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Total System Services' Genius Billion-Dollar Attempt to Jump-Start Growth

By Matthew Cochrane - Feb 1, 2018 at 7:33AM

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The payment-services company just made a billion-dollar acquisition that management believes will help the business keep up with the ever-increasing competition.

Fintech, the business of leveraging technology to more efficiently accomplish traditional financial services, is quickly changing the banking and payments landscape. Existing companies in this niche are facing challenges from multiple directions. To survive, they must navigate turbulent waters with fast-growing fintech start-ups and large financial companies trying to crowd out others in the space.

Judging by its fourth-quarter earnings, it would appear that, thus far, Total System Services, Inc. (TSS) is one of the survivors. Total System Services, or TSYS as the company commonly refers to itself, operates three separate divisions: issuer solutions, merchant services, and netspend. Issuer solutions provides services to credit card issuers such as processing credit card applications, embossing cards, and fraud management. The merchant services segment provides payment-processing capabilities to retailers so they can accept card payments at the point of sale. Netspend provides general-purpose reloadable prepaid debit cards to underbanked consumers.

Total System Services' sign outside the front of its corporate headquarters.

Total System Services acquired Cayan for about $1 billion to help keep technological pace with its payment-processing competitors. Image source: Total System Services, Inc.

For the full year, TSYS saw its net revenue rise to $3.4 billion, an 11.8% increase, and adjusted diluted earnings per share (EPS) climbed to $3.37, a 20% increase. The results fueled another move up for Total System's stock price, which has now appreciated more than 70% in the last year. But beyond the strong numbers, TSYS believes an acquisition it just finalized will provide a further boost to its top and bottom lines in the years ahead.

Metric Q4 2017 Q4 2016 Change
Net revenue $870.6 million $785.7 milllion 10.8%
Adjusted EPS $0.82 $0.70 16.5%
Operating margin 27.8% 28% (20 basis points)

Data source: Total System Services, Inc. 

A Genius acquisition

Late last year, Total System announced it would be acquiring Cayan, a payment solutions company that brings a strong omnichannel suite of products to TSYS. Cayan's flagship program is Genius, a customizable and scalable platform that integrates processing, payment acceptance, and customer experience. The platform is cloud-based, automatically updating all Genius hardware as software updates become available. Security is ensured by encrypting and tokenizing all customer data. The deal was announced on Dec, 18, 2017, and closed just 24 days later, on Jan. 11, 2018. The acquisition was an all-cash deal for approximately $1.05 billion.

In the press release announcing the acquisition had been finalized, CEO M. Troy Woods stated:

This strategic acquisition builds on our very strong foundation in the acquiring space and will support our goal to become a leading payments solutions provider to small and medium size businesses in the U.S. The addition of Cayan creates great synergies to identify best-in-class opportunities that will drive revenue. Together, we will continue focusing on developing products, technologies and services that merchants we serve want and need to continue to grow.

In the company's fourth-quarter conference call, Woods went further and called the deal a "game changer" for TSYS.

In the fourth quarter, the merchant solutions business segment accounted for 33% of Total System Services' revenue and grew to $282.7 million, an 11.3% increase year over year. If this segment continues to grow thanks to the Cayan acquisition, it should in turn provide meaningful improvement to the company's top and bottom lines.

Running with the herd or leader of the pack?

Unfortunately, while TSYS can undoubtedly improve the offerings and services it provides to merchants as a result of the Cayan acquisition, it's still not clear that the acquisition puts the company on an equal footing with its competitors. For instance, last summer, First Data Corp. (NYSE: FDC) acquired CardConnect Corp. for $750 million, which theoretically gives First Data capabilities nearly identical to the ones Cayan gives TSYS.

Another competitor, Square Inc. (SQ -0.81%), offers Square for Retail, a platform specifically developed with the needs of retailers in mind that features bells and whistles like real-time inventory and employee management.

And last summer, Global Payments Inc. (GPN -2.19%), another payment-processing company, acquired ACTIVE Network, which makes software-management tools for things like event planning, youth camps, and sports leagues. In addition, Global Payments now offers Xenial, a payment-processing platform for restaurants; its capabilities include ordering, menu management, and data analytics.

It's exceedingly apparent that the payment-processing industry is no longer the staid sector where companies simply had to provide card-accepting hardware to retailers. Companies that refuse to keep up with the technological innovation brought to the space by upstarts such as Square will fall further and further into irrelevancy. Total System's latest quarter shows the company is still thriving; its acquisition of Cayan demonstrates an understanding of what's at stake if it refuses to up its game. The deal may or may not place TSYS on par with its payment-processing peers, but it will definitely help it keep existing customers and attract new ones. It also signals to investors that Total System Services wants to stay on offense and keep those quarters of double-digit-percentage growth coming.

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