Payment Data Systems Inc. (PYDS), an integrated electronic payment processor, recently announced its first quarter results, which showed marginal increase in the company's gross margins as the company managed to curtail its service expenses. It also showed encouraging growth for it's newly launched PINless debit product, which was launched in October last year. The company reported $3.6 million of cash and cash equivalents as on March 31, 2017 and had no debt.
While the company seems to be moving along, boosting its product portfolio and operational efficiency, it is the broader industrial developments which have put the company in the spotlight. Fintech sector has seen a rise in its M&A activity in the recent past. Towards the end of 2016, FactSet Research Systems, a leading financial analytics firm, announced the acquisition of Vermilion for $67 million, while insurance software provider Guidewire Software acquired ISCS for $160 million. However, the most notable development was the First Data Corp (NYSE: FDC) announcement of its intent to acquire CardConnect Corp (NASDAQ: CCN) for nearly $750 million. The deal valued the company stock at $15.00 per share, which led to a strong rally for the company stock in the market. CardConnect is also an electronic payment processor, focusing on smaller payments. More recently is the Vantiv (NYSE: VNTV) $10 Billion bid for Worldpay. These acquisitions may well set a trend for M&A activity in the segment, which may result in attractive options for Payment Data Systems.
With annual revenue of $589.32 million for the year ending on December, 2016, CardConnect commanded the price of $750 million. The company posted its net loss for the period at $16 million. Payment Data Systems, on the other hand, reported $12 million in revenue and $1.2 million in net loss for the same time period. First Data priced the company stock at $15 apiece, which resulted in P/E ratio of -17.44 as the
diluted EPS of CardConnect stood at ($0.86) per share. However using the forward P/E ratio as provided by FT Partners for CardConnect at 39.5 times, Payment Data Systems is conveniently valued at north of $70 million even using the EPS of -$0.15 it reported for the year 2016. P/E ratio of 39.5 values the company stock at $5.93 apiece. The company currently has 11.83 million shares outstanding, taking its value to $70.15 million. The current flurry of M&A activities in the electronic payment processing segment is a good omen as it shows the maturity of the market and consequent consolidation.
However, as we measure the attractiveness of Payment Data Systems as a target, the company is also in the process of capturing higher market share by making some purchases itself. The company recently announced making changes to its Letter of Intent for acquiring Singular Payments LLC. The change allows for more time for Payment Data Systems to carry out its due diligence. However, this change is not likely to have any material impact on the process. As the companies expect to complete the process well before the end of the year, it is likely that the impact of the acquisition will be visible on the full year performance of the company. Singular Payments LLC is engaged in the business of transaction processing, a St. Augustine, Florida based company founded in 2009. Singular Payments has processed 2.5 million transactions through its system worth $440 million. Payment Data Systems is expected to draw synergies from this acquisition as it combines the technological expertise of Singular Payments for boosting its operations. Singular specializes in designing payment processing software systems for healthcare industry.
Payment Data Systems CEO Louis Hoch said that the acquisition is expected to be accretive and will accelerate the growth potential of the company. It is also expected to create new revenue streams for the company. At the moment, it is difficult to compute the impact as the companies chose not to disclose the sales price and other terms and conditions of the transaction. However, looking at the operational areas of the companies, it is reasonable to expect that Payment Data Systems will be able to consolidate the businesses to attain efficiency and cost control as it looks to reverse the trend of posting net losses. The company announced its revenue for the first quarter of the year at $2.8 million while its CEO claimed that its "operating expenses were down year-over-year on an absolute basis." The process of expense optimization is expected to be further boosted with this acquisition.
Payment Data Systems (PYDS) is currently trading close to its 52 week low at $1.25. With the announcement of strong quarterly results and upcoming completion of its acquisition of Singular Payments, the stock is likely to show strength and resume upward movement. The main growth drivers for the stock price will include the company's growing cost efficiencies and the addition of new revenue streams.
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