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Total System Services Inc. (NYSE:TSS) is scheduled to report its second quarter 2010 results after the market closes on Wednesday, July 21. The Zacks Consensus Estimate for the second quarter is 23 cents per share, representing a negative growth of about 16% from the year-ago quarter.

The credit card regulation is going to impact the number of client accounts and long-term contracts adversely. Hence, we do not foresee any substantial development strategy to drive Total System’s earnings growth in the near term.

Previous Quarter Performance

Total System’s first quarter operating earnings came in at 26 cents per share, flat with the year-ago quarter. However, they were well ahead of the Zacks Consensus Estimate of 23 cents per share.

The surge in profits of Total System was attributable to a slight upside in revenue and the absence of loss of discontinuing operations in the reported quarter. However, this was partially offset by higher-than-expected cost of services and reduction in accounts on file.

Total revenue reached $415.4 million in the quarter, up 1.6% as against $408.9 million in the year-ago quarter. On a constant currency basis, total revenue was $409.5 million, reflecting a 0.1% increase from the year-ago quarter. Reimbursable items increased 11.5% year over year to $70.8 million. Except the revenues from North America, the segments of merchant acquiring services and international services posted increased revenues in the quarter.

Guidance for 2010

Total System updated its guidance for the fiscal year 2010 in the first quarter and expects income from continuing operations of $189−$194 million or 96−98 cents per share (down 12%−14% year over year). The company also projects revenues in the range of $1.71 billion to $1.75 billion (up 1%−3% year over year), with reimbursable items in the range of $279–$284 million (up 3%−5% year over year).

In addition, the acquisition of 51% of First National Merchant Solutions LLC is expected to contribute $95−$97 million to the company’s total revenues, $2−$3 million to net income, and approximately 1 cent per share to basic earnings in fiscal 2010.

Total System’s guidance for 2010 includes the impact of de-converted portfolios, price compression, reduction in one-time termination fees and currency impact, and the current economic environment of the credit card market.

Earnings Estimate Revisions – Overview

Ahead of the earnings release, we do not see much variation in analyst estimates over the past 30 days. A similar trend is seen over the past 7 days. Hence, the estimate revision trends and the magnitude of such revisions justify no major changes in the sentiment for the stock.

Agreement of Analysts

In the last 30 days, none of the analysts have revised their estimates for the second or the third quarter, or for fiscal 2010 or 2011 either, thus providing no directional movement. This implies that the analysts are neutral on the outlook and do not foresee any upward catalyst or downward pressure on the result.


Magnitude of Estimate Revisions

In the last 30 days, there has been no change in the earnings estimate for the second quarter, third quarter and fiscal 2010 as seen from the magnitude of the Consensus Estimate trend. Estimate for fiscal 2011 moved down by a penny from earnings of $1.06 per share to $1.05. Therefore, the analysts expect the company to report in line with their estimates.

The limited number of changes to estimates also indicates that there were no major catalysts during the quarter that could drive results. Consequently, analysts are sticking to the post first-quarter earnings estimates.



Earnings Surprise

Considering earnings surprises, the stock has been almost steady over the last four quarters. We have seen positive surprises in two quarters, which imply that the company has beaten the Zacks Consensus Estimate by that magnitude over the last two quarters. We have also seen earnings surprise move in tandem with management in two quarters, which currently stands at 0.0%.

The average remained positive at 8%.


Our Take

Total System has a risk free balance sheet along with a strong cash position and modest cash flow generation. The cash equivalents are short-term, highly liquid and readily convertible, which signify an insignificant risk of changes in value because of change in interest rates.

Total System also has viable scope for acquisitions. Its pipeline of international opportunities is able to drive growth.

During the first quarter, Total System announced a new stock repurchase plan to buy back up to 10 million shares of its stock over the next two years. However, we believe that the company continues to favor acquisitions over buybacks.

Additionally, we believe Total System will report second quarter results consistent with the company's 2010 outlook, with fewer accounts on file on a year-over-year basis. In addition, inefficient cost cutting, currency risk and consumer de-leveraging will continue to present some challenges.

Over the past few years, Total System has been adversely impacted by bank consolidation and the slowdown in credit card transaction growth. We expect to see incremental costs and risks for Total System as a result of the Credit CARD Act of 2009, which was recently signed into law.

Overall, Total System warrants a bleak near term outlook, given the challenging year ahead due to the ongoing sluggish growth in the global economy. Further, we do not see any substantial catalysts on the near-term horizon and expect Total System to reiterate its full-year 2010 revenue and EPS guidance.

The quantitative Zacks #3 Rank for Total System denotes short term ‘Hold’ rating, indicating no clear directional pressure on the shares over the near term.