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On Monday, First Data Corp. (NYSE: FDC) released its first earnings report since its $2.8 billion initial public offering a few weeks ago. The Atlanta-based company processes credit and debit payments for banks and merchants.
The First Data earnings report reflected a net loss that narrowed to $126 million from $235 million in the year-earlier period. Revenue increased 5% to $2.92 billion in the quarter.
CEO Frank Bisagnano faces some challenges. First Data is not growing as fast as its competition and suffers from high debt levels. Under Bisagnano, the company has been cutting costs and investing in new technologies. The most recent report reveals it is working to an extent, but will it be enough?
First Data had a lackluster IPO priced at $16 a share, below its expected range. On the first day of trading it closed below the IPO price. Only recently have shared traded above the IPO price.
As a new company, Wall Street had not set expectations for the most recent earnings report, but its next quarter should bring increased scrutiny.
Intense Competition in Payment Processing
First Data has three core business segments. Its primary segment is its Global Business Solutions, which provides point-of-sale and e-commerce services. The crowded market segment include competitors with big names such as Stripe, PayPal (NASDAQ: PYPL) and Square, just to name a few.
First Data has managed to secure a significant market share, placing it at the top last year. However, many of its competitors are in midst of their own financing rounds that will help bolster their own growth. Square recently filed for its own (even bigger) IPO.
These companies run off of brand recognition and low price points. Some analysts believe First Data has not created a sustainable competitive advantage here and feel it’s unlikely that it can.
$21 Billion in Debt
First Data has an incredibly high debt load. Total debt from the most recent earnings report listed $21 billion. The high interest expense is contributing to First Data’s losses. However, the recent earnings report reflects the benefits of restructuring; its balance sheet has improved and interest expenses have decreased.
However, the high debt load uses up essential cash flow that could be used elsewhere. First Data could miss out on investing in more technology and possible acquisitions, which is a necessity as competition heats up.
Despite the narrowing losses reported, the market finds little reason in the third-quarter earnings report for confidence in the company. Growth is modest, and although restructuring has made the balance sheet significantly better, its high debt level continues to be a burden.
As competition continues to increase in this market, it’s unclear whether First Data has can retain its market share lead.
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