Total System Services Inc. (TSS) reported third-quarter operating earnings of 30 cents per share, a penny higher than the Zacks Consensus Estimate of 29 cents and substantially higher than 23 cents per share in the year-ago quarter.
Earnings per share surged 30.4%, while net income attributable to shareholders increased 27.1% to $58.15 million from $45.74 million in the prior-year period.
Results reflect increased revenues from most business segments, lower taxes and increase in overall transaction volume and new accounts. However, continued weakness in merchant acquiring services along with higher-than-expected cost of services and selling, general and administrative (SG&A) expenses partly offset the revenue growth.
Total revenue for the reported quarter was $459.7 million, up 6.1% year over year and exceeded the Zacks Consensus Estimate of $454.0 million.
On a constant currency basis, total revenue was $454.9 million, reflecting a 5.0% increase from the year-ago quarter. Reimbursable items totaled $69.6 million, down 0.7% year over year.
As per segments, quarterly revenues from North America increased 5.3% year over year to $243.9 million, while revenues from international services witnessed a 17.1% year-over-year growth to $99.9 million. Besides, inter-segment revenues improved 20.9% year over year to a negative of $7.0 million.
However, revenue from merchant acquiring services inched down 1.8% year over year to $122.9 million.
Total System reported a 10.6% year over year rise in SG&A expenses, which came in at $57.1 million. Alongside, cost of services increased 6.2% year over year to $321.5 million. Meanwhile, operating income climbed 2.9% year over year to $81.2 million in the reported quarter.
Total number of accounts on file as of September 30, 2011 was 392.4 million, up 15.7% from 339.2 million at the end of the prior-year quarter. This was primarily driven by new client growth and internal growth of existing clients.
Financial Update
As of September 30, 2011, year-to-date cash flow from operating activities was $297.7 million, compared with $279.9 million in the year-ago quarter. Cash and equivalents plummeted to $280.7 million versus $394.8 million at the end of 2010. While total assets were $1.85 billion at the end of the reported quarter, total shareholders’ equity was recorded at $1.3 billion.
Additionally, Total System deployed approximately $72.9 million of capital for repurchase of 4.2 million shares in the first nine months of 2011. The company repurchased 2.2 million shares during the reported quarter at an aggregate price of $37.2 million.
Business Update
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.
On September 7, 2011, Total System announced that it will continue providing authorizations and payment services to merchants of Clearent LLC– a payment processing company that caters to financial institutions, ISOs and merchants. The two companies signed a long-term agreement for the same. However, the financial terms of the deal were not disclosed.
On the same day, Total System also announced a mobile application supply deal with IE, the software division of Parseq PLC. The mobile application called TSYS Mobile App was jointly developed by the two companies. It will be integrated onto TSS’s processing platform– TS2.
Accordingly, cardholders can use the application on any smart phone. It will allow them to view their account details on their phone and help them in keeping track of their credit card spending. The users can also choose to receive notifications about their card transactions. However, the application will be available only in Europe at present.
Dividend Update
On October 25, 2011, Total System announced a 42.9% increase in regular quarterly dividend to10 cents per share from 7 cents. The increased dividend will be paid for the first time on January 3, 2012 to shareholders of record as on December 15, 2011.
On October 3, 2011, Total System paid a regular quarterly dividend of 7 cents per share to the shareholders of record as on September 16, 2011.
Outlook for 2011
Total System raised its 2011 total revenue guidance by 4-5% to a range of $1.79-1.8 billion, while revenues before reimbursable items are expected to be in the range of $1.52 -1.53 billion.
The company also raised the EPS guidance to $1.14-1.15 per share. Meanwhile, the outlook for income from continuing operations was increased 11-12% to $219-221 million.
Average shares outstanding at the end of 2011 are expected to stand at 192 million.
Our Take
Overall, Total System 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. Raised guidance for the rest of the year also raises expectations for good performance in the fourth quarter.
Total System carries a Zacks #3 Rank, implying a short term hold rating.
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