Global Payments Inc. (NYSE:GPN) Q1 2023 Earnings Call Transcript

Global Payments Inc. (NYSE:GPN) Q1 2023 Earnings Call Transcript May 1, 2023

Global Payments Inc. beats earnings expectations. Reported EPS is $2.4, expectations were $2.3.

Operator: Ladies and gentlemen, thank you for standing by. Welcome to Global Payments First Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. And as a reminder, this conference is being recorded. At this time, I would like to turn the call over to your host, Senior Vice President, Investor Relations, Winnie Smith. Please go ahead, Winnie.

Winnie Smith: Good morning and welcome to Global Payments first quarter 2023 conference call. Our earnings release and the slides that accompany this call can be found on the Investor Relations area of our website at www.globalpayments.com. Before we begin, I’d like to remind you that some of the comments made by management during today’s conference call contain forward-looking statements about, among other matters, expected operating and financial results. These statements are subject to risks, uncertainties, and other factors, including the impact of economic conditions on our future operations that could cause actual results to differ materially from expectations. Certain risk factors inherent in our business are set forth in filings with the SEC, including our most recent 10-K and subsequent filings.

We caution you not to place undue reliance on these statements. Forward-looking statements during this call speaks only as of the date of this call and we undertake no obligation to update them. We will also be referring to several non-GAAP financial measures, which we believe are more reflective of our ongoing performance. For a full reconciliation of the non-GAAP financial measures discussed in this call to the most comparable GAAP measure in accordance with SEC regulations, please see our press release furnished as an exhibit to our Form 8-K filed this morning and our supplemental materials available on the Investor Relations section of our website. Joining me on the call are Jeff Sloan, CEO; Cameron Bready, President and COO; and Josh Whipple, Senior Executive Vice President and CFO.

Now, I’ll turn the call over to Jeff.

Jeff Sloan: Thanks, Winnie. We are pleased to have delivered our best first quarter in four years. Exceeding our expectations to start 2023, despite continuing macro uncertainties. Our ongoing businesses produced adjusted net revenue growth, adjusted operating margin expansion, and adjusted earnings per share growth consistent with our cycle guidance once again. This performance reflects the wisdom of our strategies and our consistent focus on execution. We accomplished these results while also turning the page on our strategic initiatives. First, we are delighted to have closed our acquisition of EVO Payments in late March and we are already off to a strong start. Cameron will provide more details our integration efforts now underway, but let me preface his comments by saying that we remain as excited about the many opportunities we have together as we were at the time we announced the transaction nine months ago.

I am delighted to officially welcome Eva's value team members to the Global Payments family. We are pleased to have also recently completed the divestitures of Netspend's Consumer Assets and our Gaming Solutions business. With the successful execution of these transactions, we are focused on managing our go forward business composition with merchant solutions representing approximately 75% of our adjusted net revenue, and issuer solutions including B2B, comprising roughly 25%. This platform provides us the ideal set, core capabilities from which to grow, for many years to come. posted exceptional results for the first quarter. Starting with issuer solutions, our core business again generated substantial sequential financial and operating improvement, achieving high single digit growth and marking its best quarterly performance in more than five years.

It is worth highlighting that our core customer base consists of money center and systemically important financial institutions globally. We believe that we've been the beneficiary of incremental depository flows or larger institutions, combined with several significant implementations during the quarter, which we expect to provide tailwinds for some time to come. Year-over-year, consumer transaction volumes grew into the double-digits. Our commercial part business also continued to perform with transactions growing nearly 25% in the first quarter as cross-border and domestic corporate travel continued its recovery trajectory. Traditional accounts on file increased by roughly 200 million sequentially, and double-digits from the prior year to a new record due to strong conversion execution of new accounts and growth with existing customers.

Our decades long strategy of aligning with market share winners continues to bear fruit. And I think it's clear at this point that the legacy versus fintech hypothesis from 2021 has now been thoroughly debunked and turned on its head. We are delighted that we successfully converted a significant portion of one of the top 10 commercial banks in the United States in early March. This win was a double competitive takeaway, early after the announcement of our merger. We also completed the conversion of the Postbank portfolio in April. And in collaboration with AWS, we successfully deployed our cloud-based data and analytics platform for a leading financial institution partner in the United States. Finally, we are pleased to have signed multi-year extensions with M&T Bank, as well as another longstanding U.S.-based FI partner during the quarter.

We currently have nine letters of intent with institutions worldwide nearly all of which were achieved through a competitive RFP process. Turning to B2B, we continue to drive strong growth with both corporates and financial institutions as we leverage our virtual card, MineralTree automation and employer solution capabilities. This quarter, we achieved record supplier enrollments as middle market companies further digitized their payments. It's worth noting that MineralTree delivered normalized growth of roughly 20% for the period and we continue expect near 30% growth for this business in calendar 2023. We are proud of the resiliency of our merchant business, which delivered double-digit growth, excluding dispositions and the one-week contribution from EVO.

This performance was achieved despite incremental macro uncertainties driven by the banking crisis that developed in the latter part of the quarter. Stand-out for the period again include our worldwide e-commerce and omni-channel businesses, where growth accelerate into the high teens. Speaking of UCP, we are making great progress in our partnership with Spring by Citi that now spans North America, the UK, and Continental Europe. We are currently live across 14 countries and run rating at more than 100 million transactions and over $3 billion in volume annually. And based on our pipeline with many of Citi's largest treasury and trade solutions customers, we are on-track to more than double our volume together by the end of 2023. We also continue to see strong trends in our integrated business in the U.S., which grew at a mid-teens rate with sustained rates of accelerated growth.

We also produced a record quarter for new sales in this channel, demonstrating ongoing strong demand for our solutions. Additionally, vertical markets achieved double-digit growth led by School Solutions, Zego, and real estate and Xenial on quick service restaurants and stadiums. After announcing our partnership with the Brave last quarter, we are excited to have gone live with our Xenial cloud point-of-sale solutions on April 6, opening day for Truist Park. And we are pleased to have reached an agreement with the leading parks and entertainment company to provide both our Xenial food and beverage solutions, as well as our retail solutions at all of its theme park locations across the United States. Our pipeline remains full across our fixed service restaurant and sports and entertainment businesses.

Stay tuned. Outside the United States, our Asia Pacific business produced its best first quarter since 2018 as COVID-related restrictions were lifted at the end of 2022, including in Greater China. We continue to see strong trends in other faster growth geographies such as Spain and Central Europe and we are excited to enhance our scale with EVO in these markets. We also had several successful product launches during the quarter in Europe, including our point-of-sale solution in Central Europe, in our in the UK. These all bode well for the cross-sell opportunities with EVO. Before I turn over to Cameron, I'd like to address the announcement of my departure as CEO of Global Payments effective June 1 and the appointment of Cameron Bready, as our next CEO.

I've known Cameron personally for nine years and he has held the most senior and trusted positions in our company during that time. First, as our CFO and today as our President and COO. Cameron is an outstanding leader and the right person to succeed me. I have every confidence in his and our company's continued future success and will do everything I can to ensure a smooth transition to Cameron over the coming weeks. Now is the right time for us to execute on our succession plans. We recently closed on all three of our strategic transactions and we produced our best first quarter in four years with our first beat-and-raise in 18 months. Our businesses are exceptionally healthy. We delivered on a heightened cycle guidance in 2022 and are poised to do the same in 2023, excluding of course dispositions.

While challenges undoubtedly remain, we are on a path to return to normalcy as I suggested and hope for work, on our February call. When we arrived at Global Payments 13 years ago, we have many strengths, but we lack direct distribution, scale and e-commerce, a B2B strategy and we have much legacy technology debt to repay. Now, roughly 10 years after I became CEO, we have distinctive software assets owned and partnered, a market-leading e-com and omni-channel presence, enhanced exposure to faster growth markets and sizable B2B assets. We couple distinctive distribution with a solid technology footprint and unique multi-year collaborations with both AWS and Google. Finally and importantly, over the last 9.5 years since we've been running the company, GPN stock has compounded at nearly 16.5% annually, 650 basis points in excess of the S&P 500 index and 300 basis points in excess of our peers, despite all the turmoil over the last three years.

Simply put, we've accomplished our goals. I'll now turn the call to Cameron.

Card, Client, Bank

Photo by Patrick Tomasso on Unsplash

Cameron Bready: Thanks Jeff, and good morning. Let me start by acknowledging what an honor and privilege it is for me to be named the next CEO of Global Payments. I'm grateful for the Board's confidence in me leading the company going forward and I look forward to working with all of you in this capacity, continuing what has been a long history of outstanding leadership at Global Payments. On behalf of the 27,000 team members of Global Payments, I also want to thank Jeff for his leadership as CEO over the past decade. The transformation under the business under his stewardship has been remarkable and has shaped the company into the payments technology powerhouse it is today. Further, on a more personal note, I want to express my sincere appreciation for his mentorship and friendship during my time here at Global Payments.

Jeff and I worked side by side over my nine years at the company and importantly have been completely aligned on the four-pillared strategy we articulated at our investor conference roughly 18 months ago. We remain committed to this strategy as we endeavor to build the leading technology-enabled software-driven payments business worldwide. Having now closed the acquisition of EVO and the divestitures of our Netspend consumer and Gaming Solutions businesses, we have completed our strategic pivot. I'm delighted to be taking over at a time when our business now reflects the simpler model, more geared towards our corporate customers we've been foreshadowing since August of last year. Over the next month, Jeff and I will work closely to ensure a smooth and orderly transition.

I look forward to continuing the company's rich history of investing strategically to drive differentiated growth and value for our shareholders, customers, and team members, while fostering a culture that is second to none and enhancing our corporate citizenship in the communities in which we live and work around the globe. With that, I would like to echo Jeff’s remarks welcoming EVO team members to Global Payments. While we are still in the early days, we have made substantial progress on our integration and remain enthusiastic about the synergy opportunities available. Since announcing the transaction in August, we have an ample time to formulate integration plans and prepare for day 1, allowing us to truly hit the ground running. We have established a robust leadership and governance structure as we do with all of our acquisitions, which has resulted in a smooth transition and enabled us to implement early actions that align with our targets.

I'm pleased to report that we currently have executable plans to achieve the run rate EBITDA synergy target of at least $125 million within two years that we committed to at the time of the announcement. The substantial expense synergy opportunities are expected come primarily from aligning our business operations and go to market strategies, streamlining technology infrastructure, eliminating duplicative corporate and operational support structures, and realizing scale efficiencies. As all ways, we remain focused on sizing expense synergy expectations with an eye towards ensuring that we maintain momentum in the combined business and that it is well-positioned to continue to grow and expand in the future. And regarding the potential revenue enhancements, I will start by reiterating that as one company, we are uniquely positioned to deliver an unmatched suite of distinctive software and payment solutions to our combined customer base globally.

More specifically, I would highlight three broad categories that we believe provide us with ample run rate to drive revenue synergies from acquisition. First, we see significant opportunity to bring further value to EVO's relationships by leveraging our extensive distribution platforms in product portfolio, as well as our unique partner integration capabilities. This includes our point-of-sale technologies, commerce enablement solutions, and vertical market software offerings. As one example, we are bringing our point-of-sale software to key international markets where we overlap with EVO, including the UK, Spain, and Central Europe. We plan to cross-sell our point-of-sale software into EVO's customer base in these geographies, as well as bring these capabilities to EVO markets where we do not overlap today, including Mexico, Ireland, Poland, and Greece.

Second, we expect to capitalize on our ability to provide EVO's multinational customers, e-commerce and omni-channel solutions across markets and geographies, seamlessly blending their physical and virtual requirements. With our combined physical presence in over 40 countries globally, and the ability to transact in over 170 virtually, we can significantly expand EVO's value proposition to its existing customers. We have already initiated discussion with some of EVO's largest MNC clients to explore opportunities to support them in additional markets around the world. Third, EVA's accounts receivable automation software and B2B payment solutions augments our existing accounts payable automation and other capabilities, grounding out our full suite of B2B offerings.

Together with EVO, we are well-positioned to further grow in scale our B2B portfolio, particularly on the acceptance side, which includes leveraging EVO's extensive proprietary integrations to some of the most widely used ERP environments in the marketplace through its Pay Fabric platform. We could not be more excited about the many opportunities we have together with EVO given its alignment with our overarching strategy, further reinforcing our position as the preeminent payments technology company with extensive scale and unmatched global reach. Josh?

Josh Whipple: Thanks, Cameron. We are pleased with our strong financial performance in the first quarter, which exceeded our expectations despite ongoing macro concerns, highlighting the strength and durability of our business. Specifically, we delivered adjusted net revenue of $2.05 billion, an increase of 6.5% from the same period in the prior year on a constant currency basis. Excluding the impact of disposition, and roughly one-week of contribution from EVO, adjusted net revenue increased 9% on a constant currency basis. Adjusted operating margin for the quarter increased 200 basis points to 43.1%. The net result was adjusted earnings per share of $2.40, an increase of 18% on a constant currency basis, compared to the same period in 2022.

Taking a closer look at performance by segment, merchant solutions achieved adjusted net revenue of $1.46 billion for the first quarter with constant currency growth of 10%, excluding dispositions and the contribution from EVO. This performance was led by the ongoing strength of our technology-enabled businesses, while we benefited from the recovery in Asia Pacific as COVID restrictions eased across Greater China markets. We also saw consistent double-digit growth from our vertical market, POS, and payroll businesses. This strength was partially offset by ongoing headwinds from adverse foreign currency exchange rates. Along with macro softness in limited geographies, including the UK. We delivered an adjusted operating margin of 47.3% in the segment, consistent with last year.

Excluding the impact of EVO’s close in March, adjusted operating margin expanded 25 basis points and was in-line with our expectations. We are pleased with the fundamental performance of our issuer solutions business in the first quarter, which produced adjusted net revenue of $490 million, reflecting growth of 7.2% on a constant currency basis. Notably, core issuer grew high-single-digits this quarter, excluding the impact of FX, which was over 300 basis point acceleration sequentially. As Jeff highlighted, traditional accounts on file increased by approximately $20 million sequentially driven by strong account growth from our major consumer portfolio customers, as well as several portfolio conversions we successfully completed during the period.

Transactions also grew double-digits, compared to the first quarter of 2022 with strong contributions coming from both commercial and consumer card transactions. Finally, we delivered adjusted operating margins of 43.9%, an increase of 80 basis points from the prior year fueled by our accelerated growth. As for adjusted free cash flow, consistent with the prior period, we converted approximately 80% of adjusted earnings into adjusted free cash flow. We continue to target converting roughly 100% of adjusted earnings for the full-year, excluding the impact of the timing change related to the recognition of research and development tax credits. We expect our adjusted free cash flow conversion for the year to follow a similar trajectory as 2022.

We invested $162 million in capital expenditures during the quarter and continue to expect capital spending to be around $630 million in 2023, consistent with our long-term targets. This quarter, we repurchased approximately 2.1 million of our shares for roughly $200 million, which was executed prior to the closing of our acquisition of EVO payments on March 24. To help fund the EVO transaction, in early March, we successfully priced an inaugural European debt offering at a fixed rate coupon of 4.875% during 2031. With this transaction, we continue to evolve our capital structure to align with our global operations and gain access to a broader investor base and new sources of capital. Separately, in January, we established a $2 billion commercial paper program.

The CP program is supported by our revolving credit agreement. At the end of the quarter, we had approximately $1 billion of commercial paper outstanding. We currently have in excess of $3 billion of available liquidity. Following the aforementioned capital markets transactions and drawing on the revolver to close EVO, our total indebtedness is approximately 90% fixed with a weighted average cost of debt of 3.8%. We are also delighted to have closed both the divestiture of Netspend's consumer assets and the sale of the Gaming Solutions business in April. Following all of these transactions, our balance sheet remains healthy and our leverage position is roughly 3.8x currently. We continue to expect to return to a similar leverage level to where we ended 2022 by year-end 2023, while maintaining existing investment grade ratings.

We are pleased with how our business is positioned following our first quarter performance and we are raising our financial outlook for the year. We now expect reported adjusted net revenue range from $8.635 billion to $8.735 billion, reflecting growth of 7% to 8% over 2022, an increase from 6% to 7% previously. We continue to forecast annual adjusted operating margin to expand by up to 120 basis points for 2023. As a reminder, this is above our cycle guidance for margin expansion of 50 basis points to 75 basis points annually, driven by benefits to our business mix from our ongoing shift towards technology enablement and the divestiture of Netspend, partially offset by the lower margin profile of EVO prior to full synergy realization. color at the segment level, we continue to anticipate our merchant segment to report adjusted net revenue growth of roughly 15% to 16% for the full-year, but now expect to be toward the higher end of that range.

We continue to expect more than 100 basis points of adjusted operating margin expansion from the existing Global Payments merchant business, excluding dispositions in 2023, which again is ahead of our cycle guide. We expect this expansion will be more than offset beginning in the second quarter with the absorption of the lower margin profile of EVO Payments. We anticipate this impact to be mitigated by synergy realization as the year progresses. As a result, we are forecasting margin contraction in the second and third quarters and then margin expansion in Q4 as synergies ramped for our merchant business. The net result will be a modest decline in our total merchant business reported adjusted operating margin for the year, consistent with our prior guidance.

Moving to Issuer Solutions. We now expect to deliver adjusted net revenue growth in the 5% to 6% range, up from 4.5% to 5.5% previously for the full-year, compared to 2022. This outlook reflects our better than expected performance in the first quarter and the benefit we anticipate from our conversion pipeline. Specifically, we now expect core issuer to grow above 5% and continue to expect MineralTree and Netspend B2B businesses to grow low double-digits. We anticipate adjusted operating margin for the issuer business to expand by up to 60 basis points consistent with our prior outlook as we benefit from the natural operating leverage in the business. In terms of quarterly phasing, there are two continuing items to note. First, while we expect foreign exchange rates to be roughly neutral for the full-year, we still anticipate a currency headwind to adjusted net revenue of up to 100 basis points in the second quarter.

Second, we expect the successful closing of the sale of Netspend for the end of April to add roughly $25 million of incremental revenue for the second quarter versus our prior expectation with no change to our expected earnings per share dilution impact for the year. Moving to a couple of non-operating items. We expect net interest expense to be roughly $550 million, a modest $10 million increase from our prior guide in-light of yield curve movements. And for our adjusted effective tax rate be in the range of 19% to 19.5% consistent with our prior guidance. For modeling purposes, we continue to assume excess cash is used to pay down indebtedness in 2023 until we return to our targeted leverage levels for the end of the year with minimal share repurchases until then.

Putting it all together, we now expect adjusted earnings per share for the full-year to be in the range of $10.32 to $10.44, reflecting growth of 11% to 12% over 2022, up from 10% to 11%, previously. Excluding dispositions, adjusted earnings per share growth is expected to be 16% to 17% for 2023. This is consistent with our updated 2021 cycle guide, despite incremental adverse changes in the macro environment since then. Our first quarter results represent roughly $0.05 adjusted earnings per share be relative to our internal forecast. Our raised guidance for calendar 2023 essentially rolls the beat plus a couple of cents for the year in-light of the uncertainties of the current environment. Similar to what you've heard from others, we saw strength across our markets in January and February, which moderated somewhat in a number of our businesses in March.

Our issuer business did not experience any discernible moderation as our large money center bank customers benefited from the regional banking crisis that developed in March. Trends in this business continue to remain resilient through April and similar to March levels of activity. Our updated outlook today presumes a worldwide macroeconomic backdrop that is consistent with the current environment throughout the remainder calendar year 2023. And with that, I'll turn the call back over to Jeff.

Jeff Sloan: Thanks Josh. I couldn't be more proud of what we've achieved as a management team together over the last near decade with more than 27,000 team members across 40 plus countries. I'm also very pleased with our long history of and succession planning. Cameron is only the third CEO of Global Payments in nearly a quarter century. He has my complete confidence and I look forward to working with him closely to affect a smooth transition over the coming weeks. I personally thank all our team members for what they do for us every day, as well as our millions of customers and thousands of partners and shareholders and the trust you've put in us and in me over the last 13 years. The future is bright at Global Payments. Winnie?

Winnie Smith: Thanks, Jeff. Before we begin our question-and-answer session, I'd like to ask everyone to limit their questions to one with one follow-up to accommodate everyone in the queue. Thank you. Operator, we will now go to questions.

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