Total System Services Inc. reported solid second-quarter earnings but warned that two anticipated customer losses would hurt revenue in the third and fourth quarters.
However, the transaction processor said that a recent deal in Europe and a new contract, with Wachovia Corp., would help offset those losses.
“We’re really starting to see some fruit from our efforts here,” Philip W. Tomlinson, TSYS’ chairman and chief executive, said Wednesday in a conference call with analysts. The quarter “certainly met and, in some ways exceeded, our expectations.”
TSYS, which is majority-owned by Synovus Financial Corp., said revenue rose 4.6% from last year’s second quarter, to $429.2 million, and net income rose 13.4%, to $57.4 million.
The Columbus, Ga., company expects third-quarter earnings growth to be at the high end of its 21% to 23% estimate. By mid-Wednesday its stock price had risen 11.58%, to $20.43.
However, a long-term agreement with Sears, Roebuck and Co. finally ended on June 26, and TSYS is expected to lose Bank of America Corp.’s consumer processing business in October.
The year-on-year comparisons benefited from JPMorgan Chase & Co.’s business, which TSYS did not have in last year’s second quarter, and from an undiscounted rate TSYS charged Sears this year, Mr. Tomlinson said. “We’ve got smooth sailing ahead. We’re moving forward, and TSYS is going to be fine.”
To control its expenses in anticipation of losing B of A and Sears, TSYS has been renegotiating contracts with its vendors to get better rates, and since December it has trimmed its work force by 150 employees through attrition. Mr. Tomlinson has said that TSYS cannot eliminate or reassign any people attached to the Bank of America accounts until the very day it stops working on those accounts.
TSYS also expects a revenue boost this summer from Wachovia, which it announced as a customer in May. The Charlotte banking company, which formerly had MBNA Corp. service its cards, switched to TSYS after Bank of America bought MBNA Corp. in January. That same deal prompted Bank of America, also of Charlotte, to move its processing in-house after using TSYS.
Mr. Tomlinson expects Wachovia to become one of his company’s largest customers in a few years. TSYS is also preparing to take on processing for Toronto-Dominion Bank and Capital One Financial Corp., but does not expect to start processing for either until later this year.
JPMorgan Chase is planning to switch its business with TSYS, from outsourcing its processing to using TSYS’ software to do the work on its own, which is less lucrative for the processor. However, Mr. Tomlinson said “the outsourcing model is as strong as it’s ever been.”
TSYS hopes to win new processing contracts with customers of Card Tech Ltd., the London payments software company that TSYS acquired last week for $58 million.
Card Tech has 190 customers. “If we were to move two or three of those” to the outsourced processing model, “we’ve more than paid for Card Tech,” Mr. Tomlinson said. “We know we can do that. We’ve talked to some of these clients.”
Larry Berlin, an analyst for First Analysis Securities Corp. in Chicago, said that “over all it was a good quarter” for TSYS, but that the new deals do not compensate for the old ones.
Once the impact of losing the Sears, B of A, and JPMorgan work is felt, there is “a year and a half of negative comparisons ahead” for TSYS, Mr. Berlin said. Wachovia, Toronto-Dominion, and Capital One will of course help, but “B of A is huge, and Sears-MasterCard is a big client.” Bank of America “had 46 million accounts,” he said. “I mean, that’s big.”
Jefferson Harralson, an analyst for Keefe, Bruyette & Woods Inc., called the plan to cross-sell to Card Tech customers important. “Total, we think, has a superior product,” Mr. Harralson said. “The cross-selling potential should be very fertile with Card Tech.”
