Growth at Spin-offs TSYS, Metavante, But Not All Is Rosy

Newly independent of their founding bank owners, payment card processors Total System Services Inc. (TSYS) and Metavante Technologies Inc. weighed in this week with their fourth-quarter financials. The numbers by and large showed growth after a thicket of one-time spin-off and other expenses is cleared away, but both companies have some soft spots. Columbus, Ga.-based Synovus Financial Corp. on Dec. 31 spun off its 81% stake in TSYS, a move TSYS chairman and chief executive Philip W. Tomlinson says makes his company more attractive to Wall Street investors and potential new clients, and makes it easier for TSYS to make acquisitions. But TSYS's fourth-quarter earnings report shows the company, despite a better-than-expected recovery, is still smarting from the loss of Bank of America Corp.'s consumer bank card file and JPMorgan Chase & Co.'s conversion of its consumer credit cards from TSYS's third-party processing system to an in-house system based on licensed TSYS software. Those deconversions were a big reason TSYS's biggest segment, electronic payment processing, saw fourth-quarter revenues fall 20.8% to $240.5 million from $303.5 million a year earlier. The deconversions cost TSYS 105 million accounts, leaving its year-end accounts-on-file at 375.5 million, down 9.8% from 416.4 million at the end of 2006. Partially offsetting those losses were 24 million accounts from new clients and 40 million more accounts from existing customers, chief financial officer James B. Lipham said at an analysts' conference call Thursday morning. Including spin-off expenses, TSYS's total fourth-quarter revenues were $458.5 million, down 9% from $503.9 million a year earlier. Net income fell 47.5% to $45.7 million from $87.1 million in 2006's fourth quarter. For the year, TSYS reported net income of $237.4 million, down 4.7% from $249.2 million in 2006, on revenues of $1.81 billion, up 1% from $1.79 billion. Revenues, however, grew by 5% if BofA's $65 million early-termination fee in 2006 is excluded, TSYS said. And if BofA-related items and spin-off expenses are excluded, operating income grew 25% in 2007 to $368 million. Like archrival First Data Corp., which went private in 2007, TSYS is seeing most of its growth from international expansion. International revenues grew 33% last year, Lipham reported. And Tomlinson noted that while TSYS has an estimated 45% market share in the U.S., it only has 6% or 7% worldwide, which means plenty of growth opportunities remain. “That's a long way to go,” he said. The merchant-processing unit, TSYS Acquiring Solutions, hit a few bumps in 2007. Four client deconversions cost $13 million, and price concessions on some contract renewals cost $7 million, according to Lipham. Fourth-quarter revenues fell 1.6% from $65 million in 2006's last quarter to $64 million. For the year, revenues fell 2.4% to $254.1 million from $260.3 million in 2006. Lipham, however, noted that internal growth from existing clients added $21 million in revenues. “We do anticipate TSYS Acquiring revenues to stabilize and we fully expect this year to get back to a strong revenue growth rate of between 7% to 9%,” he said. Meanwhile, Milwaukee-based Metavante, which Marshall & Ilsley Corp. spun off on Nov. 1, reported a fourth-quarter loss of $92.8 million compared with net income of $44 million a year earlier. Revenues increased 5.8% to $408.2 million from $385.9 million in 2006's fourth quarter. Metavante took several one-time charges, including about $25 million for the spin-off and a $129.5 million non-cash impairment charge. Much of that later charge stemmed from weaker-than-expected sales of imaging products, which bit into Metavante's projected software-licensing revenues. Despite that, Metavante executives insisted at their analyst conference call that imaging's long-term prospects are good. But with news about mortgage problems still dominating the headlines, some banks apparently are putting off investments in big projects such as imaging. “We did see a little softness in the second half of '07 in some of the larger capital projects that banks were undertaking, and it hit our image business …” chief operating officer Michael D. Hayford said in response to a question. He went on to note that banks aren't cutting back on Metavante's basic services. “We haven't seen any softening of core processing,” he said. For the year, Metavante posted revenues of $1.6 billion, up 6% from $1.5 billion in 2006. Net income was $49.5 million, down 69% from $160.1 million in 2006 because of the one-time charges. Excluding those charges, adjusted net income was up 17% to $186.8 million, the company said. Metavante's Financial Solutions Group, which includes bank processing, posted revenues of $636.2 million in 2007, up 3.5% from $614.5 million in 2006. The segment's operating income was $154.6 million, up 7% from $144.4 million the year earlier. Metavante's other segment, the Payment Solutions Group, posted operating income of $276.8 million, up 7.8% from $256.7 million in 2006, on revenues of $961.9 million, an increase of 8.1% from $889.7 million in 2006.