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Financial sector troubles pinch TSYS profits

The financial storm that has embroiled U.S. banking and lending firms in recent months contributed to a 4 percent decline in profits for credit-card processor TSYS, the company said Wednesday in its second-quarter earnings report.

Columbus-based TSYS, which employs about 4,400 people in Columbus, also lowered its profit estimate for the full year. It now expects to grow earnings per share5 to 7 percent instead of its previous projection of 7 to 9 percent.

"At the mid-point of 2008, we have seen many of our clients’ financial results suffering as a result of the slowing economies around the world and the worst turmoil we have ever seen in the financial markets," Phil Tomlinson, TSYS chairman and chief executive officer, said in the earnings report. "This has obviously had a negative impact on their performance and expectations, and we are no exception."

TSYS said net income for the three-month period ended June 30 came in at $63.1 million, or 32 cents per share, down from $65.7 million, or 33 cents per share, in the same period a year ago.

Wall Street had been expecting a 33-cent return, according to a survey of 16 brokerage analysts by investment research firm First Call Corp.

For the first six months of the year, net income was down from $123 million, or 63 cents per share, a year ago to $119.7 million this year, or 61 cents per share, a 2.7 percent drop.

Total revenue for the quarter, however, did climb from $460 million to $483 million, a 5 percent increase. For the six months, they rose from about $890 million to nearly $945 million, up roughly 6 percent.

Tomlinson, in a conference call with stock market analysts after the earnings release, said the wheels began to slip in late May when his firm noticed troubled companies cutting expenses and trying to renegotiate contracts with TSYS.

Wachovia, Fifth Third Bank and CompuCredit are among customers who have taken hits in mortgage and consumer lending as the housing and credit markets deteriorated in recent months. Fewer cards overall are being issued, cutting into growth in the number of accounts serviced by the local processor.

"I think a lot of it has to do with the internal card growth," Jim Lipham, TSYS chief financial officer, told the analysts. "We've got customers that have really slowed down."

Lipham said overall credit-card transactions — consumers using their plastic to purchase products and services — increased about 8 percent in the quarter. But that's down from typical double-digit gains.

Organic growth in revenue from existing customers also has tilted, Tomlinson said, dropping from 15 percent a year ago to 7 percent so far this year.

Card processing is TSYS' primary money engine. But it also gets paid for services like mailing out credit-card solicitations and maintaining inactive accounts for retailers and banks.

"I don't know about you, but in the last month I haven't received very many solicitations in my mailbox," Tomlinson said. "That has really slowed down here lately. We get paid for all of that."

The CEO, peppered with questions from the analysts about the economic downturn and its impact on TSYS clients, said that most banks today are "worried about a lot bigger things than credit cards."

One analyst, David Scharf of JMP Securities, said he was curious if the U.S. downturn might spread to Europe, an area in which TSYS is aggressively working to expand.

"I think in a lot of past downturns we've seen a slowdown start on our shores and kind of move their way across the Atlantic and ultimately make their way to Asia," Scharf said.

Tomlinson responded that there have been chinks surfacing in Europe, but no major declines are expected in the fast-growing card market. Europe represents nearly 16 percent of TSYS revenues so far this year, the company said.

Despite the dire tone to the earnings report, Tomlinson said the company is pointed in the right direction. He noted one key customer will add a million credit-card accounts this year, and that four other firms have signed letters of intent to do business with the TSYS.

"As soon as we're able to release some of these wins that we've got going on, I think you'll like what you see," the executive said.

Tomlinson said the fundamentals at TSYS — blue-chip clients, long-term contracts, strong cash flow, solid technology and an expansion strategy — remain strong and the company will hold its own until the economy rebounds.

"I think it will, at some point late in the fourth quarter or early next year, start picking up," he said of business with TSYS' banking and retail customers. "I know people want to grow these businesses. They're very profitable businesses."

TSYS

Exchange: NYSE

Ticker: TSS

Closing price: $22.12 Wednesday, up 7 cents

Market value: $4.38 billion

PE ratio: 18.43

52-week high: $30.99

52-week low: $18.76

Business: Processes electronic payment transactions on 373 million accounts (as of June 30) Processing includes credit cards, debit cards and stored-value cards.

Chairman and CEO: Phil Tomlinson

Employees: 7,582 worldwide; about 4,400 of those in Columbus.

Headquarters: 1600 First Ave., Columbus, GA 31902

Phone: 706-649-5220

Online: www.tsys.com

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