Payments processing is a fantastically profitable business if you do it right, we've recently discussed the advances of Par Technology (PAR), one of our favorite stocks we hold in the SHU portfolio and also Intelligent Systems (INS), although controversy has erupted on the latter.
Here we introduce another payment processor which is really blistering ahead as the progress at PaySign (PAYS) is really impressive and investors have noticed the shares have tripled this year:
SC Capital Group did a fantastic write-up here last year when the company still went under another name (3Pea International) and it now sits on 650% gains, so kudos to it.
But it's been more than a year since the last SA article so it's time for an update. The progress in the share price is of course well supported by developments on the ground; from the earnings deck:
Revenues are zooming up and the company is now well in the black.
The company started off providing a prepaid card to the plasma center business (processing blood donations) and that's still a very good business for it. The plasma business itself grows at roughly 10% per year but PaySign's prepaid card business grows faster, that is, it's taking market share.
It can do this because it's historically focused and well-connected in this business while its main competitor, Wirecard (OTCPK:WRCDF), is much larger and has bigger customers in other verticals.
This is a recurring business which generates a roughly 3.3% take rate. It does its own processing with its own software platform, with the additional advantage that this platform can be leveraged for use in other adjacent verticals:
From the 10-Q:
We have developed prepaid card products for healthcare reimbursement payments, pharmaceutical assistance, donor compensation, corporate and incentive rewards and expense reimbursement cards. We plan to expand our product offering to include payroll cards, general purpose re-loadable cards and travel cards. Our cards are offered to end users through our relationships with bank issuers.
Management expects that the pharma vertical will already provide roughly 20% of revenue this year so that is a pretty good start.
The next step in this is the introduction of the PaySign Premier Card which will happen in the present quarter (Q2). What is the difference with the cards it already issues? These are simple corporate spend cards, the Premier Card (Q1CC):
it's more of a full service card account, debit account. So will offer direct deposit and it will offer you remote deposit capture, offer you bill pay, offer several other features that are more in-line with traditionally what you would see out there under the net spend and green dot offerings.
There is little clarity on how the more sophisticated Premier Card is going to add but we can imagine at least two ways:
- Adding functionality (and fees) for existing customers.
- Expanding the TAM, that is, having solutions for a wider set of verticals.
There are plenty of ways it extracts fees from customers:
Mostly for illustrative purposes as it's hard to compare feature for feature with the competition, but management argues that it has considerable advantages:
Given the rather spectacular growth, it's obvious it is doing something right, no doubt about that but we analysed Intelligent Systems and its card seems far more versatile to us.
However, that's probably much less relevant than it might seem at first hand with the market being segmented and the simple but effective card from PaySign the perfect solution for numerous verticals like the plasma industry.
The Q1 results were nothing less than stellar:
- Revenue increased 55.2% to $7.25M
- Gross profit increased 68.3% to $3.8M with gross margin at 52% (up 400bp y/y).
- Operating expenses increased 67% to $3M.
- Net income increased 111.3% to $871K
- Adjusted EBITDA increased 121.5% to $1.7M with the margin improving 708bp to 23.7%.
- The revenue conversion rate of gross dollar volume loaded on cards for the quarter was 3.79% or 379 bps compared to 3.68% or 368 bps the same period the prior year.
All in all, another stellar quarter.
Guidance for 2019 hasn't changed:
- Revenue $38M-$40M (+66% at midpoint)
- Adjusted EBITDA $10M-$12M (+124% at midpoint)
So basically adjusted EBITDA growth continues where it left off in 2018, growing well into triple-digit territory so it's no wonder the stock has gone gangbusters.
Gross margin was 52% of revenue in Q1, up from 48% a year ago with operating cost at $3.0M (up from $1.8M a year ago). There is a beginning of operational leverage with SG&A only up 4.4% sequentially.
Management argues margin improvement will continue (Q1CC):
We do make investments in software and technology. So both on the fixed asset as well as the intangible asset side, roughly 2.25 million to 2.5 million would be our investments we expect for the year. So from an operating expense standpoint, you'll of course see that growing at a slower rate than it did last year and therefore representing a smaller percentage of revenues, if you will generating higher EBITDA and net margins.
The business seems a license to print money:
This might look surreal as these figures are larger than revenues. However, for 2018 as a whole, cash from operations was $16M and in Q1 the figure was $20M but this included $19.15M in changes in customer card funding which is restricted cash, from the 10-Q:
The company has $12.0M in liquidity on its books. Stock-based compensation is rising rapidly but still pretty modest, well under 10% of revenue but there is a fair bit of dilution:
In Q1, the average diluted share count was 54.5M so there is more to come.
Needless to say, on a forward basis, valuations are not quite as extreme but still pretty hefty at a 12.5x EV/S multiple. Earnings multiples are even steeper, but aren't all that important right now (EPS is expected to come in at $0.13 this year rising to $0.31 in 2020).
This is one of those stocks one wishes to have discovered one or two years back. Others here did, so kudos to them, they've been richly rewarded. It's difficult to imagine growth not continuing as there is very little to no churn and once it is in with a customer it grows with them.
There are still expansion opportunities within its mainstay vertical, plasma, but conquering other verticals is now well on its way with pharma already supplying a good chunk (projected to be 20% this year) of its revenue.
We have no idea what its Premier Card will be able to add in terms of additional revenue and customers, there was no discussion on the CC about the potential.
But given the valuation of the shares, the company cannot afford even fairly small disappointments. We think one could still get in here, but we would not establish a full position.
While waiting for a pullback, one could also sell put options to get shares cheaper or collect premium.
Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in PAYS over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.