Payment Data Systems $PYDS A Small Cap FinTech Growth Opportunity

12.19.2016

The payment processing industry is becoming increasingly complex with the onslaught of new entrants and technologies. paymentdatasystems-650x535 The main players in this segment offers services such as processing of transactions carried out using cards including ACH, credit, debit, and gift cards. These service providers also offer value added functions such as balance sufficiency checks and related data.

One of the key players in this segment is Payment Data Systems Inc. (NASDAQ:PYDS). This San Antonio based company collaborates with major card companies such as MasterCard (NYSE:MA), VISA (NYSE:V), Discover (NYSE:DFS), and JCB Networks. Since the company’s strong-suit is in online transactions such as card-not-present transactions, it is well positioned to benefit from increasing e-commerce.

According to recent Black Friday/Cyber Monday figures, more and more people are shunning traditional shopping ritual like going to malls in favor of online purchases done right from home. The latest reports showed that the recent Cyber Monday set an e-commerce record in the US with $3.45 billion worth of transactions done for the event.

Payment Data Systems offers different services which make the process of online payment smoother and safer. The company’s ACH processing service offers Represented Check, which keeps a tab on customers’ non-sufficient funds for electronic payments. It also helps in converting funds into e-check format. With the increase in online payments as well as e-commerce, the company is likely to see substantial increase in its business in the long term.

Since Payment Data Systems collaborates with various card companies as illustrated above, it stands to benefit from the increased turnovers of these firms. The more people use these cards, whether offline or online, the more the services provided by firms such as Payment Data Systems will become indispensable.

The company is growing not only organically, but also through acquisitions. In December 2014, Payment Data Systems acquired Akimbo, which helped the company in boosting its product offerings. Akimbo uses the MasterCard network and provides general purpose reloadable prepaid cards. The acquisition likely provided the company with valuable synergies.

Payment Data Systems recently announced its third quarter results. The company reported its operating loss for the quarter at $574,897. It had earned $23,332 in the corresponding quarter of the previous year. Payment Data Systems also reported operating loss of $1.07 million for the first nine months of the year. The company’s revenue for the quarter stood at $3.6 million.

However, management says that the loss was mainly on account of higher SG&A expenses. The increase in the expenses was caused by increased hiring done by the company in anticipation of future growth. Payment Data Systems expects its business to expand in the coming future and hence ramped up its headcount.

The Akimbo acquisition also contributed towards losses as Payment Data Systems had to write off a higher amount for amortizing the assets acquired through the purchase of the company.

The company faces some challenges as well. Earlier this year, Payment Data Systems suffered a technological breakdown of its system, which resulted in unauthorized payments. The malfunctioning led to the loss of nearly $237,000 to the company. However, Payment Data Systems is looking to get reimbursed for this loss under the terms of its contract with payment companies. The company is also looking to file a claim with insurance as the incident may amount to a wire fraud.

Despite operating losses this year, the company ended the third quarter with $4.3 million in cash. The company also has zero debt, which allows it to remain flexible and lower the cost of capital. The company management elaborated that it ploughs back the free cash flow into the company. It can be assumed that such plough back lets Payment Data Systems obtain funds at negligible costs.

Payment Data Systems is also restructuring its management to better equip itself for future challenges. The company recently announced the appointment of Louis Hoch as its new CEO. Hoch co-founded the firm and has been working as its Chief Operating Officer and President since 1998. Prior to this, he had worked with several other corporations and built up the expertise in payment processing services. Under his leadership, the company is expected to innovate further.

Speaking at the conference call for its third quarter earnings, Hoch said that the company will continue to innovate on various fronts including digital wallet. The company is offering such wallets to its various users including the users of Akimbo prepaid card. The CEO also stressed that the company is on the lookout for potential acquisition targets.

The company stock is down 7.5% this calendar year so far. It hit its 52 weeks low of $1 in July. However, since then, it has shown good recovery. However, it is still considerably below its 52 weeks high of $3.80, offering attractive upside potential.

The company stock is now listed on NASDAQ and is expected to generate more visibility as well as liquidity.

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