Total System Services Q4 2007 Earnings Call Transcript

Jan.24.08 | About: Total System (TSS)

Total System Services (NYSE:TSS)

Q4 2007 Earnings Call

January 24, 2008 8:30 am ET

Executives

Shawn Roberts – Investor Relations

Phil Tomlinson – Chairman, CEO

Jim Lipham – CFO

Analysts

David Scharf – JMP Securities

David Parker – Merrill Lynch

Analyst for Adam Frisch – UBS

Paul Bartolai – Credit Suisse

Glenn Greene – Oppenheimer & Co.

Robert Dodd – Morgan, Keegan & Company

Operator

Good morning ladies and gentlemen and welcome to the TSYS fourth quarter 2007 earnings conference call. At this time all participants have been placed on a listen only mode and we will open the floor for your questions and comments following the presentation. It is now my pleasure to turn the floor over to your host, Shawn Roberts. Sir, the floor is yours.

Shawn Roberts

Thank you, good morning, this is Shawn Roberts from TSYS investor relations. Before we get started with the formal presentation, we’d like to call your attention to the fact that we’ll be making some forward looking statements about the future operating results of TSYS. These forward looking statements involve risks and uncertainties, factors that could cause TSYS’ actual results to differ materially from the forward looking statements are set forth in the TSYS reports filed with the SEC. At this time I’d like to turn it over to our Chairman and CEO Phil Tomlinson.

Phil Tomlinson

Thank you Shawn and welcome everybody. I hope everybody is in a great mood today after the big rally yesterday afternoon. We want to talk about the fourth quarter and the year in general and give you our reports. I hope you’ve had a chance to read our press release. We know with all these onetime issues, it can be a little complex but we’re certain we can get through it today.

Reflecting back on 2007, we think we’ve got an awful lot to be proud of. A lot of things that happened that I believe will change the long term D&A of TSYS in a very positive way. Obviously the first and maybe the biggest in our history is the tax free spin of the 80% plus of Synovus Financial’s ownership of TSYS. We’ve been asked and we’ve talked about this options for what seems like 20 years and it’s finally a reality.

As you know one of the real drawbacks for potential investors over the years has been the lack of float creating limited liquidity as a result of that, a problem that really prevented larger investors from taking a position in TSYS over the years. On January 1, we put another 160 million shares in public hands. It increased our float over five times. This transaction gives us a much greater flexibility with potential acquisitions and for the first time we have a real currency and have the ability to lever up our balance sheet.

An added benefit is our ability to be more aggressive with our share repurchase program which we have in place. I want to kind of close the chapter on the spin and as a part of that I’d like to thank Richard Anthony and the Synovus management team for taking a long term view on TSYS and moving forward with that decision. I strongly believe it was a right decision.

Speaking about TSYS, I had a couple of highlights I want to go over for the year. As you know our latest acquisition, TSYS Card Tech in London has had a wonderful year and we’ve signed deals with DnB NorBank, the largest bank in Norway, Qatar National Bank in Qatar, Marfin Popular Bank, Hellenia Bank and Universal Bank all in Cyprus. We also signed Tinkoff Credit Systems which is the first monoline in Russia. Our TSYS Europe group announced a launch of a new rewards card program with Norwich Union and a prepaid card program with Lloyds TSB in London.

We also signed a lot of other what we think are pretty significant gift card programs. One of the big things that we announced in the UK in 2007 was the Nationwide deal. Nationwide is the UK’s largest building society, it’s a turnkey deal, we’re doing all of their work from soup to nuts, its credit collections, customer service, settlement and with that model it takes them from being certainly less than a top ten revenue client to a top ten revenue client and so I think you’ll see us try and use that model more as we go forward.

We continue to make good progress with our joint venture in China with China Union Paid Data. If you’ll recall we own 44.5% of that joint venture. Our success rate on RFTs, the card processing over the past several years is nothing short of phenomenal. I would say that we’re winning eight or nine out of every ten that we look at. We still believe that’s a long term growth opportunity over the next three to five years but we do believe that long term China is going to be one of the places to be for the future and the other probably being India, which we have also entered into.

We also extended our contract with Spirit de Mexico in Mexico City. We are very excited and you’ve heard me say before that Mexico is growing. That was not the case over the past three or four years. Our acquiring business renewed agreements with Sage Payment Solutions, [Manaris] Systems up in Canada, Merchant Management Systems, National Processing. They also signed new deals with Clearnet [Impay], the Bankcorp Bank and we also signed a credit and recovery deal with Commerce Bank of New Jersey.

I wanted to share a few financial results with you but the ones I’m going to share with you and Jimmy will get into the non GAAP and GAAP numbers, but the ones I want to share are on a non GAAP basis and exclude the big termination fee that we had and the spin related operating expenses of $14 million in 2007. Both of which we view as one time revenue and expense events.

Total revenues came in at $1.8 billion for the year and $459 million for the fourth quarter, up 5% for both periods. I think you need to factor in the fact that Chase took the processing in-house in July and we certainly do get a licensing fee from that software, but certainly that was something that we had preferred not happen. Net income was $260 million for the year. That’s a 25% increase. It was $67 million for the fourth quarter and that’s a 56% increase on a non GAAP basis.

Operating income came in at $368 million for the year. That’s a 25% increase and it came in at $93 million for the fourth quarter which is a 51% increase. Basic EPS or earnings per share for the fourth quarter was $0.34 and $1.32 for the year which exceeded our forecast. Internal or organic growth which we have talked about a lot over the years for 2007 was right at the 15% mark. Now that Jimmy is going to have some interesting comments on that.

You’ll recall, we gave some early guidance prior to the startup of our road show which was around the first of December. And as you saw in yesterday’s earning’s release, we raised our 2008 earnings guidance. We expect that our total revenues will grow in the range of 7-9% in 2008 and we also expect net income and basic EPS to grow in the range of 7-9%, up from the previously announced 4-6%. So we’re very pleased with that.

I can’t overstate how pleased I am with our ability to control expenses and continue to grow organically which has resulted in the expansion of our operating margin which was 25.7% for the year. Frankly and I want to brag on this a little bit here, the obstacles we had to overcome in 2007 which I think all of you are very familiar with, I believe it turned into a great year and our team has done a wonderful job of managing through those obstacles and winning through a very, very difficult time at TSYS.

Just a few more comments on this international business. Every year, since we’ve really gotten serious about international, they continue to perform better and better and certainly 2007 was no exception. Our international revenues increased 33% in 2007. As I mentioned earlier we continue to be very excited about Card Tech and the many opportunities that we expect from that processing platform and that group of people. I think our ownership has really helped with some credibility and helped to create a higher level of interest and enthusiasm and we certainly expect big things to happen there.

I want to now turn it over to Jim Lipham, our CFO who will give you more financial details. Jimmy.

Jim Lipham

Thank you Phil. And as we go through these financial [overlay], our performance, I’m going to be excluding the onetime spin related costs as we discuss some of these changes for the quarter and year to date.

That Phil mentioned as you exclude the spin expenses in 2007 our earnings per share increased 5% to $1.32% [sic] for the year, which did exceed our earlier forecast. [Unintelligible] by looking at the income statement then I’ll [unintelligible] to these line items. First of all the electronic payment processing services as you know is our core business with licensing arrangements also in that number.

And as we compare this ’07 year to date to ’06, keep in mind that I am gonna also exclude the BofA termination fee of $65 million and the $2 million related amortization expense that we incurred in ’06 as they deconverted.

The first of all, electronic payment processin’ without the fee was up 2.3% or $6 million for the quarter and 3.4% or $31 million for the year. This is especially good growth when you consider the loss of over $37 million that was in the fourth quarter of ’06 and the loss of $249 for the year that was associated with the deconversions that occurred since June of ’06. But our revenue growth has been fueled by first of all for the internal growth which Phil stated at 15% or the year. It has dropped down to 14% for the quarter and as we go forward we still expect it to stay in double digits but probably will not maintain the 15% range as we go forward.

That was a big contributor, in addition we had new business in the quarter that added 2% additional growth and then for the year the new business along with the acquisitions, we added another 12%. Our account on file numbers are at 375 million today. This is about 41 million lower than prior year. The net decrease is a result of the loss of 105 million accounts from the two large customers that deconverted and we offset that by adding new clients of about 24 million and then the internal growth of our accounts added about 40 million more accounts.

Our volumes for the quarter were significantly impacted by the conversion of Chase’s consumer portfolio to their in-houses licensing arrangement. We saw our transactions for the quarter drop 29.8% to $2 billion. Year to date, transactions are down 5.8% to $9.5 billion and then quarter, authorizations are down 29.4% to 1[inaudible].83 billion and then year to date authorizations are down 5.5%, 8.65 billion.

Also in these revenues, international revenue increased 19.2 million or 21% for the quarter and 100.6 [b]illion or 33% for the whole year of ’07. This increase is a result of very strong growth across all of our geographic regions and revenues also associated with our international acquisitions of which Phil mentioned Card Tech doing a wonderful job. Their revenues in ’07 are up $24 million more than they were in ’06. International revenues, specifically the revenues from Europe were positively impacted by a currency translation adjustment for the quarter and 2007. The quarter being 4.3 million. This includes reimbursables and 17.8 million for the year also includes reimbursables.

Our value added service revenues grew 10 million or 4.5% for the year, ’07 over ’06. They represent about 12.8% of our total revenues including reimbursables, still good growth there. Merchant services, the next line, including reimbursables, they are up 2.8% for the quarter and 2.4% for the year. [Unintelligible] revenues before reimbursables were down slightly for the quarter and for the year.

For the quarter we dropped 2.1 million, this is mainly attributable to lower transaction growth we saw during the quarter as our volumes or transactions grew at 3% compared to about a 9% growth that we have for year to date. But for the year we’re down 9.2 million and this decrease is a result of several things. First of all, we had four processing deconversions during this period that cost up about $13 million. We had a re-class of about $3 million in revenues as reimbursable items that went through here.

Weakness in our point of sale [teep] systems and services, we talked about before, amounted to about 6.4 million for the year. And then we have these price concessions that we’ve talked about before on the renewal of client contracts that cost us about 7. All in all, this was offset somewhat by the internal growth that we saw as I mentioned before the 9% growth in volumes, it contributed about $21 million from the existing TSYS acquiring clients.

We do anticipate that TSYS acquiring revenues to stabilize and we fully expect this year to get back to a strong revenue growth rate in ’08 of between 7-9%. TSYS acquiring’s operating income for the fourth quarter of 2007 was 17.2 million, a 1% increase over the fourth quarter of ’06 and this is mainly due to we had a onetime billing adjustment in the fourth quarter of ’06 of $1 million and if you restate for that we would be up about 7% on an operating income basis, fourth quarter over fourth quarter.

For the year, operating income was 64 million an 11.6% increase over ’06. This again clearly shows the great job that these guys are doing out there controlling expenses and after the deconversions the challenges they faced last year.

Operating margin, excluding reimbursable items have increased to 28% in ’07 compared to 24% for the full year of ’06. TSYS acquiring is still showing the great service as they are availability also is up 99.99% for the entire fourth quarter.

Returning back to consolidated revenue, other services revenue for the fourth quarter is 11.1% or 5.7 million and then year to date it increased 17.8% or 33 million. Approximately 62% of this year to date growth for the quarter is a joint venture that Dimension Data, the TSYS managed services deal that we did, we hope it to 5% of it in Europe, about 62% of the year to date growth there came from there.

Loyalty, our company in Atlanta, made up another 26% from its growth in its TLP platform new loyalty business and the remain of the increase came from growth in our profit product.

Reimbursable items increased 15.4% for the quarter and 7.1 for the year primarily as a result of the base two fees that we [fatisus] acquired had to be re-classed and the treatment of court costs that we’ve talked before, our debt management company in Atlanta, the new contract where we had to switch some revenues into reimbursable items.

Total revenues for the fourth quarter decreased 9% and increased 1% for the year. As you recall, last year’s fourth quarter included this onetime termination fee and as Phil mentioned before on a for proma [sic] basis, both the quarter and year to date total revenue lines would be up 5% on a pro forma basis.

As we continue down the page I’d like to make a few comments about our expenses. The expense growth in employment up 3.1 or [inaudible] million for the quarter. For the year that’s $54.4 million or 10.4%. Europe’s, well really the biggest thing on the year to date is you got Card Tech in there and managed services on a full year basis and they contributed about a little over half of that growth of 54 million or 27 million. Then Europe had continued rapid growth there, their employment costs increased about another 19 million and as they increased their head count by 89 people.

Capitalized salaries and contractor expense increased 5.4% or [unintelligible] million for the quarter but they were down year over year 6.8 million as we did less in software development. On a sixquential [sic] quarter basis, employment expenses are really basically flat, they’re up about $789,000 and we think that’s real good in holding that number. Part of the reason that our expenses are up is the head count at the end of December, approximately 6,920 people, which is up about 172 people more than it was in December of ’06.

Our international base support services segment has experienced the largest increase, adding 485 people and not a lot of that has to do with the cost of the business. This increase is somewhat offset by decreases in our other two segments, domestic based support services experienced a 4% decline or down 233 people, while our merchant acquiring services saw an 11% decline or 80 people when compared to last year. Speaks well for how the margins have maintained where they are.

On the next line item, equipment decreased 26.9% or 25 million to 67.8 million for the quarter and decreased 14.1% or 44.8 million for the year. This decrease is a result of the lower software amortization [unintelligible] based software and lower equipment rent expense as we talked about during the year.

Remember in the fourth quarter last year as a result of portfolio deconversions, we accelerated an $11 million amortization in prepaid maintenance write off related to this mainframe software operating system that was dedicated solely to the processing of the deconverted portfolios.

We have a new line, spin related expenses and as you know as a result of the spin off from Synovus, we incurred expenses associated with advisory and legal services in connection with the spin assessment. These costs also include the incremental fair value associated with converting Synovus stock options held by TSYS employees to TSYS options. So we expect to incur some stock options expenses and a few spin related as we go into ’08 and unwind these comingled processes.

Other expenses are down 3.5% year over year for the fourth quarter and decreased 10.9% for the year. A large part being attributable to the lower transaction delivery cost at TSYS acrquiring and the drop in transactions. The reclassification of the court cost that we had for the reimbursables and then we had lower TS2 conversion amortization.

So overall we get to operating income as we go through here, when I comments also will be excluding the BofA fee and spin expenses, so if you look at operating income it’s showing down but if you do the pro forma numbers, it grew a healthy 54% for the quarter and 25% for the year.

Excluding reimbursables, our operating profit margin for the quarter was 25.6 and 25.7 for the full year of ’07 which is an increase of 422 basis points over the margin in ’06 of 21.48. As included in the 2008 guidance, we expect our margins to continue to remain in the range of 25-27%.

EBITDA as Phil mentioned was 520 million on ’07 or 9% increase over ’06. Our EBITDA margin in ’07 was 36.38% and we expect that level to continue as we indicated in our guidance at the same rate. Going forward we realize operating income and EBITDA metrics will be important in evaluating TSYS financial results and we’ll continue to report on that for you and that’s one of the reasons I guess when you look at net income growing at the same rate as our revenues, you got to remember on the forecast out in ’08, we do have interest expense now instead of interest income and if we had not levered the company there that number would be up quite higher than the 7-9 on net income.

Other income increased 9 million compared to ’06 and there again that’s a direct result of the cash we had available along with the short term interest rate increases we saw. Effective tax rate for the quarter was huge at 48.1%. Pre-discrete items the rate would have been 33.4, as you know we have some spin related costs that was directly tax related that caused that rate to jump up and you know last year our rate was 35.5.

For the year, when you look at 2007, you see a 37.8% pre-discrete items and be 35.3 compared to the 33.8 we had last year in ’06. We do expect the tax rate as we go forward to remain around 36% pre-discrete items and just note that both years of ’06 and ’07 have been affected by our SN state discrete items settlements and impacted these rates.

Pro forma net income for the quarter increased as we talked about 54% or 24 million to 67 million. Pro forma earnings per share increased to $0.34 up 55% over the $0.22 per share for the fourth quarter of last year. Year to date in earnings increased pro forma 25% or about 52 million and then the pro forma earnings per share as we talked about $1.32, up 25% over the $1.06 in ’06.

We move to the balance sheet, I’d like to make a comment or two there about the unrestricted cash is 211 million after paying the 600 million special dividend in connection with the spin and make mention we also closed our credit facility in December and we received 168 million loan and left about 252 million on a revolver that can be drawn down as needed.

Credit facility does have a five year term and bears interest at LIBOR plus 60 basis points and we also entered into a loan agreement during the fourth quarter with IBM for $22 million payable over 39 months for the purchase of software.

On the cash flow statement, you’ll note a significant contribution there again in cash generated from operating activities of $334 million for the year as we continue to generate good cash for our funding of operations on it. We invested 55 million in property and equipment, this is mainly in hardware and then we have 51 million in software which is 33 million of purchased software and 18 million developed.

We also paid the 55 million in regular dividends so far this year and the special dividend of 600 million on December 31 of ’07. In our unlevered free cash flow analysis, free cash flow was 336.6 million compared to 319 in ’06.

Did want to make just a few comments on our guidance numbers that we submitted. We will continue to provide the EBITDA numbers and income from operations and changes that occur affecting these key measures as we go forward, but on November 30 of ’07 the guidance we had depreciation and amortization at 144 million for 2008 which we have increased now to 152 million. This is primarily the result of the signing of the contract of the hardware and software purchased in December of ’07.

And then as we completed the budget process our operating expenses decreased over our November 30 guidance. Increase in pro forma operating income by 9 million and our net income 6 [m]illion. Our lower end of the revenues was also increased after the budget by 2 million and then again the spin expenses, they increased 2 million and that’s primarily due to the final pricing on the Synovus options as they were converted to TSYS options.

So with that Phil I will turn it back over to you.

Phil Tomlinson

Thanks Jimmy, we’d like to go ahead and open it up for the Q&A session now Jennifer.

Question-and-Answer Session

Operator

Thank you. Ladies and gentlemen, the floor is now open for questions. If you have any questions or comments please press the numbers one followed by four on your touchtone phone at this time. Pressing one four a second time will remove you should your question be answered. Lastly we do ask while posing your question that you please pick up your handset if listening on speakerphone for optimum sound quality. Please hold while hold for questions. Our first question is coming from David Scharf, please state your affiliation and then pose your question.

David Scharf – JMP Securities

Hi, good morning, it’s David from JMP. Phil I’d like to start with maybe just some comments on sort of the overall market environment for many of your larger customers. The internal growth in the mid teens was surprisingly strong last year and it sounds like you’re still expecting double digits, but can you talk a little bit about what some of the largest issuers, particularly on the credit card side are saying in terms of expected account growth, what their appetite is for discretionary spending or spending on value added services because obviously there are a lot of headwinds out there in terms of the market environment for them.

Phil Tomlinson

Well I think in some ways it’s a bit of a mixed bag. We have several clients who have been splashed all over Wall St. and the American bankers that are having some difficulties but we believe that the vast majority of our clients are in pretty good shape. Now I don’t think there’s any question that card delinquencies are going to rise. Particularly as it relates to the mortgage crisis that we have been in and continue to be in. But in some ways that almost helps us with some of these value added products that we have such as fraud and special collections and profit and this national attorney network through our total debt management.

People want to do more authorizations as opposed to less, people want to use more of our total access which is our relational database system to try to manipulate the data and try to better determine who they think has real issues. So there’s a lot of positives. We were frankly surprised at the 15%, we were delighted with it but you know historically that number has been lower than that. We think it’ll be in double digits but we certainly don’t expect it to be in the 15% range again with the year starting out like it is today. We do think that people will continue to issue credit cards.

One of the great ways to deal with delinquencies is to help yourself grow through them. The worst thing that you can do is just pull your horns in and do nothing. Historically, at least, we have done pretty well through difficult financial times. I mean we’ll keep you plugged in on how this time is going, we had a good holiday season. Excuse me, I’m about to choke to death here. Everybody here has been sick and I hope it’s not hitting me. But our numbers, our transaction numbers have held up well, we have a lot of products going out the door. Our prospects are good.

One positive thing, if there’s anything positive about this type of environment is we typically will get more lookers if you will or interest in new sales because it’s a great time for folks to kind of step back and review the bidding on what they’re doing with processing. Because they’re just looking for better and more effective and less expensive ways of doing processing and we think we have some great alternatives there. So while we are certainly not exciting about this economy that we’re looking at and we were very hopeful, I mean I was encouraged yesterday afternoon to finally see some progress, we don’t believe it’s the end of the world.

As a matter of fact, I told our local newspaper here the other day that it looks to me, excuse me, it looks to me like we have an awful lot of people thinking the glass is half empty and not enough people thinking the glass is half full. I think that we think our glass is better than half full. We’re very optimistic and bullish about our position in this marketplace. Excuse me, I’m sorry, so we are, we’re going to stay focused on our business, we love this business, we’re excited about it but we’re also very sensitive to our customers because obviously it is a tough time for financials and we want to help them get products out the door and we believe that they’ll continue to push products out the door, new products. And we are hoping that the folks who can afford those products will jump on them.

David Scharf – JMP Securities

Gotcha, when you look at your expectations for just organic growth in the existing accounts, the installed base, is it much more weighted towards value added products or are you actually assuming some net card account growth at your existing clients?

Phil Tomlinson

I think we think we’ll see some net new business come on board. I mean it’s really, David, a combination of all of that. We’ll add some new business. We do believe the accounts on board today will continue to grow. Albeit maybe not as fast of a pace as it has been, which you know last year was the 15%, but we do believe these value added products, it will be a very good year for value added products we believe.

David Scharf – JMP Securities

Okay. I wonder if I could just shift to a couple of other areas. One is on international, which it sounds like you know you’ve been really picking up an awful lot of steam here both in terms of new accounts and win rates. You know I was wondering, in terms of how we should think about more normalized operating margins in that reporting segment, realizing that a lot of moving pieces in different operations there, I mean the trend has been upward in recent years but boy quarter to quarter it’s still all over the place. You know maybe Jimmy could sort of address when there’s certain normalizations of head count or investment spending and you know does this thing kind of stabilize around the 20% level?

Jim Lipham

I think, David, as we go into ’08 we’re still in the investment stage in several areas in international and so I think that your margins, you’re going to continue to see for at least another year the low 20’s, high 19’s, low 20 area.

But I do think that as we go forward with the growth and the new customers coming on board next year and Europe itself that we will pick up some margin improvement on the European operation itself.

David Scharf – JMP Securities

Okay and is the pricing on many of your newer deals in Europe still more favorable to what you see in the more mature domestic market?

Phil Tomlinson

I think it’s pretty competitive. In Europe and around the world, I mean we’ve still got some touch competitors out there and we don’t have any slam dunks in this world we live in, we’ve got to earn our stripes every day. So I think you’ll see it continue to be competitive at least for the short term. We’d like to own it all as you can imagine but we haven’t got there yet.

David Scharf – JMP Securities

Gotcha and lastly I’d like to just get maybe an updated snapshot of how much of your revenue, you know we ought to think about as being truly recurring and by that you’re selling a lot of value added services, the Nationwide deal you know includes a lot of new services like collections and database and so forth, you know more variable type revenue. When we think about TSYS’ business model, how much of the ’08 revenue would we think of as just that sort of recurring per account per month type charge as opposed to more variable revenue or tied to merchant dollar volume?

Jim Lipham

David, this is Jim, I think on ’08 revenues, when you’re talking about recurring, I assume you’re talking about our growth on internal revenues which is the chart that we normally use with the 15% and as we talked about it’s going to be a little less than that this coming year and I would say it’s still going to be in the 10-12% range as we get towards year end.

David Scharf – JMP Securities

Maybe I’ll rephrase it, I think what I’m really thinking about Jim is your mix of revenue. How much of the revenue you expect is truly a recurring per account per month charge regardless of transaction volumes, regardless of merchant dollar volumes?

Jim Lipham

I’d say about 70% as you know a lot of our stuff is kind of bundled account pricing. So it’d be about 70%.

Phil Tomlinson

That’d be at a minimum David.

David Scharf – JMP Securities

Terrific, thanks a lot guys.

Operator

Thank you, the next question is coming from David Parker, please state your affiliation then pose your question.

David Parker – Merrill Lynch

Good morning, it’s David Parker from Merrill Lynch. I was hoping you’d just comment on what you’ve seen that has changed in your business since you gave the previous guidance back in December and just to why you felt comfortable raising the earnings expectations for 2008?

Jim Lipham

The main reason David is that when we gave that guidance early when we went on the road we had not finished our budget process and we mentioned that at there that we were going to be coming back and hopefully improving it and we were able to do that. I mean there was just some changes, you know we had some spend related items that went up on us but then again our operating costs went down from where we had anticipated as we tightened up on the budgets. Improved net income and then again revenues were up slightly on the low end of our range. It was more of a function of just getting back and getting finalized on the budget.

David Parker – Merrill Lynch

Okay and then with the [overlay].

Phil Tomlinson

Can I add one thing there? The three of the very top officers in this country were in this company were gone for really the first three weeks of December so we just didn’t have a chance to, we had the budget and we thought it was in pretty good shape, but we knew it wasn’t finalized, but we were just out of pocket for almost three weeks. Go ahead.

David Parker – Merrill Lynch

Okay, thanks and then just in regards to the one time spin costs that are expected in 2008, how should we think about those hitting the P&L? Do you expect most of them in the first quarter or are they going to be spread out throughout the year?

Jim Lipham

I think most of them will be in the first half.

Phil Tomlinson

Because the majority has to do with the stock options and most of that will be worked out in the first half of the year and we’re hoping to get, the biggest thing we got in the transition cost has to do with the joint payroll function that we run today with Synovus and we’ll be working our way out of that during the year and pretty fast I hope.

David Parker – Merrill Lynch

Okay and then final question, just in regards to TSYS acquiring, you were expecting some stabilizations, I think you said in third quarter comments that you were expecting to see that potentially increase sequentially, I think that you mentioned transaction authorization volumes were lower than expected in that quarter. What gives you comfort that we’re actually going to get back to that high single digit growth rate in that business as we move into 2008?

Phil Tomlinson

I guess, David, a little bit of that comment in the third quarter is they had a little more of this compression in pricing than I thought and also the volumes as I mentioned, they’re at 3% when they’ve been growing at a higher rate. Now as we go forward we are anticipating the volumes form the transactions growing at 9% but we’re hoping also that this new business which is going to come on board is going to cause the revenues year over year to grow at around 7-9%. And so we’re planning on some new growth as well as no more drops in the volumes from what you’re seeing.

David Parker – Merrill Lynch

So what attributed to that slowdown to 3% growth in the fourth quarter? Was it the deconversions or higher pricing pressure or some other issue?

Phil Tomlinson

Didn’t have any real deconversions during the fourth quarter. You know from last year you had most of them pretty much completed but it could be the market, the volumes that they saw were just a little less during the fourth quarter.

David Parker – Merrill Lynch

Okay, thank you.

Operator

Thank you. Your next question is coming from Adam Frisch, please state your affiliation and pose your question.

Analyst for Adam Frisch – UBS

Hi, it’s actually Glen [Foter]. Congratulations on another good quarter. I just got a quick question on US card issuing business. Assuming a large part of market share games are behind this, many but not all of large banks have outsourced the processing, where is the next leg of growth coming from in the US? Is it more cross selling to the big banks or is it new outsourcing opportunities to the smaller banks and do you have a sense of proportions, 50/50 from each? Thanks.

Phil Tomlinson

Well Glen it’s really, it’s all of those. I mean we think there’s an awful lot of opportunity out there with a midsized small banks, we have not even tried to, to date we have not really gotten serious about the credit union business, although we do have some very, very large credit unions, we have the largest in the world and we have several other large credit unions. There are a lot of banks that still process in house. A lot of the large banks and we think that frankly as I said earlier, times like we’re experiencing right now are typically pretty good fertile hunting for us if you will, because people that are under lots of pressure tend to want to look around and see what their options are and you know you could name just any large bank that you wanted to name that doesn’t process with us today.

We would think that they would be a candidate. And we’ll continue to do well in I think Canada, in Europe and as I’ve said Mexico is growing, but you know think about credit unions, think about smaller medium banks, think about folks that are processing in-house and think about financials that are processing with our competitors. I mean we don’t have a 50% market share yet so we’ve got a long way to go. We’ve only got, as best we can determine on a global basis, we’ve only got about a 6% market share.

Analyst for Adam Frisch – UBS

Great, thanks. Just turning to Europe, regarding the recent moves by the European Commission on Interchange Regulation and with the prospects of regulation over there where banks will presumably make lower returns on their card business, does this concern you when you think about the possibility of the impact on account growth or pressure and pushback on your fees to those banks?

Phil Tomlinson

Well I think that any new or additional regulation concerns us because you know, just like in the US, some of these Congressional hearings that you’ve seen over the last year, all of that concerns us because you know we’re all in this business together, one way or the other, whether we like it or not and certainly we don’t like to see pricing regulations and we think that’s what that is. So it does concern us, we haven’t seen any ill effects of it yet, it’s not something that seems to be a life or death topic with folks that we’re talking with right now.

Analyst for Adam Frisch – UBS

Okay and then a final question. If you had to take this 15% organic growth, I mean I know that can vary from 15 or 12 or whatever, but let’s just say it’s 15, how would you proportion that between X percent is growth of the existing customers, the next percent is new customers brought on and then offset to that is you have customer attrition. How would you sort of bucket that, proportion that 15% growth?

Phil Tomlinson

David I think you might be misunderstanding the 15%. When we talk about organic growth you should look at it very much like the retailers call same store sales.

Analyst for Adam Frisch – UBS

Okay, okay.

Phil Tomlinson

In other words its new business that we’ve signed this year is not included in that.

Analyst for Adam Frisch – UBS

Understood, okay thanks for clearing that up, appreciate it.

Operator

Thank you, your next question is coming from Paul Bartolai, please state your affiliation and pose your question.

Paul Bartolai – Credit Suisse

Thanks, good morning, it’s Paul from Credit Suisse. First question just to clarify on the merchant segment. You know you talk about the slowdown in transaction growth to 3% in the fourth quarter but it sounds like you’re still comfortable with kind of high single digit growth for 2008. Can you give us some color on what you’re assuming, I mean are you kind of assuming that pricing and transactions stay at the 4Q level and some of the new stuff that’s been signed gets you to 7 or 9% or what are you basically assuming for kind of the core business?

Jim Lipham

Paul, I think that’s right, it’s the level that we got in the fourth quarter. We might have been a little bit ahead of ourselves on anniversary-ing these price concessions and the deconversions but that definitely will, the fourth quarter revenues will be a little more indicative going forward and we anticipate new business is going to make the revenues grow.

Paul Bartolai – Credit Suisse

Okay and just on the pricing, was it new stuff that was signed or is it just this stuff that was still lapping from previous signings?

Jim Lipham

It was stuff that was lapping from previous signings, there was nothing new in the quarter.

Paul Bartolai – Credit Suisse

And are there any big signings coming up, I mean do you expect to see any further compression on pricing going forward?

Phil Tomlinson

Well I don’t know that we, I mean, you’ve heard me say before that we’re always under pricing pressure. We do have some deals that are signed and we hope that these new clients will at some point let us announce it. We have not converted them yet but we have factored that in and think we’ll add additional clients as the year goes on.

Paul Bartolai – Credit Suisse

Okay great, then looking at the payment processing segment. Kind of a similar type of question there, I mean when we look at growth for ’08, how much of this stuff that is already signed and just needs to be loaded up and how much is you just kind of assuming some level of new business signings and maybe just some comments on the backlog of what’s to be loaded up this year.

Phil Tomlinson

Paul I think for our ’08 numbers, we didn’t really, other than clients that we already know about, we didn’t put anybody else in there, although we did put some stretch goals in for revenue growth. So most of the growth is really from stretching what we have an increasing value added and this type of stuff, stuff we already got.

Paul Bartolai – Credit Suisse

Okay great, then just a final question, on the spin related costs, is there some component of the ’08 cost that is ongoing?

Jim Lipham

There will be a small part of it that will carry on through the end of the year ’08 but after that it all should be washed out.

Paul Bartolai – Credit Suisse

Okay great, thank you.

Operator

Thank you. Your next question is coming from Glenn Greene, please state your affiliation and pose your question.

Glenn Greene – Oppenheimer & Co.

Thank you, good morning, my affiliation is Oppenheimer. The first question goes back, it’s similar to the first question but just want to get a little bit of clarify on the economic sensitivity of the business model within the payment processing business. I mean isn’t it predominately account per month based business model, transaction based, volume based, just a little bit of clarify there. I have a view on it, I just want to hear it from you.

Phil Tomlinson

It certainly is not, we get paid the same thing Glenn for a $2.00 transaction as we do a $20,000 transaction so when you think about the economics, if people slow down buying what we worry about is they slow down the number of transactions. We don’t really, at least historically we have not seen transactions slow down an awful lot.

They do slow down somewhat, but certainly the bottom does not drop out of transactions. It may drop out of the dollar amount. We also have some large deals that are priced on a bundled basis that we get the same price per account per active account per month regardless of whether they have a transaction or not. And so it’s kind of a combination of those two. But none of it is based on [overlay] dollars spent.

Glenn Greene – Oppenheimer & Co.

Okay and what have you seen in previous cycles where the credit card environment, we’re sort of seeing delinquencies and charge offs like you’re hearing from a lot of the big issuers, what was sort of the impact on your business?

Phil Tomlinson

Well, again, I’m speaking historically, it was not nearly as negative as you might think it would be and I think it’s primarily because we are pricing on the transaction as opposed to the amount of transaction and even more so today than say 2001 or earlier recessions, is the fact that we have a lot of this bundle pricing. In really good times we sort of dislike bundle pricing. In times like we’re experiencing right now, we think bundle pricing is probably going to be a positive for us.

Glenn Greene – Oppenheimer & Co.

Yup and then just a question on the stability of your book of business. There’s been a few of your sort of high profile customers potentially looking to sell their credit card portfolios and I’m sure you know which names I’m referring to, but just wanted a little bit of sense of what you’re sort of thinking about that and what you might be able to tell us to get us comfortable with the stability of your book of business.

Phil Tomlinson

Well I think you’re absolutely right, we’ve got a couple out there, private label deals that have at least announced they’re considering it and we’ve had all the appropriate conversations that you can have with a client like that. We have great relationships, even if they do sell I think there’s a good chance we’ll continue to process it, but the fact of the matter is, that’s the one thing that keeps us up at night and that’s this consolidation, this merger and acquisition business with our clients.

When we go back and we’ve spent hours talking about the BofA deal, I mean, if you’ll recall when we had just signed a new ten year agreement with Bank of America and seven months later they announce that they were going to leave us because of the MBNA deal. Now we got paid a lot of money as a result but certainly it was not a good thing for TSYS. Historically, we’ve been a net winner on mergers and acquisitions but that is, when people say, Phil what keeps you up at night? That is what keeps me up at night, that we worry about here.

Glenn Greene – Oppenheimer & Co.

And how have you sort of reflect a better factor that into your ’08 expectations at this point?

Phil Tomlinson

Well it’s not factored in because we don’t know. Certainly we have long term contracts with everybody you might be speaking about and we have penalties but again that’s not what we were, if one of them does actually sell we’re going to do our very best to retain that business and I think we have at least a 50% chance and I really think better of making that happen. So much of it just depends on who buys.

Glenn Greene – Oppenheimer & Co.

Okay and then, just an easier question is, if you could just help me understand the strong retail account growth in the quarter, is there any big conversions that came on?

Phil Tomlinson

Yes, there was one.

Glenn Greene – Oppenheimer & Co.

Okay, thank you.

Operator

Thank you. Our next question is coming from Robert Dodd, please state your affiliation and pose your question.

Robert Dodd – Morgan, Keegan & Company

Hi, it’s Robert, Morgan, Keegan, a couple questions. First on the turnkey product that you’re offering now, obviously Nationwide is the first. Average revenue per account that you get today on your [tocar] base about 350 annualized. Can you give us an idea on the pricing of turnkey, I mean are we looking at10% more or double and then also on that, kind of the economics of how that works if you go into a new market because obviously there’s a lot of additional investment to do collections in a new market for example and can you give us a little bit more of a rundown on that offering?

Phil Tomlinson

Robert, a lot of it depends, I mean we don’t have that right here in front of us. Obviously the more services they subscribe to, like a Nationwide virtually has subscribed to everything or everything that I can think of. We have other folks who have subscribed to pieces of it. We have a fraud department here where we manage fraud for quite a few financials. When you subscribe to everything, I mean obviously that number goes up dramatically but I do not have that here in front of us.

Robert Dodd – Morgan, Keegan & Company

And on the economics, I mean if you were to get for example a turnkey solution in say Australia, just picking a market, where you don’t have a collections business today, I mean what effect would it have if any on margins with investments necessary in those new markets?

Phil Tomlinson

Well obviously you know we would process that hopefully all out of the US. I mean we don’t have a collection business today in the UK, but we certainly have the very good systems that work and basically we’d have to hire the people in Australia unless they would allow us to do it in the US or the Philippines or India or somewhere like that. The world has gotten so much smaller as you know so if we were, theoretically in a turnkey deal in Australia, we would want to process it out of the US, we’d probably try to have a call center. It would just depend on the economics of where the call center might be and where collections might be and all that. It’s pretty scattered around.

Robert Dodd – Morgan, Keegan & Company

Thank you, I might follow up with you on that later. Secondly, on the slowdown at [vital] or TSYS acquiring or whatever I’m supposed to call it now, was that a slowdown in transactions per merchant or was there any kind of reduction in new merchant activations in the quarter?

Phil Tomlinson

You know I don’t really have the detail on that Robert. You know we still had some pretty good growth in the IP and the SSL virtual net products but [zow] transactions were really down about 10%. So whether that’s from, I don’t know of any loss of merchants that we had so it’s just a lower transaction volume.

Robert Dodd – Morgan, Keegan & Company

Okay, thank you and one final one if I can. Obviously now you’re going to be looking around perhaps more aggressively on the acquisition front. Do you have any particular needs you’re looking to fill and what are you seeing on acquisition multiples internationally which have got pretty inflated for a while.

Phil Tomlinson

That is one positive about this marketplace we have today is, at least in theory, the price of things will come down. You know we’ve talked a lot of times about ideas or strategies that we had in the M&A business and we’ve got a board meeting next week and while we don’t have anything that’s imminent here, we certainly started looking at acquisitions in a different way because we do have dry powder, we do have the ability to go do some things that we have never been able to do in the past.

We’re not going to rush out and do something just to say we’ve done something, we’re certainly not going to try to buy everything that’s not bolted down as people have in years past so I think you’ll see us be very focused, very controlled, hopefully very smart about what we acquire. You know obvious thing would be within our business, ways to enhance value at TSYS.

Robert Dodd – Morgan, Keegan & Company

Thank you.

Phil Tomlinson

I think Jen we’re going to cut off the Q&A right now. We know the market is opening and I’d like to go into the concluding remarks. Needless to say I think you can see that we’re very bullish on our future. We believe our fundamentals are stronger than ever. The spin opens up a whole new world of opportunities. It certainly improves our financial flexibility, it broadens our float and ownership structure. We think it certainly unlocks value to the TSYS shareholders. Certainly makes it a much more liquid stock. We are very excited to have been added to the S&P 500.

We are also excited to be rated triple B by S&P, so we’re moving forward with all that. I think we’re a serious player in a global consumer and commercial credit business, without the credit risk. We have long term contracts, we have blue chip clients, we have this rich organic growth that we’ve talked about a lot. We have a strong cash flow, have a very experienced and aggressive management team. We have this expanding global reach that is getting bigger and better every day.

Our vision is to be the leading provider of global payment services and we’ve got to do three things strategically to do that. We’ve got to perfect the basics, and that’s to continue getting better at our operations, continue to get better at the blocking and tackling in this business. We’ve got to continue to expand internationally, as I said earlier, we’ve got about a 45% VISA Mastercard market share in the US today. We think we’ve got about a 6-7% global market share. That’s a long way to go. And the third thing is we’ve got to invest strategically just like we were talking to Robert a second ago. We’ve got to be smart about what we do.

And we’ve got to do three things tactically, we’ve got to continue to do these three things tactically and we think we’re very good at them and that is to be faster and better and cheaper at everything we do. We just got to be there. We believe we have the gold standard in technology but we still believe in order to be the leading provider on a global basis, we’ve got to be faster, better and cheaper and that’s our mantra.

It is a volatile time, I talked about earlier, you know the glass being half empty or half full. We do believe ours is more than half full and we are very excited about the future. We appreciate you being with us this morning and thank you for your interest.

Operator

Thank you ladies and gentlemen, this does conclude today’s conference call. You may disconnect your phone lines at this time and have a wonderful day. Thank you for your participation.

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