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

Well, good morning, everyone. Let's get started with the next session. I'm Ashwin Shirvaikar, Citi's Head of Fintech Research. And it's my pleasure to welcome next Global Payments. From Global Payments, we have Josh Whipple, who is the Senior EVP and CFO. Josh, thank you for doing this. Welcome to our event, really appreciate it.

Thanks, Ashwin. Happy to be here.

And I love the exclusivity. I definitely do, so appreciate that as well.

Yes, great.

So as sort of an intro, if we can kind of jump right in, 2024 is the first year sort of Global Payments in its current form, right? Could we maybe start with the top level of who you are today if you will? I know Global Payments as a company is known to everyone, but who you are today, talk about the two segments at a high level. And then more importantly, I want to get into sort of the management philosophy that you have with regards to guidance and numbers and so on and so forth.

Yes, sure. So let me start, Ashwin, and say it's great to be here today, and thanks for having us. And look, we think we have a very compelling tech-enabled strategy. And in 2023, we made significant progress, our financial and our strategic objectives, including efforts to create a simpler model. First, we successfully closed the acquisition of EVO in March. This enhanced our position in integrated payments, B2B and faster-growth markets. Additionally, we completed the sale of our Netspend business and our Gaming Solutions business in April. And these three transactions represented important milestones for us as we seek to advance our strategy. And today, we remain committed to building the leading technology-enabled and software-driven payments business worldwide with an extensive scale and unmatched global reach. If we focus on our merchant business for a moment, this business drives approximately 75% of our overall net revenue. And software sits at the heart of our Merchant Solutions business and is supported by an integrated payment strategy, which spans our partner ISV, our vertical markets and our POS software businesses. And collectively, Ashwin, these businesses represent about 40% of our overall Merchant Solutions business. And they contribute a meaningful share of the overall growth in that business. We overlay our software businesses with our market-leading e-commerce and omnichannel solutions. And our ability to deliver these solutions worldwide further differentiates our business relative to our peers. If we move on to our Issuer Solutions business, this accounts for about 25% of the overall mix. And in this business, we lead the market with differentiated issuer processing technology and functionality, worldwide scale, terrific customer service and a partnership mentality, very similar to what we do in our Merchant Solutions business. And we hold the #1 position in scheme-based credit cards in the U.S., Canada, U.K. and Ireland. And we're actively expanding into the rest of the world, especially in markets like Latin America and Asia Pacific. And we also have a very strong position with some of the largest and the most well-capitalized financial institutions in the world, which are continuing to gain market share. And this includes names like TD, Bank of America, Citi and JPMorgan, just to name a few. And the fundamentals of this issuer business -- of our issuer business remain very, very strong. In 2023, we added more than 50 million accounts on file and we ended the year with a record traditional accounts on file with over 800 million accounts on file. And we also have a very strong pipeline, which creates great visibility into 2022. And we have eight letters of intent that have been signed with institutions worldwide. And then finally, Ashwin, I'd be remiss if I didn't comment on our B2B business. B2B payments is core to our strategy. It spans both of our segments. And we've seen strong growth across both our corporates and our financial institutions. And then in summary, I would say, Ashwin, we are selling more market-leading technology for distribution channels than we ever have. And we feel very confident that we've built a better, more resilient business model, which positions us incredibly well for future growth.

Okay, thanks for that. That's a great intro. Maybe we should shift next to macro because payments is a cyclical business. So can you talk about the macro sensitivity across the two segments and kind of the full company as it relates to rates and other things, not just rates but also other elements that go into macro and then talk, maybe if you can, about the underlying financial assumptions that you've built into your outlook?

Yes, sure. Look, Ashwin, I think you're right. Payments is a GDP derivative business and -- but as I mentioned, we believe that we've built and have a strategic focus that has allowed us to build a more resilient and durable business model. And in our merchant business, I would characterize our business mix as pretty well diversified across discretionary and nondiscretionary categories. And today, we're exposed to over 70 different verticals in 100 different geographies. And many of these geographies are in faster-growth markets, where we're seeing really strong secular trends. And we remain in the early innings of digital payments adoption. And then I'll also just mention that roughly 40% of our Merchant Solutions business is software. And many of the revenue streams there are recurring and subscription in nature. In our issuer business, we have a balanced mix between volume and non-volume-based revenue with over half of our revenue being derived from accounts on file and transactions, where we've seen really steady and healthy growth. So while I feel like we're well positioned across both of these businesses based on the points that I mentioned, we're certainly not immune from the change in the overall economic environment. But what I do think is important is how these economic factors impact the consumer. And this is something that we obviously continue to monitor. As it relates to our outlook, our base case for 2024 presumes that spending trends are relatively consistent with what we saw in exiting 2023, including a slightly more tempered economic environment. And that's what we've seen thus far in January and in February.

Okay. Well, that's good. So the -- I guess, you touched on this a little bit in your answer to macro. But when it comes to merchant services, obviously, that's the piece that changed the most because you have EVO, you don't have gaming. When you sort of look at merchant services from a go-to-market perspective, if you will, right, I know you touched on this, but maybe you can go into a little bit more detail with regards to, let's say, software versus ISVs versus relationship-based and so on. How does it look today? And any further details that you can provide there?

Yes. Sure. Look, Ashwin, as I mentioned, software really sits at the heart of our Merchant Solutions business and is supported by this integrated payment strategy, which kind of expands our partner ISV, our vertical markets and our point-of-sale software businesses. And collectively, as I mentioned, they represent about 40% of the overall Merchant Solutions business and really contribute to the majority of the growth that we're seeing in that business. So if we start with our ISV partner business, that accounts for over $1 billion in revenue. We have roughly 7,000 partners. We transcend over 70 different verticals. And we offer three distinctive integrated payment models to our partners, which are customized to meet the specific demands of the ISV based on the vertical that they serve or their merchant base. And we complement this offering obviously with full support and services for our customers and our merchants. If we move on to our vertical software business, our own software, which we commonly refer to it as again, and this business is over $1 billion in revenue, really has the same kind of strategy on how we go to market, very similar to our integrated payments business. But here, we own the entirety of the technology stack. And today, we own software across a number of the largest vertical markets that represents something like 50% of U.S. GDP. And this includes verticals like restaurant, real estate, health care and education. And if we move on to our POS business, this business today is approaching approximately $40 million of revenue. And here, we focus on markets where the mode of competition is at the point of sale, which is primarily retail and restaurant. And then finally, our software business is further enhanced by our e-commerce and our omnichannel business, which we overlay across all of our businesses, our channels, our geographies and our verticals. And then the balance of our portfolio is primarily traditional payments. And many of those businesses are located in faster-growth markets, where the -- that are growing double digits, where they benefit from the really strong secular trends that we're seeing in those markets.

A clarification, you mentioned the 40%. Is that what you're calling tech-enabled? Or what is the definition of tech-enabled?

Yes, that's great question.

And what's the target, I guess, for that?

Yes, great question. So our technology-enabled businesses is really a key part of our overall strategy. And it's comprised of two things. It's comprised of our software business and...

Yes, that's the 40%?

The 40%, correct. And it's also comprised of our e-commerce and our omnichannel business. And those two -- those businesses collectively are growing faster than the whole, more than the overall Merchant Solutions business. So the mix in those businesses is going to be greater in the future than it is today. Now we haven't given any kind of target to 2024 and what that mix is going to look like. But I would say that just given the overall underlying growth trends that we're seeing in that business that, that will continue to go ahead and accrete higher and higher over time.

Okay, okay. Good to know, good to know. And one of the differentiating factors you guys have is you've made Global Payments truly global. So after all, [indiscernible] actually global. So as we think of the geographical breadth of your merchant business, what should we expect as we think of the growth profile, the investment profile? Are you more inclined to keep going into other geographies, say, for example, when you say LatAm and you might be in a few countries there, but you go into more? Or is it depth into where you already are?

Yes, I would say it's really a bit of both, Ashwin. And this is really consistent with our approach to our international business historically. We've entered into a number of new and attractive geographies with our acquisition of EVO, Poland, Greece, Germany. And we've also enhanced significant -- enhanced our scale with the acquisition as well, going into markets like Mexico and Spain. So look, I really think you can continue to think that -- continue to expect us to look at opportunities to go ahead and add scale to the business, especially in markets that have favorable long-term growth and where we can meaningfully impact the business. But then at the same time, we'll obviously look to add some new geographies as well.

Okay, okay. So the look to add new geographies, I mean, maybe I'll kind of pursue that a little bit. But I want to ask you, the geographies that you already have, which are the most attractive and on what metric, if you will?

Yes, sure. So look, in terms of the markets where we operated in before EVO, I would specifically call out Spain and Central Europe through our partnership with Caixa Bank and Erste Bank. These businesses have been performing incredibly well for us, both growing double digits. And then I also mentioned that EVO brought us additional scale in these markets, which have been an incredible complement to these business. In terms of EVO markets, we've been really delighted with the new and attractive geographies that EVO brought us. I mentioned Poland and Greece. These businesses have been growing double digits for us. They've been performing very well. And then separately, I would highlight Latin America, particularly Mexico. Now we were already in Mexico before the acquisition of EVO. But we were subscale. And EVO has added to that overall presence that we have in there. In our Q4 call, we announced some new customer wins that we had in Mexico, particularly Petro 7, dLocal and DHL. So look, we're really delighted with the added scale that we've been able to add to the Mexico market and also benefit from the strong secular trends that we're seeing in that market.

Yes, yes, yes. So EVO's market approach in many of these geographies was very bank partnership-centric and so going through a bank partnership. Is that sort of the preferred approach? Or where I'm really trying to get to is your technology-enabled piece, that seems to always be more highly penetrated in the U.S. than in those other geographies, right? So is that an opportunity? Or why does that lag?

Yes. Well, what I would say is that in many of the markets outside the U.S., I think we remain in the early innings and the early stages of digital payment and software adoption. And this is why we think there's an incredible opportunity in front of us. And I think this is really a function of the size of the economy and the maturity of the technology that's in the market. And I would also say that I think we're definitely seeing an inflection here. I think the trends that we're seeing have really begun to accelerate coming out of the pandemic. And so we're excited about our geographic distribution and the opportunity that we have to go ahead and export our technology into these markets and really capitalize on some of these secular tailwinds that we see in these markets outside the U.S.

Okay, okay. The -- on EVO, just kind of going back to EVO, question is really simple. I mean, 1-year anniversary is approaching. I mean, what's the report card, if you will, on EVO? I mean, integration-wise, did you -- what are the surprises? What got reaffirmed and so on?

Yes. Look, I'd say that overall, we're delighted with our acquisition of EVO. I think it's been an incredible complement to our strategy. As I mentioned, it's enhanced our positions in integrated payments, B2B and faster-growth markets. But it's really kind of hard to handicap some of these integrations. I think that every integration is different. But over the last 10 years, we've developed a real core competency around M&A and around integrating these businesses. We have a very seasoned team of integration professionals, which includes many of the same team members that worked on the Heartland integration, which we did in 2016, and then the TSYS acquisition, which was in 2019. So look, we have a tremendous amount of experience from the overall team. I would say that, as a result, I think the integration is going incredibly well. And we remain on track to go ahead and deliver on our $135 million of run rate expense synergies. And this is up from our initial target of $125 million. And then as it relates to the revenue synergies, I think what I would say on the revenue synergies is revenue synergies typically take a longer term to materialize and -- but what I would say is that we're more excited today about the opportunities that we have in front of us to cross-sell our products into the EVO customer base in different geographies than we were when we initially announced the transaction. And I also just commented on some of the strong trends that we saw in many of the markets. But from an overall product perspective, we've recently integrated EVO's PayFabric software into our merchant business, which now allows us to go to market with B2B payment acceptance. And then lastly, I would say that we recently announced the joint venture with Commerzbank, which we expect to launch this year. And we achieved this partnership not only because of Global Payments' leadership in payment technology and commerce solutions but also because of EVO's physical presence and merchant portfolio in Germany. So although we're kind of like in the still within the first year of the integration, we're making a tremendous amount of progress overall with the integration of EVO.

Right, right, right. Just a clarification, would something like that count as a synergy when you do the Commerzbank type of deal? Or would that -- you're going to do that anyway and so you're not counting that?

Well, look, I think you could count that as a revenue synergy potentially, right? Because I think it's -- the win was a win that was a combination of Global Payments and EVO, so...

Okay, okay. Got it, got it, yes. Just switching gears a bit to POS, if you could kind of talk about that business. Is there a way to frame it from the perspective of sort of verticals, commerce enablement, many of the horizontal functions that come in like inventory and so on and so forth?

Yes, sure. So today, Ashwin, we offer cloud-based POS software, really targeting three markets in entry-level SMB, mid-market and enterprise. And we primarily focus on retail and restaurant. And our POS solutions can easily scale from a single location to a more complex location. And our technology enables our customers to add functionality as they grow and expand their business, which really differentiates us from many of our competitors in the market. And then what I would say more specifically, our entry-level product, which is our GP POS product, which we talked about on one of our prior calls, is really a starter solution for our SMB customers, which we offer globally through both our regional and our wholesale distribution channel. And then separately, in North America, we offer vertically specific restaurant and retail-focused POS solutions. And here, we leverage our Heartland distribution channel, which focuses on customers that have 2 to 20 locations. And then finally, there's our enterprise POS solution, which is Xenial. We talked a little bit about some of the wins we had with that last quarter. And here, Xenial serves today more than half of the top 50 QSRs and is in more than 100 stadiums and venues globally. And on our fourth quarter call, we announced that recent win with CosMc's, which is McDonald's new restaurant concept. And we launched that in December. And we look forward to continuing to partner with them to roll out new solutions.

Okay, okay. And GP POS, I think, you said was going to be at 1Q?

That's right.

So it's already launched?

It is launching in Q1.

Oh, it is launching?

Yes, that's right.

Okay, got it, got it. The issuer business, maybe we could shift gears to that?

Sure.

And you mentioned in sort of the intro comments, the 50 million additional accounts on file. But maybe as -- when I normally think of issuer, I think, of AOF, I think of sort of the transaction side and then I think of value-add services, right, those three pieces. Maybe kind of frame it in those terms, talk about -- and that would be the traditional part of it. But then there's also the B2B part. So frame it in those two directions maybe.

Yes. Well, let me start by just saying that our core issuer business, we expect to grow in the mid-single digits this year. And I think the less mature, as how you kind of referred to it, is our B2B or...

Less penetrated.

Yes, less penetrated, yes, is our MineralTree or our Netspend B2B business. And we expect that to grow low double digits. And so -- and this is embedded in our outlook. So for our total issuer segment, we expect to grow in that 5% to 6% range, which we commented on our call last week.

Okay, okay. But in terms of sort of the pipeline for AOF and things like that, is there any incremental comment that you had or an explanation that investors have been asking about with regards to...

What I would say, Ashwin, is that we added over 50 million of accounts on file in 2023. And we ended the year with a record number of traditional accounts on file with over 800 million. And this growth was really driven by the ongoing execution of our conversion pipeline as well as the healthy growth that we've been seeing from our FI partners. And this year, we also executed 13 multiyear renewals and new customer agreements, which will help us deliver and continue that momentum in that business. And I think it's worth noting that we renewed two of our flagship clients, Capital One and Navy Federal. And those clients have been long-standing clients for us for over decades. And we also continue to expand into new and faster-growth markets, including Latin America, with our announced partnership with CAT, which was a joint venture between Scotiabank and Cencosud, which is the largest retailer in Chile. And then looking forward or looking ahead in our strong pipeline of new business, we have a great visibility into 2025. As I mentioned at the outset, we have eight LOIs signed with institutions worldwide. And then finally, I'll just say with our partnership with some of the largest and the most well-capitalized banks in the world, we continue to see really, really strong account growth there. And I think much of the account growth that they're seeing is from the regional bank crisis last year, which happened last year at about this time. And we're benefiting from that as well.

Okay, okay. And so when you sort of think of that continued growth of account on file, is that the primary reason when you mentioned the -- because 50 million, it sounds like a lot of conversion. It doesn't seem like incremental share gain by certain of your clients. So from a conversion perspective, I just want to clarify.

Yes, look, I think it's our conversion pipeline. Number one, we had a very robust conversion pipeline. And then I think it's the growth that we're seeing with the large FIs. We've seen a significant growth in their accounts on file and we've been the beneficiary of that.

Okay, okay. There isn't a breakout that you can provide, x or y?

Yes, that's right.

Okay, got it, got it. Let's talk about the issuer re-platforming, right? Because it has been going on for some time. Why is it such a lengthy process? And then where do we stand on that rollout? And how does it actually enhance your offering when it's done?

Yes, yes, that's a good question. So look, our TS2 platform is one of the most feature-rich platforms out there in the market. And look, it's complicated, but -- in taking this to the cloud. But when we do go ahead and finish taking this to the cloud, it's going to significantly enhance our total addressable market and it's going to allow us to go into new geographies. It's also going to allow us to go downmarket, targeting smaller issuers in a more cost-effective way. And additionally, with this platform, we're going to start providing microservices for our customers and enable them to go ahead and pick and choose the capabilities that they want in a best-of-breed manner. So I would say, look, we've been at it for the last couple of years with modernization. It's for -- we're making a lot of progress. We currently have two clients in production. And we expect to complete the development of our client-facing applications by the end of this year. And we're also planning to execute dozens of cloud products or cloud pilots with existing customers across multiple regions, products and in services as we prepare for the commercial launch. And so look, we're delighted in kind of the progress that we're making in this. And we think this is really going to go ahead and differentiate us in the marketplace with the best-in-class digital experiences for our customers.

Okay, okay. Maybe we can switch gears and maybe talk about profitability, margins, cash flow, things like that, things that CFOs don't care about.

Exactly, exactly.

So I guess, the question is on your earnings, you had this comment. And I got a lot of questions about it. It was kind of, "We already have healthy margins." And the question really is, because some investors, I think, took that to mean we're going to limit margin growth, right? What's the right interpretation of that statement, "We already have healthy margins"?

No. Look, I think we fully expect to continue to grow margins in the business. I think what we guided to in 2024 was 50 basis points of margin expansion. So we fully expect to continue to grow margins over the cycle. And if you think about -- if you break down our businesses a little bit, our merchant business, we're going to have 48% margins in 2024. We expect right around there. Our issuer business is 47% margins approximately. And so we'll have mid-40% margins in that business. And so we think that 50 basis points is healthy margin expansion in the business.

Yes. So that was just like an absolute statement looking at your margins saying, "This is healthy." It wasn't like calling the top on margins or anything like that?

No, absolutely not, absolutely not, absolutely not.

Okay, okay, got it, got it. So what are the puts and takes going forward? Because if you already have healthy margins, you kind of say 50 basis points, what drives the up/down on that?

Yes. Well, look, I think margin expansion is really a balance between obviously expanding margins and reinvesting in the business. So I think we'll continue to go ahead and focus on reinvesting in the business and look to go ahead and grow margins at a measured and healthy pace. And I think 50 basis points of margin expansion is nothing to shy away from. I think that's good margin growth in a healthy business.

Yes, yes, yes. So how do you think of sort of steady-state profitability, if you will, for the company and by segment as we go out a few years?

Yes. So look, what I would say is what you heard Cameron say on the earnings call. We're planning for an investor conference in the coming months. And clearly, one of the topics is going to be around our cycle guidance. And this is -- since we're a few months away, kind of the way we're thinking about it is that if you look at our 2024 outlook, those underlying metrics are really probably a good indicator, Ashwin, of how we're thinking about the business going forward. From an overall revenue perspective, we're targeting 7-plus percent revenue growth ex EVO, ex dispositions. And then as we balance margin expansion and reinvestment in the business, we're targeting, as I mentioned, margin expansions in the 50 basis points. And kind of when you put it all together with some nominal share repurchase, we're expecting EPS growth in the 11% to 12% range or, call it, in the 14-plus percent range, which we commented on the call, ex dispositions. So that's kind of how we're thinking about the business right now. But obviously, more to come when we have our investor conference here in the coming months.

Right, right, right. So essentially, when I think of it ex dispositions, which is sort of the right thing to think of because the question was about steady state, right?

That's right, that's right.

So that's really the type of total return you're thinking about is somewhere in the teens, the low-teens?

That's right. Well, mid-teens, 14-plus percent, yes.

14-plus? Okay, okay, got it, got it. And then capital allocation, you just got done with large M&A and you're still in the process of integration. But thinking forward, what's the thought process? What are your needs? What makes sense?

Yes. What I would say is that regarding capital allocation, we plan to get back to more of a balanced approach in 2024. And look, I think historically, Ashwin, we've been pretty good stewards of capital, reinvesting in the business both organically and inorganically and returning capital to shareholders while maintaining a strong balance sheet, ample liquidity and financial flexibility. And look, I'm pleased that our Board approved the increase in our share repurchase authorization of up to $2 billion. Share repo is one of our priorities this year. And also, one of our priorities is getting back to a target leverage level of 3x. And speaking of level, I'd be remiss if I didn't call out the successful convertible bond offering we had last week, where we used the majority of the proceeds to pay down our commercial paper program and replace that with low interest rate -- or low interest debt, excuse me. But from an overall M&A perspective, look, we're continuing to look at things that are in the market. We have a very robust pipeline. And look, we'll continue to look to add to our portfolio from a product, from a vertical market and from a capability standpoint. But what I would say is that any kind of M&A that we do it's -- we look at the returns and the returns against buying back our own stock. So we're very prudent from that perspective. But we look forward to continuing to return capital to shareholders and continuing to maintain a very healthy and robust M&A pipeline.

Okay, okay. And just to be clear, your outlook did already contemplate the convert that you did?

Correct. Yes, correct. Yes, so it's obviously nice to see the successful execution of that. But yes, absolutely did.

Okay, okay. Got it, got it. When you sort of try to balance out debt paydown versus share repurchase versus M&A and, at a certain point, this year, you kind of don't necessarily need to do any more debt paydown, so how should we think of -- if M&A and growth is more of the focus, how much are you ready to like lever up from a -- is it the prior cycle-type thing of you can go to 4, 4.5 and then bring it back down? Or how do you...

Yes. So let me just say this, we would never exceed the leverage point that we exceeded or that we -- when we bought EVO Payments, I think we were right around 3.9x. But look, Ashwin, it's really a function of what's available in the market. And it's a balance. Obviously, we'll continue to grow EBITDA. That's going to help us delever. We're going to pay down debt. And then we're going to look to return capital to shareholders through share buybacks. But M&A is really a function of what's available in the market. And we look at everything. And I think that's one muscle that we've developed really, really well over the last decade at Global Payments. We have a very seasoned team of corporate development professionals. We have relationships with all the sponsors out there in the market with all the banks. And we have pretty good visibility of what's coming, which I think puts us at an advantage from an overall strategic perspective because it gives us a lot of runway to go ahead and plan for what is the right way to go ahead and augment our strategy. So we feel very, very good about a couple of things: number one, our capital position; and number two, about our M&A pipeline and kind of how we're positioned. And so we feel really good about that.

Okay, okay. Good, good. As we kind of wind down on time in the last 30 seconds, any closing remarks, comments for the audience?

I don't know. Look, Ashwin, it's always great to attend your conference. I appreciate you having us. You had us last year, and it's always great to come to New York, and I appreciate everybody's support of Global Payments.

Thank you. Thank you very much.

All right. Thank you, Ashwin.