Total System Services, Inc., Q1 2009 Earnings Call Transcript

| About: Total System (TSS)

Total System Services, Inc. (NYSE:TSS)

Q1 2009 Earnings Call

April 28, 2009 5:00 pm ET

Executives

Shawn Roberts - IR

Phil Tomlinson - Chairman and CEO

Jimmy Lipham – SEVP and CFO

Analysts

Glenn Fodor - UBS

Bryan Keane - Credit Suisse

Darren Peller

Wayne Johnson

Brett Huff

Craig Maurer

Julio Conntearous

James Friedman

Glenn Greene

Jason Kupferberg

John Williams

Operator

Good afternoon, ladies and gentlemen and welcome to the TSYS-sponsored First Quarter 2009 Earnings Conference Call. At this time, all participants are placed on a listen-only mode. And the floor will be opened for your questions and comments following the presentation.

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

Shawn Roberts

Thanks, Dave. Before we get started, we want to call your attention to the fact that we will 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 the TSYS's reports, filed with the SEC.

At this point, I would like to turn it over to the Chairman and CEO in TSYS, Phil Tomlinson.

Phil Tomlinson

Thanks Shawn and thank you for joining us today for our first quarter earnings call. I hope everyone has been able to take a moment and review our earnings release, which was issued earlier today.

I don't think there is any doubt. The big news today is the reduction in guidance for 2009, the sale of Total Debt Management and the Carrefour announcement. Needless to say, we are very disappointed about the guidance, but we felt it necessary in the light of the continued deterioration of the card issuing business and just the economy in general, it's no new news to you, but unemployment has continued to climb delinquencies and subsequent charge-offs are at record levels really around the globe.

Over 30-day delinquency seem to be tracking right along with the unemployment rate at least here in the States. Major issuers this week are reporting volume reductions in the 9% to 18% range, and we are very happy that we do have an advantage charging by the transaction. But when transactions are down that much, when volume is down that much, it does have an effect.

The fed has obviously mandated extensive new card regulations and congress has even more plans as we said before. Our clients as a whole are laboring with all these issues. In many cases, they are having more difficult issues at the respective banks than just at the card businesses, as you are well aware of.

Our North American organic growth went down, went negative 1.3% for the first time that I can recall. Card transactions declined 4.3% for the quarter and declined in really revenue for products and projects in general declined.

In addition, like many companies with international operations, we are being hammered by the currency exchange, and Jim Lipham will talk to you in a lot more details about all these issues.

In 2004, I used the term perfect storm. But today's world has proven to be more than just a storm. We have decided to sell Total Debt Management, which was a wholly owned sub of ours that was involved in the collection and bankruptcy processing business.

We have good people throughout that organization, but the business model, the synergies the margins have not proven to be what we had originally planned and hoped for. There is one really good thing about this. It certainly will improve our margins. We expect that to happen in the near-future.

All of that said, we are not happy with our current position. I truly believe that what you do in difficult times, determines how you rebound when the economy improves. And I've challenged our executive team that now is the time to do whatever it takes to grow revenue and reduce expenses.

Our long-term goal, obviously, is to raise our financial performance back to historic levels. I really want everybody on the phone to understand that our energies are truly focused on growing revenue and reducing expenses. We have got to add muscle and cut fat. Now more than ever, we have to be smatter and cost-effect in the way we operate this business.

There is a couple of things though that caveats to that. We won't cut muscle that supports current clients or clients in the conversion process, or investment in expanding our geography or products. We think that's where the future lies.

Our clients and prospective clients need these products and services that we offer. The pressures of this recession, and we have talked about it on many occasions and the knowledge that they gain really in even more competitive world present great opportunities for us and we are having good conversations with a lot of people around the world.

As this economy improves and it will, one thing that will remain constant is the need to reduce expenses and generate revenue. And that's really what TSYS products and services enable our clients to do.

Now I want to turn it over to our CFO, Jim Lipham for the details, and after questions I will have closing remarks about future direction, Jimmy?

Jimmy Lipham

Thanks, Phil. My financial report today I want to address, first of all some of the highlights for the first quarter, and then I'll take a few minutes and walk you through the guidance the main changes to our guidance for the remainder of '09.

When you look at the income statements, start with revenues. There are two main items in there, Phil touched on currency. And just to let you know, the strengthening of the US dollar against the British pound and euro continued to negatively impact us during this quarter.

Year-over-year in Q1, the average exchange rate for the British pound declined 28% and euro declined 11%. What this equated to us is a negative reduction of revenue of $22.6 million when you look over quarter over quarter.

Also, he mentioned around the discontinued operations of Total Debt Management. This required us to move $66.8 million of revenues out of '09, and restate '08 by $41.9 million. So these two items alone were pretty big and in fact of our consolidated revenues decreasing 2.6% year-over-year.

When you adjust the TDM on pro forma basis, not pro forma, but non-GAAP basis if you take TDM, put them back and take care of the currency rate, we would have been up 7.9% in revenues.

But outside of that there were few items that affected revenues during the quarter. First being the internal organic growth rate of the existing clients and our electronic payment area for North America. As Phil mentioned, that we are down 1.3%, and that's the first time I remember that ever happening.

Last year during the first quarter of '08, we saw growth of 10.8%. So it's quite a shift from where we were at year ago. Phil mentioned the consolidated client transactions, they were down 4.3% to $1.7 billion from $1.8 billion last year at this time.

We also had a reduction in revenues due to the accelerated amortization of assigning incentive for the WaMu de-conversion about $2.2 million. So that hit us in this first quarter. When you look at our merchant business, it's up 6.1% and is direct result of the Infonox acquisition we had in the Q4 of last year.

And also, we have got a new client to sell the books this year, we are charge back volumes pretty large that have helped. And then the point of sale volumes of TISS acquiring are up1%.

We attribute a lot of that to be in the mid-sized merchants that predominant on our system there. In the other services revenue line this consists mainly of our loyalty business and our call center business. You can see it's up 4.6%, quarter-over-quarter. And probably would have been up a lot higher without the currency translation that hit us in Europe, but year ago versus 4.6 and good number for us.

So overall total revenues are down 2.6. If you move to the expense side, our operating expenses benefited by 19.3 million from the currency translation, which obviously works as a natural hedge, partially offset the impact of the $22.6 million, loss of revenues that we had.

The investments we are making in our infrastructure mainly people costs associated with a new clients in Europe and expansion in Brazil increased operating expenses and reduced our margins in our international segment in the quarter much the same as it did last year.

As these conversions are completed later this year, margins will improve. Our headcount at the end was 8,068 employees an increase of 6.9% compared to 7,500 last year. The main changes here are the addition of Infonox brought on 111 people. At the end of the year, we had expansion in managed services area, call center business about 87 people, international. International expansion in Russia brought on 92 people, so those were the main three areas of growth in the headcount number.

But overall, our total expenses before reimbursables were pretty flat year-over-year, and that's a good sign. Obviously the currency helped offset some of the growth. When you look at the margins, consolidated operating margin, excluding reimbursable items we were at 22.6%, the same compared to 24.4% last year.

Historically our margins in the first two quarters have been lower than our full year results, and we expect improvement as the year progresses. Our International segment's operating margin was 8.51% compared to 10.96% at the same time last year. As I noted earlier, we look for improvement as conversions are completed in the second half of the year, in advance to the 13% to 15% range for the year.

If you look at earnings per share, for the quarter we are at $0.24 of net income, and $0.26 from continuing operations. Some of the major items, there are really three of them that pertain to operating income, and two pertain to non-operating income, and I want to walk you through those.

First of all on operating income, we had that accelerated amortization of $2.2 million, on the client incentives. We had a process of near about $1.9 million, it was a one-time item. Then we have a currency translation loss of $3.3 million. And that's the loss generated from the $22 million of loss revenues, $19 million of positive effects on expenses.

So overall, operating income suffered $7.4 million. After-tax, that would equate to about $2.04 a share. On the non-operating items that hit us, we had a one-time client resolution of $3.7 million, pertaining the to TDM operation, then we had some CTA losses of about $800,000.

So overall the total pre-tax hits that we had were $11.9 million, after-tax, that's $7.6 million, or $3.08 a share. And our original budget we forecasted for the first quarter to be at $27.3 cents a share. So without those items, we would have been pretty close to that.

Balance sheet, I want to flip over to it, hit a few items there, just comment on two things really. We have continued to have very strong balance sheet, our unrestricted cash position at the end of first quarter is at $271 million. That's an increase of $60 million since December of '08.

Also when you look at the liability side, understand we got tremendous amount of unused debt capacity that we will deploy in conjunction with our strategic plans as we go forward.

If you look at the cash flow, cash flow from operations continue to generate very strong cash with $98.7 million of cash being produced in the first three months. In addition, our free cash flow at the end of the first quarter was $73.7 million, which was an increase of 15.7% compared to $63.7 million last year.

Now I would like to move on to the updated guidance for '09, and go through really two parts. The first part had to do with the removal of TDM into the discontinued operations and just to summarize that for you.

Revenues before reimbursables were reduced $39.1 million. And then reimbursable items were reduced $204.3 million, total revenues then been reduced $243.4 million. This equated operating profit of $2.7 million was taken out net income of $1.8 million was taken out.

Now the other part of the changes to guidance had to do with as a result of the first quarter, and some things that had changed from what we had in the forecast. The first one being our initial estimate of the impact of currency on 2009 was a decrease in revenue of $55 million. After three months in revised forecast that we see, we now anticipate an additional $10 million negative impact on currency translation bringing the total to $65 million negative for '09.

We also had price negotiations and discounts associated with clients qualifying for volume tier pricing, and this result in another $10 million reduction in revenues for the remainder of '09.

Our estimated reimbursables, we lowered those to $13 million and that's due to decreases in volume mainly. Then the last item here, as we analyzed all the client activity during the first three months and comparing the entire original estimates, and we now believe these trends that we have seen in the first quarter are going to continue or be further end of the year than we initially anticipated.

So as a result of that we brought revenues down due to volumes by $26 million. In summary, total revenues were reduced $302 million with $243 million due to TDM, and $59 million as I just mentioned.

In conjunction with this decrease in revenue, we did lower expenses $34 million, we increased our non-operating expenses $8 million for CTA changes and interest income decreases that we anticipate for the rest of the year. These resulted our total in a pre-tax income reduction of $33 million. When you reduce the income, $33 million it reduced taxes $12 million, which produced the bottom line effect of $26 million to $29 million.

Also in there, we had the discontinued operations of TDM, which was total about $5 million from where we had in the original forecast. When you calculate earnings per share, please keep in mind as noted in the press release that the adoption of EITF 03-6-1, and it requires prior peers to be restated. And this has resulted in a 2008 adjustment of $0.02 a share, in our previously reported earnings per share.

As we move through these volatile economic times, we will continue to manage expenses in order to maximize our operating margins and I guess my message to leave you with here is that achieving our margin targets is a priority of managing our finances.

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

Phil Tomlinson

Thank you, Jimmy. Dave, we are ready to open it up for questions now, if you are with us.

Question-and-Answer Session

Operator

Thank you, ladies and gentlemen. The floor is now open for questions. (Operator Instructions). And we will take the first question from Jason Kupferberg. Your line is live.

Glenn Fodor - UBS

Hi, it's Glenn Fodor from UBS. Thanks for taking my question. I got the sense from the last call about the heavy account purchase would be behind us. But it was still relatively big number in the quarter. Can you talk about what happened different than your expectations and update us on how we should think about this figure for full year '09?

Jimmy Lipham

Glenn, it has slowed down considerably, and I really had a strong feeling that we were pretty much through with that. But we have had some purges. They are looking it up for the quarter. Wait a minute.

In the first quarter, we had 3,800,000 accounts that were purges. What was it for fourth quarter? In the fourth quarter it was 12.5 million. So it's dropped dramatically.

Glenn Fodor - UBS

I'm looking at from a year-over-year type of, okay. So I guess it's kind of different measurement standpoint.

Jimmy Lipham

Well, you got WaMu that left, which was a pretty big number.

Glenn Fodor - UBS

Right. Okay, I'm looking at it differently, sorry about that. One, international margins, shifting gears a little bit. How much of impact was due to start up, due to start up expenses and capacity buildup, and was there any part of the impact that sort of wasn't expected to you?

Jimmy Lipham

I would say the majority of the drop in year-over-year, we went from 10.5 down to 8, and we have had more start up this year due to the Carrefour Brazil operation and the new businesses coming on over there. So we still think that our margins are going to get back to the 13%, 15% range by year end.

Glenn Fodor - UBS

Okay. And then last question on the last call, I didn't do the math yet from the implied guidance, but you said 24% to 26% operating margins for fiscal year '09, what's your expectation now?

Jimmy Lipham

I think we will still be in the 24, 26. But I believe if we can on the bottom end of the range depending on when the economy comes back.

Glenn Fodor - UBS

Okay. Thanks a lot. Appreciate it.

Phil Tomlinson

Thanks, Glen.

Operator

Thank you. We will take the next question from Bryan Keane. Your line is live.

Bryan Keane - Credit Suisse

Hi, good afternoon. Did WaMu move off already, and is that reflected in the accounts on file?

Phil Tomlinson

Yes. That's right.

Bryan Keane - Credit Suisse

And if I understand it, the WaMu loss, you get a term fee. So therefore net-net, it's a neutral effect this year. Do we have any idea when the term fee rolls off in to 2010, what kind of effect it's going to have then?

Phil Tomlinson

The termination fee on WaMu is spread throughout this year, and it will be over in December. And I'd say next year, obviously, you will see a big change, but the termination fee that is associated with it is not as much as the revenue was per month.

Bryan Keane - Credit Suisse

But the term fee obviously offset. It's still a neutral effect this year, because I assume the term fee is dropping straight to the bottom line.

Phil Tomlinson

It's not a neutral effect for this year. The term fee was not as much as if you would have had there ongoing monthly revenues.

Bryan Keane - Credit Suisse

Okay. And so there will be some a hole to grow over in 2010, but it doesn't sound like it's going to be a tremendously big number.

Phil Tomlinson

That's right.

Bryan Keane - Credit Suisse

Okay, and then just on the reduction in revenue guidance, one of it was price negotiations. Can you talk about what that was, was that planned price negotiations, because you said something about tiered volumes. But on the other hand, I didn't know that some of your clients were coming to asking for certain reductions due to the trouble they are in.

Phil Tomlinson

Well, we haven't had a lot of that yet as I said last quarter, but we did have a couple of clients that hit some pretty big tranches in just their normal tier reductions. And these are clients that have continued to grow through this process. And the other is, we do have some money in the budget for a contract renegotiation that we are going through.

Bryan Keane - Credit Suisse

Okay.

Phil Tomlinson

Of a fairly large customer.

Bryan Keane - Credit Suisse

Okay.

Phil Tomlinson

We think it's very important to get those guys signed and put that to bid pretty quickly if we can.

Bryan Keane - Credit Suisse

And that's an existing large client?

Phil Tomlinson

That is an existing client, yes.

Bryan Keane - Credit Suisse

Okay, and then just finally, any de-conversions or new de-conversions to think about going forward or new account ads to think about that you will be adding over the next, let's call, by the end of the year?

Phil Tomlinson

Well, we are going to add the Deutsche Bank, and add at least parts of this Carrefour transaction, we have got a couple of others. I'm just looking at this. We have got a pretty good sized commercial card account, we have got a good sized debit card account.

We have Deutsche Bank, as we talked about we will start up Unibanco, and we have a couple of commercial card accounts, including one that I was going to tell you about, and that's ING that we have added, so there are some good start ups there, and we are excited about it. Most of that, by the way is international.

Bryan Keane - Credit Suisse

And then anything on the de-conversion side, I think Nordstrom is probably still out there with some accounts, and I don't know if there is any update on Wachovia.

Phil Tomlinson

That's the only one that we are certainly still having conversations with, Wells and Wachovia, and as we said before, we would say that's 50-50 deal. And Wachovia is not a huge account for us. But we would still love to keep it.

Bryan Keane - Credit Suisse

Great, okay. Thanks a lot.

Phil Tomlinson

Thank you.

Operator

Thank you. We will take the next question from Darren Peller. Your line is open.

Darren Peller

Thank you. Can you just comment quickly on trends you are seeing specifically throughout the quarter with regard to transactions being processed from on a month by month basis January through March and now in to April?

Phil Tomlinson

Well, most of the, certainly the transaction trends have been down, this as I said earlier, it's the first time that I can recall, I've been here a while that our organic growth or same-store sales in North America has been down. I'm sure you saw the releases this week from the really the top two or three card issuers in the country that in the world really that were down anywhere from 19% to 18% in volume wise. The trends are, I don't look for the trends to really jump forward until this economy starts improving, I mean we are so consumer driven. But I will say this is even our commercial card business has seen a decline in the transactions which is pretty unusual we think. And we think it's basically because businesses just like yours and ours have slowed down travel and conventions and all the things associated hotels, things associated with travel.

Darren Peller

All right, when we look at April and March are the year-over-year trends comparable to what we saw for the full quarter?

Phil Tomlinson

I think you can expect that for April and March, yes.

Darren Peller

Okay. And then just touch on if you would, a bit, any new revenue potential from the UDAQ or other regulatory changes we are seeing, I know you have discussed in the past as a potential win for you down the road.

Phil Tomlinson

I don't think there is any significant at this point in time, I can't tell you there is significant revenue of UDAQ. I think that the key there is that people will start changing the way they do business and we will get paid for a lot of projects as a result of that but it's still pretty early in the game and we don't have a number on that yet. We will have some revenue but I think I would be misleading you if I said it was going to be a huge number.

Darren Peller

All right. And then lastly, just when you talk about expense cuts to try to mitigate some other revenue, to slow down the revenue. What kind of timing range should we be expecting is this something that we can see kind of really eating into expenses in to the third quarter or second quarter?

Phil Tomlinson

Well, I think you probably look in to the third quarter, we are working on that right now, we have been working on it our budget process was very detailed. We haven't been that long off of the budget process. I think we did feel like the economy would start to look a little bit better in the second half of the year and we just don't feel like that's going to happen now for obvious reasons. If that does get a little bit better we will be certainly much better off, but consumer has been hammered and as you know so have the banks. And so there is not a lot of people out there pulling the trigger on trying to put new products out the door.

Darren Peller

All right, so when you say in your guidance, in your prior guidance you had said that you assumed economic stability in the second half of '09 and unemployment would be at the certain rate. Maybe you can just help us understand what the assumptions of the second half '09 really are now maybe certain metrics?

Phil Tomlinson

Pretty much, when we did the guidance to start with, we had our organic growth and now going about 3%. So that's not going to happen. We had better exchanges rates; we had in the second half of the year, that's probably not going to happen anymore, because we got hit so hard in the first part.

Darren Peller

Right.

Phil Tomlinson

So, I think it's just the change that we seen from our make up of our customer base in the first quarter and it just can't get back to where we had it in the third and fourth quarter in the guidance.

Darren Peller

Okay. All right. Appreciate it.

Shawn Roberts

Thanks, Darren.

Operator

Thank you. We will take the next question from Wayne Johnson. Your line is live.

Wayne Johnson

Hi, yes, good afternoon.

Phil Tomlinson

Hey, Wayne.

Wayne Johnson

Hi. I was wondering if you could talk little bit about the merchant processing division and what the plans are going forward here? Are there any acquisitions potentially pending over and above, I know you did the Infonox, but anything else that you see domestically because of lower valuations and multiples compared to prior years that maybe of interest?

Phil Tomlinson

Well, we have got three or four companies on our horizon, but I want to say that, I wouldn't even consider saying anything is imminent. We certainly as we told you before would like to grow that business. It did have some growth this quarter. The Infonox has turned out to probably be a better acquisition than what we originally hoped for. The products and the people have been integrated almost 100% into total acquiring solutions. We think those products probably gave us a two to three year jump on our competitors in some of the areas there we would have had to go out and developed and it is turned in, and we would have spent probably more money than we spent buying Infonox.

We are having conversations with a lot of people around the world. We have got a lot of good things going on the fact that we, we are building cash reserves, we have our cost of credit right now is less than 2%. We would certainly like to acquire something, but the truth is we just have run across, we are looking for right now and at least we are starting to feel like there is some hope out there in this economy. I’ll tell you, we seen a couple of really good players that have really had some issues, the data breech with Heartland that was our tragedy, that's a great company that we like a lot. And there certainly others out there around the world that would might make some sense for TSYS long-term. Not only when I want to say around the world, I mean there is plenty here in the US too. But there is a lot of good companies, we are having conversations whenever appropriate. And I think you can look for something to happen but I think you make a mistake putting a timeline on it at this point.

Wayne Johnson

Okay. Terrific. Okay just one quick follow-up on the transaction volume trends, that you mentioned domestically, do you have any color internationally on how you are feeling about those trends and do you have any granularity on that between debit and credit?

Phil Tomlinson

We don't process a lot of debit, and I don't have that, although we do have a very large debit player to us, a very large debit player that will be coming on board this year. But the truth is our international transactions are down at least the same amount. The same percentage is that what you are seeing in the US.

Wayne Johnson

Is there any movement in china, any update that you have with the China Unionpay agreement or that can shed some light on how that region of the world is performing?

Phil Tomlinson

We continue to sign lots of prospects there and but I think they have got about the same, well they have got a lot of same issues we got that we have in the US, and around the world. I think that there is pretty much a governor that's been set on the issuance of credit cards until the economy does improve. So, I think we will continue along pretty much in the same vain we have until these banks get in better shape. Now, we have signed some good business there, we talked about it last month the bank of East Asia, over to Hong Kong, the city debit business, we continue to do well there. I think that's the thing that's just so frustrating in this business to us is we are continuing to win, we are continuing to do well, our prospect list is very strong, it's probably well it's not probably it's this big potentially as any we ever had in our history. So, we feel like we are going to do great, but we need to get this period of time behind us.

Operator

Thank you very much. We will take the next question from Brett Huff. Your line is live.

Brett huff

Good afternoon.

Phil Tomlinson

Hey Brett.

Brett huff

Just a couple of quick questions and follow-up some what people had asked before. I want to dig down a little bit if we can since the granularity you can give us on some of the assumptions on the new guidance, you had talked about a changed currency assumption. Can you give us one of the miracle thoughts on what do you expect the pound and the euro, it sounds like those are the largest exposures, what are those going to do, what you assuming for the year?

Phil Tomlinson

Well, I think what we use for the pound is around 1.5 on the second half of the year. On a forecast, the currency hit us for like 22 million this quarter probably the same next quarter and it will start tapering off and maybe hit us about 16 or so million in the third and really be down pretty low fourth quarter.

Brett huff

Okay. How about the euro, what assumption is that, or is that not as material?

Phil Tomlinson

About 130.

Brett huff

Okay. And then in terms of accounts on file.

Phil Tomlinson

That is not as material as the pound.

Brett huff

Okay. And then any detail on accounts on file assumptions you all are making in terms of the purges and in terms of de-conversions and maybe more importantly new accounts and same-store sales?

Phil Tomlinson

We are not making any, we are not counting on any de-conversions at this point other than what you already know about. I don't think we are prepared in this day and time to make any assumptions on new account growth but you will see some new business added.

Brett huff

Okay. Any color on the same-store sales as well? Or you just saying you are not you are expecting kind of flattish?

Phil Tomlinson

Well, same-store sales were flat right now, we talked about it being down 2% roughly or same-store sales. Our total transactions down four, but when you look at the same clients it down 1.5%, 2%, I think it will get better as the year goes on.

Brett huff

Okay, but what about based on the press release that you all put out in the accounts on file. Is that same-store sales, do you have any thoughts on the same-store sales number for that, because it was up pretty nicely this quarter?

Phil Tomlinson

I don't have that.

Brett huff

Okay. And then just one other data question, I don't think I might have missed it what was the transaction number for the merchant services, did you all include that in the press release, did I just miss it?

Phil Tomlinson

I don't know if that's in there. I don't think we break that out separate.

Brett huff

Okay.

Phil Tomlinson

We don't.

Brett huff

Okay. And then in terms of the revenue from value added products sometimes you give us some color on that, I know that that can swing margins around a lot given that they are fairly high margin products, can you give us any commentary on that?

Phil Tomlinson

Value added was down but it's still is about 12% of consolidated total revenue. But it was, it did decrease.

Brett huff

Decreased year-over-year or sequentially or both?

Phil Tomlinson

Year-over-year.

Brett huff

Okay. That's helpful. And then just commentary also Jim I think you have mentioned that your internal budget you saw sort of excel some of the one timers or miscellaneous charges that you thought you would come in $0.27.

Jimmy Lipham

Right.

Brett huff

Can you give us thoughts on how you expect in so far as you can how you expect the EPS to kind of trends throughout the year, up and down, down then up, steady March?

Jimmy Lipham

Gosh, I don't really have that here with me. Hold on one second, Brett.

Brett huff

Okay, thank you. I'm done. You can go ahead and move on. Come back to that, thank you.

Shawn Roberts

We will come back with that just a second.

Operator

Thank you. We will take the next question from Craig Maurer. Your line is live.

Craig Maurer

Yeah, good evening guys. I wanted to know if there was any change that you’re perceiving in attitude around in-sourcing versus outsourcing in the US, if there is any continuation around what JPMorgan did or any type of color you can give us there?

Phil Tomlinson

We are certainly not seeing any in-sourcing trends. As a matter of fact we are talking to several people today that would be great successes for us that are processing in-house today on old systems that are really feeling the pressure to do something big, primarily because of this economy.

Craig Maurer

Thanks.

Phil Tomlinson

Thank you, Craig.

Operator

Thank you. We will take the next question from Julio Conntearous. Your line is live.

Julio Conntearous

Great. Couple of quick questions, first of all, can you guys help us decompose the revised revenue and net income, I guess specifically as it relates to the disposition of the TDM asset, so when I look at the percentage change for over 2008 the negative five to negative three now on revenues and negative 13 to negative 11 on net income, is that apples-to-apples meaning that the TDM numbers have also been scrubbed out of '08 at this point?

Phil Tomlinson

That's correct.

Julio Conntearous

Okay. So, can you just maybe clarify then, I might have missed it earlier, the decline in the net income but I think you sited that the revenue the margin target would then changed 24 to 26 or whatever the number is. I'm trying to reconcile why the net income numbers are dropping so much more of your margin are sustained more or less inline here?

Jimmy Lipham

Most of the net income dropped the big drops you see is the drops in revenue that we have were really for business already owned and like Phil mentioned a while ago we are not going to, came out of the higher margin, really about 40%. When you look at the changes that we made outside of TDM and the TDM itself has very little net income, I said about a million eight.

Julio Conntearous

Right. That's the exact, that’s my point, is that --

Jimmy Lipham

So the rest of it is the stuff coming out from just the changes we made in our revenues and we did pick up some expense cuts that we can make initially and that's what we have at this point, but we are still committed to getting this margin backup and getting more expense cuts out of here.

Julio Conntearous

24 to 26 range, correct?

Jimmy Lipham

Right.

Julio Conntearous

Okay. I think you said towards the lower end?

Jimmy Lipham

That's correct.

Julio Conntearous

Okay. Then just related to that then any sense on free cash flow guidance or free cash flow number to be thinking about here?

Jimmy Lipham

I don't think we have anything really new to add that there, it's really going on about the pace we thought it would. I don't know much, most of our growth out there is really from leased space or something like that. We are not really anything going on that I'm aware of.

Phil Tomlinson

Two big payments.

Jimmy Lipham

Dividends is all.

Julio Conntearous

Okay. So, I guess I'm just trying to understand as a percentage of net income or on a free cash flow basis is there any change in your expectations for free cash flow growth or free cash flow target if you provided one?

Jimmy Lipham

I don't think so, no.

Julio Conntearous

So just kind of trending along with net income growth at this point is that reasonable?

Jimmy Lipham

Just one second. I don't think you heard that.

Julio Conntearous

All right. I'm sorry.

Jimmy Lipham

Can you repeat that?

Julio Conntearous

No, I was just saying is it reasonable to think free cash flow growth would be basically trending along with the net income growth at this point?

Jimmy Lipham

Yes.

Julio Conntearous

Okay. Then I guess more on a kind of a longer-term view, and thinking about this little bit more strategically assuming that credit card business does not come back this year or next year even what are the alternative options you guys are thinking about for driving growth in this business. Are there any alternative scenarios for really sort of reinvigorated the growth whether it's through M&A or through ancillary lines, what are you guys contemplating longer-term assuming that this industry remains under the kind of pressure we are under right now?

Jimmy Lipham

Excuse me, first of all, we do believe that we can grow ourselves through this, but I certainly understand what you are taking about the industry and the pressure that is going to be under for some period of time. We are looking at other processing capabilities and other industries that would really fit in to closely in to what we do and I'm not prepared to go in to those today, but we have, we are discussing that and we will discuss a lot of that later this week.

There are all sorts of things that we can do with particularly in the print business, in the transaction exchange area of I'm just trying to think, we have said that we really do want to do some acquisitions that make sense for us. I think you would have seen us already do a significant acquisition or two had the credit markets not been so bad. We did, I think I know I mentioned this in the first quarter or the January call we really pulled out a major acquisition on international basis because the credit markets just couldn't do what needed to be done.

So we do have some opportunities there, we would certainly like to be in the merchant acquiring business at some stage and I think we'll get there. This acquisition that we made with Infonox gives us some opportunities in the mobile space, it gives us some opportunities with some of the large retailers to do some things that I don't think anybody else in the industry or it really in the retail business is doing. And we are pretty excited about all of that. I mean this business is -- we certainly diversified and we are going to continue to diversify, but I do think in the meantime that you are going to see us add some more good business, we are certainly not giving up on this or walking away.

Julio Conntearous

Okay. And then any thoughts on when you guys would contemplate even assuming there is not a lot of growth and some other priorities fall further down on the line increasing the dividend or paying out just given the kind of free cash flow that you guys are throwing off?

Phil Tomlinson

Well we have talked about that and at this point we decided to hold cash, and we've heard 10,000 times in today's world cash is king. And we really wanted to have the cash when we decided to make an acquisition. I'm sure at some point there is a line of demarcation where that would be the smart thing to do. But it's not in the near future.

Julio Conntearous

Got it. Okay guys, great thanks. And good luck.

Phil Tomlinson

Thank you [Neil].

Operator

Thank you, we will take the next questions from James Friedman your line is live.

James Friedman

Hi, thank you for taking my question.

Phil Tomlinson

Sure.

James Friedman

With regard to -- you described as part of the rationale for the disposition of total debt management as the low margins, I was wondering if you could compare and contrast the margins in TDM versus the margins in the other services line item?

Phil Tomlinson

I'd sat the TDM margins are at the lowest of anybody in that group. You got some of our printing operations, maybe carry low double-digit growth and margin. Or margin at low double-digits, and then you got some of the managed services call center area which is high singles to low double-digits. But I would say TDM is almost -- almost breakeven.

James Friedman

Okay. You were asked earlier about UDAP, and correctly you governed our expectations on UDAP, but I guess what I'm asking more generally is in your conversations with prospects, you have, what seems like a significant regulatory development surrounding UDAP, what is the remaining ingredient from our past experience that's prerequisite, you got the regulatory environment coming down and then what else do they need in order to green light a transaction like what do they need to actually purchase the next series of solutions from TSYS.

Phil Tomlinson

That's a great question. And I wish I had the exact answer to it because every bank is or every issuer has different issues. I think -- honestly I think part of the problem is people are almost in shock. They've been dealing with these issues for so long. The UDAP is just another layer on the cake. I think the problem that we are seeing with most banks as I mentioned earlier is and particularly within the banking industry is they are not nearly as concerned about the card business as they are about the bank. And both the card business is certainly down but the banks typically are having these tremendous loan loss problems and not many of them have seen great progress yet. And I do think that, that will turn at some point in time. And I think we will be in better shape. But, everybody has a tipping point. And we are starting to see some good size issuers that are saying, hey I probably had enough trying to do this myself.

It's almost criminal to me that half of them are not running down here signing up. Because we know we can save the money, we know we can put a good product out the door and we certainly can contain and their cost on a go forward basis with good products. But like I say everybody has a tipping point, and we are certainly trying to help them get to that decision. But as I've said on many, many occasions this is a very long sales cycle and the best of times.

James Friedman

And then last thing I may have missed it in the press release, but did you disclose or if you didn't, could you maybe book and the amount that you actually received for TDM?

Phil Tomlinson

We don't -- that sale is still on going, I think you will be able to see that as it closes out in the second quarter it will show up in discontinued operations.

James Friedman

And is there a standard metric as a multiple, say, is there revenue that we should contemplate?

Jimmy Lipham

No. Sorry Jamie, we can't help you on that one, stay tuned.

James Friedman

Yeah. All right, well that's my job. Thank you.

Jimmy Lipham

Thank you.

Phil Tomlinson

Dave, let's wait for the next question, so Jim can answer Brett Huff's question about EPS for the remainder of the year.

Jimmy Lipham

Brett, are you there?

Phil Tomlinson

He won't come back on.

Jimmy Lipham

Okay. Well, as we look to earnings per share as it goes through the rest of the year, you can expect a progression from where we are today. And it's going to be up anywhere in the, I don't know, around 2 to 3 cents a share as it goes through the quarter.

Operator

Excuse me gentlemen would you like me to make Mr. Huff's line live?

Phil Tomlinson

Yes, if you could.

Operator

Okay Mr. Huff your line is live.

Brett Huff

Thank you, that's all I need. So you say its 2 to 3 cents sort of sequential each quarter till the end of the year.

Phil Tomlinson

That's correct.

Brett Huff

Okay thanks for getting back to me, I appreciate it, Jim.

Jimmy Lipham

Yeah thank you. Dave?

Operator

And we will take the next question from Glenn Greene, your line is live.

Glenn Greene

Thank you. Good afternoon Phil and Jim.

Phil Tomlinson

Hey, Glenn, how are you?

Glenn Greene

Pretty good. Just a couple of clarification questions, one I was just hoping to just get clarification on the client and the consumer accounts roughly 19 to 20 million, from the fourth quarter. I suspect the good majority of its WaMu, but could you help us understand how much of it was WaMu and how much of it was from purges and anything else that helps to reconcile that difference to the 19 to 20 million change?

Jimmy Lipham

I would say that you could probably think its over two-thirds would be WaMu.

Glenn Greene

And probably another two or three million from purged accounts?

Jimmy Lipham

Right.

Glenn Greene

Okay that's helpful. And then just on back to the international margins, which obviously fell a lot, and you explained that, but I guess I wasn't exactly clear on what's going to drive the improvement in the margins back to sort of the 13% to 15% level for the year, is that manually the cost cutting initiatives or some new clients that are going to be or a combination there of.

Jimmy Lipham

It's mainly new revenues coming in during the rest of this year, as the clients convert.

Glenn Greene

So expense base should be relatively stable from here on now?

Phil Tomlinson

Well, you know, I think under, yeah I think you could say that until we announced that we've signed some other nice piece of business then we will crank that up again and you will have some expenses. But when you go to these new countries your first customer is absolutely the most expensive to add.

And we are in the process of going to Germany, we are having to modify systems for, to issue cards in Germany. We are doing the same thing in Brazil. And they have significant differences in the way we do business in Brazil than we do for instance in the US, and so the next customer that we add in Brazil will be much, much easier in the same way in Germany.

Glenn Greene

Okay. All right, that's all I had, thank you.

Jimmy Lipham

Thank you, Glenn.

Operator

Thank you very much. We have a follow-up question coming from Jason Kupferberg. Your line is live.

Glenn Fodor - UBS

It's Glenn again. Thanks for the follow-up. Regarding new contracts and meeting guidance, does guidance assume some sort of win hit rate of the current pipeline, and could you give us a range of what kind of success rate you are assuming and you need to happen on your pipeline to make the guidance?

Jimmy Lipham

I does assume that, Glenn. It assumes what we know that is coming on board.

Glenn Fodor - UBS

Okay. Anything you win, over and above would be some upside this year.

Jimmy Lipham

That would be a plus.

Glenn Fodor - UBS

Okay. But what's likely this year, because of the long lead times and implementations.

Jimmy Lipham

That's exactly right. You can figure typically 9 to 15, 16 months, and on a smaller accounts you might do it faster than that. But we've done them in 90 days, but it's not really the way you want to do it. But it would be hard, we are really in May now.

Glenn Fodor - UBS

Right, okay. And on pricing just follow-up you addressed it in the beginning of the Q&A. Can I infer from your statements that aside from the large client renegotiation going on, and tiering that impacts some of your clients, is pricing overall relatively steady is that a fair assumption aside from the abnormalities.

Jimmy Lipham

Yeah, I think that's pretty fair assumption. We do have, gosh, as we said earlier, we have had some commerce meet different tranches and some of those tranches are more expensive to us than others and that happens periodically, it's just the way we do business, and we do feel like this customer we were talking about where we can go ahead and put this bed for a long-term contract and move on with it.

Glenn Fodor - UBS

Okay, great. Appreciate it, thanks.

Jimmy Lipham

Thank you.

Operator

Thank you very much ladies and gentlemen, the floor remains open for questions, (Operator Instructions). And we will take the next question from John Williams your line is live.

John Williams

Hi, guys. Quick question, wondering if you could give a little bit more color on what you are seeing in the international acquiring business acquiring business (inaudible) if acquisitions or something you have talked in the past, I guess maybe give us some near-term catalyst you are seeing.

Phil Tomlinson

On the acquiring side, we only have one customer in the international acquiring business, and that's PaySquare in The Netherlands, which we added, I think in the fourth quarter of last year, and so it's not like we have a big business internationally on the merchant processing side.

I could, just with one customer, I couldn't tell you what they are doing under any circumstances, because I would be disclosing something about a customer in particular. But I think Europe has certainly, we said earlier has certainly slowed down as much in some cases more than the US.

John Williams

Any idea when you will be restating the remaining three quarters of '08, just to look like what you showed for the first quarter?

Phil Tomlinson

Jimmy, you have to answer that.

Jimmy Lipham

Just doing it by quarters is what we started. I think we will have to look at that and see if there is some need for us to put it out there. It's mainly all the restatement that you have for TDM is Total Debt Management has to do with reimbursable revenues, which doesn't really effect operating income anyway.

And when you look at the total that you were getting as an effective net income, earnings per share, they are only contributes 1.8 million for the whole year. Those are pretty immaterial.

John Williams

Okay. Thank you, guys.

Phil Tomlinson

We see that's the last question in the queue. And I wanted to go ahead and close this thing out. One, I wanted to remind you that our upcoming Analyst Day in New York on May 21st, and certainly I think all of you have got invitations to that, and call Shawn if you would like to make reservations, if you haven't already.

I think that it's obvious we are not happy with the first quarter, and we are not happy with changing guidance like we have felt a need to do, but I think you can count on us to continue to win significant business around the world, and I think today's press release about Carrefour, it just solidifies that, I don't know if you know much about this company, but they are the largest retailer in Europe and they are second largest in the world. At 15,000 stores, 495,000 employees globally, so this is not some small deal that we are working on here.

In the first phase of this thing is a hybrid card that we come up with that looks and acts like a general private label card when you are in the Carrefour stores, but then when you take it outside the Carrefour stores, it acts like a general purpose Visa or MasterCard when you use it at their service station or somewhere else at a restaurant and it allows them to do some very unique things inside of their stores.

We will also be converting a very large private label program to TSYS as a result of this new contract. And as you know, one of our goals that we have been talking about for a long time is to be in Brazil, it's the fourth largest credit card issuing company in the world. And I think this announcement does that in a big way. And we are very excited about that.

As Jimmy said, margins have contracted, but we believe they will improve each quarter. We are going to continue to enhance and improve products and services, I said earlier our prospect list is long and deep and varied and stretches around the world as we know it today.

Prospects and clients, both have tremendous pressure to improve efficiencies, and I think you will see that a lot of them are searching for better answers than what they have got today, I do believe that we can answer that mail, I think there are four significant issues that will be in this industry for the foreseeable future.

One, the economy is going to continue to struggle, it's not going to cure itself overnight, and we just hope it cures itself this year. There is going to be a widespread retreat from risk, and it's been a wonderful thing over the years to be associated with banks, they are great customers but I have to remind everybody every time I talk to them that we are not a bank, we don't have credit risk, we don't loan money.

The third thing, there will be just massive new government regulations and I think in some ways it's going to encourage some of the smaller banks to get back in to the card business and try to take care of their customers, as you know a lot of them have got out of the business over the years, and I think there is a changing competitive landscape when you look at what has happened with Metavante and some of the other changes that are going on.

Our fundamentals are as strong as they have ever been, we got a good company. We have got a lot of the, I have been telling you all the reasons why you would want to own TSYS's stock and I don't see any of that changing.

Our cost controls are working and we are going to be even more aggressive. And we believe that now is the time that we got to get ready for the future and there will be a growth spurt that will come out of this horrible economy that we have been dealing with.

So I wanted to thank you for being with us. Thank you for your questions and your interest, and hope you will keep your eye on us and we look forward to chat with you soon.

If you have any questions after this, certainly feel free to call Shawn. He is available and we will take your calls all night if necessary. So thanks for being with us and we look forward to talking to you soon. Bye, bye.

Operator

Thank you very much, ladies and gentlemen. This concludes today's presentation. You may disconnect your lines and have a wonderful day.

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