Heading into earnings season many of the names in our coverage had outperformed, as the Wolfe FinTech and IT Services Index was up 6% vs the S&P up 2% (YTD through January 28th before first earnings report) on the back of (1) a broader rotation into high quality growth names; (2) strong holiday spend data, particularly in eComm/mComm; (3) an appreciation for secular drivers into 2020; and (4) improving stock-specific narratives (i.e. PYPL- Honey/China, GPN synergy expectations, SQ pricing initiatives, FLT M&A speculation, V acquiring Plaid, and FIS bank channel wins). That said, as expectations had run into the print and results have been mixed, the overall reactions have been muted, with a median EPS surprise of 2.0%, median revenue surprise of -0.4% and subsequent share reaction within the following trading session of -2% (see exhibits 1 & 2).
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DXC reported F3Q results after today’s (02/06/20) close, highlighted by a sound revenue and EPS beat. Total reported revenues of $5.02B were down 3.0% Y/Y on a reported basis and down 2.0% CC, ahead of our $4.89B and the Street’s $4.91B. Adjusted EBIT of $528mm was well ahead of our $463mm and the Street’s $474mm estimates. GBS revenues of $2.36B (up 8.8% Y/Y reported, and up 9.9% CC), came in above our $2.29B, and the Street’s $2.30B. Organic growth in GBS was roughly flat. GIS revenues of $2.66B (down 11.5% Y/Y reported, and down 10.6% CC), came in above our and the Street’s $2.60B. Importantly, GBS bookings were $2.5B, up ~$600mm Q/Q and represented a book-to-bill of 1.06x, while GIS bookings of $2.8B were up ~$900mm Q/Q, with a book-to-bill of 1.05x. Overall book-to-bill was 1.06x, representing the first time in three quarters book-to-bill was north of 1.0x. Adjusted EPS of $1.25 was solidly ahead of our $1.02 and the Street’s $1.09. We believe the quarter will help restore investor confidence near-term as new CEO Mike Salvino continues to restructure the business with a re-emphasis on ITO and divestitures of non-core revenue streams. While some investors may look for further signs of execution in the Company’s strategic turnaround before becoming more constructive, we expect outperformance in shares tomorrow after selling off leading up to the print (down 8% YTD).
DXC reported F3Q results after yesterday’s close (2/6/20), highlighted by a top and bottom-line beat and solid bookings across GBS and GIS. Following the release, we came away positive on trends and the strategic divestitures potential, partially offset by management’s reluctance to comment on its recently introduced FY22 guidance. Revenues of $5.02B declined 2.0% Y/Y CC but increased 3.0% CC sequentially, ahead of our $4.89B and the Street’s $4.91B. Adjusted EPS of $1.25 was well-above our $1.02 and the Street’s $1.09. Notably, bookings rebounded from a soft start to FY20, coming in at $2.5B and $2.8B for GBS and GIS, respectively, and the combined 1.06x book-to-bill eclipsed 1.0x for the first time in 3 quarters. Coupled with management’s strategic investments in client delivery, ITO, and salary increases amid improving Company culture (albeit with a temporary drag on margins), we came away incrementally constructive on the trajectory of the turnaround.
While the Corona Virus has been putting China into the headlines and will hopefully be short-term, PYPL’s entry into China has taken tangible and differentiated strides in recent months, which we see as a material opportunity longer term. The company’s GoPay acquisuition (70% equity, closed Dec ‘19) and partnership agreement with China-based Union Pay International (CUP) may open the company to incremental users, more cross-border activity, and perhaps most importantly, access to China’s physical POS locations through CUP’s QR code acceptance network and potentially other form factors. Over the next four years, estimates call for Chinese digital payments to double from $1.5tn to $3tn. China also presents a significant cross-border opportunity; by 2021 PYPL cited estimates calling for China to comprise nearly 40% of global cross-border TPV, of which PYPL has only penetrated ~1% currently.
In this Sunday Spotlight, we look at Visa from a strategic point of view and apply our thoughts around valuation. In short, we believe MA’s faster top-line growth and strategic focus on value-added services has historically driven a premium valuation on MA versus V, which has spread to ~3.5x on a NTM basis vs. the 1, 3, and 5-year average spreads of 3.2x, 2.2x, and 1.3x. We believe MA’s multiple expansion was warranted over the years given its investments in differentiated assets around services, RTP, B2B, and its strength in core payments. That said, Visa has been demonstrating what we believe to be a steady shift in strategic focus as it pertains to capital allocation and growth accelerated recently by its investment in Plaid with a goal to be a “network of networks” while expanding its addressable market through the likes of Visa Direct and B2B.
In this Sunday Spotlight, we take the pulse of banking and financial services technology trends by analyzing commentary from this week’s bank earnings calls. Today, banks face mounting pressure from new entrants in the market, particularly from big tech and neobanks, which is only expected to increase. In the payments space, 25% of all transactions now go through non-bank financial institutions, per ISG. To combat this, technology has become increasingly important to overall banking strategy, as evidenced by a 96% increase in mentions of “technology” on earnings calls in FY19 vs. FY18 among the U.S. money center banks.
Heading into Visa and Mastercard’s earnings, we note that issuing bank card trends look mostly in-line with expectations. 4Q trends at Wells Fargo decelerated sequentially while JPM consumer credit spend posted a slight acceleration and Citi growth was flat in 4Q vs. 3Q on a Y/Y basis. We note that Citi and JPMorgan are the largest issuers for Mastercard and Visa respectively and act as decent read-throughs with regards to network payment volume and transaction trends. We highlight our current V/MA models call for stable trends vs C3Q, reflecting data provided QTD (both Visa and Mastercard through October 21st) and holiday sales data which looked solid vs. expectations as well. For reference, Visa’s U.S. payment volume growth was up 8% Y/Y through October 21st, vs 8% in C3Q. At Mastercard, U.S. switched volume was up 11% Y/Y through October 21st vs. 12% Y/Y in 3Q.
In this week’s Sunday Spotlight, we provide highlights and investor feedback from our recently published 2020 Outlook, Ratings and Price Target Changes; Evolution of FinTech is Far from Over. 2019 was another transformational year for FinTech, highlighted by the 3 largest mergers in its history (FIS, GPN, FISV) and a series of tuck-in acquisitions made by MA (Nets), V (Earthport), PYPL (Honey) among others. These investments underscore a recurring theme in FinTech in which traditional offerings are no longer enough to remain differentiated in the space and key capabilities in eCommerce, cross-border, dual-sided capabilities (connecting merchants, consumers and issuers), convergence of POS and vertical software, and other emerging technologies are of the highest demand.
From YE 2017 to YE 2019, the median P/E across our coverage increased by nearly 2 turns to 23.3x NTM, while the S&P’s forward multiple expanded by less than one turn over the same period to 18.3x NTM. While the spread to the market multiple may be 1-2 turns higher than FinTech has historically traded, we suspect these valuation levels will hold or even continue to expand given we see key drivers persisting through 2020 and beyond. In particular, the majority of FinTech companies in our coverage have recognized that legacy offerings may no longer cut it, and instead, almost all have been evolving to two sided networks and/or software/omnichannel centric technology companies. Notably, most software/tech names with similar growth trade at NTM P/Es from 30x to 40x, leaving valuation room for our coverage as the FinTech universe further evolves.
In this weeks’ Sunday Spotlight, we provide investors an updated look at U. S. holiday sales by category and channel comparing growth in 2019 to 2018 performance and more. According to Mastercard SpendingPulse data, U.S. holiday retail sales increased 3.4% Y/Y (ex. auto and vs. 5.1% Y/Y in 2018 and 4.9% Y/Y in 2017) with online sales increasing 18.8% Y/Y (vs. 19.1% Y/Y growth in 2018 and 18.1% Y/Y in 2017) and comprising 14.6% of total retail sales. The data captures retail spending including cash and check from the period of November 1 through December 24. By category, total apparel grew 1% Y/Y overall and 17% Y/Y online, jewelry grew 1.8% Y/Y in total retail sales with 8.8% Y/Y online growth, department stores saw a 1.8% Y/Y decline in growth with online sales growing 6.9% Y/Y, electronics and appliances sales grew 4.6% Y/Y and home furniture and furnishings grew 1.3% Y/Y.
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