TSS
#Well, as you may know, <UNK>, the CFPB has indicated there was going to be a slight delay and pushed out towards the end of the first quarter.
And really beyond that, that's all we know.
We continue to work and move forward as if the proposed rules are going to be very, very similar to the final rule.
We will certainly let you know a lot more about that as we get these final rules published.
Hey, <UNK>.
It's exactly the right math.
Hey, <UNK>, I'll make a first shot at that and <UNK> can certainly add to it.
As I indicated ---+ we indicated in the press release that upon closing of the transaction, <UNK> will become Senior Executive Vice President of TSYS and President of our Combined Merchant Segment reporting directly to me.
Thank you.
Sure, <UNK>, this is <UNK>.
I think as it relates to the margin for the fourth quarter, obviously the compensation picture is one of those.
Obviously this deconversion that I had talked about in the third quarter, obviously kind of is playing in there as well.
Among some other things, that's at play there.
As I commented on the expected margin picture for 2016 for North America, we expect margin to improve and so this isn't like some turn in the margin profile of the business.
We do expect to have a kind of an improving margin picture on a whole basis for 2016 in the first half of the year, with a little bit more depression on the second half of the year.
But when you look at it on a yearly basis, it is an improving picture than what it is for 2015.
So, <UNK>, yes, I would point you back to what we've said on that in the past is as a data point of when NetSpend was a separate public company, they reported that overdraft represented 7% of their revenue for GPR cards.
And then you'd obviously have to add in several percentage points on top of that 7% to be able to account for pay card overdraft to get to a picture of what overdraft revenue looks like in the NetSpend revenue stream.
So that would be from a revenue standpoint.
Obviously there's also some other costs related to compliance that would need to factor in, but those would be the two comments I would point to around that.
So this is <UNK>.
Clearly had we decided not to make those investments in the fourth quarter, the margin profile for the fourth quarter would have been very commensurate with the margin for the third quarter.
So, yes, those marketing investments were the central driver between the margin drop between the third quarter and the fourth quarter.
As I said about our margin expanding on a year-over-year basis between 2015 and 2016 for NetSpend, obviously there is a higher expense base that's already now built into the 2015 numbers related to that higher level of marketing spend.
We'll continue to look at that as we progress in 2016.
We expect, as I said, the margin to expand in 2016.
But I also said if an opportunity presents itself like it did this year in the latter part of 2016 for us to invest for future growth in this business, we may make that decision.
I think I would point out that that's one of the benefits of having strong businesses altogether inside of TSYS is we're able to make decisions around progrowth things that on one specific segment might depress a segment margin, but on the overall basis we're still very large and strong.
And so that's exactly the situation that we had with NetSpend.
I had commented on this in the earlier part of the year that we might make those investment decisions and certainly we did here in the latter part of the third quarter and in the fourth quarter.
It's actually a blend of both.
It's a blend of the organic growth of the installed base as well as the impact of the two deconversions that we've talked about before from the prepaid processing side with Rush and Green Dot.
Nothing of any significance.
That is correct.
Sure, <UNK>.
We will obviously move TransFirst over to our revenue convention and so we'll be working on that over the time between the signing and close.
I'll point out, though, that under our conventions, you will expect to see the TransFirst margins to be right in line with our adjusted EBITDA margin overall.
So our Merchant segment overall margins will be very similar on kind of a go-forward basis.
It's just roughly the same as our EBITDA margin overall.
10%.
I'll take the first question.
IPOS rollout is going to be consistent with the MV rollout.
So right now our mobile solution has had strong account production growth.
It's a small percentage of our total revenue, given the size of TransFirst and the volume.
I would say it's a smaller percentage of total revenue with more expansion both on the tablet-based solution and the mobile as we transition a lot of the merchants from non-EMV capable devices to a more robust solution.
Let me ask, George, were you making reference more to the integrated side when you said IPOS.
Talking about the integrated ISC channels.
As I said earlier, that was closer to the 29%, 30% of the revenue of TransFirst.
George, as it relates to the EBITDA piece, I think if you look there, I think it's in the low 150s would be the numbers there for the ending 2015.
So it is in that tighter band, so it's more like what we saw in 2015 than in prior years where you saw that step up throughout the year.
But as I said, we do kind of expect a higher margin profile in the first half of the year relative to the second half of the year, which is this lasting effect of the deconversion of the prepaid processing that is impacting the second half of the year.
It is in this kind of tighter band range just like we had in 2015.
So as it relates to the blended interest rate, I think about a 50 basis point to 100 basis point kind of increase from our blended rate today as it relates to the structure.
We will come back as it relates to our overall guidance and give specifics around the structure.
Sure.
So on that $25 million number, if you kind of look at that on a combined cost base, it's a little over 3% of the combined cost base of the two Merchant businesses.
And I think it's important to point out that this is a growth-based acquisition.
It is not an acquisition where it's around making the financials work due to expense cuts.
The TransFirst historical organic growth model is a double-digit organic growth model.
What we now have in our Merchant business also is primed for very strong organic growth.
And so in putting these businesses together, we want to make sure we are maximizing the organic growth capabilities while also obviously taking the expense synergies that are available to take.
As it relates to platform, there is platform synergies today because the TransFirst business is already using predominately our front-end platform.
So it isn't like typical acquisitions sometimes where you have two different platforms and you are kind of shutting down one platform to get a lion's share of the synergy, but instead one we're trying to make sure we maximize the efficiencies while not trying to hurt the revenue growth trajectory.
And so this is the synergies on the surface might look relatively smaller compared to maybe some other things you compare it against, but when you put it in the framework, it's one that feels very right.
Obviously there's some upside.
As we dig into this and there's some upside we'll obviously take that upside, but this is very comfortable with what we've done the work with to support the growth profiles of the business.
Yes, so I think if you look at the free cash flow generation of us, as well as the strong free cash flow generation of the TransFirst business which has very similar free cash flow generation characteristics to our business, you see about 75 basis points of deleveraging turn each year.
And so over the first two years, that puts us back into that mid-2 range of overall leverage.
So just shy of, call it, one turn of leverage in the first year.
2.
5 times debt to EBITDA.
So that kind of takes the 3.9 times down to the more, call it, mid-2 range.
You know, Steve, I think what would be probably most helpful is to ---+ obviously TransFirst has filed an S1 out there as part of their IPO process, and so kind of go to that to look for a guide as it relates to that.
And I think we've also kind of said as it relates to what we're expecting from an adjusted EBITDA margin, and given some of the EBITDA numbers, you can probably get into the right ZIP Code as it relates to the revenue ---+ the net revenue on a relatively go-forward basis.
Yes, Steve, I think what we'll do obviously is when we come back out with guidance and have the exact kind of timing around close, we'll come back and give the specific guidance and what the impact is relative to the guidance we provided today on a standalone basis.
Absolutely, but it also has the headwind that <UNK> has talked about with the proposed rules that could be kicking in late fourth quarter.
Sure, <UNK>, we do.
We clearly have our models around our investment spend and we're constantly kind of testing that on a real-time basis as we are making that investment to make sure we are seeing a commensurate return.
A perfect example of that is the way where we started at the beginning of the year with our revenue expectations and how we have outperformed that and as we continue to invest in the business throughout the year, we got more confidence around investing more to be able to grab some share there.
So I will say that the earlier comment that <UNK> made, we do not in that revenue growth for this year have any impact related to the CFPB.
And so this is all just on kind of a pure organic growth basis.
Like we started last year, we started with a revenue growth picture of NetSpend that got better throughout the year and, obviously, that is something that we would like to be able to see in 2016 as well.
So, <UNK>, this is <UNK>.
When we came out and talked about those two deconversions, we roughly sized those at being just shy of 2% of overall Company revenue.
And so that gives you kind of a guide as to the overall kind of sizing.
But clearly there is timing, there is different things that play there, but that gives you an overall sizing as to what those two businesses are from a size standpoint.
It is not, <UNK>.
I was incorrect, thinking that some of those items would be kicking in in late fourth quarter, but I was corrected real quick.
No.
We will wait and get the final rule out end of first quarter.
No, it is not included in our 2016 numbers.
Let me take the first part of that, <UNK>, and I'm sure <UNK> can add to it.
Geographically, when we look at the geographical disbursement of their business, it's not too dissimilar from what you find when you look at the geographical disbursement of our business on our direct business.
The states that you find contributing the most are typically the same top five or six states.
Number one, number two, I think <UNK> touched on this in his prepared remarks, that there are some overlaps.
There are also some complementary areas of his business.
But I think one of the things we find strengthening to us that he is very strong on the FI side, and as you know we are very strong on the FI side of the issuing.
So we see that as a complement.
We both are in the IST business.
Ours began approximately a year ago on a de novo basis.
As we've indicated, earlier <UNK>'s business is pushing 30% of his revenues in that space.
I think over the next 60 to 90 days we obviously will have to take some real quality time to understand all of our go-to-market dynamics as we look at our sales force, his sales force, his partners and our partners.
And I think we can shed a lot more light on that at our first-quarter call.
<UNK>, do you want to add to that.
Sure, thanks, <UNK>.
<UNK>, I think when you think about the combined growth strategy, it's really a two-pronged approach and I think it will include long-term, both US and international.
But it's really the first prong is we need to sell more.
We need to expand our partner-centric model allowing more sustainable and predictable growth.
I think the second portion of that strong and selling more is leveraging multi-channel solutions for all merchants and really extending the products in a holistic way for all that TSYS has to offer.
The second prong is really about losing less, leveraging great operating excellence.
And really what <UNK> was touching on with the integrate division, continue to change the mix of our business to more integrated and high-growth verticals really will change the business over time long-term, both, again, US and, again, long-term internationally as well.
<UNK>, the 654 number that I mentioned in my prepared remarks for North America ending the fourth quarter is total accounts on file, so it includes of the accounts we have, of course, on file at the end of the fourth quarter.
I think <UNK> made a very good point earlier that, I think for at least 2016, the number that I would pay particular attention to is the traditional accounts on file, which will exclude, as <UNK> indicated, our prepaid government services and commercial card single use.
I believe that number was around $415 million, so that's probably the number that would be more relevant throughout the rest of this year as it relates to those two deconversions.
Does that make sense.
Okay.
Thank you.
We obviously baked in what we are expecting from a currency standpoint that's baked into the guidance like we typically do at the start of the year.
So nothing I'd call out there.
It's more kind of a blended outlook of our rates with what we are expecting from a blended output kind of standpoint.
That's how we typically do it, not just on a spot basis but more on a blended outlook of what we're expecting throughout the year.
So that's what it's based on.
No.
As it relates to what potential kind of headwinds that could ---+ I think you could see maybe a half of maybe 1% of headwinds that could be coming in on a total revenue basis of potential there.
But that would be kind of the only kind of topical level range I would provide you.
That's right, <UNK>, there is nothing in the guidance relative to the deal, so the higher cost of financing obviously will be referenced when we come out with the new guidance that has all the effects of the deal in it.
Without kind of providing a detailed reconciliation of each of the ins and outs, there are a lot of moving parts.
Obviously, as I talked about, we had compensation impact as it relates to team member compensation.
We actually had a higher percentage of managed services in the fourth quarter which has a lower margin to it.
We had this impact of the deconversion of the prepaid.
We had some deferred B of A conversion costs in the fourth quarter that played an impact, so there's a lot of moving pieces there.
I was calling out the topical ones, but I think the key point, <UNK>, on this is it's not a trend, it's not something that we're highlighting that has dramatically shifted in the overall margin of the business.
And as I said, this is a business that we have pretty good insight into as it relates to what the margin profile looks like from a longer-term point.
And I had pointed to the margin level for the year.
We knew it was going to be in kind of a tighter band for the year.
And like I said, we are expecting that margin profile to expand in 2016.
Sure, Tim.
I made a comment that I think an overall blended interest rate of an increase of 50 to 100 basis points is probably the right range to be thinking about what that future interest kind of cost all in would look like.
So that's the comment I'd made earlier around the potential future interest in.
And, like I said, when we come back out with guidance on the deal, we will give complete clarity on structure, blended increase of interest rate and factor all that in relative to the accretion of the deal.
So I'll start off and maybe <UNK> can layer on any comments he might have, but I think it's a very relevant question, kind of relative to the sizing of that.
When we came up with the synergies amounts, those were what we felt were the relevant expense synergies to still allow for the growth profiles of the business without starving the investments in those two businesses, which will be the one combined business.
So it's not one of those situations where we are providing a trade-off where you're having to not invest on the growth side because you've got some higher synergy number to try to kind of make deal economics.
That's one of the beauties of this transaction is the high accretive nature of the transaction without having to have a very high synergy number that can then cost you on the growth side because you're having to chase the synergies on the expense side and starve the growth profiles.
So with that kind of being the overall wrapper, that's the machination of how we got to those relevant amounts.
But in general, I'd say obviously we'll be investing in the higher growth side of the business, which <UNK> has done in his business and we've been doing in our business around the integrated side, the e-commerce side, and those differentiated distribution capabilities in high-growth verticals.
And, <UNK>, I don't know if you have anything to add on that
I think you're dead right.
I think as we start thinking about where growth is coming from, again, we need to continue to build the partner-centric model and get more sustainable and predicted growth.
Obviously in the integrated channels is a big area of growth for us, but I wouldn't classify substituting the synergy savings as an investment.
This transaction, because of the like-kind clients and other business units, really affords us a benefit to kind of cross-sell and get introductions across the Company here.
I think it's longer-term, but it's really unique to be one of the few Companies that have a long-term potential to leverage issuing, acquiring and prepaid in one location with like-kind clients, so we'll be taking advantage of that.
