Planet Payment, Inc. (PLPM, "Planet" or "the company") is a defensible, emerging growth company whose dynamic currency conversion technology is being rapidly adopted by some of the largest payment processors and acquiring banks in the world. We believe the current stock price of $4.30 per share undervalues the company and that Planet's impending re-IPO on the NASDAQ will serve as a catalyst to unlock value from current trading levels.
We believe the company has an intrinsic worth of $8 per share.
This article summarizes key points that we have put together in a 30 page research report available here (.pdf).
Investment highlights include:
PLPM is benefitting from powerful industry tailwinds:
- Increasing shift from cash and check use to electronic payments
- Visa (NYSE:V) and MasterCard's (NYSE:MA) filings show cross-border payment volumes are growing rapidly with international commerce
- Increasing penetration of eCommerce sales on a global scale
Technology rapidly being adopted and is hard to replicate; likely acquisition target in a quickly consolidating industry:
- After >$80mm of invested capital, Planet's unique, outsourced technology platform is winning the business of some of the largest payment processors and acquiring banks in the world, including Global Payments (NYSE:GPN), Vantiv (NYSE:VNTV) and Barclays (NYSE:BCS).
- Its platform is built on a unified architecture with a centralized database as opposed to the processing platforms of some of its primary Dynamic Currency Conversion (DCC) competitors that use a regionalized architecture and database.
- Patented, real-time per-transaction exchange rate calculations allow merchants to set rates on a per-transaction basis and enable enhanced data mining and reporting. Competitors do not have this capability and rely on treasury trading, settling transactions on a delayed basis and making it more difficult to scale.
- Planet is a fast-growing, high-margin business with an attractive, sticky customer base and a multi-currency processing platform as the key growth driver. This gives it scarcity value in an industry characterized by accelerating M&A activity; we speculate the company will be an attractive acquisition target for any major processor.
Network effects provide room for meaningful operating leverage and financial earnings power:
- Network effects increase the value of its platform as more merchants and consumers participate. Active merchants employing Planet's platform increased by 67% in 2011
- Recurring revenue model; customers sign contracts typically for 3 - 5 years and the company earns a fee every time a purchase is made
- Fixed investment of the platform yields significant operating leverage; in 2011 revenues increased by 37%, but EBITDA and free cash flow surged by 226% and 570%, respectively
Numerous growth opportunities lie ahead for the company
- Increase wallet share with existing clients by identifying product and solution cross-selling opportunities
- Untapped market opportunity in fast growing Latin America
- New distribution of the company's Pay In Your Currency solution with Vantiv to address the ATM market
- Social commerce solution to integrate the company's IPAY gateway with VendorShop's Facebook shopping cart application
Highly Incentivized Management to Create Long-Term Value:
- Founders and insiders own 12% of the company
- Long-term equity incentive structure rewards management for achieving a 5 year plan geared towards a $1 billion valuation
Near-term IPO a potential catalyst to unlock value from current levels:
- The company is debt-free and rapidly growing cash flow
- Strong institutional shareholders include Camden Partners, Kinderhook Partners, Fidelity and Blackrock
- NASDAQ listing will significantly improve the stock's trading liquidity and increase the company's visibility among investors. Recent IPO of partner Vantiv has already appreciated 30%
Planet Payment, Inc. is an emerging growth company that has reached the inflection point of profitability and has entered a self-funding, hyper-growth phase requiring little incremental capital expenditure. Its market valuation appears to reflect expectations for the typical lifecycle of a payment processor operating in a highly competitive environment, but Planet is far from a typical payment processor: We believe it is an infrastructure play on the mechanics of multi-currency payment processing and, after a decade and >$80 million of capital invested, one of the first companies to have laid the new foundation. It has only scratched the surface of a nascent and growing, multi-billion dollar global market opportunity in Dynamic Currency Conversion and has a clear runway for sustainable growth over the foreseeable future.
The company is positioned at the forefront of several overarching changes taking place in the market for international payment processing, including shifts from paper to electronic payments, increased international travel and commerce, and increased adoption of eCommerce. The company has numerous untapped opportunities that are likely to greatly expand its market potential. The most notable immediate opportunity is the rapidly growing Latin American market, where the company has initiated a market expansion and we believe is on the verge of announcing partnership opportunities.
The company's differentiated technological advantage is in its single, unified, currency-agnostic payment processing platform and is the reason Planet Payment has earned the business of some of the largest international banks and processors. The platform is built on a unified architecture with a centralized database as opposed to the processing platforms of some of its primary DCC competitors that use a regionalized architecture and database, allowing acquiring banks to support the growth of their international merchant customers without complication. Planet's client base currently includes more than 45 acquiring banks and processors spanning more than 18 countries and territories across the Asia Pacific region, North America, the Middle East, Africa and Europe, including established markets in China, Hong Kong, Macau, Taiwan and Malaysia. In 2011 its base of active merchant locations grew more than 67%, by over 11,000, to almost 28,000 active locations.
As Planet's global profile increases and the value of its solutions are realized in new geographic markets, the company experiences network effects, driving accelerating adoption of its services and increasing the value of its platform. This creates significant barriers to entry and results in earnings leverage for shareholders given the recurring revenue features of its customer contracts and largely fixed operating expense of its platform. In 2011, Planet's revenue grew 37% to $41.9 million and EBITDA grew 226% to $5.9 million. Net Income was $2.4 million, versus a loss of $3.1 million in 2010.
We believe the company has a clear runway to continue to grow revenue at 30-40% per year over the next 3-5 years and that it has the potential to grow much faster. The current market price for Planet's equity far understates the company's long-term growth potential and presents a highly positively skewed risk-reward profile with little risk of permanent capital impairment over a multi-year horizon. We believe the equity has a fair value of $8 per share and that the exposure the company will receive in connection with its impending re-IPO will be a catalyst to unlock value from current trading levels.
Any international traveler is undoubtedly familiar with the experience of hastily performing mental calculations to determine what something will cost in their home currency. A US traveler in Japan, for example, may ask himself whether he should purchase an iPod for 15,800 yen. Even if he could estimate the payment amount in US dollars based on prevailing exchange rates, the final charge that would show on the credit card statement a month later would remain uncertain: The exchange rate eventually locked in would not be disclosed and the card-issuing bank would layer an international transaction fee of 2-5% onto the purchase. But if the iPod were priced in US dollars ($198.79) at the point-of-sale, the decision would be simplified.
Philip Beck, an international banking and corporate attorney by background, identified these and other issues inherent to the processing of multi-currency credit card transactions and in 1999 founded Planet Payment, Inc. to develop a solution. Planet's platform simplifies the purchase decision by allowing for the final price, inclusive of exchange rate used and transaction fees charged, to be displayed at the point-of-sale or online in a purchaser's home currency.
Planet Payment has grown into a leading provider of international payment processing and multi-currency processing services. It provides its services through more than 45 acquiring banks and processors to approximately 31,000 active merchant locations in 18 countries and territories across the Asia Pacific region, North America, the Middle East, Africa and Europe, primarily through acquiring bank and processor customers, as well as through its own direct sales force.
The company has built a proprietary, currency-neutral payment processing technology platform that serves as an outsourced, revenue-enhancing infrastructure that banks and processors subscribe to through long-term contracts. The platform is effectively a merchant-acquiring platform that operates seamlessly within the processing systems of Planet's acquirer and processor customers and the front-end point-of-sale terminals and gateways of their merchants.
Planet manages its business through two operating segments: multi-currency processing services and payment processing services. Its multi-currency processing services, which make up ~65% of sales, provide merchants the ability to offer international cardholders the optional convenience of paying for purchases in their own currency, whereby Visa or MasterCard credit card purchases are made in the merchant's local currency and converted after the card is presented (at the point of sale or online) into the cardholder's home currency. Its payment processing services, ~35% of sales, comprise end-to-end authorization, capture, clearing and settlement services to its customers along with localized language support and online access to advanced reconciliation, reporting and analytics services.
How Planet Makes Money
Planet's global, currency-neutral payment processing platform is offered to acquiring banks and processors on an outsourced basis, allowing them to provide multi-currency processing services to their merchant customers without large incremental investments in legacy systems. The company's extensive relationships with the world's leading point-of-sale providers allows merchants to offer multi-currency solutions through their preferred or existing systems.
Planet's platform delivers value across the payment card transaction cycle, incentivizing banks and processors to enter long-term relationships with the company in exchange for recurring revenue generated from fees charged every time a purchase is made across the company's network. Planet's business model creates powerful network effects, which drive growth and operating leverage in its business, while contracts, which generally have an initial term of three to five years, offer stability and enhanced visibility of financial performance.
In 2011, Planet produced 56% of its revenue internationally and 44% in the United States, and in the first three months of 2012 Planet produced 57% of its revenue internationally and 43% in the United States.
The company distributes and cross-sells its services across a variety of points of sale with customized solutions in specific verticals, such as hospitality, restaurants and retail.
The business categorizes its revenue in two streams - as derived from Multi-currency Processing Services (65% of revenue) and Payment Processing Services (35% of revenue).
Multi-Currency Processing Services:
Planet Payment's flagship offerings are its multi-currency processing services, including Pay in Your Currency (PYC) and Multi-Currency Pricing (MCP), which are offered by the company's acquirer partners to the acquirer's merchant base. They allow merchants to deliver a more personalized customer service, while enabling merchants to increase sales.
The company's Pay in Your Currency service, commonly known in the industry as Dynamic Currency Conversion (DCC), identifies eligible foreign cards and provides consumers with the choice of paying for purchases or ATM withdrawals in their home currency based upon a conversion performed at the point-of-sale.
This provides certainty to the consumer, who would traditionally not find out the exact cost of their transaction until some future unspecified date when the card-issuing bank did the currency conversion at some undisclosed exchange rate and reported that cost on the credit card statement, often 20-30 days later. (In addition, transactions converted by the card-issuing bank often result in international transaction fees imposed on the cardholder, with the global average markup being between 2 and 5 percent.)
This explains why 70-90% of consumers who are given the option to pay in their home currency accept at the point-of-sale, and the acceptance percentage tends to increase sharply as a merchant's sales people gain confidence explaining the benefits of DCC to customers.
The company's Multi-Currency Pricing service is geared toward eCommerce merchants seeking to increase sales by attracting foreign customers. It allows them to set prices in multiple currencies while receiving payments in their own.
Topcreditcardprocessors.com ranked Planet Payment in the top 5 on their list of the best multi-currency processing companies that offer businesses the ability to accept payments in multiple currencies online.
Revenue from multi-currency processing is derived from foreign currency transaction fees earned on processing and converting card transactions from one currency into another currency. Foreign currency transaction fees earned under agreements with multi-currency processing services customers have traditionally been based on a fixed percentage applied to the net foreign currency margin earned, after deducting any merchant revenue and other contractual costs. Planet's average gross markup has been ~3.8%, of which Planet keeps 30-35% on average, leaving the remainder to be split between the acquiring bank and merchant.
The primary drivers of revenue are the number of active merchant locations, the opt-in rate at the consumer level (for Pay in Your Currency), and the average net transaction mark-up.
Payment Processing Services:
Planet's processing solution is delivered as a complete outsourced processing solution, providing all that is needed to support the processing of card transactions, including the following:
• Provides in-depth analysis of acquirer merchant portfolios' foreign transaction volumes to size the need for a multi-currency offering
• Patented, real-time per-transaction exchange rate calculations that allow merchants to set rates on a per-transaction basis, based upon a number of business rules (U.S Patent No. 7,660,768)
• Communication of exchange rate information to a merchant's point-of-sale to facilitate selection of currency
• Authorization and clearing of payment to the particular credit card association involved in the transaction
• Reporting and reconciliation of transactions to acquiring banks and merchants
• Multiple language support for acquirers and merchants
Planet's Integration in the Processing Chain:
As part of its processing services, Planet also offers acquiring bank and processor customers consolidated reporting and data analytics. It provides value as an information and content manager for businesses, which have traditionally been subject to complications in their information streams caused by expansion into foreign markets and the introduction of different reporting systems and languages. Its centralized reporting platform can provide transactional data in a uniform, consolidated online format across a merchant's international operations with the ability to focus on selected data according to a merchant's particular requirements, including the ability to segregate reporting by region, market and currency.
Revenue for processing services is derived either as a fixed fee per transaction or a percentage of transaction value.
iPay Gateway & Facebook Integration
In addition to enabling acquiring banks and processors to offer merchants multi-currency solutions under their own brands, Planet also generates revenue from its direct merchant solutions including the iPay Gateway, its online payment gateway. This service allows for the processing of credit card, purchase card, debit, and electronic check payments through both business-to-business and business-to-consumer platforms, as well as multi-currency processing. Revenue is derived as a percentage of transaction value and/or as a per-transaction fee.
In 2011, Planet integrated the iPay gateway with VendorShop's Facebook shopping cart application creating a social commerce solution that allows Facebook merchants to accept credit cards through any participating acquiring bank integrated into Planet's platform.
No-Brainer Value Proposition
Planet's suite of multi-currency processing and data management tools are designed to facilitate commerce and improve customer profitability. The company's multi-currency solutions drive incremental revenue for both acquiring banks (Planet's primary customers) and their merchants, while providing end consumers with a superior service offering and payment certainty. At the highest level, Planet's solutions shift the financial benefit and revenue earned on the processing of international transactions to the acquiring banks and merchants, from the historic beneficiaries, the card-issuing banks.
Acquiring banks - beneficiaries of Planet's Solutions
Planet's platform serves as an outsourced solution for acquiring banks that allows the provision of new, revenue-enhancing services without significant investment or modifications to existing systems.
Historically, acquiring banks have not shared in the revenue earned on the conversion of international credit card transactions; they would instead only collect fees on the general processing of merchant transactions in connection with the merchant's agreement with the acquirer. Offering Planet's multi-currency solutions provides acquiring banks a new revenue stream from collecting a share of the cross-currency margin earned on processing cross-border transactions. Accordingly, Planet's solutions provide the acquirer substantial incremental revenue and increase the profitability of the acquirer's general credit card processing operations. This incentivizes Planet's acquirer clients to sell their merchant bases on the benefits of adopting Planet's services, driving as rapid an uptake as possible and reducing the necessity for the company to build out a large sales force.
Further, Planet's solutions provide the acquirer with an expanded product offering that acts as a powerful competitive differentiator and merchant retention tool.
Merchants - beneficiaries of Planet's Solutions
The company's services also provide merchants with an additional profit center, increase customer satisfaction, and drive an increase in sales through price localization.
According to The Green Sheet, "To be able to see the value of transactions in home currencies makes DCC an enticement for foreigners to shop in businesses that offer DCC."
With PYC, the merchant also earns a share of the revenue from the cross-currency conversion.
Additionally, PYC eliminates the problem many customers experience due to currency fluctuations where the refund the cardholder receives is less than the original purchase price.
End Consumer - beneficiaries of Planet's Solutions
Planet Payment's DCC capability offers several benefits to cardholders. In addition to knowing that the amount they see on the payment page is the amount they will pay (i.e. no nasty surprises), the cardholders often receive a more competitive rate on foreign exchange than that provided by their credit card issuing bank. Generally, the cost attributable to DCC service is comparable to rates and fees that would have been paid had the card association and issuer performed the conversion. The consumer enjoys the convenience of paying for a purchase in his or her home currency at generally the same cost that would have been applied throughout the traditional process.
Also, since conversion is done at the point of purchase, cardholders are not subject to currency fluctuations which can occur over the period between the point of purchase and the conversion of the transaction by the cardholder's issuing bank.
Issuing Banks - losers in the process
Issuing banks are being cut out in the process from participating in the fee stream from cross-currency conversion. Because transactions are processed and received in the billing currency, they do not earn the international transaction fee otherwise charged when a transaction is converted through the traditional process. The issuing bank does continue to earn the interchange fee (the percentage of each transaction that is collected by the card associations and paid to the issuer).
Credit Card Association - neutral
Planet Payment's multi-currency processing solution is broadly revenue-neutral to the credit card associations (MasterCard, VISA, American Express, etc). They continue to earn cross border transaction fees charged to the issuers and acquirers on the processing of cross-border transactions.
As a matter of fact, the cross border transaction fees charged to acquirers, which are typically passed on to merchants, can provide a financial incentive for merchants to adopt Planet's solutions, as the revenue derived from participation serve to offset these costs.
Planet typically partners with acquiring banks and processors, which seamlessly integrate the company's solutions into their existing product offerings, which are in turn marketed to merchants under the brand of the bank or processor. Through this model, Planet is winning the business of leading international banks and processors, with >45 clients spanning more than 18 countries and territories.
Some of its leading customers amongst banks and processors across various markets include the following:
Planet also generates considerable revenue from its iPay payment gateway, which provides merchants with payment applications and sophisticated fraud and business management tools. It has attracted premier clients to adopting this service including the following:
• The Weather Channel
• Nickelodeon Junior
Benefitting from Strong Industry Tailwinds
Planet Payment is operating in the center of the largest growth areas in international payment processing - international eCommerce and multi-currency processing.
Continued Shift Toward Electronic Payment Transactions
The usage of electronic payments through credit and debit transactions has steadily taken market share from cash and checks in the past 20 years. According to The Nilson Report, a leading research provider for consumer payment information, it is estimated that credit and debit transactions may account for 75% of all transactions in the U.S. by 2015. From a global perspective, it's estimated that total card spending will reach nearly $22 trillion by 2015, with nearly 60% of the transactions occurring outside of the U.S. and Europe
Many Large Markets are Still Highly Underpenetrated and Growing
Not surprisingly, the largest growth opportunities for Planet Payment continue to lie in the emerging markets. According to The Nilson Report, in 2010 there were ~1.9 billion payment cards in circulation in the US, Canada and Europe; those regions had a total population of ~671 million, representing ~2.86 cards per person. In the Asia Pacific region, Latin America, the Middle East and Africa, there was an average of only 0.81 cards per person.
Another way of looking at the size of the opportunity for increasing card payments is to analyze the card purchase volume as a percentage of GDP. For example, Brazil's card purchase volume as a percent of GDP is only 8%, whereas more developed economies are above 20%.
Planet Payment launched multi-currency processing services in Singapore, Sri Lanka, the Maldives, Brunei, the Philippines, the United Arab Emirates and South Africa in 2010, with the results yielding strong results in 2011. Approximately 26% of the multi-currency settled dollar volume processed in December 2011 was attributed to new merchants activated in 2011.
In March 2012, the company announced it had entered into a contract to provide processing support across its platform for China UnionPay credit and debit cards. China UnionPay is one of the world's largest card brands, with 2.8 billion cards issued worldwide. Chinese consumers were estimated to spend $55 billion overseas in 2011 and China UnionPay is one of the preferred payment options for Chinese travelers. It is expected this capability will be added to Planet's platform in the second quarter of 2012.
In October 2011, Planet announced an expansion into Latin America, the hiring of a regional Vice President /Managing Director, and the establishment of a subsidiary and headquarters in Mexico City. Planet Payment currently has no revenues in Latin America, the fastest growing emerging market in terms of card payments. The company has indicated that they are in discussions with a number of prospective customers in the region, and anticipate announcing a contractual agreement in the near future.
The opportunity ahead in Latin America is further illustrated below by the success of MercadoLibre's online payment service called MercadoPago, which is designed to facilitate transactions both on and off the MercadoLibre Marketplace by providing a mechanism that allows users to securely, easily and promptly send, receive and finance payments online.
Increased International Commerce
Visa reported that, for the 12 months ended March 31, 2012, cross-border payments and cash volume grew 15% year-over-year on a constant U.S. dollar basis. MasterCard reported that for the 3 months ended March 31, 2012, cross-border volume grew 18% period-over-period on a local currency basis.
Increased eCommerce on a Global Scale
With the rapid increase in the number of Internet buyers worldwide, competition among eCommerce merchants is growing and becoming more global, and merchants must focus their resources on attracting consumers to their websites and making the buying decision as convenient and easy as possible. Growth in Internet usage, and eCommerce in particular, has a direct link to increasing electronic payments.
The data compiled by the U.S. Census Bureau indicates a steady growth profile in eCommerce retail sales over the past decade, and now exceeds $50 billion per quarter. However, this still only represents a little more than 5% of all retail sales in the U.S. On a global basis, Euromonitor International estimates a 90% increase in eCommerce sales by 2014. Internet penetration in emerging economies is still remarkably low at under 40% of the total population for countries such as India, China and Brazil, but is growing at a rapid rate of 30% per annum.
Management Incentives Tied to Shareholder Value Creation
The company's executive compensation plan provides a strong linkage between long-term corporate performance and shareholder returns.
For example, on July 26, 2011, the company made a restricted stock grant of 915,000 shares of the company's common stock to the Chief Executive Officer, pursuant to its 2006 Long-Term Equity Incentive Plan. The 915,000 shares vest in four separate tranches, each with a different long-term performance goal. The agreement provides that (1) upon a corporate transaction, certain unvested shares accelerate and become vested, and (2) upon Mr. Beck's involuntary termination, certain unvested shares shall remain outstanding and become vested only at such time as the performance goals applicable to such unvested shares are satisfied. The performance goals for each tranche are outlined below, and give an indication of where the company believes the valuation and share price potential is headed over the next 5 years. As part of the NASDAQ IPO the company has adopted a new 2012 Equity Incentive Plan and has reserved an additional 5.0 million shares.
Numerous Investment Highlights for Planet Payment
Scalable Recurring Revenue Business Model With Significant Operating Leverage
Planet Payment has a high-margin, recurring revenue model. Customers sign contracts typically for 3 - 5 years and the company earns a fee every time a purchase is made across its network. Once Planet breaks into a new geographic market, its acquiring bank customers take charge in selling its platform to merchants. In effect, once the company gets traction, it is order-taking rather than selling. Because of this, we believe Selling, General & Administrative expense will grow at 33-50% of the company's revenue growth rate, resulting in a growing percentage of revenue falling to the bottom line.
Due to the scalability of the company's technology platform, little is needed in incremental capital expenditure to support the company's growth. We believe the company can support its growth at over the foreseeable future with ~$2.5 million in annual capital expenditure, $1.5 million of which is dedicated toward new development and $1 million of which is maintenance spend.
Significant Network Effects to Drive Sustainable Top-Line Growth
Once Planet gets traction in a given geographic market, acquirers not offering their merchant bases its services begin losing market share and increasingly seek to establish partnerships with the company to provide its services. As Planet signs up new merchants and market penetration deepens, the company is able to demonstrate the benefits of its services to other merchants who may also want to implement its services.
Planet's business model benefits from powerful 'network effects': As the company acquires more active merchants and users, the value of its platform becomes more useful and valuable to all participants and prospects. These network effects appear to be at an early stage of development and are likely to be a material growth driver in the future.
Barriers to Entry and Scale
Creating a global payment platform requires significant domain knowledge and local expertise in each and every country and market. Planet Payment has invested heavily in the past 13 years to build a secure, robust, and scalable platform. The company has cemented strong relationships with the multiple parties required to successfully execute this business including acquiring banks, processors, and merchants. (See Appendix 4 for a more detailed list of partners.)
Differentiated Technology Advantage
Planet Payment has a differentiated technology platform. The company's advanced payment processing services provide an end-to-end solution for its customers. When a merchant wishes to accept a payment using a payment card, the company receives an authorization request from a merchant's point of sale. In real time, they submit that transaction to the card associations for authorization by the card issuer. Upon receipt of an authorization (or decline) they return the message to the merchant, which then completes the transaction with the cardholder. Currency transactions happen instantaneously under the company's patented rate mark-up technology. Other competitors do not have this capability, and rely on the treasury method, which pools transactions and settles them on a delayed basis and makes it more difficult to scale.
Significant Cross-Selling Opportunities
Planet Payment has untapped opportunities to cross-sell its innovative services to acquiring banks, processors, and merchants. Its range of services and solutions enable cross-selling opportunities that are intended to increase revenue from existing customers by helping them broaden their product sets with additional value-add services. Customers have the ability to leverage the company's unified global platform and enhanced services to improve operational efficiency. For example, an existing customer for Pay In Your Currency at the point of sale recently agreed to expand its use of the company's services to include Pay In Your Currency at ATMs, which is expected to launch in the second quarter of 2012. Cross-selling opportunities are still at a very early stage of penetration and represent a significant incremental margin opportunity because there are lower customer acquisition and integration expenses.
SWOT Analysis Summary
Below we provide a traditional "SWOT" analysis to outline the major strengths, weaknesses, opportunities, and threats facing Planet Payment. On balance, we believe the company's strengths and opportunities outweigh its threats and weaknesses.
Attractive Capital Structure and Institutional Support
Planet Payment has an attractive capital structure with only 69 million fully diluted shares and no financial debt.
Planet Payment has strong institutional shareholder support and significant insider stock ownership.
Acquisition Candidate in a Rapidly Consolidating Industry
Planet Payment is a leading independent payment processor with a fast-growing, high margin, difficult to replicate multi-currency business as the key growth driver. This gives it some scarcity value in an industry characterized by accelerating M&A activity.
Strategic acquirors have shown the willingness to pay high multiples relative to revenue, EBITDA, and earnings for companies that have built their own processing platforms, possess unique technologies and have acquired attractive customer bases. This is because a differentiated payment processing platform is highly leverageable. We believe acquirors are not just paying for a stream of profits, but also a scalable technology platform to leverage larger transaction volumes and generate significantly more profits.
The table below lists transactions that have taken place in the industry over the past several years. We believe it is most instructive to focus our analysis on less mature, high margin targets that developed their own processing platforms and had unique, hard-to-replicate technologies (and to exclude from our analysis mature targets and those acting simply as merchant acquiring ISOs).
• In February 2008, Intuit bought Electronic Clearing House for $131 million, or ~25x LTM EBITDA of $5.3 million. ECHO owned its underlying processing technology. This wasn't the first time an eCommerce company linked up with a payment processor in hopes of growth; eBay purchased Paypal in 2002 (for 60x LTM EBITDA) and saw its profits rise by creating an end-to-end payment service for its customers. Intuit similarly expected to boost its revenue by collecting transaction fees every time someone makes a payment through its core software offering. Intuit announced that the deal provides Intuit with access to a valuable list of new customers, including large retail and hotel chains.
• In April 2010, Visa acquired Cybersource for $2 billion, or 31.5x LTM EBITDA of $63.5 million. Cybersource is a payment gateway for online merchants. The company owned a valuable processing platform with a deep list of big online merchants, including Home Depot and Google.
According to Visa,
With CyberSource, we are adding a new suite of leading eCommerce capabilities and experience in addressing eCommerce merchant needs… Online commerce continues to grow rapidly, and this acquisition will enable Visa to offer new and enhanced services that will better meet the growing demand among merchants globally… The acquisition of CyberSource aligns with Visa's long-term strategic plan to identify and invest in opportunities today that will drive future growth…
• In August 2010, Mastercard acquired DataCash for $520 million, or 19.5x LTM EBITDA of $26 million. Datacash is an international provider of credit and debit card transaction processing and secure internet payments. Mastercard justified its purchase as follows: "eCommerce represents an important part of MasterCard's growth strategy, and this acquisition will allow us to provide new services to our acquiring customers, as well as drive increased eCommerce penetration in both existing and new markets. The acquisition of DataCash will expand our already significant eCommerce merchant gateway presence in Asia and Australia to European countries and other high-growth, emerging markets worldwide."
Strategic acquirors pay top dollar for payment processors whose unique technologies they can leverage and use to grow their revenue streams. They also place a high value on deep and extensive customer relationships through which they can cross-sell services.
Planet's solutions are creating change in its industry, shifting the balance of power from issuing banks to acquiring banks and processors and offering those institutions access to a piece of a very large potential profit stream.
We believe the company is positioning itself to be a part of a larger organization and that it will be an attractive acquisition candidate for many financial industry players in the next few years. A strategic acquiror would be buying a highly flexible multi-currency payment processing platform and an attractive customer roster of large eCommerce merchants and leading international banks and processors (and through them, large, international retail and hotel chains). As history would suggest, we believe this justifies valuation multiples at the upper end of the range for precedent transactions (>18x EV/EBITDA, 3x - 4x EV/Sales, and 25x - 35x Price/EPS).
Valuation and Price Target
We believe with a reasonable certainty that in light of the company's dominant competitive position and its growing market opportunity, that Planet can continue growing its top line at 30-40% per year for the next 3-5 years, and at a much higher rate in the upside scenario should the company land very large international acquirer accounts or successfully leverage its platform to expand into other areas of processing. If this takes place, we expect a return of 3-5x from current trading levels, and we believe the risks to our estimates are skewed toward the upside.
Based on various valuation methodologies, we believe Planet today has a fair value of $8 per share. Our valuation is based on earnings projections spanning the next 5 years. The company's stock price appears to undervalue the company's prospects and its impending IPO on the NASDAQ may serve as a catalyst to unlock value from the current stock price.
Comparable Companies Analysis
Given Planet's rapidly accelerating profitability, it is difficult to justify the use of mature sector peers as a relative valuation tool. However, below we have included for reference an analysis of publicly traded companies in the financial transactions and processing sectors. Valuations range from 16x -20x forward P/E, 9x - 12x EV/EBITDA, and 12x -20x EV/Cash from operations. Planet appears rich based on these metrics.
But the company's unique position as a multi-currency processor with related data analytics and gateway operations makes a direct comparison with sector peers inadequate.
The following charts illustrate why investors appear to be placing a premium valuation on near term earnings. The company's revenue and growth rates are the highest in the industry, and it has an unlevered balance sheet and a return on invested capital comparable with its peers but set to surpass the average over the near term.
Discounted Cash Flow Analysis (DCF)
Using a traditional DCF analysis, we arrive at our share price target of $8.00 by projecting unlevered free cash flows, and applying an 11x - 13x terminal multiple to 2016 EBITDA based on the comparable companies and precedent transaction analyses. Our base case weighted average cost of capital (WACC) assumption is 9.5%. Given Planet Payment's current share price of $4.30, we believe the stock is undervalued today and has significant room to appreciate as the company grows in the coming years.
Near-Term IPO a Potential Catalyst for Stock Price
In May 2012, the company filed an amended S-1 offering document to register shares for a listing on the NASDAQ. At the current time, it appears the offering will be $75 million in size, but it is still unclear what percentage of the offering will be newly issued shares vs. shares being sold from existing investors.
JP Morgan, William Blair & Company, and Jefferies are listed as the leads of an 8-bank underwriting syndicate for the offering. Several banks of this group are likely to follow the offering with research coverage of the company. The NASDAQ listing will provide greater liquidity for shareholders vs. the existing OTCQX listing, and help to raise the visibility and profile of the company to new investors, potentially serving as a powerful catalyst to unlock value from current trading levels.
Planet Payment has built a defensible business that is at the forefront of a nascent, rapidly growing segment of the payment processing industry. It has developed a unique processing technology platform that allows its customers to add a profit stream to their existing operations and as a result, is deepening relationships with its client base of leading international banks and processors and rapidly attracting new, sticky business. These qualities make Planet an attractive acquisition target in a rapidly consolidating industry.
We believe the company has a clear runway to continue growing revenue at 30-40% per annum over the next 5 years and that operating leverage will allow it to grow free cash flow at a much higher rate. Based on our analysis, the equity has a fair value of $8 per share, representing little risk of permanent capital impairment over a multi-year horizon from current trading levels. Its near-term IPO and resultant exposure is likely to serve as a catalyst to drive the equity toward our fair value estimate.
Disclosure: I am long PLPM.
Additional disclosure: Please read the full legal disclaimer at the end of our 30 page report linked to in the introductory section.