Total System Services Inc., facing the loss of two major clients, reported its third-quarter earnings three weeks early to reassure investors.
The Columbus, Ga., processor currently handles credit card transactions for Washington Mutual Inc., which JPMorgan Chase & Co. acquired last month, and for Wachovia Corp., which is selling itself to Wells Fargo & Co. TSYS could lose about 4.5% of its revenue if the buyers take the processing work in-house or to another company.
"We wanted to get these results to you and to the market as quickly as possible and provide as much transparency as we possibly could," Philip W. Tomlinson, TSYS' chairman and chief executive officer, said during a conference call with analysts Friday.
The fact that several large issuers, including JPMorgan Chase, process most of their transactions in-house is an ongoing challenge for TSYS, Mr. Tomlinson said.
"Don't think I'm delusional. We have a big mountain to climb with these big issuers," he said.
JPMorgan Chase, which licences TSYS software, has not disclosed its plans for the Wamu portfolio, he said. TSYS has long-term contracts with both Washington Mutual and Wachovia, "and both include appropriate fees for early termination."
Wells Fargo uses TSYS to process its commercial cards, but First Data Corp. handles its consumer portfolio.
Mr. Tomlinson said the banking industry's consolidation could provide new opportunities for his company.
"We see it as a long-term opportunity for us to sell our capabilities" to large issuers, he said. Many large issuers that do their processing in-house have "aging … patched up software" that is more expensive and complicated than TSYS' offerings. "In today's environment, what might be more important than ever is we can give them lower cost in addition to containing and guaranteeing cost into the foreseeable future."
Lawrence S. Berlin, an analyst at First Analysis Securities Corp. in Chicago who follows TSYS, agreed with that assessment but said it would not necessarily guarantee an immediate benefit for the processor.
"It is expensive to process in-house. You do have to update the software. It can be an added expense that they don't need, … but it's a matter of when the banks realize it," he said.
Mr. Berlin was sanguine about the potential loss of the Wamu and Wachovia contracts. The effects of losing JPMorgan Chase and Bank of America Corp. as customers in the last couple of years "were a lot bigger."
In 2006, before JPMorgan Chase brought its processing in-house and Bank of America Corp. did the same with its consumer portfolio, the two issuers accounted for over 34% of TSYS' revenue, according to filings.
The processor's third-quarter profits fell 6.9% from a year earlier, to $64.07 million, or 33 cents a share. Revenue increased 9.4%, to $500.4 million.
In a note to investors published before TSYS reported its earnings, Sanjay Sakhrani, an analyst at KBW Inc.'s Keefe, Bruyette & Woods Inc., lowered his full-year earnings estimate by 4 cents, to $1.31 a share. He also lowered his price target for the stock by $7, to $18, citing the potential customer losses and a relatively small debit processing business.
But Mr. Sakhrani praised the processor's international business. "A lucrative aspect … is Total Systems's equity ownership in China UnionPay (CUP) data and its acquisition of Card Tech (in the U.K.), which gives the company exposure to international markets," he wrote.
Mr. Tomlinson hinted Friday that his company wouldcontinue growing abroad and addressed plans to increase the processor's debit capabilities.
"We will roll out some new debit products before yearend," Mr. Tomlinson said.
