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

I'll talk on the merchant and I'll -- maybe you can talk more on issuer. But I would say on the merchant side, I actually view it a little bit differently. I think the competitive environment is more constructive now than it has been in a while. This has always been a competitive space, let's be honest. It's been competitive for time immemorial. So from my point of view, the degree of competitive tension sort of ebbs and flows over periods of time, and I think we're actually entering a period where the competitive landscape is more constructive for us. Now the capital is not free, and there is an expectation that a lot of our competitors now have to produce returns and they have to produce earnings and EBITDA and growth in those metrics over a period of time, I think we're seeing a few things. One is obviously less capital chasing these shiny new objects, point number one. And point number two, you're seeing more rational behavior in the marketplace around pricing, around just how some of our competitors are going to market and the things that they're doing now that they're having to focus their businesses on different outcomes than they were before. It's not growth at all cost. So I think from that point of view, we view the competitive landscape probably is more constructive than it has been in a long period of time. We know how to compete. We know how to win. I think we're very good at that. We know where we want to play. We know where we think we have a right to win. And I think we're very good at executing on that day after day. And just going back to the earlier comment, I think over time, you'll see that play out more and more with just consistency of performance and results, and we'll get rewarded for that. But I'm actually more sanguine about the competitive landscape than I've been in some time. Jeff tells a funny story. He used to get asked, "Well, how can you compete with these guys that have no expectation for ever producing earnings?" And quite frankly, it's a fair question, but that's not a perpetuity business model. No one that runs a business in perpetuity expecting never to make a profit. So I think we're now seeing more rationalization as a result of that. Again, I think the competitive landscape has kind of come back more in our favor.

I think, in the issuer business, it's actually also true, Cameron, our omnichannel business. I can't think of an RFP, Ramsey -- and of course, these are large kind of issuer customers and large multinational customers in the case of our e-comm omnichannel business, large customers tend to run RFPs, whether they're existing or new customers. But just focused on new customers for a second, they're going to go out to all the usual suspects: Adyen, Stripe. In the case of issuer, us, obviously, Fizerv and Marqeta, go through the list of folks, including the newer vintage kind of fintech disruptors. I can't think of a time, particularly in the last 5 years, but I've been here 13 years -- in the last 5 years where -- I can't think at a time where pieces of Global Payments in issuer or merchants didn't make the final round and was in the last like 1, 2 or 3. Now there are times you don't win. There are times they do nothing, don't make a change. There are times you don't win. That can be over pricing. That can be over some product in some market that we just happen not to offer and it's not worth kind of building. But when you think about where the universe is for the smartest, largest, most capable and most sophisticated customers and potential customers, I can't think of an instance where we weren't 1 of 1, 1 of 2, 1 of 3, after multiple rounds of things. And I think more than anything, in addition to our results and our bookings and all those other things, more than anything, I think that speaks to how competitive I think our technologies, our people, our products and services, our operating environments are, that these smart, big guys running these multi-period RFPs, and here we are at the finish line. And that kind of thing. And I think we're very proud of that, and I think it speaks to what's really going on as it relates to the competitive landscape.

Q1 is still somewhat fresh, so maybe a couple of questions about the quarter. Merchant volumes and revenues came in well, came in very nicely. Remind us which parts of that business are firing maybe above expectations. What's driving the growth? Are there any areas of concern? Just a little bit of an overview on merchant business, maybe as it performance -- it pertains to performance recently.

Sure. Maybe I'll start and Jeff can add some color as well. But the way I like to think about it, Ramsey, is we used to talk about our technology-enabled strategies as more being the tip of the spear for growth. Now effectively they are the spear. I mean when we think about how we've transformed the business, accelerated our investment in more technology enablement across our business and we look at where the performance is coming from today, clearly, it's our technology-enabled channels that continue to drive an outsized portion of the growth in our business, and that's going to just continue to grow over a longer period of time. So when I step back and look at the business, Jeff highlights a lot our e-com and omni business, that we were in the high teens in the first quarter, which was an acceleration off of where we were in Q4 of 2022. So we continue to be delighted with the progress we've made in that business. Our ECP platform continues to resonate with our customers. Our ability to blend virtual and physical worlds in more markets around the globe than our competitors, I think, really is a competitive differentiation for us. And then to couple that with a level of service, a distinctive level of service, that I don't think most of our competitors can match because they don't have the same physical footprint and scale that we operate in, in these markets around the globe, that really does sell. And as a predominant trend in the business continues to be sort of the morphing of the virtual and physical worlds. I think that plays to our advantage over a long period of time. We continue to lead with software, whether it's our own software or our partnered software solutions, and we continue to see those businesses perform extraordinarily well as integrated payments and more embedded financial technology becomes a growing theme in the marketplace, like we continue to be a leader in that space. Our integrated channel grew mid-teens this quarter, a long series of continued quarters growing in that same sort of trajectory. And we actually had our best sales performance month -- quarter, excuse me, ever in that business since the 10-plus years we've been in it. So that's a very strong sign for things to come in that business going forward as well. And our vertical markets businesses, our collection of software assets grew in the double digits as well. So as I think about what's really driving growth in the business, it really comes down to the technology-enabled strategies we've been pursuing for some time, those continuing to mature and they continue to be a bigger part of the business. And I think that gives us a lot of confidence that we've got good momentum going forward as well. As I step outside of that and look at the rest of the world. It was nice to see some recovery in Asia. That was a good tailwind for growth, albeit small, I'd rather have that growing than relatively flat, which it's been because of COVID restrictions for a period of time. And then obviously, we saw good strength on the continent in Europe, and we continue to gain significant share across the Central European markets in which we're operating, as well as Spain, which continues to be just a tremendous success story. I don't think there's a better investment that we've made as a company in the history of Global Payments than our investment in Spain. Obviously, the U.K. macro is soft. I don't have to tell you. Working for a British bank, you probably see that and feel that to some degree every day. But the U.K. macro is not as constructive as we would like it to be, certainly, and that is a little bit of a headwind. But certainly, I think, as it relates to Q1, a lot more tailwinds and headwinds as it relates to performance in the business. And we do think, as I said earlier, that sets us up well for the balance of the year.

And what about margins in the segment? I know you've got EVO coming in having a bit of a near-term impact. I mean, what do you think about the longer-term trajectory of the margins in merchant?

Yes, I think it's a fair question. We are rebasing them slightly lower with EVO coming in. It did have a lower margin profile. As we realize synergies over time, obviously, we'll improve upon that and get back to where we were and begin expanding from where we were on top of that. . But I think if you look at the overall company, it's relatively simple. merchant's now 75% of Global Payments post the divestitures and the acquisition of EVO. And we're targeting 50 to 75 basis points of margin expansion over the cycle. So you're not going to get that unless 75% of the business is contributing to it. So I think that overall range of outcomes that we're anticipating for the overall business is a good proxy for what we anticipate for the merchant segment more broadly. I would say, obviously, our margins are fairly rich relative to competitors. I think we've done a fantastic job scaling our business over a long period of time, making investments in higher-margin businesses that have better growth trajectories. All of that obviously lends itself to better margin profiles over time. So I think we are obviously continually balancing reinvestment back in the business wanting to sustain these rates of growth, while at the same time allowing margins to continue to drift higher over a period of time. But I think the overall target that we've established for the business is a good proxy for what we expect to see out of merchant.

And you mentioned synergies. What's the lowest-hanging fruit there? What do you think about the timing in terms of extracting those synergies from EVO?

Yes. Clearly, like any merger or acquisition of this nature, the lowest-hanging fruit is going to be across just merging duplicative corporate functions that we have in Global Payments today and that EVO had as well. So as we think about the realization of expense synergies over a period of time, and I'll focus on revenue in a second, but on the expense side, it clearly starts with those immediate overlaps from a corporate functional standpoint. Then we move into how do we better align our go-to-market strategies. Obviously, there's opportunities to rationalize costs associated with go-to-market activities in the business. And then we step into the heavier lift, which is really bringing technology environments together, creating harmonized platforms across the 2 businesses which allows us to then realize some of the revenue synergies that are obviously in the pipeline as well. So from an expense standpoint, it's generally going to fall into 1/3 of corporate kind of overhead, duplicative costs; 1/3 of aligning go-to-market in businesses in a way that yields expense benefit for the company; and 1/3 is going to come from that technology alignment of the 2 businesses over a period of time, which then also, as I said before, kind of paves the way for a lot more revenue opportunity from the combined business.

That makes sense. I wanted to ask, maybe Jeff, you can kick this one off with -- on B2B and the sort of longer-term B2B strategy. Obviously, that's something where you guys had a couple of assets, you bought some assets, you're kind of -- seems like creating some momentum building a little bit of a new path on B2B. How do you see that playing out over time?

Yes. So I'm going to stick Cameron with this responsibility. So I'll lay out the goalposts and he can kick the ball down the field so to speak. So look, I think it's -- Ramsey, we're in the early innings of B2B. And I would say, in my opinion, B2B today in payments is where e-comm/omni was in the late '90s. So I think we're at the very beginning of an incipient secular logarithmic cycle. The nice thing here is, unlike in merchant, where you really have to displace somebody to pick up share, in the case of B2B, you really competing against cash, check, ACH and clerks. That's why we're selling -- so imagine, we're selling cloud SaaS payable software, what we're seeing, in some of these past $20,000-odd a year or whatever the pricing is, for midsized business, and you can think about the savings relative to a handful of clerks as an automation matter. And so I think it's a pretty easy sale. The other thing I would say is that we bring unique assets as part TSYS in Global Payments to the B2B story, in addition to MineralTree, which we bought 1.5 years ago and is growing nicely. I think we said normalized growth of 20%, and the first quarter target for this year is 30%. We also are bringing virtual card. TSYS is one of the largest virtual card issuers on the planet. I think they did 50 million virtual cards last year with like $30 billion of outstandings. We obviously bring MineralTree on the payable side. And now with EVO, we bring accounts receivable on the invoicing side, which gives us one of the few platforms that's really a complete ecosystem, meaning payables and receivables. And it's primarily a midsized enterprise-level story. There is applicability, particularly in invoicing, to small merchants. But in general, it's kind of a mid-market to large market. And you think about what we bring there, Ramsey. We've got 7,000 ISV VAR partners who can cross-sell our B2B businesses into. Importantly, we've got 1,500 financial institutions -- Barclays being one, 1,500 financial institutions we can cross-sell virtual card in our payables and receivables technologies into. We announced a quarter or 2 ago, U.S. Bank, Citizens as being 2 banks that we signed in our virtual card business through TSYS in the last number of quarters. We're also bringing thousands of software partners. Great example is at enterprise quick service restaurant, at the franchisor level, like a Burger King working kind of cross-sell payables and receivables into these larger corporates that I was referring to before. So I think we have distinct assets that we can cross-sell and monetize, we are doing that today. And I also think we have more or less a complete ecosystem. So I think this is a lot like where the business was 20 years ago. Unlike Amazon, I don't think there's going to be kind of one winner, I think there's going to be a lot of winners in this business. But you may know better than I, but even Visa and MasterCard, B2B is like 1% of revenue. It's like some de minimis. So I think we're very early on. And I said -- I got to task Cameron with a task. But say, we've got 30 salaried, commissioned salespeople in MineralTree, et cetera, tasked with selling B2B assets, that needs to be like 300. Like when we got the company pre-Heartland at Global Payments, Cameron, I probably had 125 people in the United States who were salaried, commissioned salespeople. Say in the U.S., we have 1,500; and globally, we have 3,500. That's the kind of investment I think you need to see in B2B. And you got to take something that's $125 million to $150 million of revenue compounding in double digits, and that's got to be in the billions 5 or 10 years from now. And that will then transform permanently the growth trajectory of the business in the issuer B2B side far beyond what it is today. And I think that's kind of where we are.

And Cameron, pursuing that strategy, executing on that strategy over the next stretch here, can you leverage M&A to accelerate the strategy? Is that something that we should be mindful of?

I certainly think M&A is a lever to continue to scale that business over a period of time. To Jeff's point, I feel like, today, we have the assets we need to bring a fully kind of comprehensive -- and not just comprehensive, but a fully integrated offering to the market, which is something I want to touch on that Jeff highlighted. I think an area where we're unique right now is we have the ability to create a fully integrated AR/AP, money in/money out solution with integrations back into all the major ERPs that are running midsized businesses across the U.S. market today. And then ultimately, there's global applicability around this as well, but let's just focus on the U.S., which is a massive market. So I think we're uniquely positioned in that space from an asset and capability perspective. Now the question is, to Jeff's point earlier, how do you grow in scale? And how do you do that organically? Obviously, by investing in the business, investing in integrating to create that fully harmonized, fully integrated offering. How do you invest in distribution? And are there assets in the marketplace are going to help you accelerate what it is you're trying to do? Because from my standpoint, there's no better place right now to invest. We want to continue investing in all aspects of the business. But when you say, where is the most opportunity for us over a longer period of time to grow and scale a business from where it is today into something that's much more meaningful to Global Payments, it's B2B. It's a market that's at least 3 to 4x size the consumer market. It's incredibly highly fragmented. There's no clear winner in the marketplace today for the capabilities that we can bring to bear. So it's a market where we feel like we have the right assets, the right to win. We have the right scale already to be able to go and accelerate growth. And we're going to use our balance sheet appropriately to continue to support that strategy over a long period of time.

Fantastic. We're out of time, unfortunately. Great conversation. I appreciate you joining us, gentlemen.

Thanks for having us.

Thanks for having us, Ramsey.

Great to see you, Ramsey.

Great to see you as well.