Global Payments Inc.

Ladies and gentlemen, thank you for standing by and welcome to Global Payments second quarter 2020 earnings conference call. At this time, all participants are in a listen-only mode. Later, we will open the lines for questions and answers. If you should require assistance during this call, please press star then zero. And 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.

Good morning. and welcome to Global Payments' second quarter 2020 conference call. 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 expected operating and financial results. These statements are subject to risks, uncertainties, and other factors, including the impact of COVID-19 and economic conditions on our future operations that could cause actual results to differ materially from our 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. Some of the comments made refer to non-GAAP financial measures, such as adjusted net revenue, adjusted operating margin, and adjusted earnings per share, which we believe are more reflective of our ongoing performance. For a full reconciliation of these and other non-GAAP financial measures to the most comparable GAAP measures in accordance with SEC regulations, please see our press release furnished as an exhibit to our Form 8K filed this morning and our trended financial highlights. both of which are available in the investor relations area of our website at www.globalpaymentsinc.com. The press release and investor presentation on our collaboration with Amazon Web Services announced today are also available on our website. Joining me on the call are Jeff Sloan, CEO, Cameron Brady, President and COO, and Paul Todd, Senior Executive Vice President and CFO. Now, I'll turn the call over to Jeff.

Thanks, Winnie. We are pleased with the solid performance we delivered in the second quarter of 2020 despite the pandemic, driven by consistent execution and the outstanding dedication of our team members. We are grateful to all of our nearly 24,000 people worldwide for their exceptional service to our customers during this challenging time. I think the best way to describe the second quarter is that it would have been difficult to imagine in early April that our businesses would perform as well as they did through June. As the markets we serve around the world have reopened, we are encouraged by the improving trends we have realized. Our customer base overall remains healthy, and our businesses generated sequential improvement in May over April and in June over May. And several of our businesses delivered absolute growth year over year in June, with a number achieving record new sales performance. Our business is as strong today as it has ever been, and our mix enabled us to perform better than many of our peers as we had expected. We benefited by entering the crisis in extraordinary condition, and the timing and quantum of our actions taken early on enabled us to hold operating margins roughly flat to last year, this quarter. We also generated strong free cash flow in each month, including April, highlighting the durability and resiliency of our business model. We continue to make substantial progress on our technology-enabled, software-driven strategy this quarter, further validating our pure play payments model and widening our competitive moat. We are delighted today to announce a new multi-year go-to-market collaboration with Amazon Web Services, or AWS, to provide an industry-leading cloud-based issuer processing platform for customers regardless of size, location, or processing preference. With AWS as our preferred cloud provider for issuer services, we will deliver innovative payment solutions at scale globally in a secure cloud-based environment, enabling best-in-class experiences for our issuer clients and their cardholders. Together, we will leapfrog traditional analog means of distribution and redefine how issuer products and services are sold and consumed in the digital age. Together, we are bringing technologies that generally have been available only to nimble startups to traditional institutions at scale, leveling the playing field for innovation with immense benefits to consumers globally. Our unparalleled legacy of reliability, performance, and experience combined with AWS's cloud leadership, will future-proof our businesses to meet the increasing demands of a connected, frictionless digital world. Our transformative alliance will also substantially expand our pool of revenue opportunities. First, our collaboration broadens our geographic reach as AWS's worldwide footprint reaches nearly every corner of the globe. No longer will we be limited to geographies where we have a TSYS physical data center location for issuer services. Delivering our capabilities via Software as a Service, or SAS, means that we can build, test, and scale in more markets more quickly than before. Second, we will meaningfully expand our prospective customer base to include financial institutions of all sizes, new market entrants, and retailers. Historically, TSYS's issuer business was bifurcated into a large bank business in North America and Western Europe, primarily served through TS2, and an on-premise licensed business served through Prime everywhere else. Truth be told, our distribution resources were not proactively targeting small to mid-sized banks in the United States, new financial technology entrants, and embedded payment service providers. and we have needed a fully end-to-end cloud-native solution set to be successful in many of those markets. Now we have a unique opportunity with one of the largest technology companies to disrupt those markets on a differentiated basis. Beyond cloud availability zones that span the world, AWS has a global feet-on-the-street sales presence from Amsterdam to Zurich. AWS will work uniquely and closely with our sales team from lead generation and project scoping all the way through the commercialization and implementation of issuer solutions. In sum, we believe that our target addressable market for issuer solutions will more than triple, providing ample additional opportunities to grow and build on our track record of capturing market share. Third, we will unbundle our services through the use of open APIs and deconstructive microservices, which will allow us to sell elements of our issuer SaaS solutions via a new business model on an a la carte basis. In addition to dramatically expanding our target addressable market for institutions of all sizes, we will eliminate the need for time-consuming physical conversions and enable customers to quickly and efficiently implement the functionality and services they need and want while minimizing risk. Our collaboration will touch and support every element of the card lifecycle from origination, provisioning, risk management, and servicing to billing and ongoing delivery. We will provide end-to-end digital solutions to delight our clients and their cardholders, delivering platforms that run entire issuing businesses at scale. The new platform's cloud-based architecture allows us to capitalize on modern open banking initiatives, giving clients the ability to customize the services they need with greater speed to market and product flexibility. Resources can be scaled up and down in the cloud so customers can use just what they need. This means making enhancements will be even more efficient and clients can get to market sooner. We can build, test, deploy, and scale specific capabilities quickly. to continuously innovate and deliver tailored, frictionless, and fully digital experiences pretty much anywhere in the world. And cloud computing means near real-time redundancy with databases that are replicated across multiple availability zones without interruption. Importantly, this infrastructure is software-driven, encrypted, and auditable. Institutions globally are not going to move backwards to legacy mainframe-based systems. The digitization of financial services will accelerate, catalyzed by the pandemic. Issuers will increasingly move toward newer cloud-native technologies over time that leverage the talent-based prevalent in today's market, increasing resilience and compliance in light of the regulatory requirements in the marketplace now and in the future. And for customers' cardholders, a cloud-based issuing environment will provide the user experience consumers now demand, That means reliable, connected services across any channel available when, where, and how consumers choose. It means increased cardholder engagement, support for emerging payment options, and cloud-enabled resiliency to meet always-on expectations. Fifth and finally, we have a lengthy track record of forging industry-leading partnerships and cross-selling across all aspects of our business. Together with Amazon, We will look to capitalize on opportunities for collaboration across all of our businesses that we expect to generate substantial revenue over time. We expect areas for exploration to include our unified commerce platform and transaction optimization across our merchant businesses and digital consumer experiences with NetSpend. We also continue to make progress against our strategic objectives by agreeing in July to expand and extend our relationship with our partners at CaixaBank, one of the largest banks in Europe and Spain's leading financial group. We have committed to meaningfully increase our ownership in our joint venture, Comercia Global Payments, from 51% to 80%. CaixaBank has also agreed to extend our partnership until at least 2040, 10 years beyond the existing maturity date. Our ability to invest further in our worldwide businesses during the pandemic highlights the underlying financial strength of our company, and provides another proof point of the ongoing success of our differentiated strategies. We are proud of the company that we keep, and we have no better partner than Kaisha Bank. We often say that our longstanding partners, who see us operate day in and day out, know us best. Their confidence in us further reinforces our competitive position as the partner of choice to the most sophisticated and complex financial institutions globally. In addition to meaningfully advancing our strategies in the second quarter of 2020, we are also very pleased with the quality of our sales execution. We are excited to announce that we have signed a new multi-year issuer agreement with TD Bank in the United States and in Canada, one of TSYS's largest FI partners. TD is the sixth largest bank in North America serving over 26 million customers and also ranks as one of the world's leading online financial services firms with more than 14 million active digital customers. This important renewal highlights the distinctive durability of our customer relationships globally and the trust that many of the largest institutions place in us. We continue to see strong new sales trends in a number of our merchant businesses during the second quarter, despite the impact of the pandemic. We have seen record sales of our e-commerce and omnichannel solutions across our businesses globally as customers move quickly to implement online ordering and virtual payment solutions in response to changing consumer preferences. For example, in our Heartland business, new accounts for online payments increased 58% year over year in the second quarter with record sales performance for our e-commerce team in this channel. Harland also delivered its best overall new sales month in the last two years in June. In our global payments integrated business, new sales for the quarter were consistent with our original budget expectations despite COVID-19, while new partner production is trending 30% above plan on a year-to-date basis, reflecting the strength of our differentiated capabilities in this channel. We also continue to see strong bookings performance in a number of our vertical market software businesses. In the healthcare vertical market, for example, AdvancedMD's ability to deliver cloud-based technology solutions, including virtual telemedicine capabilities to physician practices throughout the United States, drove record bookings in the second quarter and record revenue for the month of June. We believe we've been able to capture further share as customers have increasingly looked towards safety in size and track record, and consumers continue to shift purchasing habits, and prefer safer commerce. As a reminder, our e-commerce and omnichannel businesses today already account for 20% of our total merchant revenue, consistent with the target we set in March 2018 for year-end 2020, so well ahead of schedule. And our issuer and business and consumer segments also have meaningful exposure to e-commerce trends, highlighting the diversity and breadth of our business mix post-Artesis partnerships. We have invested significantly in our unified commerce platform, which allows us to provide one payment solution worldwide through a single API, enabling higher acceptance rates and lower fees. And we provide our leading omnichannel capabilities with the same ease of integration for our core SMB merchants, as well as for the most sophisticated MNC customers globally. We are unique in our ability to offer local sales and operations support physically, in 38 countries and services cross-border into 60. That scale and reach, particularly in many of the harder-to-serve markets we operate in today, is a significant barrier to entry. This quarter, we are pleased to have signed an e-commerce partnership with Louis Vuitton for acceptance services across 14 countries in Europe, where we deliver a uniform solution and seamless experience virtually. We also are pleased to have recently signed agreements with Dolce & Gabbana, Molton Brown, and PartNow. Further, we went live with our Citi partnership in the second quarter. We are now pursuing customers jointly with Citi in the United States and the United Kingdom, and we'll be adding Canada this quarter. It's worth providing some context around the size of our e-commerce related businesses in our other segments. We estimate that roughly 40% of our issuer transactions and that nearly 30% of our NetSpan transactions come from card not present or e-comm channels. In combination with our acquiring businesses, we generate roughly a quarter of our total revenue from online efforts. We are also seeing increased demands for safe commerce solutions across our businesses. We believe Global Payments is the leading deployer of NFC technology worldwide, and we are rapidly enabling contactless acceptance for merchants as the pandemic alters consumer behavior. Other solutions we have been implementing include social commerce, pay-by-link, mobile payments, telesolutions, virtual terminals, and digital wallets. For example, in the enterprise quick service restaurant vertical market, our Xenial business launched its socially safe restaurant experience platform, which includes embedded features like guest lists and touchless payments. We are currently in discussions with several large QSR and fast casual chains about use cases for this technology. In our gaming business, launched two transformative solutions in the second quarter, with its VIP Mobility and VIP Financial Center for touchless payments and no contact funding at casinos. Finally, our issuer business is also a leader in the evolution of contactless solutions, and we are excited to have recently partnered with MasterCard and digital wallet provider Xtend to create new ways for cardholders to use virtual cards for everyday spend in a rapidly changing digital payments landscape globally. While execution is always at a premium, that is especially true during a crisis. The TSIS merger significantly enhanced our business mix and scale and has been a source of strength. We continue to make great progress on integration this quarter, and we still anticipate delivering at least $125 million in annual run rate revenue synergy. and at least $350 million in annual run rate expense synergies within three years of closing. And of course, we announced last quarter that we undertook actions to generate an additional $400 million of annualized cost savings in response to COVID-19, and those remain on track as well. During the second quarter, we successfully brought Vital POS to Canada as we said we would, and early sales trends for Vital in the Heartland Channel are encouraging. The migration of partner banks from TSYS to the Heartland brand is underway, and we are building a new sales force to specifically support these historically underserved bank relationships around the U.S., extending our expansive distribution capabilities. Further, our global payments integrated sales teams have been consolidated and are now operating under unified best practices, processes, and measurement. And the majority of our recent new partner wins combine our leading open-edge ecosystem and the TSYS Genius platform. We are also in discussions with multiple global payments bank partners outside of the U.S. regarding TSYS's issuer processing solutions. We expect the AWS collaboration to catalyze those opportunities and to provide more worldwide. Additionally, we have current in-depth discussions with multiple customers across several geographies regarding our ability to marry issuer processing with our acquiring capabilities globally. to optimize transaction flows. On the expense side, we are tracking ahead of our merger plan targets this year and see additional opportunities coming from the pandemic. As just one example, we now plan to close additional operating facilities globally and rationalize remaining physical space requirements following the success of work-from-home arrangements for nearly 95% of our team members. Before I turn the call over to Paul, I would like to comment on two strongly held values at our company. People who make a difference and diverse perspectives. I want to share what those mean to us. These principles mean that we will stand against racism, intolerance, and injustice in all their forms. We respect, honor, and celebrate the diversity of our team members and the differences among us. Standing together as one company, we will continue to work to drive positive change for the communities in which we live and work and stamp out injustice. We are grateful and fortunate to be in a position to contribute our talents to do just that.