EPAM’s 4Q print beat top and bottom-line expectations, driven by broad-based growth across segments. 2020 revenue guidance came in slightly ahead of consensus, however EPS was below Street expectations. Following the print, we remain constructive on EPAM’s industry-leading growth model while recognizing that the Company continues to invest meaningfully to sustain top-line strength. Total revenues of $633mm were up 25.3% Y/Y, 24.8% on a CC basis, ahead of the guided $616mm, the Street’s $618mm, and our $623mm. Adj. EPS of $1.51 beat the guided $1.43, the Street’s $1.44 and our $1.47. Notably, adj. operating margins were 40 bps below our prior model, and the majority of the EPS beat was related to higher than expected stock compensation add backs. Growth was balanced across verticals, with reacceleration in Business and Media driven by strength from telecom clients, and Emerging Verticals remaining at +35% growth.
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EPAM reported 4Q earnings this morning (02/20/20), highlighted by a top and bottom-line beat and FY2020 revenue and EPS guidance ahead of and below expectations, respectively. Total revenues of $633mm were up 25.3% Y/Y, 24.8% on a CC basis, ahead of the guided $616mm, the Street’s $618mm, and our $623mm. Adj. EPS of $1.51 beat the guided $1.43, the Street’s $1.44 and our $1.47. Adj. operating margins of 17.0% were down 140 bps Y/Y and below the 17.4% in our model. EPAM continues to build on its impressive track record of +20% revenue growth and has now beat top line expectations in 16 of the last 17 quarters. We see EPAM’s premium valuation as justified given the consistent growth pattern and delivery of high-value services. However, rapid multiple expansion over the LTM (+6.5x) keeps us sidelined on shares relative to other names in our coverage at this time. For reference, as of yesterday’s close EPAM shares were trading 36.1x NTM consensus EPS, or 17.1x above the market, relative to its 1-year and 3-year median spreads of 14.7x and 10.2x respectively.
Following a period of volatility during 2H19, sentiment on SQ has been materially more positive since the beginning of the year as reflected by shares up 36% YTD versus the S&P up 5%, which we attribute to (1) in-line with our expectations, buy-side views increasingly suggesting that 4Q guidance is conservative on revenue, despite risk around GPV churn following November 2019 pricing changes; (2) optimism following the January 2020 instant deposit price increase to sellers, (see Exhibit 4) which we estimate adds ~200bps to 2020 revenue growth, and a view that SQ has multiple levers to protect topline trends; (3) clarity on the $75mm of seller investments outlined for 2020, noting only ~$38mm may be incremental to run-rate investment growth; (4) conviction in a continuation of impressive Cash App growth; (5) Investor Day anticipation (March 18), with growing expectations that long-term revenue growth targets may be 25%-30% (albeit at lower margin than before) versus the 20-25% outlined at the last investor day; and (6) other variables such as the partnership with UPS (fulfillment for SQ Online) and amended employment agreements, which dictates accelerated equity vesting in a change of control, fueling M&A speculation, contrary to our view that these changes are likely legal housekeeping given SQ’s strong governance structure. While we continue to believe that 2021 trends will be the ultimate check on SQ’s LT sustainable growth given investment timing/payback and rising competition, we also see a positive near-term set-up tactically heading into 4Q and Investor Day. On increased near-term conviction and multiple expansion for comparable growth companies, we raise our YE20 PT from $70 to $85, predicated on 11x our 22E sales of $4.9B, discounted to YE20 (Bloomberg). See pages 2-5 for incremental analysis on the variables above.
ADS reported its January credit data this morning with NCOs of 7. 2%, up 60 bps Y/Y and up 110 bps M/M (in-line with the 5-year seasonal average of up 108 bps M/M). For reference, November and December NCO’s were up 80 bps and 70 bps Y/Y, respectively. We remind investors that 1H20 presents a challenging comp for NCO’s, considering the prior year’s portfolio restructuring. That said, we are encouraged by the downward trajectory of the Y/Y delta and believe easing 2H comps should drive NCO’s closer to the full year guide over time. As a reminder, management is guiding towards NCO’s to be up 20-30 bps above 2019 levels on a full year basis (i.e. 6.3-6.4%).
In this week’s Sunday Spotlight, we look at the three ‘deal stocks’, Fiserv, FIS and Global Payments, examining their leverage, growth and margin profiles, 2020 outlooks, recent results, and more. Overall, despite nice run-ups for GPN and FIS shares in particular into earnings, all three stocks at least held their ground on their respective prints. While concerns about FISV’s top-line guided range of 6-8% Y/Y growth vs. prior “at least 7% Y/Y growth” kept shares somewhat at bay, most believed fundamental trends are largely unchanged with strong synergy potential. FIS surpassed expectations on the quarter and provided what we view as a conservative guide, strong wins in banking (including a newly announced top 10 client), and strength in its merchant acquiring business.
Shares of WEX outperformed in today’s session (WEX up 4% vs S&P flat) as 4Q results beat expectations on the top and bottom line (after correcting for the $21mm ASC 606 reclass) and commentary suggesting that organic momentum in Travel & Corporate and Healthcare should offset Fuel headwinds in 2020. Investors were cautious heading into 3Q, considering management’s recent hesitancy to reiterate medium term guidance and SSS’s declines in industrial verticals. That said, today’s results should quiet near-term concerns as both non-fuel segments exited the year accelerating organically and management explicitly noted 2020 guidance across all segments was within medium term targets, despite fuel headwinds (see page three for incremental detail on guide).
WEX reported 4Q results this morning (2/13/20), with revenues slightly missing expectations, an EPS beat, and 2020 guidance (excluding Optal and eNett) coming in below expectations. That said, there are several moving pieces in the print worth considering. First, the Company reduced 4Q revenue by $21mm to accurately reflect fleet revenues and sales and marketing expenses for certain partner arrangements, with $14mm of the adjustment attributable to 1Q-3Q. Second, while we had anticipated a softer macro environment based on commentary provided last Q, fuel expectations for 2020 are $2.70 for the year vs. the 4Q actual of $2.80. Lastly, the Company excluded potential revenues from the Optal and eNett acquisition announced last month, which are expected to close mid-2020. Assuming the transactions close July 1st, we estimate WEX will benefit from incremental revenue and EPS of $90mm and 15-20c, respectively.
FIS reported a healthy 4Q with 7% Y/Y organic growth vs. 3Q’s 5% Y/Y (6% Y/Y adjusting for stub period) organic growth and raised synergy expectations for both the year and FY22. FIS now expects to achieve $200mn of revenue synergies by YE ’20 (up $50mn) and $550mn by YE ’22 (up $50mn) after realizing $80mn through 4Q19. On the cost side, FIS expects to realize synergies of $600mn by YE ’20 (up $250mn) and $675mn by YE ’22 (up $175mn). Overall, we see 4Q results as strong with revenue trends in the quarter and guidance ahead of expectations and suspect that a higher than expected share count and D&A are weighing on the EPS guide. That said, we see EPS guidance as materially conservative and would not be surpsied to see FIS beat and raise throughout the year. We’d expect shares to hold YTD gains and show follow-through in coming weeks.
We see GPN’s 4Q results as solid and supportive of the recent YTD outperformance, with potential for some follow through over time given the belief that the company will drive upside to guidance from synergies, pricing, TSS organic acceleration, and M&A. We highlight that GPN grew 7% Y/Y CC organic in 4Q despite a ~50bps headwind from Hong Kong, suggesting 7-8% Y/Y CC growth. We believe that ex. upside from pricing, synergies and M&A, 1) Hong Kong comps easing (2H), 2) the CFPB impact (laps in 2Q), 3) the Issuer Solutions client change (laps in 2H20) and 4) a strong Issuer Solutions pipeline pre acquisition for 2020/2021 should get GPN to 8-9% growth in 2020 by itself. As a result, we view guidance as conservative and see ~100bps of upside to the mid-point of revenue guidance and 20c+ upside to the mid-point of the EPS guide as possible. We raise our PT from $215 to $218 and maintain our OP rating.
Visa called for potentially accelerating revenue growth over the next 3-5 years by “fortifying its foundation” and focusing on consumer payments, while continuing to invest in new flows, and value-added services. In our view, this represents an expansion in strategy from focusing on the core business, which could result in a positive impact to V’s multiple over the next few years.
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