Total System's Q1 Shines on Top Line, Earnings Outlook Up - Analyst Blog

Total System Services Inc.’s TSS first-quarter 2015 operating earnings per share of 54 cents swiftly surpassed the Zacks Consensus Estimate of 43 cents by 25.6% and the year-ago quarter figure of 38 cents by 41.2%. With this, the company has kept its earnings streak alive by generating a four-quarter trailing average earnings beat of 11.5%.

Including acquisition intangible amortization and share-based compensation, Total System’s reported net income stood at 42 cents per share against 26 cents a share in the year-ago quarter. Net income attributable to shareholders escalated 57.7% year over year to $77.8 million.

Results reflected improved revenue growth across North America, NetSpend and merchant services segments, along with higher transaction volumes and new accounts. Operating margins also improved despite lower revenues from the international segment and higher expenses. Cash flow and capital base remained strong.

Behind the Headlines

Notably, total revenue grew 11.7% year over year to $662.2 million. Reimbursable items increased 10.4% to $66.4 million.

On a geographical basis, quarterly revenues from North America jumped 17.9% year over year to $309.2 million, although that from international services fell 3.1% to $79.8 million due to foreign currency fluctuations. Furthermore, revenues from merchant acquiring services improved 5.2% to $129.1 million. Meanwhile, NetSpend revenues were $155.1 million, up 16.9%, driven by a 16.7% rise in gross dollar volumes and 16.1% in direct deposit customer base. Inter-segment revenues deteriorated 57.1% to a negative $11.1 million.

Sales volume from the direct merchant business rose 9.9%, while point-of-sale transactions grew 5.6%, both on a year-over-year basis.

Additionally, as of Mar 31, 2015, total number of accounts on file scaled to 723.7 million for the first time, up 30.1% from 556.2 million at the end of the year-ago period. The upside was primarily driven by new, internal and existing client growth.

Total System further reported a 0.8% year-over-year rise in selling, general and administrative expenses, which stood at $90 million. Additionally, cost of services rose 6.3% to $449.7 million. Alongside, non-operating expenses stood at $9.2 million against $9.8 million in the year-ago quarter.

Subsequently, adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) increased 29.3% year over year to $193.5 million. Operating income surged 51.8% to $122.5 million in the reported quarter. Adjusted operating margin also improved to 25.9% from 21.4% in the year-ago period.

Financial Update

At the end of Mar 2015, operating cash flow grew 6.6% year over year to $158.5 million. Available free cash flow improved 26.1% to $99.9 million, reflecting lower capital expenditure and debt payments. Moreover, cash and cash equivalents rose to $328.1 million from $289.2 million at 2014-end.

Meanwhile, total assets rose to $3.78 billion from $3.73 billion at 2014-end, while total equity climbed to $1.71 billion from $1.7 billion at 2014-end. Long-term debt remained stable at $1.4 billion from 2014-end level.

Capital Deployment Update

Total System repurchased 1.45 million shares during the reported quarter.

In Jan 2015, the board of Total System sanctioned a new share repurchase program worth 20 million, thereby replacing the prior Jan 2014 authorization worth 20–28 million shares, which was slated to expire in Apr 2015. However, the latest share repurchase program came without an expiry.

On Apr 1, 2015, the company paid a regular quarterly dividend of 10 cents per share to the shareholders of record as on Mar 19.

Overall, Total System deployed 73% of its free cash flow in capital deployment in the reported quarter.

Guidance

Backed by a solid first quarter, management revised full-year 2015 operating earnings per share growth guidance of 12–14% to $2.19–2.23, up from prior estimate of 11–13% to $2.17–2.21.

However, revenue growth projection remained intact in the band of 7–9% to $2.62–2.66 billion. Before reimbursable items, revenues are expected to grow 8–10% to $2.37–2.81 billion, while adjusted EBITDA margin is estimated to expand by 100–150 basis points from 3.25% in 2014.

Zacks Rank

Currently, Total System has a Zacks Rank #3 (Hold).

Some Capable Peers

Among other stocks in the sector, General Finance Corp. GFN and Global Cash Access Holdings Inc. GCA appear quite promising with a Zacks Rank #1 (Strong Buy). Meanwhile, financial services providers like Equifax Inc. EFX, carrying a Zacks Rank #2 (Buy), is also worth considering.

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