TSYS Battered But Not Broken, Top Execs Say, Citing New Business

Top executives of card processor Total System Services Inc. (TSYS) on Wednesday portrayed a company that may be a bit bruised but is heading for better times. Columbus, Ga.-based TSYS even upped its 2006 profit projections and says earnings next year won't decline as much as previously forecast. TSYS late Tuesday reported net income of $54.3 million, up 13% from $48.1 million in 2005's third quarter, on total revenues of $441.8 million, an increase of 4.7% from the year-earlier quarter's $422 million. TSYS' merchant-processing unit, TSYS Acquiring Solutions, formerly Vital Processing Solutions, posted an 11.7% decline in revenues, from $74.2 million in 2005's third quarter to $65.5 million in the just-ended quarter. But during a conference call with analysts to discuss third-quarter results, chief financial officer James B. Lipham attributed much of the decline to the shuttering of an unprofitable point-of-sale business based in San Diego. TSYS recently disclosed that it would begin processing transactions for Discover Financial Services LLC. Chairman and chief executive Philip W. Tomlinson said he expects TSYS to announce its first European merchant-processing contract soon. Tomlinson was cautious when asked by an analyst whether MasterCard Inc.'s initial public stock offering in May and Visa's planned IPO will usher in new competition. “We get a lot of questions about whether they'll compete with us or not,” said Tomlinson, noting that TSYS and Visa co-owned Vital for 10 years. “I don't expect that to happen, but I think we can do more together in a commercial sense as time goes forward. There's nothing imminent there, and we're not having any serious conversations at this point.” Despite a respectable third quarter, TSYS is getting hit by some major customer defections, including business from two of the nation's three largest card issuers. Beginning tomorrow, Bank of America Corp., TSYS' biggest client, will start switching millions of consumer credit card accounts from TSYS to its in-house processing system. BofA was in the midst of a long-term contract with TSYS but changed course in the wake of its January acquisition of MBNA Corp., a top-tier card issuer that processed in-house (Digital Transactions News, Jan. 18). BofA and TSYS haven't disclosed the exact number of accounts to be switched, but they're all from the pre-MBNA BofA. The bank currently has about 40 million active credit card accounts, including MBNA, and probably at least twice that in total accounts. BofA will pay TSYS $69 million to get out of its long-term contract. TSYS also recently lost about 85 million Sears-branded retail and MasterCard accounts owned by Citigroup Inc. to rival First Data Corp., though the number of active accounts probably numbered fewer than 30 million. And the third Top 3 issuer, JPMorgan Chase & Co., next year plans to move tens of millions of accounts from TSYS to its new, in-house platform. Chase, however, will license TSYS' TS2 software as the foundation of its platform, mitigating the revenue impact. On the plus side, some 46 million Capital One Financial Corp. card accounts will have moved to TSYS from Cap One's in-house system by year's end, and several million more will come online next year, Tomlinson told analysts. Other new card-issuing clients include Puerto Rico-based Popular Inc.'s Banco Popular, Canada's TD Financial Group, an undisclosed large retailer, and the portfolio of Crosstown Traders, a catalog unit of apparel retailer Charming Shoppes Inc. In all, TSYS ended the quarter with 400 million card accounts on file, down about 30 million from a year earlier. “We're making good progress on our plan to deal with the loss of a couple of very large customers,” Tomlinson said. In the wake of its expected new business and cost cutting, TSYS now expects earnings to grow 26% to 28% this year, up from previous guidance of 21% to 23%. Next year, under the full impact of the BofA deconversion, earnings will fall 7% to 9%, less than the earlier-predicted 14% to 16%.