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TSS Earnings Lags Est. on High Exp.

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Total System Services Inc. (TSS - Free Report) reported first-quarter 2013 operating earnings of 30 cents per share, which lagged the Zacks Consensus Estimate of 34 cents but were in line with the year-ago quarter figure.

The company’s earnings per share climbed 1.7%, while net income attributable to shareholders edged up 1.1% to $57.0 million from $56.4 million in the prior-year period. Net income in the reported quarter included an expense of $6.2 million related to the pending acquisition of NetSpend Holdings, slated to close by mid-2013.

Results reflect consistent revenue growth in the merchant segment and increase in overall transaction volume and new accounts. Lower tax expense and almost flat cost of services also boosted the results. However, lower revenue from North America and international segments, higher-than-expected SG&A and merger expenses deteriorated the operating cash flow and cash position.

Behind the Headlines

Total revenue for the reported quarter was $465.0 million, up 0.8% year over year, although it missed the Zacks Consensus Estimate of $477 million. Reimbursable items declined 7.9% year over year to $60.8 million.

Total System’s top line also benefited from point-of-sale (POS) transactions, excluding de-converted clients in indirect business, which increased 6.6% on a year-over-year basis, while sales volume from direct merchant business jumped 15.5%. Same client transactions grew 8.7% year over year, although a decrease of $5.2 million in reimbursable items impacted the top line adversely.

On a geographical basis, quarterly revenues from North America dipped 0.3% year over year to $239.8 million, while revenues from international services witnessed a 3.3% year-over-year fall to $97.1 million. However, revenue from merchant acquiring services grew 5.9% year over year to $132.9 million, whereas inter-segment revenues improved 9.9% year over year to a negative $4.8 million.

Additionally, as of Mar 31, 2013, total number of accounts on file was 478.6 million, up 15.1% from 415.9 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 13.7% year-over-year growth in SG&A expenses, which stood at $66.1 million. Cost of services edged up marginally 0.7% year over year to $320.6 million. Alongside, non-operating income stood at $1.0 million against an expense of $0.4 million. The company also incurred merger and acquisition expenses related to a bridge loan facility of $2.7 million during the reported quarter.

Subsequently, operating income declined 11.7% year over year to $74.9 million in the reported quarter. Operating margin dipped to 16.1% from 18.4% in the year-ago quarter.

Financial Update

At the end of the reported quarter, operating cash flow plunged 46.5% year over year to $52.4 million. Consequently, cash and equivalents fell to $223.1 million from $247.6 million at the end of 2012. However, total assets increased to $2.04 billion and total shareholder equity climbed to $1.45 billion, from 2012-end.

Dividend Update

On Apr 1, 2013, Total System paid a regular quarterly dividend of 10 cents per share to the shareholders of record as on Mar 21, 2013.


Along with Total System, other strong performers in the financial sector include Alliance Data Systems Corp. (ADS - Free Report) and Fiserv Inc. (FISV - Free Report) , all carrying a Zacks Rank #2 (Buy). Another outperformer, Moody’s Corp. (MCO - Free Report) carries a Zacks Rank #1 (Strong Buy).

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