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).
Search Coverage List, Models & Reports
Search Results1-10 out of 93
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.
While SQ’s 2Q results highlighted sustained strength in Subscription & Services (up 87% Y/Y or 79% ex-acquisitions), GPV growth continued to decelerate and the 2H outlook was unchanged despite a top- and bottom-line beat. Management attributed the lack of a guidance revision to the pending sale of Caviar to DoorDash, which it announced alongside 2Q results, for $410mn. Questions around the asset’s valuation remain, however, we see the sale as strategic given Caviar’s different business model and lower margin profile relative to the rest of Square. The main positive 2Q highlight surrounded Cash App data points, including 3.5mn active Cash Card users in June and Cash App 2Q revenue of $135mn (ex-Bitcoin), which compares to Venmo’s annual run-rate of $300mn.
SQ’s 2Q saw a top- and bottom-line beat, driven by Subscription & Services strength and better-than-expected margins. That said, GPV growth decelerated to 25% (vs. LQ’s 27%) and the company’s 3Q outlook came in slightly worse than consensus’ estimates. Adjusted revenues grew 46% (43% ex-acquisitions) vs. LQ’s 59% (49% ex-acquisitions) and EPS of $0.21 beat the Street’s $0.17. Of note, Square disclosed its Cash card users of 3.5mn, or 23% of its 15mn Cash App users as well as 2Q Cash app revenue of $135mn (ex-Bitcoin), which is encouraging. The company also announced its sale of Caviar to DoorDash for $410mn in a mix of cash and preferred stock, enabling it to increase its focus on and investment into its ecosystems.
Thus far earnings season has been mixed, with the deal stocks (FISV/FDC, up 31% and 72% YTD, respectively) putting up strong standalone results ahead of its expected 7/29 close, while others like PYPL (up 37% YTD) and CLGX (up 29% YTD) reported healthy results but questions around guidance surfaced, which suggests 3Q will be the next significant catalyst for both. V results were sound, justifying high expectations into the print, however, raised questions for payments names with U.K. exposure given the deceleration to L-MSD volume growth. IBM (up 33% YTD) also reported last week, which pointed toward a continued shift from legacy to digital. As a reminder, IBM/DXC revenue surprises (misses) over the last 5 years have a correlation of .72 (r-square).
In this weeks’ Sunday Spotlight, we piece together various indicators from bank earnings and industry calls as a read through to our Core Processor and IT Services coverage (FIS/WP, FISV/FDC ACN, CTSH, DXC, EPAM,). Earnings commentary suggests aggregate tech spend among large U.S. banks has maintained a healthy pace as enhancing digital offerings is critical to staying competitive and driving resilient deposit market share, with the ultimate goal of alleviating NIM pressure from the current low rate environment (see exhibits 1-6 below). We see this as a positive read for the Core Processors, which are optimally positioned to support large banks in the effort to enhance mobile banking, card processing, loyalty solutions, bill-pay, payments services, and others. For IT Services, while U.S. bank spend continues to exhibit healthy trends, pockets of weakness in Healthcare and Energy raise questions on aggregate investment trends, particularly in managed services.
In this week’s Sunday Spotlight, we look at EMVCo’s 3-D Secure 2. 0 technology and explore its implications for the payment ecosystem. 3-D Secure 2.0 is an effective solution to address PSD2 and Strong Customer Authentication (SCA,) which is scheduled to go into effect on Sept. 14, 2019 in Europe but could be delayed. We note that both Brazil and Australia also have mandates in place which will encourage the adoption of 3-D Secure 2.0 in 2H19.
In this week’s Sunday’s Spotlight, we take a look at the impact that Boost has had on SQ’s Cash App and how that can impact Venmo. PayPal recently announced that its users were able to earn 5% cash back on eligible restaurant purchases/select merchants (Kroger, Taco Bell, Shell and Walgreens) made with its Venmo Card through 6/30, which we see as a stepping stone to a more encompassing rewards program. Ultimately, we see these programs as encouraging usage and leading to net new adds. Square launched its debit-card rewards program called Boost on May 1, 2018 to encourage users to transact using its Cash Card. The program offers rewards (primarily Square-funded) at specific retailers and we see this program as creating a “Rewards Network” where all three parties (Square, Merchant, Consumer) provide and realize value through engagement/data collection, increased sales, and discounts.
In this week’s Sunday’s Spotlight, we take a look at the private label credit card market and affiliated brands across the top three players including Citi Retail Services (C, covered by Steve Chubak, Outperform rated), Synchrony (SYF, not covered), and Alliance Data (ADS, Peer Perform rated). Over the years, competitive dynamics for loyalty solutions at the point of sale has intensified. According to Nilson, private label use comprised roughly 5% of spend in recent years versus 15%+ 25 years ago. General purpose (including co-brand) cards volume growth has seen a CAGR or roughly 8% over those years, outpacing private label growth by over 400bps. Large bank issuers have offered other reward offerings, innovative payment capabilities, and co-branded programs with retailers. Competition continues to heat up with instant reward programs through digital wallets (for further insight on reward initiatives from PayPal and SQ at POS see: Save a Cow, Use a Digital Wallet: Instant Rewards are the Next Frontier.) Further, installment financing at the POS has been offering additional alternatives to private label, such as PayPal Credit and Square Installments. While not currently offered, ADS has mentioned that extending installment loans at POS is in the Company’s long-term strategy. A recent study by Klarna (private) suggested that 75% of consumers preferred to shop at stores which offered instant financing.
The SQ story has transitioned from one surrounding 40%+ adj. revenue growth and 700bps+ of margin expansion to, more recently, a beat/raise story on the heels of accelerating adj. revenue growth at the expense of margins. SQ has evolved to encompass dual ecosystems (Seller & Individuals–See Exhibit 1), which should provide significant opportunities for it to invest and deliver revenue growth for the foreseeable future. That said, near-term growth is anticipated to decelerate on more challenging compares and acquisitions entering the organic base, and the company remains focused on investing for future growth. As a result, we see SQ’s 2Q as a relatively soft quarter (still expect slightly better than guidance) due to a number of variables, but our analysis (see pages 2-11) suggests potential for 300-400bps in excess of the outlined guidance range for 2019. That said, we note that the remainder of the year faces challenging compares.
- 1 of 10
- next →