The phenomenal growth experienced by the mobile payments industry over the last few years has generated significant interest in the industry. The industry has seen consolidation since 2014. The growth in the mobile payments industry has been driven by the increasing use of smartphones and tablets.
In 2015, search engine giant Google Inc. (NASDAQ: GOOG) announced the acquisition of Softcard, a joint venture backed by Verizon Wireless, AT&T Mobility and T-Mobile. Google’s acquisition of Softcard came just a week after South Korean conglomerate Samsung announced the acquisition of LoopPay.
Apple Inc. (NASDAQ: AAPL) launched its mobile payment service Apple Pay in the U.S. in 2014. Even retailers such as Wal-Mart Stores Inc. (NYSE: WMT) and Target Corp. (NYSE: TGT) have launched their mobile payment services.
So why are big names entering the mobile payment space? They are because the industry is experiencing phenomenal growth. According to market research firm Gartner, by 2017, global mobile payment transaction volume is expected to reach $717 billion. This is substantial growth considering that in 2013, mobile payment transaction volume totaled $235.4 million. In the U.S. alone, the mobile payment market was estimated at $50 billion back in 2014. Juniper Research, in a 2014 report on the industry, noted that more than 2 billion mobile phone or tablet users will make some form of mobile commerce transaction by the end of 2017.
Even traditional payments companies such as Visa Inc. (NYSE: V) and MasterCard Incorporated (NYSE: MA) are taking a keen interest in the industry.
An Emerging Player
The mobile payments industry has seen consolidation since 2014, which has boosted valuations. However, there are still some emerging players in the industry, offering attractive valuations.
Payment Data Systems Inc. (NASDAQ: PYDS) is a San Antonio, Texas-based processor of electronic payments for other companies. PYDS has two operating segments: Payment Data Systems and FiCentive Inc. The company offers integrated electronic payment processing services to merchants and businesses, including all types of Automated Clearing House (ACH) processing, credit, prepaid card and debit-card processing services.
In a recent investor presentation, Payment Data Systems noted that it generates revenue across the payment processing value chain. PYDS has seen phenomenal growth in its transactions processed each year. Transactions processed per year have grown at a CAGR of 35% since 2011.
In 2011, PYDS processed 4.3 million transactions per year. By 2014, this figure went up by 3x to 13 million. In 2015, PYDS processed 14.3 million transactions. The growth in dollar terms has been even more impressive. PYDS’s dollar processed per year have grown at a CAGR of 101%. In 2011, the company processed $204 million. By 2014, this figure had gone up by more than 14x to $2.978 billion. In 2015, the company processed $3.3 billion worth of transactions.
This phenomenal growth could not have been achieved without a blue chip client list and partnerships. PYDS’s partners and clients include Fifth Third Bank, Wells Fargo, Eli Lilly, Merck & Co., Merrick Bank, Pfizer and Medtronic among others.
Earlier this year, PYDS’s subsidiary FiCentive expanded its relationship with its customer C2Go Inc., an innovative electronic payment solutions provider to business and individuals. According to the terms of the agreement, Payment Data Systems will provide funding to C2Go for expansion of its B2B commissions services in the Las Vegas market. C2Go will co-brand PYDS’s Akimbo Prepaid MasterCard® and FiCentive will launch a C2Go-branded mobile and web application by leveraging the existing Akimbo platform. PYDS believes that the addition of C2Go’s cardholders could more than double the number of Akimbo Card users by the end of this year.
In late February, Payment Data Systems also entered into an agreement with Spark Development Network for payment processing services. Spark Development Network is the creator of Rock RMS, an open source Relationship Management System built for churches and businesses.
Also in February, Payment Data Systems announced that it supports Apple Pay™ on the Akimbo Prepaid MasterCard®, including the Company’s co-branded reloadable cards distributed by its corporate clients. In fact, PYDS’s is the first prepaid card to be integrated with Apple Pay.
These agreements and developments will ensure that Payment Data Systems continues to register strong growth. Indeed, the company saw record transaction processing results in the fourth quarter and full-year 2015. Recently, PYDS reported its full results for the quarter and financial year ended December 31, 2015.
In 2015, PYDS’s total dollars processed set a new record, exceeding $3.3 billion. Total transactions processed for 2015 reached 14.3 million, up 10% over 2014. PYDS’s revenue in 2015 was $14.4 million, up 7.4% from 2014 levels. The company’s margins also improved in 2015. Gross margin in 2015 was 34.5% of revenue, compared to 31.2% of revenue in 2014. Adjusted EBITDA for 2015 was $2.9 million, compared to $2.6 million reported in 2014. PYDS’s net income for the full year 2015 was $1 million, or $0.08 per diluted share, compared to $3.8 million, or $0.41 per diluted share reported in 2014.
Michael Long, Chairman and CEO at Payment Data Systems, said, “This is truly an exciting time to be in the payments space. The rapid growth of e-commerce, online mobile payments and new alternative payment methods is driving significant change in the payments market, with electronic payments now exceeding 85% of all non-cash payments. As never before, merchants need to manage the complexity to thrive and are looking at payments and payment innovators much more strategically than in the past. We serve unmet needs in a fast growing market that demands secure, adaptive, and convenient payments and prepaid products – and because of the customization and innovation we provide in meeting these needs, we have created a loyal base of customers.”
Louis Hoch, President and COO at Payment Data Systems, described 2015 as a year of significant accomplishments that position the company for long-term growth.
What Makes PYDS Attractive
Total dollars processed for the fourth quarter of 2015 exceeded $833.0 million, consistent with the same period a year ago. ACH (eCheck) transaction processing volumes for the fourth quarter were down 1% compared to the fourth quarter of 2014, reflecting the October 2015 introduction of a new eCheck verification service that helps merchants prevent returns before processing and reduces fraud. The introduction of this service reduced return processing by 22% compared to the same period last year, however, revenue from the new verification service significantly exceeded the lost revenue from return eCheck processing fees. Credit card processing volumes for the fourth quarter of 2015 set a new record, with credit cards dollars processed up 6% and credit cards transactions processed up 5% compared with the fourth quarter of 2014.
Record 2015 Annual Processing Results
Apart from strong operating performance as noted above and the growth in the mobile payments space, PYDS is an attractive proposition because of its strong balance sheet. The company has no debt and has a clean capital structure. And in fact, PYDS generates free cash flow, which is not always the case with small cap companies. In 2015, PYDS generated $2.1 million in cash flow from operations and $1.3 million in free cash flow. The company ended 2015 with $4.1 million in cash on its balance sheet. This translates to roughly a fifth of the company’s current market capitalization. Indeed, the market is significantly undervaluing PYDS right now. PYDS is not only an attractive investment proposition but it is also an attractive takeover target for any company looking to gain a foothold in the mobile payments space.