Global Payments Maintains a Solid Competitive Position

Senior Equity Analyst

Brett Horn

Revenue segments as reported by the company.

Merchant Solutions

Issuer Solutions

Business and Consumer Solutions

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We believe the market is concerned about disruption to incumbent payment players like Global Payments. In our view, though, Global Payments continues to benefit from a strong competitive position and is successfully adapting to a changing industry. While Worldpay struggled under FIS' roof, we think that was due to underinvestment, an issue that we don't believe applies to Global Payments.

Global Payments merged with Total System Services in 2019. While it was the last large deal done in the acquiring space that year, we think this combination was the most attractive. 

The targeted cost synergies from this deal were the most modest, which we think should lessen any concerns that the company is underinvesting. Additionally, among the three deals, this merger was the only one involving two companies that both had acquiring operations. Given that we believe scale is critical to competitive positioning in the industry, we think the combination immediately strengthened Global Payments' moat. Additionally, we think the merger better positioned Global Payments to adapt to industry changes. First, we think international expansion will be an increasing area of industry focus going forward. The U.S. market is relatively mature, and international expansion will be necessary to maintain growth. The two companies should be able to leverage each other's global footprints. 

Through the pandemic, Global Payments did feel the pinch from the coronavirus as payment transactions fell markedly. Given its focus on small merchants, we think Global Payments held up fairly well, and results following the pandemic suggest the long-term shift to electronic payments has reasserted itself, and volumes have recovered fairly quickly. As such, we think Global Payments can maintain the solid growth it has enjoyed historically, absent any downturn in the economy. If we do go into a recession, though, Global Payments' focus on small merchants could be a negative.

Business Strategy & Outlook

Payment processing of any type is a highly scalable business, as once a payment platform is established, there is little incremental cost to additional transactions. As a result, a handful of acquirers have come to dominate the industry. Recent mergers and acquisitions have further consolidated the space, and Global Payments has actively participated in this trend, acquiring its main rival, Heartland, in 2016, a move that meaningfully bulked up the company’s size. The more recent Total System Services merger further scaled the company's acquiring operations. Still, we estimate Global Payments’ domestic market share is less than 10%, which is a material step below larger providers such as FIS and Fiserv. However, we think the company’s small-merchant focus leaves it operating in a distinct niche that helps to shield it from its larger competitors, and in this niche, it is among the leaders. The company believes its sweet spot in terms of size is merchants that generate $500,000-$600,000 in annual payment volume, a range that is both materially lower than the area of focus for larger providers and higher than the micromerchants being serviced by newer upstarts such as Square. We see Global Payments' position in this niche as maintainable and believe the company's scale and the resulting cost advantage lead to a narrow Morningstar economic moat rating for the business.

However, the acquiring industry is evolving, as merchants are increasingly looking for more holistic solutions and omnichannel capabilities. We think Global Payments has proactively adjusted, and despite its focus on smaller merchants, which presumably could have come late to these trends, the company is well positioned to adjust to a changing competitive environment. The company has actively moved past its historical reliance on independent sales organizations, and shifted toward partnering with software providers. Further, the company has acquired its own software offerings in select verticals such as education, restaurants, event management, and private physician practices. In our view, while acquirers have always enjoyed a mild switching cost advantage, the shift from selling acquiring services on a stand-alone basis toward integrating acquiring within a more holistic software offering for merchants will increase switching costs and turn this into a more meaningful source of competitive advantage. On this front, we think Global Payments compares well with peers in terms of the scope of its offerings, and this trend could further consolidate the industry.

Global Payments has an international footprint and generates about one fourth of its revenue in Europe and Asia-Pacific. Acquiring markets are largely national, given the need for a sizable local salesforce, and competitive dynamics can vary country to country. On the whole, though, Global Payments' competitive position in these markets, if anything, looks stronger than its domestic business, as margins in international markets historically have been materially higher.

Given the limited capital needs of the business, historical returns on invested capital have been very strong. The flurry of recent acquisition activity has damped returns, but ROIC excluding goodwill has been magnitudes greater than any reasonable cost of capital assumption historically.

Narrow

Economic Moat

Global Payments

Heartland Payment Systems, Inc. was a Fortune 1000 U.S.-based payment processing and technology provider. Founded in 1997, Heartland Payment Systems is headquartered in Edmond, OK.

Heartland Payment Systems

Active Network, LLC, is an American multinational corporation headquartered in Dallas, Texas, that provides software as a service for activity and participant management. ACTIVE's management software supports a range of clients including: races, recreation, outdoor activities, camps, sports, schools, skiing services and attractions.

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eWAY is a global omnichannel payment provider. The company processes secure credit card payments for merchants. eWay works through eCommerce.

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Realex Payments is a European payment service provider and a division of Global Payments Inc. with offices in Dublin and London. The company provides a broad range of payment gateway services and processes transactions in excess of €35 billion per annum on behalf of more than 14,000 clients including Virgin Atlantic Airways, Vodafone Ireland, the AA, AXA Insurance, Paddy Power and Aer Lingus.

Realex Payments

Global Payments, Inc. engages in the provision of payment technology and software solutions. It operates through the following segments: Merchant Solutions, Issuer Solutions, and Consumer Solutions. The Merchant Solutions segment offers payments technology and software solutions to customers globally. The Issuer Solutions segment is involved in solutions that enable financial institutions and other financial service providers to manage their card portfolios, reduce technical complexity and overhead and offer a seamless experience for cardholders on a single platform. The Consumer Solutions segment refers to the general purpose reloadable prepaid debit and payroll cards, demand deposit accounts and other financial service solutions to the under banked and other consumers and businesses in the United States through the Netspend brand. The company was founded in 1967 by George W. Thorpe and is headquartered in Atlanta, GA.

Earnings data Q3 2020

Earnings data Q4 2020

Earnings data Q1 2021

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Earnings data Q3 2021

Earnings data Q4 2021

Earnings data Q1 2022

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Earnings data Q3 2022

Earnings data Q4 2022

Earnings data Q1 2023

Earnings data Q2 2023

Earnings data Q3 2023

Earnings data Q4 2023

Earnings data Q1 2024

Earnings data Q2 2024

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Global Payments delivered strong financial performance in Q4 2022, with expectations for continued growth in 2023 driven by strategic initiatives and diversified revenue streams.
The company's focus on debt reduction, margin expansion, and client relationships positions it well to navigate challenges and capitalize on growth opportunities.
Despite evolving macro conditions and challenges in certain business segments, Global Payments remains confident in delivering forecasted results and sustaining growth momentum.
Balancing debt repayment priorities with potential deal opportunities, Global Payments aims to optimize revenue streams and drive sustainable growth in the coming year.

Global Payments excels in Q1, eyes growth amid integration challenges

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Challenges lie in navigating market dynamics, maintaining growth momentum, and optimizing synergies from recent acquisitions, requiring strategic agility and operational efficiency.
Opportunities abound in B2B expansion, leveraging acquisitions for growth, and enhancing integrated business models to drive revenue and market competitiveness.

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The company's strategic focus on value creation for shareholders through capital allocation and M&A opportunities is highlighted.
Challenges include addressing stock valuation concerns and navigating macroeconomic uncertainties.
Opportunities lie in capital investment, durable business models, and leveraging distribution channels for growth.

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Global Payments delivered strong financial performance in 2023, exceeding revenue and earnings expectations.
The company is optimistic about growth opportunities in international markets and remains focused on innovation and customer-centric solutions.
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Global Payments (GPN) reported strong Q1 performance, emphasizing growth in both Merchant and Issuer Solutions. Management is strategically focused on optimizing operations, enhancing partnerships, and driving growth in software-centric strategies. Balancing investments for growth and margin expansion remains a key focus amidst positive market trends.

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