Global Payments Inc.

Ladies and gentlemen, thank you for standing by, and welcome to Global Payments' second quarter 2023 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 2023 conference call. Our earnings release and the slides that accompany this call can be found on the investor relations area of our website at www.globalpayments.com. 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, among other matters, expected operating and financial results. These statements are subject to risks, uncertainties, and other factors, including the impact of economic conditions on our future operations that could cause actual results to differ materially from 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. We will also be referring to several non-GAAP financial measures, which we believe are more reflective of our ongoing performance. For a full reconciliation of the non-GAAP financial measures discussed in this call 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 supplemental material available on the Investor Relations section of our website. Joining me on the call are Cameron Brady, President and CEO, and Josh Whipple, Senior Executive Vice President and CFO. Now, I'll turn the call over to Cameron.

Thanks, Winnie, and good morning, everyone. It is a privilege to be addressing you today for the first time as Global Payments CEO. I've been in this role for roughly two months and am delighted with how my tenure has begun. The transition has been seamless, as expected. Our organization and team members continue to execute at a very high level, as evidenced by the outstanding second quarter results we reported this morning. Our performance for the quarter was ahead of our expectations, despite what has been an uncertain macroeconomic environment globally, driven by the effectiveness of our strategy and ongoing relentless focus on execution. On a consolidated basis, we reported 7% adjusted net revenue growth, while expanding adjusted operating margins 100 basis points and delivering adjusted earnings per share growth of 11% for the quarter. This includes a roughly 400 basis point headwind to adjust their earnings per share growth from the divestiture of NetSpend's consumer assets. Focusing on our merchant solutions business, we again delivered strong organic growth in the second quarter, led by ongoing momentum in our technology-enabled businesses. Our software-centric strategy with an overlay of leading e-com omni capabilities and value-added commerce enablement solutions continues to drive our performance. And our ability to deliver these solutions across a diverse and attractive set of geographic markets worldwide further differentiates our business. Software sits at the heart of our merchant solutions business and is supported by a three-legged go-to-market integrated payment strategy, expanding our partner ISV, vertical market software, and point-of-sale software businesses. Collectively, these businesses comprise approximately 40% of our merchant solutions adjusted net revenue and are contributing a meaningful share of the growth in the business. In our partnered ISV channel, or integrated business as we often refer to it, we continue to deliver consistent teams growth and again achieved record sales this quarter, surpassing last quarter's strong performance. We signed 33% more integrated merchants this period than in the second quarter of 2022. We have a long history of success in our partnered ISV business and continue to gain share despite this becoming a more crowded market over the last several years. Against that backdrop, it is important to highlight why we continue to grow and win in this space. First, we have developed a more streamlined and simplified offering for partners with the options they desire, allowing us to meet both them and their merchants where and how they want to be met. The ISV landscape has changed significantly in the last five years. Software providers desire to bring payments closer to their business and require options on the depth of integration, a clear understanding of the responsibility those debts carry with them, and the benefits of a feature-rich solution. Our simple SDKs and APIs allow us to deliver on these expectations for our ISV partners. Second, we offer three distinctive integrated payments models to our partners. allowing us to meet the unique demands of an ISV customized for its specific vertical market and merchant base. This includes a more traditional direct integrated model, where we provide the most comprehensive suite of products, services, and support for both the ISV and its customers. We also offer a full payment facilitation, or pay-back model, where the partners have access to our leading payments technologies, although much of the operating complexity, including compliance and regulatory requirements, reside with the ISV. Additionally, we recently launched our new Progressive Payment Facilitation, or PROFAC, model, a hybrid option which provides many of the benefits of payment facilitation while minimizing the heavy burden that comes as a payback. Our PROFAC model is unique to global payments, serving as another example of our leadership in integrated payments. We have seen great interest in this proposition and have a strong pipeline of partners seeking to board in the coming quarters. Our full spectrum of integrated solutions allows us to customize our offerings and provide different levels of support based on the specific needs of our partners. Third, across all these models, we offer a higher level of service than our peers, including for our PayFact and Profact customers. And we also provide our partners with a breadth of commerce enablement and value-added solutions to sell into their merchant base, which meaningfully increases the revenue opportunity and accelerates growth. This includes human capital management software, payroll, loyalty, tailored marketing solutions, BMPL, and call center support, amongst others. Again, all customized to meet the unique needs of each partner. Overall, our technology leadership, unrivaled distribution, tailored operating models, comprehensive suite of products and capabilities, and best-in-class service and support is why we win. We meet the specific needs of our partners, which differentiates us in the marketplace and is allowing us to achieve sustainable high rates of growth at attractive margins. Turning to our vertical markets business, our approach is largely consistent with how we think about the ISV partner channel. with the exception being that we control the entirety of the technology stack and monetize it accordingly. This business again delivered double-digit growth this quarter, led by strength in our Xego, Xenial, and School Solutions businesses. Xego is seeing great momentum in the student housing vertical and recently expanded its relationships with Scion, as well as another large player in this space. Zego is also partnering with our higher education business, TouchNet, to help us capture a greater portion of the student payments value chain through our campus management and one-card solutions. Focusing on Xenial, we announced our partnership with the Atlanta Hawks earlier this year and are now officially live with our Xenial Cloud point-of-sale solutions at State Farm Arena. Xenial also recently signed an agreement with Sodexo, one of the leading food service management companies globally, to be its preferred point of sale and kiosk partner. With this win, Xenial is now the partner of choice for the three largest players in the food service management space. Our school solutions business had a strong quarter, achieving a new school district partnership with Oklahoma City, expanding its partnership with Baltimore County, and extending a large existing relationship with Chicago Public Schools for several more years. Additionally, ACTIV recently signed the City of Toronto, its largest ever win in the community vertical, and one of 14 new partnerships achieved in this space during the quarter. In vertical markets where the primary mode of competition is at the point of sale, we go to market through one ecosystem of owned POS software solutions with two distinct operating platforms, one for restaurants and one for retail. These cloud-based software solutions operate on a single hardware environment, custom designed, built, and branded with a modern look and feel. Our POS business grew 20-plus percent again this quarter as we continue to see strong demand for our solutions and benefit from releases of product enhancements, including email marketing, customer engagement, and our latest mobile-first online ordering platform. And we expect this momentum to continue on the heels of the launch of our next-generation POS platform later this year. Our latest solution provides best-in-class offerings, coupled with the full local support and service capabilities to delight our merchant customers in these verticals. Importantly, our software platforms are vertically fluent, which unlike more horizontal solutions in the market, offers feature-rich capabilities geared towards the specific requirements of businesses we serve with capabilities that integrate seamlessly. More to come on this. Our technology-enabled strategy is further enhanced by our differentiated e-commerce and omnichannel capabilities, which we overlay across all of our businesses, channels, verticals, and geographies. Today, roughly 30% of the volume in our business is e-commerce, well above the overall percentage of retail sales tied to e-commerce. We again saw mid-teens growth in e-commerce-related adjusted net revenues globally in the second quarter. We continue to benefit from our ability to seamlessly blend physical and virtual worlds in more markets than our peers, supporting the strong growth trends we have seen in e-commerce across our businesses. To that end, we are pleased to have recently signed a new partnership with Easy Park Group, a global provider of digital parking services across the U.S., Canada, and the U.K. Our exposure to some of the most attractive sector growth markets globally remains an important part of our strategy, both in terms of contributing to our overall rates of growth and providing us the global footprint and scale we need to support complex multinational corporations like Easy Park. our faster growth markets again contributed to our strong performance in the quarter as we saw double-digit growth in Spain, Central Europe, and Asia Pacific. In APAC specifically, we signed new merchant relationships with several large retailers across multiple geographies, including A.S. Watson Group, Foot Locker, and Audemars Piguet. Evo aligns well with our overarching strategy, and its performance was consistent with our expectations for the quarter. We remain excited about the synergy opportunities we see as a combined company, both revenue and expense, and remain very much on track to deliver at least $125 million of run rate synergies from the transaction. Turning to issuer, we achieved mid-single-digit growth in the quarter, consistent with our expectations and longer-term targets. Transaction growth remained strong throughout the quarter, led by our commercial business, highlighting ongoing recovery trends and cross-border corporate travel. Traditional accounts on file increased by approximately 10 million sequentially as we benefit from the strong growth with our existing large financial institution clients and the ongoing execution of our conversion pipeline. As yet another example of our successful strategy of aligning with market share winners, Deutsche Bank, our largest client in the DOC region, recently announced new issuing partnership with blue fonda for its mild and more mastercard one of the leading credit card portfolios in germany and europe we are also delighted to assign multi-year extensions with 118 118 money in the uk and another large long-standing financial institution partner here in the u.s this quarter we currently have eight lois with institutions worldwide nearly all of which were achieved through a competitive rfp process And several will go direct to cloud by our collaboration with AWS, our preferred issuer technology solutions partner. Our relationship with many of the most complex and sophisticated institutions globally speaks to our competitiveness well into the remainder of this decade and beyond. And our issuer conversion pipeline remains at near-record post-merger levels, providing further confidence in our growth trajectory well into the future. And the future for our business remains very bright as we execute on our multi-year strategy to modernize our technology platforms in cloud-native environments, positioning us to provide market-leading technologies at scale through more distinctive and defensible distribution channels in more markets than we ever have previously. Our unique collaboration with AWS is tracking well. We now have our first client in production with our cloud-native next-gen analytic solution, and have a number of additional customers preparing to join our cloud journey by leveraging capabilities we're launching together with AWS throughout the year. Moving to B2B, we continue to drive strong growth with both corporate and financial institutions as we leverage our capabilities across three focus segments within the overarching B2B market. Software-driven workflow automation, money-in and money-out funds flows, and employer solutions. Starting with software, our AP and AR workflow automation solutions that include integrations with the leading ERP environments continue to see great momentum. MineralTree achieved its best bookings quarter since the acquisition, underpinning the strong growth we are seeing in our primary mid-market segment as businesses focus their attention on automating their AP processes. We also remain excited about the opportunity we now have to combine MineralTree and EVO software to create a single APAR solution with rich data and analytics that will provide a unique value proposition to mid-market customers. As for B2B FundsFlows, as one of the largest virtual card issuers in the world, we have significant scale in all of the payment rails and capabilities necessary to support customers in making money out payments in their businesses. Virtual card use continues to expand, contributing to the nearly 20% growth achieved in our commercial business. Over the last 12 months, we issued nearly 80 million virtual cards, enabling roughly $47 billion in spend. Additionally, we are seeing strong growth on the money inside with our B2B payment acceptance solutions, as more and more of this spend shifts towards digital channels. Our B2B bookings and merchant solutions have more than doubled since the fourth quarter of 2022, and we expect this momentum to continue as we further align Evo with our existing capabilities and pursue our B2B software-centric go-to-market strategy. Finally, we provide employer solutions, including our pay card, earned wage access, and expense management offerings and issuer solutions, and our human capital management and payroll solutions in our merchant business. This quarter, our payroll card business signed new partnerships with Creative Mobile Technologies, a large taxi company with a significant presence in the top metropolitan cities in the U.S., and with Arcara Solutions, a staffing solutions provider in the senior living vertical. Our EWA business achieved new partnerships with Bravo Foods, a large QSR franchisee in the United States. Our software-driven human capital management and payroll solutions business delivered high teens adjusted net revenue growth and mid-teens new sales growth for the second quarter. We are pursuing a very similar strategy in B2B as we have in merchant solutions over the past several years. We lead with software to differentiate our capabilities and provide the vertical fluency clients demand. We integrate our payment solutions into our software to monetize payment flows. and we deliver value-added services that enrich our relationships with our clients, driving further efficiencies in their businesses while increasing our average revenue per customer. With the breadth of capabilities we have and a focused technology-enabled strategy, we could not be better positioned to capture, share, and accelerate growth in B2B over the long term. With that, I will turn the call over to Josh.