Total System Services Inc. (TSS) reported fourth-quarter 2011 operating earnings of 31 cents per share, in line with the Zacks Consensus Estimate but modestly higher than 24 cents per share in the year-ago quarter.
Earnings per share surged 29.4%, while net income attributable to shareholders increased 27.0% to $59.7 million from $47.0 million in the prior-year period.
Results reflect increased revenues across all business segments and increase in overall transaction volume and new accounts. However, higher-than-expected cost of services and selling, general and administrative (SG&A) expenses along with higher taxes partly offset the revenue growth.
Total revenue for the reported quarter was $472.2 million, up 7.3% year over year and on a constant currency basis. Top line also exceeded the Zacks Consensus Estimate of $460.0 million. Reimbursable items totaled $64.6 million, down 2.4% year over year.
As per segments, quarterly revenues from North America increased 5.2% year over year to $246.2 million, while revenues from international services witnessed a 15.5% year-over-year growth to $106.6 million. Besides, revenue from merchant acquiring services climbed 3.0% year over year to $126.2 million, while inter-segment revenues improved 22.8% year over year to a negative of $6.7 million.
Total System also reported a 4.3% year-over-year rise in SG&A expenses, which came in at $59.6 million. Alongside, cost of services increased 3.5% year over year to $322.9 million. Meanwhile, operating income surged 26.4% year over year to $89.7 million in the reported quarter.
Full-Year 2011 Highlights
For full year 2011, Total System reported operated earnings of $219.8 million or $1.15 per share as compared with $193.0 million or 99 cents per share reported in 2010. Earnings per share also exceeded the Zacks Consensus Estimate by a penny. Total revenue increased 5.3% year over year to $1.81 billion, almost in line with the Zacks Consensus Estimate. Besides, SG&A expenses surged 10.3% year over year to $228.5 million, whereas cost of services increased 4.7% to $1.26 billion.
As of December 31, 2011, total number of accounts on file was 404.2 million, up 17.9% from 342.9 million at 2010-end. The uptick was primarily driven by new client growth and internal growth of existing clients.
Financial Update
At the end of 2011, operating cash flow climbed 12.0% year over year to $435.8 million. However, cash and equivalents plummeted to $316.3 million versus $394.8 million at the end of 2010. While total assets were $1.86 billion at 2011-end, total shareholders’ equity was recorded at $1.32 billion.
Additionally, Total System deployed approximately $335 million of capital for share repurchases and acquisitions in 2011. Particularly, the company repurchased 2.4 million shares during the reported quarter for $47.7 million, whereas 6.6 million shares were bought back in 2011 for $120.6 million, thereby recording a total shareholder return of 29.2% in 2011.
Business Update
On January 19, 2012, Total System announced a strategic long-term deal with the U.S.-based retail banker BancorpSouth to offer card payment solutions. However, other terms of the deal were not divulged. Accordingly, Total System will now process the debit and credit card portfolios of BancorpSouth. The company will begin the card payment solutions early this year.
On January 10, 2012, Total System announced a strategic collaboration with privately-held Pivotal Systems to offer authorization, settlement and dispute resolution services.
North America-based Pivotal System processes more than $10 billion in annual revenues with a wide network of over 60,000 merchants, 1,200 agents and 400 employees. This premier and vast network coverage will likely spread out Total System’s merchant services business steadily besides enhancing its market position.
On November 17, 2011, Total System announced an agreement with largest private bank in Azerbaijan, Bank Standard, in order to license its PRIME 4 card and merchant management solution. Bank Standard will use PRIME 4 to support its expanding card portfolio of Visa Inc. (V) and MasterCard Inc. (MA) credit, debit and prepaid cards, in addition to managing its merchant acquiring business.
On October 21, 2011, Total System announced the purchase of the merchant portfolio of Florida-based Vanguard Payment Systems Inc. However, the financial details were not revealed.
Accordingly, the merchant accounts acquired portfolio from Vanguard will now have access to TSYS Merchant Solutions’ (TMS) products and services, which are customized to suit the client’s needs.
On October 12, 2011, Total System announced a deal with Imperial Bank, Kenya for providing its card and merchant management solution, PRIME 4. Imperial Bank will use PRIME 4 to manage its Visa credit, debit and prepaid card portfolio in Kenya and Uganda.
Dividend Update
On January 3, 2012, Total System paid a regular quarterly dividend of 10 cents per share to the shareholders of record as on December 15, 2011.
On October 25, 2011, the board of Total System had hiked its regular quarterly dividend substantially by 42.9% to 10 cents per share from 7 cents.
Outlook for 2012
For 2012, Total System expects total revenue to grow by 0–2% to a range of $1.81–1.85 billion, while revenues before reimbursable items are expected to be in the range of $1.57–1.62 billion, up 2–5% over 2011.
Besides, operating earnings are expected to increase 8–12% to be within $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 2011.
Our Take
Overall, Total System’s performance in 2011 signals a slow improvement in the near term, given the inefficient cost-cutting efforts, inadequate diversified growth, and declining cash balance. Moreover, the company is also vulnerable to increased competition from dominant players such as Global Payments Inc. (GPN) and Alliance Data Systems Corp. (ADS).
However, increasing revenues from most segments along with efficient deployment of capital bode well for the company. Optimistic guidance for 2012 also raises expectations for good performance in the upcoming quarters.
Total System carries a Zacks Rank #3, implying a short-term Hold rating.
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