Sector Watch: Payment processing stocks
Like most things that go the way of the Internet, so, too, goes commerce. Forrester Research estimates that U.S. e-commerce revenues were at $259.1 billion last year, and are growing at nearly 60% annually. This bodes well for CyberSource Corporation (Nasdaq:CYBS) and CAM Commerce Solutions, Inc. (Nasdaq:CADA), two companies benefiting from the move to online commerce from in-person banking.
CyberSource provides electronic payment and risk-management tools for businesses processing orders over the Internet. Approximately 228,000 customers use CyberSource tools, including half the companies in the Dow Industrial Average.
The company offers CyberSource Advanced service for merchants who want to accept online payments via credit cards, corporate procurement cards, electronic checks and the Bill Me Later service. CyberSource Essentials allows merchants to process credit card payments via websites and also processes telephone, fax and mail order payments using a Web-based virtual terminal. The company’s enterprise software processing platform, CyberSource Payment Manager, can authorize and settle payments originating from multiple sales channels. The company’s tools for risk management include Managed Risk Service, which offers professional analysis, risk modeling and monitoring, and Advanced Fraud Screen, a risk-scoring tool for assessing fraud risk, authenticating payers, verifying delivery addresses, making tax payments and ensuring export regulatory compliance.
CyberSource has strategic alliances with most of the leading online payment processors including AmeriNet, Checkfree, FDC/Telecheck, 14 Commerce, PayPal and Visa USA.
With online fraud running rampant, demand for fraud-screening services is rising. Visa and MasterCard are now even requiring merchants to comply with a comprehensive list of payment card security standards to limit the threat of identity theft. Faced with these rising compliance costs, many merchants are opting to process payments through third-party providers such as CyberSource and make them responsible for managing sensitive customer data.
CyberSource processed 1.2 billion transactions in 2007, up 45% from 2006. The value of these transactions, at $54 billion, was 57% higher than 2006. CyberSource’s revenues rose 67% in 2007 to $117 million from $70.3 million last year and non-GAAP net income jumped 72% year-over-year to $18.1 million, or $0.42 per share, from $10.5 million, or $0.29 per share.
During the fourth quarter of 2007, CyberSource grew its European operations 87% and its global acquiring business 103% year-over-year. According to Forrester Research, European e-commerce has been grown 38% annually in the last 10 years to $176.9 billion in 2007. The company is also capitalizing on a trend among its larger U.S. customers to seek greater access to international markets, especially Europe and China. International online e-commerce requires merchants to support more payment types, provide currency conversions, accommodate new payment processors and mitigate higher fraud risk.
Cybersource added over 15,000 new customers in the fourth quarter of 2007, including Borders Group, Inc. (NYSE:BGP), Air France, Air India Charters, Christian Dior (EPA:CDI), Juniper Networks, Inc. (Nasdaq:JNPR) and La-Z-Boy Incorporated (NYSE:LZB). In addition, the company closed the acquisition of competitor Authorize.Net Holdings for cash and stock valued at $662 million.
CyberSource targets 84%-plus revenue growth in 2008 to at least $215 million and 135%-plus non-GAAP net income gains to at least $42.5 million. Non-GAAP per-share earnings are forecast to rise at least 40% to between $0.59 and $0.61. Analysts anticipate 25% average annual growth for CyperSource over the next five years. These shares have traded as high as $19.60 in the last 12 months but currently trade near $13. My $20 price target for CyberSource is above Tuesday’s closing price of $13.76. Shares have traded between $10.85 and $19.63 over the last 52 weeks.
Like CyberSource, CAM Commerce Solutions provides point-of-sale payment processing solutions for small to mid-sized, traditional and e-commerce businesses. The company’s tools provide inventory management, point-of-sale accounting, credit and debit card processing, Internet sales, gift card and customer loyalty programs and extensive management reporting.
CAM retailing systems offer complete end-to-end solutions and integrated software, hardware, installation, training, technical support and Web processing. Payment processing is through the company’s X-Charge software. CAM also offers CAM32 software for hard goods retailers whose inventory is re-orderable, Profit$ software for apparel and shoe retailers whose inventories are seasonal, Retail STAR and Retail ICE for Windows-based systems, and MicroBiz, a Windows-based system for single-store and hard goods retailers. In addition, CAM markets Retail STAR accounting software for managing orders, accounts receivable, accounts payable, general ledger and bank reconciliations, and i-STAR software for processing, tracking and shipping orders received through Internet storefronts.
CAM revenues increased 18% in the fiscal year ended Sept. 30, 2007, to $32.2 million from $27.2 million in the prior fiscal year. The company installed a record 6,347 new X-Charge accounts in FY 2007, which was a 58% increase from 4,020 new accounts installed in FY 2006. More than 12,000 merchant accounts generated X-Charge revenues last year and the volume of payments processed exceeded $3.5 billion. As a result of higher volume and significantly improved margins, CAM boosted income 78% in FY 2007 to $4.7 million, or $1.12 per share, from $2.6 million, or $0.64 per share, last year. Recurring revenues growth also helped fuel margin gains; recurring revenues grew to 71% of fourth quarter FY 2007 revenues. Quarterly cash dividends grew 88% year-over-year to $0.30 per share and increased by an additional penny in the first quarter of FY 2008.
Strong growth continued in the first quarter of FY 2008, with revenues up 37% year-over-year to $9.8 million from $7.2 million and net income climbing 75% year-over-year to $1.7 million, or $0.30 per share, from $1 million or $0.23 per share. The number of X-Charge merchant accounts rose to 13,500 and payment processing transaction volume expanded to $4 billion. Analysts predict CAM will generate 35% growth this year; I think this company will produce annual growth exceeding 20% over the longer-term. CAM shares have traded as high as $45 in the last 12 months but closed Tuesday at $37.21. My $43 price target for CAM Commerce Solutions (CADA) is above the recent stock price. Shares have traded between $21.32 and $45.25 over the last 52 weeks.
About the Author
Contributing author Lisa Springer is an equity research analyst with nearly 20 years of investment research experience.
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