Following our May 17th report on Authorization Rates titled, “All You Need is Auth, Auth-Rates are all you Need…”, we hosted an investor call (replay can be found here) with Tricia Phillips, SVP of Product & Strategy at Kount. See below and page 2 for key takeaways:
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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.
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.
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.
In this weeks’ Sunday Spotlight, we look at the acquisitions that Mastercard and Visa have closed since 2017 to give investors a better understanding of the strategic rationale and the capabilities provided by each. So far in 2019 alone, Mastercard has 4 deals that are pending and entered into a “bidding war” with Visa over Earthport, ultimately “won” by Visa. There has been an up-tick in recent activity (MA and V have acquired, tried to acquire, investing in, or are in the process of acquiring over 10 companies each in the last 2-3 years) driven in part by the continued focus on ancillary service offerings, cross border, eCommerce, B2B, and more by the networks. See the body of this note for detail on all of the 10+ transactions per company.
In this weeks’ Sunday Spotlight, we look tech spend within large U. S. banks including JPM, BAC, C and WFC. These four institutions plan to spend over $39B on tech in 2019, (vs ~$38B and ~35B in 2018 and 2017 respectively), which is comparable to total expenses for the next 5 largest banks combined, and 8% of total expenses for the entire U.S. banking sector (see page 3). In this note, we aggregate recent commentary around tech spend from these executives (exhibit 11). Financial Services companies remain some of the largest contributors to global tech spend, comprising ~25% annually according to Gartner. Within our coverage, Financial Services contributed 21%, 36%, 26% and 23% of 2018 revenues for ACN, CTSH, DXC and EPAM respectively. Over the last several quarters, these names have seen decelerating trends in the segment, lagging industry-wide growth. The commentary from earnings calls points to large European banks trimming “run-the-bank” spend aggressively, without the equivalent reinvestment in “change-the-bank” technologies. That said, our research suggests that aggregate tech spend among large U.S. banks remains healthy with expanding/stable budgets, noting several banks are calling for a ~10-15% increase in digital/new strategic investments in 2019 (see exhibits 5-10). Beyond our IT Services names, its important to note that core account processing tech remains a priority within bank IT budgets. When coupled with cross-selling payment solutions including card processing, loyalty solutions, bill-pay, mobile banking and others, we see FIS and FISV in a sweet spot to capture incremental spend over the next few years.
While shares are down premarket, we didn’t think a mild deceleration in organic adj. revenue growth (from 53% Y/Y in 4Q18 to 49% Y/Y in 1Q19) was a surprise, particularly given the revenue beat/raise versus guidance and consensus. We understand questions around subscription and services sustainability, but also believe the drivers including Cash app growth, Square business/seller debit card traction and overall volume trends continue to support adj. revenue growth in the high 40% range relative to the company’s newly raised adj. top line guidance of 43% Y/Y. We see the quarter as another indication of the strength across SQ’s product set and the success of management’s focus on expanding its ecosystem for both consumers and sellers. In particular, Cash Card’s metrics (2.5x increase in volume Y/Y, increased engagement) as well as the spend of active Square Card users (spending 20% of GPV) should drive upside.
SQ started 2019 with strong trends, as adjusted revenue growth continued to outperform expectations on solid subscription and services growth, healthy GPV and a solid revenue yield performance. Adjusted revenues grew 59% (49% ex-acquisitions) vs. LQ’s 64% (53% ex-acquisitions) and EPS of $0.11 beat the Street’s $0.08. Strength was led by subscription and services revenue growth of 126% Y/Y (97% ex-acquisitions), while GPV growth of 27% drove transaction revenues of $657mn (above Street estimate of $645mn). 1Q’s transaction yield came in at 1.10% (vs. our 1.08%), which likely continued to benefit from higher margin products (virtual terminal, invoices and eCommerce API), while Subscription and Services was driven by Cash App (Instant Deposit and Cash Card), Caviar, Square Capital and Instant Deposit for Sellers.
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