Total System Services Sees Profits Soar in Q3



Total System Services, or TSYS, delivered a 38% year-on-year increase in adjusted third-quarter profits, reflecting the completion of a recent acquisition. On a GAAP basis, earnings rose 7% to $64.4 million, or $0.34 per share, from $60.3 million, or $0.32 per share, in the year-earlier quarter. Excluding acquisition-related intangible amortization, stock compensation and merger expenses, TSYS earned $92.8 million, up from $67.2 million a year earlier. Overall, we think TSYS is making progress toward our full-year targets and therefore we are not making changes to our fair value estimate at this time. We continue to believe that TSYS has a narrow economic moat.

Overall revenue rose 26% to $588.1 million. This was the first quarter that included the results of NetSpend, a payroll and debit card company acquired by TSYS in July. Within the company’s operating segments, revenue before reimbursable items rose 7% at North America Services; fell 3% at International Services; and rose 5% at Merchant Services.

Revenue from NetSpend came to $103.7 million and so far the unit’s revenue contribution is tracking ahead of where we thought it would be. That is convenient because we think it will take this incremental revenue to offset possible full-year revenue gaps elsewhere relative to our estimates, which may have been too optimistic, as well as headwinds such as from foreign currency. We do not expect to materially change our companywide revenue expectation for 2013, though. Operating expenses are tracking close to our views.

We were disappointed to hear that TSYS hasn’t made much headway with its expansion efforts in Brazil. Our thinking remains that TSYS should be able to capitalize on its existing relationship with Banco Carrefour to capture new clients. However, management conceded that so far Carrefour remains TSYS’ only client in Brazil. We continue to believe in the potential of growth markets such as Brazil, but recognize that this may take longer to play out.

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