Planet Payment (NASDAQ:PLPM) has experienced consistent growth over the last several years. However, from our analysis, it looks as though the new customers the company is signing up have significantly lower ticket averages, which in the transaction processing industry isn't a desirable metric and lowers the value of the company's customer portfolio. Moreover, ongoing litigation, which the company has yet to disclose to investors and has a high likelihood of receiving an adverse verdict in our opinion, could cost the company millions of dollars in compensatory and punitive damages. Given the swift rise in the company's share price this year, we would encourage investors to avoid shares of Planet Payment as it is more likely than not that the multiple of revenue, EBITDA and EPS that investors will be willing to pay will diminish rather than expand going forward.
COMPANY OVERVIEW - PLANET PAYMENT
The payments industry is dominated by a few large global players, but there are a countless number of smaller players involved in the various stages of a transaction. One such company is Planet Payment. Planet Payment is a merchant acquirer and international multi-currency transaction processor, whose services are integrated into the back office credit/debit card transaction process. Planet Payment offers its services in 21 countries at over 118,000 active merchant locations through more than 70 merchant acquirers and processors and supports transactions in over 100 currencies. Planet Payment conducts business in the Asia-Pacific region, the Americas, the Middle East, Africa and Europe. Figure 2 schematically shows where Planet Payment fits within a typical transaction.
Figure 1 - Planet Payment's Role in a Typical Transaction
Source: Planet Payments
Planet Payment's operations can be broken down along two major service offerings, payment processing and multi-currency processing. Payment processing accounted for approximately 37% of the company's revenue in 2015, with the remaining 63% coming from the company's multi-currency processing services. The company's payment processing services include end-to-end authorization, capture, clearing and settlement services to customers, with local language support and online accessibility to merchant reporting, reconciliation, and analytical services associated with card spend at a customer's business. The company's multi-currency processing offering includes Pay in Your Currency, Multi-Currency Pricing, and Dynamic Currency Conversion at ATMS.
Planet Payments has demonstrated impressive growth over the last several years as the company's consolidated gross billings have increased 25.3% since 2012. Moreover, the number of total settled transactions processed has increased 394.9% over this same period on a 188.4% increase in the number of merchant locations. In looking at Planet Payment's growth on a compounded annual growth rate basis, the company's total consolidated gross billings have increased at a CAGR of 7.8% for the 2012 through 2015 period, while the total merchant locations have increased at a CAGR of 42.3% during that same time frame. Chart 1 shows the company's growth in consolidated gross billings and total merchant locations.
Chart 2 shows the consolidated settled dollar volume of transactions and the total number of settled transactions over the Q1'13 through the Q1'16 time frame. In looking at the underlying data from which Chart 2 is derived, it is interesting to note that the consolidated settled dollar volume of transactions processed has increased at a 10.6% CAGR, while the number of consolidated settled transactions processed has increased at an 70.4% CAGR. We find this interesting because it indicates that Planet Payment is signing up new vendors that have substantially lower ticket averages than its existing book of customers, meaning newer customers represent a less desirable book of business.
Chart 1 - Quarterly Growth in Consolidated Gross Billings & Total Merchant Locations Q1'13-Q1'16
Source: Plant Payment Company Documents & Mosaic Investment Counsel Calculations
Chart 2 - Quarterly Growth in Settled Dollar Volume & Settled Transactions Processed Q1'13-Q1'16
Source: Plant Payment Company Documents & Mosaic Investment Counsel Calculations
The payment processing segment of Planet Payment's business encompasses the merchant acquisition, the authorization and capture, settlement and reporting functions for merchants. The company's payment processing services allows merchants to accept payments made via most of the major card association brands including: Visa, MasterCard, Discover, American Express, UnionPay, Diners Club International, Interac, JCB and Maestro. Moreover, Planet Payment's platform is integrated with many different POS terminals, mobile devices and e-commerce gateways. Also included in the payment processing segment is a Merchant Accounting System (MAS) which supports key functions such as clearing to the major card associations, intra-country, intra-regional and international interchange support, online exception and chargeback tools as well as multiple language support for acquirers and merchants. The payment processing segment, which generates nearly the entirety of its revenue in the United States, accounts for roughly 37% of Planet Payment's total revenue stream.
Over the last several years, the company's payment processing segment has seen rapid growth in the number of merchant locations, and settled transactions processed, with three-year CAGRs of 58.3% and 84.2%, respectively. However, when looking at the corresponding revenue that Planet Payment generated from the substantial increase in the number of merchant locations and settled transactions processed, revenue grew at a CAGR 9.4% during that time while the settled dollar volume processed increased at a CAGR of 16.2%.
In trying to understand the disparity between the CAGRs for the number of merchant locations and settled transactions processed, which have grown significantly compared to the CAGRs of both the payment processing revenue generated and the settled dollar volume of transactions processed, we've come to the conclusion that both the average revenue generated per location has been shrinking considerably over the last three years, but so has the average settled dollar volume per transaction. Over the last three years, the revenue generated per merchant location has gone from $195.17 in 2012 to $69.22 at the end of 2015, a decrease of 64.5% over the last three years. Said differently, the average revenue generated per location for payment processing has contracted at a CAGR of (-64.5%). In terms of the average settled dollar volume per transaction, it has also been under intense pressure as the average settled dollar volume per transaction was $102.27 in 2012 and has shrunk to $28.96 as of the end of 2015, a decrease of 71.7%, or a (-34.3%) CAGR over the last three years.
Chart 3 below shows the growth in the number of merchant locations versus the average revenue generated per merchant location for the period Q1'13 through Q1'16.
Chart 3 - Total Payment Processing Merchants vs. Avg. Revenue/Merchant Location Q1'13-Q1'16
Source: Plant Payment Company Documents & Mosaic Investment Counsel Calculations
The largest segment of the company's business is its multi-currency processing segment, which in 2015 accounted for approximately 63% of the company's total revenue. Multi-Currency processing is the company's "flagship" product and service offering. It allows acquiring banks, processors and merchants to provide Pay in Your Currency, Multi-currency Pricing for card not present merchants, and Dynamic Currency Conversion (DCC) at ATMs.
Pay in Your Currency. Pay in Your Currency is a feature that Planet Payment offers merchants whereby an item presented for purchase is priced in the local currency, but at the time of sale, when the payment card is presented, is converted to the consumer's native currency in real time. The transaction is settled in the local currency. The benefit of Pay in Your Currency is that it offers international consumers price transparency in their native currency for goods and services purchased abroad from those merchants utilizing Planet Payment's Pay in Your Currency service.
Multi-Currency Pricing. Multi-Currency Pricing is primarily an e-commerce tool that enables merchants to sell products globally and to give consumers the ability to view pricing in multiple currencies and pay in the currency of their choosing. Moreover, this is used in card not present transactions, which are transactions that take place when the credit card is not physically present to be swiped through the POS, but rather the credit card information is manually entered during the payment portion of a transaction, such as purchasing something online. In an online transaction, the purchaser's credit card is not physically present at the merchant at the time of the transaction, but the payment information is entered by the purchaser and the transaction is consummated. The merchant receives payment in their native currency, thereby enabling both the consumer and the merchant to pay for and receive payment in the currency of their choosing.
DCC at ATMs. Banks and ATM operators abroad can offer customers who utilize their ATMs the ability to withdraw cash in the local currency utilizing their foreign MasterCard card with the amount being withdrawn shown in real time in their native currency, thus offering the consumer piece of mind in knowing exactly how much money they are withdrawing from their bank account back home. The settlement with the ATM operator is made in the local currency. This service offering is similar to Pay in Your Currency, with the difference being that it is offered through ATMs rather than POS devices.
Given the international component to Planet Payments' Multi-Currency Processing business, it is important to look at the geographies the company serves and the growth in the company's results within those geographies. The company reports its Multi-Currency Processing business by the following geographic breakdowns: APAC, the Americas and EMEA (Europe, the Middle East, and Africa). APAC historically has accounted for the largest portion of the company's Multi-Currency Processing revenue, accounting for roughly 52.5% in 2013 with the percentage of total Multi-Currency Processing slipping to 48.6% in 2015. APAC accounted for 44.2% of total Multi-Currency Processing revenue in the Q1'16. EMEA is the second largest contributor to Multi-Currency Processing revenue accounting for 26.8% of revenue in 2013, but 30.0% in 2015 and 30.5% in the Q1'16. The Americas accounts for the balance of Multi-Currency Processing revenue, representing on average about 20% of the total Multi-Currency Processing revenue over the last three years.
In reviewing the trajectory of revenue and the underlying operating statistics supporting the company's Multi-Currency Processing segment, themes similar to those in the Payment Processing segment emerge. The company has significantly increased the number of active merchant locations over the last three years; however, the multi-currency processing revenue, transactions processed and the settled dollar volume processed have grown at significantly slower rates. Since 2012, the number of multi-currency processing active merchants has increased at a CAGR of 26.7% while the multi-currency processing revenue has grown at a three-year CAGR of only 5.1%. Moreover, the total number of transactions processed during this same time frame has grown at a CAGR of 7.7%, while the settled dollar volume processed has increased at a CAGR of only 2.8%.
In looking at the multi-currency processing segment on a revenue per location basis, the actual revenue generated per location over the last three years has contracted at a CAGR of 17.0%, while the settled dollar volume per location has contracted at a CAGR of 4.6%. This is something that raises a lot of questions in our minds about customer selection and the dynamics of the foreign markets that Planet is entering as evidenced by the significant increase in the number of multi-currency processing locations and corresponding declining revenue per merchant location. Based on conversations we've had with industry veterans, this phenomenon of a significant increase in locations and corresponding decline in revenue per merchant location indicates that the new merchants that Planet is signing up have substantially lower average sales per transaction than the company's historical average.
One other hypothesis as to why the revenue per location would be contracting at a (-17.0%) CAGR over the last three years while the number of merchant locations has increased at a CAGR of 26.7% is that Planet is targeting customers that have little loyalty or incentive to stay with Planet when another payment vendor offers them better pricing for similar services. Moreover, it could be simply that merchants are dissatisfied with Planet's services and simply migrate to another vendor. Absent significantly more disclosure from the company regarding the industry verticals it serves in a particular geography, it is next to impossible to get at the root cause of this divergence. Regardless, for us it raises a lot of questions that remain unanswered and call into question the financial future of the company and management's credibility.
Chart 4 below shows the divergence between the number of multi-currency processing merchants and the average revenue per location.
Chart 4 - Multi-Currency Processing Locations vs. Avg. Revenue/Merchant Location Q1'13-Q1'16
Source: Plant Payment Company Documents & Mosaic Investment Counsel Calculations
Consolidated Financial Performance
Over the last several years, the financial performance of the company has improved substantially. Consolidated revenue has gone from $46.6 million in 2013 to $52.8 million in 2015, a 13.3% increase over the last two years. While revenue has grown 13.3% over the last couple of years, the company has also been able to expand its gross margins. In 2013, the company's gross margin was 47.8%. In 2014, the company reported a gross margin of 49.6%, a 180 basis point increase. In 2015, the company expanded its gross margin another 160 basis points, reporting a gross margin of 51.2%.
While Planet has demonstrated solid revenue growth and gross margin expansion, it hasn't always flowed through to the bottom line. In 2013, Planet reported an operating margin of just 0.1%, or $40,000 on total revenue of $46.6 million. In 2014, things were substantially better, with Planet reporting an 8.2% operating margin ($3.9 million) on $47.4 million of total revenue. 2015 again saw improved financial results, with the company reporting a 12.0% operating margin ($6.4 million) on $52.8 million of revenue. In terms of GAAP EPS, Planet Payment was breakeven in 2013, reporting EPS of $0.00. In 2014, the company reported EPS of $0.06, and for 2015, the company reported EPS of $0.19, a year-over-year increase of 216.7%. On an adjusted EBITDA basis, which excludes stock based compensation and restructuring charges, the company reported adjusted EBITDA of $2.4 million in 2013, $9.4 million in 2014, and $11.6 million in 2015, increases of 291.7% and 23.4%, respectively.
In looking at the company's balance sheet, it has improved substantially over the last several years as underlying financial performance has improved. As of Q1'16, Planet Payment had a current ratio of 2.26, working capital of $15.3 million, virtually no long-term debt to speak of other than some capital lease obligations and generated a return on average assets of 14.6% and a return on average equity of 35.9%. Subsequent to the close of the Q1'16, and in conjunction with the company's tender offer for 7.5% of the outstanding shares of the company, Planet drew down approximately $14.0 million on its line of credit to fund the share repurchase through a modified Dutch tender offer. On a pro forma basis, Planet's debt to total capital level would be approximately 36.1%, still a very manageable level.
SHARE REPURCHASE ACTIVITY
Recent Modified Dutch Tender Offer Retires 7.5% of Shares Outstanding:
On March 10, 2016, Planet Payment announced that it would conduct a share repurchase in the form of a modified Dutch Tender offer for up to $15. million worth of stock. The purchase price range was set at $3.20 on the low end and $3.60 at the high end and the tender offer remained open for 20 business days. The result of the modified Dutch tender offer was that Planet Payment repurchased 3.866 million shares of stock outstanding at a purchase price of $3.60 per share, expending approximately $13.9 million to retire roughly 7.5% of the company's shares outstanding as of February 29, 2016
RECENT FINANCIAL RESULTS AND GUIDANCE FOR 2016
On May 4, 2016, Planet Payment reported its Q1'16 results with revenue coming in at$13.7 million compared to the $12.1 million the company reported in the year-ago period, an increase of 12.8%. The total cost of revenue came in at $6.2 million, comprised of $2.7 million for payment processing service fees and $3.5 million for processing and service costs. In the year-ago period, total cost of revenue was $5.8 million, with payment processing service fees comprising $2.6 million of the total and processing and service costs comprising the $3.2 million balance.
For the Q1'16, Planet Payment reported a gross margin of 54.8% compared to the 52.0% reported in the Q1'15, a 280 basis point increase. In turning to SG&A, for Q1'16, SG&A came in at $5.5 million versus the $4.5 million reported in the Q1'15. SG&A as a percentage of revenue was 40.1% in the Q1'16 while it was only 36.8% in the Q1'15, a year-over-year increase of 330 basis points. In terms of the company's Q1'16 operating margin, Planet Payment reported an operating margin of 14.7% for the quarter compared to the 15.1% operating margin the company reported in the Q1'15, a 40 basis point decrease year over year. After accounting for net interest expense and other income, Planet Payment reported $2.0 million of earnings before taxes in Q1'16 versus the $1.8 million reported in the year earlier period, a year-over-year increase of 9.6%. Net income was reported as $1.8 million for the Q1'16 and reported EPS were $0.03 versus the $1.7 million and $0.03 reported in the year ago period, respectively.
In conjunction with releasing its Q1'16 financial results, Planet's management also updated its outlook for the balance of 2016. The company expects total revenue to be between $57.0 million and $59.2 million, implying 7.9% top line growth at the low end of the projected range and 12.0% at the high end of the guided range. In terms of net income, management anticipates Planet Payment will generate between $8.6 million and $9.6 million of net income for 2016, assuming an 8% effective tax rate. In terms of EPS, management expects that the company will post EPS of $0.15 to $0.17 on 51.9 million fully diluted shares outstanding for the year. Adjusted EBITDA is projected to be between $14.1 million and $15.1 million for 2016.
As a requirement of every Securities and Exchange Commission filing, publicly traded companies are required to disclose outstanding litigation that it deems to be material. In reviewing all of PLPM's SEC filings since 2012, the company has never disclosed any specific litigation against the company, but rather always includes the following text:
"From time to time, we may be involved in legal proceedings in the ordinary course of business. While any litigation contains an element of uncertainty, we have no reason to believe that the outcome of such proceedings or claims will have a material adverse effect on the financial condition or results of operations of Planet Payment."
In the course of our research, we have uncovered current litigation against Planet Payment in Delaware Superior Court. In the complaint, brought by Pivotal Payments Direct Corporation, a Canadian credit card processing company, Pivotal alleges that Planet Payment made certain representations about its product and service offerings that it technically could not deliver as promised and also made misrepresentations about the services it could deliver and payment platforms that Planet Payment's service offerings were integrated into. The legal filing can be found via the following link.
After unsuccessfully attempting to reach both a technical and reasonable resolution over a period of two years regarding the misrepresentations made by Planet Payment, Pivotal has sought relief through the court system. Planet Payment filed a motion to dismiss the litigation brought by Pivotal; however, the judge in the case recently denied Planet's motion for dismissal finding that the allegations that Pivotal has made against Planet have both merit and are worthy of proceeding to trial.
In the complaint, Pivotal alleges that Planet's misrepresentations and breaches of the Multi-Currency Processing Agreement (MPCA) cost Pivotal millions of dollars. Pivotal developed software to interact with Planet's software based on the representations that Planet made during contract negotiations and was unaware that Planet was unable to deliver upon its products and services as represented in contract negotiations. One logical response to this issue would be for Pivotal to just find a different vendor and move on; however, because Pivotal developed software to interact with Planet's software, simply moving to another vendor was implausible both technically and financially because doing so would have required Pivotal to amend contracts with all of its merchants and change out hardware and software for each merchant.
It also gives us little comfort that Planet's defense does not appear to support either the quality of its service of the timeliness of its deliverables, which it was contractually obligated to do under the terms of the contract. According to the judge's order denying dismissal of the lawsuit, "Planet argues that the fraudulent inducement claims in Counts 1-24 should actually be breach of contract because Planet merely "overstates" its services during contract negotiations." Also, Pivotal alleges that Planet represented that MICROS, the most common restaurant and bar point of sale processing system, was integrated into Planet in Canada. The judge writes in response, "Planet argues that this contradicts earlier representations because it means that Planet might, not would, provide this service. The court finds that any contradiction is irrelevant because Pivotal is alleging that Planet fraudulently misrepresented that Planet could provide MICROS, not that Planet failed to provide MICROS."
Pivotal is seeking compensatory damages for fraudulent inducement and breach of contract, punitive damages, attorney's fees and pre- and post-judgment interest and other relief the court may deem appropriate. Pivotal has identified damages in excess of $4 million due to the absence of promised three tier pricing and $1.5 million per year in losses because Dynamic Currency Conversion services did not function as promised. Using the seven years of this dispute, the failure of the DCC function and the absence of three tier pricing could amount to approximately $14.5 million in compensatory damages. Once punitive damages, attorney's fees, interest are added to a potential negative verdict, the total amount of damages could well exceed Planet Payment's annual adjusted EBITDA, which Planet Payment estimates will be between $14.1 million and $15.1 million of adjusted EBITDA for 2016.
It is early in the process to qualify damages, but at the very least the fact that this ongoing litigation has been withheld from shareholders for over a year speaks to management's credibility or lack thereof in our opinion. Moreover, the reputational and financial damage that an adverse verdict could have on Planet Payment's business on a go forward basis and the financial damage it could do to shareholders is a fact that shareholders should have the ability to weigh for themselves rather than leaving it to the discretion of management on whether it is a material financial and legal matter.
One might question why we believe a jury would rule against Planet Payment in this matter and the answer is simple. We believe that most reasonable juries would rule against a defendant that knowingly misrepresented its products and services to another party to induce them to sign a contract that ultimately cost a plaintiff significant sums of money, especially after the plaintiff sought technical and reasonable resolution to the conflict for two years before seeking relief from the courts.
Shares of Planet Payment are currently trading near all-time highs. On a price to revenue basis, the shares are currently trading at 4.3x the mid point of management's 2016 revenue estimate of $57.0-$59.2 million. Historically, shares of Planet have traded at an average Forward Four Quarter (FFQ) price to revenue multiple of 2.8x, so at current levels, the shares are trading in excess of almost one and a half full multiple points of the historical mean. In looking at the shares on an enterprise value to EBITDA basis, which is a more appropriate valuation metric given Planet Payment's profitability, shares are trading at 17.0x EV/FFQ adjusted EBITDA.
Historically, the shares have traded at an EV/FFQ adjusted EBITDA multiple of 20.6x. We would point out that the first three quarters of 2013, shares of PLPM traded at an EV/FFQ adjusted EBITDA multiple of 53.3x, and given the short publicly traded history of the company in the United States, this significantly skews the average EV/FFQ adjusted EBITDA multiple. Excluding the Q1'13 through Q3'13 periods from the average calculations, and shares of PLPM have traded at an average EV/FFQ adjusted EBITDA multiple of only 11.7x, which is a substantially more realistic multiple of adjusted EBITDA to the current value of the shares in our opinion.
As a result, shares of PLPM are trading at a 5.3 full multiple points higher than the adjusted historical average. We can't justify paying 17.0x EV/FFQ adjusted EBITDA for a micro-cap stock in today's market and global economic backdrop, especially with a significant undisclosed legal liability that could essentially wipe out nearly a full year's worth of adjusted EBITDA with an adverse verdict.
Planet Payment is a growing company, whose financial situation has improved dramatically over the last several years. As a result, the stock has been rewarded with an increased multiple. The question for investors at this point in time is whether the multiple can expand further or should more likely contract given the potential for a significant monetary judgement against the company resulting from the as yet to be disclosed litigation brought against the company by Pivotal Payments Direct. Moreover, the declining revenue per merchant location indicates to us that new customer selection is becoming more adverse, which will lead to continued depression of the company's revenue per merchant location and ultimately a devaluing of Planet's customer portfolio. It is for these reasons we would recommend that investors avoid shares of Planet Payment at current levels.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.