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Total System Services Inc. (TSS - Analyst Report) reported second-quarter 2013 operating earnings of 34 cents per share, which came in a penny higher than the Zacks Consensus Estimate. However, it missed the year-ago quarter figure of 35 cents by a penny.

Excluding acquisition related expenses of 3 cents per share, the company’s reported earnings per share stood at 31 cents, while net income attributable to shareholders declined 13.5% to $57.7 million from $66.7 million in the prior-year period. Net income in the reported quarter included pre-tax expense of $8.2 million related to the recent acquisition of NetSpend Holdings.

Results reflect modest revenue growth from North America and merchant services along with increase in overall transaction volume and new accounts. However, lower revenue from the international segment, increased SG&A and merger expenses coupled with higher cost of services and unfavorable currency fluctuations deteriorated the operating cash flow.

Behind the Headlines

Total revenue for the reported quarter was $478.4 million, up 3.4% year over year. However, it missed the Zacks Consensus Estimate of $482 million. Reimbursable items declined 4.7% year over year to $60.9 million. Sales volume from the direct merchant business surged 19.4%, although point-of-sale (POS) transactions decreased 11.2% on a year-over-year basis.

On a geographical basis, quarterly revenues from North America improved 3.8% year over year to $248.6 million, while revenues from international services witnessed a 5.2% year-over-year fall to $98.1 million. Further, revenues from merchant acquiring services climbed 9.3% year over year to $136.5 million, whereas inter-segment revenues improved 9.2% year over year to a negative $4.7 million.

Additionally, as of Jun 30, 2013, total number of accounts on file was 488.8 million, up 11% from 440.5 million at end of the year-ago quarter. This upside was primarily driven by new and existing client growth, partially offset by deterioration in purges or sales.

Total System also reported 10.9% year-over-year growth in SG&A expenses, which stood at $64.2 million. Cost of services edged up 1.6% to $317.7 million. Alongside, non-operating expense stood at $0.6 million against $1.8 million. The company also incurred merger and acquisition expenses related to a bridge loan facility of $6.9 million during the reported quarter.

Subsequently, adjusted EBITDA edged up 1.4% year over year to $142.3 million. Operating income climbed 3.7% to $95.3 million in the reported quarter. Operating margin remained flat at 19.9% from the year-ago quarter.

Financial Update

At the end of Jun 2013, operating cash flow plunged 22.7% year over year to $157.2 million. However, cash and equivalents surged to $1.37 billion, from $247.6 million at the end of 2012, owing to borrowings of $1.1 billion for the NetSpend acquisition. Consequently, total assets increased to $3.19 billion and total shareholder equity climbed to $1.52 billion, from 2012-end.

Guidance

Following the inclusion of the NetSpend business, management raised the financial outlook for 2013. Accordingly, total revenue growth is now projected in the band of 14–17% to $2.14–2.18 billion. The current outlook is substantially higher than the previous range of 5–7% to $1.96–2.00 billion.

Revenues before reimbursable items are expected in the range of $1.9–1.94 billion, up 17–20% over 2012. This also came higher than the prior estimate of $1.71–1.75 billion, which displayed growth of 6–8% over 2012.

Meanwhile, adjusted EBITDA is estimated within $639–652 million, up 17–19% over 2012, while operating earnings per share is projectedto grow by 16–18%, in the range of $1.69–1.72. Previously, earnings were expected to grow 10–12% over 2012, between $1.43 and $1.45 per share.

However, the guidance excludes $16.0 million of one-time expenses and about $67 million of acquisition intangible amortization related to the NetSpend acquisition in 2013. It also assumes minimal synergies for 2013.

Dividend Update

On Jul 1, Total System paid a regular quarterly dividend of 10 cents per share to the shareholders of record as on Jun 20, 2013.

On Apr 1, 2013, Total System paid a regular quarterly dividend of 10 cents per share to the shareholders of record as on Mar 21, 2013.

Others

Along with Total System, other strong performers in the financial sector include Visa Inc. (V - Analyst Report) and Vantiv Inc. (VNTV - Snapshot Report), all carrying a Zacks Rank #2 (Buy). Another outperformer, Heartland Payment Systems Inc. (HPY - Snapshot Report), carries a Zacks Rank #1 (Strong Buy).

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