Sector Watch: Transaction processing services
Transaction processing services for government agencies is a large, growing market. Companies that provide these services under long-term contracts with the U.S. government enjoy years of recurring revenues since contract terms typically range from two to ten years.
A large market for electronic payment processing is developing around tax collection. The Taxpayer Relief Act of 1997 authorized the U.S. Treasury to accept credit and debit card payments for federal taxes. In 2006, the IRS expanded credit card payment options to include business tax payments. Between 2001 and 2006, the number of taxpayers making card-based payments grew 47% annually, to 2 million from 288,000.
Despite this rapid growth, credit/debit card payments currently represent just 1.2% of personal and business taxes paid, suggesting a large, untapped market.
The total market for personal and business federal tax payments exceeded $1.8 trillion on a net basis in 2006. The state tax market also presents significant growth opportunities. State tax receipts were estimated at $706 billion in 2006, with individual income taxes representing $244 billion of the state total and sales taxes accounting for $226 billion of the total. Of the 50 states, 26 have already adopted card-based payments. The local market for tax payment processing consists of some 3,000 counties, 13,500 school districts, 16,500 townships and more than 19,400 municipalities across the United States.
Other payment processing opportunities in the public sector include university tuition payments and utilities bills. According to the U.S. Department of Education, there are 6,400 degree-granting colleges and universities in the United States serving 17 million students and generating annual tuition payments of $230 billion. The U.S. Census recorded 6,700 public utilities across the United States generating consumer payments totaling nearly $400 billion annually.
Tier Technologies
Tier Technologies, Inc. (Nasdaq: TIER) is benefiting from demand for outsourced payment processing services by public sector. Tier provides transaction processing services to federal, state and local government agencies. Its primary business is electronic payment processing, including payment of taxes and fees owed to government entities. Tier’s clients include more than 3,100 federal, state and local government agencies, educational institutions, utilities and commercial customers.
During its second quarter ended March 31, Tier increased revenues in its Electronic Payment Processing segment 32% year-over-year to $20.4 million. Total revenues increased 7% year-over-year to $40.3 million, and net income rose to $3.7 million, or $0.19 per share, from a net loss of $5.0 million or $0.26 per share, in the year-ago second quarter. Analysts expect Tier will produce 79% growth this year, six-fold growth next year and 20% annual growth over the next five years. Our $13 target for Tier is more than 45% above the recent share price.
On Tuesday, Tier closed $0.15 lower at $8.79. The 52-week higher of $10.05 was established June 8, while the 52-week low of $5.85 occurred a year ago.
Stanley
Another company benefiting from transaction processing outsourcing by the public sector is Stanley, Inc. (NYSE: SXE).
In October 2006 Stanley was awarded a 10-year contract by the U.S. federal government to operate a passport production center in Arkansas. On March 27, the company opened the Arkansas Passport Center (APC), a mega-processing center that is the U.S. State Department’s largest passport production center. Under the terms of the contract, Stanley is responsible for directing facility operations and the printing, quality control and mailing of U.S. passports and other travel documents. At full capacity by year-end 2007, the APC will produce more than 10 million passports per year.
The State Department established the APC to meet increased passport demand resulting from new passport rules that are part of the Western Hemisphere Travel Initiative. It is estimated that over 17 million passports will be produced in 2007, compared with 12 million in 2006. Stanley has more than 1,000 employees and subcontractors working on State Department contracts and has worked with the State Department since 1992, beginning with operations at its National Passport Center in New Jersey.
During the fiscal year ended in March, Stanley’s revenues increased 44% to $409 million, from $285 million, while net income grew 29% to $10.7 million, or $0.55 per share, from $8.3 million, or $0.51 per share, the previous year. June quarter revenues grew 44% year-over-year to $133.5 million, and per-share earnings at $0.23 were up 53% year-over-year and above analyst estimates. Analysts expect Stanley to produce 50% growth this year and 20% growth next year and over the longer-term.
On Tuesday Stanley established a new 52-week high of $22.84 before closing 4.7% higher at $21.60. Our target is $25.
