In this week’s Sunday Spotlight, we introduce the Wolfe Research Cross-Border Payments Index, which will provide investors with an intra-quarter proxy of cross-border volume trends. As we have highlighted in prior research, several names in our coverage (V, MA, PYPL and to a lesser extent FIS/WP) derive a meaningful portion of earnings through cross-border payments, given significantly better economics and exposure to faster growing markets. At PYPL, CBV comprises ~20% of TPV. For the networks, our checks suggest CBV comprises less than 10% of total volume but over 40% of total revenue. Our cross-border index aggregates data across consumer spend, international travel, and cross-border financial messaging. While the index only considers data compiled over the last 3.5 years, we found a significant correlation (coefficient of .76) to the average CBV growth of V/MA/PYPL, despite cryptocurrency noise.
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ADS reported its August credit data this morning (9/16/19) with NCOs of 5. 7%, down 10 bps Y/Y and flat M/M (relative to the 5-year seasonal average of down 36 bps M/M). For reference, the Company expects net charge offs to moderate below 6% in 2H19 and result in approximately 6% for the full year (in line with our model).
AUG QTD trends look in-line with 2Q19 trends with U.S. and ROW processed growth ~1pt behind July 21st trends and global switched transactions unchanged. Cross-border is also consistent with July levels (and 1pt better than 2Q growth rate) despite questions around geopolitical and FX volatility. Through 1H19, MA GDV growth trends were: consumer credit 9% Y/Y, consumer debit 14% Y/Y, prepaid 19% Y/Y, and commercial 13% Y/Y.
After the close today (09/11/19), DXC announced Mike Lawrie would be stepping down as CEO (effective immediately) and Chairman of the Board at the end of 2019. According to management, the board had been exploring CEO succession plans since Mr. Lawrie expressed interest in retirement last summer. Mike Lawrie will be succeeded by Mike Salvino, a Managing Director at Carrick Capital Partners and current DXC board member (as of May 2019). Prior to his time at Carrick, Mr. Salvino spent 7 years as the group CEO of Accenture Operations (22 years in total) and grew division revenues 20% in 2016, his final year in the role. At this time, the business was generating over $7B in revenues, comprised ~25% of ACN globally and staffed over 100,000 employees. Our industry checks on Mike Salvino were highly constructive around his abilities to operate and execute growth plans in large enterprises.
Yesterday (09/10/19), Stripe hosted Stripe Sessions, where management highlighted a number of new products as well as enhancements made to its existing product suite. Major product announcements included: (1) Stripe Corporate Card, (2) Launching in 8 additional countries with more coming, and (3) Stripe Capital (last week). In total the company has launched 250+ products in 2019. Additionally, the company made strides in increasing functionality with (1) Instant Payouts, (2) Connect Express, (3) Stripe Terminal, and (4) Billing. The company continues to focus on its Global Payments and Treasury Network (GPTN) and building out its 3 core service lines—Payment acceptance, Storage and management of funds, and Payouts. On the acceptance side, the company honed in on authorization rate improvements with its Radar product (reducing fraud by 15% worldwide and 30% in Europe) and the synergies between Radar and Stripe Checkout. Management also disclosed that it’s accepted in 34 countries today (40 expected by year end) and now processes in the hundreds of billions $ every year (vs. previous discloser of billions of $).
Earlier today Jeff Yabuki, Chairman and CEO of Fiserv presented at a conference. Below and in the body of this note are some key takeaways.
Over the last 4 years, EEFT effectively doubled their installed ATM base, from an average of 18k installed machines in 2014 to nearly 41k in 2018, resulting in a nearly 20% revenue CAGR in the EFT segment over that period. While ATM industry experts expect global installed ATMs to remain relatively flat over the next 5 years (3.22mm ATMs in 2024 vs 3.24mm in 2018 – RBR), we expect EEFT will accelerate its independent ATM deployment growth in 2020 and 2021. The key factors supporting this thesis include (1) low ATM penetration in developing markets (the global average of ATMs per 1,000 people is 0.43, vs. North America at 2.28), (2) an expanded TAM with the enablement of Visa DCC globally (as a reminder, DCC transactions come with high incremental margins to EEFT and makes previously unattractive markets economically feasible), (3) reduced competition from physical bank branches and (4) the potential for incremental countries enabling ATM surcharge, particularly France & Italy, with populations nearly 5x that of Greece, but similar ATM revenue contributions to EEFT. For reference the primary countries in Europe which allow for surcharge are Germany, Spain, the U.K. and Greece (see Exhibits 7 &8 for an updated overview on country specific EFT revenue and surcharge opportunities).
In this week’s Sunday Spotlight, we take look at Apple Pay metrics by quarter, since its launch in October 2014 as well as the recent launch of Apple Card. During Apple’s C2Q19 earnings call (covered by Wolfe’s IT Hardware & Networking analyst Andrew Vadheim), the company noted that Apple Pay “is now completing nearly 1bn transactions per month, more than twice the volume of a year ago”. This compares to its one-year earlier (2Q18) comment that Apple Pay saw “well over 1bn transactions in the quarter”. To further put this into context, V and MA transactions reached 35.4bn and 21.4bn during C2Q19, respectively, and PYPL transactions totaled roughly 3bn. That said, the volume size of Apple Pay transactions are likely materially smaller than the others. Also, Apple Pay launched in 17 countries during C2Q19 completing the company’s coverage in the European Union and bringing Apple Pay to 47 countries in total.
We view the newly combined FISV/FDC business as a solid 5%+ Y/Y top line grower with the opportunity for 50bps+ of organic margin expansion longer term and DD EPS growth. In this note, we focus on breaking down FDC’s business lines (see exhibits 4-10) to determine if the higher than normal growth the company has been producing as of late is sustainable. Our analysis points to upside to both our merger model and consensus/investor expectations for accretion/EPS. We note that a sustainable bump to 7% Y/Y CC organic top-line growth on the First Data side of FISV would drive 2-4% upside versus our model for 2021 and beyond, and perhaps more importantly, support a higher multiple. Our PT of $118 (vs. $108 prior) reflects ~20x our pro forma CY21E EPS of $5.75.
We look at the recent performance of both Mastercard and Visa from a commercial volume standpoint. Both Mastercard and Visa have spoken to a ~$120tn commercial/B2B payment volume opportunity globally that is ~2% penetrated as of now. Given the large untapped TAM across the commercial space, we expect continued outsized growth (low-mid-teens as of now) to prove sustainable for years to come. We point out that in 2018 Mastercard grew its commercial credit and debit GDV at a 13% Y/Y CC rate (vs. 15% Y/Y CC in 2017) with commercial making up 11% of the company’s total GDV (unchanged from 2017). Commercial card growth saw 11% Y/Y growth vs. consumer credit card growth of 8% Y/Y and consumer debit and prepaid card growth of 15% Y/Y. Similarly, Visa’s 10-K shows FY18 total company commercial card volume growing at a rate of 12% Y/Y CC to $925bn with the United States (~$562bn) experiencing 11% Y/Y CC growth and International ($363bn) growing 15% Y/Y CC. During FY18, 11% of Visa’s payment and cash volumes were tied to commercial payments (16% for the United States and 8% internationally).
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