Last year, Vantiv Inc announced it would be acquiring the London-based Worldpay Group in a $10 billion deal. The combined company took the name of Worldpay Inc. (NYSE:WP) but is still headquartered in Cincinnati, where Vantiv was based, while Worldpay Group's legacy corporate headquarters in London is now the base for the company's international operations. The new payments company now has three reported quarters under its belt and, each time, it has announced greater cost synergies than expected and raised earnings guidance.
Take the second quarter of 2018 which Worldpay reported on last week. On a pro forma basis, net revenue grew to $1.01 billion, an 11% increase year over year, and adjusted earnings per share (EPS) rose to $1.04, a 25% increase year over year. Judging its top- and bottom-line results on a pro forma basis simply means Worldpay is comparing its results to the revenue and EPS the combined companies reported in last year's second quarter. Let's take a closer look at three of the factors behind the company's post-acquisition success.
Cost savings ahead
In the Worldpay's second-quarter earnings conference call, the word "synergy" or "synergies" was mentioned no fewer than 40 times by company management, indicating a keen interest in exploring ways the organizations can save money as an integrated whole. Co-CEO Charles Drucker led off the call by stating that Worldpay has raised its guidance of expected cost synergies this year from $45 million to $50 million. By the end of year three, post-merger, the company is expecting to see $200 million in annual cost savings.
Much of this cost savings can be achieved by migrating the former Worldpay's U.S. merchants onto Vantiv's domestic legacy payment platform. Management stated this migration was going well and that two-thirds of the applicable clients should be on the platform by the conclusion of the year. The remainder should be moved by the end of the first half of 2019.
A whole greater than the parts
But it's not just cost savings that are driving the company's successful integration -- it's also revenue synergies. Worldpay has accomplished this by conducting an exhaustive search of its merchant base to identify new opportunities through which the combined entity might take advantage of expanding its wallet share with its sellers. Co-CEO Philip Jansen stated:
Six months into our integration, we've mapped our path to achieving substantial revenue synergies. ... [W]e've been through our exhaustive list of clients and have identified hundreds of specific opportunities for cross-selling in global e-commerce alone. ... The response from both current and potential new customers to the new Worldpay has been extremely positive. Our e-commerce sales team have done a superb job, which gives us the confidence to announce today that we can now see a route to delivering $100 million of revenue synergies by 2020.
Jansen stated these opportunities exist by cross-selling each company's legacy clients new capabilities that the other company brings to the table. Two such examples are foreign opportunities for Vantiv's legacy customers and U.S. e-commerce action for Worldpay's legacy merchants: Selling to existing customers minimizes sales and marketing costs.
Worldwide payments reach
Perhaps the most compelling proposition the new Worldpay can offer customers is its new, almost unprecedented global reach. It can now offer merchants a leading U.S. payment platform with access to 99% of the world's GDP, according to Drucker. When talking about its new competitive positioning due to its worldwide presence, Drucker said, "[O]ur primary domestic competitors typically lack global coverage, while our largest global competitors typically struggle to demonstrate the strength that we bring in the U.S."
Jansen said the company's next step would be to leverage its global positioning to pursue the top 500 e-commerce companies. He noted that for many of these companies, a typical sales cycle lasts 9 to 18 months, and by the beginning of 2019, Worldpay expects to begin to realize the fruit of this labor.
Worldpay remains a company with industry winds at its back, as card and digital payments acceptance grows around the world. As the organization continues to upsell its new client base with each of the legacy company's capabilities, it should be able to recognize several new revenue streams without incurring new customer acquisition costs. Combined with the expected cost savings that integration can bring -- one salesforce, one corporate staff, one payments platform, etc. -- and a global reach, financial returns show much potential over the next few years.
Based on the midpoint of Worldpay's full-year adjusted EPS guidance, the company's shares sport a P/E ratio of 23.2, almost exactly in line with the broader market. Thus, the company seems to be fairly valued, and given what it has going for it as described above, its valuation actually seems more than reasonable. With secular tailwinds and a successful acquisition behind it, I foresee market-beating returns ahead for Worldpay.