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

Okay. Good. And I know we get a lot of questions, I'm sure you have as well with the interchange settlement, the long-standing one with the networks and the merchants. Does that create an opportunity to reprice as we've seen in the past, and I'd love to hear your comments on surcharging if that's also an opportunity for you to be an adviser to merchants and also take some price as well.

Yes. I think, look, on the first point, anytime costs go down from an acceptance perspective, I think it's good for the industry. I think most of interchange reductions over the course of time get competed away. They're either pass through immediately because you have merchants that are priced on interchange plus basis or they get competed away over time. And most of our book is priced on an interchange plus basis today. So it will get pass through. But what it does is it lowers the cost of acceptance which is generally good as a backdrop matter for how we think about the business more broadly. And look, I think the -- on the surcharging side of things, whether it's surcharging or cash discounting, I do think this opens up more opportunity for innovation. And for us to be able to help merchants think about different ways to help address kind of the cost of acceptance more broadly and ways that are going to work for consumers and work for their business, et cetera. But I think it creates and paves the path for more innovation around point-of-sale acceptance and how to think about cash discounting and surcharging for particular merchants. And by and large, I think that's good for us as well.

Yes. No, I agree. I agree. We look forward to seeing how the industry evolves with that. So let's dig into the merchant side a little bit, point of sale software solutions, 20% growth in the first quarter, growing faster than Square. We just heard update from Square. Build that up for us. How do you get to the 20%? What's the algorithm?

Yes, it's a great question. And obviously, point of sale has been a big point of emphasis, pardon the pun for us for a period of time now, and I feel good about how we're positioned as a product and capability matter. And certainly think that is a critical element of where we're going to put our strategic focus and emphasis as we move forward as we think about the convergence of software and payments and our point-of-sale software solutions helping to drive that in our own business. So I think it's important to step back and kind of look at our point-of-sale business across the 3 paradigms that we really run. First is our -- what we call our GP POS, which is not a great name, and we're working on branding for that just as an aside. But our GP POSs really are basic, more simplified, somewhat horizontal point-of-sale system really geared towards the small end of the merchant market. And today, we distribute that through really 2 channels. One is our international markets. That is the platform we've been nativizing and localizing to bring into markets outside of the U.S. And we've seen good success already in markets where we've introduced GP POS as a very sort of -- it's fairly feature-rich, but somewhat basic in terms of its capabilities for the small end of the merchant market. And we're looking to bring that into more markets, including some of the EVO markets where I think that will be a really distinctive and differentiated offering, think Poland, Greece, Ireland to some degree, Mexico, et cetera. So we're very excited about GP POS. We've also brought GP POS to our wholesale business because we have a lot of customers that are looking for a point-of-sale solution that they can sell. And we have introduced GP POS into our wholesale business and begin -- have begun distributing it through those wholesale partners, which creates good opportunity as well. In our direct business in the U.S., we have Heartland Restaurant and Heartland Retail. And we've talked about fairly extensively now for the last few quarters. We're rolling out the next-gen version of both of those platforms in 2024. We've already rolled them out in alpha and beta and are beginning to commercialize them both. But those are both built to be sort of have feature parity relative to "best-of-breed" largely in that mid-market sort of restaurant and retail environment although both solutions have the ability to kind of scale down to the lower end of the market in more of a register -- simplified registered version. And we have a, obviously, POS platform geared towards our direct channel and that's not quite the same as what we bring to our wholesale channel, trying to drive some differentiation in Heartland Restaurant and Retail relative to GP POS. So we have a more feature-rich product we sell through our direct channels than we do our wholesale channels. But Restaurant and Retail, we put a lot of emphasis behind investing in Gen 2, excited about the future prospects for the business. I think we've really differentiate ourselves in having a product and capability that's feature-rich and feature comparative to what's best of breed in the market. But we can scale down to the lower end with a more feature-rich solution than what might else be available in that lower end of the market. And it allows merchants to grow and scale with us by just turning on new capabilities as they grow and scale with their own businesses. And we really also try to differentiate ourselves on service. We do think there is a meaningful opportunity for differentiation through service and what we can bring to bear on those customers. in terms of our ability to serve them because we all know technology is not flawless, and it's not full proof and there are times when they require service. And I think our ability to do that well and serve them well will be a competitive advantage for us as we look to grow and scale Gen 2. And then in the enterprise QSR space in the stadium and event vertical, we operate our Xenial platform, which is also cloud-based, provides everything from drive-through technology and capabilities, which are now being deployed in McDonald's new concept CosMc's all the way through the point of sale, the back of house, the kitchen management software, the digital menu boards, et cetera that can be leveraged in multiple environments, as I said, enterprise QSRs to event venues as well as food service management, operations, we've seen good success, obviously, with the Xenial platform that's really targeted towards that specific sort of vertical segment as opposed to Heartland Restaurant and Heartland Retail, which are more mid-market kind of restaurant retail environment.

So the feature parity, differentiate with service. Is that what we should know as the differentiation in this unit?

I think that's a big part of it. Yes, absolutely. I mean it's important that you have feature-rich solutions that customers are looking for and that you can stack your features up against who else they may be talking to or they may be looking to, to provide their point-of-sale software. So I think feature parity or feature competitiveness. Feature parity is an odd term because there's always going to be slight differences between platforms, but I think feature competitiveness is a must. And then there's clear opportunities, I think, to differentiate around service and capability in the space, and we're excited about what we can do and how we can grow and scale that business going forward. But between the ability to bring product and capability to international markets, Gen 2 around our Heartland Restaurant, Heartland Retail, point-of-sale environments, the success we've seen with Xenial expanding into new verticals and obviously growing in existing. That's really the composition of where we've seen the growth, albeit from a smaller base. but it also gives us a lot of excitement about where we're going with that business going forward.

Okay. We have to talk about quickly partner ISV channel, the integrated business, strong bookings that wrote down. I think you doubled your strategic integrated partner. Can you give some examples, who are these. What are these wins about? And what might they bring in terms of sub-merchant potential?

Yes. I think we have a lot of partners in our integrated space, I think we call out like 7,000. Not all partners are created equal, not surprisingly. We have some that are more strategic that drive a lot of lead flow into the business, have big existing books of business that we can go and mine. As we develop partnerships and relationships with them that are more aggressive about going out of marketing, obviously, our capabilities and trying to monetize payments. So we kind of bifurcate the portfolio into strategic partners and then partners -- other partners in the business. So we're very focused on continuing to grow our book of business around strategic partners, and I think we called out in the first quarter, we had something like a 20% plus uplift on strategic partners in that business in the first quarter. So we feel very good about how we're positioned in the integrated space. I think our model is really geared around creating these customized sort of integrated [ paths ] to support our integrated partners, which we've been doing now for well over a dozen years in integrated. We have over $1 billion of integrated revenue. We clearly have scale in the business. We bring more feature, more capability, more commerce enablement solution, more value-added product to the overall partner relationship. Then I think a lot of our competitors have done, which makes us, I think, competitive from a rev share perspective, we can offer bigger revenue pies upon which we're splitting revenues relative to many of our competitors in the space, which I think continues to position us well to manage kind of the rev share component of the business as we move forward. And we have multiple models that we use to serve these customers, whether it's the true direct kind of integrated model to the pure PayFac model to ProFac which kind of sits in between And I think from our perspective, it's really about bringing the right tool to the right situation in terms of meeting the clients' demand and the ISV partners demand around what it is they're really trying to accomplish. And making sure that we're able to meet their needs and have the right capabilities to deliver on what their outcomes that they're trying to achieve through the relationship. We don't approach it. Everybody should be at PayFac, and we don't approach it through the lens of everyone should be a direct integrated partner. We want to bring the right tool to the right situation and really focus on outcomes that they want to achieve versus trying to force fit them into a particular model that we operate. And I think that's really the distinctive development of our integrated business. We've been able to sort of embed and integrate our capabilities into the ISV partner environment in the way that works for them, where they have a clear understanding of what the requirements are of them, what the requirements are of us. And we're able to customize that in a way that I think delivers better outcomes end of day versus them tapping into an API and not getting a lot of white glove service and support around that integration.

Right. That's where the service element comes in. But to be clear, I think you've said you're indifferent from a margin perspective across the 3.

We are. They're all priced in a way where end of day, the net margin to us is fairly similar because it's largely tied to the amount of work we're doing. Obviously, the margins for us or the revenue model for us when we are a direct integrated partner is better, but we have a lot more cost behind that model because we're doing all the heavy lifting. When it's a PayFac, they're really renting our rails, we don't have nearly as much sort of cost backing that. So when you net it down to the benefit it does and today, the margin profile of each of those models is relatively similar.

Yes. So when we think about payments, Cameron, we've been talking about there is some maturity in the U.S. in terms of card penetration. So it's important to sell through software. You're solving through that with a lot of different models need to pursue overseas where our penetration is lower. You have a pretty broad footprint internationally. You've also talked about streamlining. So can we expect a doubling down in certain regions and maybe a deemphasis on others? Walk us through the portfolio internationally.

Yes. I think the goal internationally is to be exposed to markets that have faster growth fundamentals that have stronger secular tailwinds, where we can be a scale player. If we're not a scale player today then we have a solid path to being a scale player over time. So I like the international business that we have. The vast majority of markets that we're operating in today have good fundamentals. We are a scale player today. We have good growth prospects for the business and/or we are subscale, but with a clear path towards scale. So our new joint venture with Commerzbank is a great example of that. Yes, we're subscale today, given the base we're starting from. But given the embedded base of business, 26,000 corporate customers, 11 million small- to medium-sized customers in the commerce portfolio, there's a path to becoming a scale player in Germany over the not-too-distant future by partnering with Commerz, which is why we're so excited about that opportunity. But there's other markets where we arguably are subscale and I don't really see a path towards being a scale player. And the reality is the cost of being physical in these markets continues to scale over time. There's more regulatory requirements that are being put on our business every day. There's more compliance obligation. There's more cost to being physical in these markets. And if you're subscale without a path to being a scale player, then I think you have to ask yourself, why am I here? So we are looking at our portfolio today. I don't think there's a ton of markets that probably fall into that category. But clearly, there are a few markets that I look at and say, look, we've been here for a while. The business is fine. I don't necessarily see a path to being a more meaningful scale player, and we should ask ourselves are we the right owner of it? Or is there some better option for that business as we move forward. And that's part of what we're trying to crystallize as we get into our investor conference in the fall, which is a pretty clear view of where we want to continue to focus and play. And if there's markets that don't fit that criteria, then we'll look to do something different.

Safe to say double-digit growth is the norm aside from the U.K. and Canada, perhaps some of the more mature markets for international?

That's certainly the target. Absolutely. Yes. We want to be in secular growth markets, and a lot of the markets have good, strong fundamentals that support that level of growth for our business. But obviously, there's markets that we're in internationally, to your point, that don't have those growth characteristics, but they do have attractive margin profiles. They do generate a lot of cash. And hopefully, we're being good stewards of putting that cash to work to help drive growth in other parts of the business.

Okay. Let's quickly do issuer. You're going through a modernization program. You talked a lot about that. You've had a lot of wins as well, big backlog, which you've described on the calls. What would it take to rebase the growth rate higher above this mid-single-digit level? Do you have the backlog in place today to do it? Or do you need to replenish and add more ways through this modernization program?

Well, look, we have a good backlog today, to your point. We've been very successful on the renewal front. We've been very successful on the new wins front. We've got 60 million plus cards or accounts, I should say, excuse me, in the pipeline from a conversion perspective. So we've got good visibility from a, I'd say, growth perspective over the near term. I think to unlock sort of more growth potential in the business, we need to get modernization done. A big part of the thesis around modernization was twofold. One is, over time, our clients, and we're having these conversations everyday are on their own cloud journey. And the idea of them continuing to use a technology environment that's largely sort of on-prem that wasn't modernized in terms of language and code and accessibility. It wasn't as easy to consume as our new cloud-native platform will be, look, those would be hard conversations. So we recognize we needed to modernize our own technology to kind of keep pace with where we see our clients going over time. And obviously, building those out in cloud native environments, I think, is critical to the future success of those relationships. But what it also does for us is it opens up new TAMs. We've largely been focused in that business on larger FIs, more western markets, it's been harder for us to be able to tap into, I'd say, smaller FIs in the markets that we serve, new geographic markets where the cost of going in and standing up a new code environment, a new on-prem environment to run our technology has been a little burdensome relative to the revenue opportunities that we saw. So the ability to unlock some international markets and the ability to kind of tap into some of the new fintech use cases to have capabilities that are more easily consumable and consumable in the way that more fintech players want to be able to consume them. Some of that was really not available to us in our current construct. So the modernization I think it protects obviously, the base of the business for the long term, but it also opens up new growth potential and an ability to tap into new TAMs, which we would estimate to be about 3x larger than the current TAM we've been playing in. So clearly, we're not making these investments to continue to kind of grow at the same pace. The objective is to accelerate revenue growth in that business over time. But we've got to obviously get the work done to bring about the sort of modernized cloud-native environment. But we think clearly, the solutions we're bringing to market there are resonating with our current clients and prospective ones as well.

And feature-wise, you can stack up well against some of the modern...

In my opinion, and we've heard this feedback from existing clients and prospects who continue to assess all the options in the market. We remain the most feature-rich, most capable platform out there. I think that is consistent feedback that we hear across the board. So it is clearly, I think, the market leader from a feature functionality and capability perspective. And as we bring that into cloud-native environments, I think it's going to be that much more powerful as a capability matter.

Okay. And just to close that, I know we're almost out of time. Just the synergies then with this modernization of issuers, do you think we'll drive up the synergies into cross-selling with merchant as well? Does it create more opportunities there?

Yes. Look, I would tell you, I continue to believe that there is value in being on both sides of the ecosystem. I will readily admit, we haven't done the best job demonstrating that since the merger with TSYS. So obviously, we had a global pandemic, hopefully, once in a century pandemic, that comes in the way of that. And then we've had some wins and some successes, but there is more we can do, more we should do around leveraging the position we have on both sides of the transaction. A lot of that is encapsulated in the richness of the data that we have in our ecosystem more broadly and finding new ways to tap into that and AI is an opportunity there. But I think there is value on being both sides. I think modernization will help unlock some of that value. And I think us focusing strategically on ways to capture more of that value is important as well.

Okay. Terrific. We should probably stop there. Thank you both for the time. Appreciate it, Cameron.

Thanks for having us. Thanks for attending.