Payment Data Systems (NASDAQ:PYDS) Well Positioned In Mobile Payments Industry

December 02, 2015

According to a report on the mobile payments industry, Business Insider notes that mobile transactions accounted for around 2% of all credit and debit card volume in the U.S. in 2013. Globally, mobile transactions accounted for around 4%, according to the same report.

While these numbers are not very high, it is the growth that should be taken note of. According to Business Insider, in the U.S. alone, mobile transactions have seen growth of 118% over the last few years. This does not come as a surprise considering the increasing use of smartphones and tablets and increasing Internet penetration globally.

So what exactly comes under mobile payment? Business Insider clarifies this in its report on the industry. Here is their definition of mobile payment:

“A mobile payment occurs when a mobile, Internet-connected device is used to facilitate a transaction that might otherwise have taken place using a physical credit card, check, or cash, at a store or point-of-sale.”

An important in the mobile payments industry, apart from of course the phenomenal growth, is consolidation. Indeed, the industry has seen several transactions announced in the last few years. Many of these transactions have involved the acquisition of a private company by major player in the wider payments processing industry.

One such transaction PayPal Holdings Inc.’s (NASDAQ: PYPL) acquisition of Braintree. PayPal acquired the company in a transaction valued at $800 million in September 2013. According to Business Insider, the deal gave PayPal a major boost in mobile transaction volume in the near-term. In the longer term, it gave the payment processing giant a network of clients.

Several other transactions have occurred in the payment processing space. Global Payments Inc. (NYSE: GPN) has acquired Accelerated Payment Technologies a few years ago. In fact, according to an article on Seeking Alpha by an author named Inefficient Market, between July 2011 and August 2012, a total of 33 transactions took place in the payment processing industry. This period excludes PayPal’s acquisition of Braintree, which as Business Insider noted in its report would lead to a wave of consolidation in the mobile payments space. Indeed, Business Insider noted in its report that the likes of Visa Inc. (NYSE: V), MasterCard Inc. (NYSE: MA) and American Express Company (NYSE: AXP) have already made investments in this space.

So who could be a potential takeover target in the mobile payments space? Considering that acquiring companies will be looking for targets that have strong growth and are attractively valued, an ideal candidate for them would be Payment Data Systems Inc. (NASDAQ: PYDS). Based in San Antonio, Texas, PYDS operates in the U.S. under two operating segments: Payment Data Systems, and FiCentive Inc. The company offers integrated electronic payment processing services to merchants and businesses. For a company that is operating in a fast-growing industry, PYDS currently has a market cap of just $27.75 million, making it an undiscovered gem in the mobile payments space.

Recently, Payment Data Systems reported its financial results for the quarter ended September 30, 2015. The results reflected the ongoing growth in the mobile payments space.

For the quarter, PYDS reported revenue of $3.6 million. The company’s gross profit for the quarter improved 5.1% on a year-over-year basis. Adjusted EBITDA for the quarter was $620,408. Adjusted earnings for the quarter were $565,028, or $0.05 per diluted share. Revenue for the first nine months of 2015 was $10.7 million, up 11.3% on a year-over-year basis. Gross margin for the nine-month period was 33.4%.

In the third quarter, PYDS saw record dollars processed of more than $864.7 million, up 8.6% on a year-over-year basis. The company also saw record credit card processing volume, with dollars and credit card transactions up 14% and 3%, respectively. Electronic check transaction volumes for the quarter rose 6%, while returned check transactions processed fell 9%.

Commenting on Q3 results, CEO Michael Long said that the company delivered record credit card transaction volumes during the third quarter. Long expects this trend to continue in its fourth quarter, which not surprisingly the strongest due to the holiday season and charitable giving. The company has also taken steps to maintain growth, including the launch of the Stream Prepaid MasterCard. Long describes Stream Prepaid MasterCard as PYDS’s robust platform that allows customers to disburse cash instantly and conveniently. Long notes that this is an ideal solution for insurance companies and sales agencies that are required to make regular payments to individuals.

Earlier this month, Payment Data Systems also announced the launch of Akimbo Now, a payment service that allows businesses and third-party applications to send rewards, incentives, and other payments. Houston Frost, SVP of Payment Data Systems Corporate Development said that Akimbo Now empowers businesses and third-party apps with the ability to immediately deliver a wide variety of payments from small incentives to large payroll checks.

PYDS is currently generating $2 million in free cash flows annually. The company has no debt on its balance sheet and $3.8 million in net cash. It is focused on growth with the launch of new products and services, and also through strategic acquisitions. In August, the company completed an uplisting on the NASDAQ, which gives it visibility. All of these make PYDS a very attractive takeover target, especially considering that the company has a market cap of just $27.75 million right now. Consider that several of the deals in the mobile and payment processing space have been completed at close to $1 billion per transaction; the upside in PYDS from current levels is tremendous.


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