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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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.
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.
In this week’s Sunday Spotlight, we highlight some of the work of Wolfe’s Technical Analyst Team. The team provides a technical perspective on some of the names of which we have been receiving among the most inbound calls including PYPL, SQ, FIS, FISV, GPN, V, MA, CTSH, DXC, ADS, FLT, WEX, WU and EEFT. The team sees a bullish technical set-up for 6 out of the 14 names shown in this note, with another 5 in a holding pattern and 3 of the names either facing resistance or positioned to consolidate. For each name we also highlight the key topics on investor’s minds coming out of 2Q. As an overall trend, the charts show Wolfe Research’s FinTech & IT Services Index as bullish on an absolute and relative basis.
S&P volatility was pervasive this week, following the 10yr/2yr curve inversion on Wed, coupled with headlines around trade wars, Hong Kong and weaker U.K. data. While the inverted curve is historically a signal of a recession ahead (albeit with an uncertain timeframes) we highlight that the U.S. consumer appears healthy, noting sound retail sales, lifted by robust non-store retail spend. Many of our names maintain relatively defensible positions through the cycle with highly recurring revenue streams, modest leverage and high FCF generation. Further, payments have little exposure to China and are relatively well positioned to maintain sound earnings growth in the event of trade war escalation. With regards to the Fed, last month’s 25 bps rate cut was expected, but it remains to be seen if this is the beginning of an easing cycle or a one-off “mid-cycle-adjustment”.
While DXC’s 1Q results were largely in-line, the outcome was worse than expected considering management’s lowered FY20 guide. For reference, management introduced this guidance last quarter which was lower than our and the Street’s prior estimates, raising questions around the company’s visibility. Issues driving the revision include: (1) delays closing several large deals, (2) an accelerated transition to cloud weighing on legacy, (3) stranded costs attributed to the Luxoft transaction, (4) investments to scale the digital practice, and (5) incremental FX headwinds of $150-200mm. These items underscore the challenge that IT Services firms face when attempting to pivot to digital. While management did not provide an updated view on the medium-term guide provided at Investor Day (Nov ’19), we see those targets as significantly harder to achieve. On a positive note, digital grew at 31% (ex-Luxoft) and the Industry IP & BPS segment returned to MSD growth.
In this week’s Sunday’s Spotlight, we look at real-time payments in the U. S. as the Federal Reserve announced Tuesday, August 5, 2019 that it will invest in the launch of a real-time payments network that would compete with the Clearing House’s network being built through private banks (expected to go live in 2023-2024). Lawmakers are split on whether or not the Federal Reserve should build a RTP system, many retailers and technology companies were/are in support of it, and the banks have been arguing against it stating that the Fed’s involvement would slow the adoption of RTP as smaller banks may opt to wait for the Fed’s system, which if subsidized would harm private competition as well (see body for more detail).
DXC reported F1Q results after today’s (8/8/19) close highlighted by relatively in line results, but FY20 guidance lowered 2% and 9% for revenue and EPS, respectively. Total reported revenues of $4,890mm were down -7.4% Y/Y on a reported basis and down -4.2% CC (320bps FX headwind), slightly above our $4.86B and the Street’s $4.87B. Adjusted EBIT of $652mm was below our $692mm and the Street’s $683mm and represented margins of 13.3%. GBS bookings were $2.4B, down ~$500mm QoQ while GIS bookings of $1.8B were down ~$1.1B QoQ. Adjusted EPS of $1.74 was 1c behind our $1.75, but above the Street’s $1.72. While 1Q results came in-line with already lowered expectations, we did not expect the major downward revision considering sound bookings trends over the last several quarters. These results raise more questions on the Company’s ability to drive revenue longer term.
Shares of DXC have underperformed YTD (down 4% vs S&P up 13%) as FY19 results underscored the challenge facing many players in the IT Services industry, which is to pivot the business model towards digital and away from legacy services, without sacrificing revenue growth and/or margin expansion. DXC’s FY20 guide suggests the growth inflection bullish investors are looking for may not materialize until CY20. That said, revenue declines are expected to moderate on an organic basis, as the midpoint of guidance implies approx. -2% Y/Y CC in FY20, vs approx. -3.5% in FY19. Last quarter, management outlined its strategy to secure LT digital contracts by offering pricing concessions on legacy work such as application maintenance.
In this week’s Sunday’s Spotlight, we look at U. K. spending commentary and trends (and UK exposure in our coverage) given 2Q earnings season has highlighted that the region remains challenged thus far. So far, we have had V, MA and GPN call out more tempered trends in the U.K. and we highlight comments from all (as well as IT Services, Retailers and Airlines) in Exhibit 1. Brexit related concerns have led the pound to re-rate (down >2% since the Prime Minister election) and companies are bracing for 2Q trends to sustain through the rest of the year. PCE expectations suggest decelerating growth through 2021, and ONS trends also support what companies are seeing (Exhibits 2 and 3). Total 2Q19 retail sales growth has decelerated on a Y/Y basis relative to 1Q19, however continues to show MSD growth (for both total as well as ex-fuel), while online sales, which are more relevant for FIS/WP and PYPL, have seen a deceleration on a Y/Y basis and continue to decline sequentially.
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