Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Vantiv, Inc. (NYSE:VNTV)

Credit Suisse 15th Annual Global Services Conference

March 12, 2013 3:30 pm ET

Executives

Charles D. Drucker - Chief Executive Officer, President and Director

Nathan Rozof

Analysts

Georgios Mihalos - Crédit Suisse AG, Research Division

Georgios Mihalos - Crédit Suisse AG, Research Division

So I think we're all ready to get started. Very pleased to have Vantiv with us here today. We have the CEO, Charles Drucker, and he's joined on stage by the head of IR, Nathan Rozof, for of you who don't know, that is not Mark Heimbouch. So why don't we get right into it. We'll do a little fireside chat, and I'll be sure to leave some time for questions.

Question-and-Answer Session

Georgios Mihalos - Crédit Suisse AG, Research Division

Just broadly speaking, Charles, why don't you give us an overview of Vantiv and some of the recent trends you've been seeing in the market.

Charles D. Drucker

Vantiv is the leading integrated payment provider. For those who don't know, we're the #1 PIN provider in the country and we're the #3 merchant acquirer in the country. Different than some of the other players, we serve a full breadth of the market. So we do the merchant acquiring, we do financial institutions, so we do the debit cards, credit cards, ATMs, EFT, we also own a PIN debit network called the Jeanie Network, which is a proprietary network. And we do this all on a single processing platform, which we think gives us the scale, cost advantages that help contribute to our 50% margin. We've had an outstanding year winning share in the market and we expanded into new geographies that a couple of years ago, before we carved out of Fifth Third, we were not able to do. So we've had a lot of good success there. Fourth quarter, hopefully, you heard our earnings call, we had a great year as our first year as a public company, growing 18% in net revenue, 41% at cash net income. We did this, really, by executing on our strategy, which was really broadening and deepening our distribution channel. You should have heard that we signed over 800 merchant referral banks, which was a big plus to us and as it goes into 2013. We want to expand in the high-growth eCommerce area segment and we bought Litle & Co., so we're going to be playing heavy in eCommerce. We brought new products like Vantiv Analytics, Remote Check, Mobile Accept. And then, finally, George, we're going into the small, midsized clients, so really adding to our salesforce and going down market, which has been a plus for us.

Georgios Mihalos - Crédit Suisse AG, Research Division

Sure. So why don't we touch on the Merchant Services side. Obviously, even if you adjust for the Discover agreement, which was signed or went into effect, I should say, second quarter of last year, your merchant transaction growth is clearly outpacing the overall industry. Maybe talk a little bit or dig into some of the key drivers that are allowing you to differentiate yourselves relative to competitors.

Charles D. Drucker

Yes. A couple of things, we're winning market share and we were more landlocked before and we've added a significant amount of sales people in new geographies. We were mostly east of the Mississippi, now we're moving west of the Mississippi and we're signing merchant banks. So a couple of things you'd think about us: one is our attrition is low compared to the industry. We rarely lose a large national client and our attrition is about 4% to 6% of our revenues. So there's less clients that we have to replace compared to our competitors. Our expansion of the sales force and really going after the small to midsized market and winning those shares has really helped that growth because it's a very profitable side of the business. We're still winning in the large space but we're very focused on expanding in the small to midsized clients.

Georgios Mihalos - Crédit Suisse AG, Research Division

One of the things you focused on is the growth that you've seen in your direct acquiring business, which is growing faster than in the indirect side of the channel. Can you talk a little bit about your success in signing up these new bank referral partnerships and exactly why would someone want to partner with Vantiv as opposed to any other large merchant acquirer?

Charles D. Drucker

Yes. So the merchant bank channel -- so we have a fundamental belief that you don't put feet on the street or a sales person on the street unless you have a warm lead referral partner, which is merchant bank, VAR associations, so that makes them successful. We have, in our Financial Institution side of the business, 1,300 financial institutions that we are now cross-selling into to provide them Merchant Services and help them grow their revenue. Why do we win? Well, most of my team and myself, we grew up working in the bank channel. It sounds too simple but it's knowing how the bankers think, knowing how the business bankers, the branches, what's important to them. And what's important to them is really growing their business DDAs, lending, treasury management and if we could bring a complementary wedge service in there and provide that service and consultative approach to the bankers, they want to come to us. And we're new into this market as far as -- and we're grabbing share and it's working and we -- we quite frankly enjoy working with the banks. And we have a good working relationship.

Georgios Mihalos - Crédit Suisse AG, Research Division

So you guys came out of Fifth Third, maybe talk a little bit about how big a referral partner Fifth Third is and just, has that impacted your ability, or clearly, it seems that it has not impacted your ability to sign additional bank partners?

Charles D. Drucker

Yes. Actually, coming out of Fifth Third, we had more -- first of all, inside of Fifth Third there was a strategic decision that says they didn't want to give the crown jewel and enable other banks, so we weren't able to sell it. So now coming out of Fifth Third, one is we're able to add sales force; two, it's surprisingly that by not having the Fifth Third name, or being owned by Fifth Third, that banks will do business with us. Credit unions, and particularly on the EFT side who thought about not doing business, even though we have the best products, features, functions and everything, just because you are a bank, it's really opened up that world. So our ability to invest in capital, bring new products like the Litle acquisition is a plus that we weren't able to do before. The recognition, being at the conference, we're more on the radar screen that we're viewed as a payment company, that is leading edge, bringing products, has scale, versus a commercial bank.

Georgios Mihalos - Crédit Suisse AG, Research Division

You touched on Litle, so, why don't we dig in there; recent acquisition in the eCommerce space, a place you guys were relatively small in and you're clearly bigger now and I would expect you're going to get even bigger and maybe talk a little bit about the cross-sell opportunities that exist with Litle and your core market there.

Charles D. Drucker

So with Litle, we acquired a best-in-breed system. Actually, Tim Litle built one of the first systems for one of our competitors, 10, 15 years ago that they still use, but it's the people there, the technology. They differentiate in the market by -- they do analytics, they help their merchants make decisions on the front end that allow them to get more sales, reduce their risk. Their back end is tailored towards eCommerce about how they deliver information, how they interface with their GOs or operations and more impressively, they're an agile IT environment. So every 30 days, and it's tested and within 6 weeks, a new feature or products coming out to address the market, which is a little bit different because they're so agile to get new products to the market, which is what the eCommerce space needs. So we believe that our market approach is one, Litle was growing 28% on their own. There were businesses that they won on technology but lost because of the size of the company they were and people just didn't make the switch. So we're going back after that business. Two, on the Vantiv's footprints, we have a lot of clients that we do their brick-and-mortar with and they do eCommerce with someone else. So we're using our sales force to go back after those, cross sell it, combine their settlement stream, single point of contact and go after those; and third, our sales force is going after new business. So what Litle was really a technology company and what we brought to them was sales distribution. We have 400 -- over 400 salespeople that could attack the eCommerce market when they had very few and we have 80 to 100 that are really mid-market salespeople that technically, because eCommerce is more of a technical sales. So we think we can increase that rapidly. I want to tell you that we've been growing these numbers last year, and point-of-sale typically grows in mid-single digits 7%, eCommerce transactions grow 15% and we weren't getting our share.

Georgios Mihalos - Crédit Suisse AG, Research Division

So through an agreement you have with Discover, you're now going to enable PayPal to roll out In-Store checkout. Can you provide a little bit of color on how that rollout is going? I think it's beginning right now or will begin in the second quarter.

Charles D. Drucker

Yes. So it's getting ready to go early part of it this year. And it's starting with -- the technical aspects are going fine. Discover leaned forward and they're letting PayPal use the tracks, which makes the interface to the merchants so much easy, you don't have to do a lot at the point of sale. What I love about it and what's part of our goal, is choice, merchant choice. So the more choices and alternatives a merchant has and the more that we enable, the more that we become the primary or the premier merchant acquirer. So that goal is choice and when I see PayPal, it will increase market. There will be more transactions that we'll get. Some might cannibalize from some of the associations but we think there are new players that they're going to bring into the market that will both be eCommerce and more of the brick-and-mortar side of it. So we're excited about that but focus is around choice. Our goals are to bring choice to our clients and have options.

Georgios Mihalos - Crédit Suisse AG, Research Division

Okay. So you think PayPal down the road will be additive to the total number of [indiscernible]?

Charles D. Drucker

Yes, I do believe they'll be additive, I do believe we'll have to see the ramp, they're going to be putting cards or plastic in the market and it's all going to be what's the value proposition that they deliver. We know they have a strong value proposition on the eCommerce. What's the value proposition that they're going to deliver that makes you not pull out your Visa or MasterCard and use a PayPal card and that's still to be seen, the value proposition.

But then, we're dealing with very strong companies.

Georgios Mihalos - Crédit Suisse AG, Research Division

Great, great. So let's turn a little bit to the pricing environment, maybe what you're seeing on the merchant side and on the FI side.

Charles D. Drucker

Yes. So on the merchant side, pricing's been very stable. There hasn't been any type of irrational pricing out there. Durbin, we're lapping Durbin like everyone else, we lapped it last quarter and Durbin seems to be sticking in the market. So where places like us that will have some percentages, the market seems to be very rational around that and we're winning share based upon our service, based upon some of the products we have, features and functions and we're continuing to win share. So it's been a very stable market. In the Financial Institution side with the bank, pricing is always -- banks are always looking to cut their costs and it's a normal pricing pressure. It's a 4% to 6% type of percent compression...

Georgios Mihalos - Crédit Suisse AG, Research Division

In FI, 2% to 4%.

Charles D. Drucker

FI is 2% to 4%, it's 4% to 6% overall. Yes, so it's 2% to 4% on the FI side. But what we've been seeing in the FI side was just really exciting for us. Really exciting is -- they're focused on revenue growth. So the products that we're cross-selling into them have really taken hold and you've seen some of our margin or pricing per transaction is that our fraud products, we've been able to get more sophisticated fraud monitoring to them that allowed them to save expenses. But the more exciting part is, we've brought something called Vantiv Analytics. So these midsized financial institutions and credit unions, we're able to bring analytics to them to activate and bring up the usage of their debit card transactions, which lets them make more interchange. We brought -- we lent generally reloadable prepaid to them, which is another revenue. They're grabbing ahold of the Merchant Services so our message to them is, we're here to help you grow your revenue and we're not just an expense game that we're processing your transactions on the backside. So FI business has had some good traction and we've been winning sales.

Georgios Mihalos - Crédit Suisse AG, Research Division

Great. So we're touching on value-added services and how important they are, talked about on the FI side, maybe speak a little bit to what you're rolling out on the Merchant Services side if you think of pricing longer-term and the value you're providing.

Charles D. Drucker

I mean, we continue to see traction on the gift cards and closed-loop type of networks there. We've rolled out Vantiv Accept, which is a dongle going after a little lower end of the market, not the micromarket, but just giving them choices. We're seeing tablets starting to get more demand, so I wouldn't say it's skyrocketing, but there's more demand and there's certain segments of the markets that wants to be able to walk around and do their sales. So we're seeing tablets starting to happen that we're rolling out with our clients. We do a Vantiv Wallets on the issuer side of the house and we're enabling the merchants on the acquiring side of the house to be able to accept Wallet. So there's a whole slew of things that we think will continue to have good runway on value-added products.

Georgios Mihalos - Crédit Suisse AG, Research Division

Great. So why don't we get into one of the more recent pressing issues, obviously, that I'm sure you've been inundated with. The relationship now Chase and Visa, Chase Merchant Services, I think, it's being perceived as potentially having an impact on the acquiring space. Maybe you can kind of give us your thoughts?

Charles D. Drucker

So I've talked to people in the associations, I've talked to people in the industry. So my personal assessment of this is one, Visa locked down a large customer for 10 years and with that, they got some more volume to move from one of their competitors to them, that's stage 1. Stage 2, it seems like Chase's focus is about couponing, discounting and monetizing their consumer data. So where some of their -- other competitors than Chase have had deal programs and basically, using their data to negotiate discounts if you go to the store, you'll get $1 off of this merchant or you get $5 off. It seemed to me that Chase was trying to accelerate jumping into that loyalty type of market and part of this trade-off told Visa -- asked Visa, said, "Can you put it on your system, can you build that for me?" Now my guess is, Visa was able to build this faster or different than Chase might've been -- to be able to do on their system. Okay? With that, and any large kind of deal, their size in the market, Chase locks them -- Visa locks them down, the economics on the issuer side slightly improved, would be my guess, and what I've heard, it's slightly improved. So from my perspective, you hear a lot of this noise around on-us, that we do on-us transaction. On-us has been out there a while and people that do on-us, which means on both sides of the transaction, have always had a slight benefit in some of the pricing. But that's been out there a long time and with our single processing platform, the way we operate in the back end, we don't think we're at a disadvantage or we'll lose customers to that. I would tell you, I think as Chase opens that, a lot more issuers are going to want to do couponing, or things at the point-of-sale and we can enable that with connections to our customers. There's been one other thing that has been rumbled around, is that Chase may use their issuing economics to subsidize the acquirer side. That's also not new. There's been ability to do private arrangements or rebate back that in the past, but interchange is a pretty big number for that company and they've been able to do that in the past, they haven't done that in the past because the economics you make on the merchant transaction versus what you'd give up on the issuer side and then, also, opening up the floodgates for all interchange, it's a question mark to me. So I haven't heard that, that's the general purpose, people have asked about that and said, "Oh, it could be that." But they have had that capability. I'm very respectful that's it's a very large organization, Chase, both card issuing, they run a very good acquiring shop and they're a big bank with a lot of capital. So we always keep our eye on it but at this point, it doesn't seem like a challenge to us and I would tell you, in the large merchant space, they already gather data, they have the skewed data, they go to various companies to get other data. So couponing or discounting or those things are still difficult because you're asking the merchant to give up a margin. So it's not just the layup, but I see it as long-term Visa deal, catch up on the couponing for them, it enables them to do that more quickly.

Georgios Mihalos - Crédit Suisse AG, Research Division

Great. So that's very helpful. While we are on the subject of threats and risks, obviously, one of the other popular risks that's kind of out there is the presence and the potential impact from merchant aggregators, the squares of the world, the dongle providers. What are you seeing in your business and how do you kind of defend Vantiv from some of these outside models?

Charles D. Drucker

Yes. So we do aggregation at Vantiv, too, on certain industries but specifically, if you mention Square or some of the other dongles, we have a dongle today, we haven't stripped down our customer service to no customer service, but we can compete effectively with that. So the thing that I get in the market a lot is on the very, very low end, the micro-client, and call them less than 25,000, which is a very small part of our business today. Some of the aggregators come out with a 2.75% pricing and because acquirers typically put in a minimum volume fee and what that means is as -- until you're buying hits a threshold, you're charged a certain minimum fee and every dollar you do, it makes it go away. So since there's a minimum volume threshold at the very micro merchant clients, their effective rate could look a lot higher than the 2.75%, which might make them jump over to that product. The second thing is the acquirer industry basically said years ago, we're going to give you a terminal and we're going to charge you $800 or $700 or whatever the number is. So there was an obstacle there for that small merchant doing 1 or 2 transactions. Square created the reader and reinvented that terminal so it took that obstacle away and went after that blue ocean market. When you go upstream, a whole different story. One is 2.75% is generally above the minimum threshold, which is probably like $1,000 a month in volume, is not overly scary competitor, most of our rates are down below that and then, these people demand service, they demand you handler in chargebacks, relationship's important for them, so there's other pieces. So we can defend very well and the last thing I want to tell you about our business that people get lost in sometimes, is they assume because we have a 50% margin, there's a 50% margin that, that automatically assumes that your pricing's higher, okay? That's not the case. Our pricing is market competitive in the market range of the pricing. Where we make the margin is a single integrated platform and not only the platform is our operations is consolidated. Our call centers are consolidated, all of our G&A is consolidated. So we work very efficiently.

Georgios Mihalos - Crédit Suisse AG, Research Division

Charlie, would you consider, in the future, partnering with a merchant aggregator. Is that..?

Charles D. Drucker

Yes, absolutely. So I would tell you that part of our strategy is with emerging players. We can provide the back end, Chase provides -- for the one you mentioned, Chase provides all the back end services for them. We provide the back end. And we have to evaluate to see their particular competitor to make sure that what they're doing is not accelerating someone that could compete upstream with us, but we have to look at that. The other area that's a huge focus to us and I think is growing very rapidly is the integrated service vendors or ISPs or VARs, that we hooked up to 80 of them last year and were accelerating into that space because those software providers, the cost of software is starting to come down and it's starting to come downstream and it's very exciting. And we're attached to them and we're providing them the service so we think that's a winning area. But emerging technology, you'll see us playing with these emerging partners and working to pick the right partners to enable.

Georgios Mihalos - Crédit Suisse AG, Research Division

Is there a particular vertical in terms of VARs that you're specifically kind of focused on or..?

Charles D. Drucker

Right now, we have some focus on health care because it's fragmented. We are playing with the -- we have the VARs that were enabled in the restaurants and retail, so there's a lot of places in there but -- healthcare, we're also seeing gaming start to take a little bit of traction. We do a lot of the lotteries today but some of the online gaming has become legalized in a couple of states that there is a few partners there that if you can grab that partner's space, you can grab share in the future. Government, we're working with but typically, a lot of these VARs are in retail restaurants that we're -- we're trying to pick the right ones that we think will grow because our focus is revenue growth. So you want to pick the players that you think have the right model on how they're approaching this.

Georgios Mihalos - Crédit Suisse AG, Research Division

Why don't we stop there for a moment and see if there are any questions out in the audience. Looks like you're going to have to deal with me for one more.

Charles D. Drucker

No problem, I can do that.

Georgios Mihalos - Crédit Suisse AG, Research Division

Why don't we shift gears to the FI side of the business again. Do you feel that you're, at all, at a disadvantage by not having core processing capabilities in terms of who you're competing with in a lot of these deals.

Charles D. Drucker

So I think the core processors we compete with are aggressive and they package things together but I view the core processors and a lot of their products are expensive to the merchants and what we did is we've turned around and packaged all our products together. So I think the merchant-served bank, the prepaid product, Vantiv Analytics, the Remote Check Capture, these type of products are about figuring out how to help the banks grow their revenue and we're trying to move away from we're just an expense provider. Also I'd say, us being 100% focused in the EFT space and payment space brings a lot of value to the EFT side. So I think when I look at our products, features and functions, we're specialists in that and we're winning in that space and I've been very thrilled with how Royal Cole has been winning market share. It's a very competitive space and sometimes, that bundle in packaging in the core works and a lot of times, ours work. So we're -- I'm actually excited about that space. We talked about that space being a mid-single-digit, but -- grower and that's our near-term guidance. But fourth quarter, we had a -- we've had very good sales and we've had good growth, almost double digits in the quarter.

Georgios Mihalos - Crédit Suisse AG, Research Division

Nice revenue per transaction as well. So I think we're going to have to leave it there. Charles and Nathan, thank you so much.

Nathan Rozof

Thank you.

Charles D. Drucker

Thank you. All right.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Vantiv's CEO Presents at Credit Suisse 15th Annual Global Services Conference (Transcript)
This Transcript
All Transcripts