Total System Services Inc. (TSS) reported fourth quarter operating net income of $47.2 million or 24 cents per share as opposed to $60.2 million or 31 cents per share in the year-ago quarter. However, earnings per share were in line with the Zacks Consensus Estimate.
Results reflect lower-than-expected revenues and higher-than-expected cost of services and selling, general and administrative (SG&A) expenses that also led to the decline in earnings. These were partially offset by increased same client transactions and slight increase in overall transaction volume.
Total revenue for the reported quarter was $440.0 million, up 1.7% as against $432.5 million in the year-ago quarter. This was almost flat with the Zacks Consensus Estimate of $439.0 million. On a constant currency basis, total revenue was $440.7 million, reflecting a 1.9% increase from the year-ago quarter. Reimbursible items totaled $66.1 million, down 8.2% year over year.
As per segments, quarterly revenues from North America declined 7.7% year over year to $234.0 million, while revenues from international services witnessed an 8.0% year over year decline to $88.5 million. Besides, intersegment revenues deteriorated by 11.4% year over year to a negative of $6.9 million.
However, revenue from merchant acquiring services substantially climbed 65.9% year over year to $93.5 million, thereby rising from 19% to 27% of consolidated total revenues.
Meanwhile, organic growth in the reported quarter stood at 4.0%. TSS reported a 29.2% year over year surge in SG&A expenses, which came in at $57.1 million. In addition, cost of services increased 5.9% year over year to $311.9 million.
Operating income plummeted 24.4% year over year to $71.0 million in the reported quarter. Excluding termination fees in the year-ago quarter, revenues increased 6.0% while earnings per share decreased 3.2%.
2010 Highlights
For full year 2010, net income stood at $193.9 million or $1.00 per share, in line with the Zacks Consensus Estimate. However, net income decreased 9.9% from $215.2 million or $1.12 per share at the end of 2009. Total revenue increased marginally by 2.4% to $1.72 billion, again, flat with the Zacks Consensus Estimate. Besides, same client transactions climbed 5.3% at the end of 2010.
Total number of accounts on file as of December 31, 2010 was 342.9 million, down 0.6% from 344.8 million at the end of 2009. New client growth was offset by a lower internal growth of existing clients.
SG&A expenses for 2010 witnessed an ascent of 12.8% year over year to $207.1 million. The cost of services increased 4.4% year over year to about $1.2 billion. As a result, operating income declined 10.1% year over year to $309.4 million.
As of December 31, 2010, cash flow from operating activities was $389.2 million, compared with $423.1 million as of December 31, 2009. Cash and equivalents plummeted to $394.8 million versus $450.3 million at the end of 2009. While total assets were $1.97 billion at the end of 2010, total shareholders' equity was recorded at $1.24 billion.
Guidance Revision
Total System announced its guidance for 2011 according to which management projects income from continuing operations to be in the range of $211-$216 million or $1.09 to $1.11 per share. Total revenues are expected to be in the range of $1.75-$1.79 billion, reflecting a 2%-4% year over year growth. Reimbursable items are anticipated to be in the range of $260 million-$267 million, declining 3%-5% over 2010.
However, revenue from reimbursible items is projected to be $1.49-$1.52 billion, growing 3%-5% over 2010. Besides, excluding the termination fees in 2010, the revenues before reimbursible items are projected to be up 6% - 8%, and net income from continuing operations is projected to be up 20% - 22%, in 2011. Average shares outstanding are now expected to be 194.5 million.
Business Update
On January 1, 2011, TSS expanded its merchant service solutions by purchasing the remaining 49% of First National Merchant Solutions LLC (FNMS) for approximately $169.6 million. Following the complete acquisition, Total System has renamed FNMS as TSYS Merchant Solutions.
Dividend Update
On January 3, 2011, TSS paid a regular quarterly dividend of 7 cents per share to the shareholders of record as on December 16, 2010.
Our Take
Overall, TSS signals a sluggish near-term outlook, given the inefficient cost-cutting efforts, inadequate diversified growth, and interest and currency risk. Moreover, the company has been adversely impacted by the bank consolidation and the slowdown in credit card transaction growth over the past few years.
We expect to see incremental costs and risks for TSS as a result of the new regulations being implemented as a result of the Consumer Protection Act and other laws that were passed in July 2010. The company is also vulnerable to increased competition from dominant players such as Global Payments Inc. (GPN) and Alliance Data Systems Corp. (ADS).
Although the complete acquisition of FNMS and expansion into merchant acquiring services is expected to drive growth, dependence on it solely could be risky for long-term growth. In addition, we do not foresee any other substantial development strategy to drive earnings in the near future. However, we expect Total System to benefit from the improving economy and generate healthy cash flow to achieve the guidance for 2011.
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TOTAL SYS SVC (TSS): Free Stock Analysis Report
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