Global Payments Inc.

Ladies and gentlemen, thank you for standing by and welcome to Global Payments Third 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' third 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 the future operations that could cause actual results to differ materially from our expectations. Certain risk factors inherent in our business are set forth in filing for 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 to 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 measure 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 at the investor relations area of our website at www.globalpaymentsinc.com. 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 delivered third quarter results that substantially exceeded our expectations. because of our differentiated strategy of technology enablement to drive digital growth. Each of adjusted net revenue, adjusted operating margin, and adjusted earnings per share significantly outperformed the targets we put in place post the pandemic outbreak. And we continue to gain share relative to our markets. We thank our team members for their hard work and dedication to our customers, to each other, and to the communities in which we live and work during these most difficult times. we are particularly pleased with the significant level of operating margin expansion that we generated in the quarter. These results validate the actions we took at the beginning of the outbreak of COVID-19, both in timing and quantum. As a result, we are delighted to have returned our earnings to us in the third quarter of 2020. Our expectations are for continued progress in the fourth quarter, providing meaningful momentum heading into 2021. We are also pleased to continue to make substantial progress on our strategic goals this year, extending our lead and deepening our competitive mode. Year-to-date, we entered into a landmark collaboration with Amazon Web Services, our preferred provider of cloud services for our issuer business, crossed the 60% threshold of our business coming from technology enablement, a goal we set in March 2018 for year-end 2020, and purchased an additional 29% of our joint venture in October, with CaixaBank in Spain and Portugal, two of the most attractive domestic markets in Europe. And we did all this during a once-in-a-century pandemic, while meaningfully expanding market share by citing marquee competitive takeaways, including Truist, the sixth-largest bank in the United States, and by extending relationships with some of the largest, most sophisticated, and complex financial institutions worldwide, including HSBC, CIBC, TD Bank, and Wells Fargo. Turning to our merchant business, our technology-enabled portfolio consists of three roughly equally sized channels. Our omni-channel, partner software, and own software vertical markets businesses collectively represent nearly 60% of merchant revenue. Our relationship-led businesses make up the remaining portion and continue to differentiate themselves in the markets we serve based on the strength of our technology offerings. Starting with our market-leading omni-channel capabilities, we are unique in our ability to offer local sales and operational support at scale physically in 38 countries and to provide services cross-quarter virtually into 100. That skill and reach, particularly in many of the harder-served markets we operate in today, is a significant competitive advantage. Volumes in this channel grew in the mid-teens during the third quarter compared to the prior year, excluding travel and entertainment. With changing consumer preferences as a tailwind, we believe it will sustain higher levels of growth in our omnichannel businesses on an ongoing basis coming out of the pandemic as channel shift and market share gains continue. Our ability to seamlessly provide the full spectrum of payment solutions drove new wins this quarter with large multinationals including Yves Saint Laurent, Alexander McQueen, and FedEx, each of which spans multiple geographies. Additionally, we recently signed a new multi-year partnership with Uber in Taiwan to provide payment solutions for both Uber rides and Uber Eats. The Uber agreement was won as a result of the strength of our domestic capabilities. We were also excited to expand our current relationship with global storage solutions company Pods beyond North America and Canada into Australia. We went live with Citi in Canada this quarter on our Unified Commerce Platform, or UCP, and we are now pursuing customers jointly across North America and the United Kingdom. We are also pleased to announce that we have agreed to expand our partnership with Citi across continental Europe, and we expect to launch those new UCP markets in the first half of 2021. Global Payments Integrated, GPI, returned to growth in the third quarter because of the unrivaled breadth of our partnership portfolio, with over 4,000 ISVs in the most attractive vertical markets. Prior to COVID-19, our integrated business consistently delivered double-digit organic revenue growth through market share gains and terrific ongoing execution. Through our merger with TSYS, we meaningfully increased the scale of the partner portfolio and enhanced our capabilities with additional assets like Genius and Propay. The strength of our combined integrated offerings allowed this business to achieve its budgeted new sales forecast for the third quarter, with new partner production increasing over 70% versus 2019. Notable new wins include partnerships with CDK Global, a leading provider of automated software solutions to more than 20,000 dealerships around the world, as well as with Sandhills, a large private auction software provider focused on the industrial equipment and machinery market. We also signed Pentair, a leader in software solutions for field service providers, including Pentair's own 17,000-plus dealers, in addition to independent service companies. Our own software businesses represent the remaining roughly 20% of our technology-enabled merchant revenue. And our leading SaaS solutions in healthcare, higher education, and quick service restaurant, or QSR, have been more resilient in the current environment. Even in our businesses that have been more impacted by the pandemic, including active in our K-12 primary education and gaming businesses, we are seeing sequential improvement, giving us increased confidence for 2021. Our strategy of delivering the full value stack in key verticals continues to produce deeper, richer, and more value-added relationships with customers, and it's becoming table stakes in the markets we serve. Our enterprise QSR business continued its success with Xenial's online ordering and delivery solutions, which has now enabled more than 62 million orders and greater than $1 billion in sales in 2020. We also completed the rollout of our cloud-based SaaS point-of-sale solution with Dutch Bros. And we are currently installing our POS solutions in all Long John Silver's locations in the United States. And we have now integrated our Genius payment solutions from Teasys into our Xenial offerings. significantly expanding our cross-health capabilities. Today, we lead with technology and innovative solutions across all of our merchant businesses. This includes our relationship channels, where we continue to see strong new sales performance fueled by our suite of differentiated products and solutions. For example, in our Heartland business, nearly 2 thirds of new sales are technology driven, including our leading POS software and online ordering solutions. We have seen strong demand for these offerings during the pandemic. Harlan delivered record new sales performance in the third quarter. And while we continue to focus on new technologies and markets, we have not lost sight of our longstanding partnerships with some of the largest, most sophisticated and complex financial institutions worldwide. We are delighted to announce that we have renewed our relationship with HSBC in the United Kingdom for merchant services. This comes a little over a decade after we entered that market with our joint venture. We also recently executed a new merchant referral agreement with CIBC in Canada, a partnership that began right before our IPO in early 2001. Extended relationships in Europe with HSBC and in Canada with CIBC closely followed the expansion of our partnership with CaixaMag in Spain and Portugal. We are thrilled to have closed in early October on the agreement to purchase an additional 29% of Comercia, increasing our ownership stake to 80%. Our exclusive referral relationship now extends through 2040, 30 years after the initial joint venture date. We are humbled by the confidence that our partners place in us every day. Regarding our issuer business, we announced last quarter a transformational 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. This is a game changer for three reasons. First, it levels the playing field by bringing leading-edge technologies previously available only to new entrants to financial institutions and retailers of all sizes worldwide. Second, It triples our target addressable market by extending our geographic footprint and transforming our technologies to attract new market entrants while dramatically expanding our distribution assets with AWS's Salesforce globally on a unique basis. Third, it brings significant benefits to our customers and their consumers by enabling frictionless digital experiences in a safe commerce environment. Our collaboration with AWS is already bearing fruit. we are pleased to announce our first joint competitive takeaway, a financial institution customer in Asia currently with a legacy competitor to be boarded in our cloud-based solution in 2021. We also have recently been awarded new business with a large domestic financial institution in Europe on a cloud basis. Our issuer technology transformation is now fully underway and on track. As we continue to gain share through our unique collaboration, we will capitalize on the broad and deep pipeline we have the good fortune to have in our issuer business. We currently have 11 letters of intent with financial institutions worldwide, seven of which are competitive takeaways. In the last 18 months, we have had 33 competitive wins across North America and international markets. These market share gains are occurring right now in the midst of a pandemic and prior to full implementation of our cloud-native solutions within AWS. All of this is, of course, in addition to significant renewal agreements that we executed this past quarter, including with TD Bank, Wells Fargo, and Advancia in Europe. We are also pleased to announce that we have secured long-term extensions with Arvest Bank, as well as with Banco Popularity of Puerto Rico, and that we have finalized an agreement with Scotiabank to convert its Canadian consumer credit card and loan accounts Our business and consumer segment delivered high single-digit growth, achieving record third-quarter revenues in a challenging macroeconomic environment and well after the April stimulus. This business also substantially expanded operating margins, which we drove by disciplined focus on expense management and execution since the merger. The shift to cashless solutions is benefiting us across the business and consumer portfolio. with customers remaining active longer and utilizing more of our products. As just one example, we are seeing rapid adoption of our tips solution with a number of customer locations using us for disbursement of five-fold since the beginning of the pandemic. We also signed a new strategic relationship with Austin Football Club, the newest MLS franchise, and we are working with the team in the stadium to develop a cashless payment account and processing ecosystem. while also leveraging brand sponsorship opportunities. We closed on our new joint venture with Money to Pay on October 1st, which expands our target addressable market to include continental Europe for the first time. We have no better partner than CaixaBank, and we believe the combination will offer significant growth opportunities for this business segment in the future. The new venture also validates the types of revenue synergies we anticipated at the time of Arteza's merger. Finally, the underlying strength of our businesses has enabled us to now return our focus toward the traditional capital allocation priorities that we've employed over the last seven years. Return of capital to shareholders and select M&A. We have put those initiatives on hold at the beginning of the COVID outbreak. It would have been difficult in March to imagine we would be in the position that we are in today. As a result, look for more activity going forward, subject, of course, to the capital markets environment and outlook. Now, over to Paul.