Global Payments Inc ($GPN) Q4 2024 Earnings Call

Ladies and gentlemen, thank you for standing by and welcome to Global Payments fourth quarter and full year 2024 earnings conference call. At this time, all participants are in a listen-only mode. Later, we will open the lines for questions and answers. If you should require assistance during this call, please press star then zero. And as a reminder, today's conference will be recorded. At this time, I'd like to turn the conference over to your host, senior vice president investor relations, Winnie Smith. Please go ahead.

Good morning and welcome to Global Payments fourth quarter and full year 2024 conference call. Our earnings release and the slides that accompany this call can be found on the investor relations area of our website at www.globalpayments.com. Before we begin, I'd like to remind you that some of the comments made by management during today's conference call contain forward-looking statements about, among other matters, expected operating and financial results. These statements are subject to risks, uncertainties, and other factors, including the impact of economic conditions on our future operations that could cause actual results to differ materially from expectations. Certain risk factors inherent in our business are set forth in filings with the SEC, including our most recent 10-K and subsequent filings. We caution you not to place undue reliance on these statements. Forward-looking statements during this call speak only as of the date of this call, and we undertake no obligation to update them. We will also be referring to several non-GAAP financial measures which we believe are more reflective of our ongoing performance. For a full reconciliation of the non-GAAP financial measures discussed in this call to the most comparable GAAP measures in accordance with SEC regulations, please see our press release furnished as an exhibit to our form 8-K filed this morning and our supplemental material available on the investor relations section of our website. Joining me on the call is our CEO Cameron Bready, our president and COO Bob Cordipi, and our CFO Josh Whipple. Now, I'll turn the call over to Cameron.

Thanks, Cameron. We are pleased with our financial performance in the fourth quarter and for the full year, which were consistent with our expectations. I'm particularly proud that we delivered these results while simultaneously executing on our transformation agenda. Starting with the full year 2024, we delivered adjusted net revenue of $9.15 billion, an increase of 6% from the prior year, which includes slightly less than a point headwind from currency and the disposition of advanced MD. Adjusted operating margin for the full year expanded 40 basis points to 45%. The net result was adjusted earnings per share of $11.55, an increase of 11% compared to the full year 2023. For the fourth quarter, we delivered adjusted net revenue of $2.29 billion, an increase of 5%. On a constant currency basis, excluding dispositions, adjusted net revenue increased approximately 6.5%. Adjusted operating margin for the quarter increased 40 basis points to 45.2%. The net result was adjusted earnings per share of $2.95, an increase of 11% or 12% on a constant currency basis. Taking a closer look at performance by segment, Merchant Solutions achieved adjusted net revenue of $1.76 billion for the fourth quarter, reflecting growth of 6% or more than 7% on a constant currency basis, excluding dispositions. As Cameron noted, we closed our advanced MD disposition in December, which is roughly a point of impact in the quarter. This performance represents an acceleration compared to the third quarter, consistent with our expectations, driven by our POS and software and integrated and embedded businesses, both of which achieved high single-digit growth during the period. Starting with POS and software, our new cloud POS solution for SMB customers that we launched midyear and our rebranding to Genius drove a roughly 35% increase in new POS rooftops in the fourth quarter over the prior year period. This strong demand is being driven by the new software bundles, countertop hardware choices, and embedded commerce enablement solutions available through the platform, which includes leading new feature functionality such as our virtual terminal offering, cash discounting, surcharging solution, pay by text, email link capabilities, order ahead, and invoicing solutions to name a few. Turning to the integrated embedded channel, our ISV business added 76 new ISV partners during the fourth quarter with 32 of these wins achieved in international regions. Several of the larger software partners we signed this quarter include Bookby in the salon vertical, DRX in pharmacy management, and Chamber Nation, which provides member management, automation, and digital media solutions. Our core payments business delivered mid-single-digit growth for the fourth quarter on a constant currency basis with several international businesses notable bright spots. Specifically, central Europe, Poland, Greece, and Latin America achieved double-digit growth as we continue to benefit from the strong secular payment trends in these markets. We delivered an adjusted operating margin of 48.3% in the merchant segment, an increase of 60 basis points compared to the prior year. This performance reflects strong execution on our refocused strategy and ongoing synergy realization from the acquisition of EVO Payments. We've now executed our targeted expense synergies from EVO and are on track to achieve $135 million in annual run rate expense synergies as anticipated. Our issuer solutions business produced adjusted net revenue of $542 million for the fourth quarter, reflecting growth of 3% on a constant currency basis, largely driven by a 200 basis point sequential improvement in transaction volumes. This was led by strength in consumer card transactions, consistent with the trends highlighted by several of our large FI partners this quarter. Commercial card volumes remained largely consistent with the trends that we saw in the third quarter as corporates continue to take a more cautious approach to spending. Separately, we've seen more of a return to normalcy in terms of product and service investments by bank customers and continue to have a healthy implementation pipeline in 2025. We added a total of 26 million traditional accounts on file this quarter, largely driven by growth with existing customers as our strategy of aligning with market share winners continues to drive benefits, and our near-record implementation pipeline and the completion of our renewal cycle with many of our large customers gives us confidence in the growth outlook for the business going forward. Moving to our B2B portfolio, the core mid-market segment for our AP automation solutions continues to generate solid bookings in the quarter, albeit at a slightly moderated pace from earlier in the year due to macro trends. Additionally, in our pay card business, we continue to see softer hiring trends in the segments of the market we serve, which again negatively impacted growth this quarter by nearly a point. Finally, issuer solutions delivered an adjusted operating margin of 46.9%. This improved sequentially from our third quarter performance, largely driven by better volumes, but represented a modest decline compared to the prior year period as we continue to lap strong margin expansion we realized in this business last year while also investing in modernization. From a cash flow standpoint, we've produced strong adjusted free cash flow for the quarter of approximately $814 million, representing roughly 110% conversion rate of adjusted net income to adjusted free cash flow. For the full year, adjusted free cash flow was $2.7 billion, representing a roughly 95% conversion rate of adjusted net income to adjusted free cash flow. Consistent with our guidance, we invested $184 million in capital expenditures during the quarter and $675 million for the full year, equating to roughly 7% of revenue, which was in line with our guidance. Our net leverage position decreased to 3.2 times at the end of the fourth quarter and is now consistent with our long-term target as forecasted. In connection with the closing of the advanced MD transaction in December, we repaid $500 million in senior notes that matured in the quarter and returned $650 million to shareholders through our accelerated share repurchase plan and additional open market purchases. For the full year, we repurchased 12.7 million shares for $1.5 billion, or roughly 5% of our shares outstanding. Our balance sheet remained extremely healthy and we ended the period with $3.8 billion of available liquidity. Our total indebtedness is 100% fixed with a weighted average cost of debt of 3.36%. Turning to the outlook for 2025, we are pleased with how our business is positioned as we execute against our refocused strategy and our expectations are consistent with the medium-term outlook we provided at our investor conference in September. Specifically, we currently expect constant currency adjusted net revenue growth of 5 to 6% over 2024, excluding dispositions. We expect dispositions will impact reported adjusted net revenue by over 300 basis points. We're forecasting annual adjusted operating margin to expand approximately 50 basis points for 2025, excluding the effect of dispositions. To provide color at the segment level, we expect our merchant business to deliver adjusted net revenue growth of roughly 6% on a constant currency basis excluding dispositions for the full year. We expect roughly 50 basis points of adjusted operating margin expansion for the business excluding dispositions in 2025. Moving to issuer solutions, we're anticipating adjusted net revenue growth in the roughly 4% range on a constant currency basis for the full year compared to 2024. We anticipate adjusted operating margin for the issuer business to expand by approximately 50 basis points in 2025. In terms of quarterly phasing, we expect modestly higher growth in the second half relative to the first half of the year as our transformation initiatives ramp and as we lap the renewal cycle with many of our large issuer customers and see increased benefits from conversion activity over the course of 2025. Moving to a couple of non-operating items, we currently expect net interest expense to be roughly $500 million this year and for our adjusted effective tax rate to be approximately 19%. We're also planning for our capital expenditures to be around $780 million in 2025, or approximately 8% of revenue, which is consistent with the outlook we provided at our investor conference. We anticipate adjusted free cash flow conversion to be greater than 90% for the full year, which again is in line with the expectations we outlined in September. Regarding capital allocation, we expect to return approximately $2 billion to shareholders during the year. To that end, we are entering into an accelerated share repurchase plan for $250 million. If we execute additional divestitures in 2025, the proceeds will be used to further enhance shareholder returns. We also plan to further reduce our indebtedness during the year. Putting it all together, we expect adjusted earnings per share growth for the full year to be in the range of 10% to 11% on a constant currency basis. We expect adjusted earnings per share growth to be consistent with the quarterly phasing dynamics I detailed in my earlier remarks. This 2025 guidance is the same as the outlook we provided at our investor conference in September and reflects the strategic initiatives we are undertaking through our transformation in addition to a stable macro environment. With the significant recent strengthening of the US dollar, we now expect currency to be a headwind of roughly 175 basis points to both adjusted net revenue and adjusted earnings per share. Finally, as you may recall at our investor conference, we mentioned we have been evaluating our reporting structure, including how to treat items like stock-based compensation. Beginning in the first quarter, we will include share-based compensation expense in our adjusted results to better align our convention with our peers. We will update our reporting accordingly at that time. However, we do not expect any change to the growth outlook that we provided today. Additionally, we also plan to change the presentation of cash flows for settlement assets and obligations and certain funds held for customers, moving the changes in items from operating to financing cash flows, similar to the convention recently adopted by certain of our peers. In summary, we're pleased with the progress we've made since beginning our transformation. Our focus remains simplifying our operations, strengthening our core businesses, and returning capital to shareholders. And we are confident that we have good forward momentum as we execute against our refocused strategy. And with that, I'll turn the call back over to Cameron.

Thanks, Cameron. Before we begin our question and answer session, I'd like to ask everyone to limit their questions to one with one follow-up to accommodate everyone in the queue. Thank you. Operator, we'll now go to questions.

Thank you. If you'd like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Our first question comes from the line of Darren Pellar with Wolf Research. Please proceed with your question.

Guys, thanks for the help. Just maybe start off with your early evidence of the progress you're seeing on some of the initiatives you're making. I know you touched on the timeline you expect on Genius. That was really helpful, but maybe give us a sense of two things. One is, you know, the initiatives you see some evidence of working already. I know it's only been about a quarter or so since the investor day, but any progress there. And then really more importantly, the cadence we can expect throughout the year, specifically in the merchant growth rate, so we can help understand where we can expect a trajectory, where there's a bottom, and then where you expect a re-acceleration.

Cameron, thanks. And just a quick follow.

Very helpful, Cameron. Guys, thanks very much.

Thank you. Our next question comes from the line of Jason Cufferberg with Bank of America. Please proceed with your question.

Morning, guys. Thanks. I wanted to follow up on merchant and just clarify the 6% guide for the year. I know it excludes currency and dispositions, but just on the acquisition front, I mean, I think take payments closed around the middle of last year. We're thinking it drives maybe a half a point of inorganic to merchant this year. And I know you mentioned a small orchestration platform you bought. So how much are you expecting from acquisitions in that 6%?

Okay, understood. And then just on the EPS guide, just so we're all on the same page, how should we think about the actual dollar-based EPS guide? I mean, especially with the absorption of the stock-based comp that you're going to be introducing in Q1, just so we all get our models tuned up here right at the beginning of the year.

Okay. And then the 175 bit headwind you said right on the EPS line from the currency.

Yeah. Yep. Okay. Cool. Thanks Josh.

Thank you. Our next question comes from the line of Ramsey LSL with Barclays. Please proceed with your question.

Hi, thanks for taking my question this morning. What is the macro backdrop that you're contemplating in guidance? Are you baking in any conservatism or deterioration in the environment or are you just kind of baking in what we're seeing today?

Got it. And a quick follow-up from me. Just to add, at Investor Day you called out winding down some enterprise customer contracts, I believe, in core. Has that process begun? Should we expect any noticeable impact from that in any particular quarter this year or will it be somewhat less perceptible from the outside?

Great. Thank you so much.

Thank you. Our next question comes from the line of Tenzin Hang with JP Morgan. Please proceed with your question.

Hey, thanks so much. Good to catch up with everyone. Just on the operational transformation up 100 million, I'm curious does that change also raise or maybe change the timing of savings recognitions in 25 and 26? Any update there?

Yeah. So 25 I would say is vastly the same and the majority of the benefits are going to be seen in 26 and beyond. So what we said before is that we expect approximately 200 million of OI benefit in 26. Now we expect that to be more in 26. And then we said approximately 400 million of OI benefit in 27 and we expect that to be more in 27 with full run rate of 600 million in 2028.

Got it. Thank you for that. And a quick follow-up if you don't mind, Winnie, just on the buying out of the joint ventures here. Can we assume that we'll see more of this? And is the Asia wind down the inverse meaning you'll maybe give back some of the joint ventures to the banks?

Yeah, it's a good question, Tenzin. I sort of put it in the category of trying to streamline and simplify our business with the number of joint ventures that we have, particularly in Europe. The complication in operating the business, the governance around the business makes it a little more difficult to operate the business in the way that we want to from time to time. So certainly the Kaisha Bank exit of the Ursa JV simplifies that relationship fairly meaningfully. Obviously exiting HSBC from our joint venture in Mexico allows us to bring together two businesses in Mexico that by and large were competing with each other given the nature of the relationships we had in that market into a single business, obviously with good strong referral partners in Banamax and HSBC, but we're able to operate a much more homogeneous and single operating environment in Mexico now, which is certainly a benefit for us. In Asia, we really only have one JV and that's with Bank of the Philippine Islands in the Philippines. We're very committed to that relationship in that market. We have good scale in that market. We have good growth potential with a strong partner. So that's obviously something that we want to continue with. The markets that we're seeking to exit in Asia are markets where we own 100% of the business, but they're markets that I would characterize as we're a subscale player today. We don't see a realistic path to being a scale player in a time frame that makes sense for us, and we'd rather commit our time, effort, and resources to markets where we see better opportunities.

Got it. No, makes great sense. Thank you.

Thanks, Andrew.

Thank you. Our next question comes from the line of Dave Coning with Bear. Please proceed with your question.

Yeah. Hey, guys. Thank you. And great to see just the quality of earnings here, getting better cash flow, leverage, lower addbacks, all that stuff. So, congrats on all that. I

Yes. Our next question comes from the line of James Faucet with Morgan Stanley. Please proceed with your question.

Great. Good morning and I'll get straight to my question. So wondering if we can get an update on issuer segment and is the assumption for fiscal 25 continuation of softer trends in the commercial card and pay card that you called out and how should we think about the growth from the implementation of those 70 million accounts and backlog?

Yeah sure, I'll go ahead and take that. So look, for issuer, we expect revenue to be relatively in line with where we exited the year in Q1. We do expect to see modest improvement throughout the year as we see increased benefit from conversion activity and lapping the renewal cycle with many of our large issuers. And what I would say is, as it relates to issuer, for Q4 we continued to see strong trends. We saw four conversions for the year. Cameron commented on 17 conversions for the year. The pipeline stands at over 70 million accounts on file. We saw strong sequential growth in accounts on file and we also saw sequential improvement as it relates to transactions. So we feel pretty good about the issuer business going into 2025 and we expect to see modest acceleration in the back half of the year as we lap some of these contract renewals that we talked about in Q3.

Great. That's great color. And then quickly just wanted to touch on the ISV channel. Sounds like the partner growth there is still healthy. How are you thinking about the churn and revenue pricing in that business in 25 and then 26?

Yeah, thanks Cameron. Great question, James. We continue to see partners across the spectrum, whether they're ISVs or other flavors of new tech, fintech, FI relationships with different integration needs who continue to think about integrated as a departure from the last two pendulum swings we saw over the prior decade, which was coming from integrate to us, send a lead, we'll cut you a referral check to everyone in the world needs to be a payfac and become a payments company. They continue to want to differentiate at the customer experience level. What does it look like to acquire and board new accounts? And it continues to be important to them to drive, to Cameron's point, additional value into the relationship beyond core payment acceptance. The work that we've done over the prior decade and that we continue to accelerate at the back half of 24 and into 25 as part of our transformation seeks to make those capabilities available in very easy to consume and integrate ways across the spectrum of our capabilities so that our partners can go to market in a very tailored way without having to create a bespoke program or integration for every one of them. We continue to see that being received very well in the market. We think we're positioned well against competition and it also helps us defend the partnerships that we already have as they seek to evolve their own business model and software and distribution platforms.

Appreciate that, Bob.

Thank you. Our next question comes from the line of Brian Bergen with TD Cowan. Please proceed with your question.

Great. Thanks so much for taking the questions. This is Harrison Vivos on for Brian. Just wanted to double click on the POS replatforming. Obviously still early, but could you offer any early feedback on what you're hearing from clients and then maybe put a finer point on what you're expecting from a churn level as you really start that as you launch Genius and into the second half of the year?

Yeah, Harrison, as we think about churn in the POS space, there are a couple of components at play here. One is we respect the competitive environment and we have fierce competition who's aggressive in their own right, but we also have long and successful relationships with these customers not only anchored in the solutions that we've delivered to them in the past but the way that we've differentiated around the service experience and the continued rollout of additional value-added services that we're bringing to the relationship beyond just the core business operating software in a restaurant or retail environment. Second, as customers begin to think about the next phase of their technology growth, we've got a strong relationship. It's our belief and historical experience that they think about us first and we want to be there as they're thinking about the evolution of their business, providing ramps for them to migrate to new solutions that we're going to deliver. And finally, we didn't invent Genius de novo. A fair bit of what we're rolling out in both the retail and restaurant verticals is anchored in solutions that we have in market today, and this is the next generation of those platforms. So there's a very natural upgrade path for a large share of these customers who don't require things like a data conversion, in many cases may not even require new hardware. So we feel really good about the opportunity to retain our existing customers while growing the relationship and delivering them more value, as well as our competitive positioning to acquire new accounts over the next period of time.

No, great. That's helpful. And then just quick follow-up on incremental asset sales. Cameron, I know you talked about exiting some subscale APAC businesses in the quarter. Just any commentary on potential additional processes that might be underway? Should we expect maybe more subscale geographic trimming or are you potentially looking at vertical software platforms to monetize? Just any commentary there would be great. Thanks.

Thank you. Our next question comes from the line of Dan Pearllin with RBC Capital Markets. Please proceed with your question.

Thanks. Good morning, everyone. I'm wondering if you're willing to put a finer point on this 25 revenue growth cadence. I know you've got the five to six bogey out there. You're talking about second half being stronger than first half. But what I'm trying to get at is, are you suggesting that we're at the low end of the range in the first half and then accelerate to the high end, or are we going to be maybe potentially below the range in the first half and then a reacceleration even outside of that range in the second half, which would support an exit rate to jump off into 26 with reacceleration? Thanks.

Yeah, I guess what I would say is that we're going to see a slight acceleration as we go into the back half of the year. As Cameron mentioned in his prepared remarks and earlier on this call, we are factoring in a little bit of a slowdown in the first half as it relates to transformation activities that we talked about: retooling the salesforce, revamping compensation structure, exiting some markets, and consolidating platforms. But again, we're very much within the range and I would expect to see acceleration in the back half, like we talked about at the investor conference, going into 26 and beyond.

That's great. And very clear. Thank you for that. Just quickly, Cameron, and it's kind of again a little bit high level in terms of your conviction level and visibility into the organization. You're doing a lot of things as you call out, the homogeneity of the platforms and internal organization. I'm just wondering how much of an impact that's having on your ability to forecast and then again the visibility and conviction in these numbers. Thank you.

Great. Thank you so much.

Thank you. Our final question this morning comes from the line of Vasu Boville with KBW. Please proceed with your question.

Hi, thanks for taking my questions. And, Cameron, you covered this a fair amount, but I just wanted to get a finer point on it. I think when you guys guided to 2025 at the Investor Day, it was mid-single digit. So if I'm categorizing that correctly, four to six, and now you're guiding to five to six. So it's slightly better. Just if you could help pinpoint what exactly is trending better in the business that would be great, and then I have a quick follow-up.

Thank you for that. And just a quick one on the tech modernization in the issuer business and the launch of the cloud-based apps. Would that mean anything from a revenue standpoint?

Thank you very much for the color.

Thank you. This concludes today's conference call. You may disconnect your lines at this time.