Yesterday, Total System Services Inc. (TSS) reported third quarter operating net income of $52.2 million or 25 cents per share as opposed to $58.6 million or 30 cents per share in the year-ago quarter. However, earnings were well ahead of the Zacks Consensus Estimate of 23 cents per share.
Results reflect lower-than-expected revenues and higher-than-expected cost of services and selling, general and administrative (SG&A) expenses that also led to the decline in earnings. These were partially offset by increased same client transactions and slight increase in overall transaction volume.
Total revenue for the reported quarter was $433.2 million, up 1.0% as against $428.9 million in the year-ago quarter. This was almost flat with the Zacks Consensus Estimate of $434.0 million. On a constant currency basis, total revenue was $436.0 million, reflecting a 1.6% increase from the year-ago quarter. Reimbursable items decreased 4.5% year over year to $70.0 million.
Total number of accounts on file as of September 30, 2010 was 339.2 million, down 0.8% from 342.1 million in the year-ago quarter. New client growth was offset by a lower internal growth of existing clients.
As per segments, quarterly revenues from North America declined 11.5% to $231.5 million from $261.6 million in the year-ago quarter, while revenues from international services witnessed a 1.0% year-over-year decline to $85.3 million. Besides, intersegment revenues decreased 5.1% year over year to a negative of $8.8 million. However, revenue from merchant acquiring services climbed 38.4% year over year to $125.2 million.
TSS reported a 12.2% year over year surge in SG&A expenses, which came in at $51.6 million. In addition, cost of services increased 2.7% year over year to $302.7 million.
Operating income plummeted 10.6% year over year to $78.9 million in the reported quarter. Excluding revenues from termination and revenues from deconverted clients in the second quarter, revenues increased 2.9% and operating income increased 12.9%, on a sequential basis. Besides, on year over year basis, same client transactions climbed 5.3% in North America and 4.3% internationally. Transactions grew 1.1% in the Merchant segment.
As of September 30, 2010, cash flow from operating activities was $284.5 million, compared with $333.1 million as of September 30, 2009. Cash and equivalents plummeted to $372.6 million versus 420.1 million at the end of the third quarter of 2009. While total assets were $1.92 billion as of September 30, 2010, total shareholders’ equity was recorded at $1.24 billion.
Guidance Revision
Total System revised its guidance for 2010, constituting the adjustments related to discontinued operations. Accordingly, management now projects income from continuing operations to be in the range of $192-$196 million or 98 cents to $1.00 per share, up from prior guidance of $189-$194 million or 96 cents to 98 cents per share.
The company also revised revenues in the range of $1.70-$1.73 billion, down from previous range of $1.71-$1.75 billion. However, reimbursable items were reaffirmed in the range of $279 million to $284 million. Average shares outstanding are now expected to be 196.4 million, post the recent share repurchase.
Business Update
On September 30, 2010, TSS closed the sale of TSS POS Systems and Services LLC (TPOS), a third-party POS terminal deployment business that represented a small piece of its Merchant segment. This operation is now reported as discontinued business.
Separately, yesterday, TSS also announced an agreement to provide Swisscard AECS AG with its consumer credit, commercial card and payment related services. Swisscard chose TS2 (TSS’ processing platform) to support its growing portfolio of approximately 1.2 million cards.
Swisscard is a joint venture between Credit Suisse AG (CS) and American Express Co. (AXP) and is the only leading company to offer American Express, MasterCard and Visa credit cards from a single source in Switzerland, offering a vast choice to the Swiss market. Although the terms of the deal remain undisclosed, TSS will provide its card services to Swisscard from the former’s UK centre in the third quarter of 2011.
Besides, TSS also entered into a multi-year payment services agreement with Bank of Montreal for its consumer and commercial credit card portfolios in Canada and the US. However, the financial terms remain undisclosed.
Share Repurchase Update
During the quarter, TSS bought back 3.1 million shares of its common stock, through open market offering, for $45.1 million. The company has 6.9 million shares remaining for repurchase under the current authorized share buyback plan. Accordingly, TSS also revised the average shares outstanding for the number of shares repurchased in the third quarter of 2010.
Our Take
Overall, TSS signals a sluggish near-term outlook, given the inefficient cost-cutting efforts, consumer de-leveraging and currency risk. Moreover, the company has been adversely impacted by bank consolidation and the slowdown in credit card transaction growth over the past few years.
We expect to see incremental costs and risks for TSS as a result of the Credit CARD Act of 2009, which was signed into law in July 2010. In addition, we do not foresee any substantial development strategy to drive earnings growth in the near future. However, we expect Total System to benefit from the improving economy and generate healthy cash flow to achieve the guidance for 2010.
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