TSYS celebrated its 20th anniversary in 2003, marking two decades of increased earnings and revenues. We achieved our expectations with a solid performance that will most likely be remembered in our history as a year for important new client relationships, disciplined cost control, strategic assessment and leadership transitions.
Leadership. As your new chief executive officer, it is an honor and a privilege to join Rick Ussery in presenting this report. After almost two years of planning, we announced that Rick would continue as chairman of the board, and Troy Woods would join the board and serve as the company’s new president and chief operating officer. Rick has served as the company’s most senior officer for its entire history. In that time, he has earned a reputation as one of the top-performing CEOs in Georgia and our industry.
The year brought other leadership changes as well. Kelley C. Knutson joined us as managing director of TSYS Europe, after holding leadership positions with GE Capital, Visa International and other firms. John T. Turner, former president of Bradley Specialty Retailing and Bradley Marketing Services in Columbus, Ga., joined our Board of Directors in the fourth quarter and will stand for election at this year’s shareholders’ meeting.
Performance. The company earned $.72 per basic share for the year, up 12.2% over 2002. Revenues increased 10.3% to $1.05 billion, surpassing that milestone for the first time in 2003.
Accounts on file increased 11.4% for the year, continuing our record of outperforming the industry. Peak-season transactions increased 17.5% over 2002, and authorization volumes exceeded one billion in three straight quarters.
Operating income gained 20.9% in 2003, and the operating margin increased to 18.1% from 16.5% a year ago, expanding for the fifth straight year. Six Sigma initiatives launched in 2003 are already improving quality and efficiency that contribute to these results.
Several events contributed significantly to our solid performance. TSYS acquired ESC Loyalty (Enhancement Services Corporation) of Roswell, Ga., a firm that specializes in loyalty incentive programs for more than 40 financial institutions, including two of the top 10. Revenues from international clients increased 36.9% over 2002, primarily a result of new clients in Canada and Europe. TSYS entered a long-term relationship with Bank One Corp., the No. 1 issuer of Visa accounts in the world.
Since 1983, TSYS has reported compound annual growth of 22.2% in revenues, 23.8% in net income and 24.8% in accounts on file. This is a worthy track record. But we must remain focused on the challenges ahead.
Industry events. The recent burst of consolidations in the bankcard industry has been remarkable. The industry reported 61 full or partial portfolio sales in 2003, a trend that’s continuing in 2004. Consider a few notable events from the last six months. Citibank bought the Sears portfolio. FleetBoston Financial Corp. bought a segment of Circuit City’s portfolio, and then Bank of America announced its planned acquisition of Fleet. J.P. Morgan Chase & Co. announced a merger with Bank One, and then Bank One bought the balance of Circuit City’s card business.
Overall, I am optimistic that these events may ultimately bring positive results for TSYS. In the case of Bank One, the company’s leadership team has advised us to continue the conversion that’s planned for the second half of this year.
That project is proceeding according to schedule. After the conversion, TSYS will service the portfolio for at least two years, and then Bank One will move the business inhouse in a licensing arrangement.
Other events in 2003, however, have staged 2004 as one of the more challenging years the company will experience. Mergers and acquisitions caused several important clients in Mexico to move to various inhouse alternatives. These events will reduce revenues by $40 million in 2004 as we experience the impact of higher expenses related to expanding infrastructure for future growth. In addition, Vital Processing Services, our joint venture with Visa U.S.A, also offered pricing concessions to some large clients in exchange for extended service agreements.
Based on these events, TSYS projects revenues are expected to increase 11-13% over 2003, and earnings per share are expected to increase 5-7%. I recognize that this forecast is lower than our historic year-over-year performance, and I am not satisfied with this projection. But our leadership team has managed other difficult transitions, and I am confident that we have the experience to make the right decisions now.
The fundamentals. In my opinion, 2004 will be a transitional year. Our forecast for the year does not reflect our long-term growth opportunities or strong fundamentals. Let’s take a fresh look at the basics.
Consumers continue to choose their payment cards over checks and cash in growing numbers, a sea-change that will favor our core business for many years ahead. In 2003, cash and check transactions dropped to 59.9% from 63.1% of all payments since 2001, while cards and other electronic forms have increased to 33.6% from 31.9% of all payments. Most analysts agree that electronic payments will overtake paper-based payments by 2007. And among card-based transactions, debit payments are gaining much faster than credit payments. These trends indicate our core business — processing payments and other related functions — is on the right track.
Today, TSYS captures only 12-15% of an institution’s direct expenses to manage an active account. We’re working to win a greater share of that value chain, and we’re succeeding: revenues from value-added services increased 22.1% in 2003.
TSYS has established strong positions in markets like Canada, Ireland and the United Kingdom. But to date, TSYS processes only 6% of the total non-domestic payments market. There’s plenty of opportunity ahead; we are focused intently on specific markets in Europe and the Asia-Pacific.
Another segment of unrealized potential lies in the debit and prepaid products group, in which we are aggressively pursuing specific opportunities for growth.
The future. Our management team is making decisions today that will create the momentum for healthier growth in 2005, when earnings per share are expected to increase 10-15%, based on a few key assumptions: that revenues will increase 10-12%, including 6-9% growth in revenue from existing core-processing clients; that earnings from Vital Processing Services will increase at least 5%; and TSYS will not incur any significant client losses through 2005.
With the right set of strategies and proper execution, I am confident that TSYS can return to even higher growth rates. But there are no “silver-bullet” solutions for higher growth. Instead, TSYS will be successful in the future because we are focused on our core business and selective about the opportunities we choose to pursue. As we diversify our business and search for acquisitions that complement core operations, we must execute all of these plans methodically, one step at a time, to achieve consistent growth.
I said that 2004 is a transitional year, but TSYS is not a company that’s accustomed to “transitional” results. Our team is focused, disciplined, dedicated, selfless and enthusiastic. Every team member aims to make TSYS the best in every market where we compete. We are not satisfied with any effort that falls short of that goal. Thanks for your continuing support.
Respectfully,
