FOUR reported impressive results in its first earnings as a public company this morning, highlighted by net revenue and adj. EBITDA coming in well-ahead of Street estimates. Net revenues of $67.4mm (down 10% Y/Y) beat our and the Street’s $41mm. Adj EBITDA of $14.8mm (down 45%) beat our $6.5mm and the Street’s $6.2mm, reflecting adj. EBITDA margins of 18.7%, vs. the 16.0% in our prior model. End-to-end volume of $4.24bn (down 23% Y/Y) came in ahead of our $3.30bn. Gross profit of $32.3mm (down 26% Y/Y) came in ahead of our $20.5mm. Overall, we are encouraged by the print and believe trends underscore Shift4’s omnichannel differentiation which has become increasingly important to restaurant and hospitality clients in the current environment. It’s worth noting that the company’s end-to-end volume grew in June and July (and is included in guidance for 3Q and 4Q to grow), which is impressive given its end markets and underscores FOUR’s likely share gains, tech differentiation, and gateway conversion. For reference, the Company noted CNP trx comprised ~40% of total volume in April, compared to ~5% pre-COVID-19. Coupled with significant customer wins, conversions from gateway-only service, and attrition rates which we estimate are ~30-40% better than the industry average, we believe FOUR will continue to demonstrate relative resilience despite challenging vertical headwinds. On the call we will be looking for color on 1) revenue detail between gateway-only, end-to-end, and SaaS offerings, 2) recent metrics on CNP trx volumes, and 3) potential operating leverage from recovering trends. We would expect shares to outperform over the coming weeks following these results.
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EPAM reported 2Q earnings this morning, highlighted by a top and bottom-line beat, and a strong F3Q guide above our model and the Street, especially given the challenging and uncertain macro backdrop (FY20 guidance still withheld). Total revenues of $632mm were up 15% Y/Y and 14% CC, handily beating the $598mm guidance midpoint and our $596mm (in line with the Street). Adj. EPS of $1.46 came ahead of the Street’s $1.20 and our $1.21. Adj. operating margins of 17.1% were up 30bps Y/Y and above the 15.1% in our prior model. Performance by Vertical: On a reported basis, Software & Hi-Tech was up 13.2% Y/Y (vs. our 14.0% and 22.0% in 1Q), Financial Services was up 6.3% Y/Y (vs. our 8.0% and 16.2% in 1Q), Business Information & Media was up 42.9% Y/Y (vs. our 25.0% and 46.0% in 1Q), Travel & Consumer was up 0.1% Y/Y (vs. our -20.0% and 14.6% in 1Q), Life Sciences was up 16.4% Y/Y (vs. our 20.0% and 26.3% in 1Q), and Emerging Verticals was up 11.9% Y/Y (vs. our 15% and 30.4% in 1Q).
Shares of SQ outperformed following its outstanding 2Q print (SQ up 7% vs S&P up 3%) relative to lowered expectations. At the beginning of the pandemic, we, and many investors expected that SQ was one of the most exposed names in our coverage to crisis headwinds, given the highest exposure to SMB’s and elevated credit exposure. What was underestimated was (1) SQ’s ability to pivot priorities to maintaining Seller viability and capitalizing upon the shift to omnichannel payments, and (2) the magnitude of acceleration in Cash App engagement, partly from stimulus, but also from long-term structural factors.
With shares down 15% YTD versus the S&P500 up 3% YTD, we believe FISV’s underperformance relative to peers (FIS +5% and GPN -5% YTD) is unwarranted when considering the outperformance in the Merchant acquiring business which showed only 15% Y/Y internal revenue decline versus competitors seeing 19%+ declines Y/Y, and inflection to growth in July. Further, we believe the company’s digital/omnichannel positioning, as evidenced from its trends during the quarter, are underappreciated. Although 2Q results were in-line with expectations on EPS and slightly below consensus on adj. revenues, we view 2Q as the trough and see positive trends indicating an acceleration in the business. We adjust our estimates for results and guidance driving our 2020 EPS to $4.36 (vs. guidance of 2020 EPS of $4.33+) indicating ~10% when adjusting for the divestiture in the year ago period. Further, we see FISV continuing to benefit from: 1) improving trends in July and beyond, 2) incremental cross-sells and client wins (sales up 38% Y/Y and 20% YTD with momentum continuing into July with two incremental competitive takeaways being Atlanticus and Genesis), 3) execution of realizing cost and revenue synergies, 4) further investments in technology to strengthen its structural positioning long-term specifically within omni and digital offerings, and 5) continued implementation of FISV capital allocation strategy through share repurchases coupled with strong FCF generation/conversion. Rolling forward our valuation to 2022, we apply a ~21x multiple (only 3x above the market 2022 multiple versus historic spread of 5x) on our CY22E EPS of $6.35 driving a PT of $135 (vs. $130 prior). Overall, with shares at only 17-18x 2021 estimates (3-4x below peers) and sound trends/positioning, we see shares outperforming in the following months.
2Q results were in-line with expectations on EPS and slightly below our and the street’s expectations on adj. revenues. However, more importantly, key takes are 2020 guidance of EPS growth reiteration of at least 10% Y/Y, internal revenue growth ~flat implying roughly 1-2% growth in 2H20, better 2Q performance in its merchant acquiring business vs. peers (down 15% Y/Y vs. many others down 19-20%), positive Clover and digital merchant acquiring platform metrics (Clover GPV up 32% in July and $23.4 billion of quarterly volume in 2Q driven by virtual terminal and online systems), online volume up 26%, and strong sales metrics. FISV capital allocation remains strong as the company repurchased $5.6mn shares for $550mn coupled with strong FCF generation driving 142% FCF conversion. Overall, we see strength in July trends of positive internal revenue growth (vs. -1% in June and -7% in 2Q20) as a notable inflection. Further, we continue to have conviction that strategic opportunities to deliver growth and create shareholder value from the combined FISV/FDC platform continues to be strong and FISV’s strategy as intact with management’s ability to execute FISV’s proven path of investing in revenue with operating leverage supplemented by synergies and efficiencies, solid FCF conversion, and a material focus on buybacks (management reiterated commitment for 2021+), all of which we see driving outperformance. At only 18x 2021 estimates, roughly 3-4 turns below peers and 6-7x below its historic spread to the market, we would expect shares trading well over the next several months.
Square pre-released 2Q results this evening with a more than impressive quarter, highlighted by gross profit of $597mm (up 28% Y/Y) beating our $491mm and the Street’s $445mm; and adjusted EBITDA of $96mm beating our $16mm and the Street’s -$6mm. While acknowledging SQ was a meaningful beneficiary of some near-term stimulus tailwinds, it is obvious (in our view) that SQ stands out as a material share gainer across its businesses, solidifying its status as a global leader as a challenger bank/digital wallet as well as a differentiated omnichannel provider for merchants, including a strong eComm/CNP positioning. While like other COVID-exposed names in our coverage the next several quarters will be partially dictated by the course of the virus, this print underscores our belief that SQ is a disruptor able to navigate well through variety of environments, and see estimates moving higher in the next several Q’s, despite unprecedented macro challenges.
Shares underperformed in today’s (08/04/20) trading down 1.2% (up 6% YTD) vs. the S&P500 up 0.4% (up 2% YTD) despite a sound 2Q print, in our view, a result of noise surrounding adj. EBITDA margin outlook in 3Q, guidance in-line with consensus estimate for 3Q of $3.14bn when considering improving volume trends in Merchant and solid growth in Banking/Cap Markets, and some questions on the spread b/w revenue and volume growth. That said, we believe key highlights in the quarter should outweigh these concerns in the near-term including improving trends in Merchant with 30% Y/Y growth in global eCommerce transactions, key wins in Merchant of a top U.S. Pharmacy and large U.K. fuel station operator coupled with an incremental Top 30 bank in Banking (marks the 7th large win in 3 quarters and 9th Modern Banking Platform win, incl. 4 in the Top 30), higher recurring revenues in Cap Markets (70%+) driven by shift of licensing-based revenues to a more SaaS model, and strong sales and pipeline (2 years of DD sales growth). Further, we reiterate our thesis of FIS being well positioned through the pandemic given opportunities in digital banking transformation demands, continued larger wins in banking, acceleration in Merchant growth as pandemic headwinds abate driven by eCommerce and return of SMB volumes (also to help the mix/revenue yield), and further execution of synergies realization and cost savings. Rolling forward our valuation to 2022 where earnings power may reflect a more normal environment, we apply a ~21x multiple on our CY22E EPS of $7.87 driving a PT of $165 (vs. $160 prior).
WU reported 2Q results after today’s (08/05/20) close with revenue and EPS coming in ahead of Street expectations. Revenues of $1.11bn were down 11% Y/Y CC (excluding the impact of divestitures), between our $1.14bn and the Street’s $1.08bn. Adj. EPS of $0.41 came in above our $0.37 and the Street’s $0.35. Digital transactions were up 96% Y/Y (WU.com up 50% Y/Y) and accounted for 31% and 22% of total C2C transactions and revenues (vs. ~15% and ~16% pre-COVID-19, respectively). Importantly, we also highlight relatively stable revenue/transaction trends (down ~5.1% Y/Y, vs. down ~5% in our prior model), which we are monitoring closely as digital becomes an increasingly significant portion of Company revenues. C2C revenue growth trailed trx growth by 400bps for the quarter, and mgmt commentary suggested this trend will continue at least in the upcoming quarters. Overall, we are encouraged by 2Q results and believe current Street estimates do not yet account for strength in growth from the newer digital mix. Importantly, transaction trends accelerated to 6% Y/Y growth in June and 10% growth in July (driven by 115% growth in digital and 61% in WU.com) and the company continues to see 80% of its WU.com/digital additions as new to the WU brand. We believe WU is seeing similar trends as other large money transfer players, reflecting outperformance from an initially overly pessimistic view on the space in the early innings of COVID-19, and potentially indicating market share consolidation among digitally enabled/larger players.
We believe WU’s results further supported our thesis that a secular trend toward digital transfers, which has been materially accelerated by the pandemic, is driving market share consolidation from small operators/banks to larger MTO’s and digital players. We are encouraged by digital acceleration and recovering retail trx trends, sound operational execution (adj. operating margins +10bps Y/Y despite COVID-19 headwinds), and data suggesting increased engagement levels from new users (45% growth Y/Y in avg WU.com month active users). For reference, mgmt continues to note that 80% of incremental WU.com customers are new to the overall WU brand. In the coming quarters, we will be paying close attention to the delta between trx growth rates within digital (~31% of 2Q trx, up 96% Y/Y) and retail (~69% of 2Q trx, est. down ~20%+ Y/Y), and we expect overall revenue growth to trail trx growth until the revenue mix stabilizes.
FIS 2Q results should be well received as revenue and EPS beat underscore FIS’s resiliency under a challenged macro backdrop and dramatic travel headwinds. Key highlights in 2Q include solid growth in Banking (4% Y/Y organic) and Cap Markets (3% Y/Y organic) under the tough economic environment, better-than-feared Merchant declines of 25% (-19% excl. $60mn of delayed tax revenue) versus our estimate of -32%, highlighting a top U.S. Pharmacy and large U.K. fuel station operator wins, and 150bps Adj. EBITDA margin expansion to 39.1% vs. guide of contraction Y/Y from 37.6% reported. Importantly, FIS’ announcement of an incremental Top 30 bank win shows the company’s continued execution as this marks the 7th large win in 3 quarters (9th Modern Banking Platform win, incl. 4 in the Top 30).
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