Global Payments Inc (GPN) — Q4 2019 Earnings Call Transcript

Good morning, and welcome to EVO Payments' fourth 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 will be 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 the nearest GAAP financial measures can be found in our earnings release available on our Investor Relations website. Today, we will discuss our fourth quarter and year-end performance. Joining me on the call is Jim Kelly, Chief Executive Officer; Tom Panther, Chief Financial Officer; Darren Wilson, President, International; and Brendan Tansill, President of the Americas. I will now turn the call over to Jim Kelly.

Thank you, Ed, and good morning, everyone. Welcome to EVO's fourth quarter earnings call. Before I provide my comments on EVO's performance, I'd like to introduce Tom Panther, our new Chief Financial Officer. Tom joined EVO about 3 months ago and is becoming well acquainted with our organization, having already traveled extensively to many of our global offices. We look forward to working with Tom. On today's call, we will review our results for the quarter, summarize our accomplishments for 2019, and discuss key strategic priorities for 2020. In the fourth quarter, EVO delivered 7% constant currency adjusted revenue growth, 13% adjusted EBITDA growth, and 169 basis points of adjusted EBITDA margin improvement when excluding a one-time benefit that we recognized last year. These results reflect the strong performance of our Direct and Tech-enabled divisions across both of our segments, coupled with our continuing operating efficiencies and acquisition integration efforts. In the fourth quarter, EVO's 8% overall adjusted revenue growth in the Direct division was primarily driven by our strong bank referral relationships outside the U.S., most notably, Citibanamex, PKO, and the Bank of Ireland. Across our remaining bank alliances, we continue to see solid performance, consistent with previous quarters. Turning to our Tech-enabled division, in the fourth quarter, EVO once again demonstrated strong adjusted revenue growth across all markets. Overall, Tech-enabled revenue grew at 16%, excluding our domestic e-commerce business. In the U.S., Tech-enabled growth was driven by our ISV and B2B business units, which together grew at 17% in the quarter. Internationally, our Tech-enabled division is anchored by our ISV and e-commerce businesses, which grew at 15%. Before I turn the call over to Darren and Brendan, who will provide updates on EVO's segment performance, I'd like to highlight some of our many accomplishments for 2019.

Thanks, Jim, and good morning, everyone. In the fourth quarter, European constant currency adjusted revenue grew at 12%. Within the segment, our Direct division demonstrated 12% constant currency adjusted revenue growth, which reflects the strength of our partnerships with leading financial institutions, coupled with our sales expertise and proprietary product offerings. Across our European markets, our Tech-enabled divisions also delivered solid constant currency adjusted revenue growth of 14% in the quarter as we continue to leverage our recent tech-enabled acquisitions and our Snap e-commerce gateway solutions. I would like to comment on some of the highlights for the quarter, beginning with our Polish market, where we continue to sign national and multinational merchants, as well as small and medium-sized merchants through the Cashless initiative. Since the program began 2 years ago, EVO has been the leading acquirer for merchants in this program by market share. Our success is further evidenced by our sales team winning the award for the top sales performance in 2018 and 2019 from the Cashless Poland Foundation. We are also continuing to successfully leverage our cross-border capabilities for our Poland-based multinational accounts throughout Central and Eastern Europe and now have over 140 multinational merchants across 5 countries. We believe that our underlying presence will be beneficial as we seek to develop future bank relationships in these small, fast-growing markets. Complementing our Polish business are our operations in the Czech Republic, where we have exclusive relationships with 2 banks, Moneta and Raiffeisen. Although our acquiring business there is still relatively small compared to the rest of Europe, we are quickly boarding new merchants to our platform and consistently demonstrating revenue growth greater than 20%. In Spain, we remain pleased with the 20% adjusted revenue growth from our Liberbank alliance, as we market EVO's products and services under the bank's brand throughout the country. We have also expanded our direct sales force across Spain to diversify distribution beyond our bank referral channels. Further, in our Tech-enabled division, Snap's integration capabilities continue to deliver new gateway customers, as well as their acquiring business through our one-stop shop payments offering. Turning to Ireland and the U.K., our business continues to demonstrate substantial adjusted revenue growth as a result of our bank referral relationship, our direct sales efforts, and our growing ISV network. In the U.K., we remain excited about the success of our expanded Snap gateway capabilities brought to us by ClearONE. In the fourth quarter, we continued to expand our Snap product and launched into the U.K. restaurant sector via Snap's pay-at-table solution. In Ireland, we are also expanding our tech-enabled offering with our Snap gateway, which we are leveraging to enhance merchant relationships and win new business. Since we enhanced Snap's capabilities to include unique payment options for primary and secondary scores in the market, we've signed over 90% of the acquiring business for new gateway customers. We will continue to cross-sell EVO's acquiring capabilities to schools and clubs in Ireland in 2020, as we also expand Snap's offering to enable card acceptance through SMS for other merchants. In 2019, we remain focused on delivering strong customer service and operational efficiency. We also worked diligently during the year to implement important regulatory-related infrastructure and processing requirements to support strong customer authentication, or SCA, rollout as part of PSD2 compliance. These projects required numerous system and product upgrades and extensive communication with regulators, third-parties, and merchants. We are well positioned to continue to deliver improved compliant capabilities to our customers that provide security measures in alignment with the new regulations. I will now turn the call over to Brendan, who will provide updates on EVO's businesses in the Americas.

Thanks, Darren, and good morning, everyone. The America's constant currency adjusted revenue grew at 4% in the fourth quarter when excluding the traditional division. Within the segment, our Direct division in Mexico demonstrated 13% in constant currency adjusted revenue growth, which reflects the strength of our Citibanamex relationship complemented by our local direct sales force. Our Tech-enabled division also delivered solid constant currency adjusted revenue growth in the quarter, driven by ISV and B2B growth in the U.S. of 17% and tech-enabled growth in Mexico of 21%. In our U.S. B2B business, we have recently integrated the Delego gateway capabilities into our B2B sales offering and are now leveraging its SAP integration to sign newer, larger acquiring customers and ERP referral partners. Following the acquisition of Delego, we now have full integrations to SAP, Microsoft, and Oracle, in addition to a number of smaller ERP solutions. Going forward, we remain focused on expanding our ERP integration capabilities as we continue to leverage the unique technologies and referral networks of each ERP ecosystem to sign new business. In our ISV business, we continue to work with our dealer network and third-party providers to enhance our product and service offering for merchants using integrated point-of-sale systems in the U.S. We accelerated this initiative in 2019 and are continuing to execute on this strategy in 2020 as we strengthen our relationships with market-leading payment partners to drive distribution. Further, we continue to form new relationships with software vendors and dealers as we capitalize on the current industry disruption caused by the large mergers in 2019. Turning to Mexico, we demonstrated strong growth for the full year, driven by our referral relationship with Citibanamex, coupled with our tech-enabled growth in the market. Our Tech-enabled division grew approximately 20%, as we enabled e-commerce capabilities for many of our large corporate customers. We also enhanced our integrated Snap offering with our acquisition of the SFS gateway in July and the expansion of our ISV network in Mexico throughout 2019. The success of our early tech-enabled focus is evidenced by our continued signing of new large merchants for acquiring via our market-leading integrations and new SME restaurants from our in-market exclusive partnership with TouchBistro, a leading restaurant POS provider in the U.S. and Canada. As an example, leveraging our e-commerce and integration capabilities, we signed one of the largest multinational merchants in the market at the end of 2019. We anticipate strong tech-enabled growth in Mexico going forward as we continue to build out our payments offering in the market through ISV relationships, the continued rollout of our Snap e-commerce gateway, and related tech-enabling acquisitions. Lastly, we continue to make progress establishing our joint venture in Chile. We are currently developing our processing solutions and related services in the market and are working with the regulators and the bank to obtain approval to legally establish the joint venture. As a result of this acquisition, we have elected to delay our U.S. and Mexico platform consolidation in favor of enhancing our Mexico platform and leveraging it to enable processing for Chile. Chile is now EVO's second market in Latin America, and we remain focused on additional expansion opportunities throughout the region. A key tenet of this expansion strategy is leveraging our existing processing platform and back-office functions in Mexico. Similar to our efforts in Europe, we have worked diligently throughout the year to leverage our existing infrastructure in the Americas to drive a greater customer experience and greater operating efficiencies. With that, I will turn the call over to Tom, who will now cover the financials in more detail.

Thank you, Brendan, and good morning, everyone. I'm pleased to be here today as part of the EVO team. As Jim mentioned, EVO delivered strong top and bottom line growth this quarter. For the fourth quarter, adjusted revenue grew 7% on a currency-neutral basis. FX negatively impacted revenue by 60 basis points in the quarter as the euro and the Polish zloty continued to weaken compared to the prior year. On a currency-neutral basis, adjusted EBITDA grew 13% and margin expanded 169 basis points when normalizing for a one-time benefit in the fourth quarter of 2018 related to our Cashless program in Poland. Including this program, adjusted EBITDA increased 9% to $48 million and margin expanded 52 basis points compared to the prior year quarter. These solid results reflect the core revenue growth of our business, coupled with our continued focus on delivering operating efficiencies and integrating recent acquisitions. In Europe, segment adjusted revenue in the quarter grew 12% over last year on a currency-neutral basis. Within the segment, we saw fourth quarter Tech-enabled revenue grow 14% versus the prior year, driven by our sales in Ireland, Poland, and Spain. The Tech-enabled division now represents 23% of European adjusted revenue. For the quarter, adjusted segment profit increased 15% and adjusted segment profit margin expanded 113 basis points compared to the prior year. We're normalizing for an increase in certain transitory expenses in the fourth quarter of 2019 related to the SCA implementation, the continued rollout of the Cashless program, and discrete operating costs, primarily in Spain, related to system integration activities. When including these expenses, fourth quarter adjusted segment profit declined 13% compared to the prior year. Now turning to the Americas. This segment delivered solid core business performance as well. For the quarter, normalized adjusted revenue grew 8% when excluding the impact of our traditional and e-commerce businesses in the U.S. Adjusted revenue in Mexico grew at 14% in the quarter, which is a result of our strong bank partnerships and direct sales teams in the market, coupled with our growing Tech-enabled division. In addition, our U.S. ISV and B2B adjusted revenue grew on a combined basis at 17% compared to the fourth quarter of last year. Overall, fourth quarter segment adjusted revenue increased 3% over the prior year on a currency-neutral basis. Adjusted segment profit for the quarter was $37 million, an increase of 17% on a currency-neutral basis. The Americas adjusted segment profit margin improved 490 basis points to 41% in the quarter, which reflects our revenue growth, conversion synergies, and lower state tax rate. Turning to corporate. Adjusted expenses for the quarter were $6 million, which is consistent with our full year adjusted expenses of $24 million. As we have stated on previous calls, expenses related to our operations as a public company largely began in the second quarter of 2018. We continue to make investments in this area during 2019 in connection with EVO becoming a large accelerated filer. I'm pleased to report that we are now SOX compliant.

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

So I guess first question for Brendan. You talked about pushing out the - or stopping the consolidation of the processing onto the U.S. platform. You're doing that out of Mexico. Is that a requirement there for Chile? Or is there any sort of rationale around there? Will that now be the hub for processing transactions across Latam?

Yes. So good question, George. The intent with Mexico for the time being is to enable that platform in the same way that we've been able to the Poland platform as our back office and technology hub for the European markets. So that system is already obviously in Spanish language. That's applicable to nearly all of Central and South America, excluding Brazil. And it has a lot of the capabilities that would be required to quickly stand up a system in Chile. So at one point, we had talked about the possibility of moving the Mexico platform onto the U.S. platform. But when this Chile opportunity came along, the Mexico platform could be enabled for processing in Chile far faster than our U.S. platform. And we pivoted to Chile given the revenue opportunity that we see there.

George, thank you. It's good to be here. And to answer your question, yes, I think you would see network fees and gross revenues move in generally parallel paths. So the guidance that we were giving on a post-606 basis, you can think about as being pretty consistent on a pre-606 basis. But as I mentioned in my remarks, we're going to move to talking about revenue growth and overall business trends on a post-606 basis. So certainly, encourage you to move to that to stay in sync with how we'll be referring to the business on a go-forward basis.

Could you give us an update on EuroBic and Bci in terms of timing? I know it's a difficult question. With those 2, I mean, where are we in the process of moving them forward? And you mentioned already sort of making preparations on Bci. So how quickly would those get off the ground once you got the green light?

This is Jim. As it relates to EuroBic, we signed it well over a year ago, I think it was October a year ago. I think as some of you may have followed in the press, the bank has gone through a transformation. And this has been sold to a Spanish bank. There was some entry around one of the owners. It was a privately held bank up until this transaction. And so in terms of our transaction, I think it is, at this stage, a wait and see. We had - in terms of the original agreement with that agreement had expired. We had been extending it month by month. We didn't want to extend it long-term because we didn't know what was going to happen with the bank. So we will engage with the new owner, and we'll get back to you as to what the future is as to whether we and the new potential owner will continue to move forward with the deal that we had struck with EuroBic. In terms of Chile, we would be the first acquirer in the market. So we continue to work with the bank and the regulator to clear that process. There is progress. It is slower than probably what we would have expected in the beginning. But again, being the first in a market where the regulator has not seen a joint venture structure with an independent acquirer, having a majority interest, this is something new for the market. But otherwise, the relationship is progressing well. We - as Brendan was mentioning relative to the processing component of the relationship, we're continuing to build out capabilities. We're also looking for Visa and Mastercard also entering the market to be enabled during the spring/summertime period. So we're optimistic that we'll have some news to report as an update on the second-quarter call. Okay. So I'll take first the traditional. So EVO, if you went back to when it was formed in '89 through when I joined in, I guess, 2011, '12 time period, before international became part of our vernacular, that was just a traditional sales organization. It was not a processor; it used to use Global Payments primarily as its core processing relationship. And it was feet on the street. It was telesales. It was kind of all that everybody else in the market did for 20 years domestically. That business that we define now as traditional and we discussed on the IPO reflects largely individuals, agents, or ISOs that have exited the business or have exited the relationship with EVO. It's not a core focus of the company as it relates to that group. So that is a runoff. There's not a prospect of that returning to a growth status because those people, in some instances, have retired. Now the flip side is it's a very profitable piece of business. So it's painful for us to watch it atrophy. But over the last 7 years, we've taken the profits of that business and invested in Mexico or Poland, Ireland, etc. And that has been the strategy that as it bleeds off, we've been moving into higher growth markets. B2B is another example that you mentioned, ISVs, where we're seeing very strong organic growth. So that one is going to continue to move in the direction that it has been moving, which is essentially attrition in the U.S. market.

Great. Thank you, Jim. So we focus the investment side of our business heavily on the tech-enabled capabilities, which actually becomes a source of key differentiation in the marketplace. As we continue to invest in those capabilities, they drive not only the revenue growth but also the types of businesses that we are able to acquire. Now, as we see our tech-enabled offerings growing, they reflect income streams as much as we see opportunities to diversify our offerings in the marketplace. So we draw a nice correlation between the established revenue and growth that we see while being able to add future business with those tech-enabled capabilities, as much as we see of getting into things like ERP integrations, which we've referenced in the past.

Thanks, Jim. And we also mentioned a question that we received on the 606 and I wanted to add just a little bit more color on that. As you know, the change to 606 is really around how we recognize revenue and how we reflect that in terms of network fees currently. So that will have no impact on the cash flows or the operational performance but is certainly a great upgrade for how we report that and how we reflect our earnings.

Maybe, Darren, a question for you, just on - I realize you don't have a large business in the U.K., but any implications from Brexit on the European business.

Thanks, Kartik. Just thoughts again. So there are mixed trends that you're seeing that are coming from the schemes or just kind of industry reports in terms of the potential Brexit shock. I think there is uncertainty, and we've seen that for a few quarters now, where the Visa reports have shown quarter-on-quarter on the fundamentals kind of stabilizing or a slight debt, nothing significant. Overall, I think it's a watch and see. I think now that there is certainty in terms of the date and kind of processes in terms of the trade deals to be struck, I think there's still a watching brief on that in July - end of July will be a key milestone as to what the trade deals finally look like. I think the reality is Europe needs the U.K. and vice versa for trade. So we'll watch this space, but I think it's just - it is a watching brief.

I think it's a little of both. My doing this now, 20 years, I think the key to our success or one of the keys is building great distribution, similar to what Brendan was describing on B2B with ERP relationships. You can employ a lot of people to knock on doors. I mean, that's - definitely passes, I think, for many, many, many years. But I think we're very good at forming relationships with leading financial institutions and each of the deals that we've put together, and we have something like 14 or 15 financial institution relationships to date. All of them are doing extremely well. Even with Santander, we continue to move forward constructively. So it's a model that's worked. It's worked very well for us. It's worked well for many of our competitors. It is our - one of our core focuses together with finding opportunities on the tech-enabled side because one of the things that brings a financial institution to a company like ours is the product set and capabilities that we offer them.

My question was for Darren, I guess, first off. Darren, if I look at the numbers, the quarter, it was 12% constant currency growth, which is up at least 300 basis points, I think, from last quarter. So just trying to pinpoint the driver of the acceleration. I know tech-enabled has grown well, but was there anywhere in particular that pushed the growth rate higher?

Bryan, I think you just answered my question there. That's exactly where we're seeing significant growth in multiple markets. As I said, we're seeing U.K., Ireland, Spain, Poland, key markets, where, I think, as Brendan has said, in terms of the stickiness and the margin opportunities is where the success is coming. So I think you answered the question.

I know the call is fairly long. So I'll hopefully just ask 1. We know about your largest areas from a geographic perspective, and you talked a little bit about newer offerings like B2B. Maybe you could just frame for us the top 2 or 3 things that you're focused on, either from a geographic or offering perspective? And then I wanted to get any sense from you if there's been any change on the competition side, particularly in Latin America, with some of the things that companies like Mercado Libre and stuff we're doing?

Okay. I mean, if I understand the first question on geographic. So South America is a core focus. And we obviously want to get Chile up and going as fast as possible, and as I said working it through with the regulators. I would say also on the geographic side is building out existing markets. It's much easier for us to form relationships in Europe, let's say, because we have big infrastructure in Europe. We're one of the leaders in Europe. We have all the processing in place, products in place, and people in place. So I think you'll continue to see us build out in existing markets where there are other bank opportunities without crowding out the existing bank relationships as well as going to new countries. There's lots of opportunities across Central and Eastern Europe and even on the Western Europe side. My question was for Darren, I guess, first off. Darren, if I look at the numbers, the quarter, it was 12% constant currency growth, which is up at least 300 basis points, I think, from last quarter. So just trying to pinpoint the driver of the acceleration. I know tech-enabled has grown well, but was there anywhere in particular that pushed the growth rate higher?

Bryan, I think you just answered my question there. That's exactly where we're seeing significant growth in multiple markets. As I said, we're seeing U.K., Ireland, Spain, Poland, key markets, where, I think, as Brendan has said, in terms of the stickiness and the margin opportunities is where the success is coming. So I think you answered the question.