The coronavirus pandemic has devastated retail and restaurant businesses of late, but many other companies that depend on those industries have felt the crunch, too. Payment technology company Global Payments' (GPN 0.61%) sales have alternately grown and shrunk for years, and normally speaking, the pandemic should have slowed down its revenue growth. However, the opposite is true -- and ironically, that should ring alarm bells for investors.
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See-saw numbers send mixed signals
Global Payments' fluctuating financials have sent conflicting messages to investors for years, since merchants have a lot of choice in who processes their payments. Only in the last two years has the company seen substantial improvements.
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After slow but steady increases in the key metrics above from 2013 to 2015, the company's numbers started growing rockier in 2016.
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On the other hand, Global Payments's operating margins for its merchant payment business increased rather consistently from 2017 onward. Normally, this would suggest that the company was growing more efficient over time, but in this case, Global Payments changed its accounting method in 2016 to move third-party processing fees out of its operating costs. Instead, the company now subtracts those fees from reported total revenue. And while this does not change its bottom line, it does make operating costs look lower than they were previously.
Only in the first quarter of 2020 did total revenue jump substantially: 115% year over year. However, this was not due to a sudden increase in merchant payments processed; rather, Global Payments attributed this increase almost exclusively to the operations it acquired when it merged with Total Systems Services starting in September 2019.
When deconstructing those rising sales numbers, a troubling trend emerges. The year-over-year change in total revenues was $1.02 billion -- smaller than the increase in revenue from the merger, which contributed $1.055 billion. Without that merger, Global Payments' sales would have grown smaller year over year.
Acquisitions are the key
The first quarter of 2020 underlines the importance of this major acquisition for Global Payments. Online shopping has increased dramatically over the past decade, and the coronavirus pandemic has made it more essential than ever before. Online retailers have increasingly turned to mobile and remote payment solutions to keep their businesses afloat.
The merger with Total Systems Services has reduced Global Payments' reliance on in-person merchant payment solutions, like a simple card swipe, and has allowed Global Payments to move toward a more forward-looking tech-based offering. The newly acquired operations have expanded business to include mobile and contactless payments, business-to-business payment management, and card technology support. And while this has pulled in a much-needed bump in revenue, the addition has both advantages and disadvantages.
On the downside, total operating expenses have increased by 142% over the past year alone, which suggests the new business is costlier than before. The company now lists all its operations from before the merger under the Merchant Solution segment, and in the first quarter of 2019, the operating margin for that segment was a relatively high 27% -- fueled by prior acquisitions that lowered costs and boosted profits. But then last quarter's Merchant Solution operating margin fell to 23%, as Global Payments integrated the additional merchant business from its merger. Operating margins for the new Total Systems segments are also noticeably lower: 11.8% for card technology support and 15.6% for business solutions.
Nevertheless, given the economy's growing reliance on digital payments, these additional operations still provide a significant growth opportunity for Global Payments's future. Total revenues post-merge have increased substantially, and the company has consistently increased its operating free cash flows since 2018, with $1.13 billion in free cash at the end of its most recent quarter. All in all, the company seems comfortably positioned to grow further as a result of this acquisition.
Although overall consumption has decreased due to the pandemic, online shopping has surged. Global Payments acquired technology that enables it to capitalize on the increase, but this increased business also comes with higher costs. It is clear that it needs to further diversify and invest in newer payment technology, so this acquisition should enable it to grow in the future in a way that would have been unlikely without the addition. Investors should keep an eye on the evolution of the company's revenues.
