TSYS Q4 2007 Earnings Call Transcript

TSYS (TSS)

Q4 2007 Earnings Call

January 24, 2008 8:30 am ET

Executives

Shawn Roberts - Investor Relations

Phil Tomlinson - Chairman and CEO

Jim Lipham - CFO

Analysts

David Scharf - JMP

David Parker - Merrill Lynch

Glenn Waldorf - UBS

Paul Bartolai - Credit Suisse

Glenn Green - Oppenheimer

Robert Dodd - Morgan Keegan

Presentation

Operator

Good morning, ladies and gentlemen, and welcome to the TSYS fourth quarter 2007 Earnings Call. (Operator Instructions).

It is now my pleasure to turn the floor over to your host, Shawn Roberts. Sir, the floor is yours.

Shawn Robert

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 will 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, Philip 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 year, in general, and give you our reports. I hope you've got a chance to read our press release. We know that with all the one-time issues it can be a little complex, but we are certain that we can get through it today.

Reflecting back on 2007, we think we've got also lot to be proud of. A lot of things have happened and 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 rate spin of the 80% plus of Synovus Financial's ownership of TSYS. We've been asked and we've talked about these options 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 a lack of float creating real 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 1st, we put another 160 million shares in public hand and actually increased 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, and I want to kind of close the chapter on the spin and there is part of that, I would 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 that was a right decision.

Speaking about TSYS, I had a couple of highlights I want to go 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 NORD Bank, the largest bank in Norway, Qatar National Bank and Marfin Popular Bank, [Linear 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 the launch of a new rewards card program with Norwich Union and prepaid card program with Lloyds TSB in London. We also signed a lot of other, what we think were 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, is our turnkey deal. We are doing all of their work from soup to nuts as credit collections, customer service settlement. And with that model, it takes them being certainly less than a top ten revenue client to a top ten revenue client. So I think you will see us try to use that model more as we go forward.

We continue to make good progress with our joint venture in China, with China UnionPay Data, if you will recall we own 44.5% of that joint venture. Our success rate on RFPs record processing over the past several years is nothing short of phenomenal. I would say that we are winning eight or nine items to 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, 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 have 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, Moneris Systems up in Canada, Merchant Management Systems, National Processing, they also signed new deals with ClearNet, mPay, The Bancorp Bank and we also signed a credit and recovery deal with Commerce Bank in New Jersey.

I want to share a few financials with you, but the ones I’m going to share with you and Jimmy, you get into the non-GAAP and GAAP numbers, but the ones that I want share are a non-GAAP, on a non-GAAP basis and excludes the big termination fee that we had in the spin related operating expenses of $14 million in 2007, both of which we view as one time revenue in 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. And I think you need to factor in the fact that Chase took the processing in-house in July and we certainly do get our licensing fee from this software, but certainly that was something that we had preferred not happened. 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 talked about a lot over the years, for 2007 was right at the 15% mark. And I think Jimmy is going to have some interesting comments on that.

If you recall, we gave some early guidance prior to the startup of our road show, which was around the 1st of December. And as you saw yesterday's earnings release, we raised our 2008 earnings guidance. We expect that our total revenue will grow in the range of 7% to 9% in 2008 and we also expect net income in basic EPS to grow in the range of 7% to 9%, up from the previously announced 4% to 6%. So, we are very pleased with that. I can't overstate how pleased I am with our ability to control expenses and continue to grow organically, which resulted in the expansion of our operating margin, which was 25.7% for the year.

Frankly, and I want to brag on us a little bit here with 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 wining though 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% for 2007. As I mentioned earlier, we continue to be very excited about Card Tech and 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 more financial details. Jimmy?

Jim Lipham

Thank you, Phil. And as we go through these financial (inaudible) our performance, I am going to be excluding the one-time spend related calls, as we discuss some of the changes for the quarter end here today. As Phil mentioned, as we exclude the spin expense in 2007, our earnings per share increased 5% to $1.32 percent for the year, which did exceed our earlier forecast.

First of all I'll add, if look at the income statement and I will add some color to these line items, first of all the electronic payment process and services as you know is our core business with license and arrangements also in that number. And as we compare this '07 year-to-date to '06, keep in mind that I may also exclude the BOA termination fees at $65 million and the $2 million related amortization expense that we incurred in '06 as they will be converted.

But first of all electronic payment process without the fee was up 2.3% or $6 million for the quarter and 3.4% or $31 million for the year. And this is a specially good growth, when you consider the loss of over $37 million that was in the fourth quarter of '06. And a loss of $249 million for the year that was associated with the de-conversions that occurred since June of '06.

But our revenue growth has been fueled by, first of all for the internal growth, which Phil stated 15% for the year, it has dropped down to 14% for the quarter and as we go forward we still expected to stay in double-digits, but probably we will not maintain the 15% range as we go forward, but was a bit 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 $375 million today. This is about $41 million lower than prior year. The net decrease is a result of the loss of an $105 million accounts from the two large customers that de-converted and offset that by 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-house 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 in quarter, authorizations are down 29.4% to $183 billion and then the year-to-date authorizations are down 5.5%, $8.65 million.

Also in these revenues international revenue increased $19.2 million or 21% for the quarter and a $100.6 million or 33% for the whole year of '07. This increase is a result of various strong growth across all of our geographic regions and run rate is also associated with our international acquisitions which Phil mentioned Card Tech doing a wonderful job, their revenues in '07 were up 24 million more than they were in '06.

International revenues specifically the revenues from Europe was positively impacted by currency translation adjustment for the quarter and 2007, the quarter being $4.3 million. This includes reimbursable 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. It represented about 12.8% of our total revenues including the reimbursables, still good growth there.

Merchant Services, next line, including reimbursables, they are up 2.8% for the quarter and 2.4% for the year, and the 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 transactions grew 3% compared to about a 9% growth that we have for year-to-date, but the year went down $9.2 million and this decrease is a result of several things.

First of all, we had full process and de-conversions during this period that cost us about $13 million. We had a re-class of about $3 million of revenues as reimbursable items that went through here, witnessing our poor sale tip systems and services we talked about before, managed about $6.4 million for the year. And then we had the class concession that we've talked about before on the renewal of plant contracts that cost us about $7 million.

All in all, this was offset somewhat by the internal growth that we saw, as I mentioned before, with 9% growth in volumes. It contributed about [$201] million to the listing of pieces acquiring class.

We do anticipate TSYS acquired revenues to stabilize and fully expect this year to get back to a strong revenue growth rate in '08 of 27% to 29%.

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 one-time billing adjustment in the fourth quarter of '06 of a $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 a great job that these guys are doing out there controlling expenses and after the de-conversions of challenges they faced last year.

Operating margins, excluding reimbursable items, have increased to 28% in '07, compared to 24% for the full year '06. TSYS Acquiring is still showing a great service as their availability also is 99.99% for the entire fourth quarter.

Returning back to consolidated revenue; Other Services, revenue for the fourth quarter is up 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 joint venture that Dimension Data, the TCS Managed Services deal that we did, we own 55% of it in Europe, about 62% of the year-to-date growth came from them.

Loyalty, our company in Atlanta made up another 26% from its growth in this TOP platform, new loyalty business, and remainder 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 II] fees that TSYS acquired and had to be re-classed and the treatment of core accounts that we talked before our debt management company in Atlanta, the new contract where we had to put 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 one-time termination fee and as Phil mentioned before pro forma basis, both the quarter and year-to-date total revenue lines would be up 5% on pro forma basis.

As we continue down the page, I would like to make a few comments about our expenses. The expense growth and employment is up $3.1 million to $4.4 million for the quarter, for the year that's $54.4 million growth or 10.4%. Europe, we have 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 little over half of that growth of $54 million or $27 million.

Then Europe had continued rapid growth there, employment cost increased about another $19 million and as they increased their headcount by 89 people. Catalog salaries and contract expense increased $5.4 million for the quarter, but they were down year-over-year $6.8 million as we did less in software development.

Number six, sequential quarter basis, employment expenses are basically flat, they are up about $789,000 and we think that's real good and holding that number. Part of the reason now, expenses are up as the headcount 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-based support services segment experienced a largest increase and 485 people and lot of that has to do with the call center business. This increase was 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. I think it’s well for how the margin was maintained where they are.

On the next line office and equipment decreased 26.9% or $25 million to $67.8 million a quarter and decreased 14.1% or $44.8 million for the year. This decrease was a result of the lower software amortization in the MIPS based software and lower equipment rent expense as we talked about during the year. Remember the fourth quarter of last year as a result of portfolio de-conversions we accelerated $11 million amortization in prepaid maintenance write-off related to this mainframe operating system, software operating system that was dedicated solely to the processing of the de-converted portfolios.

We have a new line spend related expenses and as you know as a result of the spin-off of Synovus we incurred expenses associated with advisory and legal services in connection with the spin assessment and these calls 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 option expenses and few spend related as we go into '08 as and unwire this commingled processes.

Other expenses were down 3.5% year-over-year for the fourth quarter and then decreased 10.9% for the year. A large part being a favorable gains over the lower transaction delivery cost TSYS acquiring and the drop in transactions. The reclassification of the cost, 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 my comments will be excluding the BOA fee and spin expense. So, if you look at operating income is showing down, but if you do the pro forma numbers, we 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% to 27%. EBITDA, as Phil mentioned was $520 million in ’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 would be important in evaluating TSYS financial results we are continuing 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 expanse now instead of interest income and if we had not levered the company there that number would be up quite higher than the [7 to 9] on net income.

Other income increased $9 million compared to $6 million and again as a direct result of the cash we had available along with the short-term interest increases we saw. Effective tax rate for the quarter was huge at 48.1%, previous discrete item the rates would have been 33.4 as you know we have some spin related cost that were directly tax related, that calls that rate to jump up and last year our rate was 35.5. For the year, when you look at the 2007 you see a 37.8% pre discrete items would be 35.3 compared to 33.8 we had last year in '06.

We do expect the tax rate as we go forward to remain around 36% pre-discrete item and just note that both years of '06 and '07 have been affected by our State discrete item settlement that impacted these rates.

Pro forma net income for the quarter increased as we talked about, its 4% or $24 million to $67 million. Pro forma earning per share increased to $0.34 up 55% over the $0.22 per share for the fourth quarter of last year. Year-to-date the earnings increased pro forma 25% or about $52 million and then the pro forma earnings per shares we talked about $1.32, up 25% over the $1.06 in '06.

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

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 will note significant contribution there again in cash generated from operating activities up $334 million for the year as we continue to generate good cash funding (inaudible). 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 purchase software and $18 million developed. We also paid $55 million in regular dividend so far this year and a 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 million in '06. I 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 occurred affecting these key measures as we go forward.

But on November 3rd of '07 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 contract of the hardware and software purchased in December of '07. And then as we completed the budget process, our operating expenses decreased over November 30th guidance, increase in pro forma operating income by $9 million and our net income by $6 million.

Lowering end of the revenues was also increased after the budget about $2 million. And then again the spend 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 and I'll turn it back over to you and your comment.

Shawn Roberts

Thanks Jimmy, we would like go ahead and open it up for the Q&A session now.

Question-and-Answer Session

Operator

(Operator Instructions). Our first question is coming from David Scharf. Please state your affiliation, and then pose your question.

David Scharf - JMP

Hi, good morning. It's David from JMP. I would like to start with some comments on 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 some of the largest issuers, particularly in the credit card side. What are you saying in terms of expected account growth? What is their appetite for discretionary spending or spending on value-added services? 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 were splashed all over Wall Street and the American Banker, and 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. The national attorney network is a group of people who want to do more authorizations, as opposed to less, through our total debt management. 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 priority.

We were, frankly, surprised at the 15%. We were delighted with it. But historically, that number has been lower than that. We think it would 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. The right way 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. Our transactions numbers have held up well. We have a lot of products going out the door. Our prospects are good.

One positive thing, if there is anything positive about this type of environment, is we typically will get more lookers, if you will, or interest in new sales. It's a great time for folks to kind of step back and review the bidding or what they're doing with the 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.

While we are certainly not excited about this economy we're looking at, and we were very hopeful, I mean I was encouraged yesterday afternoon to finally see some progress, we'll believe it's the end of the world. As a matter of fact, I have told our local newspaper here the other day that 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 are very optimistic and bullish about our position in this marketplace.

So we're going to stay focused on our business. We love this business. We're excited about it. But we are also very sensitive to our customers because, obviously, it is a tough time for financials. We will not help the products out the door, and we believe that they will continue to push products out the door, new products. We are hoping that the folks who can afford those products will jump on them.

David Scharf - JMP

Got you. When you look at your expectations for just organic growth in the existing counts, the installed base, is it much more weighted towards value-added products or you are actually assuming some net card account growth of your existing counts?

Phil Tomlinson

We think we will see some net new business come on Board, I mean, it's really a combination of all of that. We will ask a new business, we do believe that the accounts on board today will continue to grow. Albeit, may be not as fast of a pace as it has been, which 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

Great. I wonder if I can just shift to couple of other areas, one is on international and which is sounds like, you have 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 there are lot of moving pieces in different operations there, I mean, the trend has been upward in recent years but by quarter-to-quarter it is still all over the place, may be Jim you could sort of address, when there are certain normalizations or headcount or investment spending and this has been kind of stabilize around the 20% level?

Phil Tomlinson

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

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

Phil Tomlinson

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

David Scharf - JMP

Got you. And lastly, I would like to just get a maybe an updated snapshot of how much of your revenue, we all to think about is being truly recurring and by that you are selling a lot of value-added services, the nationwide deal includes a lot of new services like collections and database and so forth more and more variable type revenue, when we think about thesis, business model, I mean, how much of the '08 revenue would we think of is just that sort of recurring per account per month type charge, as opposed to more variable revenue, or a tight merchant dollar line?

Jim Lipham

David, this is Jim. I think 2008 revenues, we are talking about recurring. We are talking about our growth on the internal revenues, which is the chart that we normally use with the 15%, and as we talked about, it is going to be a little less than that this coming year. I would say that it is still going to be in the 10% to 12% range, as we get towards the year-end.

David Scharf - JMP

Yeah. Maybe I'll be referring to that. I think, really what I'm taking about Jim is the sort of your mix of revenue, how much of the revenue you expect this is truly a sort of recurring per account, per month charge, regardless of transaction volumes, regardless of merchant dollar volume strength?

Jim Lipham

I would say about 70%, as we got, as you know a lot of our stuff is kind of bundled account pricing. So, it will be about 70%. That we had a minimum David.

David Scharf - JMP

Terrific, thank a lot guys.

Jim Lipham

Thank you.

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 that you could comment on what you have seen that has changed your business, since you gave the previous guidance back in December, and just why you felt comfortable raising the earnings expectations for 2008?

Phil Tomlinson

The main reason David is that when we gave that guidance certainly when we went on the road, we had not finished our budget process and we mentioned that out there that we will going to be coming back, and hopefully proving it. We were able to do that, I mean, there was just some changes, and we had some spend related items that went up on us. But then again, our operating cost went down from where we had anticipated as we timed up on the budgets. Improved net income and then again revenues were up slightly on the low end of our range. As more of the function of just getting back and getting finalized on the budget.

David Parker - Merrill Lynch

Okay. And then…

Jim Lipham

David, can I add one thing there?

David Parker - Merrill Lynch

Sure, go ahead.

Jim Lipham

The three of the very top officers in this company were gone for 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 wouldn't be finalized. But we're 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 cost that are expected in 2008, how should we think about those hitting the P&L, should they, do you expect most of them in the first quarter or are they going to be spread out throughout the year?

Phil Tomlinson

I think, most of them to be in the first half as we, because of majority, I mean, it 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 out the biggest thing we've got in the transition cost has to do with the joint payroll function that we run today with Synovus. We have been working our way out of that during the year, pretty fast I hope.

David Parker - Merrill Lynch

Okay. And then final question just in regards to TCS acquiring, you're expecting some stabilizations, I think, you said in third quarter comments that you were expecting to see that potentially increase sequentially. Then we continue to see that you mentioned that 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 there's a little bit of that comment in the third quarter is that they had a little more of this compressional pricing and above. Also the volumes, as I've mentioned, are 3% and they've been growing at a higher rate. Now, as we go forward. We're anticipating that volumes from the transactions are growing at 9%, but we're also hoping 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% to 9%. So, we're planning on some new growth, as well as no more drop in the volumes, which you're seeing.

David Parker - Merrill Lynch

So, what attributed to that slowdown, 2%, 3% growth in the fourth quarter? Was it the D conversions or just a higher pricing pressure or some other you are seeing?

Phil Tomlinson

You know it's a real D conversion during the fourth quarter. From last year, we had most of them pretty much completed, but it could be the market or the volumes that they saw were just a little less during the fourth quarter.

David Parker - Merrill Lynch

Okay, thank you.

Operator

Thank you. The next question is coming from Adam Frisch. Please state your affiliation, then pose your question.

Glenn Waldorf

Hi, it's actually [Glenn Waldorf]. Congratulations on another good quarter. I just got a good question on U.S. card issuing business. Assuming a large part of market share gains are behind us, many but not all of large banks have outsourced the processing. Where is the next leg of growth coming from in the U.S.? I mean, is it more cross selling to 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, Glenn, it's really, I mean, it's some of those. I mean, we think there is an awful lot of opportunity out there with the mid-sized small banks. We have not even tried to -- today 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 own a lot of banks, and it's still processed in-house at a lot of the large banks. Frankly, as I said earlier, we think times like we experienced right now are typically pretty good, pretty fertile hunting for us if you will because people, who are under lot of pressure tend to, want to look around and see what their options are, and you could name just any large bank that you wanted to name that done process with us today. We would think that they would be a candidate.

And we will continue to do well in, I think, Canada and Europe and as I said, Mexico is growing but think about credit unions, think about small or medium banks, think about folks that our processing in house, and think about financial their processing with our competitors. I mean, we don't have a 50% market share yet, so we have got a long way to go. We have only got, as best we can determine on a global basis. We have only got about a 6% market share.

Glenn Waldorf

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 the card business. Is this concerning when you think about the possibility of the impact on account growth or pressure, and pushback on your fees for those banks.

Phil Tomlinson

Well, I think that any new or additional regulation concerns us because just like in the U.S. some of these congressional hearings that you have seen over the last year, all of that concerns us because we all are in this business together one way another, whether we like it or not and certainly, we don't like to see pricing regulations. So, we think, yes what that is. So it does concern us. We haven't seen any ill effects of it yet. It is not something that it seems to be a life or death topic with both we are talking with right now.

Glenn Waldorf

Okay. And a final question. If you had to take this 15% organic growth, I mean like it vary from 15 or 12, both, so say it's 15. How would you proportion that between x percent is growth of the existing customers. The next certain percent is new customers brought on and then offset to that is, your customer attrition. How would you sort of bucket that, proportion of that 15% growth?

Phil Tomlinson

Glenn, I think you maybe misunderstanding the 15%. When we talk about organic growth, you should look at it very much like the retailers call same-store sales.

Glenn Waldorf

Okay.

Phil Tomlinson

In other words, it's a new business that we signed this year is not included in that.

Glenn Waldorf

Understood. Okay. Thanks. Fair enough. I appreciate it.

Phil Tomlinson

Sure.

Operator

Thank you. The next question is coming from Paul Bartolai. Please state your affiliation and pose your question.

Paul Bartolai - Credit Suisse

Yes, good morning. This is Paul from Credit Suisse. First question, just to clarify on the merchant segment, you talked about the slowdown in transaction growth to 3% in the fourth quarter. But sounds like you are still comfortable with kind of high single-digit growth for 2008. Can you give us some color on what you are assuming, I mean you kind of assuming that the pricing in transactions stay at the 4Q level and some of the new stuff that's been signed get to 7% or 9%? What are you basically assuming for the core business?

Phil Tomlinson

Paul, I think that's why this is the level that we got in the fourth quarter. We might be a little bit ahead of our sales on anniversary-ing these price concessions and the de-conversions. But the fourth quarter revenues should 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 the stuff that was still lapping from previous signings?

Phil Tomlinson

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 mean, you heard me say before that we are 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 we think we will add additional clients as the year goes on.

Paul Bartolai - Credit Suisse

Okay, great. And looking at the payment processing segment, I mean we kind of have 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 account or 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 class that we already know about, we didn't put anybody else in there, although we did put some stretch bills in for revenue growth. So most of the growth is really from stretching what we have and increasing value added, and this type of stuff that we already got.

Paul Bartolai - Credit Suisse

Okay, great. And just final question on the spin-related cost, is there some component of the '08 cost, that is ongoing?

Phil Tomlinson

There will be a small part that'll carry on through the end of the year '08, but after that, the dollar should be watched out.

Paul Bartolai - Credit Suisse

Okay, great. Thank you.

Operator

Thank you. The next question is coming from [Glenn Green]. Please state your affiliation and pose your question.

Glenn Green - Oppenheimer

Thank you. Good morning. Affiliation is Oppenheimer. The first question goes back some where to the first question. But just want to get a little bit of clarity on the economic sensitivity, the business model within the payment processing business. Many of the predominantly account per month based business model, transaction based, volume based, just a little bit of clarity there, I have a view on it but I just want to hear from you?

Phil Tomlinson

It certainly is not. We get paid the same thing going for a $2 transaction as we do a $20,000 transaction. So when you think about the economics that people slowdown buying, what we worry about is, will they slow down the number of transactions. We don't fit 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 bundle basis that we get the same prices 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 the amount of a dollar spent.

Glenn Green - Oppenheimer

Okay. And what have you seen in previous cycles where the credit card environment we started seeing delinquency and charge-offs like you are hearing from all the biggest, a lot of the big issuers, what was sort of the impact on your business?

Phil Tomlinson

Well, again, I am 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 transactions 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 positive for us.

Glenn Green - Oppenheimer

And then just a question the stability of your book of business and there has been a few of your sort of high profile customers, potentially looking to sell their credit card portfolios. And I mean sure you know which names I referring to. I just wanted to get a little bit of sense on what you are thinking about with 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 at release have announced they are considering it and we've had all the appropriate conversations that you can have with our client like that. We have great relationships. Even if they do so, I think there is a good chance we'll continue to process it.

But the fact the matter is that's the one thing that keeps us up at night and as this consolidation is merger and acquisition business with our clients. When we go back and we spend hours talking about the [BOA] deal, I mean if you recall when we had just signed new 10-year agreement with Banc of America and seven months later, they announced that they're going to leave us because of the M&A deal. Now we got paid a lot of money as a result, but certain it was a not a good think for TCS.

Historically, we've been, I think, a net winner on mergers and acquisitions. But that is when people would say Phil what keeps you up at night. That is what keeps me up at night as we worry about it.

Glenn Green - Oppenheimer

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

Phil Tomlinson

Well, this is not factored in because we don't know. Certainly, we have long-term contracts with everybody you might have been speaking about, and we had penalties. But again that's not what we are. If one of them does actually sell, we are going to do our very best to retain that business and I think we have at least a 50% chance in that. I really think better of making that happen in. So much of just there is (inaudible).

Glenn Green - Oppenheimer

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

Phil Tomlinson

Yes, there was one.

Glenn Green - Oppenheimer

Okay. Thank you.

Phil Tomlinson

Thank you.

Operator

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

Robert Dodd - Morgan Keegan

Hi, this is Robert, Morgan Keegan. Couple of questions. First, on the turnkey product that you are offering now obviously nationwide is the first. Average revenue per account that you get today on your telecom base is 350 annualized. Can you give us an idea on the pricing of turnkey? I mean are we looking at 10% more or we looking at double? And then also on that kind of the economics of how that works, if you go into a new market, because obviously there is a lot of additional investment to do collections in the new market, for example. Can you give us a little more run down on that offering?

Phil Tomlinson

Robert, a lot of it is, I mean, we don't have that right 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 off. 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

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

Phil Tomlinson

Well, obviously we would process at hopefully all out of the U.S. I mean we don't have a collection business today in the UK, but we certainly have the systems that, very good systems that work. And basically we would have to hire the people in Australia unless they would allow us to do it in the U.S. 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, I mean we would want to process it out of the U.S. We're probably trying to have a call center, just depend on the economics of where the call center might be and where collections might be and all that. It is pretty scattered around.

Robert Dodd - Morgan Keegan

Thank you. I might follow up with you on that later. Secondly, on the slowdown at (inaudible) or TCS Acquiring or whatever we are supposed to call it. Was that kind of a slowdown in transactions per merchant or would they have any kind of reduction new merchant activations in the quarter?

Phil Tomlinson

I don't really have the detail on that, Robert. We still had some pretty good in the IP ant the SSL virtual net products. The Dow transactions were really down about 10%. Whether that's from I don't know if any loss of merchants that we had, so just a lower transaction volume.

Robert Dodd - Morgan Keegan

Okay, thank you. One final one if I can. Obviously now you are going to be looking around perhaps more aggressively on the acquisition front. Do you have any particular need you are looking to fill-in? And I mean what are you seeing on acquisition multiples internationally which has got pretty inflated for a while?

Phil Tomlinson

Well, that is one positive about this marketplace we have today is at least in theory the price of things will come down. We've talked a lot of times about ideas that we -- our strategy that we had in the M&A business and we've got Board meeting next week and while we don't have anything as imminent here, we've certainly started looking at acquisitions in a different way, because we do have to [drop out or now], we do have the ability to go do some things we have never been to do in the past.

We are not going to rush out and do something just to say we've done something. We certainly not going to start to buy everything, this is not bolted down as people have in years past. So, I think you will see us to be very focused, in control, and hopefully smart about what we acquire. The obviously things would be within our business ways to enhance value at TSYS.

Robert Dodd - Morgan Keegan

Okay. Thank you.

Phil Tomlinson

I think 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 are very bullish on our future. We believe our fundamentals are stronger than ever. The spin will opens up a whole new world of opportunities, 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 BBB by S&P. So, we are moving forward with all of that.

I think we are serious player in a global consumer and commercial credit business without the greater 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 strong cash flow. We have a very experienced and aggressive management team. We have this expanding global rich that is getting bigger and better everyday.

Our vision is to be the leading provider of global payment services. We have got to do three things strategically to do that. We have got to perfect the simplicity to continue get better at our operations, continue to get better at the blocking and tackling in this business. We have got to continue to expand internationally. As I said earlier, we have got about a 45% Visa and Master card market share in the U.S. today. We think we've got about a 6% to 7% global market share, that's a long way to go.

And then the third thing as we've got to invest strategically just like we were talking to Robert just a second ago, we 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 are 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 that we've got to be faster, better, and cheaper, that's our mantra.

It is a volatile time I talked about earlier 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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