Though it doesn't get much attention, Global Payments Inc (GPN 0.47%) has thumped the S&P 500 index's returns over the trailing 10-, five-, and one-year time periods. The payment processing company has successfully ridden the huge trend of global commerce shifting from cash to electronic and digital payments by enabling merchants to accept card payments at the point of sale and online.
When the company reported its second-quarter earnings earlier this month, there was, once again, a lot for investors to like.
In the second quarter, adjusted net revenue grew to $983 million, an 18% increase year over year, and adjusted earnings per share (EPS) rose to $1.29, a 37.2% increase year over year. Not only did the company grow its top and bottom lines, but its adjusted operating margin increased to 31.4%, up from 29.8% in last year's second quarter.
| Global Payments Metrics | 2018 Q2 | 2017 Q2 | Year-Over-Year Change |
|---|---|---|---|
| Adjusted revenue | $982.5 million | $831.7 million | 18.1% |
| Adjusted EPS | $1.29 | $0.94 | 35.2% |
| Adjusted operating margin | 31.4% | 29.8% | 1.6 percentage points |
Data source: Global Payments Inc.
While the numbers are certainly impressive, the big news came when Global Payments announced it would be making another multimillion-dollar acquisition that would add to its growing stable of software enterprise solutions.
Global Payments is quietly developing, partnering with, and acquiring software verticals it can use to grow its payment processing business. Image source: Getty Images.
An Advanced acquisition
Management stated it would be acquiring AdvancedMD in an all-cash deal valued at roughly $700 million. AdvancedMD provides cloud-based solutions for small- to medium-sized physician offices in the U.S. The platform integrates a doctor's office's scheduling, billing, health record management, and, of course, payments in a solution that facilitates nearly all its back-office needs. In the conference call, transcribed by S&P Global Market Intelligence, CEO Jeffrey Sloan stated:
AdvancedMD, or AMD, will provide us with direct entry into a new $9 billion target addressable market for software, benefiting from strong secular tailwinds. The small- and medium-sized physician healthcare software market is highly fragmented, and AdvancedMD is an industry leader at roughly twice the size of its nearest cloud competitor. AMD is also one of the only companies in the industry that provides users with an end-to-end platform encompassing practice management, electronic health records and patient engagement solutions, all delivered on a single instance, multitenant architecture.
While AdvancedMD is the largest cloud-based enterprise solution in the market, it is still only expected to generate $125 million in sales in 2019. Global Payments' management, however, sees this as an opportunity to capture market share from legacy players in a fragmented market. COO David Mangum later added, "Fragmented is what we like. The fact that they're the largest, but small, that seems like a really good thing to me as we think about the future of the business."
A vertical strategy
For investors paying attention, the acquisition of AdvancedMD should not come as a surprise. Last year, Global Payments acquired ACTIVE Network, an event-planning software used by sports leagues and youth camps, for $1 billion. Earlier this year, Global Payments partnered with Aspira, a campground reservation software management platform. The company has also developed and released Xenial, a platform restaurants can use for menu management, customer engagement, and data analytics.
The pattern should be clear: Whether through acquisition, partnership, or internal development, Global Payments aims to capture software vertical platforms for its payment processing services. This strategy accomplishes two simultaneous purposes. First, it deepens the company's relationship with its clients, making it less likely customers using one of these platforms will leave for another payment processing service. Second, it broadens the company's sales reach, making it possible to win new customers either through traditional methods or by customers coming through the software platform's channels.
The end result is less churn, more customers, and greater efficiencies. No wonder the company's stock has been performing so well. Management's stated goal is for these platforms to make up 60% of its total business by 2020. At this rate, that goal seems well within reach.
Global Payments becoming a global powerhouse
Companies with a software-as-a-service (SaaS) business model are some of the market's hottest stocks -- and for good reason! Yet Global Payments is collecting a portfolio of small-business SaaS platforms under the radar, following a strategy that could drive growth for years to come. Furthermore, the company knows that by pursuing these platforms in fragmented markets, there should be years of double-digit growth ahead.
The company is currently guiding for full-year adjusted EPS to be in a range of $5.05 to $5.20, representing growth of about 26% to 30%. At the midpoint of this guidance, this gives the company a P/E ratio of about 23.2. For a company growing earnings at this rate, with a clear and coherent strategy to continue growth for years to come, that seems like a relative bargain. The market hasn't wised up to the opportunity in front of Global Payments, but investors don't seem to mind the company's under-the-radar status -- as long as the business keeps putting up stellar results.
