Global Payments Inc. is trying to offset weak margins on its ISO-driven United States business by building strength abroad, an analyst says. In the short run, that leaves the Atlanta-based merchant processor with strong revenue growth and flat income.
Global Payments March 31 reported net income of $47.8 million for its fiscal third quarter ended Feb. 28, down 1% from $48.5 million during the same period last year. Revenues, however, increased by 15%, to $456.4 million from $398.5 million.
“North America delivered strong revenue growth in the quarter, with U.S. and Canadian transaction growth rates of 20% and 7% respectively,” Paul Garcia, Global Payments chairman and CEO, told analysts in a conference call.
Two ISO-related factors affect the company’s U.S. results, Darren Peller, a Barclays Capital analyst, tells PaymentsSource. First, ISOs keep the market roiling by trading customers with each other in a quest for market share, he says. That can bring more business to Global Payments.
Second, ISOs continue to introduce value-added services that increase the amount of revenue flowing in to Global Payments but do not boost the processor’s profits because those incremental increases flow back to the ISOs, Peller says.
Canadian margins looked better than those in the U.S., with 12.6% growth in revenue and 3.4.% growth in income year over year for the fiscal third quarter. But Global Payments has lost market share in Canada recently to Moneris Solutions Corp. and is beginning to use ISOs more there to gain market share, Peller says. That reliance upon ISOs, in time, could compress margins, he notes.
In most countries ISOs do not play a major role and thus operating abroad could strengthen Global Payments margins, Peller says.
“They’re trying to use the European and Asian businesses as growth drivers,” he says.
While Global Payments ranks about seventh among processors operating in the U.S., the company places about third in the United Kingdom after increasing its 51% share of HSBC to 100% a few quarters ago, Peller says.
Global Payments is working to raise prices in the UK by integrating the antiquated HSBC platform into the Global Payments platform, Peller continues. Until now, their UK technology charged the same price for all services. The new version can price services at different rates and thus should produce an overall price increase, he says.
“So in their next fiscal quarter, which ends in May, you should see the European revenues jump dramatically,” Peller notes.
In Spain, Global Payments is investing and that keeps pressure on margins for now, he continues.
Looking to the fiscal fourth quarter, Global Payments provided estimates in the wide range of 8% to 13% for revenue growth, while they grew by 15% in the third quarter, Peller says.
Peller expects results at the high end of that range or even better during the next fiscal quarter. U.S. growth appears likely to remain strong, Canada seems poised for improvement, the UK should do especially well because of the increased prices afforded by the revamped platform, and moves in Spain will have been in place longer and should yield more return, he says.
“They’re being conservative in their topline guidance for fourth quarter,” Peller says. “I think they’re going to grow better than 15%. Margins should get a little better, also.”
In the UK all of the price increases will pass through to the bottom line, he notes. “That’s all margin.”
In the longer term, however, when the effect of the price increase runs out the company will have set a higher bar, says Peller. Meanwhile, 70% of revenue comes from North America, where margins are under pressure, he notes.
“Then, what happens,” Peller asks rhetorically. “They’ve have to rely on other growth strategies. They’ve have to keep moving and be innovative to keep their growth alive.”
To that end, Global Payments is growing in Brazil, has started a small operation in Russia and hopes to do well in China, Peller says. “So there are long-term initiatives that could work to offset some of the challenges in North America.”
