Global Payments Inc. (NYSE:GPN) Q4 2023 Earnings Call Transcript

Global Payments Inc. (NYSE:GPN) Q4 2023 Earnings Call Transcript February 14, 2024

Global Payments Inc. beats earnings expectations. Reported EPS is $2.65, expectations were $2.63. 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’ fourth quarter and full year 2023 earnings conference call. At this time, all participants are in a listen-only mode. Later, we will open the lines for your questions and answers. If you should require assistance during this call, please press star then zero. As a reminder, today’s conference will be 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 fourth quarter and full year 2023 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 were pleased with our fourth quarter and full year 2023 results, which exceeded our initial expectations outlined last February. I am extremely proud of our teams around the world for their outstanding execution. Together, we accomplished a great deal in 2023. Starting with our financial performance, for the full year we achieved high single digit adjusted net revenue growth and increased adjusted earnings per share 12%. This includes a more than 400 basis point headwind from the divestiture of our Netspend consumer business, which we completed early in the second quarter. We also expanded adjusted operating margins 90 basis points, including the impact of EVO payments, which had a lower margin profile than Global Payments at the time of the acquisition.

Importantly, we deliver this performance consistently throughout the year despite ongoing headwinds, including macroeconomic uncertainty, persistent inflation, FX volatility and geopolitical unrest highlighting the durability of our model. Strategically, we also made significant progress during the year executing on a number of key initiatives. First, we successfully closed the acquisition EVO Payments in March, which complements our strategy of providing further penetration into integrated payments, enhancing our B2B capabilities and expanding our exposure to stronger secular growth markets globally. Our integration has progressed quite well and we remain on track to deliver on our revised target of $135 million in annual run rate expense synergies within two years.

While revenue synergies generally take longer to materialize, we are more excited today than when we announced the transaction about opportunities we have to cross-sell our products and capabilities into EVO’s existing customer base. We are continuing to invest in these opportunities in 2024 and expect them to scale more fully in 2025. Further, we completed the divestitures of our Netspend consumer assets and our gaming solutions business in April. These three transactions represent important milestones as we seek to advance our strategy and operate a simpler business model centered on our core corporate and financial institution customer base. In our merchant business, that strategy is spearheaded by a software-centric approach leveraging our strengths across our vertical markets, integrated and point-of-sale businesses, and we seek to drive distinction in our offerings by providing omnichannel capabilities and value-added commerce enablement solutions across our markets, including those that benefit from stronger payment digitization and secular growth trends.

We continue to see good momentum in our merchant solutions as we execute these strategies. Starting with our vertical markets businesses, we had a number of notable achievements in 2023 across the portfolio. These include Xenial’s new partnerships to be the official commerce technology provider for both the Atlanta Braves and Atlanta Hawks as we look to further expand our market presence in the stadium and event venue vertical. In the United Kingdom, we renewed our relationship with Principality Stadium, home of Welsh rugby and football, and expanded our services with Wembley Stadium in London. We were also selected by leading food service management company, Sodexo, to be its preferred point-of-sale and kiosk partner, and are now the partner of choice for the three largest players in the food service management space.

Our education solutions business delivered many new marquee customer additions across our K-12 and our university businesses and continue to expand to international markets with school solutions, launching MySchoolBucks in Australia, and TouchNet achieving new wins in Canada, Australia and the United Kingdom. Our active network business had a record bookings year, singing 839 new logos, including it largest ever win in the community vertical with the City of Toronto. Moving to partner and software solutions, we achieved record bookings in 2023 with new partners increasing 23% from the prior year. This was in part driven by the strong momentum we have seen with our new progressive payment facilitation, or profac model that we launched midyear.

This hybrid option provides many of the benefits of being a payment facilitator while minimizing the heavy burden that comes with it. Profac is unique to Global Payments and we are delighted to have signed 16 profac partners to date who already have thousands of merchant customers using our payment solutions. Some notable new partners in our integrated business include 402 Ventures, a leading provider of auction software in the heavy equipment and machinery vertical; Autosoft, which provides a software management platform for auto dealerships; Black Knight, a leading provider of mortgages and loan origination software; and Inovalon, a leading data analytics ISD in the healthcare vertical. These trends, including the momentum we are seeing with profac underscore our confidence in our ability to maintain consistent growth going forward as our differentiated capabilities continue to resonate with the ISB market.

As for the third leg of our software strategy, our point-of-sale software business delivered strong growth for the full year as we continue to see solid demand for our solutions and benefit from the releases of new product enhancements. Notably, our average revenue per unit continues to expand, up 9% year-over-year as more merchants are using payments and other add-on capabilities in our evolving POS platform, and of course this is prior to the full launch of our complete next-generation restaurant and retail point-of-sale software platforms, which we continue to expect this quarter. Lastly, our exposure to some of the most attractive secular markets globally remains a core element of our strategy, both in terms of contributing to our overall rates of growth and providing us the global footprint we need to support complex multi-national corporations.

We continue to see good trends across our businesses in Spain and central Europe, each of which delivered high teens growth, and key new European markets entered with EVO, including Poland and Greece, and also achieved double-digit growth. Further, we have seen favorable secular trends in LatAm, where we meaningfully increased our footprint with EVO. This includes new implementations in Mexico with large customers like dLocal, DHL and Petro 7 as we leverage our partnership with City Betamex. Turning to issuer solutions, where we have longstanding relationships with some of the most complex and sophisticated institutions globally, we are proud to have completed 11 customer conversions in 2023. In total, we added over 50 million accounts to our business and ended the year with record traditional accounts on file of more than 800 million.

We continue to have a strong pipeline of new business that extends into 2025, as well as eight letters of intent with institutions worldwide. In 2023, we achieved 13 multi-year renewals and new customer agreements. This includes a new contract with a leading U.S. bank that is a longstanding Global Payments merchant partner, a relationship that provided the foundation for the growth of our partnership to include issuer technology solutions. We also continued to expand into new and faster growth markets, including in LatAm through our partnership with CAT, the credit card joint venture between Scotiabank and Chile’s largest retailer, Cencosud. The confidence that many of the largest and most sophisticated complex financial institutions have with us is enhanced by our issuer platform monetization efforts, which positions us to provide our clients market-leading, cloud-native, real-time solutions at scale in more markets than we ever have previously.

We have made substantial progress with our modernization with two clients now in production leveraging products via our cloud solution. Further, we expect to complete the development of our client-facing applications this year and are planning to execute dozens of unique cloud-issuer platform pilots spanning multiple services, products and geographies as we prepare for the commercial launch of additional cloud-native capabilities. Moving to B2B, we continue to see solid demand for our leading capabilities across our three focus areas: software-driven work flow automation, money-in and money-out funds flow, and employer solutions. We have successfully integrated EVO’s PayFabric software into our merchant business, allowing us to go to market in B2B acceptance with a software-led approach.

Further, our MineralTree business nearly doubled subscription bookings in its core midmarket, positioning the business well heading into 2024. As one of the largest virtual card issuers in the world, we are benefiting from accelerated adoption of virtual cards globally, which contributed to strong growth in commercial transactions this year. Additionally, our B2B bookings in merchant solutions increased over 20% in 2023 as more of this spend shifts towards digital channels. Our employer solutions are also seeing favorable trends, including our payroll business delivering mid-teens growth for the full year and our paycard and EWA solutions achieving nearly 2,000 new partnerships last year. After an eventful and successful 2023, I am pleased to report that we are carrying this momentum into the early part of 2024.

In January, our merchant business announced a new joint venture with Commerzbank in Germany. This new entity, Commerz Globalpay, is expected to launch in the first half of 2024 and will deliver a comprehensive suite of innovative omnichannel payments and software offerings, including our GP point-of-sale software solutions and our GP touch on mobile technology at scale, providing merchants the capabilities needed to run and grow their businesses more efficiently in the largest economy in Europe. We are delighted to be partnering with Commerzbank, a premier financial institution with unmatched relationships with small and medium-sized merchants, to significantly enhance distribution in Germany, where there are substantial opportunities to further digitize the payment experience.

This partnership was achieved because of Global Payments leadership in payments technology and commerce solutions and extensive JV experience across European markets, while our acquisition of EVO helped provide a foundation with its existing physical presence and merchant portfolio in Germany. In North America, we remain on track to launch our next-generation Heartland restaurant and Heartland retail offerings this quarter, which will provide best-in-class omnichannel experiences and further catalyze our success in point-of-sale software. Early feedback on our next generation restaurant point-of-sale solution has been overwhelmingly positive, including our new updated and enhanced features like online ordering, loyalty, mobile point of sale, and a simplified user interface on commercial-grade hardware.

Our new retail POS solution allows us to extend into additional retail verticals, which is the cornerstone of our broader strategy of sub-vertical expansion, allowing us to increase wallet share while meeting the demands of a modern retail environment that brings supply chain, ecommerce, customer engagement and complex ERP functionality into a simplified and single ecosystem. This expansion not only aligns with our growth objectives but also ensures we stay at the forefront of retail technology, providing our clients with the tools they need to thrive in a rapidly evolving market. Our POS momentum also continues in the enterprise QSR space. We were delighted to be selected to power CosMc’s, a new concept from the McDonald’s universe. Xenial’s cloud point-of-sale drive-thru digital menu boards and nVision speed of service solutions are enabling an innovative new drive-thru traffic management system that supports CosMc’s multiple drive-thru lanes and pick-up windows, optimizing restaurant operations in a dynamic and flexible way.

CosMc’s is also using Xenial’s back office suite to provide real time reporting and management of inventory, sales, labor, projections and scheduling. We are excited to have already launched with CosMc’s at the initial Bolingbrook, Illinois restaurant concept in December and look forward to helping future-proof all new pilot locations with our cloud-based technology ecosystem as they open in additional markets in 2024. Our issuer business has also started the year well, having executed multi-year renewal agreements with two of our flagship clients, Capital One and Navy Federal Credit Union, both longstanding relationships spanning decades. Our renewal with Capital One include both its consumer and commercial credit portfolios in North America, and for Navy Federal, a not-for-profit credit union serving the military, veterans and their families, our relationship supports its consumer portfolio as well as an array of value-added services, including loyalty, fraud, and digital engagement solutions.

The extension of these partnerships further validates our strategy of aligning our business with clear market winners. Looking ahead, we remain encouraged by the resiliency we have seen in consumer spending and expect fairly similar trends in 2024. However, we recognize there remains a number of risks to the global economy and consumer and are appropriately reflecting this in our expectations. Our outlook does incorporate a slightly more tempered expectation for the macro environment relative to what we experienced in 2023, but is roughly aligned with what we saw exiting the year. January trends were fairly consistent with what you heard from the networks and broadly in line with our expectations. We are confident we have built a better and more durable business model which positions us well to manage through any environment if the current backdrop changes.

With that, I’ll turn the call over to Josh.

Josh Whipple: Thanks Cameron. We were pleased with our financial performance in the fourth quarter and for the full year, which reflects continued outstanding execution and the resiliency of our business model. I’m particularly proud that we delivered these results while simultaneously completing multiple transactions which serve to accelerate our strategy. Starting with the full year 2023, we delivered adjusted net revenue of $8.67 billion, an increase of 7% from the prior year. Excluding the impact of dispositions, adjusted net revenue increased 15% compared to 2022. Adjusted operating margin for the full year improved 90 basis points to 44.6%. The net result was adjusted earnings per share of $10.42, an increase of 12% compared to the full year 2022, which equates to over 16% growth excluding the impact of dispositions.

For the fourth quarter, we delivered adjusted net revenue of $2.19 billion, an increase of 8% from the same period in the prior year. Adjusted operating margin for the quarter increased 30 basis points to 44.8%. This equates to 100 basis points of margin expansion excluding EVO payments and dispositions. The net result was adjusted earnings per share of $2.65, an increase of 10% compared to the same period in 2023. Taking a closer look at performance by segment, merchant solutions achieved adjusted net revenue of $1.67 billion for the fourth quarter, reflecting growth of 19% or approximately 8% excluding the impact of EVO and dispositions. Our performance was led by our software-centric businesses, which again delivered double-digit growth in the quarter.

Specifically, we saw strength in Zego, school solutions, and AdvancedMD, which delivered strong double-digit growth for the fourth quarter, and our point-of-sale businesses again grew roughly 20%. Focusing on faster growth geographies, we achieved double-digit growth in Spain and central Europe, as well as in Poland and Greece. Our LatAm business was another bright spot for the quarter as we benefit from the strong secular payments trends in Mexico and Chile. This performance was partially offset by ongoing weakness in the macro environment in the U.K. and Canada. We delivered on adjusted operating margin of 47.7% in the merchant segment, a decline of 60 basis points due to the acquisition of EVO. Excluding EVO and dispositions, operating margins improved 40 basis points year-on-year.

For the full year, we realized approximately 25% of our targeted expense synergies from EVO, and as Cameron mentioned, we expect to deliver on our raised expectation of $135 million in annual run rate expense synergies within two years. Our issuer solutions business produced adjusted net revenue of $531 million, reflecting growth of 6% or 5% constant currency growth. 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 approximately 13 million traditional accounts on file sequentially – this equates to an increase of more than 50 million accounts year-over-year as we continue to benefit from the ongoing execution of our conversion pipeline, in addition to healthy consumer and commercial account growth with our large, existing FI customers.

Issuer transactions grew high single digits compared to the fourth quarter of 2022, led by commercial card transactions which increased low double digits, highlighting ongoing strength in cross-border corporate travel. Focusing in on our issuer B2B portfolio, MineralTree delivered high teens growth and achieved record bookings this quarter in its targeted midmarket segment, while pay card saw improving trends as the business lapped the more difficult employment comparisons from the last year. Finally, issuer solutions delivered an adjusted operating margin of 47.3%. As expected, this was relatively consistent with our third quarter performance but represented a decline compared to the prior year, due to a difficult comparison resulting from vendor benefits reflected in that period.

For the full year, our issuer margins expanded 100 basis points, which exceeded our initial guidance for 60 basis points of margin improvement compared to 2022. From a cash flow standpoint, we produced strong adjusted free cash flow for the quarter of $784 million and $2.5 billion for the year. This represents an approximately 100% conversion rate of adjusted net income to adjusted free cash flow for the full year, consistent with our expectations excluding the impact of the requirement to capitalize research and development costs for income tax reporting purposes. Capital investment was approximately $157 million in the fourth quarter and roughly $660 million for the full year. Since closing EVO in March, we have reduced outstanding debt by more than $1.4 billion and our leverage position was 3.4 times at the end of the fourth quarter.

Our balance sheet remains healthy and we have approximately $3.5 billion of available liquidity. Further, our total indebtedness is approximately 91% fixed, with a weighted average cost of debt of 3.78%. While debt repayment was our top priority for capital allocation in 2023, we are pleased to have also repurchased 4 million shares for roughly $410 million prior to closing EVO. Turning to the outlook, we are pleased with how our business is positioned as we enter 2024. We currently expect reported adjusted net revenue to range from $9.17 billion to $9.30 billion, reflecting growth of 6% to 7% over 2023 or approximately 7%-plus excluding EVO and dispositions. We are forecasting annual adjusted operating margin to expand up to 50 basis points for 2024, driven by 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 expect our merchant business to report adjusted net revenue growth of 9%-plus for the full year. This includes growth in the 7% to 8% range excluding the impact of the acquisition of EVO and the disposition of gaming solutions. We will fully annualize the transactions by the end of the first quarter of 2024. We 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. Moving to issuer solutions, we are anticipating adjusted net revenue growth in the 5% to 6% range for the full year compared to 2023, as we benefit from our strong conversion pipeline and continued account growth with our large existing FI partners.

We expect core issuer to grow in the mid single digit range and for MineralTree and Netspend’s B2B businesses to grow low double digits. We anticipate adjusted operating margin for the issuer business to expand by up to 50 basis points as we continue to drive efficiencies in the business, which will be offset somewhat by faster growth in our lower margin B2B businesses. In terms of quarterly phasing, as I mentioned, we will anniversary the acquisition of EVO and the disposition of gaming by the end of the first quarter. We will also anniversary the impact of the divestiture of Netspend’s consumer assets at the end of April. As a result, we will continue to have some impacts from these transactions in the first half of the year. Moving to a couple non-operating items, we currently expect net interest expense to be slightly above $500 million this year and for our adjusted effective tax rate to be approximately 19%.

We also are planning for our capital expenditures to be around $670 million in 2024, which remains roughly 7% of revenue. We anticipate adjusted free cash flow to again be in a comparable range of 100%, excluding the roughly five-point impact from the timing change for recognizing research and development tax credits. Regarding capital allocation, we plan to return to a more balanced capital allocation approach in 2024, and I’m delighted that our board of directors has approved an increase in our share repurchase authorization to $2 billion, as share buyback remains one of our priorities. We also plan to further reduce our indebtedness until we return to roughly three times levered on a net debt basis during the year. Putting it all together, we 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.

Excluding dispositions, adjusted earnings per share growth is expected to be 14%-plus for 2024. Our outlook for the year reflects the ongoing positive momentum in our business. While accommodating for a more tempered economic environment, given the continued uncertainty, we remain confident in the resiliency of our model and our ability to adapt to potential shifts in the economic environment. Cameron?

Cameron Bready: Thanks Josh. As I said when I was named CEO in May, it’s an exciting time for Global Payments, and I could not be more proud of all we accomplished last year. As we begin 2024, I remain enthusiastic about the opportunities in front of us. We have a compelling technology-enabled strategy, a world-class team, great partners and clients, and a global presence with diverse distribution capabilities. This year, I remain highly focused on the priorities for our business and customers I outlined at the time I stepped into this role. First, we will continue to execute against our strategies, which positions us well for growth and success across our markets. We will, however, sharpen our focus on the most attractive opportunities we see in these areas while seeking to further simplify our business and amplify the impact of our investments.

Specifically, we are focusing on the most impactful of these initiatives and where we can drive further differentiation in our business, including with our software-centric channels across our own, partnered and POS solutions. Additionally, we will continue to harmonize areas of the business that are less differentiated with an eye towards further improving scale and enhancing margin characteristics. Further, in markets and businesses where we are subscale with limited potential to build scale, we may choose to exit certain lines of business and activities in order to better focus our investments, resources and management intention on opportunities with better long term growth prospects that can more meaningfully impact our business. Second, I am focused on making it as easy as possible to do business with Global Payments while providing more solutions that deepen our relationships with our customers.

We will continue to prioritize meeting our clients and customers how and where they want to be met with innovative and distinctive capabilities that integrate seamlessly. This includes our issuer modernization program and cloud investments, which will provide our clients with greater enablement capabilities and allow them to consume the services they need with greater speed to market and flexibility while providing best-in-class experiences for their cardholders. Third, we will maintain our relentless focus on execution, which has been one of the hallmarks of Global Payments and a key component of our ability to produce consistent results through market cycles. We are, however, undertaking an initiative to further simplify our technology and operating environments across the globe to become more efficient and effective, placing greater focus on aligning with business outcomes.

We are committed to redefining success with a continuous improvement mindset and increasing the speed of delivery and nimbleness of our business. Fourth, we remain committed to harnessing the power of generative AI to both innovate new products and solutions that deliver value and improved experiences to our customers, and increase the productivity and efficiency of our operating environments and workforce around the globe. We have already made meaningful progress in our journey to embed generative AI into our business to leverage its power and the richness of its data in our ecosystem. We have established a center of excellence to coordinate our adoption of generative AI technologies and provide a governance framework, implemented foundational tools and models that are being utilized throughout our organization, evaluating numerous use cases and deployed generative AI technology in a number of areas of our business.

For example, in our issuer solutions business, our Foresight solution in partnership with Featurespace provider a market-leading fraud solution that uses generative AI to detect fraud strategies in real time utilizing our proprietary data. Clients using this solution have realized a nearly 50% reduction in fraud losses, and we are evaluating a number of development opportunities that use generative AI across our issuing and acquiring businesses as a key component of our next-generation applications to further combat fraud and identity risk across our portfolios. Finally, I’m focused on ensuring Global Payments’ culture is second to none. Our culture dictates how we accomplish our goals and achieve results as an organization. Having a world-class culture will further differentiate us in the marketplace while driving value creation and benefit for all of our constituents.

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 Jason Kupferberg with Bank of America. Please proceed with your question.

Jason Kupferberg: Good morning guys. I wanted to start with the guidance for 2024 on the top line. Looking at the merchant piece specifically, I know we’re talking about at least 7% organic. It did sound in your prepared remarks like you’re maybe being a little bit more conservative versus this time last year, so if you can elaborate on that, and just give us a sense–I mean, if the consumer doesn’t slow at all, are we looking at more, like, 8%? Just trying to calibrate what some of the underlying assumptions might be in that part of the guide.

Cameron Bready: Hey Jason, good morning, it’s Cameron. Thanks for the question – it’s a good question. The way I think about it is we exited the year at basically 8%, and as we said in our prepared remarks, our expectation for merchant for 2024 is 7% to 8%, kind of quote-unquote organic, obviously excluding the pick-up that we get from EVO in the first quarter before we anniversary the deal. To me, that really reflects, as we said, a slightly more tempered view of the macroeconomic environment, given that we do see some risk to the consumer as we head into 2024. That being said, to your point, if the consumer hangs in better than we would expect, I would anticipate us being towards the higher end of that range. Obviously if the consumer is a little weaker, as our guide sort of contemplates or at least allows for, I think at the low end, we might be towards the lower end of that range.

I think the way you’re thinking about it is right and it’s consistent with how we’re thinking about it. We’re being a little bit cautious around the consumer heading into the year. Obviously a continued resilient consumer who doesn’t weaken at all will put us towards the higher end, and if we do see a little bit of softness, we think we’d be towards the lower end of that range. But again, we wanted to be prudent with our expectations around the consumer heading into the year.

Jason Kupferberg: Understood. I wanted to just pick up on your comments around simplifying the business. Some possible portfolio pruning sounds like it could be on the table. I’m wondering if that might be a 2024 event. And then if you can just comment on the M&A front about whether or not large scale acquisitions could be in the cards – there was obviously some media reports out a little before Christmas on that, which I know you guys denied, but just to get a sense of where M&A versus buybacks is sitting in your priority list right now. Thanks.

Cameron Bready: Yes, happy to. Maybe I’ll address the latter part of that question first, and then I’ll circle back to the front in a second. I think on the M&A front, as Josh mentioned in his prepared comments, we’re kind of back to a business as usual mindset heading into the year as it relates to capital allocation. As I’ve said pretty consistently, whatever we do or consider from an M&A perspective obviously has to fit strategically, it has to fit culturally and financially, it needs to be attractive as a returns matter relative to the alternative uses of our capital, and given that leverage is right around our targeted level right now and we expect it to be for 2024, the alternative use of capital is buying back our stock, so I remain of the view that anything we do from an M&A perspective needs to be competitive from a returns standpoint relative to our ability to buy back stock and the returns that we think we can generate from that.

That’s true, regardless of whether we’re thinking about smaller deals that present nice tuck-in or enhanced capability opportunities, or we think of larger deals that obviously provide more opportunity for increased scale and advance the strategy as well. As always from an M&A perspective, we’re open-minded. I think we’re very deliberate, I think in terms of how we think about M&A that’s going to fit our strategy and the things we want to pursue, and we’ll continue with that mindset as we move forward in time, but I’ll be clear – the return expectation for M&A need to be competitive, and that’s how we’ll view everything through that lens. I think as it relates to your first question around potential portfolio pruning, there is some chance that that will be in the cards for 2024, yes.

It’s not contemplated in our outlook currently today, but it is something that we’re continuing to evaluate, and it’s really in the context of making sure that as we think about investing in the business, that we’re investing in those areas where we have scale, we have differentiation, we have prospects to be able to continue to grow the business at attractive rates going forward, and trying to minimize investment, minimize resources and management attention that’s focused on markets that may be sub-scale, or a line of business where we don’t have particular differentiation and we don’t see greater prospects to meaningfully impact the business moving forward. That’s the way we’re thinking about it. Obviously if we make decisions around that, we’ll provide updates as we work through the year, but it is certainly something that we’re contemplating, as I noted in my remarks.

Jason Kupferberg: Thanks Cameron.

Cameron Bready: Thanks Jason.

Operator: Thank you. Our next question comes from the line of James Faucette with Morgan Stanley. Please proceed with your question.

James Faucette: Great, thank you very much. Wanted to ask in terms of your current competitive environment, I think, Cameron, you highlighted a lot of different things that you’re working on in areas of strength, but how do you generally assess the competitive intensity in the market right now, and where do you see opportunities versus challenges generally?

Cameron Bready: I think it’s a good question. I would say we feel fairly good about how we’re positioned strategically across most of the markets that we’re in today. Certainly here in the U.S, we feel quite good about obviously our integrated business, the capabilities we have there, the differentiation, the distinction we think we can bring to ISB partners, and how that has allowed us to position that business for continued growth and success. Certainly we’re very excited about the rollout of our next-generation point-of-sale software solutions I talked about, which are coming obviously this quarter, which we think will give us a more competitive positioning obviously in the POS space here in the U.S. market, with feature-rich capabilities and obviously service that we think is distinctive, relative to again the competitors in the marketplace, and obviously we still see a long runway for growth around POS, whether it’s enterprise QSR with what we’re doing with CosMc’s, or small to medium sized merchants across restaurant and retail that we’re targeting through our Heartland restaurant, Heartland retail platforms.

I think we feel very good about that, and then of course across the vertical market software businesses and those verticals where we do own the entirety of the software stack, again we think we’re well positioned in those verticals to continue to grow nicely and continue to gain share with those businesses in the specific verticals that they’re targeting. That’s really the software-centric strategies that we’re pursuing here in the U.S. market. I do think those are the areas of growth that we’re continuing to focus on and continuing to invest in, in our business, and that’s the best strategy for us competitively, I think here in the U.S. market. But I think we’re feeling pretty sanguine about the overall competitive landscape in the U.S. I think pricing has become more rationalized, obviously, with rates rising and competitors focusing on profitability and free cash flow, which I think creates a more constructive backdrop overall just from a competitive standpoint.

I’d say outside the U.S, we’re pretty bullish how we’re positioned competitively, largely because of the capability that we can bring to bear on markets that are probably not quite as sophisticated from a product and solutioning standpoint as the U.S. market, so our ability to bring our point-of-sale solutions, our touch on mobile solutions, our commerce enablement capabilities, our Google running Grow My Business platform to markets outside the U.S., particularly in Europe, LatAm, and to some degree Asia-Pacific, I think competitively positions us really well in markets where I’d say the competitive dynamic in many cases is probably less intense than it is here in the U.S. market. From that perspective, I’m relatively bullish what we can do, putting aside macro, just in terms of competitive positioning in markets outside the U.S., bringing these distinctive and differentiated capabilities.

James Faucette: Appreciate that. Then as a follow-up, and related to this year’s outlook, how should we be thinking about the targets, especially from a profitability standpoint vis-à-vis your cycle guide that was established a few years ago, and wondering the trajectory of that and how we should be thinking about medium term EPS targeted growth rates, etc. Thank you.

Cameron Bready: Yes James, look – it’s a fair question, and I’m not going to get ahead of my skis today and sort of give a new, quote-unquote, cycle guide. Obviously as I’ve communicated previously, we intend to host an investor day this year – that will be one of the topics that we cover at that time, and we’ll provide a little more color about how we’re thinking about the business then. But I would say, if you just step back and look at how we’re thinking about the business heading into the year, as we said, excluding kind of the anniversarying of deals, if you think about the business on a normalized basis, we’re targeting 7%-plus revenue growth on the top line and 14%-plus from an earnings per share perspective, so think about it kind of in the high single digit top line growth and kind of mid-teens earnings per share growth, again reflecting a little bit more of a tempered view of the macro environment heading into the year.

I think that’s generally fairly reflective of how we think about the business, and I think that kind of business is one that we can continue to execute against, and those targets and expectations are something we think we can sustainably achieve over a period of time, so I would characterize the outlook as broadly reflective of how we think about the business, obviously with the overlay of a little bit of a tempered macroeconomic expectation for 2024.

James Faucette: Great, appreciate that. Good luck.

Cameron Bready: Thank you James.

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

Darrin Peller: Guys, thanks. I was actually going to touch on the medium term guide, but that was helpful. Just as kind of a quick follow-up on the guidance, when we think about the inputs, again you said more conservative in terms of the consumer, which is helpful. Are you incorporating any type of M&A or tuck-ins in that outlook that we should consider being at all material to the revenue growth rates? Then just going back to guide on margins, I think you’re saying up to 50 basis points. Can we just walk through that a bit? It’s a little lower than it used to be in terms of margin expansion. How much of that is synergies from EVO, how much of that is just operating leverage versus mix, any conservatism in that outlook as well, and just maybe the inputs? Oh, and then also, if your margins are coming to a level that’s higher, does that inform your view on capital allocation – more buybacks, perhaps?

Cameron Bready: Yes, a lot is buried in there, Darrin. Maybe I’ll start and ask Josh to chime in as well on a couple of the comments. I would just say on the first question, the answer is no from an M&A perspective. We did a small portfolio buy in Q4, but it’s de minimis in terms of contribution to 2024 – I mean, less than 10 basis points, so that’s not a particular large impact. We don’t have any other M&A included in our guide. Obviously if we do M&A, we’ll update at the time, as we have historically, and provide an expectation of contribution for whatever M&A we do as we head into 2024. On the second question, I think as it relates to the margin guide, I’ll just give a couple opening comments and then I’ll let Josh maybe provide a little more color.

I’d say two things, really. One is–you know, I think we’re taking a fairly prudent view of the outlook heading into the year. We have a lot of things that we’re trying to accomplish as a business, particularly as it relates to EVO integration, as well as continuing to invest in the business in areas that we think are going to help drive growth and sustain growth over longer periods of time. I think like everything in life, it’s a bit of a balanced view around how much of the benefit is flowing through margins to the bottom line versus how much we’re reinvesting in the business to support the rollout of our new POS platform, obviously to ensure that we execute integration of EVO seamlessly, effectively while we continue to invest in their underlying platforms to ensure stability and reliability.

We continue to invest in bringing new product and capability to their markets, which we think will drive revenue obviously longer term, etc. I think the view around margins is pretty balanced around, again, wanting to invest in the business to drive growth as well as allowing some of that to flow through to the bottom line, to impact earnings. The last point I would make, and I’ll ask Josh to add any color he would like, is if you exclude the impact of EVO, which obviously is still coming in at a lower margin profile, I think overall margins for the year would be up closer to 75 basis points and merchant would be closer to 60. I’ll just remind you, that’s off of a base for merchant of 48%, so margins are fairly healthy in the business overall.

We’re focused on continuing to find opportunities for market expansion, again while also continuing to find opportunities to invest to grow the business. Josh, I don’t know if you’d want to add anything to that?

Josh Whipple: No, look – I think the only thing I would add is if you think about margins by segment, we continue to expect merchant margins to improve as synergies ramp. Darrin, you may recall if you go back to last year, Q2 margins were down 170 basis points, Q3 they were down 90 and Q4 60, so we’re seeing a continued consistent positive trend coming into the year. I’d also just echo what Cameron said – we continue to focus on balancing margin expansion with reinvestment in the business, and as it relates to our issuer margins, we’ll continue to see the benefit of strong volume-based revenue trends and ongoing expense management. In Q1 specifically, we expect margins to be slightly higher than the 50 basis points, given the lower Q1 ‘23 absolute margin figures, but otherwise margin expansion for the overall company will be pretty consistent across each of the quarters.

Darrin Peller: That’s really helpful. Just quickly on the buyback question, I mean, is this–it looks like you raised your authorization, if I’m not mistaken, so is this an indication of more capital returning expectations going forward?

Josh Whipple: Darrin, I would say that we plan to return to a more balanced capital allocation approach in 2024. Buybacks remain one of our priorities, but we plan to further reduce debt until we can return to that roughly three times levered target on a net debt basis during the year.

Darrin Peller: Great.

Cameron Bready: Darrin, the only thing I’d add – I mean, it was important to us going into the year to have the capacity to be able to do share repurchases if that’s what capital allocation plans call for, so obviously we’re pleased the board supports that and I think it sends a signal, obviously, that we’re very open minded to share repurchases if that’s the best alternative for capital allocation this year.

Darrin Peller: Thanks Cameron, thanks guys.

Operator: Thank you. Our next question comes from the line of Ramsey El-Assal with Barclays. Please proceed with your question