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Total System Services Inc. ((TSS - Analyst Report) reported first-quarter 2012 operating earnings of 30 cents per share, in line with the Zacks Consensus Estimate but a nickel higher than the year-ago quarter.

Earnings per share surged 18.2%, while net income attributable to shareholders increased 15.6% to $56.4 million from $48.8 million in the prior-year period.

Results reflect consistent growth in 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 $461.2 million, up 7.4% year over year and 7.6% on a constant currency basis, recording an organic growth of 7.7%. Top line also surpassed the Zacks Consensus Estimate of $445.0 million. Reimbursable items inched down 1.2% year over year to $66.0 million.

Total System’s top line also benefited from strong same client transaction growth in the card issuer processing business that rose 14.4% over prior-year quarter. Besides, on year-over-year basis, point-of-sale (POS) transactions, excluding deconverted clients in our indirect business, climbed 11%, while sales volume from direct merchant business escalated 20.9%.

On geographical basis, quarterly revenues from North America increased 4.4% year over year to $240.6 million, while revenues from international services witnessed a 10.6% year-over-year growth to $100.4 million. Besides, revenue from merchant acquiring services increased 8.4% year over year to $125.5 million, while inter-segment revenues improved 30.0% year over year to a negative $5.3 million.

Additionally, as of March 31, 2012, total number of accounts on file was 415.9 million, up 16.6% from 356.8 million at end of the year-ago quarter. The escalation was primarily driven by new client growth and internal growth of existing clients.

Total System also reported a 5.8% year-over-year growth in SG&A expenses, which stood at $58.1 million. Alongside, cost of services increased 5.6% year over year to $318.3 million. Meanwhile, operating income escalated 16.2% year over year to $84.8 million in the reported quarter. However, non-operating expenses declined by 44.4% to $405.0 million.

Financial Update

At the end of the reported quarter, cash and equivalents surged to $370.6 million from $316.3 million at the end of 2011. Additionally, total assets increased to $1.90 billion and total shareholders’ equity rose to $1.37 billion, from 2011-end. However, operating cash flow dipped 3.5% year over year to $98.6 million.

Business Update

In April 2012, Total System successfully extended its long-term alliances with the UK-based Royal Bank of Scotland plc (RBS - Snapshot Report), US-based leading First Hawaiian Bank and another US-based Veracity Payment Solutions to continue to offer card payment solutions. Yesterday, the company bagged new contract from Huntington Bancshares Inc. (HBAN - Analyst Report), while also including U.S.-based retail banker BancorpSouth in the reported quarter, to process their credit card portfolios.

During the reported quarter, Total System also announced the successful processing of American Express Co.’s (AXP - Analyst Report) OnePoint transactions through both of its front-end authorization and capture as well as back-end clearing and settlement platforms. Additionally, the company upgraded Moscow-based Tinkoff. Credit Systems Bank (TCS) to PRIME 4, which is the latest version of the company’s card and merchant management solution. TCS will now use PRIME 4 to manage the issuance of its MasterCard Inc. (MA - Analyst Report) brand Tinkoff Platinum credit card.

Meanwhile, Total System entered into a strategic collaboration with privately-held North America-based Pivotal Systems to offer authorization, settlement and dispute resolution services. 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.

Dividend Update

On April 2, 2012, Total System paid a regular quarterly dividend of 10 cents per share to the shareholders of record as on March 22, 2012.

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

Management reiterated its growth guidance for 2012, whereby 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% from 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 slow but steady fundamental performance provides a vague picture regarding the stocks’ direction in the near term. However, inadequate diversified growth and declining cash flow warrant slow improvement. Moreover, the company is also vulnerable to increased competition from dominant players such as Global Payments Inc. ((GPN - Snapshot Report) and Alliance Data Systems Corp. ((ADS - Analyst Report).

Nevertheless, increasing revenues across segments, growth in contracts portfolio along with an enhanced capital position bode well for the company. Optimistic guidance for 2012 also raises expectations for good performance in the upcoming quarters. Hence, we maintain a long-term Neutral stance on Total System with a Zacks Rank #3, which implies a short-term Hold rating.

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