Global Payments Q2 2024 Earnings Call Transcript

Hey, Ramsey, good morning, it's Cameron. I'll maybe comment on that. Look, my own perspective on the discretionary, nondiscretionary split is it's a bit arbitrary these days. I think, what's discretionary to one person, maybe nondiscretionary to another and vice versa. I think we've always looked at our portfolio as being very well diversified across what have been traditionally considered discretionary and nondiscretionary verticals, and I think even post EVO. You know, we're still in a position where, as I look at the mix of business we have today, I think we're very well diversified. We're very well diversified geographically; I think around the globe. We're very well diversified across vertical markets. We're very well diversified kind of across revenue streams as well. So, as I think about the overall mix of the business, particularly against the backdrop of, again, a somewhat uncertain macro environment, I remain very confident in the resilience and durability of the model that we built, largely on the back of a business that's pretty well diversified, again, across different types of payments businesses with our merchant and issuer mix, as well as different verticals, different geographies, etc. So, I think the mix of business we have is good, and it positions us well for whatever macro environment we may face as we continue to move forward.

Yeah, it's a good question. Ramsay. The way I think about the profac business is it largely fills a need in the market for clients who need some payment facilitation capabilities, largely around the onboarding experience that, that delivers to merchants, and some of the funding flexibility that comes through payment facilitation capabilities. But they are not scaled enough to be able to take on all the responsibilities of being a payment facility, particularly as it relates to underwriting, risk management, etc. So, it fills a nice niche in the market for, you know, I would say, on average, probably smaller ISVs that need some payment facilitation capabilities, but really aren't in a position to take on all the burdens of that themselves. And I think that sort of middle of the ground solution that we've been able to offer has been very well received by the market, and it does kind of open up a new area where I think before, you know, we had not been as successful in signing kind of ISV partners. So, I think what I'm most pleased about as relates to the integrated business is obviously the ongoing sort of consistent growth that we're seeing in that channel, but the continued investment in capability to make sure that we sustain our leadership position in that market, and our ability to sort of tailor our offerings to meet specific needs of ISV customers in the marketplace that compete very effectively against other solution providers.

Yeah, I'll make a couple of comments. I would say it declined sequentially about a point. If you look at our sort of revenue x Takepayments, it was up roughly kind of 7.5% organically year-over-year, volumes up 6%. Last quarter it was I think 8% and 7%. So generally, I would say a pretty consistent trend that we've seen sequentially Q1, Q2. I think to your point, leap year probably had a little bit of impact. The macro, obviously, other networks and competitors have reported and generally seen the same trends as it relates to the overall volume environment and macro environment more broadly.

So, I don't think that's really unique to us. Takepayments delivers on the balance slightly more revenue than it does volume contribution. So, I think net-net, we're sort of still within a point of each other as it relates to organic revenue growth and volume that we saw in the business.

Yeah, Jason, it's a good question. Maybe I'll start and I'll ask Josh to jump in. I would just say overall, we're very pleased with the margin expansion we saw in the merchant business. And I would just note that despite absorbing Takepayments, that comes in at roughly half of our margin today. So, yeah, we did perform a little bit better than we expected in the second quarter from a margin expansion perspective. In the merchant business, I think it largely reflects kind of continued strong execution, and obviously some of the growth trends we're seeing in aspects of the business that have attractive margin profiles for us. So, I think, you know, overall, really, really pleased with the outcome there, as I said, and we grew it, you know, 30 basis points despite absorbing, you know, Takepayments that comes in at, again, about half of that margin. And the last point I would make is we're still targeting 30 basis points for the year. Our language is up to 30, but just to be very clear, we're targeting 30 for the year. And I'll let Josh maybe comment a little bit about what we see in the back half.

Yeah, Jason. So, as we think about merchant margins, what I would say is that with the EVO integration, we continue to see synergies flow in. As I mentioned, I think last quarter in '23, we realized 25% of the $135 million, and this year we expect to go ahead and realize 50%. And as it relates to the back half of the year, we expect merchant margins to be approximately, expand 50 basis points, and that gets you [Indecipherable] up 30 basis points for the full year. So, we're pretty pleased with how healthy the margin expansion looks like for the overall merchant business.

Yeah, that's fair.

Yeah, I think it's a fair question. I'll just start by saying, look, that's where the market is going. We've talked for many years about the intersection of software and payments, and obviously we've worked very hard to position our business at that intersection because more and more we see merchant clients, particularly in the SMB space that we serve, making payments decisions largely based on sort of the underlying software technology that they're using to run their business. And obviously that is true in restaurant and retail, where point of sale is now the mode of competition for payment acceptance in those key vertical markets from a consumer spend standpoint -- excuse me, struggle to get that out. But we also see it across other vertical markets as well, which is why obviously we've been leaning into our integrated strategy over the course of many years. We've leaned into our vertical market software strategy over the course of many years, and obviously we're investing more in point-of-sale capabilities because that's where the market is going. So, we think about long-term trends, obviously, particularly within SMB. As I mentioned before, it's all geared around payment decisions being made through the software that these businesses are using to kind of run their business day in and day out and make sure we're well positioned, either with our ISV partners or through our own software to continue to benefit from those trends is a core part of how we think about our strategy in the merchant business going forward.

Yeah, it's a really good question. And let me start just by saying, obviously we have our investor conference coming up in September, which we're very much looking forward to, and we're going to lay all this out, I think, in what some might describe as excruciating detail at that point in time. But as I step back and think about it, we see pretty meaningful opportunities to streamline and simplify our business internally. And we think that those opportunities are going to unlock a fair amount of value, that we're going to be able to redeploy in our business, to continue to invest in growth-oriented initiatives, as well as continue to improve returns in our business and certainly returns on invested capital in our business. So, these are meaningful enough opportunities that we certainly think they are worth pursuing, and we intend to lay all that out for you in the September Investor Conference.

As it relates to '24, none of that's really reflected in our '24 outlook. I would say the back half of the year, the margin expansion targets are largely geared towards what's happening in the business today, and most of the expectations as it relates to sort of the opportunities we see the streamline simplify and unlock value. Those are sort of '25 and beyond kind of benefits that we would expect to be able to realize. And again, we'll share more of those details as we get to our Investor Conference.

Yeah, maybe I'll start and I'll ask Josh to share a few perspectives as well. And I'll maybe hedge my comments a little bit, Darrin, just by saying a lot of this is good fodder for our conversation as we get into September, and we sort of frame up the business the way we think about it as a go-forward matter. But clearly, you laid out a few key things that probably are worth spending a little time on this morning. So, as we think about the business today, obviously we, as I mentioned before, are very focused on the merchant business positioning as it relates to the intersection of software and payments.

Yeah, we continue to think that is the future of the SMB space and the markets that are core to us today, most specifically the U.S., and that's going to continue to be the trends of evolution in markets outside of the U.S. over a longer period of time. So, our ISV strategy, our own software strategy, and maybe most particularly just given the relevance of retail and restaurants from a consumer spend perspective to our business, our point-of-sale software strategies are really core to where we want to drive the business over a longer period of time. Those are healthy technology led businesses. They are continuing to grow and they're continuing to scale, and they're contributing to -- contribute to the overall margin expansion we're seeing in the business. So, I think that's as we step back and think about sort of where are we going, it's largely driven by our investments in those areas, our ability to continue to differentiate through technology and obviously generate margins and scale those businesses in a way that contribute to the overall rate of margin expansion for our business.

As we think about more traditional payments markets, they may not grow at the same pace as our technology enabled or software-oriented businesses, but they generally have stable growth rates and they have higher margins. Those margins may not drive the same sort of margin expansion for our business overall, but they contribute a lot of cash that obviously allows us to invest in the more growth oriented and margin expanding sort of elements of the business, so that we can get to that overall mix of margins that we're targeting and margin expansion that we're targeting for the business.

And then, of course, there's markets, you know, internationally that we're growing nicely as well. We're continuing to scale our businesses as well. That is contributing to sort of margin expansion in our overall kind of merchant business. And then lastly, I would just say we benefit from being a large-scale player. Obviously, we are able to spread those fixed costs across a large, global scaled merchant acquiring businesses. And as we think about the business going forward, and I've talked about this before, we're very focused on ensuring that we're leaning into markets where we are scale player today, or have clear line of sight to becoming a scale player in markets that were not a scale player today, and we don't have clear line of sight to becoming a scale player over time. I think we need to think hard about whether we should be in those markets, and that's been a big part of what we've been looking at as part of our strategic review. Some more to come on that in September, but I think hopefully that gives you some sense as to how we think about it at a macro perspective.

Yeah, Darrin, we fully expect to go ahead and convert out of 100% this year, less, obviously the R&D tax credit, which is about 5 points. But I think that the big change that you saw on a year-over-year basis is the growth in the business and operating income, lower interest expense and a change in working capital. But again, this is something that we continue to go ahead and manage very, very closely, and we feel confident with regard to our initial guide of 100% conversion, including the R&D tax credit for the full year.

And Darrin, it's Cameron. I'll just add a couple of things. We provided a little more granularity around our reporting of adjusted free cash flow that we think will be helpful. We've broken out customer deposits and we provided a little bit of historical data as it relates to taxes that we paid around gains from the dispositions of net spend and our gaming business, which I think is just helpful for historical context. But as we think about the go forward, we're highly focused on free cash flow, and obviously our conversion rates in the business and improving our quality of earnings and our quality of adjusted free cash flow. And I think you start to see that play out in Q2 and we were really pleased with the overall result.

Yes, good morning. And maybe I'll just start by saying the term legacy sort of makes the hairs on the back of my neck stand up a little bit. We don't think about the business in that context. We have what we would characterize as sort of more traditional go-to-market strategies in our business and you called out specifically our direct distribution here in the U.S. market. We've been working for some time, and I think we're accelerating our investments and plans to really start to reorient that distribution as much as possible towards selling more technology enabled solutions. So, we have opened up our integrated business more and allowed our direct distribution channels to begin to sell integrated, and we're leaning into that. We are building by really reorienting a portion of our direct distribution channel today to developing a point-of-sale software sales team that is focused on selling point-of-sale software solutions directly into the market.

But as it relates to the overall direct distribution channel, it remains a very productive channel. They continue to drive year-over-year growth in new bookings. They continue to be a very effective in terms of selling traditional payment capabilities into the market. More of what they're selling today, obviously are omnichannel solutions and have some more complexity associated with them versus selling traditional bricks on a counter, which is way the business was back in the mid to late teens. But as time progresses, we are very focused on continuing to reorient distribution around where we see the best growth opportunities in the business. And that's clearly around our technology enabled strategies, but the ISV channel and directly selling our software capabilities where we think we can build direct distribution teams around that. So that's really the future of the business, and we'll continue to invest against reorienting distribution in that manner over a longer period of time.

I'd say that the main take is just FX. We kind of went into the year expecting FX to be a little bit better in the back half of the year than we're currently forecasting. It's obviously very volatile, and as I've said many times, if I could predict what FX rates are going to be, I probably wouldn't be sitting in this seat. I'd be doing more leisurely things. But be that as it may, we currently expect FX in the back half of the year to largely offset the contribution from Takepayments. So hopefully we're wrong on that assumption. But I think that's a prudent assumption for the time being, and that's kind of what we baked into the outlook. So, I think beyond that, the rest of the puts and takes are relatively small and on the margin. So, you know, obviously confident in reiterating and reaffirming the guide today. And I'll just let Josh provide a little bit more context as well.

Yeah. So, I think, as you think about the second half of the year, it's, you know, we still expect margin growth in the 7% to 8% range. And as Cameron, you mentioned, this includes roughly a point of contribution from Takepayments, which will largely offset FX. And then for the full year, we still expect merchant revenue to be in the 9% plus range. So, we feel pretty good about that.

Yeah, I mean, I've said, and good morning. I've said over the last couple of years, we've obviously seen rev shares sort of drift up over the course of time, as you see more competition in the integrated space. But I'd say over the last year to 18 months, we've seen probably a more constructive competitive environment than we had seen the previous 12 months to 24 months, just as cost of capital has come up and so the competitors need to be a little bit more rational with their own economics and how they approach these relationships. I think the competitive environment from a rev share perspective has been fairly constructive certainly for the last year or so. And our expectation is it will remain fairly constructive over a period of time. In our experience is if you have the right solutions, the right capabilities, you can partner with ISVs in the right way. You need to be competitive from a rev share perspective, but you don't necessarily have to be at the high watermark of rev shares. And we still see competitors offering fairly aggressive rev shares in some circumstances, but that's typically where they don't have a lot to offer the ISV outside of that sort of peer payments relationship. And one of the ways we've been able to differentiate ourselves is obviously the breadth and depth of capabilities that we think we bring across traditional integrated payment facilitation and the middle of the road sort of profac model that we have, but also the breadth and depth of commerce enablement, embedded commerce solutions that we can deliver, which enriches the experience for us and the ISP, broadens the base of revenue that we're able to share, you know, on a rev share basis. And I think makes the overall partnership and relationship more constructive for them and obviously more constructive for us. And that's a big part of why we've been able to remain, I think, fairly well positioned competitively from a rev share perspective without always again having to meet the high watermark that may be out there around a pure rev share on payments alone.

Yeah, I've been pretty -- it's a fair question and I've been pretty transparent, I think, you know, last quarter and obviously this quarter, I'll just reiterate, we're obviously very focused on providing a full sort of update on, you know, where we see the business going as a strategic matter going forward, where we're going to focus our attention, our efforts and our investment. And a big part, I think, of any strategy is also what does that mean you're not going to do. And so, we look forward to giving a pretty, you know, fulsome update around our strategy and where we see the business going forward, how we are going to frame up the business kind of around that strategy, the critical initiatives that we are pursuing to continue to advance that strategy and execute against it. And then of course the KPIs and metrics that we're looking at to judge our own performance as to how we are gaining ground against the key initiatives that we think are important to achieving the strategy that we have.

So, all that we would expect to be able to frame up for you at our investor conference. And then that will be coupled with a conversation around our efforts to continue to streamline and simplify our business, and how we are organizing ourselves internally. Some of the moves we are making to ensure we have the most nimble, agile business we can, that we remain very customer centric in our product approach. We continue to build differentiated product and capabilities that we think compete favorably in the market. And then we're able to then couple that with further differentiation around the service experience that our clients are able to enjoy from us.

So, we look forward to being able to share more around that streamlining and simplifying effort and what we think then that will unlock from a value creation standpoint and how we'll redeploy that in some areas that we want to invest in the business, but also how that will flow through to drive better returns as we look forward in time, all against the backdrop of our efforts to I think again simplify our business, improve our quality of earnings, be very focused on free cash flow generation and driving better return on capital in our business as we move forward.

Yeah, it's a really good question. I think what we've generally seen is we've done a better job of finding ways and encouraging our sales professionals to find opportunity to attach other value-added services to the pure payment experience with our clients. As I mentioned in my response to the integrated question, clearly that has been attractive to our integrated partners. A lot of the commerce enablement or embedded commerce solutions we can deliver really resonate with them. It makes their own software more competitive in the marketplace. It gives them another channel, I think, to help differentiate their solutions. And obviously it improves the rev shares and revenue opportunity that they see through the partnership with us. A lot of our ISV partners are very focused on continuing to lean into our embedded commerce solutions and finding ways to distribute those through their channels in partnership with us.

And on the direct side, again, we're seeing much the same. I called out specifically around point of sale, what we're seeing very strong attach rates for customer loyalty, particularly for our card link loyalty solutions around our point-of-sale businesses. But we're also seeing, again, good strong attach rates around the cross-selling efforts for human capital management and payroll. So, I would say across the board, a strategy that we really set out to pursue a few years ago around finding more ways to wrap value around the payment experience, which is really where we started, has continued to evolve in more of this embedded commerce strategy and our ability to attach more commerce enablement solutions around the pure payment capabilities we're delivering to clients. And it's just further enriching the relationships that we have with our clients. It's making us more relevant to them, it's allowing us to differentiate better in the marketplace. And I think again, it'll be a core part of how we think about driving our strategy as we move forward in time. And I think obviously a big focus for us is where are the areas that we want to invest from a commerce enablement or embedded commerce solution to continue to drive that richer experience and more differentiated offering relative to where our competitors are.

Look, we're very focused on getting back to our three times targeted leverage point in the back half of the year. We expect to go ahead and pay down close to $1 billion in debt just from free cash flow. So, we'll continue to go ahead and delever to the balance of the year, and we expect to get right back down to that low three mark that we talked about previously.

Yeah, I think that's probably a fair way to continue to think about it. You know, we talked over the course of, you know, the last few quarters just around the acquisition of EVO, and obviously that rebased margins lower, and we had a fair amount of work to do, I would think, to shore up the EVO environment to make sure that it was operating at our standard, particularly in markets that we didn't overlap with EVO, where we're having to rely on their technology. That was somewhat offsetting, you know, the synergy benefits that we were realizing over that period as well. But as we move forward, I think, you know, Q2 is really representative by and large of kind of where we see the business as we move forward. We still have some more synergies to realize around EVO, and we're still investing, obviously, in the business as well. But look, we were pleased with that 30 basis points, a margin expansion in the second quarter. We're targeting 30 basis points for the full year. As we talked about before, as Josh mentioned, that reflects a little bit of uptick in the back half, just to get the overall to 30 basis points for the full year. And I think then that gives us kind of a good jumping off point heading into 2025 and kind of really reflects where the business is going.

I'd also know, Dave, and I know you appreciate this, we've had that conversation directly. Our margin profile is now close to 50% in merchants. So it is, on average, a little easier to expand margins 50 basis points to 70 basis points a year when you're in the low 40s than it is when you're in the high 40s. So that math is not lost on you, I know, but as we think about the business, we're very, very focused on continuing to drive margin expansion in the merchant segment, and I think we're well positioned to do that. And I think Q2 just sort of gives you a demonstration of our ability to do that. But more importantly, it's reflecting what we said was going to happen over the last several quarters, as we continue to execute against synergies, as we've made the investments we need to make to shore up technology environments, we're getting the business sequentially, continually back to sort of par post EVO, and now we're seeing expansion. And, you know, obviously we're pleased with that outcome.

Yeah, you know, look, so, you know, I think we've shown a real positive trend as it relates to integration expenses over the last three to four quarters, and they've continued go ahead and trend lower as we said they would. And if you think about it, we're now about a year and a half into the integration. We said that of EVO, and we said that we would complete that two years out, which would be in the March of 2025 timeframe where we'd expect to go ahead and achieve $135 million in run rate synergies. So again, I think you can fully expect the integration expenses to continue to go ahead and trend lower through the balance of the year as we get closer to that time period that we called out when we initially announced the transaction.

And I also would say, you know, Dave, if you look at our quality of earnings, they have, you know, continue to go ahead and improve. And again, you know, our, you know, gap relative to adjusted is over 50% in this quarter, and we would continue to expect that to tread higher.

Yeah, I think we do, Tien-tsin, and thanks for the question. Obviously, we've talked a lot about point of sale. We're seeing good momentum in point of sale. Point of sale drives a different revenue stream for us versus just the pure payment experience. And obviously that's somewhat contributing to what we're seeing on the revenue side versus what we're seeing on the volume side. I think our goal, as we continue to move forward in time is I always want those two things to be correlated. But obviously, as we continue to invest in point of sale, we continue to invest in embedded commerce solutions, we continue to invest in areas to further differentiate ourselves beyond the pure payment economics. Many of those revenue streams aren't purely tied to volume. So, we're hopeful we continue to see continued growth in revenue that may outpace volume. But I don't want those two trends to become uncorrelated over time because when we're selling those capabilities, it's generally driving a payment experience as well, and we hope to see volume continue to drive forward from that point also.

I would say Tien-tsin, certainly in the short to medium term, we feel good about how we're positioned with that business. We're executing really well. The things we can control in that business are generally progressing very nicely. We've got 65 million accounts on file in our conversion pipeline. We've got seven LOIs that we're working to convert to full contracts right now. We are seeing new opportunities emerge. We called out Amadeus this quarter as it relates to being the first fintech customer in Europe leveraging our cloud based in AWS capabilities. So, we feel good about the further expansion of that product set as we move forward as well. So, we are seeing, I would say, good momentum on the commercial and sales side of the business. And we've got good metrics to demonstrate that in the short to medium term. You know, we're well positioned to continue to grow that business at a very stable level. I think long term, it's largely our ability to grow and accelerate growth in that business is tied to what we're doing around modernization.

And as I called out in my script today, we are very much tracking towards completing development of the customer facing sort of applications by the end of this year. We're in pilot with a number of customers already, and obviously I think that positions us to be in market with those solutions in 2025. And I think that clearly is important to kind of unlocking new opportunities for that business, not only across sort of the segments of the FI channel that we can support and different geographies around the globe that we can attack, but I think more importantly, some of the more developing use cases that we're seeing around cards, you know, that I think require our capabilities to be consumed a little bit differently than they've been able to be consumed historically. You know, that's something we're going to be able to deliver through our modernization investment, so better enable enablement capabilities for our clients, more consumability of our sort of, I think, market leading solutions. I think that really will go a long way to kind of unlocking some of the use cases that I think you were alluding to in your question. And we're excited, obviously, to be able to start bringing that about as we get into '25 and beyond.

Thanks, Tien-tsin. Well, on behalf of Global Payments, thank you very much for joining us this morning. I hope everyone has a great day. I appreciate your interest in our company.