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Total System Earnings Beat by a Penny

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Total System Services Inc. (TSS - Free Report) reported third-quarter 2013 operating earnings of 46 cents per share, a penny higher than the Zacks Consensus Estimate. However, it surpassed the year-ago quarter figure of 34 cents by 35.3%.

Including acquisition, intangible amortization and the Net Spend acquisition-related expenses, Total System’s operating net income per share stood at 34 cents. Net income attributable to shareholders increased 6.7% year over year to $64.4 million from $60.3 million in the prior-year period.

Results reflected revenue growth in North America and merchant services 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 revenue from the international segment, higher SG&A and merger expenses coupled with higher cost of services and unfavorable currency fluctuations deteriorated the operating cash flow.

Behind the Headlines

Total System’s third quarter total revenue of $588.1 million was marginally higher than the Zacks Consensus Estimate of $588 million and rose 25.6% year over year. Reimbursable items declined 1.5% year over year to $61.1 million. Sales volume from the direct merchant business surged 10.2%, although point-of-sale (POS) transactions decreased 11.0% on a year-over-year basis.

On a geographical basis, quarterly revenues from North America improved 6.3% year over year to $252.6 million, while revenues from international services witnessed a 2.1% year-over-year fall to $100.5 million. Further, revenues from merchant acquiring services climbed 2.2% year over year to $135.6 million, whereas inter-segment revenues decreased 12.6% year over year to a negative $4.4 million.

Total System closed the acquisition of NetSpend on Jul 1, 2013. Effective the third quarter of 2013, NetSpend has been included as the fourth operating segment of Total System. Quarterly revenues of NetSpend stood at $103.7 million, up 22.2% driven by growth in the direct deposit customer base and GDV. NetSpend is expected to contribute approximately $210 to $214 million in revenues for full year 2013, higher than the previous guidance of $197 to $200 million.

Additionally, as of Sep 30, 2013, total number of accounts on file was 520.7 million, up 11.7% in the year-ago quarter. This upside was primarily driven by new and existing client growth.

Total System also reported 31.8% year-over-year growth in SG&A expenses, which stood at $80.5 million. Cost of services edged up 25% to $394.6 million. Alongside, non-operating expense stood at $0.5 million, against $0.6 million in the year ago quarter. Total System also incurred merger and acquisition expenses of $7.3 million during the reported quarter.

Subsequently, adjusted EBITDA edged up 32.1% year over year to $182.1 million. Operating income climbed 23.7% to $112.9 million in the reported quarter.

Financial Update

At the end of Sep 2013, operating cash flow of Total System declined 7.9% year over year to $307.5 million. However, cash and equivalents surged to $396.9 million, from $247.6 million at year end 2012, owing to borrowings of $1.1 billion for the NetSpend acquisition. Consequently, total assets increased to $3.8 billion and total shareholder equity climbed to $1.6 billion, from 2012-end.

Dividend Update

On Oct 1, Total System paid a regular quarterly dividend of 10 cents per share to the shareholders of record as on Sep 20, 2013.


Based on the growth in NetSpend revenues offset by the decline in revenues due to foreign currency changes, management of Total System reaffirmed the revenue guidance for 2013 at $2.14–2.18 billion.


Among other strong performers in the financial sector Fiserv Inc. (FISV - Free Report) and Qiwi plc (QIWI - Free Report) , both carrying a Zacks Rank #1 (Strong Buy) and Visa Inc. (V - Free Report) , carrying a Zacks Rank #2 (Buy), are worth considering.

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