Total System Q2 Earnings Rise Y/Y on Increased Revenues

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Total System Services Inc. (TSS) reported second-quarter 2014 operating earnings per share of 41 cents.  While the bottom line was at par with the Zacks Consensus Estimate, it was higher the year-ago quarter figure of 34 cents. The results include share-based compensation.

 

 

Including acquisition intangible amortization, share-based compensation, gain from discontinued operations in Japan ($50 million or 27 cents a share) and the Net Spend acquisition-related expenses, Total System’s reported net income stood at $109.9 million or 58 cents per share against $57.7 million or 31 cents a share in the year-ago quarter.

Results reflected revenue growth in North America, NetSpend and international segments along with an increase in overall transaction volume and new accounts. However, lower revenues from the merchant services and higher expenses were setbacks. Meanwhile, operating and free cash flow witnessed improvement.

Behind the Headlines

For the first time, total revenue rose to $602 million, surging 30.4% year over year and exceeding the Zacks Consensus Estimate of $594 million. Reimbursable items increased 5% to $64 million.

On a geographical basis, quarterly revenues from North America improved 9.9% year over year to $273.3 million, while that from international services increased 11% to $90.5 million. However, revenues from merchant acquiring services declined 6.2% to $128 million. Meanwhile, NetSpend revenues were $116.8 million, down from $132.6 million in the last sequential quarter, driven by gross dollar volume (GDV) that grew 17.4% and direct deposit customer base growth of 17.6%. Inter-segment revenues deteriorated 39.3% year over year to a negative $6.6 million.

Sales volume from the direct merchant business climbed 7%, although point-of-sale (:POS) transactions decreased 8% on a year-over-year basis. On the other hand, transaction volumes in North America and international segments grew 20.7% and 13.3%, respectively.

Additionally, as of Jun 30, 2014, total number of accounts on file was 572.7 million, up 17.2% from 488.7 million at the end of the year-ago period. The upside was primarily driven by internal and existing client growth, partially offset by lower new client growth.

Total System further reported a 33% year-over-year hike in selling, general and administrative (SG&A) expenses, which stood at $85.6 million. Cost of services spiked 38.1% to $416.5 million. Alongside, non-operating expense were $0.9 million versus $0.6 million in the year-ago quarter. Merger and acquisition expenses were $1.2 million, down 5.1% from the prior-year period.

Subsequently, adjusted earnings before interest, taxes, depreciation and amortization (:EBITDA) jumped 22% year over year to $170.9 million. Operating income rose 4.4% to $98.8 million in the reported quarter.

Financial Update

At the end of Jun 2014, operating cash flow escalated 52.3% year over year to $239.4 million. Free cash flow was pegged at $133.7 million, up 69.6% from $54.9 million from the year-ago period. Moreover, cash and cash equivalents rose to $251 million from $247.7 million at 2013-end.

Meanwhile, total assets dipped to $3.68 billion from $3.69 billion at 2013-end, while total equity climbed to $1.63 billion from $1.60 billion at 2013-end. Long-term debt dipped to $1.41 billion from $1.43 billion at 2013-end.

Capital Deployment Update

For the first time since the purchase of NetSpend, Total System repurchased 3.7 million shares for $115.7 million during the reported quarter, driven by strong cash flow.

In Jan 2014, the board of Total System sanctioned a new share repurchase program worth 20–28 million shares through Apr 2015.

On Jul 1, 2014, Total System paid a regular quarterly dividend of 10 cents per share to the shareholders of record as on Jun 20.

Guidance

Management reiterated the full-year 2014 revenue growth guidance of 17–20% to $2.42–2.47 billion. Before reimbursable items, revenues are expected to grow 20–22% to $2.18–2.23 billion, while adjusted EBITDA is estimated to escalate 17–20% to $732–746 million. Moreover, operating earnings per share is projected to grow in the band of 10–12% to $1.90–1.93.

Our Take

Higher expenses, declining revenues from merchant acquiring services and moderated NetSpend revenues, witnessed in the first half of 2014 and most of 2013, are likely limit margin expansion. Nevertheless, growth is picking up in North America and international sources, which along with improving industry trends and consistent debt reduction is expected to position the company favorably forthe upcoming quarters.

Projecting steady growth, Total System sports a Zacks Rank #1 (Strong Buy). Other players with the same Zacks Rank such as Qiwi Plc (QIWI) and VeriFone Systems Inc. (PAY) are also worth considering.

Meanwhile we also await the earnings results of the electronic payment processing industry giant, Visa Inc. (V) with a Zacks Rank #2 (Buy), scheduled to release  after the closing bell on Jul 24.

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