When Global Payments Inc. (NYSE:GPN) reported its third-quarter earnings late last month, investors could be excused for experiencing a little deja vu. Several points from the press release and subsequent conference call seemed to have been made on past occasions by management. Did the company...exceed revenue expectations? Check. Exceed earnings expectations? Check. Raise guidance? Check. Complete another software-as-a-service (SaaS) acquisition expected to be accretive to earnings next year? Check.
Indeed, once again, there was a lot for shareholders to like. The company's adjusted net revenue rose to $1.03 billion, a 12% increase year over year, while adjusted earnings per share (EPS) grew to $1.44, a 25% increase year over year. Better yet, the revenue and earnings growth was realized while Global Payments increased its adjusted operating margin by over a percentage point to 33%.
|Metric||2018 Q3||2017 Q3||Change|
|Adjusted net revenue||$1.03 billion||$914 million||12%|
|Adjusted earnings per share||$1.44||$1.15||25%|
|Adjusted operating margin||33%||31.8%||1.2 ppts.|
A supersized order for a supersized market
While the company is growing nicely in all its major strategic initiatives, it's the latest software acquisition that was the quarter's big news.
In late September, Global Payments announced it would be acquiring SICOM Systems, a cloud-based SaaS platform for food-service management companies and quick-service restaurants, for $415 million. Management says the total addressable market for this integrated software solution is about $6.5 billion -- $4.5 billion in the quick-service restaurant industry and $2 billion in the food-service management space.
SICOM is supposed to be "highly synergistic" with Global Payments' existing restaurant platform, Xenial. On the Q3 conference call, Sloan stated:
...[T]he two combined provide us with end-to-end offerings for small, medium-sized, and enterprise-level restaurant customers globally, one of the largest vertical markets that we currently serve. More specifically, SICOM adds middle-of-house and back-of-house software and other technology capabilities to Xenial's front-of-house platform. The combination creates a leading solution that includes point-of-sale systems, kitchen and drive through management, data and analytics as well as payroll scheduling and procurement capabilities.
In addition, the combined platform gives Global Payments a huge opportunity to cross-sell these solutions to existing customers. The Xenial platform is used in 25,000 different restaurants. SICOM essentially doubles the restaurant base; it has a presence in 60 countries across the globe, and is used by large chains such as Restaurant Brands International's (NYSE:QSR) Burger King and Tim Hortons.
A difference maker
Of course, Global Payments isn't the only payment processing company with eyes on the restaurant industry. Just months ago, Square Inc. (NYSE:SQ) announced it would be launching its own point-of-sale (POS) solution designed specifically for restaurants, Square for Restaurants. Yet Sloan believes the SICOM acquisition gives it a leg up on competition, due to its full suite of technological capabilities and international footprint. Sloan said:
If you think about the combination of Xenial and SICOM, we have front-of-house solutions interacting with our customers at the point of sale. We have middle-of-house solutions like order management and drive through. And then we have back-of-house solutions, so like data and analytics for franchisors and franchisees. A lot of this, of course, is on a software-as-a-service ... basis ...
The other thing ... is a multinational perspective on the restaurant business ... [W]e are now present with those enterprise solutions in 60 countries around the globe in the Americas, Europe, and Asia Pacific. So if we take a step back, it's the breadth and depth of the technology solutions that we're selling ... and it's also the breadth and depth, I think, of the geographic coverage and scope that we're delivering.
Sloan added he saw competitors entering the restaurant industry as confirmation that this is an attractive market for vertical payment solutions but, while other competitors are just entering the space, Global Payments has already established a formidable foothold.
A holistic strategy
In the past 12 months, Global Payments has now made three acquisitions: ACTIVE Network, AdvancedMD, and SICOM Systems. All three share similar characteristics. All three are SaaS companies providing cloud-based platform solutions to specific industries. All three are leading software solutions in a fragmented market. The pattern is clear: Global Payments is targeting software verticals in ripe industries where it can cross-sell its payment processing services.
By embedding its payment processing services into these SaaS platforms, Global Payments is simultaneously accomplishing several goals. For starters, it's making it much harder for merchants to leave for another payment processing company; if a restaurant used Xenial and SICOM to run its operation, it would be exceedingly difficult for that restaurant to leave all that behind for a payment processing competitor. It also broadens the net by which Global Payments brings in new customers: Restaurants might now come to Global Payments through traditional sales channels, or because of their interest in the SICOM platform. Finally, it gains numerous cross-selling opportunities, allowing the company to sell existing services to the customers of the software platforms it's acquiring.
For a company growing revenue in the low double digits and EPS by more than 20% every quarter, Global Payments doesn't sell at too steep of a valuation. Based on the midpoint of full-year 2018 guidance, $5.17, shares sport a price-to-earnings ratio of 22.2. While that's not bargain territory, it certainly isn't nosebleed territory either.
Given the company's proven strategy of taking market share vertical by vertical, and its increasing margins, Global Payments might be an underappreciated way to gain exposure to macro trends such as the digitization of money and SaaS revenue streams.