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

Good morning, everyone, and welcome back to the third and final day of KBW's 11th Annual Fintech Payments Conference. I'm Vasu Govil. I'm one of the analysts covering the payments and processing space here at KBW. Over the past 2 days, we've heard from a number of executives across the fintech and payments space, and we'll be continuing today with a full lineup of fireside chats and panels. To kick things off this morning, I'm pleased to be joined by Paul Todd, who is the Senior Executive Vice President and CFO of Global Payments. As many of you know, Paul was also the CFO at Global Systems Services before the company merged with Global Payments in 2019. And this is his fourth time joining us for the conference. So thank you, Paul, for taking the time to join us today.

Thanks for having me. I really appreciate it.

Excellent.

So to start off, I know everyone is probably looking for some color on how volumes and revenues are trending quarter to date. Any update you can offer us on that versus the color that you gave at earnings?

Yes. So maybe I'll start just from a merchant volume picture, and then we'll kind of maybe walk through the businesses. As we said on the call, we were very pleased from a merchant volume standpoint that our January volumes were better than our December volumes and that our December volumes were better than the November volumes. So we were pleased that, that kind of slow grind back to positivity has continued. Obviously, when you look at different kind of verticals, there's movements there. But when you look at it on a wholesome basis, we're pleased with that trajectory, and that's kind of the trajectory that we've used as part of our guidance. So overall, we've been pleased with the volume picture at a topical level. When we look at our kind of merchant businesses from just a revenue standpoint, as we highlighted on our call, our integrated business has really been our bright spot of growth, growing both in the fourth quarter. And as well as we talked about Heartland, albeit small, also grew in the fourth quarter. So even with kind of the backdrop of the volumes, we were able to get positive revenue growth in those 2 key businesses and even in some of our vertical market businesses, AdvancedMD being the highlight there. And so that's kind of, from a merchant standpoint, what the growth and volume picture looks like. As we move over to our issuing business, we talked about the growth that we had there. If you take out the commercial card business, the slight growth that we had there in the first quarter and then really from a business and consumer solutions standpoint, that grew throughout the pandemic. So that kind of gives you a feel, both from the volume as well as kind of from a revenue standpoint. And then as I said, I mean, those kind of trajectories and what we've seen has been the underpinning of our guidance. And from a kind of a phasing standpoint next year, we've got these comparative dynamics in Q1 that presents a more muted picture on growth in Q1. And then, obviously, the opposite happens in Q2, where you have the positive comparative dynamics and then our expectation is kind of more normalized growth picture for the businesses in the back half of the year.

That's helpful color. So I guess just going a little high level, you are in a fast delivering high single to low double-digit revenue growth before the pandemic hit. And the pandemic has brought about many changes, some which are positive for the industry, like higher e-commerce penetration, but there are also some negatives like small businesses getting really severely impacted. So at a high level, as we come out of the pandemic, do you feel like your growth algorithm has shifted in any way? What are some of the areas where you're confident about making a full recovery and perhaps even doing better and if there are any areas where there could be some risk to what the future could look like?

Sure. So yes, the pandemic did change some behaviors. I think it pulled forward some dynamics that kind of lend to our strengths and lend where we've been positioning the business for several years around tech enablement. And so if we think just at maybe the highest level, the transition from cash to electronic payments, I think, accelerated in the pandemic. And I think that will be kind of a permanent kind of shift there. And so that clearly is one. You mentioned e-commerce and omni and kind of the buying characteristics that I think will be a permanent shift. And certainly, we've seen that kind of additive growth in that channel of our business. And we think that the growth trajectory of that will have a more permanent nature to it because a lot of those buying behaviors changed and a lot of the businesses changed their whole delivery apparatus to enable that buying experience to be superior. So we think that, that will have more permanency to it. Nothing's changed about our growth targets. Clearly, I think some of the mix characteristics, like the e-comm omni, will have a more pronounced kind of impact. But nothing's changed about our overall kind of growth targets or growth trajectories that we're seeing. If I had to say what's one area that may not come back online as fast, I think there's probably some question around business travel and how that looks, certainly more in the shorter term. And so, obviously, that has some impact on our commercial card business and our issuing business. But we like the shift that occurred during the pandemic because it favored our tech-enabled strategies. And certainly, I think some of the growth that we saw around sales and some of the things that we did on our merchant side, I think, speaks to that.

And would you say that travel is a pretty big chunk of the commercial card business?

Yes. On the issuing side, corporate travel is a big component of that spend because so much of it is just kind of corporate spend on cards and so much of corporate spend on cards is travel. And that's been the headwind that we've had in that business is that, that had -- and particularly in a Q1 aspect, that had a very strong Q1 of last year. And so kind of from a comparative standpoint, that's an additional headwind for us. But the commercial card business is 20% roughly of our issuing business. So it's not a huge piece of the business, and transactions are only a subset of that revenue picture there. But that's the one that if you were trying to say what is something that probably doesn't maybe come back online as fast as other things, that might be one of the areas that doesn't.

Got it. So I guess, delving a little bit deeper into the merchant business then. On the recent earnings call, you guys called out that the merchant ID count was actually up year-on-year, which I thought was really impressive given the environment that we're in and you're exported as small businesses. But can you dive into that a little bit? How have you been able to achieve that, what attrition looks like, what new sales, how they sort of come about?

Sure. And to be honest, we've kind of talked about it for the last several quarters around the success we've had on the sales front and particularly on the integrated side. We've also highlighted, certainly, we talked about it on the last call around the sales success on the Heartland side. And so that has then resulted in the mid count commentary that we gave. Obviously, mid count is only one kind of volume metric, but it is an important metric from a standpoint of kind of the base. And I would say that a lot of that is driven because we've got more products to sell than we've ever had in our merchant segment. And those products kind of cut across our businesses. And those are more tech-enabled products that have also been -- if you look at kind of the buying behavior there, that tech enablement in the pandemic has probably had a premium on it. Well, definitely it has a premium on it. And so that, once again, it goes back to my earlier comment around that has kind of played into the strength of the way we've been making our investments on the tech-enabled side over the last several years. And I think that the comments that we made around merchant ID is just one measure of that success.

Got it. And then I guess delving a little bit more into the tech-enabled businesses, you were one of the leaders in integrated payments while you make the APT and PayPros acquisitions, which was, I guess, 6 to 8 years ago. And fast forward to today, there are many more players that are offering integrated payments, both large-scale players, and then you also have big host sort of niche vertically focused providers. So can you talk a little bit about what innings are we in with merchants adopting integrated payments? And is the growth opportunity still as attractive today? And with the increased competition, sort of, what are you seeing on the revenue share economics? And how is that trending?

Sure. So it's a good question. And you're right. We were one of the first movers in any meaningful way in the integrated space. And I would say, to some degree, that first-mover advantage has allowed us to have some of the success that we've had because we were able to build out scale and differentiation and the capabilities there to be successful. And that has continued, obviously, through the pandemic with the growth that we've seen in that area. I would still say we're in the more earlier innings of the game there. We certainly are very early when you look at it on a global basis. But in the U.S., I'd still characterize it more in the earlier innings than in the later innings. And as it relates to kind of penetration and upside, I think we see a good runway of growth there, both in the U.S. and then also what we're going to be able to do to leverage our international footprint as we move some of these capabilities outside of the U.S. I maybe use one vertical, dental, as an example. We -- that's probably one of our most penetrated verticals. And if you looked at maybe our market share in that might be 25%. And so there's no obvious reason as to why we wouldn't be able to move that to a 40% or 50% kind of penetration. And that's just one of the 70 verticals that we're in. So when I talk about kind of the upside or the runway for growth, I look kind of at one there and see even though we have very good success there, there's good growth in that vertical. And then you kind of parlay that around the multiple different verticals and then layer on top of that the international side. And that's where I see the opportunity for growth, and that's why we see this as a strong double-digit growth business. As it relates to the competitive dynamic, there isn't anything unique, I would call out there. Obviously, it's been competitive for many years now. And so it's much like the rest of our businesses. They're competitive. But at the end of the day, better technology and better execution and an overall better value proposition wins. And you have to have the adequate kind of scale to participate and kind of win in these businesses. And based on our kind of first-mover advantage as well as the things we've done on top of that, that's the position that we're in.

And I mean, I guess, would you say there are certain verticals where the competition is higher with so many different providers and some that -- where you probably see more greenfield opportunities still?

That's correct. I mean, clearly, certain verticals, restaurant is one and others that are kind of more tenured in this kind of space, obviously, have kind of more certainly entrenched competition as well as more competition than maybe newer verticals. I would say each one of the verticals kind of has their own unique dynamics to them, depending on the players that are there today, depending on the kind of the pivot that the industry might be going through from a delivery standpoint or a software enablement standpoint. So it's really hard to kind of generalize across. But when we kind of look across the 70-plus verticals and our 1,400 plus partners, that's where we are optimistic around the growth characteristics going forward.

I want to take a minute before I ask my next question to sort of point the audience. If you have any questions, on the top right-hand side corner of your screen, there is a button that says ask a question. So please click on that and type in your question, and I will do my best to ask Paul. I guess moving on to sort of the vertical market software business. My understanding is that a majority of it today is still monetized through software revenues. So can you talk a little bit about how much is software versus payments monetization and how you expect that to evolve over time?

Yes. And kind of much like the last kind of question, it's hard to generalize. But I would say that we kind of are across a spectrum there. So if you take maybe our Xenial business in our restaurant area, we have a very small percentage of that revenue coming from payments. So it's very underpenetrated relative to the opportunity set. And that would be kind of on the more underpenetrated side of the spectrum. And then if you kind of take the other maybe side or touch that business, has probably 20%, 30% maybe even 40% kind of penetration from a revenue standpoint of payments revenue in that business, just as kind of 2 markers. And other businesses kind of fall into a spectrum there. And I would say that one of the things that we like around the vertical markets business is that there's this payment kind of penetration upside when we make an acquisition there. One of the characteristics is we want to make sure that there's plenty of kind of upside, additive kind of growth that we can bring to that offering from a payment solutions standpoint. And so clearly, that kind of exists in the portfolio today. And we're very bullish kind of on the opportunity to continue that further penetration. Going back to even Xenial. We, today, have an offering that kind of bundles the software with payments and have had some success with that, even though it's still in the early stages. And so, yes, it's an evolving kind of picture there, but it's one that's additive to our base growth rate. And it's one that we've got kind of a good success kind of track record with, and it's one that you'll see us continue to kind of execute against as we move forward.

And what would you say is sort of the catalyst for a client to also sort of start using your payment services versus just the software? Like is there a particular catalyst that you look for and that will kind of move along that penetration?

There wouldn't be one single catalyst I would highlight there. Once again, it kind of depends on the industry. It kind of depends on the overall value proposition. It kind of depends as well on kind of the payment acceptance embedded in the end user and how that's integrated or not integrated today. So there isn't kind of one catalyst. I would say that the ability to kind of own the software and have that kind of payment apparatus in a seamless kind of offering is critical. And that's why we feel like kind of owning that software in certain of these verticals is a critical element of encapturing the payment economics as well. But the line between kind of software and payments in certain verticals is more blurred than it is in other verticals and in those verticals. That's why we like to own the software where we're able to make sure that there's both of those kind of revenue dynamics in that relationship and not just either/or.

Got it. I have a couple of questions from clients here. So I guess the first one, just on sort of the competitive environment versus the likes of Square and Clover and Toast, sort of what are you seeing in your potential to win business against some of those names on the small business side?

Yes. So we're very pleased with -- and I think it goes back to how we started. When we talked about the sales success that we've had, particularly on the Heartland side, where that would be more small and medium-sized kind of focus there, we've been very pleased through the pandemic around the sales success. I would highlight Vital, our Vital offering there, particularly if you're talking about Clover or Square from a product standpoint and the product capabilities that we have there that then marry into the overall products that we have from a bigger kind of global perspective as being a winning formula as it relates to the sales there. So nothing's unique or anything that I would call out on the competitive dynamic. It's -- as I said kind of earlier, it's always been a very competitive landscape, and it will continue to be. And at the end of the day, product, technology, service, great sales execution are all the key components around winning in the marketplace.

Got it. And one more from the audience. I guess, just given some of the severe weather we've had in certain parts of the country, kind of what your exposure is there and if that impacted volume and how to think about that as we think about your guidance for the year?

Yes. So -- I mean clearly, there's always an impact when you have kind of severe weather. I think it kind of goes back to a little bit what we talked about on our earnings call that while we project a kind of a trend moving forward, we also said we don't project it to be totally linear because there will be unknowns and good things and kind of bad things. And so weather fits into that category of not being totally linear. So it's something that you just manage through, and there wouldn't be anything unique I would call out there.

Got it. So I guess my last one on the margin business, just the sort of merchant acquiring journeys that you've had. This has been a strength for Global Payments historically. Are there other incremental opportunities for you to work with banks, larger banks globally?

Well, sure. And that has been one of the success factors that we've had around the globe moving outside of the U.S. is partnering with high-quality financial institutions where there's ingrained relationships and coverage in a marketplace. And our track record of success is very strong there. And I think that's a very strong testament when we talk with new financial institutions around partnerships is pointing them to the success that we've had around the globe. And I think just this last year was another example of not only entering kind of new partnerships but building on the ones we have. And so the additional purchase that we made with Caixa earlier this -- or at the beginning of the fourth quarter of last year. Our MoneyToPay joint venture and our Business and Consumer Solutions segment is another example of kind of building on an established relationship. So when you look at of the issuing business and the deep kind of financial institution relationships that we have there as well as what we have from a legacy global standpoint, that dialogue is something that we continue to have. And we look forward to being able to potentially have another meaningful joint venture at some point with a financial institution partner. And I think our track record, if we did something like that, would speak to the potential success there.