Morningstar | Worldpay Delivers Solid 4Q
Worldpay delivered solid fourth-quarter results that we think highlight the growth opportunities in front of this narrow-moat franchise. Fourth-quarter results were a bit ahead of our expectations, but management’s 2019 guidance is a bit shy of our expectations. In balance, we see nothing to materially alter our long-term view and will maintain our $93 fair value estimate.On a pro forma basis, excluding currency impacts, net revenue increased 9% year over year. The technology solutions segment led the way, with 20% growth on this basis. We think this segment will remain the key driver for the business, as Worldpay and the industry shift toward integrated payments and omnichannel solutions. However, this quarter’s growth is ahead of our long-term expectations. Merchant solutions and issuer solutions generated 3% and 4% growth, respectively, on the same basis. The modest growth in these more mature areas were largely consistent with recent results.
Adjusted EBITDA margins improved to 50.6% from 49.5% last year. On a pro forma basis, the company saw 160 basis point of improvement, and Worldpay finished the year modestly ahead of its cost synergies target. While cost synergies are likely the most easily achieved merger benefit, we are pleased to see the integration progressing smoothly.
Worldpay continues to deleverage its balance sheet after the merger, paying down $180 million in debt in the fourth quarter and $520 million in January. We think the company’s strong profitability and the asset-light nature of the business allows for a relatively quick move to a more stable balance sheet, and we are pleased to see management focused in this direction. However, Worldpay expects to generate over $1 billion in free cash flow in 2019, and the company increased its share buyback authorization by $500 million, suggesting buybacks will be a material use of cash this year. We would prefer that the company maintain sufficient dry powder for the future M&A we expect, but we also think the company will likely pause on this front until the merger is fully integrated, which opens a window for capital return.
Worldpay is a holding company. Through its subsidiaries, the company provides electronic payment processing services to merchants and financial institutions. The company operates two segments: Merchant Services, which provides merchant acquiring and payment processing services to national merchants, regional and small-to-mid sized businesses; and Financial Institution Services, which provides card issuer processing, payment network processing, fraud protection, card production, prepaid program management, automated teller machine driving and network gateway and switching services that utilize the company's proprietary Jeanie debit payment network to a set of financial institutions.
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