Total System Q1 Earnings Miss Ests, Revs Up - Analyst Blog

Total System Services Inc. TSS reported first-quarter 2014 operating earnings of 38 cents per share. While the bottom line was at par with the year-ago quarter figure, it missed the Zacks Consensus Estimate by 2 pennies.

Including acquisition intangible amortization, share-based compensation and the Net Spend acquisition-related expenses, Total System's reported net income stood at 26 cents per share against 31 cents in the year-ago quarter. Net income attributable to shareholders decreased 13.5% year over year to $49.3 million.

Results reflected revenue growth in North America and international segments along with an increase in overall transaction volume and new accounts. Also, the inclusion of NetSpend as an operating segment resulted in revenue accretion. However, lower revenues from the merchant services, higher expenses and cost of services deteriorated the bottom line, although operating and free cash flow surged.

Behind the Headlines

Total revenue surged 32.1% to $592.8 million, but lagged the Zacks Consensus Estimate of $612 million. Reimbursable items dipped 1.1% year over year to $60.1 million. Sales volume from the direct merchant business climbed 6.4%, although point-of-sale (POS) transactions decreased 10.6% on a year-over-year basis.

On a geographical basis, quarterly revenues from North America improved 9.3% year over year to $262.2 million, while that from international services inched up 1.8% to $82.4 million. However, revenues from merchant acquiring services declined 7.7% to $122.7 million. Meanwhile, the same from NetSpend stood at $132.6 million, substantially up from $104.1 million in the last sequential quarter, driven by gross dollar volume GDV that grew 22.1% and in direct deposit customer base. Inter-segment revenues deteriorated 46.9% year over year to a negative $7 million.

Additionally, as of Mar 31, 2014, total number of accounts on file was 556.2 million, up 16.2% from 478.5 million at the end of the year-ago period. The upside was primarily driven by internal and existing client growth, partially offset by new client growth.

Total System also reported 32.4% year-over-year hike in selling, general and administrative (SG&A) expenses, which stood at $88 million. Cost of services also increased 38.9% to $422.9 million. Alongside, non-operating expense stood at $0.3 million against an income of $1.0 million. Merger and acquisition expenses were pegged at $1.3 million, compared with $3.5 million in the year-ago period.

Subsequently, adjusted EBITDA jumped 21.2% year over year to $149.6 million. Operating income also rose 8.3% to $80.7 million in the reported quarter.

Financial Update

At the end of Mar 2014, operating cash flow escalated a whopping 183.8% year over year to $148.7 million. Free cash flow was pegged at $101.5 million, up $104.4 million from the year-ago period. Moreover, cash and cash equivalents rose to $274.2 million from $247.7 million at 2013-end.

Meanwhile, total assets rose to $3.72 billion from $3.69 billion at 2013-end, whereas total equity climbed to $1.63 billion from $1.60 billion at 2013-end. Long-term debt dipped slightly to $1.42 billion from $1.43 billion at 2013-end.

Capital Deployment Update

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

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

Business Update

Concurrently, Total System's NetSpend allied with Western Union Co. WU to offer co-branded prepaid cards, which will be launched later in 2014.

Additionally, Total System hiked its stake in Central Payment joint venture to 75% from the prior 60%, through a cash outlay of $37.5 million.

Meanwhile, the company vended of operations in Japan during the reported quarter. Thus, it is now a discontinued operation.

Guidance

Management tweaked the full-year 2014 revenue growth guidance to 17–20% at $2.42–2.47 billion from the prior estimated$2.49–2.54 billion. Before reimbursable items, revenues are now expected to grow by 20–22% at $2.18–2.23 billion, while adjusted EBITDA is estimated to escalate by 17–20% at $732–746 million, all slightly trimmed from prior estimates. Moreover, operating earnings per share is projected to grow in the band of 10–12% at $1.90–1.93 a share.

Others

While Total System carries a Zacks Rank #3 (Hold), Western Union is a Zacks Rank #4 (Sell) stock. Some better-ranked stocks in the financial sector include Green Dot Corp. GDOT and Global Payments Inc. GPN. Both these stocks bear a Zacks Rank #2 (Buy).