Global Payments

Moat: 2/5

Understandability: 3/5

Balance Sheet Health: 4/5

Global Payments is a payment technology company delivering innovative software and services globally, facilitating transactions for businesses worldwide across numerous industries.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview: Global Payments Inc. (GPN) operates in the payment technology industry, providing a wide range of solutions to businesses worldwide. Its operations are structured around three reportable segments: Merchant Solutions, Issuer Solutions, and Business and Consumer Solutions.

Merchant Solutions: This segment provides payment processing solutions and related services to merchants, enabling them to accept various forms of payments both in-store and online. It offers point-of-sale systems, payment gateways, fraud management, and data analytics tools, catering to diverse industries such as retail, restaurants, and e-commerce. Revenue streams are primarily transaction-based, where Global Payments earns fees per processed transaction.
Issuer Solutions: This part of the business supports financial institutions by providing a variety of solutions related to card issuing and management, including card lifecycle management, fraud prevention, and loyalty programs. They handle the processing of credit and debit cards issued by banks and other financial institutions, earning fees for each transaction handled. This revenue stream is largely consistent.
Business and Consumer Solutions: This segment provides prepaid debit cards, analytics, and loyalty programs. Many of these contracts are multi year and generate recurring revenue.

Revenue Distribution: Global Payments’ revenue is derived globally, with a strong presence in the United States, Canada, and Latin America, as well as expansion into Europe and Asia. The company’s growth is primarily driven by the Merchant Solutions segment, which is also the primary revenue driver.

The company has been experiencing revenue growth, which the company has been aiming to do through volume, price, and product mix changes, as well as growth from acquisitions. They are experiencing greater than average revenue growth in their target customer segment.
The business is geographically diversified, meaning the revenues comes from various different regions with no singular dependency.

The company also has an increasing recurring revenue, implying a degree of stability and predictability, as it continues to secure recurring revenue from its enterprise solutions.

Trends in the Industry: The payments industry is highly dynamic and competitive. Increasing adoption of digital payment methods, e-commerce growth, and fintech innovation are among the trends influencing the competitive landscape. The market is characterized by a growing demand for integrated payment solutions. At the same time, an increasing consolidation of the industry. For smaller companies to compete with large global players like Global Payments, they need a strong technology offering and customer acquisition strategy.

Digital Transformation: There is a rapid increase in the adoption of digital and contactless payment solutions, propelled by technological innovation and changing consumer behavior. This trend has put a premium on companies that can deliver versatile and secure digital payment options, including online and mobile payments.
Integration and Omnichannel: Merchants seek more integrated and seamless payment experiences across all channels. Omnichannel solutions that allow them to accept payments across various platforms.
Regulatory Compliance: Financial regulations are becoming increasingly complex and global, demanding payment companies adhere to a variety of standards around data privacy, security, and transaction processing.
Data Analytics & Security: Growing importance of data analytics for transaction insights and security to protect against fraud and data breaches.

Margins: As a payment processor, Global Payments has relatively high gross margins, but operating and net profit margins can be lower as a function of acquisitions and technology spending.

Gross margins are high due to the nature of payments processing, which have a high markup.
The cost of processing is relatively small, so operating margins benefit from transaction growth, as the costs do not scale directly to transaction volume.
However, the company invests heavily in technology and acquisitions which decreases the net profit margin. The company aims for operating profit to expand through synergies and efficiency gains.

Competitive Landscape: The payment processing market is very crowded with several types of competitors.

Large-scale payment processors: such as FIS and Fidelity National Information Services (FIS), as well as Adyen, provide similar services.
Banks with their own payment platforms: such as JPMorgan and Bank of America.
Fintech companies and payment gateways: like PayPal and Stripe.

The market is fiercely competitive and requires substantial financial resources for development, and a very strong management team to handle acquisitions, integration, and compliance.

What Makes Global Payments Different:

Scale: As a large, established player, Global Payments has scale, a well-diversified global customer base, and partnerships, that make it hard for smaller companies to compete with them.
Integrated offerings: Global Payments provide end-to-end payment processing solutions, along with various business solutions to improve the value proposition for their merchants.
Strong technology and infrastructure: Global Payments has invested heavily in their platform for scale. It also has a long history of innovation.

However, Global Payments does not have a distinct technical moat in the same way that, say, Visa has. It needs to compete on price and brand recognition, as well as innovative features.

Moat Rating: 2 / 5

While Global Payments possesses some degree of competitive advantage, particularly through scale, it does not possess a wide moat. The company benefits from:

Switching Costs: Their products are designed with a strong integration strategy, making it difficult for their clients to switch.
Scale advantages: As mentioned, it is very difficult to obtain scale in this industry and companies such as Global Payments benefit from that.
Some brand recognition: especially for their merchant solutions which creates a barrier to entry in those markets.

However:

The core business is quite homogenous, and competitors are able to easily offer similar services.
New technology changes very rapidly in the payments industry. This can lead to changes in business that quickly diminish a company’s competitive advantage.
The company is heavily dependent on management’s ability to allocate capital efficiently. An unwise acquisition, or a wrong focus of expansion, can be detrimental.

Thus, the moat rating is limited by the fact that it can be replicated by existing competitors and newer ones, and its need for continued innovation.

Risks That Could Harm the Moat and Resilience:

Technology Disruptions: Rapid technological advancements may make existing platforms obsolete. It’s important for them to adapt and implement the newest technologies to stay competitive.
Data Breaches/Cyberattacks: Payment processors are big targets of cyberattacks and data breaches. Any successful attack could hurt the brand and cause financial loss.
Increased Competition: As the fintech world becomes more crowded, price competition will hurt the margins. Competitors are developing more innovative products and therefore present a risk to incumbents.
Changes in Regulations: Changes in regulations and payment processing standards could increase the compliance costs. Furthermore, they may make some of their existing products non compliant and not saleable.
Economic Downturn: The revenue is sensitive to the economic environment and can shrink due to a recession.
Over-expansion / Bad Acquisitions: Unwise acquisitions may create over-dilution, and the cost of integration may not make the acquisitions worthwhile.

Business Resilience: The company has shown resilience in periods of macroeconomic uncertainty and during the credit crisis. Its recurring revenue and wide range of customers are a major plus. It is also quite scalable, which enables them to lower operating costs. Their broad diversification across products, geographies, and clients means they are not as sensitive to a single economic shock or disruption.

However, if the debt burden is high or if they start making bad acquisitions, the company may be unable to withstand a prolonged downturn.

Financial Analysis:

Revenues: In 2021, revenue was reported at approximately $6.97 billion; in 2022, $9.05 billion; and in 2023, $8.77 billion. The slight decline in 2023 should be considered with the acquisition of EVO Payments.
Earnings Per Share (EPS): Diluted earnings per share was reported at $2.19 for 2021, $2.40 for 2022, and $1.93 for 2023. Note that these figures have been influenced by multiple factors, such as acquisitions.
- There is some earnings fluctuation year on year. EPS appears to be increasing.
Gross Profit Margins: Gross margins have been consistently in the high 60% range since 2020. This speaks to their pricing power.
Net Profit Margin: Net profit margins is significantly lower than gross margins at between 8% and 15% of revenue over the past few years. This difference comes from high spending on sales, marketing, and development of new technologies.
Liquidity: A current ratio over 1 implies good short-term health. Current ratio appears to be consistently above 1, and even over 2 for some time, which demonstrates short term stability.
Debt: The business is leveraged, with debt levels around 3-4 times the size of equity. This is a common structure in this industry, but needs constant monitoring. Debt is mainly from a combination of notes, loans, and lines of credit. Note that the interest rate on its debt will rise with the rate rises as a lot of its debt is variable.
This can be a risk if the Federal Reserve keeps on raising rates as the company has considerable short term debt.

Other Important Financial Metrics:

- ROIC (Return On Invested Capital) has been steadily rising to 16% at the last report. A high ROIC, coupled with high growth, indicates the business can deliver increasing long term value.

Recent Issues, Controversies and Problems:

The most noteworthy issue for GPN over the last two years, has been its merger with EVO payments. This caused a high level of expenses and impairment charges in their 2023 annual report. - On a positive note, they are still reporting higher than average growth in their core market segments. - The overall company, both before and after acquisition, has been a good cash flow generator. - Management believes they are positioned to accelerate growth from the cross sales. They also see an opportunity to lower cost as more technology integrates.
Rising Interest Rates will affect their cost of debt. They have a substantial amount of debt with the associated interest rates rising.
While these issues do cause volatility and affect financial reporting, they don’t threaten the core business model of GPN.

The company’s financials are easy to understand, while they use some complicated terminology, they disclose them clearly. They also have a good credit rating (BBB).

Understandability Rating: 3 / 5 Global Payments’ business is moderately easy to understand. The core processing functionality is straightforward, but the integration of various payment solutions and the complexities surrounding compliance and the company’s international operations make it moderately complex. For those without financial knowledge the complexity can become a level 4.

Balance Sheet Health: 4 / 5 Global Payments has good levels of cash and a decent liquidity ratio. However, high debt and acquisitions can be a threat over time. The interest rates are also something that could affect future profits.