Global Payments Inc. (GPN) Earnings Call Transcript & Summary

Great. Thanks, everyone, for joining. I think we're live. This is Tien-Tsin Huang. I cover the payments and processing IT services sector at JPMorgan, and welcome to the All Stars Virtual Conference. We're supposed to be in London right now, Jeff. But we're doing it virtually, of course. Hope everyone is safe. So with us, we've got Jeff Sloan, the CEO of Global Payments. Really excited to have them back. We're going to do a fireside chat. We'll do a bunch of questions that I've accumulated from the investor audience, Jeff. But then we're also going to take some questions from the group as well. I think the instructions are to e-mail those directly to me through the system, and I'll do my best to hit all those questions. So Jeff, thanks again for joining us. Hope you're well. Great to see you.

Thanks for having us, Tien-Tsin. It's a pleasure to be with you here.

No, I know it's -- you're really, really busy. So thanks for spending a few minutes with us. So I thought I'd kick it off, Jeff, with sort of a big theme in payments and fintech right now, which is this modern and legacy debate, new versus traditional, digital versus legacy. And I'm curious how you would answer this question of where does Global Payments fit in that spectrum of digital and modern versus legacy and traditional? I know you've made some very smart early bets on tech-enabled and software-owned and you coined a lot of those modern statements for us. So from a tech perspective and from a distribution perspective, Jeff, where does Global Payments fit in that spectrum, if that makes sense?

Yes. Certainly happy to answer, Tien-Tsin. And I think a really good way to think about it upfront is 60% of our business today is technology led, which is to say we're either selling our own software into our distribution channels or we're partnering with a software company to do the same thing or we're selling our e-commerce and omnichannel solutions directly to merchants worldwide. So that 60% number is a target that we set back in 2018. If you go all the way back to when we actually started running the company, believe it or not, at this point, Tien-Tsin, almost 7 years ago to the day today, that number was probably like 30%. So we've taken our business from 30% selling technology and digitization up to 60% today, and we're very proud of it. Now let's break that into pieces because I think it gets to your point of how digital really is the company. So our biggest segment at the company is our e-commerce and omnichannel business in our merchant segment. 20% of our revenue today in our merchant segment, our biggest single channel is coming from our e-commerce omnichannel segment. We announced in the second quarter call in August, a month ago, Tien-Tsin, that that business grew 16% top line year-over-year ex-T&E. That compares to GDP shrinkage of what minus 32 here in the United States, probably minus 10 in Europe. So that business grew 50 points better than the U.S. economy. So we're really pleased with that business. We announced a whole series of wins in that business, including the win we have with Citi last fall, which is now up and live in multiple geographies around the world, U.S., Canada and United Kingdom. Our second largest business in our merchant business, as you know, is our Global Payments Integrated business, which you alluded to. That's another 20% of our merchant business. So you've got e-com is 20%, another 20% is our integrated business. As you know, that business was growing high teens organically, probably for the last 6 quarters up until the pandemic start at the end of March. And as you know, Tien-Tsin, also, we've owned that business for 8 years going back to APT in 2012. We've probably got 8 years with double-digit growth in that business organically by quarter as far back as you can go. And obviously, the merger with TSYS brings us additional assets like ProPay, really into that business segment, which we're very proud with. And elements of that business returned to growth in June. We also said that on our August call for the second quarter. A third piece of our business is our owned software business. That's also about 20% of our revenue. So now we have 60% of our revenue in the 3 segments in merchant, in the 3 segments I mentioned a minute ago. It depends on which software piece we're talking about, but look at AdvancedMD, as we said in the call, in the second quarter we had all-time record bookings and revenue in that business in the month of June. We did something like 0.5 million telemedicine visits in the second quarter, up from like 50,000 in the first quarter of 2020. So a clear beneficiary of the trend coming out of digitization, coming out of the pandemic. If you look at our Xenial QSR, our enterprise quick-service-restaurant business, where we have 26 of the top 50 brands like Burger King, Popeyes, Tim Hortons, In-N-Out Burger, et cetera, that business has largely gone back where it needed to from a bookings point of view because we're selling omnichannel solutions. So buy with your phones, pay with your thumb or your face, have it delivered to you through DoorDash or Uber Eats or go pick it up on an integrated basis through the drive-through. So again, a great place to be from an enterprise QSR business. And lastly, I would say, our Heartland business, 2/3 of our new sales, and I think Cameron said in our second quarter call, that we set record new sales volumes in Heartland in June and July. And by the way, our integrated business for the second quarter met its new sales budget in the second quarter, up 30% year-over-year on the partner side because we're selling technology. So in our Heartland business, 2/3 of the sales in the second quarter were semi-integrated or technology-related solutions. So I think to answer your question, 60% of the merchant business today and probably the vast majority of the growth is really coming from digitization. That's before you can get to the issuer business and our partnership, the announcement we made with AWS in July on the August call, which really sets up a fantastic next 5 to 10 years for transformative technology growth and distribution to get all the digital channels that we need to be in, in the context of TSYS issuing. And then lastly, I'll just say our Netspend business, which we announced on the call also, 25% to 30% of the transactions in that business are online, even had people signing up for prepaid online or spending it online in the grocery and pharmaceutical space. That business grew 11% organic revenue last quarter. Record operating income, record margins over the last 10 years, and that trend is sustained beyond the disbursement in May into June and July, as we said in the August call. So if you put it all together, I think our focus on digitization is really what enabled us to meaningfully outperform the market. And look at Visa and Mastercard, our overall business down 14% of revenue, down 13% in earnings. Those guys were down 17% to 19% in revenue, down 25% in earnings. And the reason is we're gaining share. We're focused on digitization, they represent the market. Our ability to invest in the areas I just described, it's what's driving our outsized growth. So I think we're knee-deep in the digitization. And thankfully, for us, it plays into our favor even in the midst of the pandemic.

Yes. It's great to get through a lot of that. That's a good way to summarize it, Jeff. You mentioned the AWS deal. And I wanted to drill into that, if you don't mind, within the context of the issuer business, because you and I haven't had a lot of chance to get together. I know we always talk about merchant, but I don't want to leave the issuer side alone here because it's important. So sort of a 3-part question within issuer. Can you give us a little bit more on the AWS partnership, right? And then I'm really interested in the installment offering that you guys also announced with Mastercard. Buy now, pay later is a really hot area right now, Jeff. You already know that. I actually had a chat earlier with Dan Schulman, we talked quite a bit about their installment product. And then lastly, just an update on recent wins and pipeline. But maybe if you could start with AWS, how could that evolve here? You mentioned 3, 5, 10 years, but what are some of the milestones we should watch on that as you stand something up within AWS?

So it's a great question, Tien-Tsin. And there are 2 elements to the AWS deal that we announced at the end of July. The first one is really technology transformation. So like most of our folks like Fidelity and Fiserv, we compete in that business largely with mainframe technologies, in codes and architecture that were written some time ago. As you would imagine, the TSYS business is around since like 1983, right? So at the end of the day, those businesses historically, not surprisingly, given their own customer base, have largely been legacy in nature. So the first part of what we're doing with AWS is really transforming that business first into a modern cloud-native environment with AWS, and AWS has done more of this with financial institutions than anybody else. And the second element of what we're doing is transferring that knowledge into a modern architecture and modern code, right? So if you think about the technology side of the equation, as we implement this over the next 18 to 24 months with AWS, that business is going to be state of the art and set for the next 5 to 10 years of scale growth in that business. And as we ramp up with AWS and cloud-native environments, we'll be ramping down the existing mainframe department. So it's fully funded out of our existing capital budget, which is a really nice thing to be able to say. The second piece of the AWS relationship, which is so important and really is unique with us is a distribution go-to-market strategy. So as we said publicly last month at the time of our earnings call, we think this triples our target addressable market by doing a few things. Number one, brings us into new geographies that we were not in. TSYS, for example, is not in Australia because they don't have a data center in that environment. And of the existing technology infrastructure that they're using, you really need a physical data center in the market you're serving or there's too much latency. You don't have that problem with AWS. First of all, they have environments everywhere. And the second thing is it's cloud native. So it really kind of doesn't matter where it's resident physically at the end of the day. So that's one thing. The second element of tripling the TAM is really expanding us into small to midsized banks. So historically, TS2 is really the province of the largest banks in North America and Western Europe, and we have a prime business, too, which is a small piece of the business, about 20% that sells licensed software and processing solutions, primarily outside North America and Western Europe. This allows us to augment our sales force by leveraging the distribution relationship with AWS and Amazon now. So we're trying to get into the small to midsized bank market. You can't find a better partner than someone like Amazon and AWS on the technology side. And also on the distribution side to do just that. So it dramatically expands with their sales distribution assets, our ability to penetrate further into markets that we're already in, just a different size. And the last thing I'd say, and then think the third thing, the tripling, third reason is it opens us up to neo banks, think Golden with the Apple card. Think Chime, think Uber and Lyft with their own wallets, and all those other things. And that's really Amazon and AWS' sweet spot, right? So our ability as a technology, to the technology partner like that, to go-to-market with cloud-native solution, which is what you really need to win those accounts at the end of the day is dramatically enhanced by, really, what this unique relationship is with Amazon. We also expect as part of our transaction to have revenue flows back from Amazon back to Global Payments in the context of referrals, in the context of payment services, time will tell. But that's done on a take-or-pay basis. We feel pretty good about realizing these achievements there. So I think it's really a unique collaboration between the 2 of us. We're delighted that they are our preferred provider of issuer technologies going forward. And I think, Tien-Tsin, it's really transformative in the issuer side. There's nobody else who's really doing this the way we're doing it. And I think back to your question about digitization, this is going to change the nature of how people distribute and provide cloud-processing services for our second-largest business, our issuer business.

So 18 to 24 months is sort of the time frame where you think something will be stood up and some of these things will start to go live and you can -- and go against some of the initiatives you just laid out?

Yes, that's correct as it relates to technology go-to-market, but you're going to see wins soon. So I'd say over the next quarter or 2, we'll probably have things to announce where we jointly have won various pieces of business. But I think you're right on the 18 to 24 months in terms of actually being in market with the new products and services. And listen, to get to one of your other questions in terms of wins that we've had, we've announced Truist in May of this year, which was a double takeaway from our primary competitors here in the United States, sixth largest bank in United States. Obviously, we renewed TD. Just the other day, we said we renewed the Wells Fargo relationship also that we had. So I would tell you, look, the pipeline is full. I think the business is in a very healthy state. We'll continue to announce new wins with and without -- with also AWS over the coming months. I think our business is really in a very healthy areas. We announced on the second quarter call, that business, the issuing business for us in the second quarter, actually net grew in June, if you exclude the commercial card business, which is about 20% of the business, which, of course, is impacted by the fact that no one's doing corporate travel. But if you look at a normal consumer, what are consumers doing, which is 80% of the business, that business was flat to modestly up in June. And obviously, as we expect, given what I said about our share gains and where we're going relative to what the networks have announced, that our performance, we expect to continue heading into the rest of the year, really across all of our business segments, including issuing, merchant, as well as Netspend. And to go to your question about installment sales, buy now pay later, we're doing installments. We're probably one of the biggest providers of IPP, or Installment Payment Plan services in the world. First, as it relates to merchant, which we've been doing years given the prominence of our business in Asia Pacific in other markets where IPP was really the de facto standard in terms of how consumers purchase. That's come more recently in the United States. Hence, the announcements with both Mastercard as well as Visa, really first in with both Mastercard and Visa. We're very proud of that and very proud of our issuing business for doing that. I think you're right when we said great growth in that business. It reminds me of the businesses you see across Europe, the businesses you see across Asia. And as we've said all along, whether it's IPP, QR codes, at the end of the day, pay by length, which we're doing all across Europe now, we're the beneficiary of investments and trends in the ecosystem in which we operate. So it's great to see our partners, Visa and Mastercard, do this. But I think it's also fantastic that those investments generate returns in our business, which is why I expect our outperformance relative to the results you saw from the networks, which I view as the market proxy, I expect that to continue for the rest of the year.

Okay. No, good. Look, hats off for doing the cloud journey with AWS. And I think it was nice to see that you have an installment plan that's rolling out. Last question on issuer. Any other sort of products you can preview with us from a road map perspective? I know there's a lot already on your plate on the issuer side, but it does feel like a renewed energy given some of these announcements you've talked about.

Well, I think the best way to think about that, Tien-Tsin, is what you've seen in contactless, which you know has been around in Europe and Asia for a really long time, but it really did not come to the States until probably in the last year, but especially has been accelerating. And I think demand moved ahead by 3 to 5 years given that pandemic. So we have initiative called Safer Commerce, which, by the way, isn't just contactless cards, but it's actually paying with QR codes at the restaurant. So instead of actually physically taking the receipt and kind of signing with the pen or giving people your card, we actually take your cell phone and you -- through the QR reader and you actually QR it on the invoice, you don't have to touch anything, and you pay with your thumb or your face on your phone for authentication. And I think our issuer business has been the beneficiary of, obviously, all this contactless issuance, which is a key element of what I just described in terms of Safer Commerce, but isn't the only one. We also, on our restaurant business, have the ability to do menus online also through QR code, also the ability to prompt you and text you when you're in your car and say you can come in now, you don't have to wait in the lobby of the restaurant anymore where other people are congregated. So all those changes really pay -- play to our advantage, Tien-Tsin, at the end of the day. Our issuer business is really at the forefront of what I've just been describing. So it's a great time to be in that business.

Yes. Look, I mean, TS2 from a licensee perspective is everywhere. It was well-known already. So yes, I guess, getting it to this modern point and having it more digitally native, like you said, it really could bend the curve. So that will be fun to watch that as it goes. So let's -- I'm getting a lot of e-mails coming in here on the merchant side. So there's a lot to -- you've really went -- you've gone through a lot of it already. There's a lot of questions here, and I have it on my list, just Visa and Mastercard trends have been pretty resilient even through the stimulus expiration, Jeff. So I'm curious sort of your thoughts on trends, if you could be a little bit more granular here, across your big lines of business within merchant. And I'll have some follow on, I'm sure, from that.

Well, I think, Tien-Tsin, as you saw in the second quarter, we outperformed the network's trends in the second quarter. I went through kind of our revenue and our earnings relative to those guys, and that's continuing based on the trends I've seen from those guys. So I expect a continuation of the outperformance in our business, like you saw in the second quarter going forward based on what we see. I would say that's for a few reasons, and I'll come back to a little bit more micro, but let me give you the macro. First. The first thing I would say is the owned and partnered software business. As I mentioned a minute ago, our integrated business as well as our owned software as well as what we're selling at Heartland now, 2/3 of which is really integrated or semi integrated over to Heartland. Technology sells. Digitization sells. People want safer commerce, they want contactless, all the things, they want delivery at home. All the things that I've been describing really sells. So those businesses have been far more resilient than the overall kind of network trends that you've seen, which is what approximates the rate of market growth. So the first thing I'd say is our investment in technology here has really put us in a very good place. The second thing I would say is our geographies. Now I'm talking worldwide, Tien-Tsin. So our business in Continental Europe, our joint venture with Erste Bank grew 20% in the second quarter year-over-year. No adjustments. Just grew 20%, right? So being in the markets that we think -- and the third leg to our stool, as you know, for years in our strategy has been exposure to faster growth markets. So thankfully, for us, being exposed to Continental Europe with a good partner like Erste in the markets that were in there, has resulted in very good growth, notwithstanding, really the pandemic. We've seen this also with CaixaBank, part of the JV we're just buying in now. But we've seen this also with CaixaBank in domestic Spain. That's returned to growth as well in the June period. So I think we're very fortunate to be in the faster-growth markets and the right geographies. And I think you've seen that play out in the outperformance relative to the networks that you've seen in the second quarter, which I also expect to continue. The third thing I'd say is the ownership of software. So let's look at our Xenial business, and let's look at restaurant, let's look at our AdvancedMD business. So when you look at our Xenial business, and we talked about safer commerce already, as you can imagine, it really sells to go to large restaurant chains right now and talk about safer restaurant experiences, the ability to take contactless, pay with QR, the ability to have stuff delivered to your car and take-out, the ability to integrate with the drive-thru, the ability to pay, buy with your phone and have it delivered through DoorDash and Uber Eats. Every one of the things I just described is stuff we're in market with today in thousands of restaurants, quick service restaurants. And we have 26 of the top 50 quick service restaurants in the United States. In the aggregate, that's probably 5% or 6% of the revenue of our merchant business in the U.S. What I just described, the enterprise QSR clients. Think also about our AdvancedMD health business, the telemedicine I was describing before. So bookings in that business, bookings in our Xenial restaurant business, bookings in our health business are at all-time highs. And we had very good June and July in those businesses I described before how AdvancedMD had a fantastic June in terms of revenue. So many of the software businesses that we're in, not all of them, but many of the ones that we're in, which explains the outperformance, really doing very well, notwithstanding the pandemic. Our university business, whether you go to school online or whether you go to school physically, that business is up and running and we're going to get paid. And paradoxically, when folks are actually not in school, it's easier to sell to these guys because to be honest, they aren't busy with students. So at the end of the day, we've actually had really good bookings in our university in our K-12 business. Now of course, we have some businesses like K-12 here in the United States, unlike our ACTIVE Endurance business and like our gaming business that absolutely are performing worse than market, not their own markets, but relative to the corporate whole. And that's because those businesses have been impacted by the virus. Having said that, though, the bookings in that business, the bookings in ACTIVE, the bookings in our gaming business and the bookings in our K-12 business are very good, primarily because that's what the merchants want us to do, in an environment where they're not operating at full speed. So I would say that the silver lining here is that, overall, the company is performing well better, and you saw us in the second quarter and we'll continue to, I believe, well better than what the market is performing, Visa and Mastercard and our direct peers in particular. And for those businesses that are not, because of the obvious macro concerns, bookings in those businesses are very good, right? So as we think about what 2021 and beyond looks like, I think we're set up for a very good period really between the existing businesses and the businesses I just discussed heading into next year.

Got you. So let's drill into e-com and omni, the 20% that you alluded to. Jeff, I get this question a lot. How do you compete and win against the e-com pure plays that are out there? So obviously, you have a big footprint on the physical side, and they're transitioning as fast as they can to omni and to embrace e-com. But what about the digital-first companies? And how do you compete for that business? Can you just give a little bit more on what your sweet spot is or maybe where you might be putting more capital to invest and grow within e-commerce?

Sure. It's a great question, Tien-Tsin. So I'd say there's really 2 elements that are distinct to us in terms of competition. The first thing I'd say in our e-com business is, there's nobody who has more physical as well as virtual marriage than we have. And what retailers and what corporates want now and what MNCs want is the ability to marry physical with virtual presence, omnichannel, real omnichannel, the ability to buy something online, return it to store, return it in a different country as well as it's under the same corporate brand. So our ability to do that seamlessly in 38 countries around the world, where we have both a physical as well as a virtual presence, and in those markets, that means we're a direct member of Visa and Mastercard and selling our own right in those markets. That means we have support staff and sales. That means we have operating folks. That means we have compliance and regulatory folks in those markets. Our ability to do that more seamlessly in more markets physically and virtually than anybody is enormous competitive advantage. You saw in the second quarter, we announced new partnerships with Louis Vuitton in 14 markets across Europe, with Dolce and Gabbana, with Molton Brown, with PARK NOW, which is parking in the United Kingdom. Previous quarters, we announced Zara, FedEx, Desigual, we can just go down the list, a long shot of what we announced. So we think we're really well positioned in that business, and it's winning every day. And what we do in terms of positioning that is the physical acceptance, but also it's service. Because we're physically present in those markets, we can provide the kind of service that the world's most complicated multinationals really want at the end of the day, and that really is different around the globe from our competitors. The second mode of competition is we go domestic in a given market to SMBs and medium-sized companies. And that really is very distinctive to us. So for example, in Spain, we don't talk about this a lot generally because you run out of time in these calls. But in Spain, 20% of our revenue in Spain is from domestic e-commerce. In Canada, 20% of our revenue in Canada is from domestic e-commerce. So because we're physically present in these countries, Tien-Tsin, we're able to go to small to midsized business and say, "Hey, listen, in addition to being off-line, how about that being online?" And then where that's particularly impactful in the context of the virus has been our work with Xenial around the restaurants. So what we said in the context of Heartland in the last quarter in August was, 58% growth year-over-year in omnichannel solutions for small restaurants in the United States for takeout, for home delivery. There's no way we could grow at those rates if we didn't have a domestic distribution in the 38 countries that I was just describing. So it's a meaningful piece of our business domestically as well as for multinationals across border. And that's the reason that $1 billion business is growing 16% top line for us organically in a market that's got GDP compressed.

Yes. I think that's underappreciated. Glad you answered it that way. I think that's underappreciated that you've got that privileged position with the share that you have with a lot of the merchants and you're able to help them adapt. So you've invested a lot. You've talked about Xenial and some of the software assets, Jeff, and you've been a very smart chess player in this payments game. So I'm curious, the importance of expanding margins on the merchant side, given all the changes that are going on, and this big shift in how consumers are behaving, is it important to expand margins in the merchant business now, Jeff? And are you able to do so?