Total Systems Beats, Raises Outlook – Analyst Blog

On April 20, Total System Services Inc. (TSS) reported first quarter operating net income of $51.8 million or 26 cents per share as opposed to $50.3 million or 26 cents per share in the year-ago quarter. The earnings were well ahead of the Zacks Consensus Estimate of 23 cents per share. The surge in profits was attributable to a slight upside in revenue and the absence of loss of discontinuing operations in the reported quarter. However, this was partially offset by higher-than-expected cost of services and reduction in accounts on file.

 

Total revenue for the reported quarter was $415.4 million, up 1.6% as against $408.9 million in the year-ago quarter. On a constant currency basis, total revenue was $409.5 million, reflecting a 0.1% increase from the year-ago quarter. Reimbursable items increased 11.5% year-over-year to $70.8 million. Total accounts on file as of March 31, 2010 was 323.3 million, down 5.0% from $340.4 million in the year-ago quarter. New client growth was offset by reduced internal growth of existing clients.

 

As per segments, quarterly revenues from North America declined 5.4% to $254.2 million from $268.8 million in the year-ago quarter. Revenues from merchant acquiring services climbed 18.2% year-over-year to $89.2 million while revenues from international services witnessed a 7.6% year-over-year increase to $79.4 million.

 

Total Systems reported a 4.4% year-over-year decline in selling, general and administrative expenses, which came in at $44.09 million. However, cost of services increased 2.6% year-over-year to $292.2 million.

 

As of March 31, 2010, cash flow from operating activities was $133.5 million, compared with $98.7 million as of March 31, 2009. Cash and equivalents also surged to $534.5 million against $449.6 million at the end of the first quarter of 2009. While total assets were $1.76 billion as of March 31, 2010, total shareholders’ equity was recorded at $1.20 billion.

 

 

During the reported quarter, Total Systems announced a new stock repurchase plan to buy back up to 10 million shares of its stock, which equates to about $162 million of the company’s stock based on current market prices. The shares are expected to be purchased over the next two years, according to the opportunities offered by the market conditions.

 

 

On April 1, 2010, Total Systems completed its acquisition of 51% of Omaha, Nebraska-based First National Merchant Solutions LLC (“FNMS”). FNMS is a joint venture (JV) between Total Systems and First National Bank of Omaha (“FNBO”), a personal banking and commercial banking service provider, whereby Total Systems owns 51% in the newly formed FNMS. Total Systems aims to diversify its portfolio into merchant acquiring by building its FNBO deal and be among the top five merchant acquirers on a global basis in 2 to 3 years. With a bank card portfolio of over 3 million accounts on file, the company’s JV with the FNBO is expected to be accretive to earnings in 2011 and beyond.

 

 

Looking forward, Total Systems updated its guidance for the fiscal year 2010. The company now expects income from continuing operations of $189−$194 million or 96−98 cents per share (down 12−14% year-over-year). The company also projects revenues in the range of $1.71 billion to $1.75 billion (up 1−3% year-over-year), with reimbursable items in the range of $279-$284 million (up 3−5% year-over-year).

 

For 2010, FNMS is expected to contribute $95−$97 million to the company’s total revenues, $2−$3 million to net income, approximately $2.5 million to net of acquisition costs and approximately 1 cent per share to basic earnings. While Total Systems will consolidate and report all of FNMS’ revenues and expenses, it will report only 51% of FNMS’ net income.

 

Total Systems’ guidance for 2010 includes the impact of de-converted portfolios, price compression, reduction in one-time termination fees and currency impact, and the current economic environment of the credit card market.

 

Overall, Total Systems warrants a bleak near term outlook, given the inefficient cost-cutting efforts and negative growth guidance for 2010. Although management expects to grow inorganically with a modest cash position and a risk-free balance sheet, the company is adequately exposed to competition, currency fluctuation and interest risk. Moreover, poor credit markets and weakness in the credit card industry have led to a decline in the number of client accounts and long term contracts. Hence, we do not foresee any substantial development strategy to drive earnings growth in the near future.