On July 21, Total System Services Inc. (TSS) reported a second quarter operating net income of $49.6 million or 25 cents per share as opposed to $52.3 million or 27 cents per share in the year-ago quarter, a decline of 5.2%. The earnings were well ahead of the Zacks Consensus Estimate of 23 cents per share. The higher cost of services and selling, general and administrative (SG&A) expenses led to the decline in earnings.
Total revenue for the reported quarter was $433.7 million, up 5.3% as against $412.0 million in the year-ago quarter. On a constant currency basis, total revenue was $435.1 million, reflecting a 5.6% increase from the year-ago quarter. Reimbursable items increased 11.2% year over year to $68.1 million. The increase in revenues was attributable to an increased overall transaction volume during the quarter and better expense management.
Total number of accounts on file as of June 30, 2010 was 332.8 million, down 4.8% from 349.5 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 10.6% to $236.8 million from $265.0 million in the year-ago quarter. Revenues from merchant acquiring services climbed 57.8% year over year to $126.8 million while revenues from international services witnessed a 2.0% year-over-year increase to $78.0 million.
Total System reported a 14.0% year-over-year surge in selling, general and administrative expenses, which came in at $56.0 million. In addition, cost of services increased 6.6% year over year to $298.5 million.
Operating income plummeted 4.2% year over year to $79.3 million in the reported quarter, while it was flat sequentially on a quarterly basis. Excluding revenues from termination fees in both the reported and the sequential quarters and the impact of the acquisition of controlling interest in First National Merchant Solutions, LLC (“FNMS”) in the second quarter, operating income increased 18.1% on a sequential basis.
As of June 30, 2010, cash flow from operating activities was $195.7 million, compared with $219.1 million as of June 30, 2009. However, cash and equivalents surged to $388.0 million versus.3 million at the end of the second quarter of 2009. While total assets were $1.90 billion as of June 30, 2010, total shareholders’ equity was recorded at $1.23 billion.
Total System reiterated its 2010 guidance of income from continuing operations of $189 million to $194 million or 96 cents to 98 cents per share. The company also reaffirmed revenues in the range of $1.71 billion to $1.75 billion, with reimbursable items in the range of $279 million to $284 million.
Acquisition Update
Total System completed its acquisition of 51% of FNMS, the joint venture between Total System and First National Bank of Omaha (“FNBO”), a personal banking and commercial banking service provider.
The acquisition of FNMS on April 1, 2010 is bringing about positive synergies, allowing Total System to further expand across the payments value chain to gain a bigger market share of payment services. The transaction volumes of FNMS increased sequentially during the quarter and FNMS is expected to be accretive to earnings by year-end 2010 and beyond.
Our Take
Overall, Total System signals a sluggish near-term outlook, given the inefficient cost-cutting efforts, consumer de-leveraging and currency risk. Moreover, Total System 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 Total System as a result of the Credit CARD Act of 2009, which was recently signed into law. 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.
The quantitative Zacks #3 Rank for Total System denotes short term Hold rating, indicating no clear directional pressure on the shares over the near term.
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