Flush with cash and the prospect of stronger revenue growth for the rest of the year, Total System Services Inc., or TSYS, is eyeing potential acquisitions that would diversify its operations beyond its core credit card processing business.
With some $260 million in available cash, TSYS is seeking acquisitions that would make “a strategic fit” for the company, Philip W. Tomlinson, TSYS chairman and CEO, told analysts July 26 when discussing second-quarter earnings. TSYS also remains committed to buying back its own shares as the economy improves, he said.
Asked whether new Federal Reserve debit card interchange price cuts introduced as a result of the Dodd Frank Act would lead to improved margins for the company’s merchant-acquiring business, Tomlinson confirmed that margins may rise, but only temporarily. The new rule goes into effect Oct. 1 (
Merchant acquirers pay card issuers interchange when their cards are used to make purchases. Acquirers then pass along the expense to their merchant customers as part of the discount rate. Nothing in the Fed rule stipulates that acquirers, or merchant processors, must pass along all the reduction in debit interchange, though analysts believe market pressures will encourage them to do so, especially over time.
“I think, competitively, we will all go up and all bring the margin back down,” Tomlinson said. “I don’t think it’s going to be anything truly material that’s going to make a big difference, but I do think there’s a window there to work on that process.”
Most of the increased revenue TSYS might see “will certainly go back to the merchants,” Tomlinson said, noting specific amounts would vary depending on individual merchant agreements. “Merchants that are on the bundled-pricing (plan) ... will get a give-back a little slower than the folks on interchange-plus (plans).”
Tomlinson also said he expects the new rule to produce “somewhat” of a shift in processing to more credit card volume from debit.
“I do think debit cards are still a great product, and in some ways it may be less expensive to deal with a debit card than it is with a check,” Tomlinson said, noting that TSYS does not yet have full details from Visa Inc. and MasterCard Worldwide about related card-processing issues. “But I do think the pricing model is going to change. It was just too much revenue taken out of the model for it not to change.”
Citing improving economic conditions and the results of a new series of clients going live, TSYS reported a 3.9% increase in revenue for the second quarter ended June 30, to $447.6 million from $430.8 million during the same period a year ago. Net income was $54.6 million, up 4% from $52.5 million.
For North America, TSYS total revenue fell 1.2%, to $233.9 million from $236.8 million. Accounts on file at the end of the quarter totaled 328.3 million, up 12.9% from 290.7 million. Transaction volume rose 12.5% to 1.8 billion from $1.6 billion.
International Services generated revenues of $97.7 million, up 25.3% from $78 million. Accounts on file rose 13.5% to 47.8 million from 42.1 million. Transaction volume rose 14.3% to 340.6 million from 297.9 million.
Merchant Services contributed revenues of $123.1 million, down 0.7% from $124 million. Point-of-sale transaction volume fell 10.6% to 1.27 billion from 1.42 billion.
Looking ahead, Jim Lipham, TSYS chief financial officer, told analysts he believes the second quarter was the last one in which comparisons against previous quarters in which the company received large, one-time contract-termination fees would drag down its relative performance. During the third quarter of this year, “we ought to be in good shape for showing comparative operations without having to adjust for anything,” he said.
TSYS also underwent a “very significant” internal reorganization recently to cut expenses and gain efficiencies in its sales channel, including cross-selling more services, such as commercial card and acquiring processing, to existing clients. Tomlinson told analysts.
“We are trying to push customers to buy more and more value-added services,” he said.
TSYS reported its earnings after the markets closed July 26. In midday trading July 27, shares of TSYS stock were selling for $19.28, up 6.2% from the previous day’s $18.16 closing price.
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