Total System Services (TSS) M. Troy Woods on Q2 2016 Results - Earnings Call Transcript

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Total System Services, Inc. (NYSE:TSS) Q2 2016 Earnings Call July 26, 2016 5:00 PM ET

Executives

Shawn Roberts - Senior Director, Investor Relations

M. Troy Woods - Chairman, & Chief Executive Officer

Paul Michael Todd - Chief Financial Officer & Senior Executive Vice President

Analysts

Timothy Wayne Willi - Wells Fargo Securities LLC

Darrin Peller - Barclays Capital, Inc.

Ashwin Shirvaikar - Citigroup Global Markets, Inc. (Broker)

Allison Jordan - Cowen & Co. LLC

Bryan C. Keane - Deutsche Bank Securities, Inc.

Steven Kwok - Keefe, Bruyette & Woods, Inc.

Vasundhara Govil - Morgan Stanley & Co. LLC

Jason Alan Kupferberg - Jefferies LLC

Thomas McCrohan - CLSA Americas LLC

Shawn Roberts - Senior Director, Investor Relations

Dialing in and getting a busy signal or being told this was an improper number. We appreciate the number of you that did get in and apologize for any inconvenience. This evening, we're going to begin the call with opening comments from TSYS, Chairman and CEO, Troy Woods; followed by TSYS CFO, Paul Todd; reviewing the second quarter highlights and consolidated financials.

Troy and Paul will be referencing a slide presentation during their prepared remarks and a copy of this presentation, as well as our earnings release and supplemental schedules are available on our website at investors.tsys.com. After Troy and Paul's remarks, we will open the call up for Q&A. I'd like to remind everyone that during the Q&A each person will be allowed to ask two questions before the operators will place you back into the queue.

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

We will also discuss items that do not conform to GAAP. We reconcile those measures to GAAP measures in the appendix of the slide presentation and in the supplemental schedules to the press release.

At this point I'll turn the call over to Troy Woods.

M. Troy Woods - Chairman, & Chief Executive Officer

Thank you, Shawn. Good evening and welcome to our second quarter earnings call. This has been another excellent quarter for TSYS. Our team members across our global footprint delivered an outstanding performance for the quarter and for the first half of the year.

As a reminder, this quarter's results include a full quarter of transfers. I'll address our integration activities with respect to transfers later, but by almost any measure, our first quarter together has been very successful and we are pleased with our progress and the new team.

Some of the highlights for the quarter that I would like to call out are, consolidated net revenue was up 27.8%, adjusted earnings per share increased 27.9%, and consolidated operating margin expanded 202 basis points. All four of our operating segments contributed to these exceptional metrics for the quarter. I want to congratulate and thank all of our team members for their dedication, commitment and focus as we continue to deliver on our strategic plan.

One final highlight before we move into the specific results for our segments. While we measure our success with our financials, we also take great pride in our community involvement and servant leadership. In June we were recognized as one of America's most community-minded companies by Civic 50, an initiative that identifies companies for their commitment to improving the quality of life in the communities where they do business. This is the third consecutive time we've been honored with this award and it is a complement to our dedicated team members who give back in the communities where they work and live.

I now would like to address the highlights of each of our segments beginning with North America. Our strong financial performance in North America is partially a result of a positive U.S. economy, which posted job gains and overall strength in consumer spending during the quarter. April produced the largest increase in consumer spending in six years. And May and June were also robust pointing to a reasonably healthy American consumer.

We still expect a significant portion of our growth in our North America segment to come from the cross-sell of products and services. We continue to play significant focus on cross-selling existing products and services to current clients, as well as a longer-term view of delivering and cross-selling new products and services. These new products and services will be delivered through the transformation of technologies and innovation, currently underway at TSYS.

To this point, during the quarter we saw a 13.1% increase over the same quarter last year, from the sale of services across our value-added, loyalty and managed services groups in this segment. On the business development front, we signed a new long-term agreement with the Bank of Montréal to process their MasterCard branded debit accounts and we also renewed three issuing contracts.

We had previously indicated that Green Dot would be de-converted from TSYS during the second half of 2016. Green Dot has executed on three of their plan four deconvergence from TSYS; however, the final wave of accounts is not expected to be de-converted from TSYS this year.

Now let's turn to the international segment, of course the headline grabbing news from our international segment was the Brexit vote in the UK. The early reaction certainly negatively impacted both the currency and equity markets. The UK vote to leave the European Union has created an overall air of uncertainty in political, social and economic circles across the globe.

Following this vote, we spoke with many executives across our European client base and their current position is business as usual with TSYS. One of our clients published a report, which indicated that UK consumer spending remained resilient both before and after the Brexit EU referendum. There are many different views on Brexit's longer term impact and the potential implications that it may or may not cause. We will continue to monitor these developments closely. And we'll take appropriate actions when and if deemed necessary.

Also during the quarter, our international managed services business became Financial Conduct Authority or FCA authorized. This puts TSYS in a unique position against our competitors and enables us to extend our current service offering to include broad customer care support and engagement across Europe.

As I mentioned last quarter, our resilient business continues to make significant financial and operational progress. Although the Brazilian market remains challenging due to political and economic uncertainty, in the run up for the Rio Olympic Games, we are optimistic over the interest in our market leading payments platform from across the broader Latin and South America regions.

In China, the economy has slowed to mid-to mid-high single digit growth. However, the underlying electronic payment transaction growth and overall upward trend in consumer spending and this $8.3 trillion card payment market continues to fuel our CUP Data joint venture above expectations.

In our PRIME business, we continue to seek progress on the licensing and processing business lines with many new prospects in each area.

Our focus will continue to be on leveraging our recently transformed international operating platforms to deliver cost effective solutions on both TS2 and PRIME around the globe.

For our combined issuing segments, we added over 13 million traditional accounts during the quarter, which is further proof of the health of our issuing business. Our focus will continue to be on client retention, cross-selling products and services, as well as new targeted prospects around the globe.

Now let's address our merchant business. As I indicated earlier, TransFirst is included in our second quarter numbers. We have just completed our first quarter of the TransFirst acquisition and we are pleased to report that the integration work and synergy goals are both on-track.

As we've indicated from the beginning regarding this acquisition, our goal is to optimize the capabilities, products and services across our combined entities that will enable our customers to rely on one single provider for all of their processing needs.

We believe this is a key market differentiator, although there is significant integration work that still must take place, we will remain relentlessly focused on growing the business. Today over 80% of our merchant net revenue is derived from our direct channels. We believe the scale and diverse distribution network that we've created in our merchant's business is one of the keys to our success. Our combined merchant businesses now gives us leadership positions in all three of our lines of business.

And finally, I'd like to address NetSpend. Our NetSpend segment had another great quarter as well. Quarterly revenues were up almost 15%. Margins improved slightly year-over-year and 330 basis points sequentially and we surpassed 101,000 distributing locations and employers for the quarter.

On the business development front, I am happy to announce that our long-standing distribution partner and industry leader Blackhawk Network has entered a 10-year strategic partnership that builds upon more than a decade of work we've done together. This new partnership will provide significant expansion or facings for NetSpend and Blackhawk's impressive US retail network and potentially provide additional distribution locations in grocery stores and other retailers.

Another great win for our retail presence this quarter was a three-year extension of the NetSpend partnership with CVS. Our Paycard channel was also very active during the quarter. We signed new three-year agreements with the Gap and with JCPenney to be their exclusive Paycard provider. These new and growing partnerships are the manifestation of NetSpend's goal to meet consumers where they work and shop to provide them with a great solution fulfilling their financial needs.

As to the CFPB, we now expect the final rules to be published sometime in September. When the final rules are published, and after we have had an adequate review period, we will share with you what it means to our business and what our mitigation strategies are.

All-in-all, it was a great quarter with all four segments growing revenue, expanding our consolidated margin, executing on the TransFirst acquisition and winning new business.

At our Investor Day conference in May, I discussed the launching of our TSYS 2020 initiative. This is an enterprise wide initiative to bring clarity and focus to our future business model.

As a reminder, one of the tenets of TSYS 2020 was to provide us with an assessment of the ideal operating structure to maximize efficiencies and the scale of our operations. As I mentioned earlier, this process is well underway in our merchant segment, primarily as a result of the TransFirst acquisition. Through organizational consolidation, job eliminations and other efficiency initiatives, we are ahead of schedule to achieve our $15 million synergy goal for merchants in 2017.

We are now in the process of taking this efficiency initiative to the rest of our company. As a result of this process, we do expect to have some one-time related expenses in the third quarter primarily related to severance. We are convinced that these moves will ensure we are operating at our full potential and will allow us to improve and strengthen our already very successful business model. Paul will provide additional color on this in his remarks.

With that, I'll ask Paul to provide additional detailed financial information for the second quarter and outlook for the remainder of 2016. Paul?

Paul Michael Todd - Chief Financial Officer & Senior Executive Vice President

Thank you, Troy, and I want to reemphasize how pleased we are with the second quarter performance of our company as we continue to execute against our strategic plans. As I mentioned on our last two calls regarding 2016 expected performance, we would be executing on improving margins in our company while being focused on the integration of TransFirst and that is exactly what occurred during the second quarter. We couldn't be more pleased with the TransFirst acquisition as John Shlonsky and team have already started to reorganize and are successfully down the integration path to position the TSYS merchant segment in a unique way.

When we announced the transaction, our goal was to achieve double-digit percentage accretion with the transaction, which we achieved in the second quarter and our synergy attainment goals are on track. So we see very positive momentum with TransFirst.

Now turning to slide six and a review of the numbers. Total revenues were $1.15 billion, a 66.3% increase from the second quarter of last year and net revenue was up 27.8% from 2Q 2015 to $794.9 million. For the quarter, adjusted EBITDA increased 32.7% and adjusted EPS from continuing operations increased 27.9%, both in line with our net revenue increase.

On a GAAP basis, basic EPS was down $0.07 to $0.38 as a result of the effect of the TransFirst acquisition. On a year-to-date basis, total revenues were $1.89 billion, a 39.6% increase and net revenue was $1.47 billion, representing a 20.4% growth over 2015.

Year-to-date adjusted EBITDA of $504.9 million is 26.2% higher than through this time last year and year-to-date adjusted EPS from continuing operations of $1.40 is a 25.5% increase. On a GAAP basis, basic EPS was flat at $0.87 from prior year, once again reflecting the effect of the TransFirst acquisition.

I mentioned on our last two calls about our goal to increase our adjusted EBITDA margin by 100 basis points this year and we achieved this goal in the quarter with an approximate 130 basis point increase for the quarter and a 160 basis point expansion through six months. It is still our goal to achieve this 100 basis point adjusted EBITDA margin expansion for the year, building upon the strong adjusted EBITDA margin expansion we had last year.

Turning to slide seven, you can see that our diversification strategy around the contribution of revenue continues with the TransFirst acquisition included in our results for the first time and our merchant segment now represents a third of our net revenue, up from approximately 19% from this time last year. We believe this diversified revenue mix provides for strength and is a unique dynamic in the TSYS investment story as we continue to diversify our revenue mix to be more heavily weighted to the higher growth areas of payments.

Our adjusted operating margin for the quarter was 28.6%, an increase of over 200 basis points versus Q2 of 2015 and our 28.2% year-to-date margin is also an increase of roughly 200 basis points. Importantly, three of our four segments saw their adjusted segment operating margins expand for the quarter from the second quarter of last year and speaks to the strength of the cross segment delivery of performance that I've mentioned as our goal on our last two calls. Clearly, we're pleased with our consolidated results, but we are equally pleased with the impressive segment results that are behind the consolidated numbers.

Now let's dig into the segment results for North America starting on slide eight. As I mentioned on our last call, we expect the North America segment full year revenue growth in the mid single-digit range in 2016 and that is still our expectation. Revenue for the quarter was up 3.5% and we saw cross-sell growth in our value-added managed services and loyalty services up a combined 13.1% over the same quarter last year.

The sequential quarter decline in net revenue growth from the 14.1% last quarter is largely due to the anniversary of the large client conversion in mid Q1 2015 along with our output services area returning to more normalized levels as we begin to anniversary some of the elevated growth we've seen in recent quarters related to EMV, other projects and some one-time items.

As for this segment's operating income, it grew 4% over last year resulting in a segment operating margin of 37.9%, up 20 basis points. From a volume perspective, you can see from this slide that our traditional accounts on file continues to show steady growth and has reached yet another new record of $435.1 million. I'll remind you that this excludes prepaid, government services and single use accounts.

We continue to redeploy and refocus resources in our issuer product group, our client experience initiatives, and across our IT landscape to provide a more proactive and focused delivery model, as well as focus on cross-selling existing products into the market leading distribution channel that we've spent years cultivating. Overall, we continue to expect this business to grow in the mid single-digit range for the year with slightly expanding margins.

Now, I want to move to the International segment highlights on slide nine, where we continued to experience revenue growth and more importantly operating income and margin growth. Net revenue of $81.8 million was down 2.5% on a reported basis, but up 4.2% on a constant currency basis. The constant currency revenue growth of 4.2% is consistent with the low single-digit constant currency revenue growth we expect for this segment this year.

We continue to see solid growth from our existing client base in Europe which was partly offset by previously expected loss client revenue. The segment's margin continues to grow in-line with our margin improvement plans, delivering over 330 basis points in margin improvement over Q2 of 2015 at 19.3%. We still expect this segment to slightly expand its margin this year net of any currency effects.

From a volume perspective traditional accounts on file grew $2.9 million to a record level of $66 million, up 4.7% from prior-year. And the segment experienced high single-digit transaction growth of 7.3%.

As I mentioned in our Q1 call, our CUP Data joint venture continues to meet expectations for both of our organizations and we expect continued growth from this business, despite the slowdown of the Chinese economy's growth rate. Overall, we are pleased with our international segment's performance for the quarter as the business continues to deliver against its strategic plans.

Now on to the merchant segment on slide 10. First as I mentioned earlier, we're pleased that the integration and synergy plans for TransFirst are on-track. With the acquisition of TransFirst net revenue for this segment was $261.5 million, up 121.8%, and as I mentioned earlier, our merchant segment now represents roughly one-third of the net revenue of the company. Both TransFirst and our legacy merchant business are meeting our profit expectations but given the success of the integration and the movements between our businesses to competitively align our offerings, we already view this business as one entity as opposed to two separate businesses.

As we discussed last quarter, our direct business is now more than 80% of segment net revenue achieving our long-term strategic goal of having over 75% of our net revenue derived from direct merchant acquiring. Our focus on the SMB space and ongoing traction and integrated payments continues to drive double-digit SPS volume growth. Combined our integrated payments channels are now approximately 30% of our total direct business's net revenue. While we still view our indirect business as a low or flat growth business, we did see positive net revenue growth of 5.7% year-over-year driven by POS transaction growth of 6.4% year-over-year.

We do expect this to return to more of a flat growth picture for the remaining part of the year. However, similar to the comments I made last quarter within our indirect business, we continue to retain our core customers renewing four full service agreements, including one of our top five customers.

I've mentioned on several occasions that the margin picture of the merchant segment would likely remain unchanged with the integration of TransFirst and that was the case in this quarter with margins at a strong 34.4% in line with the 2Q margin, up 15%.

As I mentioned, John and his team are quickly integrating the two businesses and at the integration seasons we will likely be providing new metrics that will best measure and drive performance on a go-forward basis.

We are not likely to continue to report on a direct and indirect basis given the smaller impact of indirect and the way we are now managing the combined businesses, but wanted to continue to provide this breakout this quarter to complete the picture that we had outlined at the time of the acquisition around revenue contribution mix.

In all, we couldn't be more pleased with the performance of both the underlying merchant businesses, the integration that is occurring, the revenue contribution mix we now have, specifically in integrated payments and the opportunities that we see ahead for this segment.

Now, I want to talk about the strong performance of the NetSpend segment starting on slide 11. Revenue for NetSpend topped $162.6 million, representing 14.8% year-over-year organic revenue growth for the quarter. Revenue growth is strong both in total and by acquisition channel with three of our four distribution channels delivering double-digit year-over-year revenue growth. This shows the results of a diversified distribution model where we continue to win new business, as well as expand and extend our existing relationships.

The second quarter had more than $6.6 billion of gross dollar volume or spend, up 19.6% over prior year. We exited the quarter with 4.4 million active cards, almost 2.2 million of which are on direct deposit, which represents a 16.6% year-over-year increase.

While our card and volume levels continue to increase, we are also consistently focused on expanding our distribution network by adding approximately 1000 distributing employers and locations in the quarter, bringing the current total to more than 101,000. This count does not include new distribution locations that we could add with the expanded Blackhawk relationship that Troy discussed earlier.

Second quarter margins expanded slightly from the prior year at 26.1% and we are preparing for some larger card and marketing costs in the second half of the year associated with merchandising additional facing at Blackhawk distribution locations.

We're pleased with NetSpend's position coming out of Q2. Our expectation for this business continues to be for revenue growth in the low double-digits on a full year basis with slightly expanding margins for 2016 versus 2015.

Leaving NetSpend and moving to the consolidated level, again, you can see on slide 12 how each of our segment's margins contributed to our overall adjusted operating margin at 28.6%, up over 200 basis points from last year's 2Q level. The story is similar on a year-to-date basis with a 28.2% adjusted operating margin as seen on slide 13.

Also I want to state that these slides provide a bridge between the adjusted segment operating income for each of our segments and our consolidated adjusted operating income. We provide this because our segments report their results on an adjusted segment operating income basis which excludes amortization of acquisition intangibles, M&A expenses, corporate admin and stock-based compensation.

This slide also provides reconciliation to GAAP operating income of $287.5 million. As it relates to our cash position, we ended the quarter at $465 million in cash, up $20 million from the end of the first quarter which excluded the proceeds from the $1.49 billion we borrowed that was used for the TransFirst acquisition. We had $37 million of CapEx for the quarter, of which about 29% was related to property and equipment, 27% was related to contract acquisition costs with the remaining 44% related to internally developed and licensed software.

When we announced the TransFirst acquisition, I highlighted our deleveraging plan of approximately $800 million of deleveraging in the first 24 months post acquisition. We deployed $125 million during the quarter for accelerated repayments on our bank credit facility, as part of our deleveraging plan and we remain committed to this plan and our investment grade rating.

Our average basic weighted shares outstanding for the quarter were 183.7 million and 183.5 million on a year-to-date basis.

Now a minute on cash flow, our free cash flow for the quarter was $157.6 million and our year-to-date free cash flow of $259 million is a 37.3% increase from the year-to-date levels of last year. And based on this performance, we continue to believe that our annual free cash flow estimate of $510 million to $540 million for 2016 is still valid, although I want to remind you that as demonstrated in our history, cash will not flow in a linear manner on a quarterly basis.

On taxes, our effective tax rate for the quarter was 38.1%, which is higher than our normal levels due to some acquisition related effects that are one-time in nature and we expect the last half of the year to return to the 34% range, but on a reported basis the second quarter increase will move our expected full year rate from the 34% range closer to 35%.

And finally on guidance, while our guidance remains unchanged at this time, I do want to mention that the surprise Brexit vote and its impact on the pound and euro to the dollar could negatively impact our international results in the back half of the year. If the two currencies remain at current levels, we could see an approximate 100 basis point decline or greater in our estimated revenue growth for the full year, and adjusted EPS pressure in the $0.02 range. It's too early to tell at this point, but I wanted to share that commentary with you and will update you further in 3Q on this effect.

And finally, I want to summarize with three primary callouts that I think are the key takeaways from today. First callout is on margins, I mentioned on our January call that our focus for 2016 was going to be on margins following the strong year of organic revenue growth and margin expansion in 2015.

Our goal going into the year was to expand our adjusted EBITDA margin by roughly 100 basis points and we wanted this margin expansion to be delivered in a cross segment way. Through the first six months we delivered against this goal with adjusted EBITDA margins increasing 130 basis points on a quarterly basis and 160 basis points on a year-to-date basis.

With some investments made in the back half of the year, we still expect to expand this important metric by 100 basis points for the year roughly in line with what we achieved last year. Also we will be making margin improvement moves over the coming quarters to expand this story for the longer term.

Continuing on what Troy mentioned about our TSYS 2020 efficiency and margin improvement initiatives, we expect to have approximately $5 million to $7 million of one-time related expenses in the third quarter, primarily related to severance that will be partially offset by salary and benefits savings in the fourth quarter.

The second callout is related to the upcoming comparison in our third quarter. As you will recall, in 2015 during the third quarter, we experienced a one-time related EPS tax benefit of $0.13, which we detailed in our Q3 2015 earnings call and schedules. This $0.13 included a $15 million operating income benefit and a net $8.5 million benefit on the tax line, which had to be adjusted out of the 2015 results for a proper comparison to 3Q 2016 results and extra care on this should be applied to arrive at a better approximation of expected performance in Q3 2016.

I want to continue to stress this point as I did on our last call and at our latest Analyst Day to allow for the proper handling of the comparison results of Q3 2016 versus Q3 of 2015. So there are three moving parts expected in the third quarter; first, you should consider the tax effect from the prior year needing adjustment. Second are the expected non-TransFirst one-time expenses of $5 million to $7 million primarily related to severance which would reduce 3Q adjusted EPS by approximately $0.02. And third, the potential currency impacts in the back half of the year that I mentioned earlier which could reduce our net revenue yearly growth rate by approximately 100 basis points with a potential $0.02 of negative EPS impact.

The third and final call out is the continued execution against our strategic plan of creating a diversified payments company and platform. With the completion of TransFirst, we have largely completed our multiyear strategic goal of diversifying the revenue contribution to a more strategic balance of higher growth revenue streams in payments.

We believe the balance we now have of 37% of net revenue from North America issuer processing, 33% from merchant acquiring with the acquisition of TransFirst, 20% from NetSpend and the remaining 10% from our international opportunities not including our China Union Pay JV, provides TSYS the strength of diversification that is unique in payments. When you couple this revenue diversification with our recent margin improvement plans that will continue into 2017 and beyond, you can see that the changing face of TSYS provides for a stronger and better positioned company in the future.

None of this execution would be possible without the extreme dedication of our team members and we specifically thank our new team members from TransFirst who joined us during the quarter and made strong contributions to the success of this quarter. We thank our entire team for delivering another successful quarter of outstanding results.

And with that we will open it up for questions.

Question-and-Answer Session

Operator

Our first question comes from Timothy Willi from Wells Fargo. Go ahead.

Timothy Wayne Willi - Wells Fargo Securities LLC

Thanks and good afternoon. My first question was regarding NetSpend and Blackhawk. Could you just maybe talk a little bit more about what that partnership is and to what degree that would show up in the income statement or accounts on file just so we can sort of think about that?

M. Troy Woods - Chairman, & Chief Executive Officer

Yeah, Tim, hey Troy, and I'll take that on the front-end and Paul may want to add to it on the backside. As I indicated in my opening remarks Tim, we've had long-standing relationship with Blackhawk for many years, primarily utilizing their expansive network for distribution to help us get into the retail arena. This new agreement, which is a 10-year agreement, allows us to move further and deeper into the program management with Blackhawk, primarily taking advantage of their large-scale operation in grocery stores and retail in general. And so I'll let Paul address the financial side of it, but it's a really big win and kudos for our NetSpend group to expand this strategic partnership.

Paul Michael Todd - Chief Financial Officer & Senior Executive Vice President

Yeah sure, Tim, good question. And from a, first of all obviously, we don't ever give out specific client kind of impact, but I'd say it's relatively de minimis from a 2016 perspective, but does become meaningful if all the projections kind of play out in a 2017 context. And I would just kind of reinforce that the strategic nature of getting this partnership, if you think back to kind of the late 2014 timeframe where we had several strategic partnerships that we announced in that timeframe, we didn't have those in 2015 and that's actually kind of providing some of the rollover challenge in the second half of the year for NetSpend. So it's nice to have a strategic win of this of some meaningful size that we will get benefit for in the 2017 timeframe.

Timothy Wayne Willi - Wells Fargo Securities LLC

Okay. And my follow-up was still on NetSpend, but I know over the last year or so you've had a higher level of investment spending. You've talked about product and growth orientated. I guess just any thoughts around where you're at with that, if we should expect that to have peaked or as we think through 2016 and just conceptually into 2017 if there's still an appetite for a pretty heavy level of research development product type spending?

Paul Michael Todd - Chief Financial Officer & Senior Executive Vice President

Sure Tim, good question. I wouldn't say it's peaked, but I would also say that the trajectory has slowed, and so you're not going to see us spend at the kind of growth rate there specifically as it relates to marketing on a year-over-year basis and specifically as it relates to the fourth quarter that you saw us do last year. But I will say we are strategic in our investments with NetSpend and that when we see growth, we have the flexibility to want to deploy growth capital down that path. And so that certainly played itself out of our spend in the latter half of last year and what we saw in the first half of this year, which exceeded our expectations. And you heard my prepared remarks. We're going to provide for some added spending around this new Blackhawk engagement, but you are not going to see the trajectory of growth that you saw last year.

Timothy Wayne Willi - Wells Fargo Securities LLC

Thanks very much.

M. Troy Woods - Chairman, & Chief Executive Officer

Well, if I could just add to that, Tim, in addition to what Paul indicated, we talked on at least one occasion, maybe twice, about our small business rollout and it too requires investment. We have a lot of good plans for our smaller business rollout and it too again requires investment as we develop new products. So I think we'll continue that in the years to come.

Timothy Wayne Willi - Wells Fargo Securities LLC

Great. Thank you very much.

Operator

Our next question is from Darrin Peller from Barclays. Please go ahead.

Darrin Peller - Barclays Capital, Inc.

Thanks guys. Just to be clear, I know you mentioned the North America revenue growth rate deceleration was really the anniversary of Bank of America and I think you said the impact of tougher comps on output solutions, but was there any impact yet from Green Dot rolling off? I know you mentioned I think three of the four initiatives needed to happen and it was almost there, but I just wonder if any revenue impacted now.

And then if you can just comment on the high single-digit growth in AOF versus revenue growth rate of low single-digits, the disconnect now there and if that's going to be a sort of way to model it out, sustainable spread between the two. Thanks guys.

Paul Michael Todd - Chief Financial Officer & Senior Executive Vice President

Sure, Darrin. As it relates to the sequential quarter revenue growth rate, you are exactly right. I mean that's exactly what happened. And as I said, we still expect the North America business to be at that mid single-digit revenue growth that we expected at the beginning of the year. We do have the comp issue with the large conversion from that sequential quarter comparison, but we are from a kind of a year-over-year basis, the single biggest kind of grow over challenge is in output services where we had a higher elevated revenue from output services last year related to EMV.

And you recall last year throughout the year, I was saying that those services were coming in at higher than expected ranges. We kind of got an elevated level there that we're been dealing with this year and over time that will all kind of mute itself out. As it relates to Green Dot specifically, there is some decline there that plays out on a kind of a year-over-year basis, but outside of that, I wouldn't characterize anything else that's dramatically playing out there.

As it relates to the account on file and the North America revenue piece, yeah, I mean, as we have gotten to be kind of have a more bundled piece with this new base that we're at, the connection points between the accounts on file and revenue growth is looser. And specifically when you have value-added services and you have a bigger portion coming from kind of the non-account on file base fees, then you get into that kind of disconnect, so I would characterize it that way.

Darrin Peller - Barclays Capital, Inc.

Okay. And just as follow-up, I mean, again nothing has changed on your view for mid to high-single digit growth for that segment longer-term? And then on the merchant side, what was the organic growth rate of that segment, if maybe I missed it or the pro forma organic growth rate if you want is fine too?

Paul Michael Todd - Chief Financial Officer & Senior Executive Vice President

Yeah. So, on the mid single-digit, obviously, what we said at Analyst Day and kind of on a longer-term horizon, we still believe that when you separate out the kind of one-time things in nature that mid single-digit revenue growth over the longer term is still valid on North America. As it relates to the merchant segment, high single digit kind of revenue growth is the right kind of range to be thinking about there.

Operator

Our next question comes from Ashwin Shirvaikar from Citi. Please go ahead.

Ashwin Shirvaikar - Citigroup Global Markets, Inc. (Broker)

Hi, good evening, Troy and Paul. Let me start with a number of things that were laid out in the financial section of your prepared comments. You talked about the $0.02 severance – a potential $0.02 impact to Brexit. I think I heard you say, it's higher tax rate as well in there and you're kind of rolling all of these things in, but leaving your guidance relatively unchanged. So, I just want to get you to comment on what are the offsets that you expect to continue to see on the other side of it?

M. Troy Woods - Chairman, & Chief Executive Officer

Yeah, Ashwin and you're exactly right. I mean, those are the items that we got facing us in the second half and a couple of things as it relates to offset, one is on the one-time expected kind of one-time related severance expenses in the third quarter. We do see some partial offset in the fourth quarter that I mentioned in the prepared remarks from the salary and benefit savings that we would see in the fourth quarter, so there's some partial offsetting there.

And as we look at kind of the business and how it's performed, and you kind of put it altogether, it does kind of push us to a little bit of over performance that we've had in the first half of the year that didn't get kind of netted against some of these pressure points in the second half of the year. So, you're exactly right, the biggest thing I wanted to call out was those impacts happening in the third quarter and then some of those impacts kind of begin to mute out some in the fourth quarter.

Ashwin Shirvaikar - Citigroup Global Markets, Inc. (Broker)

Got it. And then just want to focus on the international side a bit. First half of the year, margins up on average 375 basis points by our math. But you're still looking for only a slight margin expansion, and I can understand there's maybe 100 basis points of international – of Brexit related exposure there, but can you remind us what goes on in the second half of the year, is it primarily tough comps that you're looking to bring the margin improvement profile down to that modest level, which I think you described as 25 basis to 100 basis points?

M. Troy Woods - Chairman, & Chief Executive Officer

Yeah, Ashwin that's exactly right. And we had described it that way and that's still our expectation on a constant currency basis to be in that range of margin expansion. I think the key thing to point to – and this has been the case for several fourth quarters on a comparison basis is we do have the challenging comps in the fourth quarter of this year from a margin standpoint relative to the fourth quarter of last year.

And when you look at our International segment now, once again net of currency impact it is in a much tighter band now that we've got to this kind of 18%-plus margin goal as you look on a sequential quarter basis is our expectation. Wherein the past you've seen ramp-ups quarter-to-quarter on a sequential basis that ramping up effect is more normalizing now, and we don't see any type of significant one-time things on the International side that kind of provide this challenge on a go-forward basis, but that's the issue is, is on a fourth quarter basis, the comparison challenge there is what's driving that differential.

Ashwin Shirvaikar - Citigroup Global Markets, Inc. (Broker)

Got it. Thank you.

Operator

Our next question is from George Mihalos.

Allison Jordan - Cowen & Co. LLC

Hi, this is Allison Jordan in for George. Thanks for taking my question. I wanted to follow-up on your reiteration of the 100 basis points of margin expansion for the full year, despite the strong expansion seen over the first half. Maybe if you could comment on where you expect to see margin expansion flowing over the back half? And then also for my follow-up, if you could comment on if margins north of 28% North America segment is still a fair expectation for the second half?

Paul Michael Todd - Chief Financial Officer & Senior Executive Vice President

So, Allison, yes as it relates to the adjusted margin on the second half of the year, I think I'll point to two things. One, and I commented on this on our last call, if you look at our North America segment margin for the first half of the year versus the second half, we had that 41% margin that I commented on the time being much higher than our high-30% range that that business is more normalized at. And so that has created some – when you look at second half to first half the comparison challenges that exist there.

I'd also point to the second half of NetSpend relative to the first half and due to some of the investments that we make in the back half of the year that are pre-tax season in nature that also kind of plays things out, although we do expect the second half of the year NetSpend margin on a year-over-year basis to be favorable. When you look at the first half to the second half, that's planned in there as well.

So those will be the two from a segment standpoint. There's other things that play out, but as I said, we still expect that overall yearly margin profile – adjusted segment margin profile to be at that roughly 100 basis points and you get to it with that componentry.

Allison Jordan - Cowen & Co. LLC

Great. Thank you very much.

Operator

Our next question comes from Bryan Keane from Deutsche Bank. Please go ahead.

Bryan C. Keane - Deutsche Bank Securities, Inc.

Yes, hi, guys. Just looking at North American value-added products loyalty and services up 13% that number looks like and feels like an acceleration. Maybe you can talk about where that number has been tracking recently and what the outlook is for that business? And what percentage of revenue is it? I recall it being maybe 15% to 20% of the North America segment?

M. Troy Woods - Chairman, & Chief Executive Officer

I'll take the second part of that, Bryan. As we indicated on several occasions, we track our value add as a percent of our revenue. In North America for the quarter, it was 19% all in. The individual items that I called out, and I think Paul did as well, I'll let him specifically address those, but the same point...

Paul Michael Todd - Chief Financial Officer & Senior Executive Vice President

Yes, that's right. And we didn't call out and, Bryan we captured three different sides of our business here, value-added being one, managed services being two and loyalty being three in that 13%, which is one of the ways that we've looked at the growth, and it is not actually an accelerating. In fact, it's actually little bit of a decelerating picture on a quarter to quarter basis, and we'll continue to actually de-sell in the remaining third and fourth quarters as well as some of the componentry in that year-over-year the growth rates are as robust off of his new elevated basis they were last year.

And so the improvement from year-over-year is still very strong. It's still obviously much stronger than our overall growth rate of our business, which you would expect. Our cross sell initiatives around those are as robust as ever, but it is not fair to say it's an accelerating picture. It'd be more fair to say it's a decelerating picture when you look at sequential quarters, and that will continue in the third and fourth quarter. Once again that all comes together in a mid-single digit revenue growth expectation for the segment for the year.

Bryan C. Keane - Deutsche Bank Securities, Inc.

I got that. And then just a follow-up on the segment, how big now is that output component that's going to become a drag as a percentage of that segment revenue? And then just a clarification on the revenue growth in the segment, I think you said mid-single-digit longer-term. Just making sure it's mid-single-digit because I've heard before or I thought I've heard before high-single-digit for the North America segment? Thanks so much.

Paul Michael Todd - Chief Financial Officer & Senior Executive Vice President

Yes, so Bryan two things, on that we won't really breakout that output services as a separate line item, and so in the componentry there that's just not something from a competitive standpoint we break out. I would say this about output services, we do that business primarily as a service to our customers. And while it's causing some comparison challenges on a year-over-year basis, that is a lower-margin business than our overall segment.

Now, as Bill Pruett mentioned in our Analyst Day, that is a business that potentially has some upside to it to the degree that we are more successful in cross-selling into our installed base. And so from a future growth potential standpoint, there is some there. But without that piece and with that higher EMV elevation that has occurred throughout last year that we're dealing with now in the second, it will increase in the third and the fourth quarter, we are having that rollover piece.

As it relates to your second question, it is mid-single digit revenue growth expectation both for this year, and as I look out on a longer-term basis right now everything I see still points us to mid-single digit. I think two years ago at our Analyst Day we kind of said mid-to-high, but that was before we had the benefit of the seasoning of this large conversion that came into the base.

I think, I did said at that time, we were closer to mid than high but I wanted to see the large conversion come into the base and relook at the portfolio with that in there. Now that we've done that we're at that mid-single-digit rate right now.

Bryan C. Keane - Deutsche Bank Securities, Inc.

Okay. That makes sense. Thanks for the color.

Operator

Our next question comes from Steven Kwok from KBW. Please go ahead.

Steven Kwok - Keefe, Bruyette & Woods, Inc.

Hi, thanks for taking my questions. Most of them have been answered. Just wanted to follow-up on TransFirst. Could you tell us what the revenue and adjusted operating income growth was for the quarter and what your expectations are for the rest of the year?

Paul Michael Todd - Chief Financial Officer & Senior Executive Vice President

Steven, no, we don't break that out separate. I know we did talk about this some in our last call as it relates to what some of the expectation was on a full-year basis, and I think we also said there wasn't going to be significant change on a sequential quarter basis as it relates to that contribution. But I would say this, it's from an organic growth standpoint, high-single digits with low-double-digit volume growth, it's the right range to be thinking about there. Obviously, as I pointed out on our last call, TransFirst now is under our revenue convention here, and obviously when you look at the margin picture, as I commented earlier, that margin picture and that contribution has been very consistent with what we had on a historical basis. So I think that gives you the color you need there on meeting the expectations there.

Steven Kwok - Keefe, Bruyette & Woods, Inc.

Okay. Got it. And then separately as a follow-up, on the CFPB moving it now to September, is there anything we should read into the delay in the timeline? Just wanted to get your thoughts on that. Thanks.

M. Troy Woods - Chairman, & Chief Executive Officer

Steven, I wish I could handicap that for you. As you well know, this was probably at least the third, maybe the fourth delay in getting these final rules out, but really beyond that there's nothing we can add. We've just learned this in the last literally week or so that it was going to be September. I wish we could add more.

Steven Kwok - Keefe, Bruyette & Woods, Inc.

Okay, great. Thanks for taking my questions.

Operator

Our next question comes from Vasu Govil from Morgan Stanley. Please go ahead.

Vasundhara Govil - Morgan Stanley & Co. LLC

Hi, thanks for taking my question. Just quickly, thanks a lot for your comments on Brexit. I wanted to ask if you could talk about your revenue exposure to UK. And then specifically given the uncertainty that it creates, do you expect that to be a hurdle in the decision making process of your prospective clients?

M. Troy Woods - Chairman, & Chief Executive Officer

Why not I'll take the second part of that, Vasu, and Paul can certainly address what he made in his opening comments as well as maybe go around the potential headwind around currency. As I indicated, there is a lot of uncertainty in the market over there around everything from the economy to trade to political to market uncertainty, and although the equity markets have rallied somewhat since the Brexit vote, I think it would be unwise to dismiss this as just an event. I think it's going to be a long process. It's not just an act. I think we'll just have to, as I said earlier, continue to monitor it and watch it.

Some of our customers' stock took quite a beating there over the few weeks after the Brexit vote, down anywhere from 10% to 50%. I think as it relates to making a decision, as I indicated in my remarks, in talking to some of our customers across Europe, they've indicated that business as usual with respect to TSYS. But I really think over time we'll just have to see what kind of varying degrees of disruption that may bring. I think it's just going to take a long time to figure it all out, sort it all out.

Paul Michael Todd - Chief Financial Officer & Senior Executive Vice President

Yeah, and I'll just add on to that as it relates to the sizing of euro-based revenues. So I think if you look at a 7% to 10% range, depending on which period you're looking at, depending on other moving pieces, that's kind of the right range of European-based revenue exposure. And obviously with the TransFirst acquisition, it moves to the lower end of that range as it relates to sizing there. So that would give you the color there that that relates to.

Vasundhara Govil - Morgan Stanley & Co. LLC

Got it. Thanks a lot.

Operator

Our next question comes from Jason Kupferberg from Jefferies. Please go ahead.

Jason Alan Kupferberg - Jefferies LLC

Thanks, guys. I just wanted to ask a follow-up on North America where you guys broke out the value-added, the loyalty on the managed services. I know you said that the value-added piece alone was 19% of revenue. I thought I remember that those three buckets in aggregate from the Analyst Day might be upwards of 40% to 50% of North America. If that's right, I guess the implied growth for core processing would have been negative, maybe low-to-mid single digits in the quarter. Is that math right?

Paul Michael Todd - Chief Financial Officer & Senior Executive Vice President

Well, we've got several components there and what we're not adding in is the output services piece, and so the componentry there is you have to add that piece in to get to the total. So I wouldn't necessarily go to the core piece being negative, but obviously if that's growing at a 13% range with that piece and we have this negative impact on output services, the growth on the core side is lower than the mid single-digit range that we have for the whole year.

Jason Alan Kupferberg - Jefferies LLC

Okay, okay. And then just to clarify on the EPS guide for the year, I guess you are reiterating the $2.78 to $2.85. You've got $0.04, I guess a potential headwind from the currency and from the restructuring. Are you encouraging us to think about the lower part of the range as more likely, or do you feel like there's enough offsets from some of the first half over-performance? I just want to make sure we get the second half modeling right.

M. Troy Woods - Chairman, & Chief Executive Officer

Sure, Jason, Yes, that is what I'm saying with that is that it does push us to the lower end of that range.

Jason Alan Kupferberg - Jefferies LLC

Okay. Thank you for clarifying.

M. Troy Woods - Chairman, & Chief Executive Officer

Yes.

Operator

Our next question comes from Tom McCrohan from CLSA. Please go ahead.

Thomas McCrohan - CLSA Americas LLC

Hi, guys. At the Analyst Day, you talked about an opportunity I think of about $500 million in North America value-added services, maybe split 60/40 loyalty and output services, and I'm just trying to square that opportunity with the deceleration commentary around value-added services. So is that number still applicable? Do you still think there is a $500 million of revenue opportunity for that segment and how should we reconcile the comments about this big opportunity and the deceleration in value-added services?

Paul Michael Todd - Chief Financial Officer & Senior Executive Vice President

Yeah so, Tom, they are kind of two separate pieces. The opportunity set that was mentioned at Analyst Day is still valid. But it is more of a multiyear opportunity set and requires successful cross-selling of that opportunity set. And you'll recall at Analyst Day, that was more of kind of looking at our base and taking a higher percentage of penetration. One of the examples was in output services, and then sizing what that opportunity set was. But once again, you have to be successful in achieving that through more multiyear execution.

As it relates to what we're dealing with on the current year or even as you look into the more nearer term is this mid-single-digit revenue growth that we're still expecting for this year. And specifically as it relates to this output services, that's really more of a 2016 impact that we're seeing from a 2015 inflated base due to EMV primarily, although there are some other moving pieces in there, which we'll always have one-time items and moving pieces in this business. So you would almost need to think of them in two buckets: one, what's the current run rate of the business and what's that looking like? And two, then what's the longer-term future opportunity set of a higher penetration of cross-sell of our service into our installed base.

Thomas McCrohan - CLSA Americas LLC

Okay, thanks, Paul. And then a quick follow-up in International, about a sequential 470 basis point deceleration in looks like single use accounts, accounts on file. When you add in the single use, seemed like it kind of slowed down. So is there anything you can call out there on what's going on with single-use accounts in particular?

Paul Michael Todd - Chief Financial Officer & Senior Executive Vice President

I wouldn't call anything out specifically there. And typically as we talked about before it's why we don't even really highlight the single use, those come with such a lower revenue concentration per account that it doesn't make that kind of a significant impact. There's also some purging activity on some of that single use that's also planned into that number. So nothing that I would call out from a significance standpoint.

Thomas McCrohan - CLSA Americas LLC

Okay. Thanks, guys.

Paul Michael Todd - Chief Financial Officer & Senior Executive Vice President

We probably purged, what, pushing 1 million accounts in the quarter?

M. Troy Woods - Chairman, & Chief Executive Officer

Yes.

Paul Michael Todd - Chief Financial Officer & Senior Executive Vice President

International also.

Operator

This concludes our question-and-answer session. I would like to turn the conference back over to Shawn Roberts for any closing remarks.

Shawn Roberts - Senior Director, Investor Relations

Thank you, Andrea, and thank you, everybody, for participating in the call this evening. As always, I'll be around for follow-up questions and we hope to see you on the road in the near future. Thanks.

Operator

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

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