After the market close yesterday (3/30/20), Visa issued an 8-K adjusting F2Q expectations, calling for CC net revenue Y/Y growth at the high-end of mid-single-digit vs. prior guidance of 8-9% (previously adjusted to incorporate a 2.5-3.5% drag from coronavirus vs. low-double-digit guide). As expected, management highlighted “meaningful deterioration in volume and transaction trends” in the 2H of March, in-line with industry wide comments. That said, we believe the updated guidance may be considered neutral to better than expectations when considering the read-through to March net-revenue growth trends. We now model for 6% Y/Y CC net revenue growth in F2Q better than our prior model for 1% CC growth. We adjust our CY 2020 revenue growth to 2% Y/Y growth (vs. 1% Y/Y growth prior).
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In this Sunday Spotlight, we look at historical and current money transfer trends as COVID-19 increasingly pressures the economic outlook. During the early innings of COVID-19, we expected resiliency across remittance volumes and viewed the pandemic similarly to other disasters such as hurricanes which tend to drive an uptick in aid-related remittances. However, given the impending economic downturn, we expect headwinds may surface, reflecting a loss or reduction in jobs/income for many core money transfer customers. That said, we also see potential for economic stimulus packages to partially offset the reduction in income levels, and resiliency among digital transfers as walk-in cash sending and informal channels (i.e. plane travel) are mostly reduced.
We update our estimates on both V and MA to account for more recent developments related to COVID-19. The most considerable impacts stem from our previously discussed estimates that ~40% of revenues are generated by cross-border activity, of which we believe around 70%-75% of those revenues are related to physical travel, and the remaining 25%-30% is associated with eCommerce/B2B payments.
When considering the potential near- and medium-term impact to FIS from COVID-19, we believe that legacy FIS’s revenue (~45% of revenue ex-Cap Market Solutions), primarily core bank processing, should remain relatively resilient. We note that during past recessions, FIS was able to grow its revenue at roughly 1-2% (down from ~4%), when it was primarily core account processing along with select payments offerings. The capital markets assets (~20% of revenue) also have a recurring aspect to most of its revenue, including volume based (post-trade clearing/settlement) elements, which may benefit from higher trading volume, partially offset by license fees. Most important to our analysis is FIS’ merchant business (~35% of revenue), which we see as relatively well positioned given higher non-discretionary spend exposure (pharmacy, grocery) and strong eCommerce revenue versus many other merchant acquirers.
While two-three weeks ago impacts to GPN revenue from COVID-19 appeared relatively limited to APAC and select EU countries, the changing landscape has led us to readdress our estimates for several additional variables. As a reminder we estimate APAC at ~4% of revenue, and Spain revenue at roughly 2-3% of revenue. It’s worth noting that at least a portion of Spain revenue (~20%) is eCommerce driven. We estimate that restaurant exposure is roughly 6% of GPN, but also note that roughly half of this is driven by recurring software revenue. Travel related revenue is estimated at ~2% of total revenue.
We believe a majority of legacy FISV’s revenue (core bank processing) should remain resilient and we see limited travel exposure for First Data. We estimate that the Company has roughly ~1% of total revenues tied to T&E spend. That said, we also note that roughly 30% of FDC’s legacy merchant acquiring business is SMB, which would translate to approximately 7-8% of total FISV revenue. We also believe FISV has roughly 1-2% exposure to geographies more considerably impacted by COVID-19 (outside of the U.S.). It’s also worth noting that the company’s card issuer processing business (~10% of total revenue), which is somewhat correlated to private label credit cards, may also see slower growth in coming quarters.
Overall, results were slightly better than expectations and lowered FY20 guidance was no surprise given recent interest rate cuts and unemployment pressures stemming from COVID-19. EPS of $0.98 ($0.97 adjusted for SBC) came in slightly above our model calling for $0.95 and the Street’s $0.96. Revenue of $1,143mn compares to consensus of $1,136mn and our model for $1,129mn. Revenues grew 7% Y/Y (~6% Y/Y organic). Management Solutions grew 6% Y/Y to ~$850mn (vs. 6% Y/Y last quarter) driven by increases in clients and growth in revenue per client from price increases and increased product penetration. PEO & Insurance Services revenue of $272mn was up 10% Y/Y and (vs. ~10% organic growth last quarter) driven by growth in clients in PEO and health and benefit clients/applicants in Insurance.
While Investor Day was postponed until further notice, SQ’s business update provided meaningful insights into near-term trends and high-level thoughts on competitive positioning when the economy recovers. As many investors anticipated, SQ GPV trends deteriorated materially as 1Q progressed, with 25% Y/Y Seller GPV declines over the last trailing 10-day period (versus an otherwise strong Jan-Feb (mid-20% GPV)) and weaker areas being urban centers in lockdown. For reference, our prior assumption was a ~25 percentage point headwind to growth during 2Q relative to the ~50 percentage point adverse impact to GPV growth in late March. Notably, management called out relative strength in micro sellers (~45% of GPV, albeit negative).
ADS provided an update in response to COVID-19 related headwinds after the close today, addressing liquidity and expectations in the case of prolonged economic downturn. Quarterly results and the 2020 guide will be addressed on the 1Q EPS call on April 23. Shares were up 35% today vs. the S&P up 9% as sentiment surrounding COVID-19 stimulus legislation drove a partial market rebound.
After today’s (03/24/20) market close, SQ revised 1Q guidance, with gross profit expected to be in the range of $515mm to $525mm, with the midpoint of $520mm coming in below the Street’s $526mm. Net revenues are expected to be in the range of $1.30B and $1.34B, with the midpoint of $1.32B coming in below our recently revised estimate of $1.34B. SQ provided incremental color around 1Q cadence, noting gross profit growth (ex-caviar) increased 47% and 51% Y/Y, in January and February, respectively. As expected, management has seen a significant deceleration in the Seller business through March, noting 25% Y/Y Seller GPV declines over the last trailing 10-day period, with the largest declines exhibited in the most recent days. While this is trending worse than our prior estimate for 2Q20 GPV growth of a 2% Y/Y (versus pre-Coronavirus trends in mid-20% range), we also note that the exposure to SMB with discretionary spend at food, drink, health/wellness, and other categories (see exhibit 2 in our recent Sunday Spotlight for this volume mix by vertical ) likely prepared some investors for this risk. On a positive note, the Company is seeing relative resiliency in the Cash App business to date, and we remind investors under normal business conditions, we anticipated Cash App to contribute >30% to 2020 gross profit. Unsurprisingly, SQ is suspending its full-year 2020 guidance given macro uncertainty, with updated full year expectations to be provided at the formal 1Q20 earnings call in May and the full Investor Day to be rescheduled at a later date.
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