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Total System Services (NYSE:TSS)

Q3 2012 Earnings Call

October 23, 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

Roman Leal - Goldman Sachs Group Inc., Research Division

Ashish Sabadra - Deutsche Bank AG, Research Division

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

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

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

Ramsey El-Assal - Jefferies & Company, Inc., Research Division

Craig J. Maurer - Credit Agricole Securities (NYSE:USA) Inc., Research Division

Brett Huff - Stephens Inc., Research Division

David Togut - Evercore Partners Inc., Research Division

Kevin D. McVeigh - Macquarie Research

Operator

Good afternoon. My name is Catherine, and I will be your conference operator today. At this time, I would like to welcome everyone to the TSYS Third Quarter 2012 Earnings Conference Call. [Operator Instructions] After the speaker's prepared remarks, there will be a question-and-answer period. [Operator Instructions] As a reminder, ladies and gentlemen, this conference is being recorded today, October 23, 2012. Thank you. I would now like to introduce Mr. Shawn Roberts, Director of Investor Relations. Please go ahead, sir.

Shawn Roberts

Thank you, Catherine, and welcome, everyone. On the call today, our Chairman and CEO, Phil Tomlinson, will provide highlights on the third quarter of 2012. And then he's going to turn it over to Jim Lipham, our CFO, who's going to review our financials. After that, we'll open it up for the Q&A.

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

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

Philip W. Tomlinson

Thanks, Shawn, and good evening, everybody. We have a big crowd on the phone tonight. We appreciate that. We're certainly happy to report good results and an overall strong performance for the quarter. We had double-digit operating income growth of 12% over the third quarter of 2011. Our earnings per share was $0.32 for the quarter, an increase of 5.7% quarter-over-quarter. Total revenues were $484.1 million, up 1.8%, with this increase being somewhat tampered by a decrease of $7.6 million in reimbursable items.

For the quarter, we also saw good increases in transactions. Our same client transactions from our issuer processing business were up 10.1% over last year. Same client transactions in our North America segment were up 9.9% and 11.4% for International. Point-of-sale transactions in our indirect merchant processing business, excluding deconverted clients, was up 9.5%. As you know, during the quarter, we formed a joint venture with Central Payments, really, to strengthen our sales distribution channel in the direct merchant acquiring business. And as we've said, we'll continue to diversify more into the direct merchant acquiring business.

For the third quarter, our direct business represents 48% of our merchant business compared to 38% for the same time last year. Sales volume in the direct merchant business was up 20.5%. When you exclude the impact of the C Payment [ph] acquisition, sales volume in the direct merchant business was up 15.6% quarter-over-quarter for this quarter.

As you read every day and as we know, there's more innovation and different things happening within the payments industry than I've seen maybe in the past 30 years. It's a really busy time. We have active dialogue with many new entrants and nontraditional players. We have a number of initiatives underway, including making investments through private equity funds to helping young companies entering the payments space. We're also forming partnerships with companies we feel will add incremental value to our clients and the customers we serve. The latest example of that is a partnership we recently announced with Truaxis, which will integrate our client's cardholder spending patterns and behavior to deliver personalized rewards and offers. As you know, Truaxis was recently acquired by MasterCard, and we are really excited about our agreement with them.

I want to take just a few minutes and give you a brief update on some highlights from our 3 reporting segments. Let's go to North America first. The heavy lifting is really underway with the Bank of America conversion process that we expect to be complete in mid-2014. We continue to see success with our outreach to community banks and credit unions to offer end-to-end credit card management services, which we call TPS, and have signed agreements recently with Heritage Bank in Georgia and St. Mary's Credit Union in New Hampshire, which, by the way, is the oldest credit union in the U.S. So we have the largest credit union in the U.S., Navy Federal, and then we have the oldest credit union in the U.S. with St. Mary's Credit Union. We extended our contract with Redstone Federal Credit Union for 4 years and with Synovus and CB&T for 7 years. The Barclays and Regions consumer portfolios were successfully converted. We have approximately 100 million accounts in the conversion pipeline, which we expected to be converted by the end of 2014. We continue to see account on file growth. It was up 20.9% from the third quarter a year ago. Transactions for the quarter were up 9.5% for the year, the 10th quarter in a row of year-over-year quarterly growth.

Now we'll move on to International. We continue to make good progress on our margin improvement program. And I think, as we've said before, you'll see some ups and downs in that. But we've got a good get well program there, and we have a keen focus on the revenue and expenses for that segment. We are optimistic about our progress.

During the quarter in Europe, we signed SpareBank 1 in Scandinavia, which really solidifies our position as the leading provider in the Nordic region for licensed card management solutions. Additionally, we have key prospects we are hopeful to sign. Brazil continues to show progress and growth with our anchor client Carrefour, and our prospects continue to bode well for us down there. And we think there's great opportunities for added fraud and risk products.

Our PRIME licensing pipeline remains strong with multiple upgrades and new clients in the Asia Pacific, Middle East, Africa and Russia, and these include -- new signees include the QNB, [indiscernible] Bank. It's a multinational rollout for the Qatar National Bank. A pan-African bank rollout with Ecobank in our second client in the Central Asia region. In India, we have a major PRIME 4 upgrade for ICICI Bank, so on track to go live very soon.

And we've launched our first store pilot in Delhi under the visa universal ID program, which we are running on behalf of them -- on their behalf. We have also -- as a part of that, we're providing the identification software to provide the Universal (sic) [Unique] Identification Development Authority of India the backbone infrastructure required to expand financial inclusions to millions and millions of people across India.

Our relationship with CUP Data is expanding with the launch of CUP brand in prepaid cards in select markets around the world. We're very happy with that relationship.

And I'll take just a minute on the Merchant segment. As I said earlier, in August, we formed the joint venture with CPAY out of San Rafael, California, which has been named one of the fastest-growing private companies in the Inc. 5000 list for the third consecutive year. CPAY adds another dimension to our direct merchant business for more than 800 active sales agents focused on signing small businesses. CPAY's pay-for-performance model is really effective in recruiting new agents and is great for getting the business signed.

On the indirect processing side of the business, we signed new agreements with Optimal Payments, Integrity Payments and MLS Direct Network. We also renewed contracts with, of any size [ph], Merrick and BB&T, and that's 2 of our top 5 clients in the processing side of the business. In addition, we signed an agreement with Google to provide merchant funded rewards using transaction data based on consumers' buying behavior with our company out in TP on the merchant processing side.

Now I want to turn you over to Jim Lipham, our CFO, who will review the details of this quarter's financials. Jimmy?

James B. Lipham

Thank you, Phil. Before we get into the slides, I'd like to make a few comments. As Phil said, we were very pleased with our double-digit operating income growth for the quarter at 12%. And as you can see from the statements, about a single-digit growth of net income and earnings per share didn't carry through the bottom line. And I wanted to -- it was because of the income tax line and the equity income line for CUP Data. They both negatively impacted our year-over-year results.

So for taxes for the quarter, they were, last year, for the -- last quarter [indiscernible] as we had favorable taxes because of discrete items. It's the same thing that happened last year in the third quarter. We had about $6 million of discrete items that hit during the third quarter of last year, and it caused our tax rate to be about 400 basis points lower than it was for this third quarter of 2012. For the year, we're still expecting our income tax rate to be in the 32% to 33% range. So it's just discrete items and the timing of when those things hit. As you look at the year-to-date numbers, you'll see that our double-digit growth in operating income did flow through to the bottom line, so it's just a novelty for the comparison of this quarter.

The other one had to do with CUP Data. It's net income, as we talked about it before, where we had CUP data last year in line with GAAP, and we had to defer some revenues into the third quarter of last year, which made those numbers higher by about $2.5 million. So that's now over and done with. Going forward, we should be fine. And what we said before is CUP Data will contribute 19% to 20% this year-over-year growth, and we're still on track to do that. So now that the quarter's over, we'll be able to compare favorably going forward.

On Slide 6, if you just look at the consolidated results for the quarter and year to date, when you look on the left side, revenues before reimbursables were up 4.07% or $15 million at $406 million. It's still very good growth for the quarter. As Phil mentioned, the transactions showed up well. Same client transactions were up 10.1%, and we continue to see good growth there.

Operating income was up 12%. We were able to hold the line on expense growth, a little over 2% or right at 2%. So we had pretty good growth -- I mean, pretty good control on expenses, which allowed our operating income to grow at 12%. When you get to net income attributable to shareholders, you'll see it's at 3.7% growth of $60 million, and that's because of the taxes and the CUP Data earnings that flowed through. I mentioned also that operating margin for the quarter is 22.38%. It's up 157 basis points over where it was in 2011. So we feel pretty good about the quarter, up -- we had $0.32 a share, up 5.7%.

And Phil mentioned, we did have CPAY in this quarter for the first time. Year to date, if you look at revenues for reimbursables, up 5.9% or up to $1.2 billion and still very good growth there, internal growth of 5.8%. And we'll talked about on the next slide a little bit more about how we got the 5.9% growth.

But operating income is up 15.1% at $267 million. We were able to hold expense growth for the year, 9 months, at 3.5% growth. So it's allowed us to have a good, positive productivity year so far and did grow in our operating income, which flows through to our net income at growth of 14.1% and year-to-date $0.97 per share. So this offset the quarter and the first 9 months.

If you flip to the next page, we'll talk about the growth and revenues for the year so far, year to date. And as you can see, internal growth accounted for 5.8% growth, and then new clients have added 3.1%. And then in the acquisition, we talked about this 1.4%. Our total is 10.3% growth for the 9-month period, and then we've given up some revenues based on currency and lost business and price compression of 3.9% to get us back to a 5.9% growth in revenues for the 9-month period. So all along, good growth in revenues, and we look forward to continuing to anniversary the price concessions and the lost business.

On the next slide, we'll go into the accounts on file. We continue to show growth year-over-year in all of our account on file categories. And Phil has mentioned the close to 100 million accounts we have in the pipeline. And we still maintain a segregation here about prepaid and commercial card as they continue to show year-over-year growth of 50% and contribute to the 18.9% growth in accounts on file. But the growth prior to that of commercial and consumer being at 8.6% is pretty much in line with where you see our revenues year-over-year. We've got about 35% of our accounts at our own bubble transaction. So that's pretty much in line with what you've got in growth in revenues at 6%.

Next slide is North America. Just to reiterate here, revenues for reimbursables were actually down $2.6 million or 1.3% to $203.5 million. And the decline included about $17.3 million of combination of deconverted clients and price concessions. And we talked about some last quarter about price concessions coming onto to the BofA contract. The decline included also roughly about $5 million of new business and small organic growth of about $11 million. So it's pretty good organic growth quarter for us in North America.

The segment operating income is $69.6 million, up 2.3%, and the margin was 34.2%, an increase of 118 basis points over last year's third quarter. So still good operating performance here in North America even with our renegotiated contracts.

When you look at the volumes, you'll see total accounts of 413 million, up 20.9%. Good growth there. If you exclude the prepaid, we're at 9.7% and still good growth at 264.1 million accounts. Cardholder transactions, 9.5%, not quite double-digit but still very good growth. And same clients also up at 9.9%.

Flip over to International, next slide. You see revenues for reimbursables. They're up $2 million dollars or 2.1% at $98.2 million. During the quarter, we did have a termination fee that helped out and was partially offset by about $7 million in pricing concessions and lost business, but the internal growth of $3.9 million was up about 4.1% over the previous year quarter.

Segment operating income was $7.7 million. It's down 6.7%. And the operating margin was 7.9%, which is a modest decrease, about 74 basis points over last year's third quarter. Looking at account on file, at 53 million, it's an increase of 4.9%. It's good growth there. Cardholder transactions up 15%, which is showing some of the conversions that we've had since the third quarter of last year, and it was down on transaction growth.

International is in good shape. Going over to the merchant segment, you'll see revenues for reimbursables are up 15.6% and $107.9 million or $8 million. CPAY is in this number and represents -- revenues without CPAY are up about $7.4 million or 7.9%. BAMS was in here for about $2.9 million being deconverted or offset that allows for the quarter and is offset by direct growth and acquiring of about $6.2 million outside of CPAY. Internal growth for the quarter was 3.2% or 3.4% -- 3.2 million or 3.4% for the quarter.

The $107.8 million in revenues for reimbursables, like Phil mentioned, is approximately 48% we're associated with the direct portion of the business, and 52% was with the indirect. And in the Q3 of 2011, that was actually 38% and 62%. So we've actually increased our direct business about 10% of our mix.

Indirect transactions, they were down 2.7%. And transactions without BAMS, that has been up 9.5%. The direct acquiring sales volume was up 17.4%. And if you excluded the CPAY, it would've been up 9.3%. So good growth in our transactions outside of deconversions, as well as good growth in the dollar volume on the direct business. Operating income was up 26%. Operating margin before reimbursables was at 32%, up 263 basis points over Q3 of 2011. So Merchant's had a good quarter.

Next page, [indiscernible] a little bit about our cash flow. And we have had very strong cash flow for the quarter with $130.6 million from operations and $103.9 million of free cash flow. As you can see at the top, I mean, of this chart, the trailing 12 months,, cash flow from operations was $472.6 million, and free cash flow was at $356 million.

We continue to generate EBITDA, good cash with EBITDA at $529 million over the past 12 months. Cash at the end of the quarter, you can see, was at $357 million. That's an increase of $40.3 million since the year end. And this was mainly taken away from the operating activities as dividends and our debt payment and obviously, the acquisition of CPAY.

We did purchase 2.6 million shares of our stock in the third quarter. It's been about $61 million. We currently have 7.7 million shares remaining in our plan to buy through April of 2014. We plan on continuing to deploy our capital through these acquisitions or share repurchases as we go forward.

We did complete our new credit facility in September, and that included a $150 million term loan over 5 years and the revolver of $350 million. And we did have 9 banks. A majority of our customers participate in this credit facility.

On the next page, a new chart we put in for deployment of capital for the last 2 years and 9 months, as you can see, for 2010, '12 and where we are year to date through September, just to highlight the acquisitions there and the share repurchase, as well as the dividends. We do have another dividend payment coming in, in 2012. But there will be some acquisitions that we continue to look at that can possibly happen also. But ideally for this period of time, you can see that we've deployed roughly $815 million in acquisitions and share repurchases, as well as dividends. This compares to a free cash flow over this period of time about $760 million. So we basically dipped in to our cash reserves about $55 million, above our free cash flow over this 3-year period. So good deployment of capital.

In the last slide, I'll just highlight again, as I've shown before, shareholder return for the 9 months, very good at 22.7% and the trailing 12 months of 42.35%. So good growth and still showing good shareholder return.

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

Philip W. Tomlinson

Thank you, Jimmy. I appreciate it. And Catherine, we'll open it up to questions now.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Roman Leal Goldman Sachs.

Roman Leal - Goldman Sachs Group Inc., Research Division

So first, on North American Services, can you just remind us or can you give us an update on the rollouts of those 2 accounts that were first out to 2013? Is that still scheduled for first quarter and third quarter of next year?

James B. Lipham

That was for the conversions that we have scheduled here into the fourth quarter of this year, and they have been pushed out until the third quarter of next year.

Roman Leal - Goldman Sachs Group Inc., Research Division

Okay. So no update there? It's still kind of as planned?

James B. Lipham

Right.

Roman Leal - Goldman Sachs Group Inc., Research Division

Okay. And then in International, what was the deconversion fee? And just curious on what happened with the -- on the cost side, perhaps, given where the margins ended up this quarter despite that deconversion fee.

James B. Lipham

The deconversion fee is pretty much like it was for the last quarter that we talked, and there are costs associated with that, that are -- the one out of the P&L every quarter, too. They were amortized costs that were booked on the balance sheet, and they will be offset against the revenues. But it's not that net number is more. You've got to record it in the reduction of expense to go along with the reduction of revenues. It will be finished this year. I mean, this is one of those times where we had to amortize it over the end of the year up to the end of the year. So you had part of the deconversion fee in the last quarter. You had part of it in the third, and we'll have some more on the fourth.

Roman Leal - Goldman Sachs Group Inc., Research Division

Got it, okay. That makes sense. One last one. On the acquisitions, obviously there's still -- there's a lot of potential, I guess, targets for you out there, especially on the merchant acquiring side. Just curious, what types of deals are you looking at? Obviously, it's on the direct side. But are you looking at e-commerce versus more of a traditional play, international, domestics? Just help us out there.

Philip W. Tomlinson

Well, Roman, I mean, we've been talking to a lot of people over the last couple of years, and I would say that we're looking at most anything that comes up. Some of it, we don’t look at it very hard. But obviously, we'd like to be more in the e-commerce business. We would certainly like to take a look at international. There's some properties here in the U.S. that we would be interested in that come up from time to time. So I mean, we're open minded, but certainly, e-commerce would be one of them.

Operator

Your next question comes from the line of Bryan Keane.

Ashish Sabadra - Deutsche Bank AG, Research Division

This is actually Ashish on behalf of Bryan. I had a quick question regarding the North American segment. So you saw some -- you highlighted the pricing pressure from the Bank of America, signing the Bank of America deal. How should we think about pricing pressure going forward considering that Capital One renewal annual will be in the third quarter but you also had a few more renewals? How should we think about the pricing pressure going forward over the next couple of quarters?

James B. Lipham

I think over the next few quarters, you'll see pretty much the price concessions just like you've seen it as we go and anniversary what we have done with the Capital One, as well as BofA contracts.

Philip W. Tomlinson

And Cap One anniversary is...

James B. Lipham

I think it's in...

Shawn Roberts

October.

Philip W. Tomlinson

The anniversary is this month.

Ashish Sabadra - Deutsche Bank AG, Research Division

Okay. So hopefully, the pricing pressure should decline or in a sense, the pricing pressure -- the headwind from the pricing pressure should decline going forward because Capital One anniversaries and then you just have the one big Bank of America and obviously smaller ones over there.

James B. Lipham

Correct.

Ashish Sabadra - Deutsche Bank AG, Research Division

Okay. International segment, we just saw the AOF trending down. How should we think about the AOF going forward? Do you expect them to maintain this level or go up, down going forward? And the drivers for those?

James B. Lipham

Well, we continue to have some good prospects in the International segment. So I would say that, that, with respect to the account on file numbers, to go up.

Ashish Sabadra - Deutsche Bank AG, Research Division

Okay, that's helpful. On the Merchant side, a quick question. On the CPAY JV, we -- if I'm correct, there was $7.2 million contribution from the JV, and that's only for 2 months. And then going forward, we'll get a full quarter of benefit from the JV -- or the acquisition. Is that right?

James B. Lipham

That's correct.

Ashish Sabadra - Deutsche Bank AG, Research Division

Okay. And just one final question on North American segment. Any color on the demand for project-based or Value-Added Services?

Philip W. Tomlinson

Could you repeat that question?

Ashish Sabadra - Deutsche Bank AG, Research Division

Yes. Just any color on the demand for project-based or Value-Added Services in the North American segment?

James B. Lipham

Demand.

Philip W. Tomlinson

Yes, that demand has stayed pretty strong.

James B. Lipham

And our project revenues continue to be a surprise every quarter. So continuing to be a good source of revenue.

Operator

Your next question comes from the line of Steven Kwok.

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

Just had a question around the operating margin. Is this seasonality around that line? And also with regards to decrease in the International Services operating margin, are you still comfortable with getting back to that 20% by the end of 2015?

Philip W. Tomlinson

Yes, we still are.

Philip W. Tomlinson

We're comfortable with that. And yes, there is some seasonality to this business, particularly when you consider that we get a lot of our revenues based on the transaction business, when you start thinking about the cardholder business and the traditional Total Acquiring Solutions, which is a processing business as opposed to a direct merchant acquiring business. As the seasons go, I mean, you can track them really every year over the past 30 years. Like we have just gone through a month or so ago, the back-to-school season. You have the holiday season coming up right after Thanksgiving, which is absolutely the biggest of the year. And different holidays generate more transactions and more volume than others, but it is somewhat seasonal.

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

And could you just talk about which quarter you have the highest in terms of operating margin and which ones the lowest?

James B. Lipham

So the fourth quarter would be the highest operating margins.

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

Sure. And the lowest one would be...

Philip W. Tomlinson

I think it's the first.

James B. Lipham

Well, be the first quarter.

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

Okay. And then in terms of the tax rate, I believe you mentioned the range of 32%, 33% for 2012.

James B. Lipham

Right.

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

What sort of bench should we use for 2013?

James B. Lipham

Well, we haven't kind of got our guidance together on that yet. But I don't know that we will deviate too much from where we are.

Philip W. Tomlinson

And we're worried about what's going on in Washington, too.

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

Understood. And finally, just speaking on the guidance, is your guidance unchanged? I didn't see the guidance in the...

Philip W. Tomlinson

No, we're staying with our guidance. We think we'll be on the high end of our guidance.

Operator

Your next question comes from the line of Greg Smith.

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

Can you just talk about the card link offers, the deal with Truaxis. Is this something that could become a material revenue contributor for you?

Philip W. Tomlinson

Well, we think it's another value-added product. We really like what those guys have. We think they've got a really good mousetrap, and I guess only time will tell on that. But we believe that's a great product, and we're excited about our partnership with them. And we like them, and we think it's got a lot of potential.

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

And then just shifting to CUP Data, should we expect sort of steady growth there? Or are there any potential inflection points coming up where we could see that accelerate?

James B. Lipham

I think you're going to have steady growth. I think, like I said, after we got through this third quarter comparison, you'll anniversary now, and we'll be seeing some good growth. And we're still shooting at 20% year-over-year growth in '12 versus 2011.

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

okay, great. And then just looking at your merchant acquiring business broadly in the U.S., there's obviously new competitors. You talked about just a little bit about potentially partnering with new competitors or even investing, but do you feel like the business is under siege in any way? Or do you feel flip it and see more opportunities than you have in the past? I'm obviously talking about things like Square and other players entering Groupon. Just how are you feeling about the business and your opportunities overall?

Philip W. Tomlinson

Well, I think we've got great opportunities. We've got the ability to go out and make an acquisition or 2. Obviously, there's been a lot of publicity, and the market has been stirred up by the likes of Square in particular. We are looking at ways as to how we can compete with that, whether it makes sense. So we've got a lot of arms in the fire, Greg. And some, we will pull out, and they will be really hot for us, and we are excited about that. But it's a good business. It's a profitable business. We like it. We think we're getting better at it. As time goes by, we've got to add some channels. An online enrollment is one of the channels that we need. We need some more e-commerce that makes sense to us. You don't see us out just trying to buy just a big merchant portfolio that's pretty vanilla. I don't think you'll see us doing that today, but we might at some point. But we're trying to make sure that we get all of the access channels filled and so we can grow this thing organically at some point.

Operator

Your next question comes from the line of James Friedman.

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

I was wondering, in the aftermath of the Bank of America deal, has this help to credentialize you in any way, Phil, to further escalate or accelerate conversations with other top 10 issuers? And then I have a follow-up question after that.

Philip W. Tomlinson

Well, I think certainly it helps that. I mean, I think the fact that Bank of America left us to take it in-house to MBNA in 2005, that portfolio had been with us since 1985. There was this conventional wisdom in the marketplace out there that all big players had to process in-house. We have argued against that for years. In 2006, we signed Cap One and brought them home to TSYS. And then we've signed this BofA deal, which we're very excited about. But then if you look at Canada, we really have got contracts with every major bank in Canada. We do business with all of the major banks in the U.K., with Deutsche Bank. And so we think there's -- we think we're in a position -- we're in a better position than anybody on earth to do business with the mega issuers. And we think that it does credentialize us even more than we were in the past. So I think that's true.

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

Okay. And then just as a quick follow-up, maybe for Jimmy. At the Analyst Day, Bill Pruett had articulated North American Services growth rates 2012 to 2014 in the 8% to 10% range. That would imply a material escalation from what you have done year to date and certainly in this quarter. I'm wondering, to do that 8% to 10%, is that based on the current book of business through organic growth? Or are there incremental wins that are contemplated in that kind of long-term growth trajectory?

Philip W. Tomlinson

I think it was based on a 3-year period there, that pipeline, and we think we've got a very good chance of being there.

James B. Lipham

I think if you look at our current numbers, you see that for the 9-month period, and as I said, we grew revenues 10% before we had price concessions and deconversions. And we don't plan on having that much in price concessions and deconversions every year as we go forward. I mean, we still have some fallout from the recession, as we talked about last quarter or the quarter before with ABN AMRO, which got in trouble after the failed acquisition. And we don't think we have any other large customers that are in trouble financially.

Operator

Your next question comes from the line of Jason Kupferberg.

Ramsey El-Assal - Jefferies & Company, Inc., Research Division

It's actually Ramsey El-Assal for Jason. At your Analyst Day, you provided long-term top line guidance from the processing side of your business around the bank processing side of your business but held off giving guidance for the Merchant side due to recent acquisitions, kind of muddying the water a little bit. Since then, have you developed any kind of clearer picture on the Merchant side of what type of -- sort of more color around this sort of future growth trends on that side of the business? Do you have any kind of incremental thoughts there?

Philip W. Tomlinson

We don't have anything that we'd be willing to go into today.

Ramsey El-Assal - Jefferies & Company, Inc., Research Division

Okay, fair enough. I know that you currently play in the prepaid space as a back-end processor. And to what degree have you explored -- I think you had mentioned this in the past, but what are your latest thoughts on where you would explore, participating more in the front end of that business, say, program manager or something like that? Is that something we might see and expect from you in the future? Or does it drift a little too far from your kind of existing businesses?

Philip W. Tomlinson

I think it's something that we would like to look at. I wouldn't say that you'll see it in the future. It will be a pretty big change for us. But I mean, I think it's something that we have to look at. I mean, it's just like getting into or entering the direct merchant acquiring business. I mean, it was just one of those things that just made sense, and that business may makes sense at some point. It's a pretty -- it's an interesting business right now with all of the turmoil and change that's going on.

Ramsey El-Assal - Jefferies & Company, Inc., Research Division

Right. And then you mentioned in your opening comments a bit about some pipeline strength in Brazil. Can you give us any additional color there? Are there any -- has your Carrefour -- success with Carrefour opened up other sizable opportunities in Brazil? Do you expect a mix shift in terms of percentage of International revenues kind of toward Brazil? Any color there would be helpful.

Philip W. Tomlinson

One, Carrefour is growing, and we're very happy with what's going on with Carrefour. Two, it has given us credibility, and we have more than a couple of prospects there that we think we have a good chance of doing some business with. And I'd be less than candid if I gave you any numbers because we just don't announce anything until we have a contract on hand. But we're optimistic about what's going on in Brazil. And that was the reason that we went to Brazil to start with. We see it as a growth market, and it just takes time to build up credibility and to where people trust you. This is a -- these sales efforts are pretty long term. It doesn't matter whether you're in the U.S., Brazil or the U.K. You just don't do it overnight.

Operator

Your next question comes from the line of Craig Maurer.

Craig J. Maurer - Credit Agricole Securities (USA) Inc., Research Division

I just wanted to ask you if you wouldn't mind commenting on your feel of the economy right now. You guys have a huge amount of transaction data. How does it feel in terms of directionality through the quarter and what we've seen intact over?

Philip W. Tomlinson

I don't want to be too negative, but I think it does feel like it's starting to slow down a little bit. And I don't -- our numbers are good, but you'd like to see them continuing to grow higher. And transactions, while they're growing, I just don't feel -- I don't feel great about the economy. And I'm like a lot of people. I was going to say this later, but the truth is we need to get this election behind us, this fiscal cliff, the tax questions. And there's a whole lot more uncertainty out there that I think people are just -- have some reservations about. I want us to have a great fourth quarter, and we need some more certainty for a lot of people to really want to go out and feel good about it and spend money. I've been amazed -- not amazed, but I'm really thrilled at the way the year has gone so far. But the part that has really astounded me is how well we've done in Europe with all of the bad news coming out of Europe. Our transactions increases in Europe are higher than they are in the U.S. So I think there's some slowness there. Can I put my finger on anything in particular, not any more than you or anybody else can. And so I think we're going to have to wait and see. I mean, we're sticking with our guidance. We think we're probably at the high end of that guidance. So hopefully, if we're lucky, we'll exceed it by a bit. But we're comfortable with that.

Craig J. Maurer - Credit Agricole Securities (USA) Inc., Research Division

Just on a completely separate topic, just what's your general thoughts on the merchants piecing together MCX, which seems it's sort of becoming a standards board, so to speak. But the merchants seemed very intent forward with coupling a payment product to their loyalty product likely in the form of decoupled debit. I'm just curious of your view of the merchants' likelihood of succeeding with that. And could TSYS play a role in that initiative?

Philip W. Tomlinson

I think TSYS could certainly play a role in that initiative. A lot of those big merchants are our customers anyway. And there's been -- Isis was a -- is a group of very, very large players. This Merchant Exchange is very large. There's a lot of different opportunities out there today, and there's a lot of different solutions, solutions that I would think that some of them even are not public. And I don't know that I would -- I wouldn't bet this company on any of them today. I think it's just a matter of waiting and see -- of a wait-and-see. But those guys certainly have the wherewithal to put something together. Whether it'd be successful or not, who knows. But we're studying as much as we can. It's pretty interesting that you mentioned that though. Our fastest-growing debit card customer today is a decoupled debit player.

Craig J. Maurer - Credit Agricole Securities (USA) Inc., Research Division

And just out of curiosity, are the economics and that type of transaction similar to that in a, call it, Visa PIN transaction or Visa signature transaction?

Philip W. Tomlinson

Yes, very similar.

Operator

Your next question comes from the line of Brett Huff.

Brett Huff - Stephens Inc., Research Division

Two quick questions on numbers, and then I have 2 quick -- 2 questions on more business. The term fee amount, Jim, I think you said, but I think I missed it. Can you just let us know that again, what it was this quarter?

James B. Lipham

It was a couple of million dollars.

Brett Huff - Stephens Inc., Research Division

And then the quarter-to-date same-store sales transactions, what are you guys seeing so far in the fourth quarter? I guess that kind of falls upon the prior question on what you're feeling about the economy now, but anything you can share with us today.

Philip W. Tomlinson

No, not really. I mean, we don't track that on a day-to-day basis. But I'm optimistic. I hope I didn't sound pessimistic earlier. But we just need to answer some questions and move on, and we're hoping the general public. We'll buy into whatever comes about. We can get on with business. We have some confidence.

Brett Huff - Stephens Inc., Research Division

Okay. And then a couple of business questions. First, just a follow-up on the Square question earlier. I guess just to put a finer point on it, of your merchants that you would have, sort of do you have a sense of how much of the volume that comes from merchants that are on the smaller end the Square might go after? And I don’t know if you want to define that as 50,000 in card processing volume a year, 200,000 or whatever the number is...

Philip W. Tomlinson

I think it's relatively small.

Brett Huff - Stephens Inc., Research Division

Small like 100 or 200 basis points over the portfolio or more?

Philip W. Tomlinson

I don't know that I could -- honestly, it'd just be a guess, but we think the numbers is pretty small.

Brett Huff - Stephens Inc., Research Division

Okay. And then is there -- when you talk to your ISOs, what is their interpretation of Square? And are they -- do they see a way to compete with Square here near term? Because in my view, they're the ones who seem to be sort of on the front battle lines right now.

Philip W. Tomlinson

Yes, I would agree with that. I think the feedback we've got is, it's real. I think several -- a year or so ago, a lot of people didn't buy into that concept. I think we think it's real. There's also other competitors out there that do the same thing. Intuit is one. There's 4 or 5 more that have a very, very similar product, very little difference. So we would like to be able to come out with our own version of that because we do think that for a certain market, that's a very attractive product. And I got to give those guys credit for putting it together.

Brett Huff - Stephens Inc., Research Division

Okay. And then last question. The North American margins were better than we thought they would be -- and I listened for things that might have tipped me off about why that might have been. Jimmy, was there anything in there that you want to -- we could highlight that might be the case? Or is that just a better run rate number to use?

James B. Lipham

It was just a better run rate. I mean, the only thing that we did have some capitalization going on, on some of our projects, as well as the Bank of America.

Operator

Your next question comes from the line of Dave Togut.

David Togut - Evercore Partners Inc., Research Division

I guess first of all, I just wanted to ask about the North America business. I think excluding the price reduction, I think revenue growth would have been about 1% year-over-year. And I know consumer accounts were up about 7%, transactions up about 9%. What really accounts for the delta between kind of some of the core account growth or transaction growth numbers in that revenue growth number?

James B. Lipham

So one of the things in our account on file growth numbers, we did have a -- in our government services area, we had about 16 million accounts that were put on during this quarter that were inactive accounts and still are, but they are charged a fee, flat fee now. So it made the numbers on the account on file grow a little bit higher than what you see in the revenue growth. So that was unusual for the quarter.

Philip W. Tomlinson

David, those are primarily student loans.

David Togut - Evercore Partners Inc., Research Division

And as we look forward then, when you talk about the potential to ramp revenue growth back to 8% to 10%, will you imagine that those core transaction account numbers would grow more closely in line with revenue growth, kind of a year or 2 out?

James B. Lipham

I think you still have to take into account the bubble pricing that we have on about 35% of our accounts, our transactions. But yes, the 8% to 10% is coming from the pipeline.

David Togut - Evercore Partners Inc., Research Division

Got you, okay. And then finally, I think Brett just asked about margins. Long term, is your guidance still -- I think it was somewhere -- it was 31% to 33% or something around there for the North America margins?

James B. Lipham

Yes, it's still there.

Operator

Your next question comes from the lineup Will Maynard [ph].

Unknown Analyst

This is Will Maynard [ph]. I actually was trying to ask a question, but I think we're having some technical difficulties. My apologies. I think this question is surrounding the news today regarding the Target portfolio sale. And I know that Target has historically been a client of yours. Can you just address that and any potential impacts that may come about as a result of that sale?

Philip W. Tomlinson

Sure. We're very comfortable. We have a contract with Target up through 2019, have a great relationship with them. They are very transparent with this whole process. They'll still control the processing and the customer service and all of that. So we don't really see any changes.

Unknown Analyst

Okay. And one housekeeping question. Can you just mention the merchant growth excluding the acquisition? I thought I heard 7.4%. I just want to make sure I have that right.

James B. Lipham

That's correct.

Operator

Your next question comes from the line of David Togut.

David Togut - Evercore Partners Inc., Research Division

Phil, can you provide a little more detail on the consumer credit account on file number up 0.4% year-over-year and I guess maybe some perspective on underlying organic growth in that line item versus lost business? And then just some thoughts on what you're hearing from your largest issuers with respect to their own marketing programs and consumer credit overall spending thoughts?

Philip W. Tomlinson

I think what we're seeing from the really larger guys is they're being fairly aggressive. We had a board meeting today, and we actually talked about that where there's a lot of folks getting solicitations, there's more and more advertising on television. If you've been watching television lately, you've been seeing some pretty serious advertising. So I think, like I've said before, I think the banks are really interested in cards again because it really gives some opportunity to charge some rates where they can actually make money as opposed to losing a lot of fees that they've lost over the last several years. It's a good market for the banks, and I think they see this business coming back. And they want to be in it, and they want to be more aggressive. And that's why we think that we've seen people like Huntington and Key and Regions come back in plus several others that I'm sure will come back in over time. So we're feeling good on a go-forward basis. Again, that's why we think we've got what I think is a very strong pipeline. Jim, I didn't know if you want to add.

James B. Lipham

I mean, part of the consumer problem, we did have some accounts that were purged during the quarter. But outside of that, I agree with you. I mean, the growth is...

Philip W. Tomlinson

We've talked about this purge business before. As we get closer to year end, we'll have more purges, and that is a very low income. If you have an inactive account at TSYS, which probably is an account that has had no activity for about 2 years, most of our clients will purge those accounts off. And we'll just put them in a vault somewhere, and they may want to try to activate them. It is a very, very small fee that we get for keeping those accounts on file. So it's nothing too dramatic when we get those accounts purged off. Obviously, we would prefer that they stay on. But as the banks, it's their option to go ahead and purge them.

David Togut - Evercore Partners Inc., Research Division

How should we think about organic growth and consumer credit accounts excluding the purges and lost business?

Philip W. Tomlinson

I'm sorry, can you just -- Did you get it, Jimmy?

James B. Lipham

I mean, most of our growth that we talked about from the North America segment in the 8% to 10% range is going to come from consumer. SO I think that's -- just like Phil said, you will have some purges, but a majority of what we put on is going to come in the consumer area as we go in the pipeline.

Philip W. Tomlinson

Right.

David Togut - Evercore Partners Inc., Research Division

Just a final question for me. Referencing your earlier comments on Brazil, you've got the big contract with Carrefour there. FIS has a strong beachhead there with Banco Bradesco. Are you going after the traditional bank card issuer processing market in Brazil? Or are you more focused on retail cards?

Philip W. Tomlinson

We're focused on both, honestly. We compete with FIS on a day-to-day basis in the U.S. And certainly, we would be willing to do it there. And hopefully, we can.

Operator

Your next question comes from the line of Kevin McVeigh.

Kevin D. McVeigh - Macquarie Research

At the Analyst Day, you commented that you're starting see solicitations come back for the first time in a couple of years here. Has that continued? And just -- the pace is special projects? And has any of the -- it sounds like things are okay, but maybe just a little hesitancy around the election as opposed to anything, sea change? Just Any thoughts ut that would be helpful.

Philip W. Tomlinson

Well, I think we probably all watch television too much and see too many pundits on it. But I feel pretty good. Our projects are up. When I say projects, I'm talking about new products. Our special projects are up. Our revenue on those lines is up. Our accounts on file are growing. There's some major marketing activity out there. We're seeing new regional banks enter the business in an aggressive way, buying back portfolios. We think that bodes well for TSYS and our industry. We've got good prospects. We have a good pipeline. And I'll talk about all of that when we close, but we feel good. We'd feel better if the government would settle down and we could get this fiscal cliff dealt with and some of these other things that will send shockwaves through this economy if we don't get it dealt with.

Kevin D. McVeigh - Macquarie Research

Understood. Phil, any sense of -- the $100 million that will be converted by the end of '14, how that sets up in terms of first half of the year versus back half of the year, just any direction on that?

Philip W. Tomlinson

Most of it is in the last half of '13 and through about the third quarter of '14. I don't have that with me. [indiscernible] next year.

I think it's probably time for us to shut down and move on. And if there are any other questions, you can certainly call Shawn. And he'll get you to the right people if he can't answer it.

I just wanted to close with a couple of remarks. As we head into the fourth quarter, we are optimistic, and certainly we'll be happy to get the election, the fiscal cliff, the tax questions behind us. And hopefully, after that, we'll see a much more energized economy regardless of who wins. We'll continue to look for opportunities that'll add long-term value to this company. And from time to time, as the market makes sense, we certainly will buy or repurchase shares.

I believe that TSYS is a unique company and an opportunity for investors. And I'll give you some reasons here. In 2013 we're going to celebrate our 30th anniversary. I think I said something about staying power in this business. There's a lot of folks who haven't made it over the years. We have a fortress balance sheet. We have really strong cash flow. We have blue chip clients. I mean, our list of clients is like a who's who of the financial industry. We have long-term contracts. We have a recurring revenue model. We have the gold standard in technology, and we invest millions in that every year. We have 100 million account pipeline today that will grow. There are significant barriers of entry -- to enter this business. It's very expensive. I think our international and merchant acquiring businesses add diversification and growth. Our prospect pipeline is strong globally. We have the financial strength to do M&A and stock repurchases, and maybe most of all is our -- we have a great team of very dedicated professionals that have a real will to win. So I think it's a unique company. And we appreciate your interest, and we thank you for your support. And we want to be as helpful and transparent as we can. So thank you for being with us today, and we look forward to talking to you at the first of the year.

Operator

Ladies and gentlemen, this concludes today's conference call. You may now disconnect.

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