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

All right. Good morning, and thanks for being here at the DB Tech Conference. I'm Bryan Keane. I cover the payments, processors and IT services here at Deutsche Bank, and we're excited to have Global Payments. And with us is Josh Whipple, who's SEVP and CFO. So I think we will go through a Q&A and a fireside chat. We're missing the fire, but we do have a nice table up here to asking Josh an update on GPN's business. So with that, Josh, thanks for being here.

Yes. Thanks, Bryan. Great to be here.

So I guess, the first question is obligatory one about looking at volumes, and we saw stronger-than-expected retail sales in July. So how would you characterize GPN volumes in the U.S. in July and August versus kind of 2Q '23 overall?

Yes. Thanks, Bryan, and thanks again for having us today. Regarding volume trends, as we said on our August call, in July, we saw a stability in both our Issuer and our Merchant business relative to our second quarter results. And that trend has largely continued into August. So overall, I think, broadly speaking, we see a relatively stable consumer. Additionally, we highlighted that our base case outlook today presumes spending trends in a macroeconomic backdrop that is largely consistent with the environment leading up to our second quarter call. And as I just noted, that trend has largely continued in August, thus far.

Got it. And then when I always think of Global Payments, U.S. is just a piece of the business, and you guys are spread all across the globe. So maybe you could comment, Josh, just on growth rates kind of maybe accelerating, decelerating in some of the major geographies. And I'm thinking about Central Europe, Spain, Asia Pacific, Mexico, and then I know there was a little bit of a decel in U.K. and Canada. So maybe just an update on some of the major markets.

Yes, sure. So 75% of our business is in the U.S. And as I just mentioned, that trend has remained relatively stable. The other 25% is in international, and it's largely comprised of faster-growth markets, which has been a focus area for us, and it's one of our strategic pillars. And this includes markets like Spain, Asia Pacific and Central and Eastern Europe. And those businesses have continued to grow consistently in the double digits and have largely benefited from the strong secular trends that we've been seeing in the market and the shift from cash to card and other forms of digital payments. And now with EVO, we've been able to add additional faster-growth markets to our overall portfolio, which include Poland, Greece, Germany. And then we've also been able to go ahead and enhance the scale of some of our existing geographies in the faster-growth markets like Spain and Mexico. So we feel pretty good about how that overall portfolio has shaped. As it relates to the U.K. and Canada, look, we have seen some weakness in those markets. We've talked about it on our Q2 call that, that's largely due to the overall macro headwinds that we've been seeing in that market. But what I would say is those markets each represent less than 5% of our total Merchant Solutions business. And look, those businesses generate attractive margin and cash flow profiles, which helps invest in the broader business to help support our overall growth of our business.

Got it. I thought you guys did a nice job talking about kind of the industry and breaking down the acquiring business. So the market continues to analyze gains and losses. And you guys, GPN, has gained volume share versus the traditional competitors out there. So even better volume, I think, last quarter than some of the network data that we saw from Visa, Mastercard. So thinking higher level, why has GPN volume been consistently here over the last couple of quarters, at least been above kind of the industry peers?

Yes. So Bryan, as it relates to competition, we talked extensively about this at our September 2021 Analyst Day. And look, our business has always been highly competitive. And we have a lot of great competitors out there in the market. And that environment really hasn't changed. And what I would say is that we're not all focused on the same things. We're not all focused on the same customers. We're not all focused on the same areas. And additionally, it's not a zero-sum game. And what I mean by that is, with the trends around digitization, that has created a market that is massive in size and scope. And that continues to go ahead and get larger. And in the markets that we choose to go ahead and compete, we provide differentiated product, differentiated services and differentiated technology, coupled with distinctive distribution. And I think that has really gone ahead and contributed to the growth that we're seeing in the overall portfolio and the share gains that we're seeing. And then I would say, if you take a step back and you think about our strategy more holistically, we're focused on providing commerce enablement to our merchant customers, providing value-added services to go ahead and help them run their businesses more effectively and more efficiently. And these include things like human capital management and payroll. And we bring these things to the point of sale. We bring these things to the point of sale, and they're fully integrated. And this makes a difference in many verticals like retail or a restaurant. And I think where our competitive advantage is, is being able to go ahead and provide these commerce enablement solutions at scale to our customers globally. And that has made a difference, I think, with regard to the growth in the share gains that we're seeing. And then finally, I would say is I think we have a different mix than some of the names that you had mentioned. We're not overly exposed to travel. We're not overly exposed to enterprise e-comm, which has seen some softer volume growth. And in the markets that we choose to compete, we provide differentiated solutions. And again, that's helped contribute to the share gains that we're seeing.

40% of the merchant business has been driven by that vertically fluent solutions, which is the integrated business, the vertical software and the point-of-sale software business. So just thinking about those 3 key segments that's driving a lot of the growth, how fast do those -- each of those businesses grow organically?

Yes. Look, Bryan, software sits at the heart of our Merchant Solutions business. And it's supported by the 3 components of our integrated payment strategy, which spans ISVs, as you said, vertical markets and our point-of-sale business. And that comprises about 40% of our overall Merchant Solutions revenue. And our partner channel today, this is about $1 billion business, consistently growing in the teens. And again, in Q2, we achieved record sales. This business has about 7,000 partners and transcends about 70 different verticals. And on our Q2 call, Bryan, we talked about why we continue to grow this business and how we win in the market with this business. And I think it really comes down to 3 elements. Number one, we provide our ISVs with more simplified and streamlined offering. Number two, we provide 3 integrated models. We provide our direct model, our payment facilitation model and our ProFac model. And our ProFac model is -- we talked about extensively on our second quarter call, and this is a hybrid between our direct model and our payment facilitation model. We also -- number three, we also provide a higher level of service relative to our peers. And then finally, we provide a comprehensive suite of products. As it relates to our vertical markets business, our vertical markets business is really what we characterize as our own software. And this is where we own the entirety of the technology stack. And the way we've shaped our vertical markets business is we focused on markets that are highly fragmented and where there's not a clear winner. And we focused on either the 1, 2 or 3 player in those markets as we built this business. And we focused on companies where there's a clear nexus between software and payments. And you may have heard us talk about it when we talk about this market, talk about chasing GDP. And today, we feel we own assets that transcend approximately 50% of U.S. GDP. And then, finally, if we move over to our POS business. This business is growing at 20-plus percent. We continue to see strong demand for this -- for our POS solutions. And I think that this business has really benefited from the product enhancements that we continue to go ahead and bring to market, things like e-mail marketing, things like customer engagement, things like our mobile-first ordering platform. And we expect to see continued momentum in this business when we go ahead and we release our next-generation POS software in the back half of this year.

Yes. I wanted to drill down on a couple of those. Just on integrated, I think you mentioned on the last call that new merchant signings were up 33%. How are you gaining -- continue to have momentum there? You've seen some of the competitors falter there. And then maybe you can just explain the ProFac model and some of the success and differentiation.

Yes, sure. Let me start by saying, look, we're very pleased with the performance of our integrated business and what we've achieved there. Regarding our merchant base, as you highlighted, new sales grew 33% last quarter relative to the second quarter of 2022, and it was another record quarter for us in the business. And look, I think the success in our business is really a function of our approach. Across all the models, we provide a custom solution and different levels of support based on the needs of the ISV. And the last question you asked me, Bryan, we talked a little bit about why we win in that market. And I think about, just to summarize, it's really we lead with technology. We have unrivaled distribution. We have a higher level of support, and then we have a comprehensive suite of products. As it relates to the ProFac model, again, we launched this in the second quarter. And this model is a hybrid between our direct model and our payment facilitation model. And it provides ISVs with many of the benefits of being a payment facilitator without the burden of becoming a PayFac and basically becoming a payments company. And this offering, Bryan, is unique to Global Payments. We have a very robust pipeline, and we'll look to go ahead and board some of those partners over the next several quarters.

Got it. And then inside the vertical software business, can you just talk about the differentiation of Zego and Xenial and some of the School Solutions? And how you guys are -- what's the outlook for growth in that business?

Yes, sure. As I just talked about, look, our vertical software business, we've always targeted the largest segments of the U.S. economy. And as I mentioned on the last question, today, we think we own software that transcends 50% of U.S. GDP. And regarding the specific businesses that you mentioned, if we start with Zego, Zego is -- focuses in the real estate sector. And this is a market that we like. It's large. It's global in scale. It's fragmented. It's ripe for further penetration of software and payments. And this business provides a cloud-native SaaS platform, which enables property management and resident engagement. It's highly scalable. It has predictable recurring revenue. It has strong retention rates. And this business, it has been growing double-digit organically for us since we've owned it. And then I think some of the trends that we're seeing in that business is really -- where we've seen a lot of momentum is in the student housing area. And we've recently partnered with our TouchNet business, that's our Higher Education business, to try to capture more of the payments flow in student housing. So we feel really good about how that business is positioned. Regarding School Solutions, this business provides commerce and cafeteria management solutions to the K-12 schools. And this business was impacted during the pandemic with the school closures and the free lunches. And we've actually -- this business has rebounded nicely with the return of school lunches for pay. And if you go back to our second quarter call, we talked about some of our key wins in that market. And we had a key win with a school district in Oklahoma City. We extended a couple of partnerships, one in Baltimore County, Maryland, as well as with Chicago public schools. As for our Xenial business in the restaurant vertical, here, we moved into a more specialized areas, focused in enterprise QSR, foodservice management and sporting events. And these solutions are more fit-for-purpose. And today, we have something like 20 of the top 25 QSR brands in the U.S. that use our Xenial solution. So we feel very good about how that business is positioned. And then also, over the last 6 months -- or I'm sorry, over the last 12 months, we've announced some pretty big wins in the stadium area with Mercedes-Benz and the Braves at Truist Park. But I think if you were to take a step back and think about the trends more holistically and what we're seeing around our vertical software businesses is, coming out of the pandemic, we saw this acceleration around digitization and the need for digital solutions. And so if you think about the verticals, which I just talked about, in the real estate vertical, for example, no one wants to write a check anymore and drop that off at their landlord's office. And if their air conditioning or heater's broken within their apartment, they don't want to go down to the superintendent's office and fill out a work order. And if they're looking to go ahead and rent an apartment, they don't want to go to the leasing office and fill out an application. They want to be able to do this on their phone digitally, and we provide all those solutions within our Zego business. Take -- and if we think about restaurant, restaurant, same thing. People want to go ahead and order with their phone, whether they're remote or they're at the physical location. And they want to pay with their thumb or they want to pay with their face, and we enable those solutions within our restaurant vertical. And then finally, with School Solutions, Bryan, we're just talking about our kids, I can't think of the last time I gave my kids cash to go to school and to buy something in the cafeteria or to buy something at the snack stand. That's all handled digitally, and we provide that within our School Solutions business.

I want to ask about the restaurant and hospitality businesses, in particular, because you guys seem to be -- the growth rate seemed to be good there, and it's an opportunity for you guys. The market is always worried that, that's too competitive for GPN to compete in there. But your success there, can you just talk about why you guys have been able to compete successfully in the restaurant and hospitality side?

Yes. Look, I think we provide a solution that touches all parts of the restaurant and the hospitality solution. And it really goes back to our strategy, again, focused on commerce enablement and providing differentiated products and services. And I think in the hospitality space, we've had a lot of success in providing differentiated solutions and across the spectrum from a restaurant perspective. And that's why we're winning in that business.

Got it. I want to ask you about EVO and that acquisition, and maybe give us an update on how synergies and cross-selling initiatives are going.

Yes. Look, we couldn't be more pleased with the way the integration is going. And I'm happy to report that we successfully completed our first 100-day plan. We expect to realize $35 million of cost synergies in 2023. These largely consists of the elimination of public company costs, facility rationalization and the harmonization of duplicative vendor cost. I'm also pleased to announce that we have very defined and executable plans in place to achieve our $125 million of run rate cost synergies that we announced -- that we said we would do when we announced the transaction. On the cross-selling front, we've identified 3 broad categories of revenue synergies. Number one, the first category, we think that we can cross-sell our product capabilities into EVO's existing customer base. Number two, we think that we can provide EVO's multinational customers with our e-commerce and omnichannel solutions across markets and geographies. And then number three, we think we can bring their B2B capabilities together with our B2B capabilities and provide one go-to-market offering. And so look, Bryan, we think there's a lot of opportunities to go ahead and enhance our top line revenue growth. We think there's probably a point or 2 on top of EVO's existing run rate revenue of $600 million, which equates to about $10 million to $15 million in revenue synergies. And then I would just reiterate, Bryan, look, M&A is something that we do very, very well at Global Payments. And integrating companies within our Merchant Solutions business is something that we do very, very well. It's become a core competency of Global Payments with a number of acquisitions that we've done and how -- and the success that we've had in integrating those businesses. And then finally, I would say, we have a great track record of achieving those synergies that we commit to publicly. And we couldn't be more pleased and delighted with regard to how the integration is going with EVO.

Got it. I want to turn to the Issuer business. It grew mid-single digits in the second quarter. I think you guys added 10 million accounts. How many accounts did the current 8 LOIs add to the potential pipeline?

Yes, sure. So let me start, Bryan. I'm very pleased with how our Issuer business is performing and the opportunity ahead of us. And we believe there are a number of tailwinds going forward. Regarding the 10 million accounts, which is an 8% increase in traditional accounts relative to the second quarter of 2022, we have a -- let me start by saying we have a very strong position with some of the largest and the most well-capitalized financial institutions in the world. And these banks continue to go ahead and gain share, and we benefit from the share gain. And this includes names like Bank of America, like Barclays, like TD and Capital One, just to name a few. But to answer your question more directly, in addition to the healthy account growth that we've been seeing from these financial institutions and the benefits that we've been -- that we've received from them, the new customer pipeline currently today stands at approximately 60 million. And that 60 million includes the 8 LOIs that you mentioned. And this is -- the 60 million is near a record level. And this pipeline gives us a lot of comfort with regard to the future growth of our Issuer business.

And just to be clear, LOIs is -- typically, the close rate on the LOIs is...

Is very, very high.

Yes. Yes.

Yes. It's very, very high.

Got it. Can you just talk about then how do we think about when we think about the cycle guidance or the revenue growth and margin of the Issuer business, in particular, just thinking about the moving away from managed services and promoting more cloud-native solutions.

Yes. Look, what I would say is that, as it relates to managed services, anytime that you can pivot to more technology enablement, that's a good thing, Bryan. And that gives us -- as we continue to go ahead and pivot more and more towards technology enablement, that gives us a lot of confidence in our targeted growth.

And then as a result of that move, I think managed services, obviously, is a lower-margin business. Can you just talk a little bit about the margins inside of Issuer? They had a big move last quarter, and kind of what the outlook is there.

Yes. Look, like I said, we're very pleased with the performance of our Issuer business and the margin expansion that we've been able to go ahead and achieve through that. In Q2, our margin expansion was largely driven by our top line growth and the continued shift to technology enablement. And it was also -- our margin expansion in Q2 was also related to the operating efficiencies that we've been able to go ahead and drive in the business. And what I would say, Bryan, as we think about the back half of the year, it is a little bit of a -- it is a tougher comp and -- but with that said, we still fully expect to go ahead and achieve our 60 basis points of margin expansion for the year.

Got it. Last quarter, you guys reiterated that the overall margin guidance and the expectation for the 120 basis points of expansion, which is notably above the cycle guidance, which I think you guys have called out is 50 to 75 basis points annually. Can you just talk about some of the key drivers when we think about the overall business for margin leverage?

Yes, sure. Just to clarify, on the call, our second quarter call, we said up to 120 basis points. But on margin expansion, first and foremost, this is driven by our technology-enabled businesses, which are growing more quickly than the whole and have a higher margin profile. And what I would say, this year, our core Merchant business and our Issuer business are growing margins right in line with what we would expect from our long-term targets. On top of that, we do expect to receive margin benefit as it relates to the divestiture of our Netspend business, which is a lower-margin profile business. But that will be slightly offset by the EVO acquisition until we go ahead and realize full synergies. And then going forward, the 2 primary businesses that we have going forward, both of those businesses had a very attractive growth and margin profile, which gives us a lot of comfort as it relates to margins going forward.

Got it. And by the way, if you have a question, just raise your hand, and we can call you out if there's any questions. I wanted to ask about the transition in CEO. So obviously, Jeff had been at Global Payments for so long and for so many years, and now it's turned over to Cameron. So maybe you could just first talk about has anything changed in the strategy, the culture of the firm now with Cameron in charge as CEO? And then, of course, capital allocation priorities, any kind of change in thinking around that?

Yes, sure. That's a great question, Bryan. So let me start with capital allocation. I think we've done a really good job in balancing reinvestment in the business, both organically and inorganically, and returning capital to shareholders while maintaining a strong balance sheet and ample liquidity. As it relates to M&A, look, we're -- you know the history of this company. We're always looking at things in the marketplace, and we're always looking for ways to go ahead and accelerate our strategy. From an M&A perspective, we're very focused on the 4 pillars of our strategy: software-driven payments, e-commerce and omni, faster-growth markets and B2B. With that said, I do think there are some things that are interesting out there from a strategic perspective, but the bar today is pretty high just given the return profile of buying back our shares. But with that said, we talked about it on the Q2 call, we talked about it on our Q1 call, we're -- from a capital allocation perspective, this year, we're very focused on paying down debt and getting back to our target leverage level. As it relates to change in strategy and then the question that you had, look, Cameron is a veteran of Global Payments. He's been at Global Payments a long time. He worked very closely with Jeff on the strategy, and that strategy has been incredibly successful for us. So Bryan, I don't see any change to the strategy going forward.

Got it. Let's take a question or 2.

Yes, just a quick one. Your comments on August sounded pretty positive. It's in line with July, stable. When you gave the guidance before, had you considered any macro weakness? Or was there room for this impending macro weakness when/if it does come in those -- in your thoughts then?

Yes, we did. On our second quarter call, we said that our guide can accommodate a moderation in spending and overall macroeconomic activity in the back half of the year. So we did comment on that in our guide.

Right. And that still stands?

That's right.

And then just on -- just a quick follow-up on the EVO conversation. Bryan models it very -- and team model it very closely as we covered it. Anything to mention on the margins there relative to the rest of the company?

For the rest of the Global Payments?

For the rest, yes. I mean, yes.

Yes. Look, we've said publicly that, that's about a mid-30% margin business. We said that publicly before. So...

I mean do people have that? Do you think that's in the number? So with this, the difference, that's what I'm referring to.

Yes.

B2B seems to be a larger focus within your overall business in recent quarters. Can you maybe talk more about overall B2B payment strategy, maybe across automation and money flows?

Yes. Look, I think Cameron did a really nice job in outlining that on our Q2 call. There's really kind of 3 components of our B2B strategy. We have our workflow automation, which is our AP/AR, which we talked about on the call. And we also have our money-in and money-out flow, which is more of our virtual card payments. Our virtual cards, I think we issued something like 80 million virtual cards in the last 12 months and which controlled about $50 billion of spend. So we have one of the leading virtual card businesses in the market. And then the final component is our Employer Solutions, which includes our paycard, our earned wage access and our payroll business. And look, what I would say about B2B, that market is still evolving, and there's still tremendous room to run in that business. We're still in the early innings of that business. And that business has a massive total addressable market. And so look, we feel like we're very well positioned in B2B, especially with the EVO acquisition, to go ahead and acquire their accounts receivable automation. So now we have one complete offering from a workflow automation. So we feel very good about how we're positioned in B2B and where that market is today.

I wanted to just follow up on the question on the economic sensitivity. If we ever do get to an economic downturn, can you talk about, as CFO, some of the levers maybe you have on cost to protect the EPS?

Yes, sure. Look, I think if we just talk about an economic downturn more generally, I think it's helpful to kind of think about our business in building blocks. And if you think about our Merchant growth, how we've talked about that, we expect merchant growth to be low double digits. And as it relates to Merchant growth, about 300 to 400 basis points of that is about same-store sales. And in an economic slowdown, you could see that go to 0. If you go back to the great financial crisis in the '07, '08 time period, for Heartland, that actually went negative. And the other components of our growth are really driven by digitization, new products, new sales, new markets. Those businesses continue to perform very, very well. As I talked about earlier, we've seen record bookings in that business. So we feel very good about how the merchant business is positioned if we were to encounter any kind of economic slowdown. If we move to Issuer, and if you go back to the 2008 time period, our Issuer business actually grew during this time period, if you eliminate 2 of the bank insolvency. So we feel pretty good about how that business is positioned in the event of an economic downturn. And then I would say, Bryan, if you go back to the pandemic in 2020, we actually grew earnings during that time period, and we produced record free cash flow. So I think what we've proven as a management team is that we can continue to grow the business through any kind of economic event with the levers that we have within the business.

Okay. With that, I think we'll keep it there. Thanks so much, Josh.

All right. Thanks, Bryan.