In the biggest U.S. initial public offering (IPO) of 2015, First Data Corp (NYSE:FDC) was spun off from private equity firm KKR, raising $2.56 billion in the process. From that time until just a few months ago, First Data had severely underperformed the S&P 500 index, even as other companies in the payment processing industry, such as Global Payments Inc (NYSE:GPN) and Square Inc (NYSE:SQ), soared. But after releasing two quarterly earnings reports that beat analysts' expectations, First Data no longer appears to be the industry's punching bag. Year to date, shares of the payment processor are now up 43%, easily outpacing the market's gains.

In the second quarter, the numbers were better than expected, and management was able to raise its full-year revenue guidance. Total segment revenue rose to $2.23 billion, a 11% increase year over year, while total segment EBITDA grew to $864 million, an 11% increase year over year. The company now expects segment revenue to grow 7% to 8% and segment EBITDA to increase 8% to 10% in 2018.

First Data Metric 2018 Q2 2017 Q2 Year-Over-Year Change 
Total segment revenue $2.23 billion $2.01 billion 11.1%
Adjusted EPS $0.39 $0.40 (2.5%)
Free cash flow $378 million $448 million (15.6%)
Net debt $18.04 billion $17.87 billion 1%

Data source: First Data Corp.

A good-luck Clover

Perhaps most encouraging for investors is the continued success of Clover, the company's point-of-sale solution for small businesses. Much like Square is doing with its robust ecosystem, Clover is attempting to build out a customizable payments solution for smaller businesses, bundling services such as data analytics and a loan platform while integrating the platform into payroll and inventory segments, to create a one-stop shop for small business back-office needs. 

Customer pays with credit card at point-of-sale.

First Data's Clover platform is growing tremendously among small- and medium-sized businesses. Image source: Getty Images.

The results speak for themselves. In Q2, Clover processed $65 billion in total payment volume on an annualized basis, representing a 50% increase year over year. It's also seeing success in new overseas markets and from third-party sales. In the second-quarter conference call, CEO Frank Bisignano stated:

Clover ... is well positioned to win in the market with a compelling value proposition for merchants, developers, and our distribution partners. Clover continued its strong performance in the second quarter ... We're expanding Clover's addressable market. Our distribution partners will offer the Clover platform through the digital signup solutions that are now starting to go live on partner websites. We're leveraging our global presence to launch Clover in key international markets as we successfully did in Germany and Austria earlier this year and are planning to launch in Argentina and Canada later this year... [T]here's a great runway in front of us for further Clover growth as we enhance this position as a leading integrated POS solution.

More to come

While the next generation Clover, referred to as Clover 2.0 during the conference call, is still in development, Clover allows coders to write apps for the platform, allowing retailers to customize the platform to best suit their needs. CFO Himanshu Patel noted that "hundreds and hundreds" of third-party developers were writing code for the platform, a trend management expects will continue.

Management is also hard at work integrating its recent acquisitions of Bluepay and CardConnect into Clover's platform. Cardpointe, one of CardConnect's services, allows sellers to manage their transactions in real time, accept mobile payments, and tokenize transactions. When First Data acquired BluePay, management lauded the new addition's card-not-present and omnichannel capabilities. These additional features will only add to the attractiveness of Clover's platform to merchants.

The nagging concern

Of course, any serious discussion about the investment worthiness of First Data has to include the mountain of debt on its balance sheet. This debt stems from KKR's acquisition of the company in 2007, at the time one of the largest leveraged buyouts in history. In Q2, First Data reported a whopping $18.04 billion in net debt, down from $18.62 billion at the conclusion of 2017. This quarter, $344 million was paid off from the total. The company's leverage ratio, which management defines as segment EBITDA to net debt, remains sky-high at 5.6, though modestly down from the beginning of the year.

"[W]e've been primarily utilizing our free cash flow to pay down debt this year," Patel stated. Unfortunately, every dollar used to retire debt is a dollar that cannot be devoted to sales growth or product development. This is a hurdle competitors do not have to clear, especially to the same extent.

First Data looks well-positioned competitively. Management claims Clover is taking market share from competitors, and the platform's growth numbers more than back that up. Management seems more than competent, making smart acquisitions that improve offerings to its customers. Secular tailwinds, such as the shift from cash to digital and electronic payments in global commerce, remain at the company's back.

Yet, when I look at this space, and the fierce competition First Data faces, I can't help but think it would be far better for investors to look elsewhere in this high-flying industry. For now, especially after its remarkable run year to date, I believe it's best for investors to give First Data nothing more than a first look.