Global Payments Inc. (NYSE:GPN) Q1 2024 Earnings Call Transcript

Global Payments Inc. (NYSE:GPN) Q1 2024 Earnings Call Transcript May 1, 2024

Global Payments Inc. beats earnings expectations. Reported EPS is $2.59, expectations were $2.57. Global Payments Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Ladies and gentlemen, thank you for standing by and welcome to Global Payments’ First Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will open the lines for questions and answers. [Operator Instructions]. And as a reminder, today’s call is being recorded. At this time, I would like to turn the conference over to your host, Senior Vice President, Investor Relations, Winnie Smith. Please go ahead.

Winnie Smith: Good morning and welcome to Global Payments first quarter 2024 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 speak 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 material available on the Investor Relations section of our website. Joining me on the call are Cameron Bready, President and CEO; and Josh Whipple, Senior Executive Vice President and CFO.

Now, I’ll turn the call over to Cameron.

Cameron Bready: Thanks, Winnie, and good morning, everyone. We are pleased with our first quarter results, which were ahead of our expectations as we saw strong execution across our businesses in resilient consumer trends, despite the uncertain macroeconomic environment. Specifically, we achieved 7% adjusted net revenue growth and delivered adjusted earnings per share growth of 8% or mid-teens adjusted earnings per share growth, excluding the impact of the divestiture of Netspend’s consumer assets. We also expanded margins 40 basis points. Our merchant solutions business again delivered solid organic growth driven by our differentiated capabilities across our partnered ISV, vertical markets and point-of-sale businesses, as market demand for embedded payment solutions continues to accelerate.

Starting with our partner ISV channel, we continue to see strong booking trends and business development results, including doubling the number of new strategic integrated partners we signed this quarter compared to the prior year. We have added nearly two dozen new progressive payment facilitation or profac partners since we launched this model mid last year. And now have several thousand merchants boarded to our hybrid integrated solution. We are also seeing strong demand for commerce enablement and value-added solutions as we are cross-selling into our partners’ merchant base, including human capital management and payroll, loyalty and marketing, and analytics and customer engagement solutions amongst others. Our ability to meet the specific needs of our partners with unrivaled distribution, tailored operating models, a comprehensive suite of products and capabilities, and best-in-class service and support differentiates us in the marketplace and gives us confidence in our ability to sustain growth and expand margins in this business going forward.

Our unique value proposition for partners has also allowed us to maintain relatively stable revenue shares over time, while retention rates remain strong. And in the current cost of capital environment, competitors who have historically led with price in this channel are increasingly focused on striking a balance between growth and profitability, which is to our benefit. Turning to point-of-sale software solutions, we again achieved 20%-plus growth in the first quarter, adding over 3,000 new locations across our POS platforms. And our focus on delivering additional commerce enablement solutions to our point-of-sale customers continues to gain momentum. As one example, we saw a nearly 50% increase in the number of new Heartland POS customers leveraging our customer engagement and loyalty solutions this quarter compared to the prior year period.

And while in early days, we are encouraged by the initial feedback on the launch of our next-generation Heartland restaurant in retail point-of-sale software, which has been overwhelmingly positive. As a reminder, these next-gen solutions deliver an improved user interface and more intuitive experiences across our iOS and Android based offerings. They are also designed to be mobile first, allowing for a best-in-class omni-channel experience. And we couple our complete commerce enablement solutions with distinctive distribution and full local service and support that is unrivaled in the market. We expect these new offerings will begin to contribute to our performance later this year and more meaningfully in 2025. Additionally, GP POS, our general purpose cloud-based point-of-sale software is also contributing to the growth we are seeing.

We have now launched a solution in a number of international markets including Canada, UK, Spain, and the Czech Republic. We are encouraged by the success we are having in bundling POS and other value-added solutions for our merchant customers in these geographies. We also remain on track to bring GP POS to additional markets outside of the U.S., including Germany, Ireland, Mexico, Poland, Austria and Romania over the next 18 months. Moving to our vertical market software business, today, we own enterprise software solutions across seven vertical markets, which collectively generate more than $1 billion of adjusted net revenue, growing roughly 10%-plus annually. These include education, both K-12 and higher ed, communities and events, property management, healthcare, quick service restaurants and food service management, and sports and entertainment venues.

In these verticals, owning the entirety of the technology stack is advantageous as it better allows us to develop highly integrated, vertically fluent software, payment, and other commerce solutions necessary to meet the needs of the market. We focus on these vertical markets first and foremost because of the size of the underlying TAMs. For our own software business, we specifically target large addressable spend markets that represent a meaningful component of overall economic activity globally. Second, in core to our thesis of owning software, we target vertical markets with a strong nexus between software and payments, providing us the ability to further enhance software solutions by embedding payments to drive incremental growth and differentiation.

Today, all of our software assets are delivering significant transaction volumes that did not exist prior to our acquisition. Third, we like highly fragmented and ideally underpenetrated markets from a software perspective where we can acquire a player with leading technology and a significant runway to gain share. Lastly, we generally prefer vertical markets software where there is international applicability allowing us the opportunity to export our solutions to markets outside of the U.S. overtime. Our ability to deliver more integrated payments offerings in faster growth geographies where embedded payments are in much earlier stages of development and we have local sales and support further differentiates Global Payments relative to competition.

Critical to the success of our own software portfolio is maintaining our focus on building and delivering great software, so that we can compete on the basis of product functionality and innovation. Global Payments supports this priority with extensive experience in onshore and offshore development, and we provide efficient sources of capital to invest in growth. Further, we are able to leverage our global scale to deliver technology and administrative services to our software businesses, allowing them to focus their efforts on differentiation in their business while enhancing their overall scale. And by combining the innovation of our software portfolio with the global reach, efficiency and extensibility of our payments infrastructure, we were able to deliver a unique proposition for our customers.

We saw consistent, strong execution in our vertical markets businesses in the first quarter, including delivering double-digit bookings growth across the portfolio. Zego, our property management focused software business in newest addition, continued to see strong demand for its solutions in the quarter from new customers, while also successfully cross-selling additional products and solutions to several large existing partners, including endeavor, MHC, residential communities, my homepage property management platform, and apartment management consultants. In the communities and event vertical ACTIVE signed nearly 300 customers this quarter. This includes the City of Waterloo, Bogus Basin Ski Resort in Idaho, Tough Mudder Australia and Milestone Events Group.

Turning to our QSR business, Zego went live with CosMc’s in three additional locations in Texas following our initial launch with the McDonald’s new concept in Bolingbrook, Illinois in December. We look forward to continuing to future proof the CosMc pilot locations with cloud-based technology ecosystem as they open this year. We also continue to have success cross-selling Xenial technology into the stadium and event venue environment and we are pleased to have extended our relationship with the Braves by completing the rollout of our technology in 24 retail locations at Truist Park here in Atlanta. Additionally, our higher education business TouchNet achieved several notable new international partnerships in the first quarter, including the King’s University in Canada and Middlesex University and Cardiff Metropolitan University in the UK.

And in April, TouchNet recent agreement with Sussex University in Brighton, which marks the fifth new university partnership in the UK achieved in the last six months. The UK serves as a great example of our ability to bring our software solutions to geographies outside of the United States. We have had a strong payment proposition in the UK for decades, which we are now successfully leveraging to sell our software solutions, as demand for embedded payments and technology is growing in higher education in the region. We also continue to see good momentum in our international markets with stronger secular growth trends in the quarter. Specifically, we achieved double-digit growth in Spain and Central Europe, as well as in Poland and Greece. And our LatAm business continues to be a bright spot as we benefit from the strong secular payment trends in Mexico and Chile.

Specifically, we signed a number of large new customers in Mexico during the quarter, including leading insurance company Qualitas, HomeGoods retailer Recubre and video game retailer Game Planet, as we leverage our omni-channel capabilities in partnership with Citibanamex. And in Asia-Pacific, we were pleased to have expanded our partnership with Marriott International to offer seamless omni-channel solutions to additional locations and geographies. In January, we announced a new partnership with Commerzbank in Germany. We are pleased to have recently received EU regulatory approval and are launching the new joint venture Commerz Global Pay this month. We are already laying the groundwork to deliver a comprehensive suite of innovative omni-channel payments and software offerings, including our GP POS software solutions and our GP tom technology at scale, providing merchants the capabilities they need to run and grow their businesses more efficiently in the large economy in Europe.

Shifting to issuer solutions, we are delighted to have executed two new contracts during the quarter. This includes a new agreement with a large existing FI customer in Europe that significantly expands our debit processing relationship. We also reached a contract agreement with a leading global travel technology company who selected us as its issuer solutions partner for its platform across the UK and EU after an extensive RFP process. Once live, this will be our first fintech customer operating in our AWS cloud environment in Europe. Additionally, we successfully executed eight customer renewals during the quarter. This includes extending our long-standing relationship with Virgin Money in support of its credit card portfolios for a multi-year period.

We also successfully renewed our multi-decade relationship with citizens that spans both its consumer and commercial portfolios and includes a wide range of value-added services, including fraud, loyalty and digital engagement amongst other solutions. Further, we executed a multi-year renewal with Scotiabank, one of our premier clients globally. In the first quarter, our issuer team also completed four conversions and we currently have over 60 million accounts on file in the implementation pipeline, in addition to five active LOIs. Further, we’ve made additional progress on our issuer modernization this quarter and now expect to have four North American clients piloting multiple modernized cloud services in support of both consumer and commercial portfolios over the next several months.

We remain on track to execute dozens of unique cloud issuer platform pilots across additional services, products, and geographies in 2024, and expect to complete the development of our client facing applications as we prepare for commercial launch next year. Moving to B2B, we continue to drive strong growth as we leverage our capabilities across three focused areas within the overarching B2B market: software-driven workflow automation, money in and money out funds flows, and employer solutions. Our MineralTree business achieved a 30% increase in new bookings during the first quarter, which includes a nearly 60% improvement in new virtual cart bookings as adoption continues to accelerate. Additionally, our B2B bookings in merchants increased over 100% this quarter compared to the prior year as we are beginning to benefit from the integration of EVO’s PayFabric platform and more of this spend shift towards digital channels.

Our employer solutions are seeing favorable trends in the restaurant vertical including signing a new EWA relationship with the White Restaurant Group, which operates over 200 Wendy’s and Taco Bell restaurants within 8,000 employees. We also achieved a Tip Paycard partnership with Sunshine Restaurant Partners, the largest IHOP franchisee with over 140 locations in the Southeast. We are delighted with the progress we are making to accelerate B2B growth as we continue to unify our offerings and refine our strategy in this space. With that, I’ll turn the call over to Josh.

Josh Whipple: Thanks, Cameron. We are pleased with the financial performance we achieved in the first quarter, delivering adjusted net revenue of $2.18 billion, an increase of 7% from the same period in the prior year. Adjusted operating margin for the quarter increased 40 basis points to 43.5%, excluding the impact of our acquisition of EVO Payments and dispositions, adjusted operating margin increased 80 basis points, highlighting ongoing consistent execution across our businesses. The net result was adjusted earnings per share of $2.59, an increase of 8% compared to the same period in 2023 or mid-teens growth, excluding the impact of dispositions. Taking a closer look at performance by segment, merchant solutions achieved adjusted net revenue of $1.68 billion for the first quarter, reflecting growth of 16% or approximately 8% excluding the impact of EVO and dispositions.

Our performance was ahead of our expectations driven by our U.S. business, which delivered high-single-digit growth in the quarter, normalized for the contribution of EVO as we continue to benefit from our software led strategy. In addition to the 20%-plus growth Cameron highlighted in our POS software business, we also saw strength in our vertical markets portfolio with Zego, TouchNet, and AdvancedMD being the notable bright spots. We are also seeing strong bookings in our partner ISV business as we continue our long history of differentiation in the marketplace. Outside of the U.S., we achieved double-digit growth in Spain and Central Europe, as well as in Poland and Greece. Our LatAm business also performed well in the quarter as we benefit from the strong secular payment trends in Mexico and Chile.

This performance was partially offset by ongoing weakness in the macroeconomic environment in the United Kingdom and parts of Asia-Pacific. We delivered an adjusted operating margin of 47% in the Merchant segment, a decline of 30 basis points due to the acquisition of EVO. This was consistent with our expectations and we are pleased with the continued sequential improvement we are delivering in — on our margin performance as we continue to execute against our synergy targets from the EVO transaction. Regarding the EVO integration, we’ve made substantial progress and remain enthusiastic about the synergy opportunities available. Specifically, after realizing 25% of our targeted cost synergies last year, we expect to achieve an additional 50% in 2024.

This puts us well on our way to realizing the $135 million in annual run rate expense synergies we expect to achieve within two years. As always, we remain focused on sizing expense synergy expectations with an eye towards ensuring that we maintain momentum in the combined business. And we remain more excited today than when we announced the transaction about the opportunities we have to cross-sell our solutions and capabilities into EVO’s existing customer base. In fact, while revenue synergies generally take longer to materialize, we are already having early success in bringing our products to EVO’s markets in Europe, notably ecommerce, GP Com and commerce enablement, as well as certain micro services including tokenization and fraud solutions.

And we also look forward to bringing these products and solutions to LatAm as well. We are continuing to invest in these opportunities across EVO’s markets in 2024 and expect them to scale more fully in 2025. Our issuer solutions business produced adjusted net revenue of $516 million, reflecting growth of 5%. The core issuer business also grew mid-single-digits this quarter, driven by ongoing strength in volume-based revenue. This was partially offset by slower growth in managed and output services, as we continue to focus our issuer business on more technology enablement. We added nearly 20 million in traditional accounts on file sequentially or 49 million year-over-year as we continue to benefit from ongoing execution of our conversion pipeline.

In addition to healthy consumer and commercial account growth with our large existing FI customers. During the quarter, we completed four conversions and achieved eight renewals. Issuer transactions grew over 6% compared to the first quarter of 2023, led by commercial card transactions, which increased to low-double-digits, highlighting ongoing strength in cross border corporate travel. Focusing on our issuer B2B portfolio, MineralTree achieved record bookings this quarter in its targeted mid-market segment, while paycard continues to see improving trends as the business lacks more difficult employment comparisons. Finally, issuer solutions delivered an adjusted operating margin of 46.8%, an increase of 290 basis points compared to the prior year period, fueled by volume-based revenue growth and our focus on driving efficiencies in the business.

From a cash flow standpoint, we produced strong adjusted free cash flow for the quarter of approximately $509 million. This represents a roughly 80% conversion rate of adjusted net income to adjusted free cash flow consistent with the first quarter of 2023. We continue to target converting roughly 100% of adjusted earnings for the full year, excluding the roughly 5 point 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 2023, as we benefit from the seasonality and a higher conversion rate as the year progresses. We invested $145 million in capital expenditures during the quarter and continue to expect capital spending to be around $670 million, or roughly 7% of revenue in 2024, consistent with our long-term targets.

Further, we are pleased to have repurchased 6 million shares of roughly $800 million in the first quarter. In February, we opportunistically took advantage of market dynamics and issued $2 billion in convertible notes with the majority of the proceeds used to repay our commercial paper facility. This was essentially leverage neutral and lowered our overall cost of capital. Specifically, we replaced a portion of our variable rate debt at an interest rate of over 6% with a fixed rate convertible with a coupon of 150 basis points. We also entered into a call spread transaction, increasing the effective strike price to $230 per share, providing significant dilution protection. Our leverage position was 3.5x at the end of the first quarter. We remain on track to return to a leverage level consistent with our long-term targets in the low-3s by year end.

Our balance sheet remains healthy and we have approximately $3.4 billion of available liquidity. Our total indebtedness is approximately 98% fixed with a weighted average cost of debt of 3.37%. Turning to the outlook, we remain confident in how our business is positioned this year. We continue to expect reported adjusted net revenue to range from $9.17 billion to $9.30 billion, reflecting growth of 6% to 7% over 2023. It’s worth noting, relative to our prior outlook; the dollar is strengthened against the foreign currencies to which we have exposure. Although, currencies remain quite volatile, we currently anticipate a roughly $20 million foreign currency headwind in the second quarter versus our prior expectation of roughly neutral. We will continue to monitor any potential impact on the back half of the year.

We still expect annual adjusted operating margin to expand up to 50 basis points for 2024, driven by the benefits to our business mix from our ongoing shift towards technology enablement partially offset by the lower margin profile of EVO prior to full synergy realization. To provide color at the segment level, we continue to expect our merchant business to report adjusted net revenue growth of 9%-plus for the full year. This outlook includes growth in the 7% to 8% range, excluding the impact of the acquisition of EVO and the disposition of our gaming solutions business. We also still expect up to 30 basis points of adjusted operating margin expansion for the merchant business in 2024, with a slower expansion in the first half relative to the second half as EVO synergy realization ramps as the year progresses, which is consistent with our prior outlook.

Moving to issuer solutions, we continue to anticipate adjusted net revenue growth in the 5% to 6% range for the full year compared to 2023. We also still anticipate adjusted operating margin for the issuer business to expand by up to 50 basis points as we drive efficiencies in the business, which will be offset somewhat by the faster growth in our lower margin B2B businesses. Moving to a couple of non-operating items, we expect net interest expense to be about $500 million this year and for our adjusted effective tax rate to be approximately 19%, which is consistent with our prior outlook. Putting it all together, we continue to expect adjusted earnings per share for the full year to be in the range of $11.54 to $11.70, reflecting growth of 11% to 12% over 2023.

This translates to adjusted earnings per share growth of 14%-plus for 2024, excluding dispositions consistent with our prior guidance. As we commented at the outset of the year, our outlook continues to reflect a relatively stable and macroeconomic environment, albeit somewhat temperate given the continued uncertainty. Cameron?

Cameron Bready: Thanks, Josh. I am proud of the results our team delivered in the first quarter. While we are closely monitoring what continues to be an uncertain macroeconomic environment, we were pleased to continue to see stable trends in April. Importantly, we have also now lapped all three of the transformational transactions we completed in 2023. And we are continuing to make progress on sharpening our strategic focus and simplifying our business to support sustainable long-term growth and success. As we move forward, we remain committed to the key priorities I highlighted since I stepped into the CEO role last year. This includes continuing to advance our software centric strategy, making it as easy as possible for our customers to do business with us, maintaining our focus on operational excellence, and ensuring we have the right culture to achieve our vision.

Earlier this year, we began a holistic review of our operating model, organizational structure and internal processes to ensure they are optimized for the company that we are today. While we are early in the process, we are encouraged by the opportunities we have already identified to better align our go-to-market activities against our strategy and drive greater efficiencies and effectiveness in our business. This includes the potential to increase commercial productivity, accelerate product development delivery times, enhance our partnerships with our customers, and simplify the organization while streamlining business activities. Ultimately, we expect executing on these initiatives will provide us with additional capital to invest for growth.

We anticipate completing our review and developing specific execution plans over the next few months. Further, as we realign our go-to-market activities and operating model, we will also harmonize our KPIs and metrics against this structure, allowing us to provide a clear articulation of performance and execution against our strategy going forward. We have successfully grown this company for over the last decade and the work we are doing to create the right operating environment will position us for the next decade of growth. We look forward to providing you with an update on our strategy and progress against these key initiatives our investor conference this fall. Winnie?

Winnie Smith: Thanks, Cameron. 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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Q&A Session

Operator: Thank you. [Operator Instructions]. Our first question comes from the line of Bryan Keane with Deutsche Bank. Please proceed with your question.

Bryan Keane: Hi guys, good morning, and congratulations on the solid execution here. I guess I just wanted to ask on thinking about simplifying the organization. Cameron, is there a lot of assets potentially that you could divest? Are they small, large? Just thinking about that. And then what would you do with some of the proceeds? I know stock buyback would be really accretive here versus M&A. Thanks.

Cameron Bready: Yes. Bryan, it’s a fair question. I think from my standpoint, I’m really looking across the business and making sure that in all the markets, whether they’re a vertical market or geographic market that we’re operating in today, we have the right scale, or to the extent we don’t have scale today the way that we would like. We have a path to be a scale player over a period of time. So as I think about the portfolio and sort of opportunities perhaps to simplify and sharpen our focus around the key elements of the strategy we expect to pursue going forward, which are really around the software-centric orientation of the business coupled with obviously, our exposure to some of the faster growth secular markets around the world, I think we want to make sure that we’re able to dedicate our time, our assets, our resources, obviously our investments against those strategies.

All that being said, I think we’re talking about probably more things on the margin versus bigger elements of our business as we sit here today. I think we’re always open-minded as it relates to potential opportunities to create more value for our shareholders. And certainly, if there are assets that we own that we think are more valuable to someone else, and we’re certainly open-minded to that. But as I think about sharpening the focus around the strategy, it’s really around the areas where perhaps, I think we’re distracted in markets that were not scaled player today and don’t have a good path to be a scale player. And it’s really a desire to reorient and refocus around the core elements of the strategy that I think are going to be more impactful in driving the business where we want to drive it over a longer period of time.

I think, as it relates to the use of proceeds, I think your point is fair. Obviously, I won’t sort of comment about hypotheticals as we sit here today, but naturally, we’re value-oriented as we think about proceeds, and we’ll continue to look to deploy any proceeds that might come from those activities in a manner that’s going to drive the most value for our shareholders long-term.

Bryan Keane: Got it. Got it. And then as a follow-up, Josh, just maybe the breakout of EVO, as for contribution of revenue and organic, just to get about the volume numbers, I think 16% was the total reported number, but I don’t know if there’s a pure organic number there. Thanks.

Josh Whipple: Yes. Bryan, what I would say is, we’re about a year into — a little over a year into the integration, so we’re really operating, this is one. But I think if you think about the EVO business, its growing right in line with what we’re expecting for merchant to grow for the full year and the 9% — the 8% to 9% range and that kind of gets us to the core merchant growth in that 8% range. So that’s kind of how we’re thinking about it, and that’s kind of the contribution as it relates to EVO and the overall business.

Cameron Bready: Yes, Bryan, I would just add on the volume comment. The overall volume growth was in line with the revenue growth, and if you strip out EVO, it’s going to be the same on the sort of core business. So in that 7%, 8% range relative to the 8%-ish growth that we highlighted, ex-EVO.

Operator: Thank you. Our next question comes from the line of Darrin Peller with Wolfe Research. Please proceed with your question.

Darrin Peller: Hey, thanks, guys. Cameron, maybe we could just start with you giving us a little bit more color on the underlying — the growthiest parts of the merchant business. And what you’re seeing to give you confidence in that 7%, 8% being sustainable, when we think about 30% increase in merchant partners or the pause growth 20%, maybe just help us understand what you’re seeing in terms of giving you conviction that that holds up throughout the year. Obviously, these increases in partners is a good sign. And then, Josh, maybe just to help put my two questions together to add-on to that would be an understanding of the margin dynamics of each of those sub pieces and how it impacts your abilities on up to 50 bps for the full year for the company or 30 for the segment. Thanks, guys.

Cameron Bready: Yes. Thanks for the question, Darrin. Look, I think we called out several metrics in our prepared comments today that gives us confidence around the growth we’re seeing, particularly in the software oriented aspects of the business. And as we’ve highlighted a couple of times already today that is the focus strategically for us going forward. And we continue to deploy more assets, more resources, investment against those strategies. In the ISV space, we continue to see good partner growth. As we highlighted on our prepared remarks earlier today, the business development activities continue to generate a lot of new opportunities from a partnership perspective. We’re continuing to see good flow through as it relates to leads from partners and our ability to convert those leads into new merchant customers for Global Payments.

So I think as we look at the outlook for the integrated channel, I think we remain very pleased with how our proposition is resonating in the market and our ability to sign new customers. From a partnership perspective, and obviously, turn that into good lead flow and good conversion into new merchants. So all those trends remain very attractive, I would say, as it relates to how we’re positioned in the market. The other thing I would say, and I commented on this in my prepared remarks, I think the competitive landscape is more constructive than it has been in some time. Obviously, there’s been a lot of activity is no surprise to anyone on the call in the ISV space and the partner model over the last several years, and we have seen some aggressive marketing of rev shares that have been attracted to some partners.

We’ve been able to continue to grow through that. I think in the environment we’re seeing today, it’s a little more balanced and a little more rational, I think, in terms of what sort of payment providers are offering in terms of rev shares to clients and partners. And I think that creates a good backdrop for us to continue to grow and scale that business over time. POS is something we’ve talked about quite a bit, obviously, over the last several quarters; it’s an area of emphasis for us. It’s an area where we’re also investing fairly heavily in the business, particularly around our restaurant and retail POS environments and our Heartland channel, as well as taking our GP POS, which is really our entry point, point-of-sale software capability to markets outside of the U.S., as well as deploying it to our wholesale channel here in the U.S. market.

So we added about 3,000 plus kind of new, we call rooftops or locations. You can think about it in that context in the first quarter. We’re obviously very pleased with the momentum that we’re seeing in that channel, and that’s really before the full kind of extensive commercial launch of Gen2 of our Heartland restaurant and Heartland retail environment. So I think that backdrop, again continues to see good momentum in our business and gives us a lot of confidence around our ability to continue to grow and scale that aspect of the business as we move forward, admittedly from a smaller base, obviously relative to our ISV channel. And then lastly, the vertical market businesses continue to see healthy booking trends. We call those out in the quarter, again growing in the double-digit pace with good trends across a number of the different vertical markets as we continue to see good demand for our software solutions, as well as our ability to monetize payment flows in connection with those software relationships.

So I would say overall, Darrin, the trends we’re seeing across those three core elements of the strategy underpins a lot of the growth expectation that we have for the business as we work through the balance of 2024. And frankly, as we look forward to the future, and part of our objective is continue to find more ways to invest in those areas and make sure that we’re amplifying the investments we’re making in that part of the business, again, to drive the best outcomes for us on a longer-term basis. And I’ll let Josh kind of get into some of the margin dynamics around each of those.

Josh Whipple: Yes. So Darrin, what I would say is, as it relates to just our general merchant margins, these were consistent with our expectations in the first quarter, and we continue to go ahead and see that sequential improvement while executing on synergies, continue to run the business and investing in EVO’s technology and platforms in the new markets that we weren’t previously in. And our merchant — overall, merchant margins were 47% in Q1, down 30 basis points. But Darrin, if you go back to 2023 and you look at our margins beginning in Q2, we were down 170 basis points in Q2, continued to improve down 90 basis points in Q3, and then 60 basis points in Q4, so again we’re continuing to see that, that positive trend around merchant performance, and we expect that to go ahead and continue sequentially through the balance of the year.

The only other comment I would say is that as we started to see a more shift towards technology enablement, Cameron just went through the piece parts as it relates to the overall merchant business, these businesses, faster growth businesses, and they come in at a higher margin. So it gives us a lot of confidence in our guide of up to 30 basis points of margin expansion for the full year.

Cameron Bready: And Darrin, I would just add two points maybe to wrap up that conversation. One is, obviously, we see a demand overall for embedded payments growing, not just here in the U.S., but globally. So clearly, as we think about how we’re positioning our business and how we want to orient our go-to-market strategies and how we want to emphasize investment in the business, it’s really going to be geared towards continuing to drive, be able to capitalize on that longer-term trend in the marketplace is point number one. And then point number two, as it relates to margins specifically, we really think about managing merchant margins kind of known an overall basis. There’s areas of the business that we’re going to invest more from time to time.

There’s other areas of the business where we’re “harvesting margins from time to time”. But we really think about trying to manage the overall margin for the merchant business kind of holistically across the channel, and we make decisions around investments and where we may want to pull back in certain cases as we look to kind of manage that overall outcome. And to Josh’s good point, the trajectory of margins, certainly post-EVO is obviously moving in the right direction sequentially, very consistent with what our expectations would be. And we feel good about how we’re poised to deliver on the commitments we’ve made and the outlook we provided for the full year.

Operator: Thank you. Our next question comes from the line of Tien-tsin Huang with J.P. Morgan. Please proceed with your questions.

Tien-tsin Huang: Hey, good morning. Good, clean results here. I thought maybe, Cameron, if you don’t mind me asking around the settlement on the credit side, and of course, as the interchange change, I know there’s no direct impact for you, but your thoughts on surcharging and what that might mean. And in general, could we see sort of this helping the pricing environment in general for you and the group?

Cameron Bready: Yes. Tien-tsin, I would say, and I don’t mind you asking at all, I mean, obviously, our perspective remains what it has been for many, many years, which anything that really lowers the cost of acceptance in the industry, by and large, is good for us — so, and good for the industry more broadly. So as it relates to the settlement that kind of came out more recently, I think long-term that’s generally good news for the industry overall. I think as it relates to surcharging or cash discounting, I think you’re going to see a lot more cash discounting than you are really surcharging in the marketplace. But I still think on the margin it’s not going to be a terribly impactful trend. I mean, there are certainly areas of the country where it is more common than others, but I wouldn’t say sitting here today that we think that’s going to be sort of an overwhelming trend, that we’re going to see broad-based kind of across the U.S. market over time.

I do think, as I said, you’ll see a little more cash discounting activity and maybe less “surcharging activity”. They’re basically the same thing. Just one has a probably better optic to the consumer than the other. And therefore, I think will drive incrementally slightly more adoption overall. And it does potentially create a little bit more opportunity for innovation at the point-of-sale as well, which potentially on the margins are slight positive. But I don’t think either of those will be sort of transformational as we move forward.

Tien-tsin Huang: Great. Thanks for that. On the issuing side really quickly, any callouts on the renewals with respect to pricing and are you seeing implementations happening on time? I know there’s been a little bit of slowdown in IT spending on the bank side. I know you stood up one in AWS, but anything you’re seeing there? And I may as well ask if any new learnings on the Capital One discover thing that you could share that might be impactful for you. Thank you.

Cameron Bready: Yes. All good questions there. I would say everything on the issuer side is tracking sort of exactly according to our plans, our implementation — excuse me, implementation pipeline for 2024 as well on track. We had a successful first quarter around implementations and had a full year of busy activity as we have a number of implementations that we expect to execute over the course of the year. The pipeline also looks really good as well; we called out 5 LOIs that are in our pipeline today. We have another seven sort of late-stage opportunities, many of which we expect to convert into LOIs in the not too distant future. And the last thing I would say is our cloud-based, modernized platform, as we bring that closer to reality is really resonating with potential clients.

We’re seeing a lot of interest in new clients, in what we’re doing from a technology perspective and the capabilities and the differentiation, we’re going to be able to continue to drive as we move our sort of market-leading feature functionality into cloud native environments, and the demand for that is fairly robust. And we’re excited about what we’re hearing from potential clients around that. We’re also excited by what we’re hearing from existing clients about some of the additional enablement capabilities we’re delivering through that platform, some additional configuration solutions that we’re going to be able to provide existing clients, as well as an ease of conversion from their current on-premise environment to a cloud native environment over time.

That’s really resonating with them as well. So I feel good about where we are with the issuer business overall. Obviously, we have a lot of execution work to do as we complete our issuer sort of modernization activities and begin to roll those out commercially. But I think the future is bright for that business and we arguably have more tailwinds than we do headwinds in that space in the near to medium-term. On renewals themselves, we continue to work through those in the ordinary course of business. And I would say over time, obviously, we think the differentiation that we can provide will allow for a more constructive renewal environment for the business. But as we sit here today, everything that we’re seeing remains fairly stable on that front.

Tien-tsin Huang: Terrific. Thank you for that.

Cameron Bready: And then to your last question on Capital One.

Tien-tsin Huang: Yes, Capital One discover, sorry.

Cameron Bready: We have Capital One discover. Yes, but not a lot more I can say. Obviously, as we sit here today, the only comment I would make is largely consistent with what we said previously, which is we have a long track record with Capital One, almost two decades now. We just renewed our agreement with them on a multi-year basis. And historically, when Capital One has engaged in M&A, that’s generally been a good thing for us. So, obviously, time will tell how the whole discover transaction works out for them. They’ve got a road in front of them in terms of working that through the regulatory approval process. But sitting here today, I think our history with them is quite positive as it relates to M&A activity they’ve engaged in.

Tien-tsin Huang: Yes, for sure. Thank you so much.

Operator: Thank you. Our next question comes from the line of Dan Perlin with RBC Capital Markets. Please proceed with your question.

Dan Perlin: Thanks. Good morning. I wanted to just maybe get you to elaborate a little bit on the commentary around upside surprise that you guys saw in the quarter, in particular around what was happening in the U.S. growing high-single-digits. It sounded like that was one of the areas that kind of caught you off guard on the positive side, and I was wondering what were some of the more specific key drivers there because it feels like we’ve been highlighting more international stuff than what’s going on in the U.S. for a while.

Cameron Bready: Yes, Darrin — sorry, Dan, it’s Cameron. I would say, I don’t know that I would call it out as a surprise so much as it’s more macro driven in the sense that the macro was probably on balance, a little more constructive than we would have anticipated kind of coming into the year. Certainly, we remain very focused on the consumer. The consumer has remained fairly resilient through the course of the first quarter. And as I called out in my prepared remarks, April trends were pretty stable relative to what we saw in the first quarter as well. So I think from our perspective, it’s really about the macro. I think our execution around our business and the strategies we’re pursuing continues to work well. And we delivered again in line with the expectations that we had for those businesses was probably a little better in the quarter than what we anticipated going into the year was the macro.

And that’s something, obviously, as I said before, we continue to monitor very closely. I think the consumer continues to face some headwinds, but there’s also some tailwinds around labor trends and what we’re seeing around wage inflation, et cetera, that has allowed the consumer to continue to have confidence to spend. And obviously, we’re seeing that flow through our business.