Total System Ties with Acclaris

Yesterday Total System Services Inc. (TSS - Analyst Report) announced a strategic coalition with privately-held Acclaris Inc. to offer card processing solutions to the latter. The latest deal is an attempt by Total System to expand its healthcare payments services network.

Acclaris is a leading private firm that provides on-and off-shore operations to health exchanges and other consumer reimbursement accounts for health plans, third-party administrators, high-reliability organizations and banks through its cloud technology.

Accordingly, Total System is set to offer a unique card payment service solution in the card processing industry, by offering healthcare services to such card consumers. The healthcare services include administration of reimbursements for health plans, which resourcefully help third-party administrators, outsourced human resource organizations and banks to manage reimbursements in a better way. It also offers flexible and secured spending on accounts.

We believe that Acclaris’ more than 15,000 employers and 1.8 million active account holders will provide Total System with an expanded clientele base, thereby driving profitability through higher membership satisfaction and innovation. The alliance also validates the company’s focus on fortifying its business portfolio through diversification.

Earnings Recap

Late last month, Total System reported second-quarter 2012 operating earnings of 35 cents per share that outpaced both the Zacks Consensus Estimate of 32 cents and the year-ago quarter’s earnings of 28 cents per share.

Results reflect consistent growth in revenues across all business segments and increase in overall transaction volume and new accounts. Strict expense control also boosted the results. These positives paved way for escalated bottom line and improved operating cash flow. However, higher-than-expected non-operating and tax expenses partly offset the revenue growth.

Our Take

Overall, Total System’s slow but steady fundamental performance along with disciplined expense management and improving cash flow ensure an optimistic near-term growth. Moreover, based on its recent influential merchant-acquiring contracts with Bank of America Corp. (BAC - Analyst Report) and The Royal Bank of Scotland Group plc (RBS), management expects to achieve the higher-end of its guidance in all growth metrics in 2012.

However, vulnerability to increased competition from data processing, bankcard computer service firms and third-party software vendors within the U.S. as well as from international processors and third-party software vendors, are some lingering concerns.

Nevertheless, increasing revenues across segments, growth in contracts portfolio as well as an enhanced capital position bode well for the company. Optimistic guidance for 2012 also raises expectations for healthy performances 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.