Global Payments Inc (GPN) — Q2 2019 Earnings Call Transcript

Good morning and welcome to EVO Payments second quarter earnings conference call. This call is being webcast today and a replay will be available through the Investor Relations section of EVO's website shortly after the completion of this call. Please note that some of the information you will hear during our discussion today will consist of forward-looking statements. These forward-looking statements are based on currently available information and actual results may differ materially from the views expressed in these statements. For additional information on factors that may cause our actual results to differ from the views expressed in any forward-looking statements made today, please refer to our earnings release; and the risk factors discussed in our periodic reports filed with the SEC including our most recent 10-K, which is available on our website. In an effort to provide additional information to investors, today's discussion also includes certain non-GAAP financial measures. An explanation and reconciliation of these non-GAAP financial measures to their nearest GAAP financial measures can be found in our earnings release available on our Investor Relations website. Today we will discuss our second quarter 2019 performance. Joining me on the call today is Jim Kelly, Chief Executive Officer; Kevin Hodges, Chief Financial Officer; Darren Wilson, President, International; and Brendan Tansill, President, The Americas. Now, I will turn the call over to Jim Kelly.

Thank you, Ed, and good morning everyone. Welcome to EVO's second quarter earnings call where we will review our results for the quarter and provide updates on our business performance, our platform migrations, and our recently announced acquisitions. For the quarter, constant currency adjusted revenue grew at 11% and constant currency adjusted EBITDA grew at 14% when excluding the card network incentive recognized in the prior year period. These results reflect our strong international bank partnerships, our growing integrated payments network, and our expanding sales efforts across all markets. I'd now like to provide an update on our business performance in Europe. Our Polish business continued to deliver solid results in the second quarter leveraging both our bank relationship with PKO and our strong direct sales team. We signed several large national customers including a pharmacy network and a grocery store chain. Additionally, we signed an agreement with a merchant which supports over 1,000 locations and is implementing Visa Direct for payouts immediately to the consumers' Visa debit card. This application is Europe's first implementation of Visa Direct at a physical point-of-sale and we are excited to work with Visa and the merchant to launch this digital solution. On a side note, we anticipate launching Visa Direct in the U.S. during the second quarter of next year. We also expanded our sales team to include the Postbank branch network to support our new relationship with the bank which we announced last quarter. Additionally, we have renewed our agreement with the Polish Post to continue to provide card acceptance and mobile top-up solutions for its network of over 4,700 post offices and 3,500 couriers. Our tech-enabled division continues to deliver strong results as well. Earlier this year we expanded our Snap platform to provide e-commerce processing capabilities for in-market merchants and we have already signed new merchants utilizing these capabilities. Lastly, as we mentioned on our previous call, the cashless program began its rollout in Q1 2018 and we continue to see new business from this program. As expected, growth rates have slowed as the program annualizes over 2019. We have seen strong renewal rates for merchants after the initial trial period as they now transition to a traditional processing arrangement. Turning to Ireland and the U.K., these businesses continued strong growth in the second quarter as well. In Ireland, we continue to leverage our partnership with the Bank of Ireland to sign new merchants. Additionally, we have implemented new tech-enabled solutions in the market. For example, since rolling out our Snap e-commerce platform in Ireland earlier this year, we have signed key customers requiring tech-enabled capabilities such as virtual terminals, omnichannel solutions, and e-commerce. As discussed in our last call, we integrated our Way2Pay acquisition to Snap to further enhance our e-commerce offering. Since the acquisition, 70% of new Way2Pay signings are using EVO acquiring services, demonstrating the success of our cross-selling capabilities. In the second quarter, we also extended Way2Pay into the U.K. market where we began signing new schools. In the U.K., our business continues to onboard over 1,000 new merchants monthly through its direct sales efforts. In our tech-enabled division, our ISV network remains strong and continues to deliver a steady stream of merchants as one-third of our new merchant signings are now referred by an ISV partner. Our e-commerce offering is gaining traction in the market as well, with 30% of new deals from our direct sales force now including an e-commerce component. Finally, I would like to provide an update on Spain. In our tech-enabled division, we continue to build our strong distribution by adding new ISV partners in the medical, education, and hospitality verticals. Additionally, ClearONE's unique product capabilities continue to attract new customers, including a large national gift shop chain and a multi-store clothing retailer. We now see over 60% of new ClearONE gateway customers using EVO's acquiring services, demonstrating the success of our integrated strategy. In our Direct division, we remain pleased with our Liberbank relationship and are seeing steady referrals from the bank. With respect to Santander, the bank has recently announced that it has completed its accelerated consolidation of the popular branch network and IT infrastructure which has increased attrition and impacted new referrals. Turning to North America. We continue to see strong adjusted revenue growth from our U.S. ISV and B2B business units which together grew at 21% in the second quarter. Our U.S. ISV business grew in the high teens this quarter and we are focused on signing new partners to expand the vertical markets we support. For example, in the second quarter we signed a key software partner in the U.S. focused on veterinarian practices. As this partner is an international company, we plan to support this partnership both inside the U.S. and in Europe via our Snap platform. We also expanded several key relationships with existing software partners and found new ISVs focused on membership clubs and unattended retail. Our B2B business unit continues to be the fastest-growing component of our tech-enabled division, demonstrating strong adjusted revenue growth once again for the quarter. The performance from this group is a result of our direct sales efforts, growth in our B2B partner network, and the ongoing software sales of our Microsoft- and Oracle-integrated ERP solutions. We also continue to develop new products for cloud-based solutions such as our newest application to support Microsoft Dynamics 365 Business Central which we released last month. As a result of this application, we have signed a new Microsoft partner specializing in ERP implementations for distribution and manufacturing customers. The third component of our U.S. tech-enabled division is our e-commerce business which trails ISV and B2B in its performance as previously discussed. As such, we have implemented several strategic initiatives this year to improve its performance including launching and marketing our Snap e-commerce capabilities directly to partners and merchants. Turning to Mexico, we demonstrated very strong constant currency adjusted revenue growth of 13%, which includes the positive incremental impact of the Easter holiday. Our primary bank partner, Citibanamex, continues to deliver strong merchant referrals ranging from small merchants to large national customers. Beyond our bank referral channel, we have launched new technologies and capabilities in the market including paperless boarding, integrated solutions, and our proprietary e-commerce gateway which we are utilizing to sign new merchants and enhance the experience for our current customers. For instance, in the second quarter, we signed the e-commerce business of Heineken and will begin processing by year-end. Next, I'd like to provide a brief update on our ongoing integration work. In the second quarter, we began the Liberbank migration from the national processor to our Polish platform. The pilot phase of the project is now complete and we are boarding new merchants directly to our platform. We expect this existing portfolio of merchants to begin migration in the first half of 2020. In Spain, we also migrated another portion of the Banco Popular portfolio and continue to migrate the remainder of the portfolio that includes larger merchants requiring a higher level of coordination. Last year, we completed the initial phase of the Mexican migration which was to in-source our customer service and technical support functions from a third party. The migration of our Mexican merchants onto our U.S. backend platform remains on plan for the initial requirements phase and we anticipate commencing the next phase of the project in the second half of 2020. In addition to our ongoing migration efforts, our teams have been ensuring we are in compliance with the European Strong Customer Authentication mandate SCA that is part of the PSD2. We have a comprehensive plan in place to meet these requirements, although the regulatory landscape continues to evolve. Our EuroBic joint venture in Portugal is still pending regulatory approval. We anticipated we would receive approval by this summer; however, we now expect to hear from the regulator in late fall. Now, I would like to turn the call over to Brandon Tansill who will discuss our recent acquisitions in Mexico and in Chile.

Thanks, Jim. Good morning everyone. As Jim mentioned, in Mexico, we continue to make investments in our tech-enabled distribution to drive growth for the business. In July, TouchBistro, a well-known point-of-sale provider for restaurants with a strong U.S. presence, announced it was launching its integrated payments platform to restaurants in Mexico later this year and selected EVO to be its acquiring partner. At the end of last month, we also closed on our acquisition of SF Systems, an ISV integrator platform based in Mexico, to complement our Snap platform in the market. The acquisition extends our ISV capabilities and allows us to accelerate growth in the Mexican ISV market using its existing integrations. Turning to Chile, as was announced in May, EVO signed an agreement to form a new 10-year exclusive bank joint venture with Bci. Chile is a new market for EVO and our first operation in South America. Recent regulatory changes have enabled greater innovation in the market, ending the historical monopoly for payment processing. Local banks are now evaluating their digital strategies to compete in this evolving market and are looking for innovative solutions. Anticipating this change, Bci conducted a competitive evaluation process last year and selected EVO based on our deep understanding of successfully building acquiring businesses internationally. This will be EVO's 16th international bank relationship since we started our global expansion in 2012. As a result of the transaction, EVO will become the first independent merchant acquirer to enter the Chilean market by partnering with a leading financial institution. We are very excited about entering Chile and South America. Chile is a market-oriented economy with strong foreign trade, financial institutions, and public policy. There are over 600,000 merchants in Chile today and it is estimated that only 40% accept card payments. Additionally, the market has experienced strong growth of 22% in credit and debit card transactions annually over the last five years, driven by a robust economy and the shift from paper to plastic. With $60 billion in assets and 325 branches serving over 70,000 customers, Bci is the third largest bank in Chile by assets, with a 17% market share. Bci has been in the market for more than 80 years and is committed to providing a digital experience to its customers. As an example, in 2017, the bank successfully launched a leading mobile payment solution in Chile, MACH, and has had tremendous success with over one million subscribers in less than two years. In addition to P2P capabilities, the mobile solution also allows consumers to pay merchants like Amazon, Spotify, Netflix, AliExpress and other international e-commerce brands via a virtual debit card connected to MACH. We look forward to marketing this product with Bci via the JV and expanding its capabilities to include the point-of-sale as we launch EVO's global product suite in the market. Under the terms of the agreement with the bank, EVO will own a majority of the new joint venture and have operating control. Bci will exclusively refer merchant customers from its branches and corporate offices to the JV, while EVO will deliver a unique platform proposition to differentiate from the offerings currently in the market and provide its global proven sales and marketing expertise to quickly gain market share for the business. We have already identified a country manager from Bci, who will work with our head of Latin America to ensure the business' success as we look to expand further into South America. The business in Chile will initially leverage our Mexico infrastructure for support similar to how our European businesses utilize our Polish infrastructure. The JV in Chile does not include a back book of merchants and will require initial investments to establish the business, not unlike our Irish business, which began in 2014 and achieved 25% acquiring market share within four years of its launch. Utilizing our proven sales and marketing expertise, we can achieve a similarly successful outcome in Chile as well. I will now turn the call back over to Jim.

Thanks, Brendan. We look forward to the launch of our business in Chile this year after obtaining regulatory approval. Our M&A strategy remains the same as we partner with international financial institutions and continue to expand our tech-enabling capabilities in new and existing markets. Overall, we are pleased with our results for the quarter. Kevin will now cover the financials in more detail.

Thank you, Jim, and good morning everyone. As Jim mentioned, EVO delivered a strong quarter of top and bottom line growth. For the second quarter, normalized adjusted revenue grew 11% on a currency-neutral basis, with acquisitions contributing four percentage points of that growth. FX negatively impacted revenue by 260 basis points in the quarter. Based on current FX rates, most of the adverse FX impact compared to 2018 occurred in the first half of 2019, although the euro and Polish zloty continued to weaken versus the prior year. Results are normalized for a card network incentive in the prior year period. As previously discussed, our revenue is now reported net of card network fees, which were $27.5 million in the second quarter. We report adjusted revenue excluding this deduction to aid in comparability with 2018. In the second quarter, we delivered double-digit currency-neutral adjusted revenue growth in our largest international markets including Poland at 10%, Spain at 11%, the Irish and U.K. market at 24%, and Mexico at 13%. As indicated on our previous call, growth in Poland was impacted in Q2 as a result of the annualization of the cashless program and the migration of a large customer at the end of Q1, which affected growth beginning in the second quarter. Growth was further impacted by merchant renewal pricing in Q2. We expect these factors to impact Polish growth through Q1 of next year. While revenue in Spain grew at 11% in the quarter, we initially had higher growth expectations earlier in the year, which were impacted by the Santander consolidation efforts as Jim previously mentioned. On a currency-neutral basis, normalized adjusted EBITDA increased 14% to $39.3 million. Currency-neutral normalized adjusted EBITDA margin increased 82 basis points to 26.2% compared to the prior year period when excluding the previously mentioned card network incentive. Beginning with our European segment, segment-adjusted revenue in the quarter grew 11% over the prior year period on a currency-neutral basis. In the second quarter, our adjusted revenue per transaction in Europe declined 8% due to the growing number of large merchants performing well in the market and lower DCC take rates which will annualize in Q4. We saw second-quarter European tech-enabled transactions grow 20% versus the prior year driven by our sales in Poland, Ireland, and the U.K. The Tech-enabled division now represents 22% of European adjusted revenue. Segment profit for the quarter was $15.1 million, an increase of 9% on a currency-neutral basis. For the quarter, segment profit margin was 23.7%, a decrease of 47 basis points compared to the prior year due to the previously mentioned headwinds in Spain. Turning to North America. We saw strong performance out of this segment as well. Second quarter normalized adjusted revenue increased 10% over the prior year on a currency-neutral basis with acquisitions contributing five percentage points of that growth. Within the segment, our U.S. Tech-enabled normalized adjusted revenue increased 8% compared to the prior year period, which reflects the strong growth in our ISV and B2B business units offset by the performance of our e-commerce business. Our U.S. Direct and Traditional divisions adjusted revenue grew 9%, which reflects the federated buyout and expected declines in the Traditional division. The strong growth in Mexico is a result of our strong bank partnerships and direct sales teams in the market coupled with our growing Tech-enabled division. On a currency-neutral basis, our normalized adjusted revenue per transaction in North America decreased 1% in the quarter, which reflects the impact of large merchant growth in Mexico as previously discussed. Segment profit for the quarter was $29.9 million, an increase of 16% on a currency-neutral basis when adjusting for the card network incentive in the prior year. North America segment profit margin improved 180 basis points to 34.6% in the quarter due to our revenue growth and ongoing operating efficiencies. Turning to our corporate expenses. Adjusted corporate expenses were up modestly to $5.7 million for the quarter compared to the prior year period, primarily due to additional public company costs. Expenses related to operations as a public company largely began in Q2 2018 and the company is continuing to make investments in this area during 2019. Pro forma adjusted net income was $13.4 million for the quarter reflecting growth of 29%. On a reported basis, consolidated net income was $3.8 million for the quarter. Reflecting adjustments described in our press release in all share classes, pro forma adjusted net income per share was $0.16. At the end of the quarter, our diluted share count was 31.9 million, which reflects the weighted average Class A common stock outstanding in all diluted securities. Including all share classes and diluted securities, we had 85.7 million shares outstanding. In the second quarter, we spent $6.8 million in capital expenditures of which 62% was for point-of-sale terminals in our international markets. CapEx declined 61% versus the prior year period as we annualized the terminal investments made in the prior year to support the cashless initiative in Poland and the timing of other purchases last year. We ended the quarter with net leverage of 4.2 times last 12 months adjusted EBITDA. In addition, interest expense declined 21% in the quarter compared to the prior year period after adjusting for the prior year debt modification costs associated with the post-IPO refinancing. Free cash flow described as adjusted EBITDA less capital expenditures, less net interest expense was $22 million, an increase of 270% over the prior year period. Finally, as mentioned, we've seen headwinds in Spain from the bank's consolidation and related efforts pertaining to Banco Popular. As such, we now estimate a revenue impact to the company of 75 to 100 basis points for the year. We maintain our full year 2019 guidance and expect adjusted revenue to grow between 10% and 12% on a currency-neutral basis. We expect adjusted EBITDA to grow between 11% and 14% on a currency-neutral basis and pro forma adjusted net income per share to grow between 12% and 18% on a currency-neutral basis. I will now turn the call back over to Jim.

Thanks, Kevin. I will now turn the call over to the operator to begin our question-and-answer session. Operator?

Hey, good morning. Thanks. I wanted to ask on Bci, just the cost to stand that up. I know that there's no back book involved here with Transbank keeping that. But I'm just curious how quickly, I think you mentioned four years I heard that. But just the cost to stand it up and how quickly we might see it flow into the P&L.

Good morning. In Ireland, we achieved a 25% market share over four years. As we mentioned earlier, we're planning to utilize our Mexican infrastructure, which includes a team of over 400. Similar to our operations in Europe, where Poland serves as a back office, we aim to establish a similar structure for South America. Initially, Bci will focus on sales, product, and account support, with plans to introduce first-line customer service down the line. There will certainly be costs involved, primarily related to sales expenses incurred before revenue starts coming in. Given the under-penetrated market, we expect organic growth in card issuing and merchant acceptance to exceed 20%. We anticipate rapid growth, estimating a timeframe of about two years, although we may incur some initial losses, which we will disclose during calls. We were interested in acquiring a back book but couldn't because it's controlled by the central processor. We are very enthusiastic about this opportunity to enter South America, which we have discussed before. We see significant growth potential in the market and consider our partner focused on technology to be excellent. As mentioned, they already have a product in the market similar to Venmo for P2P transactions, which facilitates online payments, including with Amazon and e-commerce. They are also interested in expanding into face-to-face transactions, along with the capabilities that our Mexican team can offer, which has seen great success in the region.

Yes. No, I was glad to see it. I know you mentioned South America being a focus. Is there more to do behind this one? Or do we need to give this time to develop and provide a proof point for others that you can stand something like this up?

Yes. I think that's a really good question. For us, because as we described our M&A strategy our objective is to form a long-term relationship with financial institutions and benefit from their distribution, and they benefit from our monoline capabilities. So it's not as easy as going to a private equity firm and buying a business. You have to cultivate a relationship. Typically, these financial institutions, if not typically, all the time run a process. So you have to wade through the process, the contracts, all of that stuff. So yes, Bci took over one year from start to finish. But our expectations are a number of the Spanish-speaking countries in particular in South America, I think will look at Chile and also Brazil, but look at Chile and how it's opening up; obviously the same in Argentina. So my expectation is that you'll see us in other countries in the not distant future, but we don't have anything that's actionable immediately.

Okay. No. Congrats on that. Real quick, if you don't mind the third question. Just on the North America margins, Kevin, is that a sustainable level for the second half of the year? Thank you.