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Total System Services Inc (TSS)
Q4Â 2018 Earnings Conference Call
Jan. 29, 2019, 5:00 p.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
See all our earnings call transcripts.
Prepared Remarks:
Operator
Good day, and welcome to the TSYS Fourth Quarter 2018 Earnings Release and Conference Call. All participants are in listen-only mode. (Operator Instructions) After today's presentation, there will be an opportunity to ask questions. (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.
Shawn Roberts -- Vice President of Investor Relations
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. I'll remind everyone that each person will be able to ask one question and one follow-up before you placed back into the queue.
I'd now call your attention to the fact that we will be making forward-looking statements about the future operating results of TSYS. These forward-looking statements involve risks and uncertainties. Factors that could cause TSYS's actual results to differ materially from the forward-looking statements are set forth in TSYS's reports filed with the SEC, including its 2017 annual report on Form 10-K. I 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, President and Chief Executive Officer
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, it's been lingering around for awhile, 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 and 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 they are 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 basis points 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 3 times. 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 three 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 to 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 uptake 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 discipline platform integration; two, continuing to lead on integrated solutions; three, driving our skilled partnerships; and four, remaining an active player and 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 could vote at over 64,000 Cayan merchants from a competitive 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 up 21.8% and 23.7% respectively.
And our integrated channel, we have established a leadership position and 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 at a strong year for the integrated channel. And our partner channel, we achieved several significant milestones over the course of the year, including 12.5% increase in sales volume year-over-year.
And lastly, we renewed several of our large ISO and bank partners, including a top five indirect clients. By 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 under way 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 and 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 were 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 four of our distribution channels made solid contributions to our performance in the quarter with double-digit growth in two of them. For the year, net revenue top $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. At our retail and partner channels, we signed a two-year extension with Walmart, which included an expansion of tech placement for our NetSpend cards and an agreement to pilot the PayPal product and 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 and the fourth quarter alone. During 2018, our partnership with Houston Astros had a meaningful impact on our H-E-B card program in Texas and we recently agreed to a multi-year extension with the Astros.
Moving into 2019, this partnership will allow us to continue to build off of last year success with HEB and expand our Astros program to other retailers. In our PayCards channel, we signed or renewed several key agreements including a new referral agreements with Ceridian, a three-year renewal agreement with Brookdale and a three-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 an outsold and 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 two-thirds 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 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 rear view mirror. During Paul's comments, he will elaborate further on the 2019 financial headwinds we are anticipating as a result of the impact from 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 payment 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?
Paul M. Todd -- Senior Executive Vice President and Chief Financial Officer
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 six. 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 up $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 a $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 it was consistent with a 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 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 and 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've been communicating for over two years now that are 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 two years.
Now I will cover our Issuer Solutions segment performance starting on slide eight. 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 to the growth in both volume and non-volume net revenue on a reported and constant currency basis. As was the case last quarter, we continued to have overperformance in our output and 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 non-volume 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're 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 non-recurring item I mentioned in 1Q of last year along with the non-renewal of our non-traditional account-on-file government accounts that will not repeat in 2019. These two 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 that position this business well for 2019 and beyond.
Now onto slide nine, 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 over performance, we've had the last two quarters on revenue growth partly due to a tougher comp quarter from last year and some calendaring the facts 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 shift mix and grow over from a strong 4Q of 2017. Normalized for those events, revenue per transaction would have been 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 two 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 group 7.2% from 4Q of last year. This quarterly growth allows 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 four of our distribution channels and as Troy mentioned, we had double digit growth in two 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 product, where over two-thirds 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 strategies, 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 non-recurring in 2019. This $0.18 of adjusted diluted EPS headwind represents about 4% of growth and without these two 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 in acquisition with a heavier weighting of these shares to be repurchased in the first half of the year that we'd open market purchases and accelerated repurchase program or 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 in income and equity investments and particularly our CUP Data joint venture, given some additional investments expect it 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 is roughly $0.05 impact.
Finally, I want to wrap up with three call outs from today's call. The first call out is on net revenue growth across our company. Has it's 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 it's evidence that the execution of our strategic plans in each of our businesses is paying off.
The second call out 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 as far 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 call out is related to capital. The fourth quarter was an important capstone to the year from a capital standpoint and that we were able to resume repurchases of more shares in a meaningful way on the heels of meeting our deleveraging goals in the third quarter. We ended the year below 3 times, leveraged 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 creative acquisitions, all while maintaining our investment grade balance sheet and expecting to end 2019 below three times leveraged. And 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 make TSYS a better company. And with that we will open it up for questions.
Questions and Answers:
Operator
We will now begin the question-and-answer session. (Operator Instructions) And our first question comes from Ashwin Shirvaikar of Citi. Please go ahead.
Ashwin Shirvaikar -- Citi -- Analyst
Thank you. Hi, Troy. Hi, Paul. Hi, Shawn. So I guess my first question is on growth. And you guys have mentioned now for a 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 required for that is that included in the numbers? Could you talk about that?
M. Troy Woods -- Chairman, President and Chief Executive Officer
Hi Ashwin, thank you. Yeah. I think you started off now that I have mentioned LOIs, we've talked about primarily, but have been in the Issuing segment. I'm not to say 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, yeah, 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, they did move from LOI to contract. We also have several LOIs is that I mentioned that are close to going to contract. Anything that we have that is plan from a conversion activity in 2019, of course is baked into the guidance that Paul gave. As I've have indicated on several occasions, for several quarters at least the pipeline that we have related to conversions and issuing brings growth over the next 12 months to 24 months.
Paul M. Todd -- Senior Executive Vice President and Chief Financial Officer
And Ashwin, I just might add on your, the last part of that question around the investments, are they included or not? Yeah, I mean our investments bringing this new business on even though, it's going to take some time to do it. That's all factored in.
Ashwin Shirvaikar -- Citi -- Analyst
Right, right. So I was asking primarily because in your -- in the last sheet on your presentation, it says that large contracts and take cons 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 a share repurchases, but the outlook for this year seems to include the buyback. Could you first of all, I guess quantified the buyback and clarifies that is correct or not?
M. Troy Woods -- Chairman, President and Chief Executive Officer
Yeah. So Ashwin, we did actually included 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 at 1% to 2% of adjusted EPS growth is associated with the buyback activity.
Operator
Our next question comes from Dan Dolev of Nomura. Please go ahead.
Dan Dolev -- Nomura -- Analyst
Hi, guys. Thanks for taking my question. 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 2019? And then I have a follow-up.
Paul M. Todd -- Senior Executive Vice President and Chief Financial Officer
Yeah, 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, that happened this quarter, but the fundamentals of the business are really strong. And we're comfortable around next year's outlook.
Dan Dolev -- Nomura -- Analyst
Got it. And so nothing kind of macro related that any slow down or anything on that one?
Paul M. Todd -- Senior Executive Vice President and Chief Financial Officer
No.
Dan Dolev -- Nomura -- Analyst
Got it. And then 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 the two of your competitors that how does 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 may be with another company like is there anything changed because of the first data advice your transaction? Thank you.
M. Troy Woods -- Chairman, President and Chief Executive Officer
Hi, Dan. I'll take that. And thanks for the question. Look, I don't think anything has changed here TSYS, of course. We congratulations to Jeff and Frank and wish them the best. We made competitors with both of them for gosh, decades and decades. They were both good customers of ours here at TSYS go faster and FTC. I think, as Paul indicated, we have a lot of competence. 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 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.
Operator
Our next question comes from Darrin Peller of Wolfe Research. Please go ahead.
Darrin Peller -- Wolfe Research -- Analyst
Thanks, guys. Look, just 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 2019 and the magnitude of the other LOIs that you haven't really called out names for yet?
M. Troy Woods -- Chairman, President and Chief Executive Officer
Hi, Darrin. as I mentioned last quarter on the retail and co-brand portfolios, at least as it related to Cap One of those would be 2019 events. One of those continues to be at 2019 event. One has moved due to a few other priorities to the first quarter of 2020. And so, and the one in 2019 is clearly on the back half of this year that 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 the ones that I just mentioned are really 2020 events. And we should be announcing soon of those of soon.
Darrin Peller -- Wolfe Research -- Analyst
Okay. And then, thanks. And 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? Thanks, guys.
M. Troy Woods -- Chairman, President and Chief Executive Officer
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. That it's a very large national partner I think will be -- could be in a position to announce it by the end, later than the end of this quarter. You asked about Vital and whether it's a response to clover or square or whatever, we have said now for quite some time that we needed a different product set and 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 for the small business market where we see an opportunity to simplify their capabilities to bring the market what we think are very excellent POS product, which is Phase 1 of our Vital launch with the three that we mentioned. So yeah, 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 yeah, we do have very aggressive goals set for sales of those products for 2019.
Darrin Peller -- Wolfe Research -- Analyst
Okay.
Operator
Our next question comes from David Togut of Evercore ISI. Please go ahead.
David Togut -- Evercore ISI -- Analyst
Thank you. Good afternoon. Appreciate all the helpful callouts in detail on the 2019 guidance. 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, they could take you, let's say to the bottom end to the range versus the top end. And to what extent have you included any specific views on the US economy? Are you expected to remain strong or to slow throughout the year?
Paul M. Todd -- Senior Executive Vice President and Chief Financial Officer
Yeah, 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 and kind of different forms, that that would be additive pressure. We do have baked in some currency headwinds, but 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 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 feed to the businesses doing and outside of consolidated level.
David Togut -- Evercore ISI -- Analyst
Thank you very much.
Operator
Our next question comes from George Mihalos of Cowen. Please go ahead.
George Mihalos -- Cowen -- Analyst
Great, good afternoon and thanks for taking my question, guys. 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?
Paul M. Todd -- Senior Executive Vice President and Chief Financial Officer
Yeah. So George, two things there. One, I obviously did call out both the output and Managed Services impact and both investments. The majority of the delta between that 50 basis points consolidated range and where we ended up was the overperformance on the output 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.
George Mihalos -- Cowen -- Analyst
Okay. That's helpful. And just a quick follow-up as it relates to merchant. Bringing the outlook up for 2019 to 8% to 10% from kind of the 7% to 9% target, is that increase the function of the large national partner coming on? And are you thinking that revenue per transaction will be relatively flat in 2019 versus 2018. Thank you.
Paul M. Todd -- Senior Executive Vice President and Chief Financial Officer
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 the 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 one twelfth of the revenue per transaction that we get on the direct side. And so when we are a little more successful in 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 wetlands there. But that's our expectation right now is just slightly contracting there for next year.
Operator
Our next question comes from Dave Koning of Baird. Please go ahead.
Dave Koning -- Baird -- Analyst
Yeah. Hi, guys. Thank you. 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, you think?
Paul M. Todd -- Senior Executive Vice President and Chief Financial Officer
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 a direct and indirect. But that's more of the dynamic that's playing through there, Dave.
Dave Koning -- Baird -- Analyst
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 2019? And then just confirming the 3% to 5% consumer growth, that includes the headwinds from CFPB? Those two just numbers questions.
Paul M. Todd -- Senior Executive Vice President and Chief Financial Officer
Yeah. So the 3% to 5% consumer growth does include the CFPB impact as I mentioned in the prepared remarks. As it relates to EBIT, yeah, 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, it's playing through there as well, which I commented on our last call roughly about $25 million of operating income headwind related to the CFPB impact.
Operator
Our next question comes from Dan Perlin of RBC Capital Markets. Please go ahead.
Daniel Perlin -- RBC Capital Markets -- Analyst
Thanks, guys. 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 talk a little bit ahead of what we had thought. And I'm still wondering why maybe you'd 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 just love your thinking around that first.
M. Troy Woods -- Chairman, President and Chief Executive Officer
Hi, 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 four channels, we're only dealing with an upgrade proposition in three 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.
Daniel Perlin -- RBC Capital Markets -- Analyst
Okay. That's great color.
M. Troy Woods -- Chairman, President and Chief Executive Officer
I will add one more thing just to be somewhat repetitive, Dan, as I indicated in my prepare remarks and I think Paul touched on as well. We are extremely pleased with the overdraft take that we're getting on the DDA as well in the direct deposit. So both of those are encouraging.
Daniel Perlin -- RBC Capital Markets -- Analyst
Great. I think that's encouraging. The other follow-up question I have is really around -- it's in merchant. The conversation you have around the indirect business coming in so much stronger in my question is, is there opportunity to migrate up, maybe over some of your ISO partners with the new Vital product in the POS side?
M. Troy Woods -- Chairman, President and Chief Executive Officer
Absolutely. As a matter of fact, Philip is here and I think he can probably address that a whole lot better.
Philip C. McHugh -- Senior Executive Vice President and President, Merchant Solutions
Absolutely. We find iMobile3 as a platform so we lost the Vital product tail, a lot of good pickup with our direct partners. But we were very specifically (inaudible) that we're going to create a new competitive product out there as a result that's very partner friendly. I think that's a big differentiation. That's what's core to our TSYS seeds. And if you pick up from our direct partners, but also a lot of our indirect partners are talking to us. We've had a lot of relationships with them through our processing but also through iMobile3. So we certainly expect to see the Vital product to get partners with our brand or potentially with their brand, but it will be the same back end platform.
Operator
Our next question comes from Brett Huff of Stephens. Please go ahead.
Brett Huff -- Stephens -- Analyst
Good afternoon, Troy, Paul and Shawn. Thanks for taking the questions. 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 may be 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 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 a really pipeline or a really strong closing you're hearing 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?
M. Troy Woods -- Chairman, President and Chief Executive Officer
Brett, it's Troy. 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 -- someone put that as a 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 2018, 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.
And then I think the only other thing, I would just add to it, maybe two things. You mentioned the pipeline and honestly that's more heavily weighted toward end of 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've continued to be pretty upbeat and optimistic. I think all of us, as Paul indicated a little bit concerned about some slowdown in the economy and sometime 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 and the markets look pretty good.
Brett Huff -- Stephens -- Analyst
That's helpful. And then the follow-up is, on margin for 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 four to six 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 then maybe you would have otherwise given how strong and how likely the high the incremental margins are and incremental margin dollars are in the issuing business or did your plans kind of come in like you thought?
Paul M. Todd -- Senior Executive Vice President and Chief Financial Officer
Yeah. I mean, I think our plans, like I said earlier on the investment side in the fourth quarter, we're 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 2019. And so kind of a improving margin picture on a year-over-year basis in 2019 compared to 2018 with the kind of investments that we've been making baked into the expense base.
Operator
Our next question comes from Steven Kwok of KBW. Please go ahead.
Steven Kwok -- KBW -- Analyst
Hi. Thanks for taking my questions. Good quarter. Just had a clarifying question around the net spend 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 are calling out $0.11 versus the previous guidance of $0.17 to $0.19 without the mitigates, which would imply 40% mitigation. Just wanted to clarify on the revenue side. Thanks.
Paul M. Todd -- Senior Executive Vice President and Chief Financial Officer
Yeah. 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.
Steven Kwok -- KBW -- Analyst
And just on the revenue side, how much of mitigation are you baking into it versus the $60 million to $65 million you called out previously?
Paul M. Todd -- Senior Executive Vice President and Chief Financial Officer
Yeah. So there's $35 million roughly of revenue headwind after mitigation. So that's the amount, yeah, roughly.
Steven Kwok -- KBW -- Analyst
Okay. Great. Thanks.
Operator
Our next question comes from Jim Schneider of Goldman Sachs. Please go ahead.
Jim Schneider -- Goldman Sachs -- Analyst
Good afternoon and thanks for taking my question. I was wondering if you could maybe comment further on the detail on the issuing side, that you talked about earlier that was very helpful. When you look at the international business specifically, there's been a lot of questions about the UK economy, and how that's going. And maybe you could kind of talk about whether you're seeing any of that UK 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?
M. Troy Woods -- Chairman, President and Chief Executive Officer
Yeah, Jim, I'd 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 2018 was significant for our international business. It's been really, really well. We talked about new business that we've gained internationally. We've talked about some of the Latin American business, I know you're primarily zeroing out on the UK. We talked a lot about 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, a really good opportunities coming out of not only the UK but all of Europe.
Paul M. Todd -- Senior Executive Vice President and Chief Financial Officer
Yeah. The only thing I would add, I mean, it's 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 non-renewal of the business and the one-time 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'd call out on the international side.
Jim Schneider -- Goldman Sachs -- Analyst
Great. And then just a quick clarification. On the accounts on file, I think there was a pretty well expected and telegraph deconversion that we saw in the quarter on the kind of single use of non-traditional side and on the government side. Is this kind of like a good AOF baseline to use as we go forward in terms of what from here should be organic growth rate and portfolio additions?
Paul M. Todd -- Senior Executive Vice President and Chief Financial Officer
Yeah, I think so. I think the significant noise with those things you mentioned being out gives us a good baseline.
Operator
Our next question comes from Ben Budish of Barclays. Please go ahead.
Ramsey El-Assal -- Barclays -- Analyst
It's actually Ramsey El-Assal from Barclays. I wanted to ask you about the ISV, an integrated channel. You've announced consistently new signings there. And I'm just tried 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 non-exclusive? Are they takeaways or is it just simple, 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.
Philip C. McHugh -- Senior Executive Vice President and President, Merchant Solutions
Hi, Ramsey. This is Philip McHugh. The answer to that, it's a little bit of all of the above. I'd be strange to say that is a specific trend. We are bringing in -- we continue to bring in practice management software and health, large and small retail ISV, some very well known ISV system 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-up ISVs to more traditional ones across the board. Some are exclusive, some we have very high commitments and somewhere 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 with a good reputation and easily integrate with and capture that volume. But it's all of the above right now.
Ramsey El-Assal -- Barclays -- Analyst
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 then we would have had typically.
M. Troy Woods -- Chairman, President and Chief Executive Officer
I wouldn't say Ramsey necessarily larger volumes. One of the things that we are certainly watching, with the government shutdown, partial government shutdown therefore several weeks. Does that have any impact? And maybe shifting some of the tax reforms into early 2Q. But beyond that, I wouldn't say there's anything particular to call out on volumes.
Operator
Our next question comes from Michael Del Grosso of Jefferies. Please go ahead.
Michael Del Grosso -- Jefferies -- Analyst
Hi, gentlemen. Thank you for taking my questions. Well, question most have been asked and answered. 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's 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?
Paul M. Todd -- Senior Executive Vice President and Chief Financial Officer
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 will be a little perhaps some headwind dynamic to it. But more constant throughout the year on merchant.
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 -- Vice President of Investor Relations
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.
Operator
The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.
Duration: 68 minutes
Call participants:
Shawn Roberts -- Vice President of Investor Relations
M. Troy Woods -- Chairman, President and Chief Executive Officer
Paul M. Todd -- Senior Executive Vice President and Chief Financial Officer
Ashwin Shirvaikar -- Citi -- Analyst
Dan Dolev -- Nomura -- Analyst
Darrin Peller -- Wolfe Research -- Analyst
David Togut -- Evercore ISI -- Analyst
George Mihalos -- Cowen -- Analyst
Dave Koning -- Baird -- Analyst
Daniel Perlin -- RBC Capital Markets -- Analyst
Philip C. McHugh -- Senior Executive Vice President and President, Merchant Solutions
Brett Huff -- Stephens -- Analyst
Steven Kwok -- KBW -- Analyst
Jim Schneider -- Goldman Sachs -- Analyst
Ramsey El-Assal -- Barclays -- Analyst
Michael Del Grosso -- Jefferies -- Analyst
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