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Total System Services (NYSE:TSS)

Q2 2012 Earnings Call

July 24, 2012 5:00 pm ET

Executives

Shawn Roberts - Director of Investor Relations

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

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

Analysts

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

Darrin D. Peller - Barclays Capital, Research Division

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

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

David Togut - Evercore Partners Inc., Research Division

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

Bryan Keane - Deutsche Bank AG, Research Division

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

Brett Huff - Stephens Inc., Research Division

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

Operator

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

Shawn Roberts

Thank you, Shannon. And welcome, everyone. On the call today, our Chairman and CEO, Phil Tomlinson, will provide highlights from the second quarter 2012; and then turn it over to Jim Lipham, our CFO, who will review the financials. And after that, as Shannon said, we will open it up to Q&A.

At this time, I'd like to call your attention to the fact that we'll be making forward-looking statements about 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 introduce TSYS' CEO, Phil Tomlinson.

Philip W. Tomlinson

Thanks, Shawn. And I'm excited to report that we had another good quarter. I hope you've been able to read our press release. And obviously, as you know, last Thursday, we were delighted to announce a new long-term agreement with the Bank of America to begin the processing services for its U.S. consumer credit card portfolio. And also, to continue providing processing for their commercial card credit portfolio.

As is our long-standing practice regarding client-specific information, we won't be discussing revenues regarding the new relationship with Bank of America, but I will tell you what we're going to be doing. We'll be handling the transactions, authorizations, processing and billing for Bank of America, but they'll continue to do their own card issuing or card production, their statement production and their reward programs, and all of which we were doing for them when they left us in our previous contract that ended in 2006. So it's not an apples-to-apples comparison.

Again, the planned conversion date is mid-2014, so I look at any associated expenses along the way as a long-term investment in our future that I believe we can handle. You might remember that Bank of America previously outsourced its consumer business to us from '96 to 2006 when we acquired MBNA. Bank of America decided to take that processing in-house on the MBNA legacy system. We believe that their decision to transition the consumer business back to TSYS after 6 years says a lot about our ability to build strong and long-term relationships.

So when the world's third-largest issuer decides to outsource their processing, I think it's a clear confirmation that large issuers will outsource, and I think it debunks the theory that I've heard over the years, that many people believe that large issuers believe they've got to do their own processing in-house. I just have -- still have never believed that's the case, and I believe this is another great example of it.

It's a huge win and I believe it sends a very strong message to our industry. It also gives me great comfort to know that in 24 months, this business will be coming on board and I hope you feel the same way as the investor. It goes a long way in helping ensure our long-term success over the next 3 to 5 years. Once we convert this portfolio in mid-'14, we believe our U.S. market shares of the Visa and MasterCard credit card market will be in the range of approximately 40%. And as we've said before on the commercial card side of the house, we believe that is in the 80% range.

I strongly believe this -- that this decision to outsource is a continuing indicator, a leading indicator that large and small issuers around the globe see real value at TSYS in their -- and really, a never ending requirement for competitive pricing, service, new and innovative products that have to be faster, better and cheaper. Personally, I continue to believe the issuers competing with banks that are TSYS' clients will find themselves at somewhat of a disadvantage, not only technically, but in customer service product development and speed-to-market as we continue to invest and enhance and improve our products and quality each day.

From a quarterly perspective, the key metrics we used to measure our business were all positive. EPS was $0.35 for the quarter, an increase of 26.5% over the second quarter 2011. Total revenues were $462.7 million, an increase of 3.4%, and operating income was $92.1 million, a 17.3% increase over the second quarter of last year. It's a quarter we're really proud of.

I want to take a few minutes and give you a brief update on some of the business highlights from our 3 reporting segments. In North America, during the second quarter, we were fortunate enough to sign Fleet One, Oregon Community Credit Union, Scotiabank in Mexico and KeyBanc, which is also another big win for us.

In last quarter's call, we mentioned the signing of Regions Financial and Huntington Bank, which are 2 institutions that are helping to take back ownership -- that are working to take back ownership of their card programs and grow their portfolios. I know that sometimes our pipeline can be confusing, so I'm going to give you a little bit more detail than usual this quarter. Our total pipeline including Bank of America exceeds 100 million accounts. We've scheduled several smaller conversions and startups for the third quarter, and as you know, we do very little conversion startup business in the fourth quarter because of the holiday season.

We're scheduled to convert another 20 million accounts in the first quarter, and we have another 10 million scheduled for the third quarter of 2013. Of course, these numbers are all subject to the usual issues, people will be adding new accounts, they'll be deleting accounts and -- but they should work fairly well for your models.

In the international side, we mentioned last quarter in -- on last quarter's call, the contract renewal with the Royal Bank of Scotland, which extended our processing relationship through 2024. During this quarter, we successfully moved the Tesco accounts to a new direct relationship and are having good success in cross-selling additional products like mobile apps and online card management tools, to new clients like Swiss Card and ING.

In the past 2 weeks, we announced that we've signed the largest PRIME license agreement today with SpareBank 1 in Norway. In the Merchant segment, as Jim will address in detail with you later, same client point-of-sale transactions in our indirect acquiring business in dollar volumes and sales from our direct acquiring business continued to increase. We've continued our positive market momentum by signing 3 new indirect processing agreements and extending our agreements with 3 existing clients.

On the direct acquiring side, we've added new -- 2 new large national merchants and we have extended agreements with over 20 existing clients. The merchant advocacy sales group we created with our -- with the direct merchant sales group is seeing what we think is healthy productivity increases, and we're gaining traction from new referral partners and we're improving the sales from existing partners. Our sales per sales unit are increasing every month.

So with that, I'm going to turn it over to Jim Lipham, our CFO. And when he gets through, we'll have a Q&A, then I will have some closing remarks for you. Jim?

James B. Lipham

Thank you, Phil. Before I get into the slides, I thought I'd take a few minutes to touch on a couple items that I know you saw in the press release, that we raised our guidance to the upper end of our range for our net income of $243 million and earnings per share of $1.28, respectively, there.

We have experienced quite a productivity coupled with internal growth during this first 6 months of the year, which were the primary drivers of our stronger income before tax number. Year-to-date, revenues before reimbursables were up 6.9% and operating expenses were up 4.3%, driving our productivity gains higher than we had expected. We were very pleased with these results and but however, due to things we have to pay some adjustments in the last half of the year, and I know Phil kind of mentioned a little bit, but the adjustments include a pricing concession in the last half of the year related to a large client. And then we had 2 clients that requested delays in their conversions, and we were expecting to convert them in the last quarter of 2012 and they've now been moved to 2013. And these pricing concessions and conversion delays amounted to, roughly, $17 million of decreased revenues in the latter half of the year.

We expect our original productivity gains that we've experienced in the first 6 months of this year to continue for the last 6 months, and they will help offset the pricing concession and the revenue loss from the deconversions being pushed out.

Also, during the quarter, we had a discrete item in our income tax section where we recorded a $6.2 million tax benefit, and it was in our guidance numbers. It was old so $1 million greater than what we had thought. It represented about $0.03 a share. As Phil mentioned, we were up in the quarter to $0.35 per share. But I wanted to touch on those 2 items that are kind of really unusual as far as where we are with the results for the 6 months and inspection for the remainder of the year.

If we'll flip over to Slide 6 and look at the second quarter results, you'll see that revenues before reimbursables are up 4.9%, and that's roughly $18.5 million, about half of this is coming from issuing business and the other half from the merchant side of the house.

Our expenses during the quarter were up 1.4%, so you can see that the operating income really had benefits from good productivity and growing at 17.3%. Our margins for the second quarter were 23.1% compared to 20.7% last year at this time, a great improvement, continuing to show good strength there.

Earnings per share, as I mentioned before, $0.35, up 26.5% year-over-year. I will say the same client transactions during this quarter were up 12.7%, and that's slightly down from where we were in the first quarter of 14.4%. So we did see a little drop off there from where we were in the first quarter.

On a year-to-date basis, revenues before reimbursables up 6.9% or $51 million. There, again, it's just good organic growth, it's good programming. We've had TermNet in here. We've got a small deconversion fee during the second quarter. But overall, just good growth, organic and internal growth for the 6 months.

Our operating income again, we get -- actually had our expenses grow at a lesser rate than revenues down 4.3%. So the operating income growing double digits at 16.7%. Our margin before reimbursables is up 2%, roughly, from where it was in 2011, and net income is up 20.1% year-over-year. It's just outstanding growth and for the 6 months, we're at $0.65 a share, up 22.7%.

Just as Phil said, a great quarter and a great 6 months. On the next page, you'll see the revenue change for 2012 year-to-date and where it all came from. We got internal growth of 6.4%, that compares to a 7% internal growth number in the first quarter, just a slight decrease.

We had new clients contributing 3.7% and then the acquisition of TermNet added another 1%. So all total, we had 11.1% growth for the year-to-date numbers. And then what happened to us was lost business was a big item on the column of 3.7%. It's about 3.3% loss for business and that was mainly attributable to cards we lost with BofA when we had the termination of ABN AMRO and had a little merchant loss there so that -- we did pick up the termination fee and -- but it all netted out to 6.9%. As I said, that stands us a little bit from where we were.

Next slide has to do with our accounts on file, and as I mentioned in the Analyst Day in New York, we did put it in here this time the commercial card, single-use accounts. And as you can see there, the last category there about 34 million accounts and then, roughly, about half of what we had in commercial category. But overall, these commercial card accounts represent about 1.7% -- or excuse me, 1.2% of our consolidated revenue.

So they're small contributors to revenue just like prepaid card and that's why we need to pull them out. Also I mentioned is, EBIT category was up. The total category has grown to 7.2%, which kind of coincides with our 6.9% growth in revenues. And so we're mighty proud to see all of these account categories growing year-over-year.

With that, we'll go to the North America segment. Look at the key drivers there, strong internal growth and increased volumes. Revenues before reimbursables at $205 million, that's up 3.4% or 6.8% and this primarily comes from new business and organic revenue growth. So just good growth organically here, up about 6.9%.

Operating income, $72.1 million, it's up 12.5%, and margins before reimbursables at 35.1%, that's an increase of 282 basis points from where it was last year at this time. Let me highlight the accounts on file, they are up 18% total at $387 million. I think the prepaid and the onetime use commercial cards out just see a 6.6% growth.

Total cardholder transactions growing at 13.5%, a little over 2 billion. First time in quite a few years that we have broke 2 billion transactions, but that's down from the first quarter growth of 16.4%, so but overall, North America had a great quarter.

Next slide on the International segment, you'll see good internal growth here. The deconversion fee from one of our customers, about $2 million, but it all attributed to our revenues being up before reimbursables of about 5.6% or up about $5.3 million and operating income at $9.4 million, that's a decrease of 6.8%, that's about $683,000. It's not really that great but the deconversion fee helped us there. As you know, we did move those expenses over in the first quarter as we reallocated resources to the International segment.

But operating margin, revenues before reimbursables at 9.5%, that's down 1.2% from last year's 10.4%. The deconversion fee, if it hadn't been in this quarter, we would have been -- our margins before reimbursables would have been down to 8.1% or have been down about 2.6%. So if you look at the accounts on file, you'll see them up 11.11% -- 11.1%, still good growth there in accounts. Cardholder transactions were up 18.1%, which is in line with where they were the first quarter when they were growing to 17.5%. So same card transactions up 11%, so we're still seeing some good growth internally and internationally.

Look at the next slide on the merchant side, you'll see the revenues for reimbursables up 5% at $97.7 million, that's up $4.7 million. Most of these growth is coming from TSYS Merchant Services in Omaha. They're up about $6.5 million for the month -- excuse me, for the quarter. And it's mainly due to compliance fees, new services, transaction volumes. TAS had -- was a -- our TSYS Acquiring out in Tempe, and our point-of-sale was down about $1.7 million in there, mainly it's because of that deconversion of BAMS portfolio continues to move forward.

Acquisition of TermNet added about $1.6 million to the revenue line here also. Now the $97.7 million of it, about 59% of it is transaction driven, which is predominantly our indirect business and TSYS Acquiring, 41% belongs to the direct merchant ownership part of our business in Omaha.

The point-of-sale transaction volumes, as you can see up here, are down or are growing about 0.8%, almost flat, but when you exclude the deconverted customers, you'd see a growth from everybody else of 12.4%, which is kind of in line with the other transaction growth we see. The direct merchant dollar volume, it increased 9.7% over the second quarter of last year. And as you know, in the first quarter, we had a bigger growth, but that was because TermNet was not in the first quarter of '11. But overall, operating income, it's up 28.2% at $33 million, and that's up 7.2% and creates a margin of 33.7%, which is up about 600 basis points over 2011. You might be interested, we did have some onetime expense items in 2011, which are showing a favorable effect on the margin. But overall, again, the Merchant businesses was pretty strong for the second quarter.

The next slide, cash flow strength trailing 12 months. You'll see that we had very good cash flow, strong cash flow for the quarter with $105 million from operations, $64 million, $7 million of that's mainly is free cash flow. For the trailing 12 months, cash flow from operations of $440 million and free cash flow at $330 million. EBITDA at $518 million, still growing very strong, generating good cash.

Our cash balance at the end of the quarter was $419 million, that's an increase of $102 million since the year end. And as you saw in the press release today, that we -- the board did approve to extend our buyback plan and also to increase it to another 5 million shares to 10.3 million shares and move the date out another year to April of 2014. And we plan to continue to look at acquisitions and plan on that or share buybacks as we continue to go forward.

I will mention here about our credit facility. I know we talked about we'd have it done by the end of the second quarter, the extension of it. And we had to hold off on it as we were waiting on the announcement on Bank of America, but we have been working on it. We have 4 lead banks in place today. We have commitments out there that have been committed of over $525 million and we will be launching the syndication of this in the next few days, hopefully to finish it sometime between now and mid-August, something like that. And we'll have it done before the second quarter gets started.

So and the last slide I wanted to leave you with is a new one that we've put in. It has to do with showing you the shareholder return for the first 6 months of this year. You can see it's up 23.4%, very good stock appreciation and the increased dividends. And then if you look at the trailing 12 months, same thing, with a good shareholder return of 34.3% [ph].

And with that, Phil, I'll turn it back to you.

Philip W. Tomlinson

Thank you, Jimmy. Shannon, we're ready to open up for questions.

Question-and-Answer Session

Operator

[Operator Instructions] And your first question comes from James Friedman of SIG.

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

One slide that you didn't refer to, Jimmy, is this Slide 17 in the appendix. I don't recall you mentioned it in your prepared comments, but I wanted to ask you about the difference between the as-reported revenue and the constant currency.

James B. Lipham

And what was the question again?

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

Yes, so how should we think about the foreign exchange impact on the reported revenue in the quarter?

James B. Lipham

Well, it hurt us. And as you can see, it's down, what was it, foreign currency was $2.6 million -- $2.7 million. So it was a negative for us during the quarter. But I think for the revenues, it's that much and then works out to be a better number for us on the expense side of the house and a positive when you get down to operating income.

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

Okay. Just so I'm reading this right. Is the international -- are you breaking the international out from the total here? Or is this combined?

James B. Lipham

Well, this is -- I mean, it's just 2 segments, consolidated is consolidated, and then the international is by itself.

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

Okay. So and then maybe turning back to the operating margins on a segment basis. So it sounds like you had a little bit of deconversion activity. But even when you net that out, it seems like that the trajectory, at least in 2 of the 3 segments look good. Where should be thinking about the operating margins going forward? If you could update us just to what Gaylon was saying at the Analyst Day on the international side, where we think merchant services in North America margin should be traveling through the end of the year?

James B. Lipham

I still think on the individual basis, they're going to track pretty much where they are today. I think international will improve a little bit more as it goes through the remainder of this year. And I think the merchant segment will at least hold its margin. Most of the growth in the international margin will come as a reduction in the North America margin, as they work those intercompany resources. So I think consolidated-wise, you'll still see us finish up in the 22% to 24% range.

Operator

Your next question comes from Darrin Peller of Barclays.

Darrin D. Peller - Barclays Capital, Research Division

First question, if you wouldn't mind just giving a little more color on the contract with Bank of America. It's a great win for you guys. I know after a while it's been discussed. First of all, can you talk about the expenses that we should expect to be impacting the model over the course of the next, perhaps, year or 2 before it starts to truly ramp up and convert over? And then secondly, can you give us some color on the profitability, really just the competitive process, how -- bidding for it. What it means for the margins overall?

Philip W. Tomlinson

Well, I'll talk about it as best as I can. And Jimmy might be willing to add something on expenses. We -- there was not a big front-end payment on this so I think you can not worry about that. Obviously, for a deal this size, they had a very competitive price and it was a competitive process. And as you know, it took quite some time, but we were finally able to win that. And as a part of that process, we did go ahead and extend our commercial card portfolio, which is one of our larger, it's one of our top 3 commercial card clients, so we're very excited about that. Those contracts will be coterminous for 6 years out. So we're excited about that. On the expense side, we're going to work our way through the expenses just like we always had historically. We will capitalize what we can, which is a good portion of it, the rest will expense. We think we can handle that as we go forward.

Darrin D. Peller - Barclays Capital, Research Division

Okay. And that's been factored into your guidance already, right?

Philip W. Tomlinson

Yes.

Darrin D. Peller - Barclays Capital, Research Division

Okay, good. Just one other question for me. On the overall environment -- 2. Well, first on the sort on the midsized and smaller banks, you had some great success, year-to-date, between Huntington and others that I know have been sort of looking into adding -- to growing their credit card portfolio business. Is there a lot of other opportunities like that out there? Because BofA was sort of a once -- bit of a one-of-a-kind large win for you guys. It was a great opportunity that you took it. But now just kind of going forward in addition to that, are we -- should we -- can we expect to see some midsized bank to keep coming down the pipe?

Philip W. Tomlinson

I think, Darrin, I think you can only because, I mean, the banks are under tremendous pressure when you start looking at the revenue stream that has been taken away between Durbin and overdrafts and all of the other things that you're well aware of. Cards is still one of the more attractive products that a bank can offer. And so I think a lot of people or a lot of the -- potential issues -- issuers have been looking at it. We -- I think I said earlier, we've got 4 startups coming along. We've got some very good prospects out there, some large names that you would certainly recognize, and we hope we'd be able to bring some of those to the table in the future. Certainly nothing is for sure but we see more activity today than we have seen in a long time, and I've been saying that all year. The one thing we continue to worry about is this economy in Europe. It's pretty amazing to me that our international transactions have continued to be strong in spite of what we're seeing of the economic news coming out of Europe, and the U.S. numbers are strong. So I fully expect more prospects to come out of the woodwork.

Operator

Your next question comes from Glenn Greene of Oppenheimer.

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

I guess just the first question, maybe you can help us with this, is the -- the pipeline increase. I think you were sort of in the low 30s at the Analyst Day, and now you've suggested 100 million, obviously, a huge chunk of that is Bank of America. So it's actually sort of a two-part question. Is there a way to sort of frame how much of that is Bank of America? But also importantly, the organic growth that you're getting from other prospects outside of the Bank of America win?

Philip W. Tomlinson

Yes, Jimmy, you have the organic growth segment.

James B. Lipham

Yes, and organic growth is still running at 7%. So it's pretty good for the second quarter.

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

I really meant the pipeline additions outside of Bank of America.

Philip W. Tomlinson

Are you talking about our prospects?

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

Yes, yes, the 100 million accounts on file pipeline.

Philip W. Tomlinson

Yes. I mean, we've said 100 million, I think I said there was a few small conversions and some startups for the rest of this year. We had about 20 million accounts deconverted in the first quarter and in the third quarter, we've got another 10 million accounts to be converted, that's all 2013. And then the rest, you can kind of figure that it's mostly BofA. There are some other things sprinkled in there that will happen, but they're not significant.

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

Okay. So most of the increase is really, the large, large part of that, is Bank of America, that increase?

Philip W. Tomlinson

The big part of it is certainly is. I mean 30 million accounts is nothing to sneeze at.

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

Oh, absolutely, absolutely. I wanted to understand sort of your outlook commentary, and understand first of all the delays in the conversions, and also, I guess, the pricing concession, a little bit of color on that. And then I think you alluded to in the press release some benefit offsetting that from the Bank of America win. And I was a little confused by that because I would think the conversion is scheduled from 2014 so you wouldn't benefit from that? So maybe I'm missing something.

James B. Lipham

I didn't -- that's in the press release, I got it.

Philip W. Tomlinson

Yes, we're -- Glenn, what was that in the press release you're talking about?

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

There were some reference to the delayed conversions and the -- it was -- would be partly offset by benefits from the Bank of America conversion. I guess more importantly, if it's not sort of like in front of you or on top of your head, maybe just talk about the deconversion activity, why that sort of happened, and also the large price concession that you sort of called out which seemed like it was not in your guidance.

James B. Lipham

The deconversion was a customer in the International segment.

Philip W. Tomlinson

Yes, we've talked about ABN AMRO, Glenn. We -- I mean, we also -- we did have this pricing was not in our guidance but the -- and neither was the...

James B. Lipham

Delay.

Philip W. Tomlinson

The delays in these 2 conversions. And these were at customer requests. This is not something that we wanted to do. Our customers just weren't ready. They were supposed to go in the -- in late third quarter, early fourth quarter and they're just not ready. It's not a whole lot that we can do about that other than just try to make sure they're ready the next time. We were ready to go. And that happens from time to time. I don't think you should read any negatives into that whatsoever. I mean, it's just part of the business that we're in. These conversions are large and they're expensive and they need to go perfect. We don't want to get -- we don't anyone to be embarrassed and especially our customers. And so, they have the final say on when it gets converted.

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

Yes, okay. And then the pricing concession to the large client?

Philip W. Tomlinson

Yes, you said what that would mean.

James B. Lipham

Yes, I mean that was part of the...

Philip W. Tomlinson

It's a total of $17 million, I think.

James B. Lipham

Well, yes. It was about $8 million worth for discounts in the third and fourth quarter, split between those 2 quarters.

Philip W. Tomlinson

Did that help?

James B. Lipham

It had to do with the extension of the contract.

Philip W. Tomlinson

Did the help you?

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

Okay. Yes, it does help. And then just finally and I think it was a similar question, last quarter similar trends was kind of the revenue yield per transaction in North America was sort of a disconnect relative to the revenue -- the transaction growth was a lot stronger than the revenue growth in North America suggesting the yield. And I think the answer last quarter was paramountal bundling of transactions, was that the same phenomenon this quarter?

James B. Lipham

Yes. There's about 33%, 34% of our transaction are bundled. So you can take about 1/3 of that growth and consider it not reflective of revenue growth.

Operator

And the next question comes from the line of Jason Kupferberg of Jefferies.

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

So I just wanted to make sure we're all clear on the revenue growth outlook for full year '12. It sounds like you're not changing it, the 0% to 2% total revenue growth and 2% to 5% revs x reversible. So I just wanted to confirm that that's the case. Obviously, that implies deceleration in the second half. Is that just because of the client delays and the price concessions? Or what are the other factors that are driving the deceleration in the second half?

Philip W. Tomlinson

That's the answer.

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

All right. I love when I answer my own questions.

Philip W. Tomlinson

We do too.

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

So I mean just a follow-on to that is, if you hadn't had these unexpected delays in price concessions, you would have been in a position to...

Philip W. Tomlinson

We'd raise guidance. Yes, we'd raise guidance.

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

All right. And then any notable change in the trajectory of transaction growth, either domestically or internationally, either on the issuer or the merchant side month-to-date so far in July versus how you exited Q2?

Philip W. Tomlinson

I don't know. Not that we're aware of. I mean, we don't deal with that on a day-to-day basis, but I have not heard anything and -- I do think there is, everything you read in the press says that the consumer -- well, not maybe the consumer but the economy is starting to slow a bit. But if you're like me, you've read so much negative, I don't know. I guess we'll know at the end of the quarter. But we're certainly hopeful that the velocity will at least stay the same.

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

Right, that makes sense. And then just lastly on the tax rate. I think previously, as to the last quarter's call, you guys were thinking 33%, 34% for full year 2012. Is that still the expectation despite the help in Q2? Or does the full year rate now come in a little lower than you had previously thought?

Philip W. Tomlinson

No, that still the rate. 33% to 34%.

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

For full year?

Philip W. Tomlinson

Yes.

Operator

And the next question comes from the line of David Togut of Evercore Partners.

David Togut - Evercore Partners Inc., Research Division

Recognizing you're not going to disclose specific details behind the contract, maybe you could just help us bracket the contract relative to some of the average numbers that we see for your North American card issuer business. So if we were, for example, to just look at averages in terms of transactions for active account and annual AOF fee, calculated on our own, of course. I mean, how should we think of this relative to some of the averages based on the services you'll be providing versus what they'll keep in-house?

Philip W. Tomlinson

Well, I mean, we won't be providing a full array of services, although I'll assure you we'll be trying to sell those services to them. So I think those averages would be down, and I think it's important for you to understand that someone of that size is obviously going to get a little better price than the average guy out there.

David Togut - Evercore Partners Inc., Research Division

Understood. Looking at that contract, you mentioned 30 million accounts in the pipe, is that a pure number for credit card in the U.S. for BofA? Or does that include other things as well?

Philip W. Tomlinson

No, that 30 million I was talking about didn't include BofA.

James B. Lipham

I think you said, excess of 100 million.

Philip W. Tomlinson

Yes, I said we had our total pipeline in excess of 100 million. But I'm really trying to talk about what we have -- we've tried to keep it in a 1 year or 18-month period at the most.

David Togut - Evercore Partners Inc., Research Division

Got it. Okay. And just finally, can you give us some more color behind the drivers and margin expansion in the merchant business in the quarter?

James B. Lipham

Well, it was still some good growth in revenues. And then again, like I said, we had some onetime expenses in the second quarter of 2011, as well as the first quarter, and they helped to bump the margin up a little bit.

Philip W. Tomlinson

Well, I think we also get the benefit of that reduction in force that we had internationally.

James B. Lipham

Of merchant?

David Togut - Evercore Partners Inc., Research Division

Yes, merchant.

Philip W. Tomlinson

I'm sorry. It's international merchant. So that's pretty much what it is. I don't -- you won't have those things continuing, obviously, as we go forward, because they were onetime expenses. Or if you remember, we had that litigation settlement in 2011. There's about $4 million, so that helped the margin a little bit.

David Togut - Evercore Partners Inc., Research Division

Just one quick final question. Any update on HSBC North American card discussions, and when we might hear an answer there?

Philip W. Tomlinson

Well, I think that we're feeling pretty good about that. I mean, we don't have any official announcement, but we're feeling pretty good about it.

Operator

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

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

Can you just give us the card number on BofA, how many cards it represents today?

Philip W. Tomlinson

I can't.

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

Okay, no problem. And then just you said you're going to capitalize some expenses, some of it will get expensed related to BofA. But is there any match with revenues, or will the revenue not come in until cards are actually converted?

Philip W. Tomlinson

Unless they start up some programs, in the interim, the revenues will not come in until they actually get converted.

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

Okay. And then just back to HSBC, so the HSBC North America is not in your 100 million pipeline?

Philip W. Tomlinson

I didn't say that.

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

Okay, okay. That's clear then. And then the productivity gains you guys had in the quarter, which were pretty eye-popping, and you said actually going to continue through the rest of the year. Will that continue into 2013 or is there something you're pushing out from an investment perspective? Or are these truly sustainable on a go-forward basis?

Philip W. Tomlinson

Well, we believe that it's been pretty sustainable for 2 quarters. So unless something drastically happens here in the last half of the year, they should continue.

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

Okay. And then last question. The prepaid card, there's always typically a sequential jump, but it just seemed a particularly large jump in 2Q in the number of prepaid cards. Was that just organic or did you add a new customer?

Philip W. Tomlinson

It's -- it's organic.

Operator

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

Bryan Keane - Deutsche Bank AG, Research Division

Just thinking about the Analyst Day, we talked about the North America segment growing 8% to 10% between '12 to '14. Obviously, now with some of the pushout, it looks like North America segment is going to end up in the low-single-digit growth rate for '12. I assume, then, we're reiterating the 8% to 10%, meaning we're going to see kind of a spike in that number in '13, and I assume with BofA coming on in '14, we're going to see the biggest number in that year, is that correct?

James B. Lipham

Probably. I think so.

Bryan Keane - Deutsche Bank AG, Research Division

But the 8% to 10% growth rate for North America between that period, that doesn't change just because of this pushout, obviously, we're just moving revenue from '12 into '13?

James B. Lipham

That's correct.

Bryan Keane - Deutsche Bank AG, Research Division

Okay. And then, Phil, the prospect pipeline, it sounds like it's relatively healthy. How about some of the big, large deals that you we're working on, obviously, probably the biggest, BofA, was signed. But are there still others out there that you see in the prospect pipeline?

Philip W. Tomlinson

Yes, there are certainly others out there. I mean, obviously, BofA is about as big as you can get. So I mean, there's only 2 larger than BofA that we're aware of and one of them runs on our software and the other is in-house, so we're always working on them. But I mean there isn't a lot of prospects out there around the world.

Bryan Keane - Deutsche Bank AG, Research Division

Okay. And then last question, and just on the merchant segment. Any update on the BAMS deconversion, where that stands this year and into next? And then second part of that, on the merchant segment, revenue per transaction was down a little bit sequentially. Was there any reason for that?

Philip W. Tomlinson

Well, I think that the BAMS business continues to fade away as per our projections. I don't know of anything that is different than that. We still think we've got several more years of that left. Jim, do you have the answer on...

James B. Lipham

The only thing on the revenues, we did have in the first quarter some favorable adjustments that came in from the previous year, about $1 million which could have affected the revenue per transaction which would have made second quarter a little lower. It was an adjustment from December. But outside of that, I can't think of anything else that would have affected in a negative way in the quarters.

Operator

And your next question comes from the line of Tim Willi of Wells Fargo.

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

Two questions. The first question was, I don't know if you have any feel, if you could give us any thoughts on you talked about a bit of a deceleration in same-client transaction growth in North America. During the quarter, I'm just curious, if you have any insight as to whether that was more around your consumer-focused cards or versus commercial? Any thoughts or insight there?

Philip W. Tomlinson

I think it's probably -- I mean the consumer cards. But the slowdown, some of it could have been from the leap year, could have contributed quite a bit of growth in the first quarter that you wouldn't of had in the second. So it could just be number of days.

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

Okay, that's a good point. Probably the early Easter might have helped, as well, the first quarter versus second quarter.

Philip W. Tomlinson

Yes, Tim, this business is still somewhat cyclical. Holidays drive a lot of it.

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

Yes, yes. The second question was on capital. So 2 things, one is in securities, can you give us some update around the -- what you're seeing in the M&A environment, domestic or international, card versus merchant? Obviously, there's a lot of cash on the balance sheet. So I'm curious what you're seeing on the M&A pipeline. And then second of all, obviously, you talked about enlarging the buyback. Just sort of curious around your thoughts around dividend policy, lots of flexibility on this balance sheet right now?

Philip W. Tomlinson

Well, I mean, there are some potential acquisitions out there. I mean, you saw Merchant e was acquired by Cielo in Brazil, that would have been a big win for us. There are several others out there that we're working with and certainly we're hopeful for some success here. I think in the second quarter, I said that if we were not able to do any -- didn't see a way forward to do any acquisitions, that you should look for us to buy $0.01 to $0.02 in EPS for the year. I mean, we will still stand by that. We don't have any appetite right now for a dividend increase. We increased it 42% last year. I don't think that's in the cards for this year.

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

Not another 42% or not a dividend hike?

Philip W. Tomlinson

Not a dividend increase.

Operator

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

Brett Huff - Stephens Inc., Research Division

On the pipeline, again, I'm sorry to beat a dead horse here but I'm -- maybe I'm being a little thick. In excess of 100 million cards, prior number was, roughly, 30 million. That leaves us 70 million of incremental cards that is due to BofA, and what else is in that incremental 70 million? I just want to make sure I'm getting this.

Philip W. Tomlinson

Well, it's BofA and miscellaneous. I mean, we're converting, some people have 100,000 accounts, 50,000 accounts, that we just don't talk much about because it don't move the needle that much. Just let me see if I can say this again because I was afraid it'd make some confusion. But I mean, we've got about over 30 million accounts on file over the next 12 to 18 months. And I've told you about when we expect in the first quarter of 20 million and in the third quarter another 10 million. In addition to -- and those are the big ones, and that's 3 or 4 big conversions. And then you have BofA and then some miscellaneous stuff.

Brett Huff - Stephens Inc., Research Division

Okay, that's helpful. I appreciate that reiteration. The Bank of America option to bring the processing in-house, I mean, right now, we had a JPMorgan that exercised that option, we have a Capital One that has not. What color can you give us on, such that you can, on that particular option?

Philip W. Tomlinson

Well, I think the color I would give you is when we announced the JPMorgan thing, we said they were going to take it in-house at the end of the term. We did keep it a year or so longer than what we expected, but that was always the plan. On Cap One, we said it's a train wreck sort of deal, and we believe it's a train wreck deal with BofA. We don't believe that's their plan at all. But they need -- in case something happens to TSYS, they need an outlet, the need an exit plan.

Brett Huff - Stephens Inc., Research Division

And then in terms of the price concessions, how many -- if you can look in your crystal ball a little bit, what other price concessions do you see coming, A; and then B, are those in guidance or how do you handicap those? The $8 million is a pretty reasonable size that we didn't -- I don't think was on the guidance, we didn't see coming.

Philip W. Tomlinson

I think you're right there. I don't know of any big ones that we've going on now that where we see any significant decreases. We've -- I know of one large deal that we have just completed, it's in the guidance. We just finished this bank that has caused this issue to come up. Our International business is in good shape, our U.S. business is in good shape, Canada is fine. We don't have any huge customers in Mexico and, of course, we only have the one client in Brazil and that's a fairly new contract. So I feel pretty good about where we're at. We don't have anything huge coming up in the next year.

Brett Huff - Stephens Inc., Research Division

Okay. And then I think you said the other $8 million was the deconversion. And, Jim, did you say that was a net number that you got -- that it deconverted, or is it maybe will split in 3Q and 4Q, but that is net of the deconversion fee you're going to get?

Philip W. Tomlinson

Yes, the deconversion fee was about $2 million. And...

Brett Huff - Stephens Inc., Research Division

So essentially, the gross deconversion amount was $10 million, minus $2 million, gives us the net, $8 million?

Philip W. Tomlinson

Correct.

Operator

And our final question comes from the line of Dave Koning with Baird.

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

Is it fair to say that the North America margins that have been kind of the mid-30s, kind of around 34%, 35%, are they biased down over the next several quarters now, just given the pricing concession, and then some cost to ramp the BofA contract?

James B. Lipham

They could drop just a little bit, but I wouldn't look for much drop in it.

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

Okay. And then secondly, on the Merchant Services side, the revenue per transaction has grown a lot the last several quarters, and especially with Durbin. I guess, how do you see that playing out, and are we in a situation that as that falls off, could we see the merchant business going into revenue decline, I guess, later this year, or do you expect that to continue to grow pretty nicely?

Philip W. Tomlinson

I would think it's just going to continue to grow from the volumes that we're seeing. I mean, we'll -- we were asked the question a while ago about Bank of America's deconversion and this is really going according to our plans and what we had forecast. And so we've been pretty pleased with the transaction growth, the organic growth that we're seeing that TSYS is acquiring. And I have no reason other than -- the TermNet affected the first 2 quarters and the revenue growth, so that will, obviously, anniversary here coming in this next quarter, and we really did it in May. So it'll have some effect, but not a whole lot.

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

Okay, great. And then the final question, just the non-operating expense this quarter was a little higher than it's been, at about $2 million. Is that -- what was that, I guess, and is that going to be a smaller going forward?

Philip W. Tomlinson

Currency was probably the major item there as far as the other -- we had -- I guess, it was roughly around $1.6 million or so. Yes. $1.6 million loss there, 6 months.

Operator

Do you have any closing remarks, Mr. Roberts?

Philip W. Tomlinson

I do. This is Phil Tomlinson. We've seen some exceptional results for the first half of 2012 and, as I mentioned earlier, we'll continue to keep a close watch on the economy and the consumer confidence or indicators. We believe we will achieve the high end of our guidance range for net income and EPS for 2012 despite the changes that we've talked about. And I do believe that indicates a real strength for TSYS, and I'm talking about the pricing concessions and the 2 delayed conversions. And again, I want to emphasize that those delays are not at TSYS, they're at a customer's request. I think the performance of each of our segments demonstrates that we're meeting or exceeding expectations and that we're making progress on our vision to be the leading payment services provider. We continue to gain strength in issuer processing, we will continue to expand into direct acquiring in the global market. In late June, the S&P upgraded our credit rating to BBB+ from BBB. I think that's a clear [indiscernible] in recognition of the strength of our financial condition.

And to quote the Beatles, "It's been a long and winding road," but we're thrilled to be working with BofA again.

With that, I want to thank you for your interest in TSYS and your time this evening. And if you have any additional questions, please feel free to call Shawn Roberts at Investor Relations. I know you've got his number. And with that, we'll sign off and say good night.

Operator

Ladies and gentlemen, thank you for your participation. You may now disconnect.

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