First Data Corp. (NYSE:FDC) is a payment-processing company that offers retailers card and mobile payment acceptance capabilities for online and point-of-sale (POS) transactions. First Data is one of the largest processing companies in the world and provides these services to approximately 6 million retail locations and more than 4,000 financial institutions in 100 countries. Speaking to its immense size, the company processes 2,800 transactions per second and $2.2 trillion in payment volume per year.
Lately, growth has stalled, as fierce competition from deft and disruptive competitors such as Square and Global Payments have hit the company hard. In the third quarter, total segment revenue was $1.9 billion, just a 3% year-over-year increase on an organic constant currency basis. While net income was $296 million, a whopping 124% year-over-year increase, this was largely driven by "a significant discrete tax item" related to its $750 million acquisition of CardConnect earlier in the quarter. The company's free cash flow during the quarter actually dropped to $370 million, a 13% decrease year over year.
To make matters worse, First Data is still saddled with a lot of debt, stemming from its spin-off from private equity group KKR. This debt has acted like a yoke around First Data's neck, as it has prevented the company from investing in growth and innovation as much as it should have been in years past.
|First Data Corp. Metrics||2017 Q3||2016 Q3||Change|
|Total segment revenue||$1.91 billion||$1.82 billion||4.9%|
|Total segment EBITDA||$787 million||$739 million||6.5%|
|Free cash flow||$370 million||$427 million||(13.3%)|
|Net debt||$18.21 billion||$18.18 billion||0.2%|
Despite anemic growth and debt, there are signs that things might be beginning to change for the payment processor. The company is beginning to invest in growth again, as evidenced by its CardConnect acquisition. The company also launched a promising joint venture with Live Oak Bancshares, which promises to deliver digital and mobile solutions to small banks and credit unions. Here are three other reasons shareholders have to be optimistic about First Data's future.
First Data's good luck Clover
Clover is First Data's premier cloud-based POS operating system. Acquired in 2012, Clover is open-architecture, meaning third-party developers can write applications to be used on the system. These apps allow business owners to "manage their employees' work schedules, operate customer loyalty programs, integrate transaction information directly into their accounting software, manage inventory, and provide analytics on their business." This arrangement not only helps First Data retain customers -- because so much of customers' business is run through Clover -- but also provides an extra revenue boost through a revenue-share arrangement with the app developers.
In its third-quarter conference call, CFO Himanshu Patel said there were now 700,000 Clover-installed base units and that its annualized payment volume was approaching $50 billion. Recent partnership and agreements should help lift Clover's profile even further.
In an agreement with Apple Inc. (NASDAQ:AAPL), Clover Go, a dongle that plugs into a smartphone, will now be sold on Apple's website and in its retail stores. As part of the arrangement, Apple Pay loyalty and gift cards will now be supported at Clover POS terminals.
Clover also made a recent deal with Amazon.com, Inc. (NASDAQ:AMZN). Restaurants with Amazon Pay accounts and Clover POS units will be able to accept takeout orders made from Amazon's app. Orders will be sent directly to the kitchen's pre-existing Clover system's printer, so no new equipment or software is needed.
Expanding China UnionPay's American footprint
In October, First Data entered into an agreement with UnionPay International, a subsidiary of China UnionPay, to accept all chip credit and debit cards from UnionPay at First Data POS locations in the United States. China UnionPay is the largest credit and debit card network in the world, with 13 billion cards in circulation at the end of 2015. The U.S. is expected to see 23 million Chinese tourists by 2021, who spend, on average, about $8,000 per trip. UnionPay card acceptance will certainly be an attractive feature for any business wishing to capture a slice of Chinese tourism, and First Data hopes to capture these merchants' attention with the deal.
Another accretive acquisition
As it turns out, CardConnect won't even be First Data's largest acquisition of the year. That distinction belongs to BluePay Holdings, which First Data agreed to acquire for $760 million in October. The acquisition is expected to close before the end of the year. First Data sees BluePay's strength in card-not-present transactions, which will help its online capabilities now match its POS capabilities with the addition of CardConnect. In the press release, CEO Frank Bisignano stated:
BluePay is a long-standing First Data distribution partner with an excellent track record of innovation and growth. We are pleased to add BluePay's unique capabilities and its talented team to the First Data family. We believe BluePay's best-in-class integrated card-not-present solutions, combined with CardConnect's cutting-edge ISV [independent software vendor] product suite acquired earlier this year, clearly sets First Data apart from the competition in the high-growth integrated payments space.
In the company's third-quarter conference call, Bisignano added, "We see ourselves now having all the aspects of where we can compete." With a greater suite of e-commerce and POS solutions to offer clients, First Data finds itself in a much better position to compete on a level playing field with its rivals.
Is First Data a first-class investment?
There are still lots of concerns, however, for potential investors. Foremost among these is its net debt levels. In its third-quarter presentation, the company reported $18.2 billion in net debt, a grossly large amount for a company with a market cap size of $15.4 billion. Competition is still fierce, too: Innovative upstarts like Square and industry incumbents like Global Payments are not going away anytime soon.
It's due to these concerns that I'm reluctant to invest in First Data. I'd like to see the debt levels decrease and First Data begin to show greater revenue, earnings, and free cash flow growth before taking a position. In other words, I would wait for proof that First Data's strategy is working. While the recent partnerships and acquisitions are reasons to be optimistic, investors should approach a company with this kind of massive debt and sluggish growth with caution.
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Matthew Cochrane owns shares of Amazon, Global Payments, and Square. The Motley Fool owns shares of and recommends Amazon and Apple. The Motley Fool owns shares of Square and has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool recommends Global Payments and KKR. The Motley Fool has a disclosure policy.