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Total System Services Inc. (TSS - Analyst Report) reported fourth-quarter 2013 operating earnings of 48 cents per share. Results comfortably surpassed the Zacks Consensus Estimate of 45 cents and the year-ago quarter figure of 37 cents.

Including acquisition intangible amortization, share-based compensation and the Net Spend acquisition-related expenses, Total System’s reported net income stood at 34 cents per share against 32 cents in the year-ago quarter. Net income attributable to shareholders increased 7.9% year over year to $65.7 million from $60.9 million in the prior-year period.

Results reflected revenue growth in North America and international segments along with an increase in overall transaction volume and new accounts. Also, the inclusion of NetSpend as an operating segment during the quarter added to the improvement. However, lower revenues from the merchant services, higher selling, general and administrative (SG&A) and merger expenses coupled with higher cost of services deteriorated the operating cash flow and margins.

Behind the Headlines

Total revenue surged 25.4% to $600.8 million, but lagged the Zacks Consensus Estimate of $614 million. Reimbursable items declined 4.4% year over year to $57.8 million. Sales volume from the direct merchant business surged 8.9%, although point-of-sale (POS) transactions decreased 10.3% on a year-over-year basis.

On a geographical basis, quarterly revenues from North America improved 4.6% year over year to $259.1 million, while that from international services rose 6.4% to $113.9 million. However, revenue from merchant acquiring services dipped 1.0% to $128.1 million. Meanwhile, the same from NetSpend stood at $104.1 million, slightly up from $103.7 million in the last sequential quarter, driven by gross dollar volume (GDV) that grew 21.5% and in direct deposit customer base. Inter-segment revenues improved 12.5% year over year to a negative $4.3 million.

Additionally, as of Dec 31, 2013, total number of accounts on file was 541.1 million, up 12.9% from 479.4 million at the end of the year-ago period. This upside was primarily driven by internal and existing client growth, partially offset by new client growth.

Total System also reported 16.6% year-over-year growth in SG&A expenses, which stood at $84.8 million. Cost of services also increased 27.8% to $403.5 million. Alongside, non-operating expense stood at $1.0 million against an income of $0.05 million. The company also incurred merger and acquisition expenses related to a bridge loan facility of $9.8 million during the reported quarter.

Subsequently, adjusted EBITDA jumped 32.2% year over year to $184.2 million. Operating income also escalated 22.9% to $110.4 million in the reported quarter. Operating margin dipped to 18.4% from 18.7% in the year-ago quarter.

Highlights of Full-Year 2013

Total System recorded operating earnings of $1.72 per share for full-year 2013, beating $1.46 per share reported in 2012 and the Zacks Consensus Estimate of $1.62. Operating net income rose 18.0% year over year to $323.6 million.

Including acquisition intangible amortization, share-based compensation and the Net Spend acquisition-related expenses, Total System’s reported net income stood at $244.8 million or $1.30 per share, almost in line with $244.3 million or $1.30 in 2012.

Total revenue increased 14.0% year over year to $2.13 in 2013, although it missed the Zacks Consensus Estimate of $2.15 billion. Revenue from NetSpend for 2013 of $207.8 million were slightly lower than $210–214 million estimated earlier.

Total merger and acquisition expenses as well as cost of services increased 15.4% year over year to $1.75 billion. Subsequently, adjusted EBITDA soared 16.0% year over year to $634.2 million.

Financial Update

At the end of Dec 2013, operating cash flow dipped 0.7% year over year to $452.4 million. However, cash and cash equivalents rose to $278.2 million from $247.6 million at the end of 2012.

Meanwhile, total assets surged to $3.69 billion from $2.02 billion at 2012-end, whereas total shareholder equity climbed to $1.60 billion from $1.44 billion at 2012-end. Moreover, long-term debt worth $62.5 million and $124.9 million was reduced during the reported quarter and since the NetSpend acquisition in Jul 2013, respectively.

Capital Deployment Update

Total System bought back 3.1 million shares for $97.6 million during the reported quarter, leaving about 12 million shares under the existing authorization. Concurrently, the board also sanctioned a new share repurchase program worth 20–28 million shares through Apr 2015.

On Jan 2, 2014, Total System paid a regular quarterly dividend of 10 cents per share to the shareholders of record as on Dec 19, 2013.

Guidance

Management provided the full-year 2014 revenue growth guidance of 17–19% at $2.49–2.54 billion. Before reimbursable items, revenues are expected to grow by 19–21% at $2.25–2.30 billion, while adjusted EBITDA is estimated to escalate by 17–20% at $744–759 million. Moreover, operating earnings per share is projected to grow in the band of 11–13% at $1.90–1.93 a share.

Others

While Total System carries a Zacks Rank #4 (Sell), some better-ranked stocks in the financial sector include Equifax Inc. (EFX - Analyst Report), Global Payments Inc. (GPN - Snapshot Report) and Xoom Corp. (XOOM - Snapshot Report). All these stocks bear a Zacks Rank #2 (Buy).

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