IMGCAP(1)]
Transaction processor Total System Services Inc., known as TSYS, is searching for growth opportunities from acquisitions and potential new contracts amid the loss of several large clients, according to the Columbus, Ga.-based company.
TSYS "is focused on dealing with overcoming the large loss of several large clients … primarily to financial difficulties and credit issues with the banks," Philip Tomlinson, TSYS chairman and CEO, said last week during a conference call with analysts. The loss of such clients as Washington Mutual Inc., Wachovia Corp., Charming Shoppes Inc. and the eventual loss of Bank of America Corp. "does create a big hole" for the company, he said.
The number of accounts on file decreased 3.8%, to 342.1 million as of Sept. 30 from 355.5 million a year earlier. Overall, TSYS added 29.6 million accounts from internal growth and 25.7 million from new clients between September 2008 and 2009. It lost 31.3 million from purges and sales and 37.4 million from deconversions.
TSYS's earnings results "were in line with expectations, except for accounts on file," says Darrin Peller, information technology and computer services analyst at Barclays Capital, the investment-banking division of England-based Barclays Bank PLC. The number of accounts on file is the "most important underlying driver of the business, and [the decrease] shows the market is still challenging," says Peller.
TSYS has signed 21 letters of intent for new business and believes the associated accounts potentially could offset the company's recent losses, said Tomlinson.
However, "the uncertainty in the market is inhibiting them from signing contracts," says Peller.
The difficult economy and challenges in the industry have slowed the rate with which companies sign agreements, noted Tomlinson. "We'll just be glad when 2009 gets over," he said. "There has been nothing pretty about it, other than we have signed … letters of intent for a lot of business."
Acquisition Pursuit
Besides signing letters of intent, TSYS is pursuing acquisition opportunities "aggressively," according to the company. The processor accumulated $420.1 million in cash and cash equivalents as of Sept. 30.
"We're certainly anxious to put together a plan … that makes sense both strategically and financially," said Tomlinson.
TSYS has considered and passed on multiple agreements and bid on some opportunities, yet has no announcements regarding potential acquisitions at this point. "We're looking for targets that will provide long-term growth," Tomlinson said.
TSYS's cash and cash equivalents are "more than enough to make a nice-sized deal," says Peller. "The challenge is finding the right candidate."
Despite talk of acquisitions, TSYS did not discuss explicitly "if they planned to change strategies from pure processing on the acquiring side, where they make a couple of cents per transaction, to get into the ISO business directly," says Mike McCormack, president of Palma Advisors LLC, a Fort Lauderdale, Fla.-based consulting firm.
Speculation in the market indicates TSYS is interested in purchasing a merchant-acquiring company, agrees Peller, noting most of TSYS's business involves working with issuers, and the company wants to increase its merchant business. "They only generate one to two cents per transaction on the merchant side," says Peller.
If TSYS purchases a merchant acquirer, it potentially could generate 30 cents to 40 cents on each transaction, he says.
Acquisition discussions, however, have been ongoing at TSYS for some time, notes Peller. "If you look at conference call transcripts for the past two years, they have been saying they want to make an acquisition," he says.
Overall, TSYS reported a 14.2% drop in third-quarter net income, to $55 million from $64.1 million during the same period last year. The transaction processor reported a 1.6% decline in revenue, to $432.3 million from $439.4 million.
"We're still facing some currency headwinds as well as the economic crisis," Jimmy Lipham, TSYS senior executive vice president and chief financial officer, said during the conference call with analysts.
Card transactions in North America processed by TSYS dropped 7.7%, to 1.56 billion from 1.69 billion during the same period last year. International card transactions processed dropped 10.1%, to 299.7 million from 272.1 million. Merchant point-of-sale transaction volume grew 3.9%, to 1.34 billion from 1.29 billion.
The North America Services segment posted $253 million in revenue for the quarter, down 8.8% from $277.3 million a year ago. Revenue from the International Services segment fell 2.2%, to $85.9 million from $87.8 million. Merchant Services revenue grew 25.7%, to $93.4 million from $74.3 million.
Revenue in Europe decreased 8.6%, to 70.4 million from $77 million. Revenue in Canada grew 14.8%, to $36.5 million from $31.8 million, and revenue in Japan grew 59.7%, to $11.5 million from $7.2 million. Revenue in Mexico decreased 40%, to $2.1 million from $3.5 million.
