Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message| ()  

Executives

Shawn Roberts - Director of Investor Relations

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

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

Analysts

Darrin D. Peller - Barclays Capital, Research Division

James E. Friedman - Susquehanna Financial Group, LLLP, Research Division

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

Bryan Keane - Deutsche Bank AG, Research Division

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

Brett Huff - Stephens Inc., Research Division

Vasundhara Govil - Morgan Stanley, Research Division

David J. Koning - Robert W. Baird & Co. Incorporated, Research Division

Roman Leal - Goldman Sachs Group Inc., Research Division

Steven Kwok - Keefe, Bruyette, & Woods, Inc., Research Division

Ashwin Shirvaikar - Citigroup Inc, Research Division

Gregory Smith - Sterne Agee & Leach Inc., Research Division

Glenn Greene - Oppenheimer & Co. Inc., Research Division

Total System Services (TSS) Q1 2012 Earnings Call April 24, 2012 5:00 PM ET

Operator

Good afternoon. My name is Vineda, and I will be your conference operator today. At this time, I'd like to welcome everyone to the TSYS First Quarter 2012 Earnings Conference Call. [Operator Instructions] As a reminder, ladies and gentlemen, this conference is being recorded today, April 24, 2012. Thank you. I would now like to introduce Mr. Shawn Roberts, Director of Investor Relations. Please go ahead, sir.

Shawn Roberts

Thank you, Vineda, and welcome, everyone. On the call today, our Chairman and CEO, Phil Tomlinson, will provide highlights from the first quarter of 2012, and then he'll turn it over to Jim Lipham, our CFO, who will review our financials. And after that, we're going to open up to Q&A like Vineda described.

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

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

Philip W. Tomlinson

Thank you, Shawn, and good evening, everybody. I'm excited to share the report of the first quarter results, which were really good, as you've seen in our press release. The key metrics that we used to measure our business exceeded our expectations, which we believe is a direct reflection of an economy that's picking up the pace of improvement, at least in our business. While one quarter doesn't make a year, we think it's a good start.

Results were positive in EPS, revenues and net income for the quarter. EPS was $0.30 for the quarter, an increase of 18.6% over 2011. Revenues were $461.2 million, up 7.4%. Revenues before reimbursables were $395.2 million, an increase of 9%. Operating income was $84.8 million, up 16.2% over the same quarter last year.

At the enterprise level, we saw healthy increases in transactions, both on the issuer processing side, as well as increases on the acquiring side, in the processing and the direct acquiring. Same client issuer transactions for North America and international combined were up 14.4%. Excluding deconverted accounts, same client point-of-sale transactions in our indirect acquiring business were up 11%.

Sales volume for our direct acquiring business was up 20.9% over the same quarter last year. And looking at the economy from a macro level, we see continued healthy decline in both credit card delinquencies and charge-offs quarter-over-quarter. Charge volumes on credit cards have trended upward over the past 3 quarters, which, again, indicate improved consumer confidence, and we see a renewed interest among our issuers, in particular, in offering new credit cards and new products.

As you know, the unemployment rate slowly continues to decline yet the job market and mortgage situation still remains pretty fragile, and consumers continued to carefully manage their finances.

I want to take just a few minutes and give you a brief update on our 3 reporting segments before Jim gets into the financial details.

First, let's take North America. We had some strong wins this quarter, and you may have seen today's announcement that we signed Huntington bank for issuer processing. And we're also happy to report that we recently entered into a long-term issuer processing agreement with Regions bank to be their payments partner as Regions reenters the credit card business or the card business in general. And we'll be converting that portfolio that they've acquired later this year.

We continue to win in the regional banks sector as more of these institutions look to credit cards as a business driver and really a necessary product for their customer base. Also, during the quarter, we successfully completed the BancorpSouth's consumer credit, commercial and debit card portfolio conversions.

On international, we're delighted, and you saw the announcement, I hope, Monday afternoon, that Royal Bank of Scotland has extended its issuer processing relationship with us. Our relationship for the U.S. business has been extended for 13 years and the U.K. business for 12.5 years, taking both of them out to the 2025 range. RBS has been a client of TSYS since 2001, and our first client in the U.K. or Europe, and is a real anchor tenant for TSYS, and we couldn't be more proud of this relationship and this extension.

Post the Carrefour conversion, the reaction in Brazil has been very positive. We've had some interesting -- we have some really interesting prospects in this market, which continues to see good economic growth. Our joint venture with CUP Data in China UnionPay had a strong finish in 2011. We expect to see an equally strong performance in '12, which is worthy of mention and is a noted addition to our net income.

In the quarter, we saw growth in our license business, with upgrades to, and the addition of several new banks to our PRIME 4 card management system in Africa, Europe, the Middle East and in Russia.

On the merchant side, we saw overall growth across the indirect and direct merchant business. Total revenues were up 8.4%, primarily attributable to higher transaction volumes.

In our indirect acquiring business, we won 2 new contracts for authorization and capture service, one with Merchant Warehouse and the other is a top 45 ISO, which moved from a competitor. In addition, we signed BluePay for back-office clearing and settlement services. We extended full service contracts with Veracity and First Hawaiian Bank and extended a clearing and settlement agreement with Maneres [ph].

We also signed a National Account business of Aflac, the insurance company, who is our neighbor here in Columbus, so that their agents can accept cards for insurance premiums.

During the quarter, we entered into 7 new partner agreements with value-added resellers, financial institutions and associations that are now referring new small businesses to us for their payment acceptance needs.

I also wanted to share some 4 significant awards or recognition that we have recently received that we're really proud of.

In March, TSYS was recognized as one of 2012's most ethical companies by the Ethisphere Institute, which is a leading business ethics think tank. This week, we were notified by FORTUNE magazine that we have now moved into the Fortune 1000, which is a real high watermark for us. In April, Visa awarded TSYS 2 service quality awards for our timeliness and authorization responses and our system uptime. TSYS is the only multinational payments processor to receive this recognition from Visa based on 2011 performance. And also this week, we were just recognized by the Military Times EDGE Magazine as one of the top 40 companies for veterans in America.

Now I'd like to turn it over to Jim Lipham, our CFO, who's going to review the details of the quarter's financials. Jim?

James B. Lipham

Thank you, Phil, and good afternoon, everyone. Before we get into the operating results in more detail on the segments, I want to touch base first of all on our credit facility. As I mentioned last quarter, we were looking at it as to whether we will go renew it, pay it off or whatnot.

So just where we are today, we worked hard during the quarter, but we're still looking at a new credit facility, and we're trying to determine the appropriate size. We think it's going to be a little higher than what we had. And we're choosing the lead and we expect to complete it in the second quarter. So we'll have the results of that at the end of the next quarter.

Now going into the quarter, as Phil mentioned, we were very excited about the positive trends, both that we saw in our revenue growth, as well as our volumes in all 3 segments. And we did a good job in all 3 segments of maintaining our expense growth, keeping it down, showing positive productivity and, thus, having a higher growth in our operating income than we saw in revenues.

Now on the first slide, on Slide 6, which is the consolidated results for the quarter, Phil mentioned revenues were up 7.4%. Revenues before reimbursables are up 9% or $32.5 million. Of that amount, North America contributed 39% of that growth. I'll get into more of their detail in a minute.

Merchant segment was up, that represented 33% of that also, and international was about 28%. So we had some good growth in revenues, operating income was up $11.8 million or 16.2%. We showed a 1.5% increase in our operating margin before reimbursables, up to $21.5 million. So just had an outstanding quarter and organic growth as you'll see in minute was up 7%.

We'll flip over now to the second slide. You'll see a breakout of our 9% growth in revenues before reimbursables. Internal growth’s up 7%. It’s a little higher than what we had anticipated at the beginning of the year. But then again, we had some one-time revenues this quarter, as well as a leap year day, which is one extra day of processing. And so it contributed a little bit of that, too. So new clients up 4.2% and acquisitions 1.5%. And currency was minor down 3%. But all total, that was about 12.4% of growth there, which we had, that was offset with 3.4% for the lost business and price concessions and some nonrecurring items.

The price concessions, which not a lot of folks like to -- is about $6 million or represents about 1.6% of this number. So that's kind of in line with what we've been experiencing and what we thought we'd have for the year, so no surprises there.

On the next chart, we go over our accounts on file summary. And as you can see, accounts on file totaled is up 16.6%, which ties into what we saw on our transaction growth Phil mentioned a while ago.

But then again, you go back up before prepaid and store value, and you'll see we're growing 11.2%. Every category of our account segregation here is showing growth. This is the fifth quarter in a row that we've shown growth and just speaks volumes for what you're seeing in the market today, with all of our financial institutions growing their portfolios.

Currently, we have about 33 million accounts in our pipeline. We expect to see these numbers continue to grow as far as adding accounts year-over-year. And then again, prepaid continues to grow, but not quite at the same pace it has been growing but still at 42%. And we are still seeing about 7% of that -- of our prepaid accounts being active. So just less than right around 3% of our revenues and still waiting for the activity in those accounts to really pick up.

The next slide. We get into the North America segment. You can see the drivers there, the organic growth, increased volumes. Revenues, excluding reimbursables of $204 million. They're up 9.5% or -- excuse me, $9.5 million or 4.9%.

Biggest contributor of that comes from our transaction growth, account on file authorization and fraud services, which is our electronic payment processing fees.

Outside of that, we had managed services. It grew pretty strong. It's mainly our Canadian operation with the new business we put on there at the end of last year and the new call center business that we have up there.

Operating income, up $13 million or 23.5%. There again, it shows that the expenses grew at a less rate than revenues to contribute that kind of growth in operating income. If you look at our margins at 33.4%. You see they’re up about 500 basis points from where they were last year and if you remember, we had the realignment in December we talked about, where were moved about $6 million worth of expense from North America to international.

If you adjusted our expenses for that, North America will be at about a 30.4% margin as to the 33.4% and be up only about 200 basis points. But still, overall, good growth in our margin there. Accounts on file at $361.8 million, it's up 16.9% and, as we said, good growth there.

Same-client transaction is up 15.6%. It's pretty much mirroring what you see in North America as far as total transition growth is. Last year, you remember, we had a lot of growth in new clients from the international sector. Overall, North America’s very strong.

Next slide is international. Some good organic growth also. Conversion of new clients that we put on last year. And then, of course, we've had the dedication of these resources. But revenues, excluding reimbursables, is up $9.1 million or 10.4%. Big portion of that is electronic payment processing, which is all of our accounts on file transaction volumes. We will make note, GP Net, in Japan was up $2.8 million, which was a good growth for them, 25% growth in revenues, as they continue to show good expansion.

Managed services in international was up by $2.3 million. So it was a good contributor also. Operating income was $4.1 million. It is down 62.7%, and as a result mainly of this new dedicated resources to international. If you took those out, they're operating margin will be up about -- will be around 10.6%. So we do anticipate this to continue to improve as time goes on, and we'll get the margin back up as we get later on in the rest of this year and next year.

Same-client transactions at 8.4%, they're at $352.7 million. The accounts on file at $54.1 million, they're up 14.6%, showing good growth as a result of acquisitions -- I mean, new clients that came on board during the year last year that were not there at the first part of the year.

Currencies had a very little impact on us on the operating income line. It was only about $176,000. Although it didn't [ph] make about $1 million decrease in revenues for the quarter. But international sales showing some good growth in revenues and look forward to getting on top of those expenses and getting the margin back up.

Next segment is our merchant segment. You'll see the acquisition of TermNet is in here. They were not here the first quarter of last year and that represents about $4.6 million of this revenue increase of $11.8 million or 13.7% on the revenues before reimbursables.

TSYS of Omaha represents about $7 million of the increase. It's all higher transactions, volumes, compliance fees, income tax reporting and a very small amount had to do with Durbin. Partially offset by the deconversion going on with BofA has held down our transaction growth on the TAS side. We’re only representing about $800,000 pickup there in those revenues.

But of the $94.8 million, about 60% of it is transaction driven, and obviously, that's predominantly TAS, our direct business, and 40% is direct merchant ownership.

On the POS transaction side, you'll see the note there, without the deconverted class, it'd be up 11% instead of 1.1%. So we had pretty good growth when you consider taking out the deconverted customers and effects they had.

The direct merchant ownership is driven by dollar volume, and for TMS of Omaha, this volume increased 20.9% over what it was for the first quarter of last year. Operating income is up 27.1% at $34.2 million, and our margin before reimbursable was up 367 basis points over last year, and it’s at 34.8%. Good volume growth there and some good margin improvement, and we continue to see growth in the market from sales and the macro environment, I guess, of people buying. So we look forward to continuing to see that during the year.

Last slide here is the trailing 12-month cash flow and the strength that we have. We did have cash flow during the quarter of $98.1 million from operations. Free cash flow was at $81.3 million, and you can see the cash flow from operations of $432 million. EBITDA was $503 million and then $338 million in free cash flow.

We did finish the quarter at $371 million in cash. That's an increase of about $55 million since year end and obviously, driven by operating activities, less dividends and debt payments.

We still have 5.3 million shares in our plan to buy back stock over the next -- over the rest of this year and we are planning on deploying that capital through acquisitions and share purchases as we have done in the past.

We have been busy during the quarter, like I said, on M&A front, looking at some direct acquiring opportunities. We still are looking at some, and that's the main reason we are not buying back any stock although we've had a pretty good quarter with our stock appreciation since the first of the year.

But with that, Phil, I'll end my comments and turn it back to you.

Philip W. Tomlinson

Thank you, Jimmy. Vineda, we can open it up to Q&A now.

Question-and-Answer Session

Operator

[Operator Instructions] And your first question comes from the line of Darrin Peller with Barclays.

Darrin D. Peller - Barclays Capital, Research Division

Let me just start off on the Merchant Services line, again. I know we touched on this. I think you touched on it during the call or Jim, maybe I think you're the one who got a little more detail into it. Can you give us some more idea exactly what drove the big numbers there? I mean, the top line number for the Merchant Services was little a bit -- or meaningfully, I should say, above our estimate. I think you mentioned TermNet, but that's been there for a little while now. And transaction growth was a little better than we thought, but was there anything going on? Was Durbin a bigger part of that revenue number than we maybe anticipated?

Philip W. Tomlinson

Not really. I mean, TermNet has been here for a while but they were not here in the first quarter of last year. And then you've got 20% growth in your dollar volumes, which is creating some good dollar volume there. Appliance fees, there were some new fees that were implemented that obviously will anniversary off here pretty soon. But there's not -- I mean, it's just good volume growth.

Darrin D. Peller - Barclays Capital, Research Division

And then, I mean, on the cost of service line, I mean, that was also a little bit higher, such that the benefit we're seeing off the higher Merchant Services didn't really pass through, I mean, to your -- to the bottom line, I think as a result of the cost of service being a little higher. What was the driver there?

Philip W. Tomlinson

Well, a lot of that cost is volume driven, obviously, with the TAS accounts. But when you say it didn't get to the bottom line, our operating income did grow a lot faster than our revenue did as far as a percentage but...

Darrin D. Peller - Barclays Capital, Research Division

Right, I mean, I guess this is versus our -- the Street's estimate or our estimate. All right, just another quick question, on the overall business mix, I mean, the underlying drivers in North America are still very, very strong. I mean, we're seeing a lot of the issuance among the card industry, obviously, help quite a bit. Accounts on file growth very strong. Processed transactions growth up again in the teens, mid-teens. Yet revenue growth is still -- it's good, but it's obviously only in the mid-single digits versus your teens kind of growth rates in the underlying drivers. I think last couple of calls, you've mentioned pricing being a point or so and capital I know had a renegotiation, it wasn't that impactful. What is -- can you just explain, really, the major delta between what we see in these underlying growth drivers and the actual revenue growth? I mean, understanding that some of the merchant [ph] prepaid as part of it?

James B. Lipham

I think you're looking North America, the 9%. We had about -- lost business was about 2.5%, so that made it about 11.5%. And then price reductions were about 1.6%. So I mean, you get close to the 13%, 14% growth without those 2 items. So you still got that in there. You remember ABN AMRO's leaving us.

Darrin D. Peller - Barclays Capital, Research Division

Is that -- that delta, should we expect that? I mean, is there anything anniversary-ed in there, we should expect the gap to narrow to some extent over time in the near term?

James B. Lipham

Not sure about the lost business off hand. But I think price reductions, we'll see pretty much the same thing typically [ph] the rest of the year.

Darrin D. Peller - Barclays Capital, Research Division

And then just last question for me. On the commercial AOF [ph] side, another area, another very strong quarter of growth. I mean, is this a new trend of growth rate for that area? I mean, Commercial up sequentially 5%, year-over-year up 27%, very, very strong growth rates? Is that something we should expect to continue?

Philip W. Tomlinson

I would. I mean, I think it is a high-growth area of ours and the corporate accounts, are really expanding and I see no reason for it not to.

Operator

Your next question comes from the line of James Friedman with SIG.

James E. Friedman - Susquehanna Financial Group, LLLP, Research Division

So my first one is you had a flurry of contract renewals, meaningful ones, late in this quarter and obviously, last quarter. Are you seeing any differences in the characteristics of contracts when they renew in terms of the products that customers may be taking? And if -- are there any margin differences in your renewals relative to the prior contracts that you signed?

Philip W. Tomlinson

Well, let me see if I can explain it. I mean, we've said on numerous occasions that basically, we signed long-term contracts that allow a client, as they grow, to take advantage of some of their growth. So if a person signed 5 years ago when he was smaller, in theory, the unit price may be somewhat less but we don't think that's actually hurting our margins at this point. Now when you renew a Cap One or Royal Bank of Scotland, they're big enough, they might -- can make a little difference, but we continue to add at the middle or smaller size accounts and commercial card accounts where the margins might -- are probably better. I think you could conclude that they are better than at the very highest level. So I think what we see in most cases, we've said over several years now, maybe that you probably should expect us in margin pressure to 1% to 2%, somewhere in that range. But a lot of that depends on who we're renegotiating with. And getting this RBS deal behind us, we're not negotiating with any other large clients right now. I mean, we don't have any contracts coming up anytime soon. The Cap One and RBS deal have -- RBS has lingered on for -- we've been working on that for about one year. And I can say, we’re happy to get that one behind us. Now we can go focus on trying to help them grow.

Operator

Your next question comes from the line of Jason Kupferberg with Jefferies.

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

So you're off to a great start here in 2012, especially on revenue. And I guess, the math would suggest that if you just kind of run rate your Q1 revenues with no quarter-over-quarter growth the rest of the year, you'd be at the top end of your full year guidance range. So are you just being conservative at this early juncture of the fiscal year in terms of not raising the revenue range? Or I know you did mention there was some one-time revenues in the quarter, maybe you can quantify that. I know the leap year helped a little bit. So maybe just walk us through the thought process there because it does seem like you've got a great jump on your full year guidance at this point?

Philip W. Tomlinson

Let me start that and Jimmy can finish up. I do think that we had a good quarter and we're excited about it, and it's very promising. As I said earlier, a quarter doesn't make a trend, but we're encouraged by it, and we're optimistic about it. But we're certainly not ready to change any guidance at this point. Jimmy, you want to talk about any...

James B. Lipham

I think that we have several million dollars of one-time items. I think as you go and look at taking the quarter and just averaging that out over the year, you might get close to the top line, but we are working on some things that will take clarity during this quarter. And as you said, it's -- I mean, we're close to the top end of it, but then again, it's not for just a 4x what the first quarter was to get there. So I think we'll have more clarity here in the second quarter and see how these volumes continue to hold up.

Philip W. Tomlinson

Truth is, we'd like nothing better than to raise guidance.

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

Yes, but you'll do it at the right time, that makes sense. And maybe just to stay on the topic of top line here. I mean, if some sizeable opportunities in your pipeline go your way and maybe you get a little more tailwind from the macro environment, I mean, what's a reasonable longer-term organic revenue growth rate? I mean, you just did 7% here in Q1 and again, a little bit of help from leap year and some one-time stuff. But is something in that neighborhood sustainable as you look out longer term?

Philip W. Tomlinson

Well, I know you know we had in our guidance the 3% to 5%. Obviously, we're pushing the high end of that right now with the growth internally, where it is. So, yes, I mean, it could get higher than that if we continue to have this kind of growth. Our accounts on files continue to grow year-over-year. It'll approach the 7% to 10% range.

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

7% to 10%, okay. And then just lastly for me, conceptually, how should we think about the eventual move of the U.S. to EMV? How might that impact your business? New card issuance on that side of your business or helping merchants plan for EMV migration on that side. Any other factors we should be thinking about? I mean, is this a meaningful potential net positive over the next few years as we approach that liability shift that the networks have outlined for 2015?

Philip W. Tomlinson

I think it's a net positive for us. I mean, obviously, it requires a lot of work on both sides of the transaction, and we will perform a lot of that work and hopefully, we'll get paid for it. We've been through that in the U.K. and Europe. We've been through it in Canada, and now we're looking at it, obviously, in the U.S. We've got a couple of banks that have come to us. I'd say, a couple, 4, that have come to us and want to get in the EMV. But it's not like, they're knocking down the doors yet. I think a lot of people have sort of a wait-and-see attitude. But we absolutely believe it will happen. But to answer your question, it will, long term, be a net positive for us.

Operator

And our next question comes from the line of Bryan Keane with Deutsche Bank.

Bryan Keane - Deutsche Bank AG, Research Division

The 33 million accounts in the pipeline, can we get some sense on when those rolls through? Will be some in 2012, 2013? Just give us an idea of when to expect those coming in.

Philip W. Tomlinson

Well, I don't have that list in front of me. But that's all due to come on within the next 12 to 18 months. Within the next 18 months, some will come on later this year. Don't expect anything really in the fourth quarter. People just don't convert in the fourth quarter. We've got some big ones coming on in the early part of next year that we're excited about. And these dates move around by -- they're subject to move 90 days either way, up or back.

Bryan Keane - Deutsche Bank AG, Research Division

Is there anything coming on substantial in the next 2 quarters of this year? If the fourth quarter...

Philip W. Tomlinson

Not substantial, no. Not substantial.

Bryan Keane - Deutsche Bank AG, Research Division

So you're back-end weighted for 2013?

Philip W. Tomlinson

We've got a few process [ph] coming up, some smaller conversions. But I think for your planning purposes, I would look at the first quarter of -- and the second quarter of 2013. And obviously, if we were to get lucky and sign something big over this next quarter, that would move into probably 2013.

Bryan Keane - Deutsche Bank AG, Research Division

Yes, that was going to be my follow-on, is just an update on some of the big fish, any more movement there?

Philip W. Tomlinson

Well, we got a lot of hooks in water. We've got some good bait on them. So stay tuned is all I can tell you. We're keeping our fingers crossed and working hard.

Bryan Keane - Deutsche Bank AG, Research Division

And I guess, just 2 more quick ones for me. Just an outlook on operating margins? There was obviously some decent leverage in the quarter year-over-year. How do we think about margins going forward?

James B. Lipham

Well, I’ve always said, on consolidated, we're going to stay in the 22% to 24% range, and I think that's where we should be from a consolidated perspective. We moved around the margins between International and North America, but they should stable out.

Bryan Keane - Deutsche Bank AG, Research Division

And then just another crack at the guidance. I mean, guidance is, I think, 2% to 5% revenue growth, if I remember correctly, and you did 9% in the first quarter. So is there anything besides FX, I know, will be a bigger factor in the second and third quarter that will drag revenue growth that we should keep in mind?

Philip W. Tomlinson

Just the economy and I think that we still come for...

Bryan Keane - Deutsche Bank AG, Research Division

The economy. In the normal pricing and deconversion that we were talking about earlier, but just economy, there's no large deconversions or large one-time fee that we don't know about?

Philip W. Tomlinson

No. That's correct.

Operator

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

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

Just 2 questions, I apologize, I jumped on a bit late if you'd already hit them. But one was that I wonder if you could just maybe talk about the regional banks. Obviously, we saw the announcements and I heard you mention Regions in addition to [indiscernible] of the pipeline and then a sense of how...

[Technical Difficulty]

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

Okay, let me try again. If I'm breaking up, I'll just drop off and get you offline. So with the regional banks that you've won, I'm curious about how you would characterize other hot prospects that are like Regions or Huntington, if there's only a couple more, if there are many more? And then what your sense is as to sort of how aggressive [indiscernible].

Philip W. Tomlinson

Tim, I got the first question about how many more are there, and I would say there are probably 2 or 3 more that we are aware of that we'll have a shot at. I couldn't -- I didn't get the second part of your question.

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

I'll drop off and catch you offline. I don't want to interrupt...

Operator

Your next question comes from the line of Brett Huff with Stephens Inc.

Brett Huff - Stephens Inc., Research Division

A couple questions on the one-time stuff, Jim. You mentioned there was about -- I think, you said several millions, is that $2 million, $3 million revenue that was one time?

James B. Lipham

Yes.

Brett Huff - Stephens Inc., Research Division

And then you mentioned there were some one-time things in the costs that's within that -- your bucket of lost business, and et cetera. Can you just detail what was one time in that dollar wise?

James B. Lipham

Well, the lost business was roughly about $9 million total, consolidated.

Brett Huff - Stephens Inc., Research Division

And the rest was one time?

James B. Lipham

Yes.

Brett Huff - Stephens Inc., Research Division

And then I think somebody asked a little bit about this before but I want to dig in, 20% volume growth is really nice on your direct acquiring business. What's the driver there? I know that there's some good cyclical trend across the industry, but what specifically is getting you from that sort of high-single digit that we're seeing in a lot of places to more the 20%?

James B. Lipham

I really don't know other than the make-up of the merchant base. I think we're maintaining and growing merchants. We've added some merchants. We lose a few from attrition, but I think the ones we're putting on are a little bit higher-volume, dollar-volume merchants than what we are losing.

Brett Huff - Stephens Inc., Research Division

So bigger merchants?

James B. Lipham

Yes.

Brett Huff - Stephens Inc., Research Division

And then the -- one of the things I was trying to understand is your new account on file growth was better than we expected. Same-store sales account growth is about where we thought. Does that mix -- is the margin on those 2 different types of accounts differ meaningfully? I assume it does. And did that impact the margins in the quarter given that the new files are pretty good?

Philip W. Tomlinson

I mean, I think commercial cards carry a little more weight than others but, yes, I mean, just the makeup of that growth.

Brett Huff - Stephens Inc., Research Division

And then last question, Value Added Services. Those are -- those seem to be growing. How big a business is that when you guys think about it? And how fast did it grow this quarter?

Philip W. Tomlinson

I think it's about 11%. But how fast, I don't have it in front of me.

James B. Lipham

I don’t already have that. I know we have gone away because of the segment business. We just talk about value-added on a consolidated basis, and we kind of got it spilt up now between the 3 segments and it's...

Philip W. Tomlinson

I think it's about 11%.

James B. Lipham

But it's 11%.

Brett Huff - Stephens Inc., Research Division

Of total rev?

Philip W. Tomlinson

It's pretty steady right now.

James B. Lipham

If you take for all services, they're up quite a bit this quarter. It's all about a 9% growth.

Brett Huff - Stephens Inc., Research Division

And is that 11% of total rev or net?

James B. Lipham

Net.

Philip W. Tomlinson

Net.

Operator

Your next question comes from the line of Glenn Fodor with Morgan Stanley.

Vasundhara Govil - Morgan Stanley, Research Division

This is Vasundhara Govil for Glenn. I just wanted to go back on the comments you made on regional banks about more banks getting aggressive on new card issuance. But it's kind of hard to imagine that overall appetite for consumer credits is going up given that consumers are still in a deleveraging mode. So in that context, I'm just trying to understand if this new card issuance is really incremental to the whole market or is it just coming out of market share shift from within existing issuers?

Philip W. Tomlinson

I think that -- truth be known, it's probably coming out of the market. I don't know that there's an incremental demand for cards, but I think people have -- are coming up with better products, better ideas, better loyalty programs. I mean, I've read some here recently where they're really aggressive on it. And when you have new clients reentering the business, they’re going after their own customer base, which they have some leverage with, we would think. But I do think that it's going after some of our competitors’ cards is where these folks are going. But they're going really after their customer base when you talk about regionals. And by the way, I mean, I think you've all read where regions bought their old portfolio back from Bank of America 3 or 4 months ago. And so they've already acquired a lot of their customers back, and we'll convert that later this year.

Operator

Your next question comes from the line of Dave Koning with Baird.

David J. Koning - Robert W. Baird & Co. Incorporated, Research Division

And I guess, my first question is just on the Merchant Services line, you've done a great job growing revenue per transaction. And I know quite a bit of that is probably from Durbin and some PCI compliance or tax IDE fees. There's just a lot of benefits right now to the industry around some of those things. Is this something that by late 2012 or into 2013, starts to flatline or even decline a little bit? Are these some, I guess, transitory benefits that go away at some point?

Philip W. Tomlinson

I think you'll see those decline to some degree. I mean, obviously, as competition continues to move forward, anybody that had big wins with Durbin, I don't think we had a huge win, it is incremental with us. But that's going to, at some point, virtually go away. And same way with some of these other fees. Now some of these fees will go on long term.

James B. Lipham

But they will anniversary in.

Philip W. Tomlinson

Yes, they will anniversary as Jimmy said.

David J. Koning - Robert W. Baird & Co. Incorporated, Research Division

On the international side, revenue per transaction was down about 6% year-over-year. The last few quarters, it was up kind of mid-single to even double digits year-over-year. What, I guess, changed this quarter? Maybe that was just the anniversary of something as well?

James B. Lipham

I don't really know other than the mix and the Call Center business as I mentioned. Managed services was a good growth for international and normally, it carries a little lower growth rate.

Philip W. Tomlinson

By the way, just for what it's worth, in March, we did eliminate 182 positions in that international side in various countries around the world.

David J. Koning - Robert W. Baird & Co. Incorporated, Research Division

And then my last one, just on credit trends. I guess, month-to-month, were there big differences? Obviously, February had the leap day benefit. But growth month-to-month, were there any differences I guess through the quarter?

James B. Lipham

In?

David J. Koning - Robert W. Baird & Co. Incorporated, Research Division

In transaction growth, in credit?

Philip W. Tomlinson

No, I think it's just been pretty strong the whole quarter and it's been in the double-digit range as far as transaction growth in the 14%, 15% range in North America. And International is a little smaller than that. But it's been pretty consistent for the quarter.

Operator

Your next question comes from the line of Julio Quinteros with Goldman Sachs.

Roman Leal - Goldman Sachs Group Inc., Research Division

It's actually Roman Leal in for Julio. The organic growth in your accounts on file look really strong this quarter and your portfolio contains various card types and you service banks, both large and small. Can you share perhaps where you're seeing the greatest strength in organic growth. I guess, across the card types, is at all commercial or is it different pockets? And is it all large accounts -- or large banks versus regional banks?

James B. Lipham

It’s Commercial and large banks -- we've had some good growth from some of our specialty issuers like fuel cards. But for the first time -- I mean, not the first time, but over the last quarter or 2, we're finally starting to see some growth out of the regional and smaller banks. But I think the vast majority so far has been either larger issuers and the Commercial card issuers.

Roman Leal - Goldman Sachs Group Inc., Research Division

So is it safe to assume that you're seeing more activity in the regional banks? And as that picks up, first with accounts and then with revenue, you'll start seeing some delta -- sorry, that delta shrink? I mean, some more revenue per transaction on smaller banks' side? It's more of another crack at a question that was already asked, but there is a pretty big delta between the transaction growth and revenue growth? Do you think that shift towards regional banks helps that?

Philip W. Tomlinson

Oh, absolutely. I absolute think. I mean, the truth is, every card that we get out the door, helps it. And it takes -- when you get a new -- when you get approved for a new card, it takes a while for that volume start adding up for us. I mean, we've got post the transactions, authorizations. You get in that regular cycle, and that's when we sort of hit the sweet spot after your account's been on a while.

James B. Lipham

One of the things we haven't talked about as far as what your question leads to is that 30% of our cardholder transactions, they're from bundled accounts. So as you see that high growth in transactions, it may not equate back to revenue being it is a bundled account. So you get back to some of your revenue growth has to be new accounts added. And then you could start talking about transactions.

Roman Leal - Goldman Sachs Group Inc., Research Division

Yes, it makes sense. One last one on the merchant side, you talked about looking at some potential acquisition opportunities there. Maybe can you help us think through what type of opportunities you're looking at? Are these top 50 ISOs that perhaps you have a relationship already on the processing side? Or are these other third-party acquirers that perhaps you don't have a relationship with?

Philip W. Tomlinson

Well, it's both, honestly. And there's some areas that we would really very much like to be in. Obviously, one of the areas we would like to, that we're chomping at the bit to get into is the Internet space for transactions. We're not very large in that, and we would certainly like to be in that, in a much bigger way. And we have relationships with a lot of people in this business, and we have a lot of opportunities to look at things. We just -- we're a careful buyer and I don't mean that to sound facetious, but I mean we really think that as we build this merchant acquiring business up, we've got to buy good property. We don't need to buy something that we've got to rebuild. So we're looking for good people, good property.

Operator

And your next question comes from the line of Steven Kwok with KBW.

Steven Kwok - Keefe, Bruyette, & Woods, Inc., Research Division

I just had 2 quick questions. One was on the share repurchase. Was that due to both M&A activity and then also potentially renewing or getting a new credit facility?

Philip W. Tomlinson

It's mainly due to the M&A piece. I don't think it had anything to do with credit facility. I mean, we are -- we still pretty strongly generating over around $25 million of -- a month in free cash flow. So it's just a matter of -- I mean, we had the M&A activity going on and it didn't make much sense right now, especially with our stock price appreciating every month, we ought to get in there when we had the high likelihood of doing something.

Steven Kwok - Keefe, Bruyette, & Woods, Inc., Research Division

But on the International Services side, for the operating margins, how fast can it get back to the historical levels?

Philip W. Tomlinson

Well, as I said last quarter, we've got a get-well plan. I talked about the jobs that we'd eliminated in March. It's going to take probably 2 years, at least.

Steven Kwok - Keefe, Bruyette, & Woods, Inc., Research Division

And then last question on the...

Philip W. Tomlinson

Let me add one thing there. If we can -- additional business will make that easier. In these countries that we're already in, as an example, we signed something of significance in Brazil or Germany or the U.K., that will make a big difference. Because we've already built the infrastructure.

Steven Kwok - Keefe, Bruyette, & Woods, Inc., Research Division

And then final question. And notice the tax rate, it was a bit high this quarter. Is that just due to seasonality? I know that was the case in the first quarter of last year.

Philip W. Tomlinson

I noticed that too and waiting for Jimmy to explain it.

James B. Lipham

It's just that we had some discrete items last year, which were -- brought the rate down, but it's pretty normal. Going to be what you see the rest of the year, probably.

Steven Kwok - Keefe, Bruyette, & Woods, Inc., Research Division

So it should be 35% for the rest of the year?

James B. Lipham

No, it should be -- drop down around 34%.

Steven Kwok - Keefe, Bruyette, & Woods, Inc., Research Division

34%.

Philip W. Tomlinson

See what the rate was.

Operator

Your next question comes from the line of Ashwin Shirvaikar with Citi.

Ashwin Shirvaikar - Citigroup Inc, Research Division

I guess, many of my questions have been answered. I had a clarification. If you could provide one on Capital One with ING and I guess eventually HSBC kind of behind them, what's the [indiscernible] pulling in those accounts on your platform? Is any of that contemplated this year? And then, is there any risk of not getting a part of this, that’s associated with the private label?

Philip W. Tomlinson

Well, I think there's certainly risk of all that. We certainly would not anticipate anything [indiscernible]. And you said ING, right? We wouldn't anticipate anything out of that. I mean, we -- of course, on HSBC, they haven't even, at least as best I know, they haven't consummated that deal yet. We're hopeful that they will, and we're hopeful that we'll get a good chance at it.

Ashwin Shirvaikar - Citigroup Inc, Research Division

I was kind of trying to figure out the timing for the sake of AOF [ph] because that can provide, if it comes next year, provide a pretty good continued year-over-year benefit. I guess, the second question, I think you just answered this, but a clarification. You didn't -- I mean, you have a very healthy balance sheet. So I mean, is this an either or if you're considering M&A from a compliance perspective not allowed to do a buyback? And if you continue to look at M&A, then does that preclude a buyback for a long time?

Philip W. Tomlinson

No, I don't think it precludes this. If you recall, I don’t know if you were on the call in the last call and I said, maybe what you should do in your annual model is factor in somewhere between $0.01 and $0.02 per share as a buyback.

Ashwin Shirvaikar - Citigroup Inc, Research Division

So the 2 things can obviously happen together?

Philip W. Tomlinson

I think so. I mean, obviously, if it were -- if we found something that was in the $1 billion range, it might not. But there's not a lot of those floating around.

Operator

Your next question comes from the line of Greg Smith with Sterne Agee.

Gregory Smith - Sterne Agee & Leach Inc., Research Division

Let's say you’re successful on your fishing expedition. What kind of -- how should we think about pricing, revenue per account, if you were to reel in something very large?

Philip W. Tomlinson

Well, I mean, it would be probably -- it will be very good pricing. I mean, you have to think of it as very good pricing. We're not going to give it away. We are in the business to make money and -- but we can -- we certainly -- one thing we do understand is economies of scale, and scale really helps us. And so I think you would see us make a good profit on it. It might be somewhat less, depending on how big. I mean, we're always fishing for big ones out there and you've got to make sure you don't get pulled underwater by them. And we're not planning on doing that.

Gregory Smith - Sterne Agee & Leach Inc., Research Division

And how much customization work is typically required with the realty [ph]?

Philip W. Tomlinson

It really just depends. I mean, some issuers, there’s very little, others, there’s more. I would think on a really big guy, they’d be -- I mean, I don't know how to judge it. I mean, that'd be 50,000, 60,000 hours maybe of development, just for special products and interfaces that they need. But then we're used to that. I mean, we build all that into the deal.

Gregory Smith - Sterne Agee & Leach Inc., Research Division

And does that get booked? How does that get recognized as revenue?

James B. Lipham

Well, normally, when we're converting special projects like that, we'll capitalize them and then amortize them over the life of the contract. And the estimate of hours and all gets priced into the transaction price.

Gregory Smith - Sterne Agee & Leach Inc., Research Division

And then the joint venture income, it stepped up nicely, I think, as you guys have been saying. I think we were looking for $10 million for the full year. Is that still a good number, the CUP Data joint venture income?

James B. Lipham

I had them -- I don't know if that was $10 million or -- we grew 19% last year, they should growth around 15% this year, year-over-year.

Gregory Smith - Sterne Agee & Leach Inc., Research Division

Yes, maybe it was a growth rate, gets you to close to 10%. And then just the transaction activity in April, any notable change in what you've been seeing the past few weeks versus the first quarter?

James B. Lipham

None so far.

Operator

Your final question comes from the line of Glenn Greene with Oppenheimer.

Glenn Greene - Oppenheimer & Co. Inc., Research Division

I guess, the first one, just you sounded somewhat excited about Brazil on the pipeline prospects there. Just figured I'd go there, get a little bit of color and maybe an update on kind of how Carrefour is going at this point as well?

Philip W. Tomlinson

I'm pretty excited about everything, honestly. Not particularly Brazil. I mean, we -- after the last 2, 3 years, it's just very -- it's just a lot more fun having good calls as opposed to explaining why we're down. I mean, I think Brazil is a very strong growth market. They have some great banks down there, some great issuers. There are some opportunities in Brazil. I think there's probably more, and I think I said this last time, last quarter, there's probably more opportunities in the U.S. right now than there is anywhere in the world, which, again, when you go back and think over the great recession, the U.S. went absolutely dark for about 36 months. You couldn't get anybody to even think about talking about a conversion, much less doing it. And if you'll recall, during that recession, we continued to add business internationally, and in Canada, which is part of our North American numbers. So we think we have some great opportunities out there. Now it takes a lot of work to get these folks signed and it takes even more work to get them converted. But once you get them converted, it's a -- we have a really strong business model that says, unless something out of the ordinary happens, they're going to be here a long time. Just like the RBS announcement, I mean, they've extended 12.5, 13 years, out to 2025. And by that time, I'd probably be on a beach somewhere, and one of these young guys will be handling this. But we're extremely encouraged by what's going on, not only internationally, but certainly in North America and in the merchant business, on both sides of the merchant business.

Glenn Greene - Oppenheimer & Co. Inc., Research Division

Well, let me just sneak in a couple of number questions, real quick. Maybe for Jim. Could you just quantify the BofA roll off, what was the negative drag in the quarter? Or was that the $9 million in lost business in the quarter?

James B. Lipham

No, that was not BofA. BofA is -- for the quarter, did about what we thought was -- we said they would probably run off about $10 million a year and they went in line with what we figured they would have for the first quarter. Actually, they -- they actually had about $400,000 worth more revenues that we have anticipated. So they were a little slower than we thought in deconverting.

Glenn Greene - Oppenheimer & Co. Inc., Research Division

And then the slide you have where you sort of go through the lost business of 3.4%, this is sort of another crack at a component of the guidance. But for the year, you had guided to 5% to 6% for lost business and pricing. Any reason to think that this 3% revenue -- 3% line during the quarter is not a good run rate? Or is there any reason to think it would step up toward that 5% to 6% or even higher to get to there on a full year basis?

James B. Lipham

It did have a one-time nonrecurring item, it was a positive in there that would have -- and it represented 4% and 6%, so it's about $2 million. So if you haven't had that, it's been up a little over 4%.

Glenn Greene - Oppenheimer & Co. Inc., Research Division

So it would have been about 4% was kind of the normalized run rate?

James B. Lipham

Yes.

Glenn Greene - Oppenheimer & Co. Inc., Research Division

And then just finally, the $33 million conversion pipeline, is HSBC contemplated in there or is that not contemplated at this point?

Philip W. Tomlinson

Well, we've set aside a slot for something like that, hoping that --, it's not a done deal. So it could be -- and I just wouldn't want to get into any details there. We've set aside a slot. We've got people ready to go work on it should we be -- should we get that business. I mean, I can't tell you how many accounts it is because I don't know. I've just read in the press same thing you have. But -- and again, like I said last quarter, we would hope that we have an opportunity there. I mean, we do their Visa and MasterCard processing and certainly, at least on the Visa, MasterCard side, we think we would have a good opportunity there.

Operator

At this time, I'd like to turn the call back over to Mr. Tomlinson for closing remarks.

Philip W. Tomlinson

Thank you, Vineda. I just have a few things that I want to say. One is during the quarter, we introduced our new corporate purpose brand "People-Centered Payments", which defines our reason for being and our belief that payments really should revolve around people, not the other way around.

I know that some of you probably think that I get a little corny about some of this stuff once in a while. But people have always been at the heart of TSYS. And frankly, I think it's what makes us different. And I truly believe it gives us a competitive edge. And this idea that we are really talking more and more about putting people at the center of every decision we make, in every product, in every solution that we build, provides a real clarity of purpose for our folks and a real focus on the over 38 million times each day that the people of TSYS touch somebody else's life, whether that's an authorization or a phone call or whatever it is.

And this concept really has resonated well with our people. So when you see that, it's really more than a slogan or a marketing campaign. It's a way of life. It's the way we do business. And it's really our secret sauce, and I think that, that is being amped up, and we're feeling better about it and we are really excited about our business.

On another note, I want to let you know that we just mailed the agenda and registration forms for the Investor Day in New York that’s going to be held May 22. If -- we would love for you to be there if you can, we think we've got a good day planned for you.

And with that, I want to thank you for your interest in TSYS and your time this evening. We appreciate the questions. If you have any additional questions, again, please feel free to call Shawn Roberts in Investor Relations, and we hope you have a great evening. And again, thank you for your time. Good night.

Operator

This concludes today's teleconference. You may now disconnect at this time.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Total System Services' CEO Discusses Q1 2012 Results - Earnings Call Transcript
This Transcript
All Transcripts