Cost Cutting Helps TSYS Boost Profits After a Tough Year

It was a bumpy ride, but Total System Services Inc. (TSYS) emerged from 2006 with some hefty profit growth. The second-largest card processor this week reported fourth-quarter revenues of $503.9 million, up 19.8% from $420.7 million a year earlier, and net income of $87.1 million, up 75.2% from $49.7 million. For the year, TSYS posted net income of $249.2 million, up 28.1% from $194.5 million in 2005, on total revenues of $1.79 billion, an increase of 11.5% over 2005's $1.60 billion. Columbus, Ga.-based TSYS lost two huge accounts in 2006, Bank of America Corp.'s consumer credit card business and Citigroup Inc.'s Sears file. In all, clients representing 132.9 million cardholder accounts deconverted from TSYS last year. To maintain profitability, TSYS put a priority on cutting costs, a process that included closing offices in Jacksonville, Fla., and New York City, and the net reduction, excluding two acquired companies, of 210 employees compared with the December 2005 head count. “2006 is closed out and frankly we're glad it's done,” chairman and chief executive Philip W. Tomlinson said this morning at an analysts' conference call. Partly offsetting the BofA defection was the bank's $68.9 million early-termination fee. Factoring out that payment, TSYS still grew earnings 11% in 2006, Tomlinson said. There's one big, known hurdle left, however. Client JPMorgan Chase & Co., which has more than 100 million card accounts, in the third quarter plans to take its processing business in-house, but will license TSYS's TS2 software to do that. Asked by an analyst about how the switch will affect profitability, chief financial officer James B. Lipham said licensing revenues will be lower than processing revenues, but expenses will fall. “When it's all said and done, we should have an operating net income that is as good or better than what we have today,” he said. TSYS added 91.2 million cardholder accounts in 2006 through several new clients, the biggest being Capital One Financial Corp., and 36.6 million accounts through internal growth of existing clients. The Capital One conversion is nearly complete. In all, TSYS ended 2006 with 416.4 million accounts on file, down about 5% from 437.9 million a year earlier. Nearly 10% of the file now consists of stored-value cards: 40.7 million stored-value accounts in 2006, up 51.5% from 26.9 million in 2005. TSYS's merchant-processing business, Tempe, Ariz.-based TSYS Acquiring Solutions, formerly Vital Processing Services, in 2006 posted a 15% increase in front-end transactions processed, Lipham reported. The merchant business suffered its own deconversions too, the biggest being Heartland Payment Systems Inc., but added some new clients while posting 2006 margins of 24.2% in 2006, up from 19.1% in 2005, according to Lipham. TSYS's growing international business and newer, specialty services helped keep the revenues flowing. Tomlinson told analysts that TSYS will continue to develop higher-margin new products as its core processing services remain under pricing pressure. Excluding the effect of BofA's one-time payment, TSYS expects profits to increase 14% to 17% this year. JPMorgan Chase, meanwhile, reported on Wednesday in its fourth-quarter financials that its merchant-acquiring business processed $660.6 billion in bank card charge volume in 2006 and nearly 18.2 billion total transactions, both up 17% from 2005. JPMorgan Chase owns 51% of Chase Paymentech Solutions, the nation's largest acquirer, with First Data Corp. owning 49%.