TSYS reports $49.3 million profit, says it has exited Japanese market

Net income down 13.5 percent from year ago as expenses climb in first quarter

tadams@ledger-enquirer.comApril 22, 2014 

TSYS Riverfront Campus

JOE PAULL — jpaull@ledger-enquirer.com

Global credit-card processor TSYS on Tuesday reported a first-quarter profit of $49.3 million, or 26 cents per share, with the company also saying it has exited the Japanese market after nearly 14 years there.

The company’s profit, or net income, was down from $57 million, or 31 cents per share, from the first quarter of 2013, a decline of 13.5 percent.

Total revenue for TSYS, which is headquartered in downtown Columbus, came in at $592.8 million, 32-percent higher than the $532.8 million the company racked up in the same January-March period a year ago.

“As expected for the quarter, our expenses grew faster than our revenue growth,” said Troy Woods, TSYS president and chief operating officer, during a conference call with brokerage analysts who follow the firm.

“These extra expenses are primarily the result of increased incentive pay, and phase one and two of our market salary adjustments that I mentioned during last quarter’s call,” he said. “Historically, our first-quarter (profit) margin is the lowest quarter margin of the year and this year will be no different.”

A significant portion of Tuesday’s conference call was directed toward the departure in Japan, with TSYS selling its subsidiary, TSYS Japan Inc., to a group of former executives who once ran the operation. It also sold its 54-percent stake in GP Net Corp. to Visa, which was already a minority investor.

“I hope that these dispositions didn’t surprise anybody as I’ve mentioned on numerous occasions over the past several years that we were not happy with our progress and our growth in Japan,” said TSYS Chairman and Chief Executive Officer Philip Tomlinson, who started the call off by saying the company had met all of its internal goals for the quarter.

Tomlinson also mentioned TSYS had purchased an additional 15 percent of the firm, Central Payments, bringing its ownership to 75 percent.

He also noted a recently signed contract to process cards for Virgin Money in Europe, and the news Monday that NetSpend — a major acquisition by TSYS last summer — is partnering with Western Union to market a prepaid card. NetSpend specializes in prepaid cards for those consumers who don’t want a traditional bank account or can’t have one for some reason.

Later in the call, Woods further explained the decision to leave the Japanese market was very deliberate and strategic. Since 2011, TSYS has been assessing all of its lines of business in international markets.

“One of the outcomes of this exercise was a plan to streamline our operations, and to (focus on) the markets and business lines that we felt would give us the highest returns and align with our long-term strategic goals,” he said.

That meant selling TSYS Japan, an issuer-processing business with a technology center in Okinawa, and its stake in GP Net, a company that provides point-of-sale terminal (transaction) services. In essence, Woods said, the processing market is too crowded in Japan, and a handful of large financial institutions there do their own credit-card processing.

“After assessing the size of the investment required to enhance our processing platforms, and balancing that investment against the low likelihood of successful penetration of scale needed in the processing market, we decided to exit the Japanese processing segment,” he said.

In Tuesday’s report, TSYS said it had classified the Japan business and the final $16.2 million of revenue there as “discontinued operations.” Other financial highlights of the first quarter included $50.6 million in income from continuing operations, which led to adjusted cash earnings per share of 38 cents. Market analysts who follow the firm were expecting 43 cents per share in that area.

TSYS reported that transaction growth in its North American card-issuer processing business rose nearly 13 percent, the 18th quarter in a row of year-over-year growth. Woods said half of the increase was from several retailers having to reissue credit cards because of a string of security breaches.

On the international side, there was 19 percent transaction growth overall.

Revenue from NetSpend climbed 13 percent, the company said, with the prepaid specialist adding more than 2,000 retail locations to its distribution footprint. It also added 70 PayCard clients.

Woods pointed out the TSYS pipeline will remain filled with new card accounts being converted to its high-tech processing system. He mentioned new contracts with IberiaBank and Trustco Bank, along with contract extensions with Toronto Dominion, Canadian Tire and Bank of Nova Scotia.

“All of our conversion activities are green and on schedule,” Woods said. “We have converted just over 800,000 accounts already this quarter, leaving approximately 4.2 million left to be converted. This will leave us with approximately 91 million accounts to convert in the third quarter, finishing up the largest conversion pipeline in our history.”

That doesn’t include the 600,000 accounts that TSYS expects to convert to its system for Virgin Money in 2015.

“While the metrics for the quarter are lumpy when compared to last year, we believe the underlying trends for this quarter — like 8.9 percent account-on-file growth, and 19 percent transaction growth — as well as our other growth initiatives, will keep us on track to deliver both our revenue growth and margin targets for the full year.”

TSYS reaffirmed its revenue guidance for all of 2014, saying it still expects to grow that number between 20 percent and 22 percent over 2013.

In trading on the New York Stock Exchange Tuesday, TSYS shares rose 24 cents, or 0.8 percent, to $29.20. The stock’s 52-week trading range is $22.58 to $33.44 per share.

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