Q1 2020 Earnings Call
Releasing supplemental presentation for the corridor, which includes slides on her updated revenue in cost synergy targets announced in March or available.
And the Investor Relations section of <unk> Dot com.
Marks today will include forward looking statements about among other matters the impact of the covert 19 pandemic on our business expected operating a financial results strategic initiatives and expect.
I could benefit from synergies from the first data acquisition.
Forward looking statements made different materially from actual results and are subject to a number of risks and uncertainties you should refer to our earnings release for discussion of these risk factors.
Please refer to our materials for today's call for an explanation of the non gap financial measures disgusting. This call along with a reconciliation at those measures to the nearest applicable gap measures.
Unless stated otherwise performance references made throughout this call or year over year comparisons and all references to internal revenue growth around a constant currency basis also note.
At non get financial measures included in our earnings release and supplemental materials include the first quarter of 2019 results for first data.
Which had been prepared by making certain adjustments to the sum of historical first data and <unk> gap financial information.
And now called <unk> turn the call over to Jeff.
[noise] theater and good afternoon, everyone.
To say we are living in interesting times is an understatement.
Sample.
Air in Milwaukee appropriately social distanced, Frank and Peter are joining from separate locations in New York and many of you are likely at home. We are all adapting to this transitory time as we approach a new normal or incredibly proud of how the beiser team.
Has responded protecting your company, while executing on our number one priority keeping associates and clients shape.
Activator or business continuity plan quickly starting in Asia and continued around the world today about 85 per cent of our associates.
It's a working remotely and the remainder or following rigorous shaky protocols to protect the hell.
Okay.
Additionally, hourly associates, whose jobs cannot be perform remotely have received a 25% increase in pay well, we navigate the covert crisis.
Supporting clients by providing them with the leading edge solutions they need to serve their customers are account sales service teams are adjusting the changes required in this new world, including travel by tech connecting with clients three individual and team based video capabilities.
Substantial majority or implementations are progressing a schedules and sales in the corridor held up reasonably well coming in just shy of the prior year, we enter cute too with the solid pipeline and in fact, our preliminary sales results for April we're up more than 20 per cent over the prior year.
We have a strong resilient business model, which is buttressed by the delivery of mission critical solutions to financial institutions corporate clients and merchants around the world.
We also believe leadership matters.
Having more than our fair share of experienced executives, who have successfully navigated the global financial and economic events of the last 30 years, what contribute to even stronger results as we navigate these changing economic times.
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Early March we communicated meaningful increases to our five year synergy targets, including a 20 per cent increase in revenue to at least $600 million.
And the cost side, we increased our target by $300 million to a total of $1.2 billion, which is you will recall does not include our sizable interest expense benefits.
From day, one we fully that are significant synergies would help mitigate the potential.
Verse impacts of a recession.
In addition to the quantum we are intently focused on the speed to attain those synergies all of which Frank we'll discuss later.
The financial results for the first 10 weeks of the year were quite strong even with some limited weakness outside the U.S. The last two weeks of the quarter got progressively worse, a shelter in place and other restrictions ramped up around the world. The majority of the business displayed resilience.
The largest negative impact in the merchant business.
Long with pressure and our Devon oriented transaction businesses not seen in previous downturns circumstances also spurts of <unk>.
For mental growth across several areas, including payments and digital.
Global merchant transactions are generally on the upswing.
Variability by country.
But with meaningful improvements from the low seen in late March in early April.
In the U.S., we've seen early signs of recovery in later April and May to date with comparative transactions down in the low double digits after declining nearly 30% in the last week of March.
Since then we've been seeing continuing gradual improvement a merchant transaction recovery.
Including into May.
U.S. debit transactions were pressured but also showed improvement in the second half <unk>, finishing the month with a low double digit declines a substantial improvement from the approximately 20 per cent drop we saw in the last week in March and into early April.
Overall, we are quite optimistic about the improvement we are seeing and the current trends I believe we will see further acceleration a shelter in place restrictions or <unk>.
U.S. and around the world.
[noise] given the uncertainty around covert 19, we are withdrawing or previously communicated 2020 financial outlook.
System with the trends, we have seen we expect meaningful pressure on Q. twos results and anticipate improvements throughout the second half of the year.
Given the strength and resilience of our business model, concluding the significant synergy opportunity geez.
See a solid actionable path to achieve double digit adjusted earnings per share growth again this year.
You will recall that we had expected our first quarters results to be the weakest of the year due to a difficult compare and the ramping synergies throughout the year.
Given that along with the impact of covert 19, we produce solid results, including internal revenue growth a 4% adjusted earnings per share growth of 16% and free cash flow increasing to $760 million for the quarter.
Our capital allocation strategy was in full force, including closing the sale of 60% interest in investment services.
Adding to our merchant capabilities through too small acquisitions, and repurchasing 8.6 million shares in the quarter.
Importantly, we were making excellent progress on integration with a focus on value creation across strategic operational and financial fronts.
The privilege relationships, we have in our account processing businesses continued to expand adding 12, new clients in the quarter, including five on D.N.A. <unk>, such as John Dark credit Union in Massachusetts, with 1.5 billion and assets and neural net existing help put solutions client got selected D.N.A. to <unk>.
Submission of helping students make their educational dreams possible.
<unk> Clover growth.
Payment volume started strong 40 per cent through February and despite the Cove. It hit still ended up 29% for the quarter.
Clover devices shift was up about 25% and the adoption of add on software services, such as virtual terminal and our new order add functionality continues to expand rapidly across the base.
We saw important momentum in E. commerce, adding 36, new direct clients globally, including total wine and more the country's largest independent retailer a fine wine.
The U.S. Army installation management command, USA technologies, and Regis salons, the largest hair salon chain in the world. We also added the German grocery chain to <unk> and Mediamark Saturn retail group, Europe's largest consumer electronics retail chain with over one.
<unk> and stores and 14 countries.
[noise] E. commerce transactions remain strong in the quarter up 26% and the U.S. and 20 per cent globally, reflecting or market position and opportunity in digital commerce.
Are integrated payments value proposition also continued to expand growing partners more than 20 per cent in the quarter impressively I.S.P. revenue grew more than 55% even in the face of late March weakness, we continue to see strong opportunities to grow in this important space.
Overall total contract and merchant locations globally grew 12% and the core.
We also have very strong as l. results implementing eight times more clients and Q1 compared to the prior year and payment volume skyrocketed up nearly 90 per cent in the quarter and we saw a even stronger roles in the second half of April as people look for new ways to pay in this new environment.
We continue to see a significant value creation opportunity at the intersection of cards D.D.A. based payments and our merchant scale around the world.
Importantly, we remain fully committed to deploying or 500 million dollar innovation investment.
We've identified importing opportunities in areas such as enterprise digital card.
<unk> Commerce, I.S.V. and Clover.
We also see expanded opportunities across the data horizon, including risk fraud, and Decisioning, where the specific emphasis on authorization rates network innovation and next generation integration.
We will continue to invest in 2020 and over the next several years to ensure that we're focused on where the market is going and what we need to do to win.
Lastly is you have seen we announced or C.E.O. succession plan earlier today, which Alex Frank Bisignani to succeed me on July 1st.
I will serve as executive chairman for the remainder of the year working closely with Frank to ensure a smooth transition. We will also worked closely together to continue advancing or longer term strategy, which will be heavily based on the well honed capital allocation discipline, which is embedded in the D.N.A. of the company.
Given my 15 year tenure, the board and I have been engaged indeed succession planning conversations for a number of years.
It has been my long held belief that organizations benefit from changes in leadership and I've used that principle to maintain a fresh approach over my time adviser, including most recently through the first data acquisition.
My conviction has gotten even stronger given the current pandemic and result in need to manage and lead differently.
Frank will bring new energy and perspective of the company well fully embracing the strategic foundation.
Service value creation playbook.
I've had the pleasure of working closely with Frank over the last 18 months and it will be two years since the announcement when I ultimately depart.
In addition to the things that you know such as Frank being and accomplish executive with vast experience in large complex organizations, including doing a fantastic job as C.E.O. first data. He's further established himself with our team leading our businesses and integration exceeding goals on our synergies.
And working closely with me to establish the foundation for our future success.
Board and I feel great about Frank and he has are unanimous support the spicer snack C.E.O. only the first person for person and our 36 year history.
Incredibly happy for Frank and his family and offer my heartfelt <unk> congratulations to him as a business partner and my friend.
It has been an honor and privilege to lead your company for what now amounts to a quarter of my life.
Over that time, we have transformed by serve into a global leader in payments and Fintech.
Had been named a world's most admired company for seven consecutive years.
Oh, well building, a sustaining culture of delivering differentiated value for clients associates and you are shareholders.
Primary objective has been to leave the company's stronger than when I found it and we'll have some might say we accomplished that objective.
I firmly believe that the best days per Pfizer by ahead with that let me turn the call to Frank.
Thanks.
You know afternoon.
I can't tell Ya, how much I've enjoyed.
18 months and how much I look forward to all the things we're going to do right here in the future.
So first of all let me say how on an I am reelected the next year and size of the company with a grain history and a bright feature.
Yeah.
For his partnership in leadership to create one of the world's most admired companies.
Vision for a company, which invest for the future growth and allocates capital for the benefit of shareholders is the platform from which the company will continue to execute.
Strategy will continue.
Shareholders associates and clients extremely well for the long term.
We have jointly assembled a world class team and will continue to drive in innovation and excellence, allowing us to be known as degrading spin tank on the planet.
I greatly appreciate Jeff and the boards confidence in me, leading the company.
I feel privileged.
And tremendously humbled deserve Oh clients, Oh communities, Oh shareholders industry company.
Now onto business, Oh, I'd has changed since L. asked call no. All we've made great progress on integration well put even more focus on ensuring business continuity protecting their health and safety of our associates and delivering on client commitments in life.
Because of the 19 crisis.
The team has come together beautifully.
And I am incredibly proud of the company.
As Jeff mentioned.
There was well prepared to serve as clients real well tested in robust business continuity plan.
And and experienced in seasons leadership team.
A crisis waits for no one.
Move in 40000 people to remote work environments.
During over 200 global locations.
Proactively managing credit risk, we're introducing alternative ways from merchant acceptance.
Urgency certainty and expertise are critical ingredients to successful outcome.
Delivering value to our clients is why we exist over the past several weeks coven has presented a number of unique opportunities deserve clients would speed and agility innovation.
Let me provide a few examples of how else solutions are helping out clients navigate these uncharted waters.
We're both Oh, Clover platform and I'm financial institution clients, we've process tens of thousands of loans to enable small businesses to share in P.P.P. funding.
We are in neighbouring a variety of expedited use cases throw money network prepaid cards solution, including supporting the National Institute of Health C. 19 research project and enabling not for profits to provide funds for those.
As a neat.
In Argentina, we're working closely with government owned banks to enable the distribution of benefit and subsidy payments.
We've partnered with and I see to offer L. walk in Bill payments services across 28 states to enable payments outside of government offices.
Threw out spend trend solution, we have providing proprietary data in insights to merchants financial institutions and governments to enhance the understanding of economic implications across business segments and geography is.
I'd Clover, we expedited the delivery about new order ahead capability, which since launched in early April is already being used by nearly 1800 restaurants.
As Jeff mentioned.
Implementations have generally continued as scheduled as technology agendas for our clients remain very important.
One terrific example, using a virtual teams approach.
No money bank in the Czech Republic recently completed a phone migration of the banks credit and debit card <unk> two hour outsourced first visions service during a full quarantine period.
Then of money bank highlights in new ways to deliver great service, which are emerging in this challenging time.
Oh focus now more than ever is consistently deliver high value services.
Our engagement model is that an all time high.
Within enhance focus on daily client service request.
Prioritizing resources.
In March.
Indicated significant increases values synergy targets moving the cost sign up by a third.
From $900 million to $1.2 billion or roughly 12% of out total cost base.
We also to go revenue synergy target up 20% by $100 million to $600 million over the five year period.
While we're pleased with the progress to date.
Dyssynergy work is not complete.
We remains fully committed to unlocking in additional opportunity where impossible across most revenue and costs folds as we work toward being the best Fintech and payment companies on the planet.
They enhance costs synergies include additional opportunities in vendor efficiencies contractor replacements infrastructure and operational leverage.
Burst, we've had great results working without vendor partners.
Hi cost efficiency is for the combined company as well as acquiring new capabilities, which will have the dual benefit of avoiding internal investment and reducing cab backs.
As a result, we have any increase oh expectations on procurement primarily in technology.
About $200 million.
Second.
We expect to achieve additional synergy benefits from shifting original verse data's outsourced offshore operations to original visors captive.
Primary savings on from converting third party contractors, which generates cost arbitrage improved operational efficiency and most important no loss of knowledge as we re badge existing third party resources.
Blast, where identifying even more savings from the consolidation of real estate.
Data centres and back office systems.
We've also had success extending the sophisticated call centre operations of original verse data, including in A.I. based virtual agent and enhance self service capabilities.
All geared to meaningfully <unk> improve the overall experience.
We have also package these capabilities to help supplement our clients, while doing delivering revenue for us.
We are moving more quickly to accelerate costs energy timing as a way to offset some of the corona virus revenue and pressure.
Oh originally next vacation was more than $300 million. This year, we now expect $500 million of full year synergy savings.
Within annual <unk> rate of more than $700 million and drain 2021.
We feel great about progress and will continue to look for ways to add even more value.
As we mentioned on the revenue side, we raise though initial target, 20% or $100 million.
Based primarily on anticipated outperformance in bank merchant.
And new opportunities in areas, such as digital disbursements payment innovation in much stronger momentum outside the U.S. than we expected.
We are seeing continued strand in linking the account processing privileged relationships with now market, leading clover solution.
Eight unique value for our clients.
Do that and we signed 55, new bank merging clients in the corner with 42 of those wins through the end of February.
We've now signed 109, new F.I. clients since the start of the program with competitive <unk> and about 40%.
And then even higher percentage in the larger Bang space.
Although sales activity has slowed due to the cove. It disruption interest remains very high with nearly 400 institutions in the pipeline.
While we expect the current environment, where moderate the pace near term revenue realization, we have raised oh current expectation, 15% to $230 million.
In addition, we also signed another 16 institution.
L. Bank merchant program outside of out of synergy efforts over the period not including the expansion of nonbank partners.
Although we every calibrated the expected timing about revenue synergies given the current economic situation, we are still expecting $75 million to $100 million of Renner revenue synergy in 2020.
Oh integration is building an organization that will sustainably provide unique value.
This is a critical time for the market and we believe by serve with highly differentiated market leading solutions is the best place for clients Associates and you Oh shareholders.
Now, let me pass the call to Bob for a view about financial results.
Thank you Frank and good afternoon, everyone.
Discuss our results utilizing our new we portable segment structure included on the eight K. filed on April 1st.
We have three business segments merchant acceptance, which we may referred to as acceptance or merchant.
Is primarily the global merchant acquiring business of original first data.
Financial technology or Fintech comprises original five service Corps account processing businesses, along with digital banking financial in risk management and other software oriented solutions and finally payments in network or payments is the most blended segment between the original companies in is primarily.
Global debit credit and prepaid card issuer processing.
Cards production services.
And electronic payments services, such as bill payment filler <unk>.
As you heard the company had very strong performance through mid March well above our original expectations and even with the significant decline in the last two weeks still achieved 4% internal revenue growth.
The results are even better when considering that result was against our most difficult quarterly comparison as Q1 2019 included a high level of non recurring in periodic revenue.
Synergies, we're a strong $27 million in the quarter.
Adjusted operating income, which includes the grow over impact of the investment services transaction increased 1% to $968 million in the quarter with adjusted operating margin of 10 basis points to 27.8%.
Operating margin was lower than anticipated due to the sharp decline in revenue in the second half of March unexpected lower one time and periodic revenue.
Actually offset by about $90 million of expense energies in the quarter.
Adjusted earnings per share was up 16% to 99 cents compared to the 85 cents in the prayer year is adjusted for the investment services transaction that close this quarter.
Internal revenue growth in the merchant second merchant acceptance segment was a very solid 6% for the quarter.
These results were buoyed by our geographical breath diverse industry verticals in broad payment capabilities.
North America internal revenue growth was 5% for the quarter after being up double digits through February.
Or international business grew 7% on a constant currency basis, even as covert impacts were seen in Asia and Europe earlier in Q1.
We continue to make great progress on the dissolution of the BAMS joint venture consistent with their internal revenue growth methodology, beginning this quarter, we're excluding the 51% share of BAMS acquiring revenue from our internal revenue growth calculation due to the plan to solution at the end of June.
We will incorporate our new direct BAMS revenue as we would in any acquired business beginning one year post the close of the transaction.
We look forward to continuing to serve this important client.
Adjusted operating income in the acceptance segment decrease 17% to $283 million in the quarter and adjusted operating margin decline 440 basis points to 21.2%.
Two issues drove you unusual margin decline led by roughly 270 basis point headwind primarily related to the very sharp covert volume decline at quarters end with roughly two thirds of that amount from our higher growth international business.
Next the comparative negative impact or brand assessment fees, along with the expiration of a 10 year deferred revenue item in BAMS, which ended in Q. to last year pushed margin don't buy another 200 basis points.
Although we were able to okra revenue decline in March resulting mix changed.
Served to compress operating performance in the quarter.
Anticipate the segment operating margin to remain under pressure in Q2 due to the <unk> 19 impacts.
[noise] the payments and network segment delivered internal revenue growth of three per cent in the quarter.
Growth was led by card services and output solutions, including revenue synergy.