Credit-card processor TSYS experienced solid revenue growth in the second quarter. But expenses related to the $1.4 billion purchase of prepaid card specialist, NetSpend, took a bite out of the company’s profit.
TSYS, headquartered in downtown Columbus, reported net income of $57.7 million in the quarter, down nearly 13 percent from $66.7 million in the April-June period a year ago.
That equates to diluted earnings per share of 31 cents, down more than 12 percent from 35 cents a year ago. It missed the 33-cents-per-share consensus estimate of 18 Wall Street analysts polled by Thomson Financial.
TSYS, which closed its mammoth acquisition of Austin, Texas-based NetSpend on July 1, said expenses connected to the deal were nearly $8.2 million in the quarter and about $14.4 million in the first half of 2013. That included financing costs and professional fees, such as legal services to complete the deal.
Excluding those numbers, earnings for the quarter would have been 34 cents per share, while they would have been 67 cents per share for the first half of the year, instead of the reported 61 cents per share.
First half net income was $114.7 million, nearly 7 percent off the $125.6 million a year ago.
The earnings hit was the toughest aspect of the processor’s second-quarter report. Beyond that, TSYS Chairman and Chief Executive Officer Phil Tomlinson, as he has in the past, called the NetSpend purchase a “transformational event for us.”
Said the CEO in a statement: “The next two years will be very exciting as we work on the integration of NetSpend. We also plan on growing the prepaid program management business and converting the largest pipeline of accounts in our history over the next two years.”
The company is now working to convert about 90 million accounts to its TS2 processing system, including a Bank of America consumer portfolio.
The bread-and-butter business for TSYS is charging to manage the authorization and completion of credit and debit card transactions by consumers. That includes cards used at supermarkets, gas stations, restaurants, retailers and online purchases.
Troy Woods, TSYS president and chief executive officer, stepped in for Tomlinson on an analysts conference call to discuss earnings information. The CEO is suffering from laryngitis.
“By almost any performance measurement, the second quarter was a very good quarter,” said Woods, who pointed to double-digit increases in transactions and accounts on file. The latter at the end of June was 489 million accounts, up 11 percent from 440 million a year ago.
“These metrics are very important as transactions and accounts on file represent approximately 50 percent of our issuing revenue,” he said.
Woods also noted that TSYS originally was scheduled to convert 26 million accounts to its system this year — meaning they would start generating revenue — but about 13 million were shifted into 2014 for various reasons. That will leave the 90 million North America accounts to convert.
“The not so good news is it will just take them a little longer to get them all converted,” he said. “But get them converted, we will.”
Naturally, a hot topic this earnings day was NetSpend, which brings aboard 500 employees and expertise in the fast-growing prepaid card market. That segment serves those who either can’t get a checking account or credit card because of financial problems with their financial history, or simply don’t want to use a bank.
There are an estimated 68 million in that category, said TSYS. That business is expected to double over the next four to five years, it said. NetSpend currently only has 5 percent of the market.
The Texas operation becomes a subsidiary, with TSYS upgrading its overall revenue guidance for the year based on the money that will now be flowing in from NetSpend. Total revenue should range between $2.13 billion to $2.18 billion this year, the company said. That would be an improvement of 14 to 17 percent over 2012.
TSYS, which now employs roughly 9,200 people worldwide, with more than 4,500 of those in Columbus, financed the NetSpend purchase through the issuance of $550 million in five-year senior notes (loans through the bond market) and $550 million in 10-year notes. The balance comes from a $200 million term loan and a $100 million revolving line of credit.
The average interest rate for the financing is 2.8 percent, said TSYS Chief Financial Officer Jim Lipham. He noted the company expects to pay the debt off at a rate of about $20 million per month.
Tomlinson said the expenditures are worth it.
“The opportunity to capture greater market share is within our reach,” he said in the statement. “NetSpend’s mission is to empower consumers with the convenience, security and freedom to be self-banked, which aligns with TSYS’ brand promise to improve people’s lives and businesses by putting people at the center of payments.”
Earnings per share aside, TSYS did see total revenue rise both in the quarter and the first half of the year. For the quarter, revenue was $478.4 million, up 3.4 percent from $462.6 million in the same period last year. For the first six months, revenue came in at $943.4 million, 2.1 percent better than $923.8 million last year.
The business model for TSYS typically experiences a revenue increase in the second half of each year, particularly as the holiday shopping season approaches and consumers start pulling out their plastic to make purchases.
The company noted that its earnings results also were impacted negatively by an “unfavorable currency translation” amounting to $6.2 million. That’s primarily due to its business in Japan, with the yen-dollar rates constantly fluctuating.
TSYS released its second-quarter report Tuesday after the stock market’s close. Shares were up 36 cents, or 1.4 percent, at $26 even. The stock’s 52-week trading range is $21.10 to $26.25 per share.