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Total System Lags 4Q Est, Beats Y/Y

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Total System Services Inc. (TSS) reported fourth-quarter 2012 operating earnings of 32 cents per share, a penny below the Zacks Consensus Estimate but 3.4% higher than the year-ago quarter’s earnings of 31 cents per share. The company’s net income attributable to shareholders increased 1.7% year over year to $60.9 million from $59.9 million in the prior-year period.

Total revenues for the reported quarter were $479.1 million, up 1.5% year over year. However, the top line lagged the Zacks Consensus Estimate of $484.0 million. Reimbursable items declined 6.2% year over year to $60.5 million.

Total System’s top line also benefited from the point-of-sale (POS) transactions, excluding the deconverted clients in indirect business, which increased 9.9% on a year-over-year basis, while sales volume from the direct merchant business jumped 12.9%. Sales volume improved 3.2% year over year excluding the impact of acquisitions.

On a geographical basis, quarterly revenue from North America increased 0.6% year over year to $247.6 million, while revenue from international services witnessed a 0.4% year-over-year increase to $107 million. Further, revenue from merchant acquiring services grew 2.5% year over year to $129.4 million, whereas inter-segment revenue improved 26.9% year over year to a negative $4.9 million.

Additionally, as of Dec 31, 2012, total number of accounts on file was 479.4 million, up 18.6% from 404.2 million at end of 2011. This upside was primarily driven by new client growth, partially offset by lower internal growth of existing clients.

Total System reported a 23.5% year-over-year rise in SG&A expenses, which stood at $73.6 million. However, cost of services edged down 2.2% year over year to $315.7 million. Alongside, non-operating income was $5,000, against non-operating expenses of $0.54 million in the year-ago quarter.

Meanwhile, operating income inched up 0.1% year over year to $89.8 million in the reported quarter. However, operating margin declined to 21.5% from 22.0% in the year-ago quarter.

Full-Year 2012 Highlights

For full-year 2012, Total System reported operating earnings per share of $1.29, in line with the Zacks Consensus Estimate and up 12.5% from the year-ago earnings of $1.15. Net income was at $244 million, up 10.8% from $221 million in the prior year. Total revenues were $1.87 billion, up 3.4% year over year from $1.81 billion.

Financial Update

At the end of 2012, cash and equivalents declined to $247.6 million from $316.3 million at the end of 2011. Additionally, total assets increased to $2.02 billion from $1.86 billion and total shareholders’ equity climbed to $1.43 billion from $1.30 billion at the end of 2011. Moreover, operating cash flow increased 4.5% year over year to $455.8 million.

Share Repurchase Update

Furthermore, Total System bought back 3.2 million shares for $75 million during 2012.

Dividend Update

On Dec 26, 2012, Total System paid a regular quarterly dividend of 10 cents per share to shareholders of record as on Dec 17, 2012.

Outlook for 2013

Total System expects total revenues to grow by 5%–7% to a range of $1.96–$2.00 billion. Revenues before reimbursable items are expected in the range of $1.71–1.75 billion, up 6%–8% over 2012.

Net income is expected to increase 9%–11% to $266–$272 million. On a per share basis, operating earnings are projected in the range of $1.43–$1.45, climbing 10%–12% over 2012.

Zacks Rank

We maintain a Zacks Rank #4 (Sell) on Total System. However, other companies in the financial transaction services industry such as Heartland Payment Systems Inc. (HPY) – Zacks Rank #1 (Strong Buy), MasterCard Incorporated (MA) – Zacks Rank #2 (Buy) and Global payments Inc. (GPN) – Zacks Rank #2 (Buy) are worth considering.

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