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Edited Transcript of TSS earnings conference call or presentation 29-Jan-19 10:00pm GMT

Q4 2018 Total System Services Inc Earnings Call

COLUMBUS Jan 31, 2019 (Thomson StreetEvents) -- Edited Transcript of Total System Services Inc earnings conference call or presentation Tuesday, January 29, 2019 at 10:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* M. Troy Woods

Total System Services, Inc. - Chairman, President & CEO

* Paul Michael Todd

Total System Services, Inc. - Senior EVP & CFO

* Philip C. McHugh

Total System Services, Inc. - Senior EVP & President of Merchant Solutions

* Shawn Roberts

Total System Services, Inc. - VP of IR

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Conference Call Participants

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* Ashwin Vassant Shirvaikar

Citigroup Inc, Research Division - Director and U.S. Computer and Business Services Analyst

* Brett Richard Huff

Stephens Inc., Research Division - MD

* Dan Dolev

Nomura Securities Co. Ltd., Research Division - Executive Director of Business Services

* Daniel Rock Perlin

RBC Capital Markets, LLC, Research Division - Analyst

* Darrin David Peller

Wolfe Research, LLC - MD & Senior Analyst

* David John Koning

Robert W. Baird & Co. Incorporated, Research Division - Associate Director of Research and Senior Research Analyst

* David Mark Togut

Evercore ISI Institutional Equities, Research Division - Senior MD

* Georgios Mihalos

Cowen and Company, LLC, Research Division - MD & Senior Research Analyst

* James Edward Schneider

Goldman Sachs Group Inc., Research Division - VP

* Michael Browning Del Grosso

Jefferies LLC, Research Division - Equity Associate

* Ramsey Clark El-Assal

Barclays Bank PLC, Research Division - Research Analyst

* Wai Ming Kwok

Keefe, Bruyette, & Woods, Inc., Research Division - VP

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Presentation

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Operator [1]

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Good day, and welcome to the TSYS Fourth Quarter 2018 Earnings Release and Conference Call. (Operator Instructions) Please note, this event is being recorded.

I would now like to turn the conference over to Shawn Roberts, Vice President, Investor Relations. Please go ahead.

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Shawn Roberts, Total System Services, Inc. - VP of IR [2]

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Thank you, Andrea, and welcome, everyone. We'll begin this evening's call with opening comments by TSYS' Chairman, President and CEO, Troy Woods; followed by TSYS' CFO, Paul Todd, reviewing the fourth quarter and full year 2018 highlights and consolidated financials. Troy and Paul will both be referencing a slide presentation during their prepared remarks. A copy of the slide presentation as well as our earnings release and supplemental schedules are available on our website at investors.tsys.com. After the prepared remarks, we'll open the call for Q&A. (Operator Instructions)

I'll now call your attention to the fact that we'll be making forward-looking statements about the future operating results of TSYS. These forward-looking statements involve risks and uncertainties. Factors that could cause TSYS' actual results to differ materially from the forward-looking statements are set forth in the TSYS' reports filed with the SEC, including its 2017 annual report on Form 10-K.

We'll 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.

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M. Troy Woods, Total System Services, Inc. - Chairman, President & CEO [3]

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Thank you, Shawn. Good afternoon, and welcome to our fourth quarter earnings call. I need to apologize on the front end for a cold that I have that's been lingering around for a while, but I really do believe I'm on the back half of it.

Well, in spite of escalating trade wars, increased tariffs, a no-confidence vote on Brexit, an increase in interest rates and an extremely volatile fourth quarter market, TSYS delivered an exceptional performance in the fourth quarter, resulting in a very strong finish to 2018. Some of the highlights across the organization for the fourth quarter include record-setting transactions and excellent operational performance during the holiday shopping period. For example, on Black Friday, we processed over 112 million authorizations, our largest authorization volume day of the year. Also as a result of our accelerated deleveraging and strong free cash flow position, we resumed our share repurchase activity in the fourth quarter by purchasing 2 million shares of our stock for approximately $172 million. For the full year of 2018, we increased our adjusted diluted EPS to $4.47, a 32.7% increase over 2017. We increased our adjusted EBITDA margin by 69 basis points to 35.9%, which was slightly higher than our projected 25 to 50 basis points of expansion. And due to our accelerated debt repayments and 14.4% adjusted EBITDA growth, we were able to lower our debt leverage ratio to below 3x. By almost any measure, 2018 was an exceptional year for our company and provides us with excellent momentum going into 2019.

Now I would like to address some highlights within our 3 segments for the quarter and year. First, we had another strong quarter in the Issuer Solutions segment and an overall outstanding growth year. Total traditional accounts on file were up 7.4% for the quarter and ended the year at 614 million. Total transactions were 6.6 billion for the quarter, an increase of 12.5% over 4Q '17 and 12.9% for the full year. And net revenue for the quarter was $439.3 million, an increase of 7.1% on a constant currency basis. All of these metrics were new records for our Issuing segment.

Our business development pipeline going into 2019 remains very strong. We have the commitment from Cap One to convert 2 additional retail and co-brand portfolios that I mentioned last quarter as well as several other LOIs that we should be announcing soon. During the fourth quarter, we signed contract extensions with Wright Express as well as KBC Ireland.

On the product development side, we continue to have a healthy demand for the solutions we are bringing to the market that enable our clients to offer more innovative experiences and more effectively manage their portfolios. Delivering these new products in conjunction with our core platforms enables a seamless customer experience and makes it easier for our clients to update new services. All in all, we were very pleased with the performance of our Issuer segment in 2018, and believe we are in an excellent position for 2019 and beyond.

Now let's look at our Merchant Solutions segment. At TSYS Investor Day in May, we outlined a very straightforward strategy for our Merchant segment: one, achieving disciplined platform integration; two, continuing to lead on integrated solutions; three, driving our scaled partnerships; and four, remaining an active player in market consolidation. Over the course of 2018, we believe we hit the center of the target on each of these. We posted strong financial results with double-digit top line and bottom line growth and expanded the margin. We closed on the acquisitions of Cayan and iM3 and the majority of the functional integration work is now complete on both. We converted over 64,000 Cayan merchants from a competitor platform and exceeded our financial synergy targets. We leveraged our extensive distribution engine to deliver strong organic growth while continuing to win and grow relationships with new partners across all of our channels. We accelerated our product capabilities as we prepared for the launch of our vital suite of POS products. And we completed a full reorganization of our Merchant segment to align our talent and leadership with our go-to-market strategy.

With the accomplishment of these strategies and action items, we were well positioned to post solid results in the fourth quarter. Net revenue was $334.6 million and adjusted segment operating income was $124.2 million, increases of 18.4% and 30.9%, respectively. And for the full year, net revenue was $1.34 billion and adjusted segment operating income was $484.2 million, increases of 21.8% and 23.7%, respectively.

In our integrated channel, we have established a leadership position in several high-growth vertical markets, and we continue to focus on building a strong position in key emerging verticals.

Our differentiated Genius and ProPay platforms generated large wins over the course of the year, and we expect to announce a new partnership with a very large national partner by the end of this quarter. During the quarter, we renewed several integrated partners and signed 37 new partners, closing out a strong year for the integrated channel. In our partner channel, we achieved several significant milestones over the course of the year, including a 12.5% increase in sales volume year-over-year. And lastly, we renewed several of our large ISO and bank partners, including a top 5 indirect client.

While leveraging the technology and talent from our iMobile3 acquisition, we recently announced the launch of Vital, a new brand of payment products designed to help small and medium-size businesses run more easily and efficiently. We are also well underway with several platform consolidation and enhancement efforts, including accelerating the capabilities of our Genius platform. In addition, we are investing in a new modern and agile boarding and servicing platform, which will improve the merchant experience as well as enable us to accelerate deployment of new products and services to our merchants and partners. We believe that continued investments in modernizing our platforms and enhancing our gateways and products will improve our long-term competitive positioning in the market.

And finally, let's turn our attention to our Consumer Solutions segment. The fourth quarter represented a solid finish to a better-than-expected 2018 for our Consumer Solutions business. Net revenue for the fourth quarter was 7.2%, and gross dollar volume grew 10.6% to $8.4 billion. This was our fourth consecutive quarter with GDV exceeding $8 billion. All 4 of our distribution channels made solid contributions to our performance in the quarter with double-digit growth in 2 of them. For the year, net revenue topped $800 million for the first time, and gross dollar volume exceeded $34 billion.

In addition to the positive financial results for the quarter, we were able to also extend and expand several of our key distribution relationships during the quarter. In our retail and partner channels, we signed a 2-year extension with Walmart, which included an expansion of [peg] placement for our NetSpend cards and an agreement to pilot the PayPal product in select Walmart stores beginning in the second quarter. We also implemented swipe reloads of our products at Kroger, the nation's largest grocery store chain. The initial take-up of this service is very encouraging with thousands of reloads performed in the fourth quarter alone.

During 2018, our partnership with the Houston Astros had a meaningful impact on our H-E-B card program in Texas, and we recently agreed to a multiyear extension with the Astros. Going into 2019, this partnership will allow us to continue to build off of last year's success with H-E-B and expand our Astros program to other retailers.

In our PayCard channel, we signed or renewed several key agreements, including a new referral agreement with Ceridian, a 3-year renewal agreement with Brookdale and a 3-year renewal with Cracker Barrel Old Country Stores as well as many others. Having a large and diversified distribution network continues to be one of the core strengths of our Consumer Solutions segment for the partners and customers we serve.

Our products announced are now sold in over 123,000 distributing locations and used by employers across the United States, which equates to the combined branch network of the top 2,000-plus banks across the country. Our product diversification efforts also continued during the fourth quarter. Our DDA product has now been rolled out as an upgrade offering across all of our sales channels with multiple partners and brands. The number of DDA debit active cards increased to more than 525,000 in the quarter with over 2/3 of these now on direct deposit. While it is still early days with our DDA initiatives, we are pleased to see so many GPR customers upgrading to our new DDA product.

The effective date of the new CFPB prepaid rules are now just a few months away. We feel very good about our implementation and delivery plans to adhere to the new regulatory requirements. As a matter of fact, by the time we talk next quarter, we should be able to put this initiative in our rearview mirror. During Paul's comments, he will elaborate further on the 2019 financial headwinds we are anticipating as a result of the impact of the CFPB rules.

I want to personally thank all of our team members across the globe for their hard work, dedication and loyalty. These outstanding results for the quarter and full year would not be possible without their commitment to our people-centered and performance-driven culture. After celebrating 35 years of success and growth during 2018, we are more excited than ever about the future of TSYS and the payments industry as a whole.

I'll now ask Paul to share additional detailed financial information about the quarter, the year and review our guidance for 2019. Paul?

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Paul Michael Todd, Total System Services, Inc. - Senior EVP & CFO [4]

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Thank you, Troy. And I want to reiterate how pleased we are with our 2018 financial performance and how we are positioned well for 2019.

I will first cover our consolidated performance starting on Slide 6. Fourth quarter GAAP total revenues were $1.02 billion, down 20% due to the adoption of ASC 606. And non-GAAP net revenue was $959.3 million, up 10.2% from 4Q last year. We have highlighted the impact of the adoption of ASC 606 on our fourth quarter results on Page 17 of our press release.

For the year, GAAP total revenues were down 18.3% related to the adoption of ASC 606, while full year, 2018 non-GAAP net revenue of $3.82 billion was up 12.2%.

GAAP diluted EPS was $0.74 for the quarter, down 43.4% from 4Q of 2017, primarily due to the Tax Cuts and Jobs Act in 4Q of last year. Non-GAAP quarterly adjusted diluted EPS was $1.08, up 31.5% from 4Q last year. For the year, GAAP diluted EPS was $3.14, a decrease of 0.8% from this time last year. And non-GAAP adjusted diluted EPS was $4.47, an increase of 32.7%.

Our fourth quarter non-GAAP adjusted EBITDA increased 18% to $346 million. And our adjusted EBITDA margin of 36.1% was up approximately 238 basis points from the fourth quarter of last year and was consistent with the 36.1% adjusted EBITDA margins we had in the second and third quarter. For the year, adjusted EBITDA grew 14.4% to $1.37 billion. And our full year adjusted EBITDA margin of 35.9% is up 69 basis points. We are pleased that we've delivered annual adjusted EBITDA margin expansion above the 25 to 50 basis points of expansion that has been our target throughout the year.

Free cash flow was $187 million for the quarter, bringing our full year free cash flow to $799.5 million, up 20.9%. This was at the high end of our $770 million to $800 million expectation range we have been communicating.

Due to our strong cash position, we were able to significantly return to our share repurchase activities that we discussed on our last call as we repurchased 2 million of our shares in the fourth quarter for approximately $172 million or roughly $85.93 per share.

In all, at the consolidated level, we finished the year in a strong fashion, achieving our net revenue, profit, margin and cash flow growth goals while also achieving our deleveraging targets and executing significant repurchase activity.

Before I cover our segment performance, I do want to mention that beginning in 2019, we will change our segment profit metric from adjusted segment operating income to adjusted segment EBITDA. We have been communicating for over 2 years now that our consolidated margin goals have been to expand adjusted EBITDA margin initially in the 25 to 50 basis points range and now to the 25 to 75 basis point range annually. We've been talking throughout the year about our focus of managing our margin expansion at the consolidated level. We believe this move will streamline the way we manage, communicate and deliver our profit and margin expansion goals. On Page 18 of our press release, we've included a schedule outlining the adjusted segment EBITDA by quarter for the last 2 years.

Now I will cover Issuer Solutions segment performance starting on Slide 8. First, on growth. The Issuer Solutions segment grew net revenue 6.1% on a reported basis and 7.1% on a constant currency basis. We saw good growth in both volume and nonvolume net revenue on a reported and constant currency basis. As was the case last quarter, we continue to have overperformance in our output in Managed Services areas, which grew net revenue at 15.2% for the quarter, up from the 15.1% from last quarter and the 7.6% and 8.9% growth we had, respectively, in the first and second quarters. While we are pleased with this overperformance in these areas and the comprehensive service aspects these offerings provide our clients, we generally deliver these services at a lower margin than our other volume and nonvolume revenue.

Next, on margin. Quarterly reported adjusted segment operating margin of 34.6% is down 64 basis points from 4Q of last year and down 61 basis points for the year. Our margin contracted slightly more than the 50 basis points I mentioned on our last call due partly to investments in the business and the overperformance in the lower margin Managed and Output Services areas.

As I said throughout the year, we are very focused on managing our consolidated margin to achieve our annual margin expansion goals. And given we exceeded those goals on a consolidated basis for the quarter and the year, we will make margin trade-offs across our segments willingly as long as we are achieving our consolidated goals.

Finally, on outlook. For 2019, we continue to expect this segment to grow net revenue in the 5% to 7% constant currency range for the year, although we will have some comparative headwinds, particularly in the first quarter due to the nonrecurring item I mentioned in 1Q of last year along with the nonrenewal of our nontraditional account-on-file government accounts that will not repeat in 2019. These 2 items provide over a 100 basis point headwind to our revenue growth for 2019.

We couldn't be more pleased with where we are in our Issuer Solutions segment. We had a successful year financially. We built out a full pipeline of conversion activities. And we invested in our people, our technology and infrastructure and our product delivery capabilities to position this business well for 2019 and beyond.

Now onto Slide 9 in our Merchant Solutions segment. First, on growth. The fourth quarter was another strong growth for our Merchant segment. Net revenue grew at 18.4% compared to 4Q of last year, putting us at a 21.8% growth rate for the year. While we did see some pullback from the overperformance we've had the last 2 quarters on revenue growth, partly due to a tougher comp quarter from last year and some calendaring effects among other items in December, we were pleased to continue to deliver in or above the 7% to 9% long-term net revenue growth goal range. We did see some contraction in our revenue per transaction metric due to the strong growth in indirect transaction volume combined with portfolio ship mix and grow over from a strong 4Q of '17. Normalized for those events, revenue per transaction would have been up approximately 1% for the quarter.

On margin, our adjusted segment operating margin was 37.1% for the quarter, a 355 basis point expansion from 4Q of last year. We ended the year with adjusted segment operating margin of 36%, a 54 basis point expansion for the year ahead of our 50 basis point goal.

And finally, on outlook. For 2019, we expect net revenues to grow in the 8% to 10% range, slightly higher than our longer-term 7% to 9% range.

In summary, we're very pleased with our position in our Merchant Solutions segment. We delivered strong organic top line and bottom line growth, completed 2 acquisitions and expanded margins while making strategic investments expanding our product capabilities as evidenced by our recent Vital launch.

Now onto the Consumer Solutions segment on Slide 10. First, on growth. We were again pleased with the net revenue growth we had in Consumer Solutions, which grew 7.2% from 4Q of last year. This quarterly growth allowed for a full year record net revenue of $806.4 million, up 8% year-over-year, consistent with the improved guidance range we gave last quarter. Continuing the trend from the third quarter, fourth quarter growth was again strong across all 4 of our distribution channels. And as Troy mentioned, we had double-digit growth in 2 of the sales channels in this segment. We exited the fourth quarter of 2018 with over 5 million debit active cards with over half of them on direct deposit. And gross dollar volume for the quarter exceeded $8 billion for the fourth quarter in a row.

In particular, we've been pleased by the performance of our DDA products where over 2/3 of the cards are on direct deposit. Because direct deposit by cardholders continues to drive higher usage of our Consumer Solutions products, we saw both a higher revenue growth rate and a higher growth rate of gross dollar volume in 2018 compared to debit active card growth.

Next, on margin. Q4 2018 adjusted segment operating margin of 22.2% is up 138 basis points from the 20.8% in Q4 of last year, driven largely by overall expense management. On a full year basis, Consumer Solutions delivered adjusted segment operating margin of 24% in 2018, down just 39 basis points from prior year. We are pleased this segment has largely been able to overcome year-over-year margin pressure related to the large partner renewal last year we have discussed previously.

And finally, on outlook. As Troy mentioned in his earlier comments, the effective date of the CFPB rules on prepaid is just a few months away. Assuming no changes to the CFPB prepaid rules and before considering mitigating effects from our business expansion and product diversification strategy, we still expect that our calendar year 2019 net revenue will be negatively impacted by approximately $60 million to $65 million. As a result, we expect Consumer Solutions 2019 net revenue to grow in the 3% to 5% range. In short, this was another solid quarter, a better-than-expected 2018 and a positive outlook for Consumer Solutions in 2019.

Now I want to comment on our 2019 full year consolidated guidance on Slide 13. We are expecting GAAP total revenues to be in the range of $4.19 billion to $4.29 billion and non-GAAP net revenue to be in the range of $3.99 billion to $4.09 billion, an increase of 5% to 7%. We expect our GAAP EPS to be in the range of $3.48 to $3.63. And we expect our non-GAAP adjusted diluted EPS to be in the range of $4.75 to $4.90, an increase of 6% to 10%. Recall that this range includes roughly $0.11 of unmitigated headwind from the CFPB prepaid rule implementation effect as well as $0.07 of tax-related headwinds related to discrete tax items in 2018 that are nonrecurring in 2019. This $0.18 of adjusted diluted EPS headwind represents about 4% of growth. And without these 2 items, our growth range expectation for next year would be right in line with the 10% to 14% longer-term organic adjusted diluted EPS growth range target that we discussed at our last Investor Day. Also inclusive in this guidance is an expectation of our effective tax rate to be in the 21% to 23% range, and we expect our annual consolidated adjusted EBITDA margin to expand in the 25 to 75 basis points range.

We've also included in this guidance our expectation to continue to repurchase our shares, absent an acquisition, with a heavier weighting of these shares to be repurchased in the first half of the year through either open market purchases, an accelerated repurchase program or a potential combination of both. Depending on how soon we are able to repurchase shares and their respective price, we could lower our weighted average diluted shares outstanding by over 5 million shares, although some of the EPS accretion from this buyback activity would be offset by the higher interest expense. We expect the net effect of this repurchase activity to add 1% to 2% to adjusted diluted EPS growth, which is included in our guidance.

Also as it relates to our expectation for our equity and income and equity investments, and particularly our CUP Data joint venture, given some additional investments expected to be made in the business, we expect this line to grow less than the roughly 11% growth we reported in 2018. The Chinese market continues to see tremendous growth in the payments arena, and we continue to be encouraged by the performance of CUP Data and the market overall.

Finally, as it relates to the tax headwind in 2019 versus 2018, note that the bulk of this occurs in the first quarter. I call this out, so the appropriate modeling for 1Q would be lower to account for this roughly $0.05 impact.

Finally, I want to wrap up with 3 callouts from today's call. The first callout is on net revenue growth across our company. As has been the case all year, we continued our string of success in the fourth quarter in terms of organic revenue growth across our segments. Equally as important, we're expecting next year to have a compelling strong organic net revenue growth picture with each of our segments growing in or even above our longer-term net revenue growth rate ranges if you exclude the impact of the CFPB rules. This multiyear track record organic net revenue growth across all of our segments is one of the key drivers of our company and is evidence that the execution of our strategic plans in each of our businesses is paying off.

The second callout is on our margins. We were very pleased with our consolidated adjusted EBITDA margin expansion above our 25 to 50 basis points range in 2018. We anticipate consolidated annual adjusted EBITDA margin expansion of 25 to 75 basis points for 2019. And since we are focused on managing this expansion with more priority at the consolidated level as opposed to the segment level, I won't generally be providing outlooks for adjusted EBITDA margin expansion at the segment levels going forward. However, our initial expectation for our segments for 2019 is for our Issuing segment to be above this 25 to 75 basis points expansion range, our Merchant segment to be in the range and expect roughly 200 basis points of adjusted EBITDA margin contraction for next year for Consumer Solutions, primarily due to the impact of the CFPB rules.

The third callout is related to capital. The fourth quarter was an important capstone to the year from a capital standpoint in that we were able to resume repurchases of our shares in a meaningful way on the heels of meeting our deleveraging goals in the third quarter. We ended the year below 3x leverage and are positioned well for next year with a heavily fixed rate debt load at roughly 80% fixed and 20% floating and are positioned to continue to repurchase our shares consistent with my earlier comments while still maintaining flexibility for strategic accretive acquisitions, all while maintaining our investment-grade balance sheet and expecting to end 2019 below 3x leverage.

In all, we couldn't be more pleased with our financial performance in 2018 and how we are positioned to perform in 2019. We again thank all of our team members who delivered these results and who each day made TSYS a better company.

And with that, we will open it up for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question comes from Ashwin Shirvaikar of Citi.

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Ashwin Vassant Shirvaikar, Citigroup Inc, Research Division - Director and U.S. Computer and Business Services Analyst [2]

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So I guess, my first question is on growth. And you guys have mentioned now for few quarters the LOIs. Could you talk about to what extent the impact of those is included in your outlook? And how should we sort of expect those to be split across issuer versus merchant? The investment acquired for that, is that included in the numbers? Can you talk about that?

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M. Troy Woods, Total System Services, Inc. - Chairman, President & CEO [3]

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Ashwin, thank you. Yes, I think you started off down the path when you mentioned the LOIs that we talked about, primarily that you've been in the Issuing segment. Not to say that we also do not have, as I mentioned in the Merchant segment, a large national partner that we do plan to announce this quarter. But as it relates to the issuer segment, yes, the growth that we are expecting for any LOIs that we already announced, for instance, last quarter, we did announce a couple of new wins in the Issuing side that had moved from LOI to contract. We also have several LOIs, as I mentioned, that are close to going to contract. Anything that we have that is planned from a conversion activity in 2019, of course, is baked into the guidance that Paul gave. As I've indicated on several occasions -- for several quarters, at least, the pipeline that we have related to conversions in Issuing brings growth over the next 12 to 24 months.

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Paul Michael Todd, Total System Services, Inc. - Senior EVP & CFO [4]

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And Ashwin, I just might add on the last part of that question around the investments, are they included or not? Yes. I mean, our investments of bringing this new business on, even though it's going to take some time to do it, that's all factored in.

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Ashwin Vassant Shirvaikar, Citigroup Inc, Research Division - Director and U.S. Computer and Business Services Analyst [5]

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Right. So I was asking primarily because in your -- in the last sheet on your presentation, it said that large contracts and take-ons like that might not be included, but thanks for the clarification. The other question I have is, I believe, at your Investor Day, when you spoke of the 10% to 14% EPS growth rate, that at the time had not included share repurchases. But the outlook for this year seems to include the buyback. Could you, first of all, I guess, quantify the buyback and clarify if that is correct or not.

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Paul Michael Todd, Total System Services, Inc. - Senior EVP & CFO [6]

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Yes. So Ashwin, we did actually include it in that 10% to 14% at our Investor Day. So it was inclusive in that number. And to be consistent, it's included in this number as well. And we did quantify it roughly 1% to 2% of adjusted EPS growth is associated with the buyback activity.

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Operator [7]

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Our next question comes from Dan Dolev of Nomura.

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Dan Dolev, Nomura Securities Co. Ltd., Research Division - Executive Director of Business Services [8]

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It seems like Merchant was weaker than we had expected. I know you had some callouts. What was the implied organic growth in this quarter in Merchant? And what gives you conviction that you can actually get from 7% to 9%, to 8% to 10% in '19? And then I have a follow-up.

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Paul Michael Todd, Total System Services, Inc. - Senior EVP & CFO [9]

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Dan, so to kind of take out the noise on an organic basis, we were in the 9% to 10% range organically. And if you kind of look at for next year, that's consistent with kind of the range that we talked about for next year. So we've got a good track record there around the organic growth. We did have some things I called out that happened this quarter, but the fundamentals of the business are really strong, and we're comfortable around next year's outlook.

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Dan Dolev, Nomura Securities Co. Ltd., Research Division - Executive Director of Business Services [10]

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Got it. And so nothing kind of macro related that's any slowdown or anything on that one?

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Paul Michael Todd, Total System Services, Inc. - Senior EVP & CFO [11]

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No.

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Dan Dolev, Nomura Securities Co. Ltd., Research Division - Executive Director of Business Services [12]

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Got it. And my follow-up is kind of bigger picture. Obviously, there has been a large transaction out there. This is a question for you and for Troy with 2 of your competitors. How did that change the competitive landscape right now? Like how do you -- what -- does it make TSYS stronger? Is there anything that TSYS needs to do longer term to sort of partner maybe with another company? Like is there anything changed because of the First Data and Fiserv transaction?

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M. Troy Woods, Total System Services, Inc. - Chairman, President & CEO [13]

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Dan, I'll take that, and thanks for the question. Look, I don't think anything has changed here at TSYS, of course. We send our congratulations to Jeff and Frank and wish them the best. We've been competitors with both of them for, gosh, decades and decades. They're both good customers of ours here at TSYS, both Fiserv and FDC. I think, as Paul indicated, we have a lot of confidence. We have a good track record. We have a 35-year track record of delivering, and we think our model has proven quite successful. So we like where we're playing today. We don't necessarily see the necessity for a fourth leg to our stool. Our goal is to continue to deliver best-in-class technology and service where we play, keep our heads down, work hard, execute on our strategy and just be the best that we can be. So we don't see anything changing here.

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Operator [14]

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Our next question comes from Darrin Peller of Wolfe Research.

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Darrin David Peller, Wolfe Research, LLC - MD & Senior Analyst [15]

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Just a quick question first on issuer processing, and then I have a follow-up on the merchant side. But on the issuer processing side, you mentioned a couple of conversions more publicly around Capital One coming on. Just what's the timing of these conversions now that you expect to happen in '19? And the magnitude of the other LOIs that you haven't really called out names for yet?

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M. Troy Woods, Total System Services, Inc. - Chairman, President & CEO [16]

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Darrin, as I mentioned last quarter on the retail and co-brand portfolios, at least as it related to Cap One, that those would be 2019 events. One of those continues to be a 2019 event. One has moved due to a few other priorities to the first quarter of 2020. And so -- and one in 2019 is clearly on the back half of this year. But as Paul indicated, everything is baked in. As to the timing and magnitude of the others, what -- again as I said earlier, what we know of is in our guidance. Most everything that we've talked about other than ones that I just mentioned are really 2020 events. And we should be announcing several of those soon.

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Darrin David Peller, Wolfe Research, LLC - MD & Senior Analyst [17]

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Okay. And then just a quick follow-up. You mentioned a large national partner a couple of times now around the Merchant side. Is that a bank referral partnership? Or is that a large retail merchant partner? And then, I guess, just honing in on the Merchant side a little more, I mean, the announcement of Vital, it sounds like that's really a competitive solution that you're trying to answer to Clover and Square and after the -- I think it was iMobile3 acquisition, you can leverage for that. Can you just touch a little more around your strategy there? And is that something that you're planning on? How hard are you going to push that starting this year? And what can that do?

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M. Troy Woods, Total System Services, Inc. - Chairman, President & CEO [18]

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Sure, Darrin. Well, as it relates to the large national partner that I've mentioned, I think it's best that I just leave it at that. It's a very large national partner. I think we'll be -- could be in a position to announce that by the end -- no later than the end of this quarter. If you ask about Vital, and whether it's a response to Clover or Square or whatever, we have said now for quite some that we needed a different product set in the Smart POS area and the merchant portal area back when we announced the acquisition of iMobile3, and to some degree, Cayan with its gateway capabilities. So with the announcement earlier this month of our Vital products, it is clearly a take to go after the market, the small business market where we see an opportunity to simplify their capabilities, to bring to market what we think are very excellent POS products, which is Phase 1 of our Vital launch with the 3 that we mentioned. So yes, it's a little bit of a competitive. It's a little bit of what we see our customers want. The feedback that we've had from our partners and our customers has been extremely encouraging when we came out with the Vital launch. So yes, we do have very aggressive goals set for sales of those products for 2019.

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Operator [19]

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Our next question comes from David Togut of Evercore ISI.

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David Mark Togut, Evercore ISI Institutional Equities, Research Division - Senior MD [20]

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I just like to ask about the net revenue growth range of 5% to 7% in non-GAAP revenue. Could you give us a sense of what the puts or takes are that could take you, let's say, to the bottom end of the range versus the top end? And to what extent have you included any specific views on the U.S. economy? Do you expect it to remain strong or to slow throughout the year?

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Paul Michael Todd, Total System Services, Inc. - Senior EVP & CFO [21]

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Yes, David, I'll take that. I mean, as it relates to moving kind of to the bottom, obviously, if we get some additive kind of headwinds across all of the segments in kind of different forms, that would be additive pressure. We do have baked in some currency headwinds, so there's about 0.5% of currency headwind that's baked into that 5% to 7% range. And obviously, there's 1% roughly of CFPB impact that is also baked in to that 5% to 7% range. But as it relates to baking in the economic impact, obviously, we go through our normal process around forecasting, and we follow those same protocols this time. And so we feel like what's been baked in is the most realistic outcome that we see each of the businesses doing and as said a consolidated level.

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Operator [22]

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Our next question comes from George Mihalos of Cowen.

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Georgios Mihalos, Cowen and Company, LLC, Research Division - MD & Senior Research Analyst [23]

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I just wanted to start off as it relates to the Issuer segment. Some of the strength there. I think Paul, you talked about the margins being negatively impacted by investment and then obviously, the outperformance and output. Was hoping maybe you can parse that out a little bit. And then maybe related to that, as we think of output in the business related to that, is there a lot of momentum around moving to contactless and maybe some sort of acceleration in a card reissuing cycle?

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Paul Michael Todd, Total System Services, Inc. - Senior EVP & CFO [24]

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Yes. So George, 2 things there. One, I obviously did call out both the Output and Managed Services impact and both the investments. The majority of the delta between that 50 basis points consolidated range and where we ended up was the overperformance on the Output and Managed Services. We did make some additional investments, but those were pretty much in line with where we were expecting to. So that little last piece there is more of a mix issue as it relates to the margin there. As it relates to contactless and that, we're just going to have to wait and see. We're going to have to wait and see what the demand equation looks like from our issuers. I know there is a good bit of dialogue out there, but it's all coming on the heels of the chip reissuances. And so time will tell if that kind of is an additive kind of tailwind to that segment of our business or not.

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Georgios Mihalos, Cowen and Company, LLC, Research Division - MD & Senior Research Analyst [25]

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Okay, that's helpful. And just a quick follow-up as it relates to merchant. Bringing the outlook up for '19 to 8% to 10% from kind of the 7% to 9% target, is that increase a function of the large national partner coming on? And are you thinking that revenue per transaction will be relatively flat in '19 versus '18?

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Paul Michael Todd, Total System Services, Inc. - Senior EVP & CFO [26]

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No. That is -- the 8% to 10% is not reflective of this large national partner. It's a de minimis impact in the 2019 due to kind of the timing aspect of that. And so the 8% to 10% is kind of what we've been doing from an organic standpoint. And certainly, it was where -- what we did from an organic standpoint in the fourth quarter. So the fundamentals of the business drive that 8% to 10%. On a revenue per transaction, basically kind of a flat to maybe even a contracting scenario there next year. And the primary reason for that is the overperformance in our indirect channel. We talked for really several quarters now wanting to get positive growth out of the indirect side. We're getting that. But those indirect transactions come kind of basically 1/12 of the revenue per transaction that we get on the direct side. And so when we are a little more successful on growing the indirect, which we did in the fourth quarter, we do see some kind of mix pressure on that revenue per transaction metric. But we're fine with that. We're managing the business to grow, the top line and the bottom line, and that metric will see kind of what lands there. But that's our expectation right now is just slightly contracting there for next year.

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Operator [27]

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Our next question comes from Dave Koning of Baird.

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David John Koning, Robert W. Baird & Co. Incorporated, Research Division - Associate Director of Research and Senior Research Analyst [28]

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I guess, first of all, is the Merchant segment -- I know you called out the RevPAR transaction and some one-off kind of comp issues, but this transaction growth actually accelerated. Do you feel like is the market actually getting better for merchant acquiring? I know the issuer data showed a little de-sell, but is the acquiring market actually accelerating in Q4, do you think?

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Paul Michael Todd, Total System Services, Inc. - Senior EVP & CFO [29]

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Well, we saw the overperformance on transaction growth on our indirect side. So as we've been successful in getting some of the ISO volume that we talked about for a couple of quarters, that's become kind of additive fuel on the transaction side that has kind of both organic growth to it, but also some new business growth dynamic at play there. So I wouldn't necessarily correlate that on the Issuing side just because of the dynamics of the business and the difference between the direct and indirect. But that's more of the dynamic that's playing through there, Dave.

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David John Koning, Robert W. Baird & Co. Incorporated, Research Division - Associate Director of Research and Senior Research Analyst [30]

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Okay, that's great. And then just a couple little financial things. Is your -- I know you're changing this year to the EBITDA kind of method of reporting. Would the cash EBIT or the adjusted EBIT margin also go up about 25 to 75 bps in '19? And then just confirming the 3% to 5% consumer growth, that includes the headwinds from CFPB? Those 2 just numbers questions.

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Paul Michael Todd, Total System Services, Inc. - Senior EVP & CFO [31]

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Yes. So the 3% to 5% consumer growth does include the CFPB impact as I mentioned in the prepared remarks. As it relates to EBIT, yes, we get positive growth. And whether you do it out of the old or the new way, there is an additive piece on the EBITDA side because our depreciation and amortization is a little bit higher. So, but we get positive growth on both metrics. And certainly on an adjusted EBITDA, our expectation is to be in that 25 to 75 basis points range. We have the CFPB obviously impact, that's playing through there as well, which I commented on our last call of roughly about $25 million of operating income headwind related to the CFPB impact.

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Operator [32]

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Our next question comes from Dan Perlin of RBC Capital Markets.

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Daniel Rock Perlin, RBC Capital Markets, LLC, Research Division - Analyst [33]

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I want to hit on the consumer side a bit on that CFPB. So it sounds like the DDA account conversion has been kind of running ahead of plan maybe, maybe not ahead of what you guys thought, but it's a little bit ahead of what we had thought. And I'm still wondering why maybe you wouldn't be willing to update kind of the conversion or the mitigation opportunities. It just seems like that could potentially be a benefit for you guys. So I'd love some -- I would just love your thinking around that first.

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M. Troy Woods, Total System Services, Inc. - Chairman, President & CEO [34]

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Dan, I'll take the first part of it. As I indicated in my prepared remarks, and I think Paul touched on it as well, we have been extremely pleased with the rollout of our DDA product. As you recall, we started with our largest partner quite some time ago now looking back on it. And even though we are now in all 4 channels, we're only dealing with an upgrade proposition in 3 of those channels. We still have new business in the partner channel. And so we didn't want to go out there and cram it all in. We needed to have a lot of lessons learned, which we have, particularly in our direct-to-consumer channel. We feel pretty good about the rollout. We will be full steam ahead by the time the CFPB rule is implemented in April. I will add one more thing just to be somewhat repetitive, Dan, as I indicated in my prepared remarks and I think Paul touched on it as well. We are extremely pleased with the overdraft take that we're getting on the DDA as well and the direct deposit. So both of those are encouraging.

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Daniel Rock Perlin, RBC Capital Markets, LLC, Research Division - Analyst [35]

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Great, I think that is encouraging. The other follow-up question I had is really around -- it's in Merchant. The conversation you have around the indirect business coming in so much stronger. And my question is, is there opportunities to migrate up, maybe over some of your ISO partners with the new Vital product in the POS side?

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M. Troy Woods, Total System Services, Inc. - Chairman, President & CEO [36]

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Absolutely. As a matter of fact, Philip is here. I think he can probably address that a whole lot better than I could, Dan.

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Philip C. McHugh, Total System Services, Inc. - Senior EVP & President of Merchant Solutions [37]

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Absolutely. We bought iMobile3 as a platform, so we've launched the Vital product. It's getting a lot of good pickup with our direct partners. But we were very specific when we launched that we're going to create a new competitive product out there that was also very partner friendly. I think that's a big differentiation. That's what's core to where TSYS succeeds. And we got a new pickup from our direct partners, but also a lot of our indirect partners are talking to us. We've had a long relationships with them through our processing but also through iMobile3. So we certainly expect to see the Vital product being picked up by our partners with our brand or potentially with their brand, but it will be the same back-end platform.

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Operator [38]

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Our next question comes from Brett Huff of Stephens.

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Brett Richard Huff, Stephens Inc., Research Division - MD [39]

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First one is when you gave your 5% to 7% Issuing growth, is there any puts and takes there from a gross point of view that maybe net out? Are you anticipating sort of a slower same-store sales card issuance from your major customers, the big ones that I think are kind of the more aggressive issuers? Are you hearing anything from them, saying, we had a great couple of years. We're not sure we're going to issue as many cards this year. Are you hearing any of that? And/or is that being offset? And if you're hearing that, is that being somewhat offset by the really strong pipeline or the really strong closing year you had last year and kind of helping avoid some of the 5%? Is there any of that dynamic going on? Or is it just kind of full steam ahead for most of your big issuing partners?

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M. Troy Woods, Total System Services, Inc. - Chairman, President & CEO [40]

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Brett, it's Troy. Well, I think it's a combination of just about everything you touched on. I did make a comment last quarter when we had a pretty significant purge of inactive traditional accounts on file, looking at that growth and whether you could somewhat pick that as slowing down. But when you look at the fourth quarter and take out the Cabela's conversion that I mentioned that happened in early 4Q '18, our customers added about 16 million accounts in the fourth quarter. So I would put that in the category of a long way from slowing down by adding organic business. We see the reports that come out just like you do with all the big issuers, and most of their sales volume did decelerate from 3Q to 4Q. But our transaction growth accelerated from 3Q to 4Q as a growth rate. So -- and then I think the only other thing I would just add to it, maybe 2 things, you mentioned the pipeline and obviously, that's more heavily weighted toward end of the year, early 2020. And I touched on this last quarter as well. We do meet with our customers and do what we call quarterly business reviews. And they continue to be pretty upbeat and optimistic. I think all of us, as Paul indicated, a little bit concerned about some slowdown in the economy at some time over the next 12 to 18 months. But when you look at some of the charge-off rates that have been reported and delinquency rates that are coming out, the metrics in the markets look pretty good.

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Brett Richard Huff, Stephens Inc., Research Division - MD [41]

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That's helpful. And then the follow-up is on margin for the Issuer business. Our view of that business is that especially when you're bringing in the number of cards that you brought in over the last 4 to 6 quarters that the margins incrementally on that business are probably very, very good. You run it very efficiently on one large platform more or less. And I know you're making investments for customers that you expect to come on. But it seems like you're also making investments for innovation. Have you pulled forward any sort of -- have you gotten quicker, if you will, on the innovation spend than maybe you would have otherwise, given how strong and how likely high the incremental margins are, incremental margin dollars are in our Issuing business. Or did your plans kind of come in like you thought?

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Paul Michael Todd, Total System Services, Inc. - Senior EVP & CFO [42]

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Yes, I mean. I think our plans, like I said earlier on the investments side in the fourth quarter, were roughly what we anticipated. We are and we have throughout the year invested more on multiple fronts in Issuing, and some of that investment will continue. But as I mentioned in my prepared remarks, we do expect the Issuing Solutions segment to grow above our 25 to 75 adjusted EBITDA margin range for '19. And so kind of an improving margin picture on a year-over-year basis in '19 compared to '18 with the kind of investments that we've been making baked into the expense base.

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Operator [43]

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Our next question comes from Steven Kwok of KBW.

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Wai Ming Kwok, Keefe, Bruyette, & Woods, Inc., Research Division - VP [44]

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I just had a clarifying question around the NetSpend revenue guidance, the 3% to 5%. Does that include the mitigating impacts of the CFPB rule? Because when we look at the EPS impact, it seems you're calling out $0.11 versus the previous guidance of $0.17 to $0.19 without the mitigants, which would imply 40% mitigation. I just want to clarify on the revenue side.

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Paul Michael Todd, Total System Services, Inc. - Senior EVP & CFO [45]

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Yes, yes, Steven, you're right. I mean, everything that is baked into this guidance has the mitigating effects both on the revenue side and the EPS side baked in.

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Wai Ming Kwok, Keefe, Bruyette, & Woods, Inc., Research Division - VP [46]

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And just on the revenue side, how much of the mitigation are you baking into it versus the 60 to 65 you called out previously?

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Paul Michael Todd, Total System Services, Inc. - Senior EVP & CFO [47]

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Yes, so there's $35 million roughly of revenue headwind after mitigation. So that's the amount. Yes, roughly.

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Operator [48]

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Our next question comes from Jim Schneider of Goldman Sachs.

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James Edward Schneider, Goldman Sachs Group Inc., Research Division - VP [49]

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I was wondering if you can maybe comment on further on the detail on the issuing side that you talked about earlier that was very helpful. When you look at International business specifically, there's been a lot of questions about the U.K. economy and how that's going. And maybe you can kind of talk about whether you're seeing any of that U.K. weakness, given your concentration there on the issuing side with some of your larger partners, or what you're seeing and expecting for 2019, generally speaking, on that front.

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M. Troy Woods, Total System Services, Inc. - Chairman, President & CEO [50]

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Yes, Jim. I'll be glad to take maybe the first part of that and Paul can add to it. As you know, we don't break out anymore our North America and issuing -- I mean, International business as it relates to growth. I will say, though, that the growth that we've experienced in '18 was significant for our International business. It's been really, really well. We talked about new business that we've gained internationally. We talked about some of the Latin American business. I know you're primarily zeroing in on the U.K. We talked a lot with our customers, and clearly, our management team over there, we all have some concerns about Brexit or no Brexit and where that may be headed. But right now, other than some of the currency things that Paul has talked on, we see really good growth, really good opportunities coming out of not only the U.K. but all of Europe. Paul, do you want to add on that?

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Paul Michael Todd, Total System Services, Inc. - Senior EVP & CFO [51]

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Yes, the only thing I would add is exactly, we're still seeing good growth. We're glad to be in a position when you take those dynamics at play and you take the 100 basis points of headwind related to the nonrenewal of the business and the onetime item and still be in that 5% to 7% growth with some of the pullback that we're expecting on the Output and Managed Services. So we're pleased to be in that position, given kind of all the dynamics at play, but nothing else I called out on the International side.

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James Edward Schneider, Goldman Sachs Group Inc., Research Division - VP [52]

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Great. And then just a quick clarification. On the accounts on file, I think there was a pretty well expected and telegraphed deconversion that we saw in the quarter on the kind of single-use, nontraditional side and the government side. Is this kind of look a good AOF baseline to use as we go forward in terms of what from here should be organic growth rate and portfolio additions?

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Paul Michael Todd, Total System Services, Inc. - Senior EVP & CFO [53]

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Yes, I think so. I think the significant noise with those things you mentioned being out gives us a good baseline.

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Operator [54]

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Our next question comes from Ben Budish of Barclays.

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Ramsey Clark El-Assal, Barclays Bank PLC, Research Division - Research Analyst [55]

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It's actually Ramsey El-Assal from Barclays. I wanted to ask you about the ISV in the integrated channel. You've announced consistently new signings there, and I'm just trying to kind of get at where we are in terms of the overall penetration rates in that industry. When you sign these new relationships, are they exclusive or nonexclusive? Are they takeaways? Or is it just simply you're finding new customers that don't already have a payment solution? Just a little more color on your view of the penetration rates in the industry would be helpful.

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Philip C. McHugh, Total System Services, Inc. - Senior EVP & President of Merchant Solutions [56]

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Ram, this is Philip McHugh. The answer to that is it's a little bit of all of the above, I'd be strained to say there is a specific trend. We are bringing in -- we continue to bring in practice management in software and health, large and small retail ISV, some very well-known ISVs with some emerging ones. And then we also do a lot of specialty ISV in health and wellness. We're seeing growth in field services. So we are -- we're getting traction in fast start of ISVs to more traditional ones across the board. Some are exclusive, some we have very high commitments and some were a group of many providers. So right now, that market is very dynamic. The amount of ISVs grows every single day. And so it's just about being active out in the market and well and with a good reputation and ease to integrate with and capture that volume. But it's all of the above right now.

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Ramsey Clark El-Assal, Barclays Bank PLC, Research Division - Research Analyst [57]

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That's super helpful. A quick follow-up. This tax season, we've seen obviously tax reform. Are you anticipating larger volumes flowing through your prepaid card business because of tax reform this year than we would've had typically?

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M. Troy Woods, Total System Services, Inc. - Chairman, President & CEO [58]

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I wouldn't say, Ramsey, necessarily larger volumes. One of the things that we are certainly watching, with the government shutdown, partial government shutdown there for several weeks, does that have any impact and maybe shifting some of the tax refunds into early 2Q? But beyond that, I wouldn't say there's anything particular to call out on volumes.

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Operator [59]

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Our next question comes from Michael Del Grosso of Jefferies.

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Michael Browning Del Grosso, Jefferies LLC, Research Division - Equity Associate [60]

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I guess, the main one is on the adjusted EBITDA trajectory and the adjusted EBITDA margin trajectory in 2019. It sounds like the Issuer segment should outperform, but most of that is coming in the second half of '19. Could you comment on the trajectory for the Merchant segment as we move through '19? Should that be more front-half weighted? Or any commentary there would be helpful.

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Paul Michael Todd, Total System Services, Inc. - Senior EVP & CFO [61]

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Sure. So on the issuer side, I wouldn't necessarily say it was front-end loaded there. It's going to progress throughout the year, and so we see kind of more of a linear progression on the issuing side on the margin expansion there. And on the Merchant side, it's just relatively constant. And so there isn't any kind of comment I would make on necessarily front half or back half. Obviously, this was a very strong margin quarter from a 4Q standpoint, and so the comp there would be a little perhaps some headwind dynamic to it, but more constant throughout the year on merchant.

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Operator [62]

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

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Shawn Roberts, Total System Services, Inc. - VP of IR [63]

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Thank you, Andrea. As always, we appreciate your participation in our earnings call and look forward to seeing you on the road. Feel free to give us a call if you need to talk. Thank you. Have a good evening.

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Operator [64]

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