Total System Services Inc.’s (TSS) fourth-quarter 2014 operating earnings per share of 58 cents outpaced the Zacks Consensus Estimate of 50 cents by 16% and the year-ago quarter figure of 48 cents by 20.8%. With this, the company generated four-quarter trailing earnings surprise at an average beat of 3.4%.
Including acquisition intangible amortization and share-based compensation, Total System’s reported net income stood at 45 cents per share against 35 cents a share in the year-ago quarter. Net income attributable to shareholders increased 25.9% year over year to $83.2 million.
Revenue growth in North America, NetSpend and international segments along with higher transaction volumes and new accounts boosted results. Despite lower revenues from the merchant services and higher expenses, operating margins improved. Cash flow and balance sheet also remained strong.
Behind the Headlines
For the first time, total revenue grew 8.9% year over year to $635.1 million, exceeding the Zacks Consensus Estimate of $624 million. Reimbursable items increased 13.8% to $65.8 million.
On a geographical basis, quarterly revenues from North America improved 15.6% year over year to $299.4 million, while that from international services rose 2.6% to $98.7 million. However, revenues from merchant acquiring services dipped 2.2% to $125.3 million. Meanwhile, NetSpend revenues were $119.2 million, up 14.4% from year-ago quarter, driven by rise of 18.2% in gross dollar volumes and 21.9% in direct deposit customer base. Inter-segment revenues deteriorated 72.4% year over year to a negative $7.4 million.
Sales volume from the direct merchant business rose 10.6%, while point-of-sale transactions grew 4.4%, both on a year-over-year basis. On the other hand, same client transaction volumes in North America and international segments grew 13% and 11.8%, respectively.
Additionally, as of Dec 31, 2014, total number of accounts on file scaled to 616.7 million for the first time, up 14% from 541 million at the end of the year-ago period. The upside was primarily driven by new, internal and existing client growth.
Total System further reported a 5.2% year-over-year rise in selling, general and administrative expenses, which stood at $90.2 million. Additionally, cost of services rose 9.3% to $422.1 million. However, merger and acquisition expenses were negligible compared to $2.2 million in the prior-year period. Alongside, non-operating income stood at $0.97 million against an expense of $0.72 million in the year-ago quarter.
Subsequently, adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) climbed 7% year over year to $193.7 million. Operating income jumped 12.8% to $122.8 million in the reported quarter.
Highlights of Full-Year 2014
Total System recorded operating earnings of $1.96 per share for 2014, outperforming $1.73 per share reported in 2013 and ahead of the Zacks Consensus Estimate of $1.79. Bottom line also exceeded the projected guidance of 10–12% growth.Operating net income rose 11.9% year over year to $364.4 million.
Including acquisition intangible amortization, share-based compensation and the Net Spend acquisition-related expenses, Total System’s reported net income stood at $275.2 million or $1.48 per share, higher than $246.9 million or $1.31 in 2013.
Total revenue surged 18.5% year over year to $2.45 in 2014, beating the Zacks Consensus Estimate of $2.44 billion. Top line was also within the guided range of 17–20%.Revenues from NetSpend for 2014 were $482.7 million against $207.9 million in 2013.
Total merger, acquisition and operating expenses as well as cost of services shot up 27.4% year over year to $2.02 billion. Subsequently, adjusted EBITDA soared 14.1% year over year to $712.3 million, within the management guidance of 13–15%, while adjusted margin stood at 32.5%.
Financial Update
At the end of 2014, operating cash flow escalated 24% year over year to $561.1 million. Free cash flow improved to $325.2 million. Moreover, cash and cash equivalents rose to $289.2 million from $247.7 million at 2013-end.
Meanwhile, total assets rose to $3.73 billion from $3.69 billion at 2013-end, while total equity climbed to $1.7 billion from $1.6 billion at 2013-end. Long-term debt dipped to $1.4 billion from $1.43 billion at 2013-end.
Capital Deployment Update
Total System repurchased 1.5 million shares during the reported quarter, while a total of 5.2 million shares were bought back in 2014.
Concurrently, the board of Total System also sanctioned a new share repurchase program worth 20 million, thereby replacing the prior authorization worth 20–28 million shares that was approved in Jan 2014 and was slated to expire in Apr 2015. However, the latest share repurchase program came without an expiry.
On Jan 2, 2015, the company paid a regular quarterly dividend of 10 cents per share to the shareholders of record as on Dec 17, 2014.
Overall, Total System deployed 94% of its free cash flow in capital deployment in 2014.
Guidance
Concomitantly, management provided the full-year 2015 revenue growth guidance of 7–9% to $2.62–2.66 billion. Before reimbursable items, revenues are expected to grow 8–10% to $2.37–2.81 billion, while adjusted EBITDA margin is estimated to expand by 100–150 basis points from 3.25% in 2014.Moreover, operating earnings per share is projected to grow in the band of 11–13% to $2.17–2.21.
Zacks Rank
Currently, Total System has a Zacks Rank #3 (Hold).
Some Capable Peers
Among other stocks in the sector, Green Dot Corp. (GDOT) appears quite promising with a Zacks Rank #1 (Strong Buy). Meanwhile, financial services providers like CIT Group Inc. (CIT) and Global Payments Inc. (GPN), both carrying a Zacks Rank #2 (Buy) are also worth considering.
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