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Total System Services Inc. (TSS - Analyst Report) reported third-quarter 2012 operating earnings of 32 cents per share, in line with the Zacks Consensus Estimate and a couple of cents ahead of the year-ago quarter’s earnings of 30 cents per share.

The company’s earnings per share climbed 5.7%, while net income attributable to shareholders edged up 3.7% to $60.3 million from $58.1 million in the prior-year period.

Results reflect consistent revenue growth in merchant and international 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, declined revenue from North America, higher-than-expected SG&A and tax expenses partly offset the upsides.

Total revenue for the reported quarter was $468.1 million, up 1.8% year over year and 2.3% on a constant currency basis. However, the top line breezed past the Zacks Consensus Estimate of $466.0 million. Reimbursable items declined 10.9% year over year to $62.0 million.

Total System’s top line also benefited from point-of-sale (POS) transactions, excluding deconverted clients in indirect business, which increased 9.5% on a year-over-year basis, while sales volume from direct merchant business jumped 17.4%. Sales volume improved 9.3% year over year excluding the impact of the acquisition.

On geographical basis, quarterly revenues from North America dipped 2.6% year over year to $237.6 million, while revenues from international services witnessed a 2.8% year-over-year growth to $102.7 million. Further, revenue from merchant acquiring services grew 8.0% year over year to $132.7 million, whereas inter-segment revenues improved 28.3% year over year to a negative $5.0 million.

Additionally, as of September 30, 2012, total number of accounts on file was 466.4 million, up 18.9% from 392.4 million at end of the year-ago quarter. This upside was primarily driven by new client growth, partially offset by a decline in internal growth of existing clients.

Total System also reported a 7.7% year-over-year growth in SG&A expenses, which stood at $61.5 million. However, cost of services edged down 1.8% year over year to $315.7 million. Alongside, non-operating expenses plunged 84.7% to $0.6 million.

Meanwhile, operating income escalated 12.0% year over year to $90.9 million in the reported quarter. Subsequently, operating margin rose to 19.4% from 17.7% in the year-ago quarter.

Financial Update

At the end of the reported quarter, cash and equivalents surged to $356.6 million from $316.3 million at the end of 2011. Additionally, total assets increased to $1.97 billion and total shareholders’ equity climbed to $1.39 billion, from 2011-end. Moreover, operating cash flow escalated 12.2% year over year to $334.0 million.

During the reported quarter, Total System culminated a new credit facility worth $500 million, which includes a 5-year term loan of $150 million and a 5-year revolver of $350 million that included nine banks. This new revolver, along with the free cash flow is expected to provide more financial flexibility in making investments and enhance shareholders’ return.

Share Repurchase Update

Furthermore, Total System bought back 2.6 million shares for $61.2 million during the reported quarter. Since September last year, the company has repurchased 12.3 million shares for $227.0 million.

In July 2012, the board of Total System expanded the current share repurchase capacity up to 20 million from the prior 15 million, and also extended the expiration date to April 30, 2014. Including the extended authorization, the company has 7.7 million shares available for repurchases to date.

Dividend Update

On October 1, 2012, Total System paid a regular quarterly dividend of 10 cents per share to shareholders of record as on September 20, 2012.

Additionally, on July 2, 2012, Total System paid a regular quarterly dividend of 10 cents per share to shareholders of record as on June 21, 2012.

Outlook for 2012

In July 2012, management at Total System had reiterated its growth guidance for 2012, whereby the company expects total revenue to grow by 0–2% to a range of $1.81–1.85 billion. Revenues before reimbursable items are expected to be in the range of $1.57–1.62 billion, up 2–5% from 2011.

Operating earnings are expected to increase 8–12% to a range of $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. Based on its influential contracts, management expects to achieve the higher-end of its guidance in all growth metrics.

Our Take

Overall, Total System’s slow but steady fundamental performance along with disciplined expense management and improving cash flow warrant an optimistic view on the company’s growth in the near term. However, inadequate diversified growth and vulnerability to increased competition from dominant players such as Heartland Payment Systems Inc. (HPY - Snapshot Report) and Wright Express Corp. are some lingering concerns.

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 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.

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