Global Payments Inc. (NYSE:GPN) Q4 2022 Earnings Call Transcript

Global Payments Inc. (NYSE:GPN) Q4 2022 Earnings Call Transcript February 10, 2023

Operator: Ladies and gentlemen, thank you for standing by and welcome to Global Payments Fourth Quarter and Full Year 2022 Earnings Conference Call. And as a reminder, today’s conference will be recorded. At this time, I would like to turn the call over to your host, Senior Vice President, Investor Relations, Winnie Smith. Please go ahead.

Winnie Smith: Good morning and welcome to Global Payments fourth quarter and full year 2022 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 and the proposed transaction between Global Payments and EVO Payments. 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 materials available on the Investor Relations section of our website.

Joining me on the call are Jeff Sloan, CEO; Cameron Bready, President and COO; and Josh Whipple, Senior Executive Vice President and CFO. Now I will turn the call over to Jeff.

Jeff Sloan: Thanks, Winnie. We delivered strong results for the fourth quarter and calendar 2022 in what was an unprecedented year by nearly any measure with heightened worldwide macroeconomic uncertainties caused by persistent inflation, dramatically rising interest rates, significant foreign exchange volatility, a war in Europe and lingering impacts from the pandemic early in the period. Yet the consumer remained resilient throughout the year and we enabled a record over 64 billion transactions, culminating in a successful holiday season with multiple all-time high peak days. We delivered record results for 2022. While it’s certainly in the New Year, internal metrics indicate more of the same. Where we have seen any discernible change, it is in some macro weakness in limited geographies like the United Kingdom and parts of Asia-Pacific.

Having said that, those items already are reflected in our fourth quarter results and our guidance assumes no meaningful change in operating environments for 2023. We are pleased with our preliminary January results. For the fourth quarter, our Merchant business delivered 9% adjusted net revenue growth excluding dispositions and our Issuer segment achieved 5% adjusted net revenue growth, each on a foreign exchange neutral basis. Importantly, our core Issuer business again generated sequential financial and operating improvement, consistent with our expectations and the best performance since our merger with TSYS in 2019. For the full year, our performance was consistent with our September 2021 cycle guidance despite multiple black swan disruptions that emerged in 2022.

Our Merchant business delivered 13% adjusted net revenue growth, excluding dispositions and our Issuer business generated 5% growth, each on a constant currency basis. For calendar 2022, we produced 10% total adjusted net revenue growth, again excluding dispositions, expanded margins by 200 basis points and generated 17% adjusted earnings per share growth on an FX-neutral basis, all right lined with our raised cycle guidance from 18 months ago despite all the incremental challenges of the macroeconomic environment. At our investor conference, we outlined our four-pillar strategy and focus on a simpler model more geared toward our corporate customers with enhanced growth and margin prospects. We detailed our capital allocation priorities that balance building the leading technology-enabled, software-driven payments business worldwide with efficient return of capital.

And we highlighted our commitment to advancing our strategic partnerships with leading global technology companies, investors and share gaining financial institutions to further expand our competitive moat. We anticipate closing the acquisition of EVO Payments no later than the end of this quarter. With EVO, we have reinforced our position as a preeminent payments technology company with extensive scale and unmatched global reach. EVO enhances our target addressable markets, increases our leadership in integrated payments, expands our presence in new and provides further scale in existing geographies and augments our B2B software and payments solutions. We look forward to welcoming EVO’s valued team members to the Global Payments family. We also remain on track to close the divestiture of Netspend’s Consumer portfolio by the end of the current quarter, a key element of our strategic pivot.

We believe that this transaction will best position Netspend’s Consumer business for future success and we wish its team members the best of luck in the future. Additionally, we have reached an agreement to sell our Gaming Solutions business to Parthenon Capital Partners for $415 million. This transaction, much like the sale of Netspend B2C is consistent with our efforts to refine our portfolio toward our core corporate customers in a way from consumer-centric businesses. These three transactions further our strategic objectives, simplify our businesses and provide us with enhanced confidence in our growth and margin targets. We expect each of them to close by the end of March, providing us with core businesses from which to grow for many years to come.

Our unique ability to provide differentiated vertical market software, payments and other technology solutions continues to resonate with customers. Our vertical market segment again delivered low double-digit growth in the fourth quarter with our QSR and School Solutions businesses, notable standouts. We are delighted to announce today that both the Atlanta Hawks and the Atlanta Braves have chosen Global Payments to serve as their official commerce technology provider for State Farm Arena and Truist Park. The Hawks and the Braves ranked comprehensive RFPs to select their partner for the future. And they chose Global Payments because of our ability to deliver distinctive cloud-based software and payment solutions to create enhanced frictionless experiences that increase fan engagement, drive loyalty, provide cloud-based data and improve operational efficiency.

We are proud to be the commerce technology partner for all of Georgia’s major professional sports and entertainment venues. And our pipeline in this channel remains robust. In addition to the Hawks and the Braves takeaways, Xenial produced record revenue in the fourth quarter of 2022. Recent wins also include A&W Restaurants, Jack in the Box and Panda Express. What do these new customers all have in common such that they chose us in recent competitive takeaways? In short, consumer expectations for the sports and entertainment and QSR channels are high and the pace of technological change in those markets plays uniquely to our competitive strengths. Our technologies are winning everyday in the marketplace with more than 51,000 restaurants in over 65 countries choosing our purpose-built ecosystems to deliver positive experiences back to their customers.

Other standouts in our Merchant business for the fourth quarter include our integrated and worldwide e-commerce and omnichannel businesses, which both again delivered mid-teens growth in the period. We are excited to combine the best of these businesses with EVO as our integration activities commenced in the near-term. In addition, we are now live with our acquiring relationship with Google across North America on the heels of the success of our initial launch in Asia-Pacific in 2021. Turning to our Issuer business, we produced the best performance we have experienced since the TSYS merger in 2019 in the fourth quarter of 2022. We ended last year with a record 816 million traditional accounts on file, an increase of 15 million AOS sequentially, driven by double-digit account growth with industry-leading customers as our strategy of aligning with market share winners, shows gains.

Our commercial card business continued to perform well, with transactions growing 20% in the fourth quarter as cross-border and domestic corporate travel continued its recovery trajectory. We lead in the issuer market with cutting-edge technologies, worldwide scale, terrific customer service and a partnership mentality. While the issuing business has always been and we expect will always remain highly competitive, those partners seeking to compete digitally know where they need to invest to be competitive in the marketplace. Much like in the Merchant business, issuing businesses in growth challenged markets without the wherewithal to make cloud-centric technology investments for the digital future will be increasingly challenged to compete.

Thankfully, that’s not our target market. We are very pleased to announce that TSYS signed a multiyear extension with Bank of America, one of our largest customers and relationship that spans consumer and commercial card portfolios in North America and the United Kingdom. We also extended our successful partnership with Deutsche Bank, our largest client in the DACH region into the next decade as TSYS remains their partner of choice for scheme branded card portfolios across international brands, including Deutsche Bank and Postbank, also good timing in light of our pending entry into the acquiring business in Germany through EVO. Other recent multiyear extensions with longstanding customers include P&C for its commercial business. Our durable relationships with some of the most complex and sophisticated institutions globally speak to our competitiveness well into the remainder of this decade.

We currently have 9 letters of intent with institutions worldwide, nearly all of which were achieved through a competitive RFP process. This includes a recent LOI for new business with TSYS in Mexico, well timed in relation to EVO and a competitive takeaway conducted via RFP. Another 12 of our recent LOIs, including 5 competitive takeaways, have gone to contract since the beginning of 2022, providing further future growth opportunities. We recently entered the Swedish market through a contract we executed with Entercard during the quarter spanning both its consumer and commercial portfolios. And we have got a contract with Scotia Chile portfolio, which is being added to our agreement with Scotiabank, a partnership that spans multiple markets across the Americas.

Photo by alexander grey on Unsplash

This marks our second win in Chile, following the long-term agreement we reached with market leading retailer, Cencosud, signed earlier this year. Our issuer conversion pipeline stands at a record post-merger of over 75 million accounts, providing further confidence of our growth trajectory well into the future. We are pleased to report that we have now reached business agreement on ahead of terms with CaixaBank, one of the largest issuing institutions across Europe. Post implementation, we expect to become one of the largest debit technology providers in Europe. We are the beneficiaries of technological innovation, continued share shift and market share gains is just one example while we have been providing market-leading technologies for buy now, pay later initiatives for decades.

We continue to innovate and deliver installment products as BNPL demand grows. This includes launching a successful BNPL program with one of our longstanding partners, NatWest, to aid customers with longer term purchases and special events. This product was designed to enable payments to be easily tracked and incorporates the robust fraud protections provided by FCA-regulated purchases. Other issuer highlights include a new partnership with Mastercard, leveraging Ethoca consumer clarity to improve the dispute resolution process and digital experiences for more than 25 million car owners in the U.S. and the UK. We also are collaborating with fintech software-as-a-service platform, Mondu, to provide next-generation capabilities for financial services customers across a number of strategic use cases, including credit cards BNPL, prepaid cards and a range of deposits and lending solutions.

Finally, we have now combined the TSYS commercial card business, MineralTree and Netspend’s B2B assets into a single unified B2B organization within the Issuer Solutions business as we focus on driving cross-selling opportunities. Across MineralTree and our core TSYS virtual card capabilities, total spend grew more than 50% in 2022 over the prior year as we remain focused on bringing the industry’s best virtual card capabilities to our FIs, enabling B2B transactions, mobile wallet provisioning and online travel capabilities. MineralTree had a terrific fourth quarter of 2022 with growth in excess of 30%, and it is well positioned for gains heading into 2023. Josh?

Josh Whipple: Thanks, Jeff. We are pleased with our strong financial performance in the fourth quarter and for the full year, which highlights the durability of our business model. Starting with the results for the full year 2022, we delivered adjusted net revenue of $8.09 billion, an increase of 7% from the prior year on a constant currency basis. Excluding the impact of dispositions, adjusted net revenue increased 10% on a constant currency basis. Adjusted operating margin for the full year improved 190 basis points to 43.7%. The net result was adjusted earnings per share of $9.32, an increase of 17% on a constant currency basis compared to the full year 2021, which includes the impact of the exit of our Russia business during the second quarter.

These results were consistent with our guidance expectations and with our September 2021 cycle guidance from our investor conference despite all the challenges Jeff highlighted earlier. Moving to the fourth quarter results, we delivered adjusted net revenue of $2.02 billion, an increase of 4.4% from the same period in the prior year on a constant currency basis. Excluding the impact of dispositions, adjusted net revenue increased 7% on a constant currency basis. Adjusted operating margin for the quarter increased 240 basis points to 44.4%. The net result was adjusted earnings per share of $2.42, an increase of 17% on a constant currency basis compared to the same period in 2021. Taking a closer look at performance by segment, Merchant Solutions achieved adjusted net revenue of $1.41 billion for the fourth quarter, reflecting constant currency growth of 9% excluding dispositions.

This performance was led by the ongoing strength of our U.S. and technology-enabled businesses. We delivered an adjusted operating margin of 48.4% in the segment, an increase of 20 basis points year-on-year as we continue to benefit from the underlying strength of our business mix. We saw double-digit growth across a number of our U.S. businesses in the quarter, including our integrated channel, vertical markets portfolio, POS solutions and HCM and payroll businesses, while our worldwide e-commerce and omnichannel businesses also delivered growth in the mid-teens on a constant currency basis this quarter. This strength was partially offset by ongoing headwinds from adverse foreign currency exchange rates along with macro softness in limited geographies like the UK and continued COVID-related restrictions in parts of Asia-Pacific.

We are pleased with the fundamental performance of our Issuer Solutions business in the fourth quarter. Notably, core Issuer grew 5% this quarter, excluding the impact of FX, which was an 80 basis point acceleration sequentially and positions us well heading into 2023. As Jeff highlighted, traditional accounts on file increased by 15 million sequentially, driven primarily by strong account growth from our major consumer portfolio customers. Transactions also grew high single-digits compared to the fourth quarter of 2021 with strong contributions coming from commercial card transactions, which were up roughly 20% for the quarter. Our total Issuer business including B2B delivered $501 million in adjusted net revenue, also a 5% improvement on a constant currency basis for the same period in 2021.

Excluding the impact of our PayCard business, which faced headwinds from both employment trends due to the macro environment and the lapping of pandemic subsidies, Issuer Solutions grew 5.3% on a constant currency basis. Finally, we delivered adjusted operating margins of 48.3%, an increase of 560 basis points from the prior year, fueled by our accelerated growth and focus on driving efficiencies in the business. From a cash flow standpoint, we produced strong adjusted free cash flow for the quarter of $723 million and $2.3 billion for the year, consistent with our target to convert roughly 100% of adjusted earnings into available cash, excluding the impact of the expired federal research and development tax credit. We invested $152 million in capital expenditures during the quarter and $616 million for the year in line with our expectations.

Further, this quarter, we repurchased approximately 7.3 million of our shares for approximately $790 million. And for the full year, we repurchased 23.3 million shares for $2.9 billion or approximately 8% of our shares outstanding. Our balance sheet remains healthy and our leverage position was 3.2x on a net debt basis at quarter end. We made further progress on our strategic priorities during the fourth quarter and remain on track to close our acquisition of EVO Payments and the divestiture of Netspend’s Consumer assets by the end of the quarter. As Jeff mentioned, we also reached an agreement to sell our Gaming business to Parthenon Capital Partners. We are pleased to have received HSR approval for this transaction and have submitted all other required regulatory filings.

We also expect to close the Gaming Solutions divestiture by the end of this quarter. As a result, our business mix as of April 1 of this year will reflect our future state composition for three quarters of 2023 and beyond. We have ample financial flexibility, including our $5.75 billion revolving credit facility, which is currently undrawn. And following the completion of all of these transactions, we expect our net leverage to be approximately 3.75x, below our prior estimates. We continue to expect to return to current leverage levels by year-end 2023 while maintaining existing investment-grade ratings. We are pleased with how our business is positioned as we enter 2023 and the resulting financial outlook for the year. We currently expect reported adjusted net revenue to range from $8.575 billion to $8.675 billion, reflecting growth of 6% to 7% over 2022.

We are forecasting annual adjusted operating margin to expand by up to 120 basis points for 2023. This is above our cycle guidance for margin expansion of 50 to 75 basis points annually, driven by benefits to our business mix from our ongoing shift towards technology enablement and the divestiture of Netspend, partially offset by the lower margin profile of EVO prior to full synergy realization. To provide color at the segment level, we expect our Merchant segment to report adjusted net revenue growth of roughly 15% to 16% for the full year. This includes growth of approximately 9% to 10%, excluding the impact of the acquisition of EVO Payments and dispositions. We expect the EVO Payments acquisition to contribute approximately $475 million of adjusted net revenue in calendar 2023, which assumes the transaction closes at the end of the current quarter.

We expect more than 100 basis points of adjusted operating margin expansion from the existing Global Payments Merchant business, excluding dispositions in 2023, ahead of our cycle guide. This expansion will be more than offset beginning in the second quarter with the absorption of the lower margin profile of EVO Payments. We expect this impact will be mitigated by synergy realization as the year progresses. As a result, we are forecasting margin expansion in Q1, contraction in the middle of the year and then margin expansion in Q4 as synergies ramp for our Merchant business. The net result will be a modest decline in our total Merchant business reported adjusted operating margin for the year. Moving to Issuer Solutions. We expect to deliver adjusted net revenue growth in the 5% range, including Netspend’s B2B assets for the full year compared to 2022 as we benefit from our strongest conversion pipeline since the TSYS merger.

Specifically, we expect core Issuer to grow roughly 5% and for MineralTree and Netspend’s B2B businesses to grow low double digits. We anticipate adjusted operating margin for the Issuer business to expand up to 60 basis points as we continue to benefit from operating leverage in the business as growth continues to accelerate, offset somewhat by faster growth in our lower-margin B2B businesses. Finally, while the disposition of our Consumer Solutions business is naturally expected to be a headwind for the full year, this transaction enhances the overall growth and adjusted operating margin profile of the business going forward. In terms of quarterly phasing, there are several items to note. First, while we expect foreign exchange rates to be roughly neutral for the full year, we anticipate the currency headwind to adjusted net revenue of up to 200 basis points in the first quarter and a headwind of up to 100 basis points in the second quarter.

Second, we expect the timing of our EVO Payments acquisition and the dispositions of Netspend Consumer and Gaming to naturally impact quarterly growth rates during the year. We anticipate the impact of the disposition of the Netspend Consumer business to be offset for the most part by the addition of EVO, which we expect to close at the end of the first quarter. Given the impacts of acquisitions and divestitures as well as foreign exchange rates, on our expectations for 2023, we have provided greater detail regarding our adjusted net revenue, adjusted operating margin and adjusted earnings per share assumptions for the year and by quarter in our slides posted today on our website. Moving to a couple of non-operating items. We currently expect net interest expense to be roughly $540 million and for adjusted effective tax rate to be in the range of 19% to 19.5% for the full year.

We also expect our capital expenditures to be around $630 million in 2023, consistent with our long-term targets. We anticipate adjusted free cash flow to again be in a comparable range of 100% of adjusted earnings per share in 2023. For modeling purposes, we have assumed excess cash is used to pay down indebtedness in 2023 until we return to our current leverage levels towards the end of the year with minimal share repurchases until then. Putting it all together, we expect adjusted earnings per share for the full year to be in the range of $10.25 to $10.37, reflecting growth of 10% to 11% over 2022. Excluding dispositions, adjusted earnings per share growth would have been 15% to 16% for 2023. Finally, we anticipate and assume a stable worldwide macro backdrop throughout the calendar year in 2023, reflecting the current environment.

And with that, I’ll turn the call back over to Jeff.

Jeff Sloan: Thanks, Josh. I could not be more proud of all that we accomplished in 2022 despite the incremental challenges we faced throughout the year. These achievements have given us increased confidence in the accelerated growth trajectory we outlined at our investor conference. Simply put, we built a better, a more durable business model. Our expectations for 2023 are for a return to normalcy with businesses across our markets delivering a typical financial and operating levels. The consumer remains resilient with anticipated spending patterns reflected in our recent results and our guidance. The imminent closing of the acquisition of EVO and the sales of Netspend B2C and Gaming mean that three quarters of calendar 2023 will reflect results of the businesses that we intend to manage well into the future. We’ve completed the strategic pivot set forth in September 2021, and we are very much the better for it. Winnie?

Winnie Smith: Thanks, Jeff. Thank you. We will now go to questions.

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Q&A Session

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

Darrin Peller: Guys, thanks. Nice results. But look, just still a lot of moving parts. So Jeff, my first question would just be if you can help us understand, when you look past all these €“ the Gaming divestiture, the EVO deal, in the Merchant business, number one, I guess, if you can give us a sense of what the €“ some of the main moving parts were in the quarter again in terms of the €“ some of the verticals you’re operating in, in the software-centric businesses, the tech-enabled areas, a little bit more granularity. But more importantly, when you look beyond this, what is this growth profile of this business, again, including EVO, including the divestiture of Gaming? And how do we think about Merchant going forward for the next year or 2?

Jeff Sloan: Darrin, it’s Jeff. I’ll start, and I’ll ask Cameron to jump in, too. So I think we’ve described that over the last number of calls. We’re going to end up with €“ in the aggregate, if you step back, a Merchant business is three quarters of the revenue of the company and an Issuer in B2B business that’s 25% of the revenue of the company. That’s reflected in our September €˜21 cycle guidance expectations, and if anything, makes us feel better about achieving those expectations. That was covered in our press release in our prepared remarks this morning where, excluding dispositions on an FX-neutral basis, we actually hit those targets despite all the incremental challenges and uncertainties in a lot of the markets that we’re in.

I’d also say that we expect all the transactions that we’ve announced previously and now Gaming today that closed by the end of this quarter, So three quarters of 2023, as I said in my prepared remarks, I expect to reflect the businesses that we will have for many years in the future and the future to come. I also touched on €“ I’ll turn to Cameron in a second, but I also touched on some of the pieces that have generated fantastic growth, the 9% that we announced this morning in Merchant, the 13% for the year, 9% for the quarter, the 9% volume growth I announced in my prepared remarks. Some of the pieces that added into that namely our integrated business, which again grew into the mid-teens, our e-comm and omni businesses. which again grew into the mid-teens meaningfully in excess of the Visa, Mastercard kind of e-com reporting, and of course, meaningfully in excess of what PayPal announced last night in terms of their volumes and the like.

So I think those growth drivers that we’ve described historically at our last investor conference in probably the last 4 or 5 years of calls in our Merchant business, I expect to continue to drive the business forward. Cameron, do you want to provide more detail on merchant to take it?

Cameron Bready: Yes, Darrin, I’m happy to. Maybe I’ll start with the quarter and then I’ll spend a little bit of time on the outlook as well. So for the quarter, as Jeff highlighted, I think we’re pretty pleased with the overall growth we saw in the business. Obviously, that was led by the U.S. business, which again produced double-digit growth in the quarter. Jeff highlighted a couple of, I think, the outstanding businesses from a performance perspective. But I’d also note, our point-of-sale, ATM and payroll businesses also grew in the double digits. Our vertical market business grew in the double digits. So our U.S. business overall was double digits for the quarter. North America in total, including Canada, was right at 10%, exactly what we did in Q3.