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Executives

Shawn Roberts – Director of Investor Relations

Philip W. Tomlinson – Chairman of the Board & Chief Executive Officer

James B. Lipham – Chief Financial Officer & Senior Executive Vice President

Analysts

Analyst for Elizabeth Grausam – Goldman Sachs

Elizabeth Grausam – Goldman Sachs

Analyst for Adam Frisch – UBS

Bryan Keane – Credit Suisse

James Friedman – Susquehanna Financial Group

Glen Greene – Oppenheimer & Co.

Brett Huff – Stephens, Inc.

Total System Services, Inc. (TSS) Q1 2008 Earnings Call April 29, 2008 8:30 AM ET

Operator

Good morning ladies and gentlemen and welcome to the first quarter 2008 earnings conference call. At this time all participants have been placed on a listen only mode and we will open the floor for your questions and comments after the presentation. It is now my pleasure to turn the floor over to your host Shawn Roberts, Director of Investor Relations. Sir, the floor is yours.

Shawn Roberts

Before we get started I want to call you attention to the fact that we’ll be making forward-looking statements about the future operating results of TSYS. These forward-looking statements involve risk and uncertainties. Factors that cause TSYS’ actual results to differ materially from the forward-looking statements are set forth in TSYS’ reports filed with the SEC. At this time I’d like to turn the floor over to our chairman and CEO Phil Tomlinson.

Philip W. Tomlinson

Welcome everybody that’s on the phone. We appreciate you being with us this morning. I know a lots going on. I’m very excited about this first quarterly earnings call that we’re doing as a fully independent publically traded company and we’re really pleased with the way we’ve started in 2008. As you saw in the earnings release last night we’ve done a good job of meeting our goals for the quarter. Total revenues increased 8% quarter-over-quarter, international revenues grew 28%, operating income on a GAAP basis increased 1% and on a non-GAAP basis which excludes the $6.9 million in non-recurring spend expenses which is included in operations, operating income increased 9% quarter-over-quarter. Basic EPS on a GAAP basis came in at $0.29 per share and adjusted for the 2% or the $0.02 per share of non-recurring spend expenses we wound up for the quarter at $0.31 which is exactly where we planned on being.

Some highlights of the first quarter were we signed a new contract with Standard Bank of South Africa to provide card issuing, merchant acquiring and related payment services. Standard Bank has a huge global presence operating in 18 countries in Africa, in 20 countries on other continents including the key financial centers in Europe, the Americas and Asia. We are also very excited about a new relationship with Corporate Lodging Consultants and the recent launch of a very large prepay program. This program already has over $9 million accounts on our system and is growing well ahead of forecast. We also announced the launch of Engine which is a new business paradigm that makes it easy for TSYS clients to efficiently and thoroughly manage complex payment related business needs with a point and click ease. Engine is not a conversion to a new platform, what it does is it just adds a new level of business intelligence that’s made available through analytical based services giving our banks or institutions a total view of their portfolio in order to make actionable well informed decisions on growth opportunities and overall risk which is a huge issue in today’s time. I described it as it’s like adding a new and thicker layer of icing on our cake which is TS2.

Our TSYS loyalty company announced the development of an innovative new product that calculates points and rewards for customers who describe to multiple products with a single financial institution and these products include but certainly not limited to direct deposit or checking accounts, credit cards, mortgages, insurance and CDs. It’s a way to kind of do the total package for loyalty, we’re very excited about that. It’s generated some good interest from the banking community.

Our healthcare initiative is starting to pay off a bit. We announced the successful market launch of what we think is the industry’s most advanced benefits payment system and Fringe Benefits Management Company out of Tallahassee Florida is the first third party administrator to use this solution and it offers their subscribers the ability to pay with multiple healthcare tax advantage accounts such as they can use credit cards or other cash accounts through a single card. Also I hope you saw the press release where after a lot of speculation about what Target was going to do we did resign Target to a new long term contract and we’re very proud that during the quarter we also completed successful conversions of the Capital one and Nationwide portfolio in the UK and as we talked about in the last couple of quarters we did open up the call centers in the UK and we have some start up expenses there which Jimmy Lipham will talk to you more about in detail in just a minute.

We believe our value added products are continuing to play a more significant role for our clients during these tough economic times, they add tremendously to our customers’ ability to analyze their portfolios, to make good, strong, smart decisions and to reduce risk. Value added has continued to be a solid contributor to our revenues and it makes up about 12% of our total revenues today. TSYS Acquiring Solutions had a good first quarter, they continue to maintain strong operating results as they do a really good job of managing expenses while seeking additional and new revenues. Their business was up slightly during the quarter, operating income increased to 26% in Q1 over Q1 07.

That’s sort of the highlights of the quarter. I’d like to turn it over now to Jim Lipham who will give you a lot more details about what’s going on here at TSYS.

James B. Lipham

I’d asked everyone to take a look at the income statement that was included in the press release as I give a little more color to each of these line items. We’ll start off first of all with electronic payment processing and as you can see there we’re up 5% for the quarter that was $11 million. If we excluded the two main deconversions that we had from the first quarter of last year being Chase and BB&T you’d see this revenue growing at 14%. Our revenue growth has really been fueled by great internal growth as before. It’s up 11% for the month, this is the same client processing revenues as we talked about before. For the quarter last year it was up 12, this quarter it’s up 11 so it’s maintaining its growth pattern. New business added 4% of our revenue growth also.

On the account on file basis at the end of the quarter we’re down to 365 million accounts which is down 58 million since the end of the first quarter of 07. This net decrease is mainly contributed, it’s about 130 million accounts total but Chase is roughly 91 million of that as they converted into an in house licensing platform and then we had some other deconversions in regard to Exante Bank on the prepaid platform left us at the end of 07. And of course, I mentioned BB&T a while ago. These losses were offset by new customers that came on board for 18 million accounts and then the internal growth adding another 54 million accounts. So we continue to show good growth internally. Our volumes for transactions and authorizations were impacted pretty strongly by Chase as for the quarter they were down 29% as far as transactions to $1.8 million and down 29% to $1.6 billion. But, when you exclude the transactions that pertain to Chase you’d see growth of 8.5% in transactions quarter-over-quarter and growth in authorizations of 9%.

On an international basis our revenues increased $14.8 million or 28% over last year. We have had some good conversions over in Europe since March of 07 as we’ve added Cap One UK, Nationwide, CompuCredit UK and Barclay card. International revenues were also favorably impacted by a currency adjustments of about $1.6 million. Phil mentioned value added services and they were kind of flat quarter-over-quarter but when you restate the first quarter of last year pulling Chase out of there it would show a 12% growth quarter-over-quarter so we feel real good about the growth in value added as we go forward.

Merchant services, slight growth there, the next line item at 3%. Included in merchant services is the revenues also from GP Net in Japan and just to highlight there they had about a 30.7% growth or $1.5 million and part of that had to do with CPA but half of it had to do with good growth. If you look at their volumes over there the base one, base two volumes are really growing as base one is up 38% from first quarter of 07 and the base two volumes we’re seeing a 19.5% growth there. So, things are starting to happen on the domestic front in Japan.

TSYS Acquiring, revenues for full reimbursed [inaudible] are down slightly for the quarter but when you exclude the impact of the decoversions and the non-recurring revenues from the first quarter last year of Visa, their pro forma revenues increased 2.6%. For the quarter volumes are growing at 4% still down a little bit from where they were for the fourth quarter last year but we do anticipate revenues to stabilize over the remainder of 08. Phil mentioned their operating results and they are very strong for the first quarter of 08 as operating income was up $15 million or 25% over the first quarter of 07. Our margins increased to 27% compared to 22% in 07. Then TSYS Acquiring also had a great operating service quarter both front end and back end as they maintained 99.9% availability. So, outstanding performance there.

Looking back on consolidated other services, revenue as you see for the quarter is up $4 billion or 8% and this is mainly coming from the increased call center business both domestic which is Charming Shoppes and Bank of America mainly as well as a new and existing European business with RBC Nationwide and Barclay. So, those are the big increases there.

Reimbursable items increased 18% for the quarter. This is primarily around the treatment of the court costs as reimbursable items for Total Debt Management. This continues to be a shift from what we’ve done in the past as we changed that contract last year. Total revenue for the first quarter, they’re up $32.1 million if you restated the first quarter prior year for the deconverting revenues you’d see a growth there also of 14% year-over-year.

As we continue down the page, looking at salaries and other personnel expenses you’ll see growth of $8 million or 5.6%. Europe’s rapid growth of revenue impacted employment costs of about $7 million as we’ve seen the headcount grow by 807 people. Sequentially we’ve grown about 627 people during this quarter. Our capitalized salaries and contract expenses helped offset that some as this has grown during the quarter. I might mention on a sequential basis also that this category is up $2.6 million and 1.8% for the quarter. Our consolidated headcount the end of March is approximately 7,550 people that’s up 744 people from March of 07. And, as I noted before on the international we’ve added about 807 people as we’ve opened these new call centers during the quarter for their newly converted call center business there. This 807 people was offset somewhat by a decrease in merchant acquiring headcount of around 67 people.

IT equipment you see increase there of 8% or $5.5 million to $73 million. This increase is a result of a new software agreement we signed, a leasing agreement with IBM in December as well as increased MIPS capacity which we have put in place which drives greater software amortization as we go forward so those were the real reasons for that. Then, you see the spend related expense as we’ve talked before, we had some advisory fees hit in the first quarter as well as the converting of the Sonova stock options held by TSYS employees to TSYS stock options. You might make note that we have not recognized or seen any significant changes in our ongoing operating expenses due to the spend outside of these one-time items. The other expense line is down 10% year-over-year or $5 million and that’s attributable to lower transaction volumes within TSYS Acquiring. The reclassification of these court costs to reimbursable as well as lower TS2 conversion amortization.

Operating income mentioned on a GAAP basis was [inaudible]. I’m going to talk to you in regards to a pro forma number without the spend related expenses since they’re one-time non-recurring. Operating income grew without the spend related expenses 9.3% for the quarter. When you exclude reimbursable our margin for the quarter was 26% and as we stated in our 08 guidance we continue to expect our margins to remain in the range of 25 to 27%. Evident was $133 million on a non-GAAP basis for a 7% increase over 2007’s $124 million. Our Evident margin for the first quarter was 36.91% compared to 2007’s 36.17 and we expect that level to continue as indicated in our guidance. Going forward we realize that operating income and Evident metrics will be important in evaluating our financial performance and we’ll continue to report these amounts to the public.

Other income it decreased $4.6 million for the first quarter and as you know interest expense associated with our long term debt arrangements as well as decreased amounts of cash cause that to drop. Our average debt rate for the quarter was 4.355%. Tax rate was impacted by some non-deductable spend expenses and some discreet items of about $1.1 million made our effective tax rate 36.9% compared to 37.9 last year. And, we typically anticipate our effective tax rate to be around 36% pre discreet items so that’s all in line. Pro forma net income for the quarter increased 7.5% or $4 million to $62 million and our pro forma earnings per share increased to $0.31 up 7.4% over the 29% first quarter last year. I want to back up and make one comment about equity income of investments, a big increase there for the quarter and that increase is strictly coming from Cut Data our and closing out some investment securities that they had so that will normalize itself this next quarter and be back in line. So all that increase was closing out some investments they had and had some gains.

We’ll flip over to the segment information, I want to highlight a little bit on the international based services. As we’ve talked about they’ve invested in the conversions of two major clients Cap One and Nationwide along with the conversion of two more portfolios in Europe operations. With these expenses were budgeted, they are in line with budgets and their significant portions have to be expensed as incurred amount to approximately $3 million. We expect operating results to improve significant as 2008 progresses and we look forward to the roughly $28 million of revenue to be generated by these spend expenses in the first quarter.

When you compare international Q1 07 we also had a bad refund in 07 that reflected in operating expenses of $3.3 million and is not present in 08. So, sequential quarter international operating income is down as a result of start up expenses and some one off revenues in December associated with the seasonality of holidays. When you adjust Q1 for the startup expenses, the operating margin would have been 15.5% compared to the 14.7 we saw in Q1 of 07 when the back tax benefit is removed. I’m hoping that explains our operating margin drop there for the first quarter of 08.

If you flip to the balance sheet I’d just like to mention a few items there. As you can see our unrestricted cash of $243 million and it’s up $32 million since December. Pretty good growth there. The current debt down in the liabilities section of $71.7 million that was the increase of $65 million as the note in Europe for the Card Tech acquisition was $65 million and it comes up in January of 09 so it got re-classed to current. During the quarter we also in the equity section you’ll see we purchased 500,000 shares of treasury stock at the cost of $11 million. Those are the major changes there. We did also fund our employee benefit accruals in the first quarter and that was about $32 million we used there.

When you look at the cash flow statement on the next page you’ll note significant contribution cash generated of $100 million for the quarter as we continue to generate a significant amount of cash to fund investing and financing activities. We also – down below you’ll see where we invested $14 million in profit and equipment mainly in hardware and then we had $4.8 million in software which we split between purchased and developed. We also paid $14 million in regular dividends so far for this year. So very good cash flow.

With that Phil I’ll turn it back over to you.

Philip W. Tomlinson

Mandy, we’d like to open it up for the Q&A session now.

Question-and-Answer Session

Operator

(Operator Instructions) Please hold while we poll for questions. Our first question is coming from Liz Grausam. Please announce your affiliation and then pose your question.

Analyst for Elizabeth Grausam – Goldman Sachs

My question will be on the international channel side. What is the – I know there were a couple of one-time expenses but will there be other one-time expenses going on in 08? And what is the margin profile look at for that division going forward?

Philip W. Tomlinson

Certainly the big expense of starting up these call centers and the conversion expense has been taken care of and I don’t think that would be a real surprise to anyone. As Jimmy said just a second ago we think those margins will get back and become normalized as we go forward through the year. We’ll continue to open up some offices here and there outside of the US but we don’t have any significant expenses planned at this point? Jimmy, if you want to add anything to that.

James B. Lipham

I would add Phil that the normal operations in Europe are still running at 20 to 21% margins and of course, when you put the one-time expenses to it and you put the opening of the other international offices it’s dragging it down right now. But, the normal processing operations were still running at the margins we’ve talked about in the past.

Elizabeth Grausam – Goldman Sachs

This is Liz, sorry I just hoped on. Also on your M&A program can you give us any update around how you’re viewing the European marketplace from an M&A standpoint? And, if there’s anything on the horizon that you’ve been looking at?

Philip W. Tomlinson

I don’t think we have anything that we can talk about this morning. We’ve certainly been doing a lot of looking. There’s a lot of opportunities there, we have looked at several things that we have decided to pass on. We’ve got several that we’re taking a look at right now and they’re not far enough along for us to really be talking about but we’re very active in that area.

Operator

Our next question is coming from Adam Frisch. Please announce your affiliation and then pose your question.

Analyst for Adam Frisch – UBS

We saw an announcement lately of MasterCard building up its IPS offering. What do you think about the potential for associates to move further in to traditional credit and debit card processing markets? And, what do you think of the potential impact this could mean for your business overall?

Philip W. Tomlinson

That’s a hard question. I think certainly I believe MasterCard and Visa will both be looking at other services they can provide. We think obviously this is a pretty unique business that we’re in and I think there’s a good reason why there’s not a lot of people in it. It is a hard business to be successful at and it’s hard to get really good at it and we think we’ve done that over the past 30 years. As an example that’s really the reason that the folks at Cut Data and China UnionPay wanted us as a partner is because of the vast knowledge base that we’ve built up on how to deal with customers and how to manage SLAs and contracts and new business and firewalls between competing customers and all of that. So while I think they have certainly got the cash or the currency to go do most anything they want to do I would think that they would probably think twice before they were to try to get in to our business. But, certainly there’s nothing to stop that. I think probably the biggest issue that someone like that might have is we are basically card brand agonistic and I think that Visa and MasterCard both would have a hard time at least mentally processing each others cards and they may be able to get over that, I don’t know, you’d have to ask them. But certainly I think they’re just like us, they’re looking for more and better services to provide.

Analyst for Adam Frisch – UBS

And in this environment what would you say is an easier “sell” to an issuer? Is it an outsource service that you provide that they don’t use from you that they do in house or use from somebody else? Or, is it a cross sell to one of your existing customers who is already using a TSYS product but sell them another one instead?

Philip W. Tomlinson

Well, I think that the cross sell is always easier because they know you and they’re on your system and you’re selling these value added services and as times get difficult people tend to buy more of these services particularly in these fraud areas and risk areas, collection tools, those sort of things. We’ve always maintained that the sell cycle in this business was very long. I mean, I would say in most cases it’s a year to 18 months. So, to sell somebody and to move them is probably a two year transaction. That’s why we sort of go in spells because it does take so long to move folks. We are very good at moving them but sometimes when you’re trying to sell particularly to people in house it can be a tough sell and it’s usually a tough sell primarily because the cost accounting is a little skewed and it’s not very good. I mean, we can tell folks exactly what it’s going to cost and what it’s going to cost on a future basis and most people that we’re dealing with who are processing in house really don’t have a good handle on what it’s costing them, you know it’s allocated expenses and issues like that. But, we do believe strongly in times like today it does cause people who have been very adamant about in house processing to step back and take a look at any options that are available to help them reduce and contain costs long term.

Analyst for Adam Frisch – UBS

My last question, just real quick just a follow on to Liz’s question, regarding Europe, I know in the past in the US when you were kind of acquisition constrained you had said you looked to buy a domestic debit network, weren’t able to. Now, in Europe we have everything going on with SEPA and all the domestic schemes looking to do something sort of integrate across Europe wide. Could a acquisition of a domestic scheme in Europe be within the range of possibility for you guys?

Philip W. Tomlinson

It could be but I don’t think it’s at the top of our list right now. We’ve got some other things that are ahead of it.

Operator

Our next question is coming from Bryan Keane. Please announce your affiliation and then pose your question.

Bryan Keane – Credit Suisse

Phil obviously the financial markets continue to be impacted by the slowing economy and the credit crunch. I guess I was just hoping to get your latest thoughts on your conversations with some of your larger clients in the quarter and their willingness to spend on card issuance in this environment?

Philip W. Tomlinson

Well, you heard Jimmy’s comments on the new accounts that we’ve added. Our transaction growth continues to be really maybe better than what we expected. We’ve talked about this business and secular trends in this business that it’s virtually recession proof and I was going to talk about this in my wrap up but I’ll talk about it now. We continue to see that although it’s rather interesting, as best as we can tell right now our average ticket size is actually up which kind of surprises us. But then we think a little bit about maybe the price of gasoline and other things have maybe pushed that up a little bit but our transactions are in good shape. Our customers, we’ve got a couple that have publically said that they’ve got some issues but in general I think our customer base seems to be in pretty good shape from what we’re seeing. They’re still adding new accounts. Jimmy, you’ve got those numbers right there in front of you?

James B. Lipham

New accounts, Charming Shoppes is up about 8 million, Green Dot 7.7, Cap One UK 6 million, US Cap One 6 million, Target 3.3 million; good growth.

Philip W. Tomlinson

So we’ve got good growth in the numbers. We don’t believe anything is going to stop there or at least we haven’t felt the affect of it. Like I said we mentioned this prepaid deal that I really can’t tell you anymore about it but we think this thing could be really large, larger than it is. As a matter of fact I was just handled a note and the 9 million accounts that was on my screen this morning has now increased to 11 million accounts and I think my information was about a week old so you can see the increase that we’re seeing there. We’re feeling pretty good. I think I would be naïve to sit here and tell you we’re not worried about our customers. I mean, we’re seeing our customers in the Wall Street everyday and the American Banker with difficult numbers and I think that we worry about that having an effect on us. To date, it really hasn’t had a great effect but what we worry about more than anything and we’ve said this on multiple occasions on calls like this is consolidation. One of these customers will get in trouble in a corporate way and they’ll wind up selling their card program or they’ll wind up selling their company and we struggle with that.

Bryan Keane – Credit Suisse

What about sales cycles in general, have they been extended at all in this environment?

Philip W. Tomlinson

No. If you can get people’s attention in this environment we’ve got a couple of prospects that we’ve been working with that have obviously had so much difficulty in their bank that they’ve had to kind of refocus on whether the bank might survive long term and we’re continuing to sell in to those clients and I think the card business is doing pretty good. I don’t believe that the sales cycle – you know, six months from now I may tell you that is a fact.

Bryan Keane – Credit Suisse

Then the transaction and authorization volumes looked about kind of in line with what you expected. I guess you haven’t seen any change in the consumers I guess transaction behavior? I know you talked about average ticket size up but anything you’ve seen recently that would tell you the consumer is slowing down the amount of transactions that they’re doing?

Philip W. Tomlinson

No, not as of quarter end. I mean we obviously like the transactions to be up 15% and maybe that is a slowdown but they’re up over 8% right now and we feel good about that. We have been a little surprised that the average ticket is up.

Bryan Keane – Credit Suisse

Then just last question, any change in pricing or in difficult times like this do you get any calls coming in from some of your larger clients trying to get a little bit lower pricing due to their financial difficulties?

Philip W. Tomlinson

Well, we get that call all the time. I mean, this is a business where we have to manage our prices very carefully. I mean, we sign long term contracts but people are always trying to get a better price and I think we do a pretty good job on managing that. We think we’re in good shape, we think we’re in good shape with the length of our contracts. We don’t have any major contracts coming up in the next year or so. But, I’m sure we’ll have someone who will walk in and say, “I need some help.” And we’ll do as best we can there.

Operator

Our next question is coming from Jamie Friedman. Please announce your affiliation and then pose your question.

James Friedman – Susquehanna Financial Group

I wanted to ask about Cut Data Phil, looking at the equity income line item it looked like it increased to about $1.8 million from $1.5 million sequentially, that means versus the fourth quarter and that’s about a 20% increase. First, I wanted to verify that that is all Cut Data and second I wanted to get some sense of how many credit cards you might be processing with Cut Data at this point versus say last quarter?

James B. Lipham

The equity line also includes our operation in Mexico and they’ve had pretty good growth too sequentially. But you’re right the Cut Data is a little high because of some investments that they had made and they closed out at the end of the year and the gains and all got recorded here in the first quarter. And, like I said before, that’s going to be some one-time stuff there and it should level itself out as we go forward back to the $1 to $1.5 million range.

James Friedman – Susquehanna Financial Group

Do you have any estimate of how many credit cards you’re processing now with Cut Data?

James B. Lipham

We do but we’re not ready to give that out Jamie.

James Friedman – Susquehanna Financial Group

Okay. I also wanted to ask about the value added services, any comment that you might have about Total Debt Management? What was the performance of that product line in the quarter?

Philip W. Tomlinson

The performance was down a bit for the quarter. We think we’ve signed some new business there, we have had some mild start up expenses on a new piece of business that we’re not really prepared to talk about this morning. But, we think that will be a good win for us long term. In that business as you know, the real sweet spot of that business is the National Attorney Network and some of those deals that we cut there where if you’re going to be in the collection business and you wind up paying the expenses up front it’s an investment on the front end, you get a great return on the back end and that’s where we’re at in that cycle with those guys. But, it was not a great performance in the first quarter.

Operator

Our next question is coming from Glen Greene. Please announce your affiliation and then pose your question.

Glen Greene – Oppenheimer & Co.

The first question, just looking at the accounts on file and I think you alluded to this on the call but I just want to get clarification on the sequential drop in the stored value accounts. I think you alluded to a deconversion that may have happened at the end of the third quarter?

Philip W. Tomlinson

That’s right. We did have a deconversion that was planned, it was a large retailer that took their program in house. They’d really been trying to get it in house for quite some time and that has been delayed on two or three occasions. It did happen, I think it was 16 to 18 million accounts if I recall. Gift cards, it wasn’t a regular prepaid card, it was a gift card program for a national retailer that they did take in house.

Glen Greene – Oppenheimer & Co.

Any way you can sort of give us some color on the revenue per card or the profitability per card so we’ve got some sort of idea of how to think about it going forward? Or, at least relative to the base business?

Philip W. Tomlinson

I think it’s fairly insignificant. We’re going to be a lot better off with this new piece of business, it was about $250,000 a month as I understand it.

Glen Greene – Oppenheimer & Co.

So, not that big of a deal.

Philip W. Tomlinson

It’s not that big of a deal, we’ve replaced it with something that is certainly much richer.

Glen Greene – Oppenheimer & Co.

Okay. Then looking at the margin for both domestic and international and I know you had a lot of comments on each of them but the domestic was really strong with 30%. I was wondering if there was anything unusual in the quarter or is this sort of a sustainable level going forward? The converse on the international I know there are a number of moving parts, the startup costs and I guess there was refund in the year ago quarter but I was wondering if you’d just sort of go through that and sort of help us understand the direction of each of the margins.

James B. Lipham

I think the margins in the US are sequentially pretty close they were in the 30% range and that’s what we’ve been seeing and a lot of that higher margin comes from scale and the value added services. I mentioned in Europe that the normal operations were still in the low 20s as far as margins go and obviously depressed in the first quarter with the startup expenses. You had some one-time stuff in the first quarter of 07 with the [BAT] about $3 million worth of [BAT] refund tax. We expect Europe to get back to the normal level of margins around the low 20s and hopefully as we go forward the scale will pick up as it gets bigger.

Philip W. Tomlinson

I think you heard Jimmy wonder about the number of people that we added in the first quarter, in the first and fourth quarter which is pretty massive for this startup that we had and as I’ve told on previous calls this deal that we’ve got with Nationwide which will take them to a top 10 customer as opposed to a top 25 customer where we’re doing everything from soup to nuts from the credit approval down through the customer service, collections, settlement and the whole operation of their credit card program. It just takes people to do that and we feel very good about where we are at there. We had a couple of bumps, minor bumps I would say in the startup because we had so many new people but I think we’ve done a great job of bringing that up and I think that our customer is well satisfied with it now and it is running well.

Glen Greene – Oppenheimer & Co.

On the Cut Data venture, I know that Jamie tried to get some metrics on this but is there any way you can sort of talk about where you are in the process? Is this sort of still a few years away before this becomes a viable sort of credit market? And, any color on the number of issuers that are involved here at this point that are signed by the venture?

Philip W. Tomlinson

It’s pretty interesting, we went on our road show in early December, out of the last 50 RFPs that have come out in China we’ve won 48 of them which is a pretty darn good batting average if you will. Everything is a startup in China, I mean they just still are learning about credit cards, it’s a chicken and egg issue I mean we didn’t have the acceptance to begin with. I think the Olympics as advertised has certainly helped the acceptance. I think people in China do want cards and it’s starting to crank up but I think to be perfectly honest with you the government certainly is not going to allow a massive issuance of cards. That’s just not the way they do business and I think it will be a slow start up and I think we are at least a couple of years out before we see any significant revenue and income from there. We still are very bullish on what’s going on in China. We feel good about where we’re at and we think it’s getting better every time we take a look at it. We just had a board meeting 30 days ago, everything was positive. For our board meeting in July we have their chairman coming over to make a presentation to our board which we think is going to be a very special deal and we’re excited about that and our relationship is in great shape. So, we’re feeling good about it. We’re optimistic about where the Olympics are, that’s coming up late this summer and hopefully that’s going to help this card cause.

Operator

Our next question is coming from Tim Willi. Please announce your affiliation and then pose your question.

Tim Willi – Avondale Partners LLC

I apologize if this was already asked I got distracted here for a second but I was wondering if you could talk about in the prepaid industry in general you continue to see lots and lots of bullish stuff about the industry, lots and lots of people also chasing it with different angles and flavors of their offering. I guess I’m curious just thinking about the profitability curve of that business if its one that you see changing markedly over the next several years? Do you see people exiting the space? Do you see a lot of opportunity to consolidate that space to sort of maybe help that cause?

Philip W. Tomlinson

It’s a really interesting question and it’s one that we ponder around here at lot. As you know we have not made a lot of money on prepaid but we’re still bullish about it and what’s going on is exactly what you said. I mean, it appears that everybody and their brother is in the prepaid business and I mean there are a lot of people operating prepaid cards basically out of their garages and we think that’s going to have to change. We think there will be a pretty big consolidation in this business. We think we’re advantaged there because we do have these harden computer centers, we do have a lot of really strong data security and as people start figuring this out and as this business continues to grow I think it will be very much like a lot of businesses that you’ve seen in the past it’s going to have to consolidate and that’s why we’re working so hard to try to – we’ve moved our operations and data center out of New York and New Jersey down to Alpharetta, we’ve saved a lot of money doing that. We’ve added some really strong new people to the team.

We’re feeling better about it but the business in general is a very fragmented, just as you described, I mean there’s a lot of people chasing it and certainly we plan on being a winner in that business as time moves on. We’ve had to learn the business, it’s certainly not the traditional card business that we have know and we’ve won some big deals like this one I was talking about earlier. I don’t think that you can win those kinds of deals and be operating out of your garage, you’ve got to have a real business to be able to do what we’re doing there. We’ve been very involved in the Walmart transaction with Green Dot and GE. That’s been one of the real success stories in the prepaid business. I saw this morning I think First Data bought a prepaid company that I’m just not real familiar with. But, it’s a business I still believe has a future long term there are just too many people particularly in this country that are unbanked that want card and when you look at what happened over the Christmas holidays with gift cards and prepaid cards it’s pretty amazing really and I just look at myself, I wound up with about three as gifts and they work pretty well.

Glen Greene – Oppenheimer & Co.

If you could just add on to that comment, any thoughts you have about prepaid in an international marketplace versus domestic capabilities you have or don’t have? Is it an issue? I mean I’ve seen and I think there’s a consensus that parts of Europe are probably multiple years behind the US in terms of gift cards and prepaid cards?

Philip W. Tomlinson

We’ve been pleasantly surprised at the activity we’ve had in Europe. We’ve got a prepaid operation that runs out of our center in York and we’ve had a lot of activity in places like Spain and the UK and we’ve done some really neat products there, some that I believe are certainly much more creative than what we’ve seen in the US. I think in answer to your question I think there’s a big market there and we certainly play in the European market. We’ve been pretty wrapped up with some of this traditional card business that we’ve got but we feel good about that. Speaking of that I did want to mention while we’re talking about Europe that this Card Tech acquisition continues to be a really big win for us. It has created much more enthusiasm and activity than we had expected and we believe that we’re going to continue to win some good business and process it on the prime software. That’s really what we’re going to use with the Standard Bank of South Africa and do the 18 countries in Africa. We’ve got several other deals to be announced that are really multiple countries and its really turned out to be a more exciting acquisition or product line than we had anticipated. I just needed to get that off my mind Tim, I’m sorry I hope I answered your question on the prepaid business.

Operator

Our next question is coming from Brett Huff. Please announce your association and then pose your question.

Brett Huff – Stephens, Inc.

Most of my question have been answered, just a couple of color questions, number one you all had talked about doing some work on your debit product maybe coming to fruition later in the year, is there any update on that?

Philip W. Tomlinson

Yeah, that product is right on line and I’m sitting here and looking eyeball to eyeball with our CIO who is shaking his head yes so I’m feeling pretty good about where we’re at there. We think we’ve already got a customer or two lined up and we think it will allow us to offer a competitive debt product and it will also allow us to do this decoupled debit that there’s been a lot of conversation about. So, we think that is on track and on line and we’re feeling good about it.

Brett Huff – Stephens, Inc.

Then on the Standard Chartered win can you give us a sense of how that phases in? Will it be soon this year, late this year? Can you size the total amount of impact and when that might occur?

Philip W. Tomlinson

I think it will be in the third and fourth quarter of this year, the conversion. I was just told we’re already operating in Uganda which is not a lot of cards in Uganda but we are operating there and that is certainly a first for us and what you’ve got is a staging of these 18 different countries.

Brett Huff – Stephens, Inc.

Just a follow up question on that is, is this a foothold to sort of more of the Standard Chartered business? Or, what are your thoughts on that?

Philip W. Tomlinson

Well, we think it is. We believe that we’re going to wind up doing a lot more business with Standard Chartered, they are just a great organization and we’re very excited about our relationship with them. We’ve started to really do well in South Africa. As you know, we have the joint venture on the call business in Europe with Dimension Data out of South Africa also so we’re pretty excited about what’s going on there.

Brett Huff – Stephens, Inc.

That’s helpful. Last question, just looking forward in terms of adding accounts on file, how do you see the additions of accounts on file splitting out between the same store sales or how you guys define organic versus the new business? Will it be similar to what we saw this quarter? Or how do you see that planning out?

Philip W. Tomlinson

Well, our best guess right now is going to be similar. I mean, you read the papers every day, it was up 12.9% for the year so far. We think it will continue but that’s – the world is changing every day.

Operator

(Operator Instructions) Gentlemen we have no further questions at this time.

Philip W. Tomlinson

I wanted to close it out with just a couple of comments. We do feel really good about our first quarter. As you can imagine we’re really excited about our future and we’re certainly going to continue to focus on new revenues, operating income and margins. We’ve got a great experienced team here, we’ve got a lot of really positive things to help us reach our growth objectives. You’ve heard me say this before but giving the difficulties the economy is experiencing today we think our story is more compelling than ever. With TSYS you get a great play in the global credit markets with really no credit risk. We continue to win blue chip clients as evidenced by what we told you this morning. These clients sign long term contracts. We have a great recurring revenue model, we have a very strong double digit organic growth, we’ve got really great free cash flow. Secular trends in this industry are positive, card usage is growing stronger and stronger and again, we get paid by the unit measure and history basically shows that this business is virtually recession proof. I would thank you for your attention and interest today. We appreciate your support and look forward to hearing from you in the future. If you have any follow up questions, don’t hesitate to call or email Shawn Roberts in our investment relations department. We thank you again and hope you have a great day.

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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Source: Total System Services, Inc. Q1 2008 Earnings Call Transcript
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