Global Payments (NYSE:GPN) felt good about being a middleman yesterday: The card transaction processor destroyed analyst estimates.
During its fiscal first quarter, Global's net sales grew 8.8% from the year-ago quarter, to $441 million, on strength in its international merchant services business. Revenue generated overseas was up 28.7% from last year's quarter, and operating margins also improved in that segment. However, the rest of the business had a lackluster performance, and net income rose just 0.5%, to $57.8 million, leaving earnings per share flat at $0.71.
Drop it already
If Global wants to make big improvements going forward, there are a number of steps it should take. First things first: Global's money transfer business adds little to the company, and it should be sold. Perhaps a competitor such as Western Union (NYSE:WU) would like to solidify its foothold in that industry. The money transfer business contributes only marginally to Global's total revenue, and it often serves only to hamper sales growth. As I see it, as long as Global keeps its money transfer business, it won't be firing on all cylinders.
Global might also get tips on improving its business by looking at how its international segment appears to be more efficient than its North American operations. Compare their respective operating margins:
|
Operating Margin, by Segment |
Q1 2010 |
Q1 2009 |
|---|---|---|
|
North America Merchant Services |
25.0% |
29.0% |
|
International Merchant Services |
27.1% |
24.8% |
|
Money Transfer |
10.8% |
12.2% |
Source: Company financials.
One strategy to get North American margins moving back in the right direction might be for Global to rely less on independent sales organizations (ISOs) in the U.S. to facilitate sales. Global mostly uses a direct-sales model internationally, which appears to have boosted margins for its overseas operations. Meanwhile, ISOs inject another player into the sales process, which can't be helping margins right now.
All the right tools
Global has accumulated several processing systems that it now uses. But the company is investing in a G2 processing system, which aims to replace those systems with a single platform that should generate big long-run cost savings.
Perhaps the most attractive thing about Global, though, is the transaction processing business itself. Transaction processors are essentially middlemen between money centers like Bank of America (NYSE:BAC) and Citigroup (NYSE:C) and card companies like Visa (NYSE:V) and MasterCard (NYSE:MA).
So as long as card companies and money centers keep trying to unlock new markets, Global will have more growth opportunities. I believe that if Global can finish the G2 transition, get its ISOs under control, and sell its money transfer business, it will be sitting pretty. In the meantime, keep it under observation.
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