We believe strong FY20 performance is critical for restoring investor confidence, as digital staffing challenges led to another year of revenue contraction in FY19. In our view, a positive full year constant currency revenue guide would go a long way in assuring investors that DXC is making progress in scaling the digital franchise. While the $300-400mm of revenue synergies from Luxoft are not expected to achieve full run rate until FY 2022, we believe that acquiring a strong digital brand in Eastern Europe gives DXC an attractive hiring lever near-term. For reference, DXC is in the final stages of approvals, noting the EU Commission’s recommendation was received in late March. Should the deal close prior to earnings, we expect management to present a pro-forma growth profile within guidance.
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In this week’s Sunday Spotlight, we highlight investor sentiment and feedback on each name in our coverage following last quarter’s earnings season (beginning on page 3). Our coverage continues to meaningfully outperform the S&P, with the Wolfe FinTech and IT Services Index up 26% YTD vs the S&P up 14%. Payment stocks continue to be the leaders within our coverage, with WP and FDC benefitting from M&A and strong quarters (up 57% and 54% YTD respectively) while others such as GPN, FLT, and WEX (up 46%, 45% and 44% respectively) continue to grind higher on sound earnings growth. Underlying drivers at PYPL and V/MA continue to be received well. Within IT Services, the performance is more mixed, as digital leaders such as ACN and EPAM have participated in the market rally, while sentiment around DXC has yet to turn and a large downward revision by CTSH reset expectations. We continue to see FIS & FISV as well positioned to outperform given pro-forma synergies and valuations.
As eComm/card-not-present fraud continues to grow at a rate of >20 % per year, authorization rates have declined to what is now a low-to-mid 80% range as merchants and issuers tighten standards. Said another way, online payments transactions are rejected for one reason or another 15-20% of the time, versus <1% rejected at the physical point-of-sale. As such, auth rates have clearly become a top priority for eComm merchants, considerably more important than a few bps on pricing paid to the processors. In our view, companies like Worldpay, PayPal, Adyen as well as private companies such as Stripe, BlueSnap, Kount and Riskified have differentiated themselves around auth-rates.
The meeting highlighted 1) Cash app evolution and growth, 2) SQ’s long-term objectives, 3) Eventbrite ramp in 2H19, and 4) its Square Online Store, among others. While short-term questions around SQ’s growth remain, we continue to see multiple drivers including its cash card, business debit card, online store and Square capital driving growth in 2H, with upside to guidance. Further context around Cash App demographics and Subscription & Services (revenue breakdown, cash card and Square card economics), begin on page 2.
ADS reported its April credit data this morning with NCOs of 6. 4%, up 10bps Y/Y and up 20bps M/M (relative to the 5-year seasonal average of up 20bps 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.
Yesterday (05/14/19), FIS announced pricing of its multi-tranche offerings ahead of its acquisition of WP. $8.2bn of senior notes across Euro, Pounds and USD were priced at a blended rate of ~1.9%. The company intends to borrow up to $11.1bn of permanent financing to provide funds for the cash portion of the merger consideration, the repayment of the outstanding WP bank debt and notes (~$7.5bn) and costs associated with the merger. Upon deal announcement, the pro-forma weighted average cost of capital was 3.3%. We now estimate that the blended interest rate will be ~2.5%, which could add over 200bps to EPS accretion in 2021. That said, given the EUR/GBP exposure, we expect that a FX swap will likely need to be utilized, which will likely reduce the upside.
Following our May 14th report on BlueSnap titled, “Oh Snap, It’s BlueSnap Coming onto the Map”, we hosted an investor call with Ralph Dangelmaier, CEO of BlueSnap. Below are our key takeaways:
Authorization Rates: We highlight that a 1-2% change in authorization rates can result in millions of dollars in revenue for larger merchants. BlueSnap just integrated a client and drove a 25% increase in authorization rates for them (that can mean $4-$5mn of new sales for a $100mn company previously with a ~80% authorization rate). Adyen was “first to market” with a focus on improving authorization rates but Ralph believes that Worldpay, BlueSnap and a few others have caught up or are not far behind.
Wolfe Research Senior Payments, Processors, & IT Services Analyst, Darrin Peller, hosted a webcast with BlueSnap CEO to discuss how an innovative FinTech company like BlueSnap is trying to help incumbents including First Data and many large bank acquirers offer a compelling and competitive eComm solution to those of Adyen, Worldpay, and Stripe.
BlueSnap is a global payments company that offers payment acceptance services such as online and mobile checkout, the ability to operate and run online marketplaces, subscription payment management services including full-scale recurring billing, payments for invoices, virtual terminal capabilities, and POS solutions (expected to launch in the summer of 2019). BlueSnap accepts Visa, Mastercard, American Express, Discover, Diners Club, JCB, and supports eWallets like PayPal, Visa Checkout, MasterPass, Apple Pay, Payment Request API (W3C), Google Pay (coming soon), ACH and bank transfers to name a few.
Last week we took investors to V’s offices in San Francisco and visited with President Ryan McInerney. The company highlighted three key strategic initiatives including: 1) driving new flows over the network, 2) expanding the client base to incremental types of customers, and 3) expanding and effectively selling the suite of value-added services.
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