(April 19, 2006) Putting his best spin on a tough situation, processor Total System Services Inc. (TSYS) chief executive Philip W. Tomlinson today said he regards the credit card industry’s top three issuers as prospects for future business, even as all three begin or plan to take tens of millions of accounts off of TSYS’s system. Tomlinson’s comments came on a day when TSYS reported first-quarter earnings of $50.4 million, up 9.3% from a year earlier, on revenues of $412.3 million, an increase of 17.8% from 2005’s first quarter. And at least 75 million new card accounts are in the pipeline for conversion onto TSYS’s system.

Behind the rosy numbers, however, are some serious threats. Bank of America Corp., TSYS’s biggest customer that in January acquired issuer MBNA Corp., will deconvert its consumer credit accounts in mid-October and place them on MBNA’s in-house system, creating a $140 million revenue shortfall for TSYS. Citigroup Inc. in May will switch its Sears Holdings Corp. portfolios, with an estimated 20 million-plus accounts, from TSYS to rival First Data Corp. And JP Morgan Chase & Co., which only recently switched more than 80 million bank credit card accounts from First Data to TSYS, eventually plans to take the processing of its cards in-house by licensing TSYS’s TS2 software.

Despite all that, Tomlinson denies there is an in-house processing move afoot among card issuers. “I absolutely don’t think it’s a trend,” he said during an analysts’ conference call this morning. He noted that Citi and BofA/MBNA would remain users of TSYS’s commercial card or merchant processing services. “We’ll continue those relationships and we’ll continue to do everything in our power to expand those relationships,” he said. In addition, Capital One Financial Corp. will soon convert its U.S. card file from in-house processing to TSYS, and a large retailer, which won’t let TSYS disclose its identity, also is becoming a customer of the Columbus, Ga.-based processor.

Regarding Chase, Tomlinson said that a licensing deal with the issuer would generate lower revenues than a straight processing contract, yet actually would be more profitable. But he clarified his position in response to an analyst’s question about why he’s still trying to convince Chase to remain a processing customer. “Certainly the [processing] margins would be absolutely very strong and it would be very, very profitable,” he said. “We really don’t consider ourselves to be in the software sales business. We are in the card processing business and that’s what we think we are good at and what we are passionate about. We would like to convince anybody to stay with us long-term under the recurring revenue model.”

TSYS has identified $35 million in cost savings and continues to search for more as it prepares for the BofA deconversion. Making the job difficult is the fact that TSYS must maintain a full complement of staff, computer systems and support services until the last day, Tomlinson said. Somewhat cushioning the blow will be a one-time $69 million early-out payment from BofA.

Despite the turmoil, TSYS still expects profits to grow 21% to 23% this year, aided by new accounts, international growth, cost cuts and earnings from some of the company’s other businesses. “We have felt a little battered over the past six months but we’ve got our balance back,” Tomlinson said. One recent development is TSYS’s decision, announced this week, to rebrand its merchant-acquiring operation, formerly known as Vital Processing, as TSYS Merchant Acquiring in a bid to better position the unit to compete for acquiring contracts in overseas markets where TSYS is strong. The move, together with TSYS’s acquisition from Visa USA last year of the 50% stake in Vital it didn’t already own, gives TSYS a strong position on both the acquiring and issuing sides of the card-processing market, much like rival First Data.

First Data is scheduled to release its first-quarter financials Thursday afternoon.