significant potential for growth in our core issuer processing business both North America and international in the form of delivering and cross-selling new products and services that clients both need and would prefer to buy from us as a trusted provider than from someone else.

As such we have made and continue to make significant investments with the goal of enhancing our technology infrastructure and modernizing the technology framework that sits on top of our four processing platforms. We’re building an open real time platform that allows developers, partners and the greater fin tech community to easily connect and leverage TSYS’s platforms so that we deliver innovative products and services faster and with greater quality so our teams can prototype, deploy and iterate faster than ever before.

Today just under 18% of our revenue is delivered from value added products and services across our core issuer processing businesses. By aggressively developing and deploying new products and services, expanding our footprint and continuing to win new business. We believe we can continue to deliver growth in our core issuer processing business.

And lastly on the subject of the proposed rules on prepaid from the CFPB and how they may impact big spend and its overdraft feature. The CFPB has not yet delivered their final rules relative to prepaid products. So I really don’t have much of an update to what we previously disclosed. I will remind you however, that nearly 6,000 consumers have commented to the CFPB regarding the proposed rules.

Recently cardholders from five states listed Washington DC to make their voices heard and asking Congress to engage with the CFPB to ensure that new regulations do not eliminate their access to opt in overdraft protection, which would leave hundreds of thousands of cardholders with very limited alternatives to meet their small and short-term liquidity needs.

We also continue our discussions with the CFPB as well. Since the proposed rules were published in 2014, we have considered multiple scenarios and possible outcomes. When the final rules have published and after an adequate review period, we will share with you what it means to our business and what our litigation plans are.

Let me now shift to a quick review of our business from a global perspective. In North America where nearly 70% of economic activity is consumer generated. The economy of sale is a direct measure of an improving employment market, relatively strong auto sales, some of the lowest gas prices in 12 years and improved consumer confidence. These are the real catalyst for sustained growth.

Generally, our customers in both the United States and Canada are performing better than expected and better than many of their peers. And when they grow we grow with them. Against this macroeconomic backdrop, our North America issuing business in the first quarter produced record quarterly revenues, record operating income and record traditional accounts on file. And they also expanded margin by 257 basis points.

Our merchant segment increased sales volume and direct revenue by double-digits and also increased their margin by 90 basis points. And NetSpend delivered record quarterly revenues, record GDV and record operating income. They also exceeded 100,000 distributing locations and employers for the quarter. We were very pleased with the performance of all of our North American businesses in the first quarter.

Now let’s take a look at the other economies around the globe where we do business. China’s $11 trillion economy is moving away from its reliance on manufacturing towards services and consumer spending. This is good news for TSYS. China’s bank card industry is growing at a fast pace. At the end of 2015, bank card issued in China ranked number one in the world and bank card consumption rates have accelerated to the same level of those in other developed markets.

Innovative payment initiatives are thriving particularly in the mobile and internet payment space. Overall TSYS’s joint venture with CUP Data is performing extremely well and we do not see a slowdown in that business. We still expect double-digit revenue and double-digit net income growth in 2016.

Brazil’s economy is facing one of the longest and harshest recessions in history, with growing unemployment, rising inflation, a weakening currency and political unrest. However our steadfast client Carrefour maintains a strong motivation for investments and they continue to outperform the Brazilian market in both their retail and consumer credit businesses.

Looking at Europe, the payments market continues to be challenged by regulation and competition. The level of change in the market is unprecedented and is allowing progressive issuers of credit and debit products to be created and pursuing growth strategies. Again we do change in disruption as a driver of new opportunities for TSYS clients and their customers.

The India and Asia Pacific region is one of the fastest growing regions in a slowing world economy. The payments market is relatively under penetrated across most countries in the region, but growing fast. This contributes to the region having one of the highest growth rates in non-cash payments in the world, averaging over 20% annual growth in areas of cards, acquiring, online and mobile.

Third party processing and hosting is a corresponding emerging need in the region. To take advantage of these opportunities TSYS is working to upgrade clients in the region to its latest prime system and promoting it as a consolidated platform for all issuing and acquiring. Across our international footprint in the first quarter, we produced strong revenue and transaction growth and ended the quarter with record accounts on file.

Now I would like to take the opportunity to mention a few changes within the TSYS family. Later this week we hold our annual shareholders' meeting, where we will recognize two founding members of the TSYS’s Board, Gardiner Garrard and Lynn Page who will retire. Gardner and Lynn have chaired and served on almost all of the various TSYS’s board committees over the years and has been two of our most loyal supporters, astute advisors and greatest champions. We thank to each of them for their 33 years of service and wish them all the best in the future.

Also at the shareholders' meeting we will welcome Pam Joseph who is elected to our Board in March and will become a member of the TSYS’s executive leadership team serving as President and Chief Operating Officer beginning next Monday. We are very excited to have Pam to join our executive leadership team. Her experience, vision and direction will help shape the future of TSYS.

I’ll now ask Paul Todd to provide additional detailed financial information and review our revised guidance for 2016. Paul?

Paul Todd

Thank you, Troy and I too want to reiterate how pleased we are with the company’s exceptional performance for the first quarter specifically related to the strength across each of our reporting segments, the closing of TransFirst and our revised guidance which incorporates the TransFirst’s business into our expected performance for the remainder of the year.

Digging into the results starting on slide six at the consolidated level, our net revenue increased 12.7% for the quarter. Consolidated adjusted EBITDA for the quarter was $230.8 million, representing a year-over-year increase of $37.4 million or 19.3%. Finally adjusted EPS from continuing operations were $0.66 for the quarter which represents the 22.8% increase from prior year. This EPS performance was driven by strong segment performances across all of our segments as well as strong performance by CUP Data.

One thing we discussed throughout last year was the growth across all of our segments occurring at the same time and the first quarter was a continuation of this trend. Before I leave the consolidated financial results turning to slide seven, I want to point out that our quarterly net revenue growth of 12.7% is all organic. And our ability to take that revenue growth to the bottom line was seen in the adjusted operating income growth of 20.5% to $186.2 million and adjusted operating margin of 27.7%, representing a margin improvement of 178 basis points on a year-over-year basis. This combination of pure organic revenue growth with this margin expansion is a key takeaway from our first quarter consolidated results.

Now to explain our results in more detail let’s turn to slide eight and I’ll cover our North America segment first with a key headline for the segment is the strong organic revenue growth of 14.1%. As you will remember, this quarter marks the anniversary of the largest client conversion in history that happened mid first quarter of last year. The incremental impact from this conversion plus continued organic growth from much of our client base and a few onetime revenue items drove revenue before reimbursables up 14.1% over quarter one of 2015 to $303.6 million.

This amount represents another record high for revenues in a quarter surpassing that of the fourth quarter of 2015. During the quarter, we signed four contract extensions that included commercial, consumer and managed services as well as a healthcare contract renewal.

As it’s been the recent pattern, this double-digit revenue growth was driven by the large conversion as well as by broad based growth in our core offerings as well growth in our value added services, managed services and loyalty services. However, I think it is important for you to remember that in the quarters ahead we will begin to see the year-over-year impact of our departure from the peak prepaid processing space within this segment due to the loss of Unit Rush and ongoing deconversion of Green Dot. But to reiterate our statement on our last call, we still expect mid-single-digit revenue growth for this segment for the full year.

As for the segment’s operating income, it also reach at historical level of $124.8 million, up 21.7% over last year resulting in a segment operating margin of 41.1%. This growth rate was aided by the one-time revenue items mentioned earlier and a one-time favorable impact of state R&D tax credits that flow to operations. Without these one-time items, this 1Q margin is consistent with the 1Q, 2015 margin of 38.5% and we expect the margin of this segment to remain in the approximate range of 37% to 39% for the rest of the year and still expect the margin on a full year basis for this segment to expand slightly from the 37.4% margin in calendar year 2015.

From a volume perspective, you can see from the slide that our traditional accounts on file continue to show steady growth and we reached a new record level of 423.3 million accounts. The higher percentage growth rate reflected in previous quarters is obviously due to the large conversion last year and I will point out that we revised these bar charts to focus on our traditional accounts on file levels and growth rates, which we consistently stated are a better metric of our revenue performance.

Historically these charts have shown total accounts on file that are the sum of both our traditional accounts on file as well as prepaid government services and single use accounts. As we said in the past, these non-traditional accounts can vary substantially and the number of accounts are less correlated to revenue. We rolled out some new formatting changes to our report this year and our graphs will now show traditional accounts on file given its tighter connection to revenue, but we will continue to provide information on both.

As Troy mentioned we believe we have growth potential within our issuer processing business by driving additional growth and profits through the sale of innovative products and related services that our clients need. We are committed to being a more product driven organization and we are redeploying and refocusing resources within our issuer product group and across our IT teams. Overall, we are pleased with the strong first quarter performance of the North American segment.

Now I want to move to the International segment highlights on slide nine, where a key highlight is the continuing expanding margin with an improving constant currency revenue growth picture. During the fourth quarter call we shared that the segment achieved a full year margin of 18.1% based on the target announced four years ago. With this as a base the segment will continue to drive for margin expansion with an improving revenue growth picture. The first quarter of 2016 saw strong results for the segment with net revenue of $75.4 million, up 2.2% on a reported basis and up 9.2% on a constant currency basis.

Revenue growth for the quarter was again fueled by the four new clients converted last year coupled with strong organic growth from existing clients. We start to annualize these new clients in the March-April timeframe and this is why we still anticipate segment revenue growth to be in the low-single-digit range on a constant currency basis for full year 2016.

On the margin front, our Q1 margin up 13.7% was a 420 basis points improvement over Q1 of 2015 and we still expect some margin improvement in 2016 net of any negative currency impact. From a volume perspective traditional accounts on file grew 4 million to a record level of 65.5 million, up 6.6% from the prior year and we continue to break records for the number of accounts processed in the segment now standing at 80.8 million accounts on file. I would emphasis that most of this growth is in the single-use and debit account areas.

The segment experienced high single-digit transaction growth of 8.1% with same client transactions growing by 7.6% while not included in the segment’s financial results are results from our CUP Data partnership were also strong for Q1, our joint venture with CUP continues to meet expectations for both of our organizations and we expect continued growth from this business despite the slowdown of the Chinese economy’s growth rate. Overall we were pleased with our International segment’s performance for the quarter.

Now on the Merchant segment on the slide 10, where the key headline for this segment was the strong performance leading us to the announcement of our closing of the TransFirst acquisition. Our revenue grew 9.3% for the quarter versus the first quarter of 2015. The direct business saw 10.6% growth and our indirect business had 7.2% year-over-year growth. The growth of our small and medium business sales volume was up 11.9% year-over-year and our indirect business grew POS transactions by 10.8% year-over-year.

Within our indirect business we continue to retain our core customers renewing to 2 of our top 25 while also signing a new full service agreement during the quarter. We remain commitment to our indirect partners and this line of business will continue to be important to the combined TSYS-TransFirst business on a go forward basis as it generates strong margins and cash flow and creates a platform that powers our direct business.

On the direct side we have continue to gain traction on the integrated payments front with ISV and with the integration of TransFirst we can further expand across the entire merchant base we serve.

From a margin perspective, we experienced an overall increase of 90 basis points for the first quarter, which is important in our plan is to expand the margin in this segment in 2016. Overall it was a strong quarter for Merchant segment and we still believe success in this space will require diverse distribution channels and scale for operating leverage. With TransFirst we are now well positioned with a robust partnership distribution model that held access to millions of SMB merchants in a scalable and cost efficient way. We’re pleased with the Merchant segment’s performance in the first quarter and we are merging the TSYS and TransFirst businesses from positions of strength.

Now I want to talk about the strong performance of the NetSpend segment starting on slide 11. The highlight for this segment is the 19.3% organic revenue growth for the quarter. Revenue of $185 million represents a record setting tax season and this is the highest quarterly revenue in NetSpend’s history. As you remember, we made significant investments for growth in this business during the fourth quarter of 2015; this resulted in excellent organic Q1 revenue growth in 2016 tax season volumes.

The first quarter had over $9 billion of gross dollar volume of spend, up $19.6% over the prior year. We exited the quarter with almost 4.9 million active cards, almost 2.8 million of which are on direct deposit, which continues to be a relentless focus for the NetSpend. First quarter margins held consistent with the prior year of 22.8%. I’ll remind that NetSpend’s first quarter margins tend to be the lowest quarter of the year because of our investments in marketing and customer acquisition efforts to support a successful tax season.

While our card and volume levels continue to increase. We’re also consistently focused on expanding our distribution network by adding approximately 3,000 distributing employers and locations in the quarter bringing the current total to more than 100,000. The 2016 tax season has been one of the continued excellent performance by our NetSpend segment and we’re pleased with the way we are positioned coming out of Q1. Our expectation for this business continues to be for revenue growth to be in the low-double-digit on a full year basis with the expanding margins for 2016 versus 2015.

Now back to the consolidated financial results starting on slide 12. Our adjusted operating margin for the quarter was 27.7% consistent with the expanding margin story I mentioned on our last call. Also I want to state that slide 12 provides a bridge between the adjusted segment operating income for each of our segments and our consolidated adjusted operating income. We provide this because our segments report their results on an adjusted segment operating income basis, which excludes amortization of acquisition intangibles, TransFirst’s M&A expenses, corporate admin and stock-based compensation.

Now let’s talk about our cash position on slide 13 for a moment. We ended the quarter at $445 million in cash excluding $1.5 billion received from our notes offering, a $55.8 million increase from the fourth quarter of last year. Our largest outflow of cash of $44.4 million was related to CapEx of which $9.9 million was related to property and equipment, $21 million related to contract acquisition cost with the remaining $13.5 million related to internally developed and licensed software. We show our cash position on this slide net of the outflow for the acquisition of TransFirst.

On cash flow on slide 14, our free cash flow for the quarter was $101.4 million and with the addition of TransFirst net of the additional bond expenses and one-time items, we expect free cash flow for the year to be in the $510 million to $540 million range. I want to make one comment on leverage with the closing of TransFirst our debt ended where we were anticipating at approximately $3.8 billion and pro forma leverage moved to approximately 3.8 times debt to trailing 12 month pro forma EBITDA excluding one-time items.

Our $1.5 billion notes offering in March was extremely well received and we drew an additional $870 million from our credit facility to close the transaction. We anticipate our weighted average blended interest rate for our overall debt to be in the range of 3.15% to 3.4%, which is in line with our prior expectations of about 50 basis points higher than our pre-transaction rate.

As Troy mentioned, regarding our capital allocation strategy, our immediate priority and plan is to use our strong free cash flows over the next 24 months to delever our balance sheet so we get back to our longer-term target leverage ratio of the low to mid two times range.

From a share count perspective, we ended the quarter with 183.4 million our common shares outstanding with the average basis weighted shares outstanding at 183.3 million.

On taxes we ended the quarter at an effective tax rate of 33.6%, which is about 150 basis points lower than in Q1 of 2015 and we expect our estimated tax rate for 2016 to be in the range of 33% to 34% with it being closer to the high end of this range and expecting it to stay in that high 33% or low 34% range for each of the next three quarters. I want to point that this effective tax rate increase from 2015 levels is the main driver as to why our adjusted expected EPS growth rate is not consistent with our expected growth rates and adjusted EBITDA or adjusted operating income.

Now on guidance, we are raising our full year consolidated guidance based on the closing of the TransFirst acquisition and stronger than expected performance in the first quarter. On page 15, we highlight our full year consolidated guidance of total revenue growth of 50% to 53%, net revenue growth of 20% to 24% and adjusted EPS from continuing operations of 13% to 16% growth.

We are introducing a new adjusted revenue disclosure net revenue that better aligns our reporting with how the company measures performance internally. A reconciliation of net revenue, which is a non-GAAP measure to GAAP revenues is included in the detailed schedules of our press release. We also expect consolidated adjusted margin to increase approximately 100 basis points over 2015, which is consistent with the margin expansion I mentioned on our last call.

Finally, I want to mention call outs that I think are the key takeaways from today. The first call out is on organic growth. The first quarter was another impressive quarter of purely growth for our company and for each of our segments and continues stream of strong quarterly organic revenue growth in our businesses. With the closing of TransFirst we will now have acquisition related growth in our results on a go-forward basis. So this period of ongoing success and organic growth across all of our businesses at the same time speaks to the strength of the TSYS platform of businesses.

The second major call out is on margins and we will be talking a lot about margins in 2016 with our goal to increase our consolidated adjusted EBITDA margin by approximately 100 basis points coming off the heal of a similar level of margin expansion in 2015. However, our goal is to expand each of our segment’s margin profile to deliver a cross segment margin expansion similar to the cross segment organic revenue growth theme that we saw in 2015. Our first quarter’s performance on the margin front strengthens our result around this call.

And the third final call up is related to expected performance for the remainder of the year. While we do not provide quarterly guidance, I do want to call out two key points given the moving parts present in 2016; the first point is on North America. As I mentioned, when I was covering the North American segment we still expect this segment to grow in the mid-single-digit range that I mentioned on our last call. I also mentioned on our last call that the second-half of the year will have lower growth than the first half given the expected run off of the prepaid processing clients previously mentioned as well as other effects.

We have stated, we expect this segment to grow in the mid to high-single-digit range over a longer term horizon with expected growth being closure to the mid-single-digit and while we expect to achieve that in 2016 the path to that level is heavily weighed on the front half of the year.

The second point is on our third quarter and specifically related to tax comparisons. In the third quarter of 2015, we have $0.13 of tax benefits in the quarter that we detailed in our 3Q, 2015 earnings call and schedules. Given that we have significant positive impact in 3Q of 2015 extra care must be used in modeling our 3Q expected 2016 results as the $0.13 doesn’t repeat and in fact our expected effective tax rate for 2016 approaches the high end of our 33% to 34% range, which is higher than our 30.5% effective rate in 2015 with a significant change in the third quarter of this year over the third quarter of 2015.

While there are other effects in the third quarter of this year versus the third quarter of last year specifically in North America, this effect of the $0.13 in the third quarter of last year has to be properly handled at modeling to a better approximate the expected performance of the third quarter of 2016. And as I said on our 3Q call last year there was a $15 million operating benefit and a net $8.5 million benefit on the tax line that have to be adjusted for in last year’s three quarter results to better model 3Q of 2016.

Finally I’ll wrap up by expressing how pleased we are to be raising our full year guidance for 2016 and the strength of our performance in the first quarter across all of our businesses. This strength is complimented with the addition of the outstanding colleagues and business from TransFirst and we look forward to reporting on these combined efforts on our next call. Our team members from around the world enabled the results we have discussed today and they have proven again that they will deliver.

And with that we will open it up for questions.

Question-and-Answer Session


Thank you. [Operator Instructions] Our first question is from Darrin Peller at Barclays.

Darrin Peller

Thanks guys, nice job. If you can just touch on a little more on organic growth potential on the issuer processing side of the business. Just given the strength we’ve seen and we know you’re going to be anniversariying some slightly tougher comparison going forward. Just a little better understand on how that business should sustain going forward including the roll off of [indiscernible] and Green Dot?

Paul Todd

Yeah Darrin this is Paul. Yeah we - as I’ve talked about in the prepared remarks, obviously coming off this very strong first quarter that had the impact of the large conversion that we did last year we got some additive growth there. The biggest single driver of kind of the growth story after that as you look forward in the remaining part of the year is this prepaid effect of exiting the prepaid processing side. And so that’s why I mentioned the second half being lower than the first half. And we continue to kind of see mid to high-single-digit organic revenue growth story for the North America business. When we look at the fundamentals of the business, but this year because of the dynamics that we had to play with this large conversion as well as this exiting of the prepaid side in the second half, it presents kind of a two sided story that lands to kind of more of a mid-single-digit revenue growth picture.

I think the key point around the organic growth side is that we’re going to continue to focus on the processing side and seeing the growth there. And then as we mentioned and Troy may want to add to this, on the product side you’re going to see us spend more and more time focused on the growth that we can get from the value added product side.

Darrin Peller

Alright, that’s very helpful. So it sounds like I mean the mid-single-digit this year potentially better than that let’s call it high-single-digit years out after you start to grow over the Green Dot change.

Paul Todd

Well I’m not ready to say that it’s high-single-digit coming out of that. I think we’ll obviously address that as we get closer to that when we move into a 2017 picture. Obviously there will be still some impact in the first half of 2017 related to this prepaid roll off that we would have that in the first half of 2016 that would be an impact in 2017. So I wouldn’t go there yet I’m just saying that as we’ve talked about now for over a year the overall outlook goal for that business is vary to be in the mid to high-single-digits with us trending more toward the mid-single-digit and that’s what this year is looking like it’s going - our expectations of it shaking out at.


The next question is from Brett Huff with Stephens Inc.

Brett Huff

Good afternoon guys and congrats on a nice quarter.

Troy Woods

Hey, Brett, thank you.

Brett Huff

A bigger picture question, we were impressed and sort of uniquely surprised by the fact that your - it seems like the ancillary sales in North America issuing processing really helped drive a lot of that growth I think the core AOF was up 7%, but the organic was up 13% or 14%. And Troy you mentioned in your comments that you guys see a big opportunity in the cross sale. Can you talk a little bit about if you had to look at the TAM for the business, is it winning new big issuing or even medium size issuing customers and getting more cards? Is it the same store sales at existing or is the cross sale for some of those value added stuff getting that 18% of rev in North America higher into the value added. Because this 1Q really seem to see some nice rev per card going up.

Troy Woods

Yeah Brett thank you and I’ll take that and Paul may want to jump in on the back end of it. But as I mentioned in my prepared remarks there are really several moving parts that I think help drive that and you’re right we did bring in some outside help in 2015 to help us look at our corporate strategy and our product delivery strategies. And one of the things that came out of that that I mentioned was. We truly believe that we have some significant runway not only in just North America, but all the while issuing processing business to continue to build out value added products and services that our customers want and need and according to our feedback from our customers they prefer to get from us as their trusted advisors.

So one, additional products and services to be built. You’ll hear more about that in the coming months. Number two, while selling more aggressively the products and services that we already have. You’re right, I think same store transaction on store, the same transactions for the quarter were up 12.7% in North America so very strong robust there. We also had some - continue to have good robust growth in our EMV output services area for card personalization. It was up several hundred percent over the first quarter of 2015. So Paul you may want to add to that?

Paul Todd

Well the only thing I'd add to that is Brett that it was a strong quarter from that standpoint. And while we will continue see a bit good growth, the growth that we saw in the first quarter because of some of the mix was better than we expect to see for the remaining quarters for this year. So it’s still a positive growth picture on that front, but we did get some additive growth and some comparison benefit in the first quarter that won’t repeat itself in the coming three quarters.

Troy Woods

Brett you mentioned that I just recall, you mentioned the large issuers and clearly as we talked about on many quarters the large issuers that are now processing with TSYS were always on our prospect list. We’re calling on them all the time be it with other competitors or in-house. So that’s not something we every quarter two or three or every year baked into our guidance, we certainly baked it in the targets and goals. As you know those are the long-term sales opportunities, but we worked on them relentlessly.

Brett Huff

That’s helpful. And then my follow up is, Paul I think you mentioned that you’re raising guidance both because of TransFirst and because of better than expected 1Q, can you give us just even a qualitative sense of whether a few pennies or a lot of pennies or whatever on the bottom-line and then some percentage in the top-line that came from just better legacy or organic guidance raise?

Paul Todd

Sure Brett. So on the bottom-line if you look at kind of the midpoint of the two different guidances, our guidance before this raises about a $0.22 improvement in the middle of that range. And roughly 90% of that $0.22 is related to TransFirst and the remaining $0.02 are related to improved performance or improved and expected performance from the business pre-TransFirst. If you look at on the revenue side it’s more dramatic. It would be closer to kind of 95% to 98% of that revenue lift increases related to TransFirst. So on the revenue side it’s a little more dramatic than it is on the EPS raise side.


The next question is from Ashwin Shirvaikar at Citi.

Ashwin Shirvaikar

Hello, this is Ashwin. Can you hear me?


Yes, please go ahead.

Ashwin Shirvaikar

Okay, congratulations guys on the quarter. I guess my question was really as you look at each of these segments. Could you provide some incremental color with regards to the margin trajectory that we should expect through the course of this year?

Paul Todd

Sure, Ashwin. So just walking down the segments, we’ll start with North America as I commented on our last call and reiterated again today we still expect to see an expanding margin picture there. I think in our last call when I’ve said kind of slightly expanding margin picture I think I framed it as between 25 to 100 basis points and so that would still be the kind of the range to be thinking about and frankly I am going to make that same commentary as we walk down to kind of the band of range that I am talking.

So from a North America standpoint that is the margin expansion that we expect to get out of that point. The one point I would make about North America is and I’ve made it in the prepared remarks that although we were at 41% when you kind of take out the one-time items that pulls it down to about 38.5% and we expect that band to be more of the consistent band across the quarter than maybe what we have had historically where there has been more movement around the target.

So as we move to international same type of margin expanding story the only caveat I would add is the currently impact that could have some negative impact there, but on a constant currency basis we look for the similar kind of margin expansion in that band. When we move down to merchant it’s the same kind of story and as I commented on our last call and we will reiterate today, the TransFirst business with the guidance we have provided and our net revenue provides for an exactly almost similar margin picture.

So our margin expansion story that we had pre-TransFirst continues over and kind of a push TransFirst acquisition scenario. And then finally on NetSpend the same kind of commentary, and if you kind of wrap all of that around the overall 100 basis points expansion of the margin for adjusted EBITDA and overall consolidated adjusted margin and look at kind of how that can kind of buildup given that commentary that’s this margin call out I made at the very end and will be one of the key things we’re focused on this year and we’ll continue to talk about as the year progresses.

Ashwin Shirvaikar

Got it. And then this question about the CFPB, Troy you had some commentary there with regards to potential timing. What we are hearing based on our checks really is it’s not going to come out until the summer and if and when it does come out there could be some potential changes with regards to effective date and so. So is it I mean in your planning are you sort of thinking that you don’t have to worry about this until the second half of 2017 at the earliest. How you are thinking about this from a planning perspective?

Troy Woods

Yeah, Ashwin, sure. Well I think we would agree with you from what you quote unquote, hearing with respect to when they may come out. Now I think it’s helpful to remember this is about the second or third delay. So whether they hit this one or not I guess only time will tell if they get it out before the end of June number one. Number two I can assure you we are worrying about it. Whether it comes out May, June or July, a lot of people have been working on this and digging into this and looking at it as I have said in my prepared remarks many, many different scenarios and planning scenarios to look at what the impact may be.

I think you mentioned perhaps some charges I think we will just have to wait and see what the final rule brings, but and again after some adequate period of review time we will certainly come out and share what we think the impact is and what our mitigation plans are going to be.


The next question is from Bryan Keane at Deutsche Bank.

Ashish Sabadra

Hi this is Ashwin Sabadra calling on behalf of Bryan. Congrats on the strong quarter. Just quickly on the guidance a quick follow-up question. If I do the math around revenue increase, I get TransFirst revenues of roughly $400 million for the three quarters, I just want to confirm if my math is right because that number seems to be significantly higher than the numbers that we’ve seen in the S1 for historical context.

Paul Todd

Yeah Ashwin you are correct that $400 million kind of number is in the right range there. And I think the difference that you’re probably alluding and I have commented on this on our last call was as we move TransFirst over to our revenue conventions and with this net revenue I think that’s the difference of what you were referring to versus what you may have seen them on a standalone basis versus what it looks like for us on a consolidated basis.

Ashish Sabadra

Okay, no that’s helpful thanks. And then my question was on the Merchant segment, how should we think about the organic growth there because it’s been trending really well in the first quarter. And I think I believe you’re guided to mid-single-digit. How should we think about the organic growth in the Merchant segment?

Paul Todd

Well obviously with TransFirst coming into the Merchant segment, it changes the future look of the revenue growth going forward, because it’s roughly doubling in size from a revenue standpoint on a go forward basis. But if you didn’t have that TransFirst impact that’s playing out, we are still in kind of a mid-single-digit range for the Merchant segment from a growth standpoint. Yeah we did come out a little stronger in the first quarter, transaction growth was a little bit strong on the indirect side. But as some things anniversary and some product stuff doesn’t repeat that mid-single-digit range is still the right kind of range on the business pre-TransFirst.

Ashish Sabadra

Thanks, congrats.


The next question is from Jason Kupferberg with Jefferies.

Ryan Kerry

Hi this is Ryan Kerry calling in for Jason thanks for taking my question. Staying on the Merchant side it looks like the indirect business continues to grow nicely in the quarter while growth in direct was a little softer than in the past few quarters. First anything in the quarter call it for the deceleration in direct? And then second, I believe growth in direct contributed to margin pressure in the fourth quarter, but it looks like margin grew nicely in the first. Just curious if there was anything else in the quarter that contributed to the 90 basis points of acceleration.

Paul Todd

No Ryan. As it relates to just I’ll take the components to kind of as you laid it out. On the indirect side, it was slightly better than expected and the volumes were stronger. There is some as I said anniversariying and as few things in the following quarters that don’t repeat themselves to point that to a higher as we’ve said, I mean as not a growth business we expect that business to be a roughly flat business it can slightly squeeze out some growth in some years depending on some things. But it’s still the growth trajectory of that business has not changed.

On the direct side, I think the biggest thing relative to maybe what you’re looking at from a prior basis would be the anniversariying of some of the product stuff that we had on the direct side last year that’s fully played its way out on the direct side. But we feel very happy with the direct business growth and the volume growth on the small and medium business volume side was very strong and very in line with our expectations for the business.

Ryan Kerry

Okay great. And now that you have a TransFirst in-house any changes to your expectations for the $15 million in cost synergies for 2017 and the $25 million to $30 million in 2018?

Paul Todd

No, we do not have any changes to those estimates.


The next question is from David Scharf with JMP.

David Scharf

Hi, good afternoon. Thanks for taking my questions. I guess maybe this is more just directly or qualitatively, but can you provide a little bit of an update on the first quarter performance just at TransFirst prior to the closing how that tracked relative to your expectations and some of the trends and I realized it’s baked into the consolidated guidance, but whether or not you have any more positive or negative outlook for the expected growth rate this year?

Paul Todd

Sure David. The TransFirst business for the first quarter was strong. And I think the best thing - the best way I can characterize how the business is performing relative to our expectations was we came out when we made the announcement and said that the acquisition was going to be double-digit accretive. And if you do kind of the math of how I talked about raising the guidance here and you look at the nine months versus a 12 month over a calendar year period, it points exactly the kind to what our expectations were when we announced the transaction.

So performance is on track we are very pleased with obviously what they did before the closing of the transaction, but also in our forecasting and looking at the remaining three quarters based on the revised guidance that we have provided today.

David Scharf

Got it, that’s helpful. And inherent in the full year guidance at the bottom-line how much of the free cash flows is anticipated to be deployed towards deleveraging this year?

Paul Todd

So we have talked about David a $400 million deleveraging occurring in the first 12 months that is not necessarily specifically linear across all four quarters. And so our deleveraging profile as said that we plan to deleverage $400 million in the first 12 months of owning TransFirst and those are still our plans, but not necessarily in a perfectly linear way.


The next question is from Tom McCrohan at CLSA. One moment please.

Tom McCrohan

The America segment, revenue per account years ago say back in 2008 was close to $3.50 per account then you had this mix shift of lower yielding prepaid, which you’ve talked about and the revenue per account has gone down precipitously. So we all expected to kind of start ticking up again is there any reason why revenue per account as you deconvert Unit Rush and Green Dot it could not return back to levels seen back in say 2008?

Paul Todd

Well I think there is a couple of moving pieces there at a simplistic kind of level yes, that the revenue per account obviously improves when the prepaid accounts kind of removed out the denominator. I think the only thing I would caution is obviously with the large conversion that come on the composition relative to the history of the business changes because it’s such a base lift. So I would say that A; and B these value added products and how that mix can change specifically in both value added products as well as managed services. And so that kind of plays into it as well.

So on a simplistic kind of math basis that’s true, but overall I think there is some of cautionary kind of things there specifically as it relates to single-use accounts would also be something that could have to factor into that calculation.

Troy Woods

And I think the only thing I would add to that Tom is going back to really Paul’s prepared comments about the change beginning this quarter of calling out more of a traditional accounts on file. So we would agree with you that clearly you take out the non-traditional as leading into really deaccelerate with the prepaid coming off so you should definitely see a difference if you’ve been using total accounts on file and revenue.

Tom McCrohan

Okay. A follow-up on that segment, Troy what is the market share that TSYS enjoys today in issuing services do you have any sort of market share objectives and how would you characterize TSYS’s competitive advantage in that space today?

Troy Woods

Well, I think [indiscernible] Tom is around 42%, 43% market share Canada significantly higher than that can’t call it off top of my head we may have it here in the room. I think from a significant advantage standpoint, I think there are a couple of things one, when you think about our culture, our operational excellence focus, when you think about our technology and feature functionality that we bring to the table with our technology. I think investment grade is also extremely important, it’s important to us, it has turned out to be very important to our customers not only current customers, but as well as working with the prospects and the potential customers. It’s a selling point, it’s an advantage.

So I think those are the reasons we continue to win and I think those are the reasons that we feel like we are different when we go to market and it helps us enjoy as we have said before, we believe we are the number one credit card branded process in the United States number one in Canada with an 80% market share by the way, number one in China and number two in Europe. And we think those are the reasons why.


Next question is from Glenn Greene at Oppenheimer.

Glenn Greene

Thank you, good afternoon really nice results. I guess the first one maybe for Paul. I just want to sort of see if I could sort of summarize the guidance change. It’s largely you’re sort of adding in $400 million as for TransFirst or kind of $530 million annualized and most of the segments or all the segments look like directionally the same as they were before at a high level in terms of revenue growth and margins and first I just want to clarify that. And are we still thinking double-digit growth going forward for TransFirst and your comment margin where you’re referencing EBIT margins for TransFirst being comparable to core TSYS?

Paul Todd

Yeah so generally Glenn what you said is the accurate, both on kind of the revenue add and then that add, as it relates to the expected performances of the business. And so I’d say the businesses are expect to perform slightly better, which is evidence in the fact that the pre-TransFirst business we’re raising guidance reflecting that general improvement. I think as it relates to the adjusted segment margin for the Merchant business, yeah, I mean that’s based off of the adjusted segment margin for merchant of when you pull the TransFirst business and based on our revenue conventions. And you look at it on a segment basis, the margin profile is very similar to what it was on the business pre-TransFirst. And then also as I said we’re expecting to expand that margin in that segment. So I think the way you characterize the guidance and change that we’ve laid out today is generally accurate.

Glenn Greene

Okay. And then just a quick follow-up maybe just an update on the accounts on file pipeline both domestically and internationally?

Troy Woods

Yeah Glenn you go back to couple of quarters and we have not given that pipeline from the standpoint of North America. I think we have - we wanted to get a lot of these anniversaries behind this and I think when you look at international, we’re looking at a couple of conversions and three or four launches but I don’t think we’ve shared that number as well.

Paul Todd

Yeah it hadn’t changed Glenn from what we’ve talked about in the last couple of quarters.


The next question is from Steven Kwok at KBW.

Steven Kwok

Great, thanks for squeezing me in. Congrats on the TransFirst deal and good quarter. Just in terms of going back to TransFirst, if we look at that $400 million of revenues for this year embedded in your guidance what’s the comparable number for last year over that same period of time? I just want to see what type of revenue growth assumptions you’re using.

Paul Todd

Yeah it’s because of the different convention as it relates to our net revenue that maybe reported in that way there wouldn’t be the number I provide you there. But I think I would point to what we said in our last call which is TransFirst just had if you look at their results on the way they were reporting strong double-digit organic revenue growth over period of years.

And so we’re expecting strong organic revenue growth to continue in that same kind of generic kind of a range of where they were and obviously there is different moving pieces and you move into a higher base number. And so I wouldn’t - you can’t go kind of one-for-one in the correlation there. But the revenue profile of growth for TransFirst is very strong. And if you kind of go back and look at it on their history you kind of see what that track record looks like.

Steven Kwok

Got it. And then just in terms of seasonality how should we think about from the TransFirst business both in terms of revenue and operating income?

Paul Todd

Yeah there wouldn’t be anything that I would call out as it relates to specific seasonality. It’s a pretty straightforward quarter-to-quarter kind of look as it relates to TransFirst and pulling them overall onto our sides. So nothing I’d call out there specific.

Steven Kwok

Okay, great. Thanks for taking my questions.


The next question is from John Davis at Stifel.

John Davis

Hey, good afternoon guys. Maybe first quickly hit the indirect merchant side, after a couple of years of shrinking fairly significantly now we’ve seen kind of two or three quarters of nice growth and it seems like Paul you little bit added emphasis on your confidence on that channel going forward. Maybe just talk a little bit about what’s driving it and kind of what gives you confidence that it can continue to grow?

Paul Todd

Well yeah, I think that as it relates to growth I think the confidence around the first quarter was the 10.8% transaction growth that we saw on the indirect side. And so for the quarter that helped fuel the stronger kind of than expected growth on the indirect side. I think I did kind of comment earlier we don’t expect this business to grow. So I wouldn’t want my confidence around the first quarter to kind of probably lay itself into kind of an improving overall growth picture of the indirect business. I think what I was trying to hit on in my prepared remarks is that that the indirect side of the business is going to be an important component of the combined piece of TransFirst business on a go forward basis. It’s got for all margins as I said it fuels our direct business from a processing standpoint.

And so it’s a good business that we have scale efficiency than, which improve our cost basis, it generates a lot of cash, it’s got strong margins, it just doesn’t have the same type of revenue growth potential that the direct side of the business has. Obviously with the TransFirst business added it takes a lesser contribution of the revenue going forward. So if you look I think it was about 39% of the revenue this quarter, that will diminish down to sub-20% on the go forward basis. So we probably talked about it less moving forward just because of the smaller percentage of the whole. But I did want to make sure that from a strategic standpoint I placed the proper amount of emphasis of it being an important business on a go forward basis.

John Davis

Okay, that’s helpful. And then maybe on the EMV card issuance side, was the impact in 1Q big enough to call out kind of what inning are we in and does that play any role in kind of second half being a little bit tougher from a comp perspective? Any kind of color there would be helpful.

Troy Woods

Yeah John I’ll be glad to take that again, Paul may add to it. But no, it wasn’t anything of significance that we would call out neither Paul or I. I did indicate I think in response to part of the question earlier from Brett that part of the North America is clearly being helped by some EMV activity around card personalization and the percentage is with our card production was significantly up in the first quarter 2016 versus first quarter 2015.

But again with that said, it’s not enough to move the needle to really drive to kind of numbers that we gave for North America in the first quarter. I think what inning I think we’ve indicated probably on our consumer business in North America we probably have around half of our business that we believe has been shift enabled if you will. And so maybe between 50% and 60%. So that will give you some relatively of what’s left to go.


This concludes our question-and-answer session. I would like to turn the conference back over to Shawn Roberts for closing remarks.

Shawn Roberts

Thank you, Amy and always we appreciate your participation in the call. If anybody has any follow-up questions, do feel free to give me a call this evening. Thank you.


The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect.

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