Total System Services, Inc. (TSS)

TSS 
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Total System Services (TSS)

Q2 2013 Earnings Call

July 23, 2013 5:00 pm ET

Executives

Shawn Roberts - Director of Investor Relations

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

M. Troy Woods - President, Chief Operating Officer, Executive Director and Member of Executive Committee

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

Daniel R. Henry - Chief Executive officer

Analysts

David Togut - Evercore Partners Inc., Research Division

Georgios Mihalos - Crédit Suisse AG, Research Division

Ashwin Shirvaikar - Citigroup Inc, Research Division

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

Bryan Keane - Deutsche Bank AG, Research Division

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

Brett Huff - Stephens Inc., Research Division

Darrin D. Peller - Barclays Capital, Research Division

Jason Kupferberg - Jefferies LLC, Research Division

Tulu Yunus - Nomura Securities Co. Ltd., Research Division

David M. Scharf - JMP Securities LLC, Research Division

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

Presentation

Operator

Good afternoon. At this time, I would like to welcome everyone to the TSYS conference call. [Operator Instructions] I would now like to turn the conference over to your host, Mr. Shawn Roberts, Senior Director of Investor Relations. Mr. Roberts, you may begin.

Shawn Roberts

Thank you, Tanya, and welcome, everyone. On the call today, our Chairman and CEO, Phil Tomlinson, will have a few opening remarks; TSYS President/COO, Troy Woods will review our 4 segments; followed by our CFO, Jim Lipham, covering our raised guidance and the consolidated second quarter 2013 financials. After that, we'll open it up to Q&A. [Operator Instructions]

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

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

Philip W. Tomlinson

Thank you. Thank you, Shawn. If you can't tell, I've got laryngitis, and I may have to give it up. Good evening.

Shawn Roberts

Phil just passed this back to me. This is Shawn again. I'm -- as we talked about, Troy is going to be covering the 4 segments, and Jim is going to be handling the financials and the update to the guidance for the remainder of 2013. As you can probably imagine, the first half of 2013 was an incredibly busy time. The acquisition of NetSpend is extremely exciting and important and is going to ensure our long-term success. Overall, we feel very good about the business and believe our future is looking very, very bright.

And with that, I'll turn it over to Troy Woods, COO and President.

M. Troy Woods

Thanks, Shawn. Good evening and welcome to our second quarter earnings call. I guess first and foremost, we all hope for a speedy and full recovery for Phil, who has been battling this voice issue now for over 2 weeks. And although it has been somewhat quieter around the office, it certainly has not slowed him down from sending emails and handwritten notes all over the place. I will begin our review of the quarter with a summary of our segments, including NetSpend.

In an effort to provide you with additional visibility, consistency and clarity into some of our metrics and trends, we have included several new graphs and charts with this release that hopefully you will find helpful. We will begin on Page 6 with a review of the North America segment. On almost any performance measurement, the second quarter was a very good quarter. Revenue before reimbursables increased 4.4% to $214.5 million, primarily driven by incremental transactions, growth in accounts on file, fraud and managed services. This is a very encouraging number, as it represents the highest quarterly percentage increase in 5 quarters.

Equally encouraging, operating income for the quarter was a strong $79.9 million, representing an increase of 10.6% over second quarter 2012. These 2 factors combined helped produce a 37.2% operating margin, which is the highest margin in North America in over 2 years and 210 basis points above the second quarter of 2012.

Page 7 reflects continued strong growth in accounts on file and total transactions, increasing 11.2% and 11.5%, respectively. These metrics are very important, as transactions and accounts on file represent approximately 50% of our issuing revenue. Organically, we added 13.8 million consumer, commercial and debit card accounts during the quarter for the segment.

Over the past few months, we have come to realize that there exists some confusion in the marketplace around the North America conversion pipeline and the time line for these conversions. We have included a chart on Page 8 that will hopefully help you better understand our conversion pipeline and time lines. As you can see on this chart, when we reported our fourth quarter 2012 earnings and provided 2013 guidance on January 22, we indicated we had over 100 million accounts in the North America conversion pipeline. At that time, over 26 million of these accounts was scheduled to be converted in 2013. When we reported first quarter earnings, the pipeline was still in excess of 100 million accounts but for varying reasons beyond our control, almost 15 million accounts originally scheduled to convert in '13 had shifted into 2014. These accounts not only shifted into 2014, they moved out by 2 and 3 quarters. The good news is we converted the approximately 11 million account HSBC portfolio to Cap One on July 13 and still have approximately 90 million accounts in the North America conversion pipeline. The not-so-good news is it will just take us a little longer than originally planned to get them all converted. But get them converted, we will. I know this is a lot of numbers, and we usually do not provide this type of granularity on our conversion pipeline. But I just thought it was important to get this information in front of you to hopefully help you with your modeling on a go-forward basis.

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