This is an attempt to read up more on global companies, in particular looking at some of the disruptors in tech space.
In this article, I will be talking about a payment gateway solution company called Adyen NV, which has been around since 2010 but only really boom at the back of e-commerce trend two years ago. The company is listed in the Amsterdam Stock Exchange since 2018.
Adyen NV is a company I’ve been dealing a lot at my current workplace (almost on a daily basis) since I joined my e-commerce company. Before that, I’ve had to deal with another company called Stripe which does pretty much the same thing but is based and headquartered in the US.
To have a better understanding on how I can enrich some value for the company through the negotiation process, I figured that I would spend my weekends reading up on the company to have a deeper understanding of their value proposition.
About The Business
Adyen NV (AMS: Adyen) is a Dutch payment platform company that allows businesses to accept point-of-sale payments for their e-commerce business.
The unified single platform is built with an API interchange for integration for a holistic view of all payment transactions irrespective of channel.
In other words, the model works similarly like how our NETS work for our local branding but with a much larger API network to integrate behind the scene.
Adyen debuted its IPO in Jun 2018 at EUR 240/share and its share price rises by 90% on the first trading day.
Management has guided that they would strive to achieve revenue growth of between mid-twenties and low thirties in the medium term while improving EBITDA margin through optimization of efficiency to levels above 55% in the long term.
Thus far, they have achieved their financial target of what they aimed to become.
Payment Gateway Solutions such as Adyen, Boost, Worldline, Paypal, Alipay or Grabpay come in and complement the direct approach scheme of card processors such as Visa, Mastercard and AMEX.
To understand better how these payment gateway platform works, we must first understand how the business model of credit card processors work.
Credit card processors such as Visa or Mastercard usually charge 3 different types of fees:
- Processing Fees – Charged by your payment provider (e.g Visa/Mastercard/AMEX/Discover) based on the MDR for processing the payment
- Card Scheme Fees – Charged by the card schemes for using their network
- Interchange Fees – Charged by the customer’s bank
When it comes to interchange fees, there are ways to bring it down because it depends on the issuing bank and location of the bank and this is where global gateway like Adyen comes in.
As a local acquirer, interchange fees are usually cheaper because they are a global platform catered to merchants in each of the acquiring country, hence they can offer a much cheaper rate than the traditional issuing bank.
The company’s business revenue segment is dividend into 4 parts:
Settlement Fees are the Merchant Discounted Rates (MDR) fees paid by merchants, similar to how credit card processors like Visa or Master are charging their merchants. The difference is that costs passed on to merchants is a mark-up charged by Adyen for its master acquiring services as a result of very huge consolidation volume and lower interchange fees.
To illustrate an example, Adyen will charge MDR of 2% to a particular merchant while paying only 1.1% processing fees to Visa. The difference is their direct revenue to the pocket.
The growth of this revenue segment will depend on the company acquiring more merchants and also the increasing Gross Merchandising Value (GMV) transacted by merchants through volume transactions.
The processing fees is a fixed fee per transaction for the use of the platform.
It is usually fixed at 2 to 3 cents for each transaction and used to enhance the processing capability of the platform over time.
Sales of Goods:
Adyen segregates the sales of the terminals (POS) from the payment services as the latter is subject to IFRS15 based on the revenue recognition at the time of the obligation performed. For this segment, the company recognizes revenue at the time of the sale of the POS terminals and related accessories.
The last segment is to categorize all the other revenue that doesn’t fit into the above 3 segments such as foreign exchange service fees, third party commission, referrals, etc.
The company has grown its volume transactions from just over 100 billions in 2017 to over 230 billions in 2019. While faced with an economic uncertainty in 2020 because of the Covid, the company still manage to amass an increase in growth to over 67 billion in Q1 2020, which is a 38% increase year on year growth as compared to Q1 2019.
Revenue from contracts have also grown correspondingly to the increase in volume transactions processed over time while gross profit margins are stable at between 19% to 22%.
Net profit margin ranged between 33% and 41% and the good trend seems to continue in Q1 FY2020 with NPM margins coming in at 46%. The company has a goal of increasing the NPM margins to over 55% in the mid term.
The company is not trading cheap at about 100x of forward PE earnings but this is a company that is still growing at over 30% in the next few years as it opens up new regional market (they just opened up new markets in Africa in 2019).
The growing EBITDA margin also shows that the company is moving in the right direction when it comes to rationalizing its operating efficiencies to enhance better use of their productivity and platform to merchants.
For a case comparison in reference, Paypal is trading at 98x PER while Square Inc is trading at over 150x PER. These are growing names with growing businesses so they are likely to continue their uptrend until growth is plateuing.
To balance the article, I feel that we should also take note of these few risk factors.
Reliance On Merchants Growth
As the gateway to the payments platform, much of its volume and size of transactions will very much depend on how much merchants can grow their business organically and through acquisitions.
During boom period, we should see an increase in both demand and supply needs which will transcend with increase volume over time. However, during recession or economic uncertainty like Covid, we will see a drop in spending from both merchants and transactions.
The company faces a wide array of competitions in this space with the likes of Stripe, PayPal, Grab, World line all narrowing into this space of digital point of payment solutions.
The race to capturing market share and offering a competitive MDRs and having the best API integration as a platform will be key for these gateway companies. Most of these payment gateways are also on a T+1 so working capital requirement and liquidity will be absolutely key to acquiring new merchants.
You can see how these tech companies have rebounded quickly since Covid has rattled the market a couple of months back.
This is for good reasons because if there’s anything about Covid, it has just accelerated the movement into more digital and more cashless payments for merchants. During the Fortitude budget, DPM Heng has even announced the Digital Resilience Bonus that targeted every hawkers, wet markets, coffee shops and retail into signing with NETS as a master acquirer. This will set the scene into a cashless payment scheme in the near future as we move into a more digital era world.
For now, I’ll continue to study more tech companies every week in the hope of getting into some of these positions in the portfolio to prepare for the next decade of stock investing.
Thanks for reading.
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