Over the past year, Global Payments Inc. ( GPN ) dropped by nearly 20%, reflecting a year characterized as a bloodbath for all fintech companies. Rising interest rates and the blowbacks from the COVID-induced economic slowdown were largely to blame for the trend, and GPN was not immune. However, even with these headwinds, the company has maintained strong fundamentals and delivered a good product. Its reward has been an attractive valuation, and continued attention from fintech watchers everywhere.
GPN specializes in payments, across online, mobile, and point of sale — with basic solutions for simple e-commerce. As an example, the company offers a ready-made payment page for a business website or app that’s PCI-compliant out of the box. GPN also sells the popular PayLink solution, which enables business customers to send a unique payment link via SMS, WhatsApp, or email to receive instant payments, an incredibly useful service for the “gig economy.”
Unified payments is a fast-growing category, as brick-and-mortar retailers continue to bolster their online presence and take steps to merge off- and online operations. And GPN’s cloud-connected point of sale hardware for physical merchants commands clients such as Atlanta’s Mercedes-Benz Stadium. These systems incorporate customer loyalty program management.
GPN reported $2.02 billion in revenue and $2.42 EPS. Overall, revenue for 2022 was $8.09 billion, representing a 7% year over year increase. The company’s annual EPS was $9.32, a 17% YOY increase. Further, its full-year adjusted operating margin improved 190 basis points to 43.7%. Among individual segments, e-commerce and omnichannel commerce were the highlights. And issuer solutions revenue was up 2.3% year over year, rising to $582.6 million. But consumer solutions fell 18.6%, to $142.4 million, as SMBs were heavily impacted by the slowing economy.
GPN did an excellent job on expense control for the quarter. Cost of service fell 4.1% year over year, to $927.9 million. As a result, gross profit increased by over 8%, to $1.33 billion. Gross profit margin was 58.8% compared to 56.2%, up 260 basis points. SG&A (selling, general and administrative) expenses were also only up 1.6%. This resulted in operating income up a whopping 27% to $407.6 million.
As companies look to modernize financial operations with new internet and cloud technologies, GPN is poised to benefit. It is by now well-known that the pandemic permanently advanced digital payments adoption. In a November 2022 report, Skyyquest Technology Consulting projected global digital payments revenue to grow at a 14.3% CAGR from 2021, when the industry’s revenues stood at $89.6 billion, to 2028, when they would hit $228 billion. (Skyyquest’s digital payments estimate spans the mobile payment, online banking, point of sale, and digital wallet categories, across industry verticals.)
Although virtually any company is at risk in the event of any degree of economic slowdown, we believe GPN is significantly more recession-resistant. Much of its revenue is recurring, as it sells subscriptions to merchants and financial institutions to use its software. Still, a large portion of the business also comes from taking a percentage of every transaction, which means reduced sales on the part of its customers would hit GPN’s topline in the short term.
Even so, the company’s balance sheet would likely remain very strong. As GPN has a $5.75 billion credit facility that is completely undrawn. Its net leverage is 3.02x, and it has a current ratio of 0.92, making it one of the most solvent companies in the market.
Although a majority of GPN’s business comes from U.S. clients, it has extensive clientele in the U.K. and elsewhere. As our readers may already know, such markets are undergoing extreme currency devaluation relative to the dollar — the pound sterling especially so, losing nearly 13% against the dollar over the past year. U.K. economic woes are further exacerbated by a recently reported 10.1% inflation rate further hurting GPN’s client base there. Similar trends are seen in the Eurozone and other markets, albeit to a lesser extent. These issues were cited by GPN as serious headwinds, and have already dampened an otherwise exceptional quarter.
We performed a diluted cash flow analysis with a 11% discount rate, 3% terminal growth rate, and a 10% free cash flow growth rate. This should be reasonable, as global payments has achieved double digital FCF growth in the last few years and, once again, the overall market is expected to grow at a 14.9% CAGR.
GPN has shown strong fundamentals and a resilient business model that has paid off, especially in recent quarters. A diverse portfolio of B2B products in sectors that are projected to grow at extremely high rates while staying resistant to recession are strong tailwinds that inspire confidence. We believe currency risks are short term.