Total System Services Inc.
) reported second-quarter 2012 operating earnings of 35 cents per
share that outpaced both the Zacks Consensus Estimate of 32 cents
and the year-ago quarter's earnings of 28 cents per share.
Earnings per share surged 25.5%, while net income attributable
to shareholders increased 24.1% to $66.7 million from $53.8 million
in the prior-year period.
Results reflect consistent growth in revenues across all
business segments and increase in overall transaction volume and
new accounts. Strict expense control also boosted the results.
These positives paved way for escalated bottom line and improved
operating cash flow. However, higher-than-expected non-operating
and tax expenses partly offset the revenue growth.
Total revenue for the reported quarter was $462.7 million, up
3.4% year over year and 3.9% on a constant currency basis. However,
top line fell shy of the Zacks Consensus Estimate of $467.0
million. Reimbursable items declined 5.0% year over year to $64.0
Total System's top line also benefited from strong same client
transaction growth in the card issuer processing business that rose
12.7% over the prior-year quarter. Besides, on a year-over-year
basis, point-of-sale (POS) transactions, excluding deconverted
clients in indirect business, increased 12.4%, while sales volume
from direct merchant business climbed 9.7%.
On geographical basis, quarterly revenues from North America
increased 2.4% year over year to $239.6 million, while revenues
from international services witnessed a 5.9% year-over-year growth
to $103.4 million. Further, revenue from merchant acquiring
services rose 1.5% year over year to $124.9 million, while
inter-segment revenues improved 26.5% year over year to a negative
Additionally, as of June 30, 2012, total number of accounts on
file was 440.5 million, up 17.1% from 376.0 million at end of the
year-ago quarter. This upside was primarily driven by new client
growth and internal growth of existing clients.
Total System also reported a 1.6% year-over-year growth in
SG&A expenses, which stood at $57.9 million. Alongside, cost of
services edged up 0.2% year over year to $312.7 million. However,
non-operating expenses increased to $1.8 million from $0.8 million
in the year-ago quarter.
Meanwhile, operating income escalated 17.3% year over year to
$92.1 million in the reported quarter. Subsequently, operating
margin rose to 19.9% from 17.5% in the year-ago quarter.
At the end of the reported quarter, cash and equivalents surged
to $418.6 million from $316.3 million at the end of 2011.
Additionally, total assets increased to $1.94 billion and total
shareholders' equity rose to $1.39 billion, from 2011-end.
Moreover, operating cash flow improved 2.1% year over year to
Furthermore, the board of Total System expanded the current
share repurchase capacity up to 20 million from the prior 15
million, and also extended the expiration date to April 30, 2014.
Including the extended authorization, the company has 10.3 million
shares available for repurchases to date.
On July 19, 2012, Total System entered into an agreement with
Bank of America Corporation
) to provide its consumers with processing services related to the
credit card portfolio in U.S., for at least six years.
Additionally, the company also expects to conclude the conversion
of Bank of America's consumer card portfolio from its in-house
processing system by June 2014. The agreement allows the bank to
use the company's TS2 software, the payment for which will be met
over the long term.
On June 11, 2012, Total System announced the launch of its new
VAR Partner Connect Program. The program focuses on TSYS extensive
VAR partner relationships and provides TSYS clients the access to
industry-leading third-party payment processing applications across
a range of industries.
In May 12, Total System launched connected mobility to support
real-time communication through a variety of devices. The newly
launched technology includes various Application Programming
Interfaces (API), Near Field Communications (NFC) technology
clubbed with cloud-based products and other user-friendly
applications to enable easy payment and acceptance facilities.
Additionally, Total System announced a licensing agreement with
Qatar National Bank (QNB) to offer the company's latest PRIME 4
card and merchant management solution to the latter.
In April 2012, Total System successfully extended its long-term
alliances with the UK-based
Royal Bank of Scotland plc
), US-based leading First Hawaiian Bank and another US-based
Veracity Payment Solutions to continue to offer card payment
solutions. Yesterday, the company bagged new contract from
Huntington Bancshares Inc.
), while also including U.S.-based retail banker BancorpSouth in
the reported quarter, to process their credit card portfolios.
On July 2, 2012, Total System paid a regular quarterly dividend
of 10 cents per share to the shareholders of record as on June 21,
Additionally, on April 2, 2012, Total System had paid a regular
quarterly dividend of 10 cents per share to the shareholders of
record as on March 22, 2012.
Outlook for 2012
Management reiterated its growth guidance for 2012, whereby
Total System expects total revenue to grow by 0-2% to a range of
$1.81-1.85 billion. Revenues before reimbursable items are expected
to be in the range of $1.57-1.62 billion, up 2-5% from 2011.
Operating earnings are expected to increase 8-12% to a range of
$238-243 million. On per share basis, operating earnings are
projected to be in the range of $1.26-1.28, climbing 10-12% over
However, based on its influential contracts with Bank of America
and Royal Bank of Scotland, management expects to achieve the
higher-end of its guidance in all growth metrics.
Overall, Total System's slow but steady fundamental performance
along with disciplined expense management and improving cash flow
warrant an optimistic view on the company's growth in the near
term. However, inadequate diversified growth and vulnerability to
increased competition from dominant players such as
Heartland Payment Systems Inc.
Wright Express Corp.
) are some lingering concerns.
Nevertheless, increasing revenues across segments, growth in
contracts portfolio along with an enhanced capital position bode
well for the company. Optimistic guidance for 2012 also raises
expectations for healthy performances in the upcoming quarters.
Hence, we maintain a long-term Neutral stance on Total System with
a Zacks Rank #3, which implies a short-term Hold rating.
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