Global Payments Q3 Earnings Conference Call: Full Transcript

Operator:

Ladies and Gentlemen thank you for standing by and welcome to the Global Payments Third Quarter Fiscal 2016 Conference Call. At this all participants are in a listen-only mode. Later we will open the lines for questions and answers. If you should assistance during this call please press star then zero and as reminder today's conference call will be recorded. At this time I would like to turn the conference over to your host, Vice President Investor Relations Andrew Langford. Please go ahead.

 

Andrew Langford: Vice President of Investor Relations:

Good morning and welcome to Global Payments fiscal 2016 third quarter conference call. Our call today is scheduled for one hour. Joining me on the call are Jeff Sloan, CEO; David Mangum, President and COO; and Cameron Bready, Executive Vice President and CFO.

Before we begin, I would like remind you that some of the comments made by management during today's conference call contain forward-looking statements which are subject to risks and uncertainties discussed in our SEC filings, including our most recent 10-K and subsequent filings. These risks and uncertainties could cause actual results to differ materially. We caution you not to place undue reliance on these statements. Forward-looking statements made during this call speak only as of the date of this call and we undertake no obligation to update them.

In addition, some of these comments made on the call may refer to certain measures such as cash earnings, adjusted net revenue and free cash flow, which are non-GAAP measures. For a full reconciliation of cash earnings, adjusted net revenue and other non-GAAP financial measures to GAAP results in accordance with Regulation G, please see our press release furnished as an exhibit to our Form 8-K filed this morning and our trended financial highlights, both of which are available in the Investor Relations area of our website at www.globalpaymentsinc.com.

Now I'd like to introduce Jeff Sloan. Jeff?

 

Jeffrey S. Sloan: Chief Executive Officer:

Thank you, Andrew and thanks everyone for joining us this morning. We are pleased to report another quarter of very strong results. We accelerated organic growth across our key markets with particular strength in our United States and United Kingdom businesses, continuing our track record of solid execution globally. Importantly, we are also on track with our pending acquisition of Heartland Payments which we expect to close later this month.

For the third quarter of fiscal 2016, we grew net revenue 6%, expanded margins 50 basis points, and increased cash earnings per share 17%, all this despite absorbing significant incremental foreign currency headwinds. On a constant currency basis, each of these metrics exceeded our expectations, reflecting the successful execution of our strategy and operational excellence across the organization.

Now for more detailed highlight. We are especially pleased with our performance in North America where we believe we continue to grow faster than our market by capturing share in verticals with attractive growth and margin characteristics. Organic net revenue growth for our US direct business accelerated in the quarter compared to the second quarter of fiscal 2016. OpenEdge continued its streak of mid to high-teens growth. Our gaming business also continued to deliver strong organic growth coupled with sound execution of the FIS Gaming acquisition that was completed in June.

In Europe, our UK business continues to execute exceptionally well with significant organic revenue growth. Our results also reflect the benefits from EU interchange regulations that became effective in December 2015. Outside of the UK, Spain maintained its strong record with yet another quarter of double-digit volume and transaction growth, well in excess of the market rate of growth and Spanish GDP.

We remain pleased with the performance of our European e-commerce gateway business, Realex and we are poised to enter the Spanish market with new omni-channel offerings in the coming months following the UK launch last fall.

In the Asia-Pacific region, we produced strong revenue growth on a local currency basis despite ongoing macroeconomic headwinds in Greater China. Our strategy to diversify distribution in the region by entering new geographic markets and partnerships has been successful.

Ezidebit had another outstanding quarter, accelerating growth to 20% plus on a local currency basis. Our BPI joint venture also continues to perform in line with our expectations. We have been able to offset macro weakness by solid execution illustrated by margin performance in Asia, which significantly exceeded our expectations.

We are also building upon our successful partnership with Ezidebit with the acquisition eWAY, a payment gateway and e-commerce technology company in Australia. Similar to Realex in Ireland, eWAY is a leading provider of payment solutions to developers and software partners with approximately 25% of the online market. The combination of eWAY's cutting edge products with Ezidebit complements our global omni-channel solution strategy and will create the leading payment technology company in Asia-Pacific with nearly 40,000 merchant customers in Australia and New Zealand.

We have made considerable progress on our pending acquisition of Heartland Payment Systems, which we look to close later this month. This transaction will accelerate transformative growth at a time when both businesses are executing strongly and we continue to be impressed with the people we have met at Heartland. As we have done successfully with APT, PayPros, Ezidebit, and Realex, we are confident in our ability to accelerate sales growth at Heartland.

The goal of our integration is to ensure a frictionless transition post-close, building on the momentum that Global Payments and Heartland have each had individually as one combined company. We are even more confident in the synergies that we described at the time of the transaction announcement and could not be more pleased with our proposed partnership. We look forward to welcoming our new colleagues shortly.

Now I'll turn the call over to Cameron.

 

Cameron M. Bready: Executive Vice President and Chief Financial Officer:

Thanks, Jeff and good morning everyone. We've made substantial progress in the business in fiscal 2016 and are delighted to report another quarter of strong adjusted net revenue growth, operating margin expansion and cash earnings per share growth despite significant FX headwind.

Total company net revenue for the third quarter was $497 million reflecting growth of 6% versus the third quarter of fiscal 2015 or 11% on a constant currency basis. Importantly, normalized organic net revenue growth on a constant currency basis was high single digits for the quarter, at the high end of our cycle guidance.

Operating margins expanded 50 basis points to 28.7% for the quarter or 110 basis points on a constant currency basis. Cash earnings per share increased 17% to $0.70 or 28% on a constant currency basis. North American net revenue grew 6% in the quarter with operating margin expansion of 70 basis points to 27.2% despite unfavorable currency trends in Canada. Normalized organic net revenue growth in our U.S. direct channel was high single digits for the quarter and accelerated sequentially relative to fiscal second quarter performance.

Canada delivered solid growth in local currency, in line with expectations driven by stable fundamentals. The weak Canadian dollar impacted North American net revenue growth by several hundred basis points.

As Jeff noted, our European business performed exceptionally well again this quarter, posting revenue growth of 8%. Adjusting for advert currency exchange rates, especially the British pound and euro, European constant currency net revenue growth was 16%. Operating margins in Europe for the quarter increased 10 basis points to 49.7%.

Asia-Pacific net revenue grew 9% on a constant currency basis despite continued macroeconomic weakness in Greater China. Reported net revenue growth in Asia-Pacific was 3% as a result of significantly unfavorable foreign currency exchange rates. We are particularly pleased with operating margins in Asia-Pacific for the quarter which expanded by over 600 basis points. This was driven primarily by growth in our higher margin businesses, predominantly Ezidebit, as well expense management across the region in light of the broader macro trend.

Capital expenditures in the quarter totaled $21 million. Free cash flow, defined as net operating cash flows excluding settlement assets and obligations plus capital expenditures and distributions to non-controlling interest, was $77 million.

In connection with our planned acquisition of Heartland, we have engaged in a variety of financing related activities over the past few months. In February, we amended our existing credit facilities to retain them post-closing of the Heartland transaction. At the same time, given strong interest from existing and new lenders, we entered into a new $735 million delayed draw term loan A facility to fund a portion of the cash consideration for the transaction. The new term loan A facility, which we expect to be more cost effective than our term loan B, allowed us to reduce the size of the term loan B component of the transaction financing by $735 million to $1.045 billion. In addition, in March, we successfully completed syndication of the $1.045 billion term loan B facility on terms and conditions more favorable than we expected in December.

As a result of these activities, we now expect the weighted average pro forma interest rate on our debt facilities to be in the range of 3.75% to 4% as compared to the 4% to 4.25% range we anticipated at the time of the announcement of the transaction. We expect this will generate a meaningful amount of annual interest expense savings relative to our original pro forma assumptions.

As we approach the closing of the Heartland transaction later this month, we intend to resume our normal capital allocation policies immediately thereafter, although our near-term priority is to return to our targeted leverage ratio, we retained sufficient capacity to continue to pursue the capital allocation program we have employed with much success over the past few years.

As evidenced by the eWAY transaction, we remain interested in select acquisitions that augment our strategies globally. Likewise, you should assume that we will return to being a consistent buyer of our stock as a means by which to return capital to shareholders.

Now turning to our guidance for fiscal 2016, on a constant currency basis, we expect net revenues to be towards the high end of our guidance range of 10% to 12% growth over fiscal 2015. Given the continued weakness we have seen in foreign currencies relative to be US dollar, in particular the British pound, we expect reported revenue to be towards the low end of our previous guidance range of $2.06 billion to $2.10 billion. We are increasing our cash operating margin expectation and now anticipate margins will expand by at least 100 basis points in fiscal 2016 on a constant currency basis. Cash earnings per share now expected to grow 16% to 19% over fiscal 2015 and range from $2.93 to $3.

Finally, please note that our outlook does not include the impact of the Heartland acquisition that we expect to close later this month. We anticipate that the addition of Heartland will add $80 million to $100 million to our net revenues, and have a de minimis impact on cash earnings per share for fiscal 2016.

I will now turn the call back over to Jeff.

 

Jeffrey S. Sloan:

Thanks Cameron. We are delighted with our team’s accomplishments this quarter and this fiscal year. Looking ahead, we are eager to finalize our transformative partnership with Heartland. This merger furthers the four pillars of our strategy described in our October Investor Day: grow and control, direct distribution through the addition of 300,000 new merchants, add distinctive products and services in new markets such as the K through 12 and university educational markets, leverage our combined technological and operational advantages by increasing transactions nearly 50% on a pro forma basis, and continue to invest in our global businesses to generate superior returns. This is truly an exciting time and I look forward to speaking with you in July as one combined company.

Andrew?

 

Andrew Langford:

Before we begin our question-and-answer session, I would to ask everyone to limit their questions to one with one follow up in order to accommodate everyone in the queue. Thank you. Operator, we will now get the questions.

 

Question & Answer

 

 

Operator:

Thank you. [Operator Instructions] Our first question comes from the line of Ashwin Shirvaikar of Citigroup. Your line is now open.

 

Ashwin Shirvaikar: Citigroup:

Thank you guys. Good morning.

 

Jeffrey S. Sloan:

Good morning, Ashwin.

 

Ashwin Shirvaikar:

I guess the first question I have is with regards to the margin trajectory and you've now performed I guess better than expected on margins for a couple of years here. I am wondering how much more is there in terms of margin improvement ex the Heartland synergies. I mean, if Heartland was not effective, can you go through as you look at the company in the present shape, what are the factors that continue to drive margin improvement, is it primarily to scale, revenue mix, scale or what are the factors?

 

Jeffrey S. Sloan:

Ashwin, it's Jeff. I'll start and I will ask Cameron to join me as well. First, I thought still we've got plenty of runway on margin enhancements. I think as we’ve said probably a number of times in the last couple of years, we view margins on a standalone basis in the low thirties as achievable and sustainable. Even with terrific margin performance today, we're still not at that level. I think to get to your question about what's driving that growth, undoubtedly scale is an important element in that, but I think it's really been conscious decision on our part to shift our mix towards businesses that we view as attractive and by attractive I mean growing faster than the rate of market growth with better margin characteristics. So, if you look, for example, at OpenEdge, which we’ve talked a lot about, that continues to grow, as we said in our prepared remarks, average 2 to 3 times the rate of market growth. If you look at Realex, if you look at Ezidebit, these are all businesses, Ashwin, that faster growing fairly rapidly compared to their market, but second provide us with opportunities for further margin enhancement prior to Heartland. So I still think we're in the early innings where we can take the margin that gives us obviously a lot of comfort as we look toward Heartland, to think about what we might do together as one combined company. Cameron, do you want to add?

 

Cameron M. Bready:

Yes, Ashwin, the only thing I would add to that, a couple of points. First, if you look at our guidance for this year, it’s sort of implies almost 30% margin, and growth of, as we noted, over 100 basis point year-over-year. We still have a lot of room relative to our overall target level of low thirties to continue to expand margins from here on a standalone basis. In addition to the items Jeff described, the other things I would call out specifically are, one, the acquisitions we continue to do improves scale in markets that we find attractive, that have good dynamics where our businesses are geared towards higher margin solutions such as, for example, the eWAY transaction that we just executed and its contributions to our Australian business and what it will do to margins in Australia to continue and improve those from their already attractive levels.

The last thing I would mention is we continue to make investments in our infrastructure to improve our operational leverage. We continue this transformation we started out on several years ago to move away from the holding company, operating company model, the business utilized for many years to the single unified operating company structure the David described at the Investor Conference back in October. That's still in process and I think that continued evolution provides a nice tailwind for margin expansion overtime as well.

 

Ashwin Shirvaikar:

Okay and then I guess the follow up is really on the Heartland. Your comments that Heartland, that the progress you’re making on Heartland is better than you'd expected to be and was that primarily, Cameron, selection of your commentary on interest expense or were you also talking about other things such as conversations with clients, feedback you are receiving in the market, things like that if you could comment on that?

 

Jeffrey S. Sloan:

Yes, Ashwin, it’s Jeff. I'll certainly start. No, it's more on the strategic side. So what I'd say is as we spend more time with our future colleagues at Heartland, we've been more and more impressed with the quality of the people, the quality of the culture and the business that Bob and the team has built over a period of decades at Heartland. I think David has said in the December call that there was relatively a little overlap between Heartland's vertical markets and our markets even though we are both SME focused. Our view on that continues to strengthen. I mean there is relative little overlap as we see it and as I said in my prepared remarks, we believe that we are even more confident today in the synergies that we described in December sitting here in April. So really I was referring to the strategic rationale for the transaction and what we believe the receptiveness is and has been to-date with our partners at Heartland as well as with potential customers. Cameron, of course, was commenting more on the financials, but I was really commenting on the strategic objectives.

 

Cameron M. Bready:

Yes, Ashwin, my comments in the script around the financing obviously serve to bolster the overall confidence in the transaction as well, taking the financing risk off the table as we have in the first quarter of calendar '16 obviously was a meaningful step towards executing the transaction and obviously being able to do that on terms and conditions that are more favorable than we would have expected back in December when we announced the transaction, again gives us a nice tailwind as we look to close later this month and begin operating as a combined company in the next several weeks.

 

Ashwin Shirvaikar:

Okay,congratulations.

 

Cameron M. Bready:

Thanks Ashwin.

 

Operator:

Thank you. Our next question comes from the line of Bryan Keane of Deutsche Bank. Your line is now open.

 

Bryan Keane: Deutsche Bank:

Hi guys I just want ask about the UK strength, is that directly related to the changes in the EU regulation or is that something different?

 

Jeffrey S. Sloan:

Hey Bryan, it’s Jeff. I would say it’s probably something different, meaning we’ve probably had now 18 months of very solid new sales growth, organic sales execution in that market. Yet the benefit of the interchange regulation really picked up in December of 2015. So certainly the performance in the UK, I think we described quarter in the call has significantly exceeded our expectations, really all year implies the last 18 months, just a little bit more of that. As it relates to the interchange benefit, as we discussed in the context of Spain and also in the case of the United States when we had driven 4 to 5 years ago, we do the interchange benefits a little bit more temporal, that’s just a function of over what period of time that will rationalize within the marketplace. But that business as it relates to that element, its growth has also met what we -- what our expectations were heading into the third quarter. So, it’s a little bit more of the latter of what you’ve said than the former.

 

Bryan Keane: Deutsche Bank:

And do you expect the EU interchange benefits in the UK to last for a significant period or is it hard to tell how long it will lasts for?

 

Jeffrey S. Sloan:

No, I think Bryan it's very similar to what we said about Spain and the United States markets and other markets in which we have experienced that. We tend to think about it in 12-month increments for kind of obvious reasons as you can imagine. This actually straddles a number of fiscal years here to just start in December for us given our May fiscal year. So I’d say, Bryan, as we usually assume something like 12 to 18 months until we get back to levels that pre-date the interchange change, our actual experience has been closer to 18 to 24 months in terms of what we saw in the United States. I’d say sitting here in Spain and we’re probably 18 months after the inception in September of 2014 in Spain, we are still today, Bryan, at higher levels of spread in Spain than we were before the adoption of the first place 18 months later.

 

Bryan Keane:

Okay. And then just the quick follow up, Cameron, I think you've said $80 million to $100 million in net revenue for Heartland expectations. I guess is that over a 4 to 5-week period and I guess what we'll all do is we will extrapolate what that means for next year; is there any seasonality in that number that you can guide us to as we build out models for fiscal year '16 and '17?

 

Cameron M. Bready:

Sure Bryan, and of course we'll give you more color in July obviously when we have our call as to what we would anticipate for Heartland for a full fiscal '17 for us. But to the first part of your question, yes, I mean, it reflects sort of a 4 to 5-week period, we don't know exactly when it’s going to close, obviously we know when their shareholder date is and we want to close as quickly thereafter as responsible, but we don't know the exact date on which it will close, hence the range. There is also obviously some work to do to ensure that they're completely in line with our net revenue reporting convention. We believe that the estimate we provided obviously is a line, but we need to get under that a little bit further to make sure that's the case as well. Their business is probably going to be seasonally similar to ours. So to the extent that you want to try to extrapolate these numbers into a fiscal '17, early view I would suggest their seasonality is not going to be materially different than what you would see in our business and that should help give you some color as to how to shape if for fiscal '17.

 

Bryan Keane:

Okay. Congrats on the results.

 

Jeffrey S. Sloan:

Thanks, Bryan.

 

Operator:

Thank you. Our next question comes from George Mihalos of Cowen. Your line is now open.

 

George Mihalos: Cowen & Company:

Great, thanks for taking my question. I caught the commentary around the US direct growth, but can you guys talk a little bit about what you’re seeing in the ISO channel and then maybe somewhat related to that, the rumored or expected migration on a large customer there off to a competitor’s platform, how is that coming along?

 

David E. Mangum: President and Chief Operating Officer:

Yes. George, this is David. Happy to help with a couple of those questions there and let Cameron add any details that I miss. In terms of the ISO channel, it’s really business as usual for us that was another flat quarter from a revenue perspective. That means all the growth the Cameron is talking about, the acceleration growth comes from our direct control channels, so another very consistent quarter. we've been talking about the ISOs for quite some time as a flat maybe low single digit grower. It continues to perform in that range. As to the migration you're talking about, maybe I will be even more specific, appreciate though the way you phrased to your question. You’re really talking about Mercury and the migration of Mercury accounts that will be leaving us did actually occur over the course of this past quarter. So by the end of our February, the month February, our third quarter, the migrations were completed. As we talked about any number of times that impact is already reflected in the guidance, you can tell from the performance we delivered in the United States this quarter just how minor this migration is in the terms of effecting Global Payments overall.

 

George Mihalos:

Great. Thanks for that.

 

Cameron M. Bready:

I will just add a couple of comments there quickly as to first part of your question. US direct growth on a normalized basis organic was high single digits for the quarter, accelerating sequentially over Q2 probably 50 to 100 basis points, something in that range. So, obviously very pleased that continues to be led by OpenEdge, growing mid to high teens yet again. Obviously we are now 3 years past the acquisition of ATP and going on to for PayPros and continuing to perform again at growth levels that we find very, very attractive and the momentum remains very strong for that business. So, very pleased with our US performance in Q3, as you noted.

 

George Mihalos:

That's great to hear. And just a quick follow up on Spain, I think you guys made the commentary that described obviously higher than what they were prior to the interchange benefit coming through, but are have the spreads stabilized on a quarter-over-quarter basis sort of if you compare the February quarter to for the November quarter?

 

David E. Mangum:

Yes, George, this is David. They have stabilized, they stabilized just above levels as Jeff noted before the interchange benefits, but they are quite stable right now and then I think I’d add to that, what’s really driving Spain is incredible sales growth, incredible volume growth that continues in the mid-teens volume and transaction growth both. So we've got a little extra spread from back in the day, plus that kind of volume and transaction growth, we are just in a grate place in Spain right now.

 

George Mihalos:

That's great. Thanks guys.

 

David E. Mangum:

Thanks George.

 

Cameron M. Bready:

Thanks George.

 

Operator:

Thank you. Our next question comes from the line of Oscar Turner of SunTrust. Your line is now open.

 

Oscar Turner: SunTrust:

Good morning, thanks for taking my question. So we've seen some news on the backlog or EMV Certifications. So just had a couple question on that. One, is that something that you’re seeing within your merchant base and two, does this backlog have any long term implications for acquirers?

 

Jeffrey S. Sloan: Chief Executive Officer:

Yeah, Oscar, it’s Jeff. I will start and David can provide some commentary too. So first, I sow the same series of article. The first thing I’d say relative to those articles is unlike some of our peers, we're independent, not owned by banks. So, clearly the implications of that article was that there is some relationship between bank ownership on the issuing side, the acquiring side and just so we all recognize that that wouldn't -- really not apply to us as it relates to the specific article that I think you are referring to.

As it relates to certifications, I think the key strength of ours has been early rollout of EMV we announced probably a year ago at this point, maybe a little bit more than year ago, a suite of products and services under names of Edge Shield and Global Shield that were EMV compliant with encryption and tokenization, and NFC kind of all wrapped into one. So I think everybody has tried to push on the certification side given the complexity of the US broader ecosystem. So I don't think that's different really for anyone. But I would say that we are very proud of the fact that we are in market and I think Heartland is probably very similar, in market very early on with the certifications. So we really on our side have not seen any meaningful impact as it relates to the certifications the way that article really had alluded to as I read it. David, you want to add any additional color?

 

David E. Mangum:

Yes. Well, I think the key is the last couple of things you mentioned, Jeff, in that we don't view EMV as a compliance exercise, it’s part of a security solution we are bringing to market based on merchants demand. At the same time, we’re also bringing to market with its global expertise in EMV, we've rolled out EMV all over the world as you might imagine, a way back to Canada five years ago, it’s probably the most recent example of needing to bring EMV to market to improve security for the merchants.

When you think about the focus on the security suites and solutions, we have been able to drive some new sales around security. But EMV itself is in no way an economic tailwind for us; it’s a process for us in terms of migration of making sure the ecosystem is more secure. From that perspective, from an ecosystem perspective, our metrics are really right in line with what you might see from the industry at large measured migration, consistent migration, is our theme driven by merchant demand, after merchant education from Global Payments. One think I would note for you though is when you think about our key direct portfolios, things like OpenEdge, which is full of dentist offices, veterinary clinics, dry cleaners, those are not high demand verticals for EMV migration. So we're working at a pace our merchants want to work. We are trying to drive more education, drive more migration, as Jeff noted before our certifications on in very good shape. We're just moving along with the market, in some cases a little ahead of the market.

One more remainder in term of percentages when you see them bandied about by industry players, we have a very focused portfolio at this Heartland, small to medium merchants around the county. You won't find big box retailers in our portfolio, you won't find them by large in Heartland’s portfolio either. So just remember that when we talk about the level of migration, the pace, we've got a lot small to medium merchants to go through as does the rest of the industry. We're going through them very consistently; very happy with the progress I think our merchants are as well. We're managing charge backs with the merchants, which maybe a follow up you might want to ask in term of there is a minor uptick, but very manageable so far and I think again, that's the result of years of global experience managing EMV, managing the shift and being able to help our merchants through it.

 

Oscar Turner:

Okay , thanks. And just a small follow up to that, about what percentage of your merchant base is updated for EMV? So either that's upgraded as far as hardware goes or that's able to actually process an EMV transaction.

 

David E. Mangum:

Yeah, I don't think we're going to quote any specific percentages. I would stick with we are very consistent with the industry stuff you see at large. We are very happy with progress and I think our merchants, again, are driving it from demand perspective, but just note that whether you’re talking about terminals in place that are ready to be enabled or actually enable transactions, we're pretty consistent in our key verticals, maybe a little bit ahead of the market. And the industry said it’s about 20%, that obviously includes an awful lot of big box retailer because there’s been a great deal of moment in the last few months from very low single digits up to that 20 percentage kind of mark you have seen in the press in the last couple of weeks. That's a lot of big box retail, but it's really nice progress for the industry. I think we'll keep making more progress on the global side obviously as we go forward.

 

Cameron M. Bready:

Hey, Oscar, it’s Cameron. I just want to add one other note to append to David's response. If you are thinking about this question, obviously there is an industry element to it, but there may be a financial element as well. There seems to be a fair amount of confusion in the market as it relates to the financial impacts of EMV and some of that's driven by in this space, there is a lot of issuers who also do acquiring etcetera, etcetera. I think for Global Payments in particular, EMV has certainly not been a tailwind as it relates to our financial results. I think I still view it frankly as a headwind in the sense that we had to make investments into our systems and I am still waiting for the return on that investment to some degree. Over time obviously I think we expect that to come, but to David's point, our focus has really been here on ensuring that our merchants have all the tools available to them to become compliant, working at a pace that aligns with their desires to become EMV compliant. We haven't really viewed it as an economic return opportunity thus far. So the conventional wisdom is EMV has been a tailwind for all the acquirers, that's really not the case for us, but we have been I think managing through it very, very effectively.

 

Oscar Turner:

Okay, that's very helpful. Thank you.

 

Operator:

Thank you. Our next question comes from the line of Steven Kwok of KBW. Your line is now open.

 

Steven Kwok: KBW:

Great. Thanks for taking my questions. Just going back to eWAY, could you talk about how big it is and in terms of what the financial impacts are?

 

Cameron M. Bready:

Yes, Steven, it's Cameron. I'll just jump in quickly. So purchase price wise it’s small. I mean, it’s sort of 50ish million US. So it's not a particularly large asset, but it’s a very nice, I think of it as the product add to our existing position in Ezidebit business in Australia. It obviously enhances our omni-channel solution strategy that we spoke at great length about in October at our Investor Day. I think bringing that asset to our portfolio into Australia really positions us to accelerate our omni-channel solutions capability end market and we've really looked at it very simply as a buy versus build opportunity. We're delighted with Realex and what it’s been able to bring to our portfolio. As we noted in our prepared comments, we launched the bundle in the fall in the UK. We're bringing it to Spain in the not too distinct future. But as it related to Australia, this was the very unique opportunity to buy the market leader from an e-com point of view coupled with our existing presence with Ezidebit which we've been thrilled with their performance to create the leading technology enabled distribution perform in the Asia-Pacific region. So with the fantastic opportunity and one of the side benefits of structuring the Heartland transaction the way we did, as we've maintained the financial capacity to be able to do these types of things. And we're obviously delighted to have eWAY as part of the family.

 

Steven Kwok:

Got it and then just could you update us on perhaps your M&A pipeline as well?

 

Jeffrey S. Sloan:

Sure, Steven, it’s Jeff. I will respond to that. So obviously we announced the product extension today with eWAY. As we said in December at the time of the Heartland announcement, we continue to have term sheets out in a bunch of regions, primarily in Asia and in Europe, of course we are pretty full up here in the United States and in North America with the pending close of the Heartland transaction. So I think as you look at eWAY, and as you look at -- which we expect to close by the end of this fiscal year, I think to Cameron's point, those are pretty good examples of the types of transactions that we have sheets out on today, which is to say while towards the lower end of what was invested in transactions, nonetheless very meaningful from a strategic and new market point of view. And I would look to see some more of those as well, as Cameron mentioned in his remarks, our term as a normal cadence of capital allocation that we have been doing as a company over last three and half years.

 

Steven Kwok: KBW:

Got it. Great, thanks for taking my question.

 

Cameron M. Bready:

Thanks Steven.

 

Operator:

Thank you. Our next question comes from the line of Tien-tsin Huang of JP Morgan. Your lines now open.

 

Tien-tsin Huang: JP Morgan:

Hey good morning. I will first start on Asia-Pac, I guess the margins there a nice upside, how much of this is from the proactive cost cutting? I think you mentioned given I think China, how much impact have you seen from a macro perspective from China? Can you qualify some of that? Thanks.

 

Jeffrey S. Sloan

Hi, Tien-tsin, it’s Jeff. I'll start, so one of the things that we pointed out in our prepared remarks is that we have been very successful on Asia-Pacific by adding new markets and by increasing our presence in markets that have been performing well. So we talk a lot about Australia, we just responded to Steven talking about eWAY and Ezidebit, of course we have our joint venture with Bank of the Philippine Islands, which was also performing in line with our expectations in that market, before the JV and we increased our size to the second largest presence in that market thereafter. As a result, we have been able to grow, to answer of question, we have been able to grow the Asia-Pacific business 9% on a constant currency basis this quarter. So I think we’re still getting relative growth and Greater China which I defined as Mainland China, Hong Kong and Macau, as a percentage of the business in the Asia-Pacific has been reduced from probably number years, probably about half of it to maybe around 30% currently and that is result of targeted additions in other markets like Australia, New Zealand and Philippians. We also continue to grow very well in markets like Singapore beyond the two or three that I just listed. So, I would say there’s been a fair amount of revenue growth, it seem about two-thirds of Asia-Pacific, Tien-tsin, coming from markets other than as a percentage of revenue other than Greater China, providing in the case of Ezidebit 20% plus growth. It's not that we are going to have dramatic impact on the revenue growth in anyone quarter, Greater China that is. So I think a lot of it’s coming from the mix of business, particularly that Ezidebit is at a much higher margin than the overall company as well as Asia by itself. That’s how I think about it. Cameron, you can comment may be a little bit on the expense side.

 

Cameron M. Bready:

Sure. I'll just start maybe, Tien-tsin, on Ezi. So I would note first and foremost we're a year plus beyond the acquisition. We've now I think in our minds fully integrated Ezidebit. So that is creating an environment where incremental margins at Ezi are improving and obviously it's already higher than our Asia average margins. So and in its increasing from there and accelerating from there. So I that's contributing to it, but as it relates to the expense side, I think what we're really try to do is look at our core business in Asia Pacific outside of Australia and to some degree the Philippians where we have the joint venture with BPI and really try to rationalize the size of the expense base relative to the outlook for that market over the next 12 to 18 months and the reality is we do expect continued weakness in China, hopefully we've seen the four, but we don't expect it to rebound dramatically in the near term. So we really try to reposition the business to right out what we expect to be soft spot in the cycle in the Greater China markets and position the business for continued success and I think you're seeing the results of that play through in margins this quarter.

 

Tien-tsin Huang:

All right, great. That's helpful. So just as my follow up, I think I will on Canada, just any update on volume and spread performance, any call outs there, I think might watching the call very closely.

 

Cameron M. Bready:

Yes. I think I'll start by saying we are delighted with the performance of our Canadian team this year. Their ability to forecast, predict and manage their business to produce results in line with our expectations in light of what is obviously a continued soft macroeconomic environment has been fantastic.

So, I'll start there. I think we continue to see, sort of our code for stable fundamentals is the combination of stable well single-digit transaction volume growth and relatively stable spreads. So when we talked about fundamentals for Canada, our expectation is the combination of transaction volume growth and stable spread is going to produce low single-digit growth in local currency in that market. We've been consistently doing that now for probably 8 to 10 quarters, I would say, and that remain very pleased with how that team has performed in light of the broader micro.

 

David E. Mangum:

And maybe, Tien-tsin, this is David, a little bit of commercial for Canada. We're ahead on sales. So when you lay on top of that sales growth and new product introduction, things like OptBlue that we've rolled out on global basis, you got that little bit extra to help make you feel more confident managing the stable conditions in the stable metrics that Cameron was describing.

 

Tien-tsin Huang:

That's good, well done, thanks.

 

Operator:

Thank you and our next question comes from David Koning of R W. Baird . Your line is now open.

 

David Koning: Robert W. Baird :

Yeah. Hey guys, nice job and I guess first of all just on spend. I am wondering if that could be a nice catalyst for growth, improving growth in to next year. I know you said spreads are still up, but is revenue right now down because spreads on a year-over-year basis are probably still down and the minority interest line was pretty weak this quarter. So I am just wondering if spend right now is even though good in a little tougher spot, but basically set to really nicely accelerate next year?

 

David E. Mangum:

Yeah, David, it’s David. I think that's a really impressive question and that where Spain sits right now is flat to slightly up in term of revenue growth, which is really remarkable when you think about annualizing that interchange benefit and of course driven by the amazing sales we get out of the branches and the resultant volume and transaction growth in the mid teams. So you're exactly right, as we look ahead and can think through fully annualizing spread changes etc. we had toward September it accelerating as we speak in terms of market share and penetration and it will be a piece of the European growth story that Cameron has described in earlier as we go forward. no questions about it.

 

Cameron M. Bready:

And David, it's Cameron. The only thing I'll add that to David's point more specifically, we annualized the annualization, the interchange reductions in September. So when you are growing transaction and volumes at the rate we're growing once you get beyond that date obviously you should see top line growing at similar levels which creates a nice tailwind going in to the back half of fiscal '17 in Europe as we start to annualize the interchange reductions in the UK.

 

David Koning:

Yes. That will make sense, great and I guess secondly as we look out next quarter you'll be giving guidance on fiscal '17 and we'll all be looking at Heartland and everything else going on but is there anything -- as we look back over the last year, so is there anything we need to think about from a comp standpoint so that we are starting to think about the quarters right in the future, is like the Q1 comp for a Q1 '17 are really tough one or is there anything one off that we need to be starting to think about now?

 

Cameron M. Bready:

Well. I think your point on Q1 is a good one. As we said in October when we had our first quarter call, Q1 was an exceptional quarter this year and not one that we expect to duplicate not withstanding or seem to be sort of the view that we would duplicated in Q2, but despite having a very good quarter it wasn't quite as good as Q1.

So I do think that's a fair point as you think about sort of setting your model up for fiscal '17. Outside of that it's just again and I talked to many of you guys about this, it's sort of assessing the FX impacts on results and trying to figure out how to overlay those on top of annualization of acquisitions that we've made and how all that plays through the financials. Obviously happy to talk more offline is that and think about that. But obviously the volatility around FX and the amount headwind we've seeing from FX does make it little bit difficult from time to time to try to get reported results forecasted correctly quarter-over-quarter, year-over-year.

 

Jeffrey S. Sloan:

I would say, Dave, though, it’s that that’s exactly right. I would say the company as you know from our subscription support is going to go from that half the revenue being in the United States and half outside being dominated into two thirds post Heartland dollar denominates so what Cameron is exactly right in first our three regions and so that we regionally I would hope and our complicating Cameron think this I would hope of the user model coming out and I just given the mix of 50% dollar denominated the overall company going to two thirds. So my hope is while things were exactly right that in terms of the impact as a whole an overall company revenue and all becoming the earnings state I am kind of hopeful that's is all more straight forward, but as Cameron said the details I am sure we get that.

 

David Koning:

Yes. That's great that make sense. Thank you.

 

Jeffrey S. Sloan:

Thanks, Dave.

 

Operator:

Thank you. Our next question comes from the line of Tim Willi of Wells Fargo. Your line is now open.

 

Tim Willi: Wells Fargo:

Thank you. Good morning. I had question on just sort of the e-commerce omni-channel, obviously you've talked a lot about this in the last year. So given the success in the UK and you've talk about moving this into Spain, could may be just sort of review like lessons learnt what has worked really, really well that you think is very exportable into other regions and maybe areas where either it’s competition or product where there were areas that needed to be improved and you’ve done that but maybe hindered some of the performance if there were instances of that, just get a sort of better feel for the momentum and the potential here.

 

David E. Mangum:

Yes. Tim, this is David. A couple of lessons learned. We are finding very strong demand for the bundled solution in the UK. The place where we are working the hardest is probably on the joint sales preposition and being able to take what you might think of as a traditional sale and marry to it and more technology enable piece of the sale. So the gateway marry to the acquiring, marry to reporting, marry to the fraud and credit management you have to be able to provide. All those tools are there. Probably the place where we’ve learned the more lessons has been on making this joint sales cause and enabling and equipping traditional sales folks to be able to sell, it’s the early stages of e-commerce enabling small to medium merchant or sell the entire bundle. The god news is with the demand we've had and the lot of execution we've seen, it has not affected our sales trajectory. In fact we are very pleased with the sales coming in the back of the demand, but it is more technical sale. So being able to equip your sales people on a global basis, to sell more technology enabled transaction processing is a challenge of its own. We feel like we've earned a lot in that early integration between the UK and Ireland that was serviced well in Spain particularly. It's allowed us, Tim, to think more specifically about how you target a market and how you focus a piece of the sales force on the micro payments from sales on micro merchants, a piece the sale force on small to medium and then joint calling of experts may be from Ireland in addition to Spain on large to national merchants and certainly joint calling between all of your regions as well as your technical experts in a place like Ireland where Realex is based on multi-regional or multi-market or regional accounts. So really how you do the market has been where we learned lessons. And again, we’re fortunate enough to be learning them in a situation where the sales are right at target or above in many cases. So we feel good about those pieces and if you step back a little bit and think about this, the second pieces, the second and third pieces of this is really partners and software developers. As you enter new markets, you want to continue the momentum you have with channel partners. So ISVs, card providers, folks like that, you also want to develop and faster your relationship with developers to press the shops of this worlds and you see in the press even from all the providers in e-commerce world. So in specific markets you've got certain ISVs, card providers as well as software providers. You're also taking your regional partners with you. So being able to go to market and manage the direct sales as I described earlier in a specific region, the face to face marry the technology as well as local channel partners, local software providers and with that an overlay of the regional folks and in make take in many cases of the global software providers. It’s a little tricky and it comes down again to market segmentation and how you compensate and drive the direct sales force to certain behavior as you want to target the segments, make sure they don't trip over each other and make sure that you can drive joint sales.

That's all a bit in its infancy in global, we're really, really pleased with pieces. So pleased that we went and deployed $50 million of more capital in Australia to continue executing the same strategy where we can take this bundle with Ezidebit and eWAY to market and drive even deeper penetration what’s already the leading provider of small to medium size retail e-commerce in Australia. So long-winded answer, I realize, but it's actually been a great deal of learning, a great deal of really excellent execution by our teams in Ireland and in the UK and now about to be in Spain that’s led us to sort of feel really good about the execution levels we're seeing relative to something we spend a lot of time describing at the Investor Day in October, omni-channel global capabilities that we think we're uniquely positioned to sell.

 

Tim Willi:

Great. That's really helpful. I will let somebody else get into queue. Thanks very much

 

Operator:

Thank you. Our next question comes from the line of Kevin McVeigh of Macquarie. Your line is now open.

 

Kevin McVeigh: Macquarie:

Great. Thanks. Nice job. Cameron, can you give us a sense of there’s been obviously so much FX pressure. Do you feel like we're starting anniversary that and maybe you think about there actually any kind of releases as we think about '16 to '17 and just any particular thoughts the noise coming out of the UK as well around the potential exits just as relates to the currency as well.

 

Cameron M. Bready:

It's a great question Kevin. I would say we are still seeing some weakness in certain markets, particularly the pound. And today's another example I would point you to say not only is the U.S. dollar sort of checked really strong, the volatility in some of this major currencies is astounding. See the pound moving a point and half or two points intraday, for example obviously makes it very difficult to forecast FX with any sort of certainty as we think and look forward. I think we are as we get into fiscal '17, particularly as we get into the back half of fiscal '17 hopefully going to be in an environment where we are starting to anniversary some of the stronger headwinds, but I certainly don't think that we are approaching anytime soon in environment where the U.S. dollar is going weaken relative to most of the major currencies around the world to which we have exposure I think we are in a sort of secular --market for the U.S. dollar I expect that to continue for some time that should not allowed out there we are -- to believe the dollar is going to weaken but as we continue anniversary some of the bigger moves for example the anniversary the strong euro move in Q3 of this year unfortunately that was more than offset by an equally strong move downward in the pound at relatively the same time.

So we have good exposure to that number of currencies to guess earlier point, part of the benefit of the Heartland transaction is that it does the risk currency exposure to the company on a micro basis, will be two-thirds U.S. dollar denominated business going forward and that obviously will diminish some of the FX exposure that we have globally but I am hopeful to get into an environment where in '17 we’re leasing most of the strong headwinds begin to diminish to some degree.

 

Kevin McVeigh:

Great. Thank you. Nice job.

 

Cameron M. Bready:

Thanks Kevin.

 

Operator:

Thank you and our last question comes from the line of Jason Kupferberg of Jefferies. Your line is now open.

 

Jason Kupferberg: Jefferies & Company:

Hi guys thanks for getting me in here. I want to just a question regarding plans for the Heartland sales force if we just think about retention, integration etcetera any latest thinking there.?

 

David E. Mangum:

Jason, it's David. I think that the thing is very similar to what we described you in December. That's as an a large part of why we're so attracted to the Heartland acquisition that sales force its trajectory is been remarkable for the last couple of years.

The deeper we've gone into our homework on integration to happier we are with what we found. So our plans are really very similar with they were in December. We don't want to screw this up so we are going to keep the performance plans consistent we are keep the bills of rights with which you're familiar and keep using those to drive organic growth as a management matter we are very impressed with the team, we spend a lot more time with them.

So I think not a lot of changes at all as you might imagine going forward and their trajectory right now is really impressive so it's more a matter of making sure we can figure out how to accelerate that with more product may be different way to think about enhancing the traditional distribution with again additional product out of Heartland commerce and the other business units they already in placed there. So really pleased with the pieces, really please to the sales force and the trajectory no plans to change anything we described you in December.

 

Cameron M. Bready:

The only thing I would add Jason its Cameron. When you think about our entire approach to integration is really behind the sales force, behind the customer such that the objective is do not disrupt anything that's happening from a sales and sales momentum point of view nor to create conflict at the customer level that's going to distract the sales professionals from continuing to grow and expand the business our decade is to accelerate growth through that channel as we've been able to deal with many of the previous acquisition we've done and the integration that we're going to do will be behind to seems that impact the momentum that we're expecting to be able to achieve from an organic sales point of view.

 

Jason Kupferberg:

That's helpful and just switch gears all bit the OpenEdge business at our payments compensate, there is lot positive commentary just about the amount of run-rate that remains for this channel so I just wanted understanding from global perspective as far as which vertical you're most excited about I mean in terms of remaining run-rate any update on the size or growth of the dealer and developer network there?

 

David E. Mangum:

Yes I'll start and these guys join me anything I miss So, we continue to be very pleased with OpenEdge still growth in mid to high team the revenue production is really impressive that's all at increasing margins that are hard than company's margins so back to several other questions earlier today in term of existing verticals we remained very low penetrated that's just not perfect grammar but really I don't think with vertical justify more than 20% penetrated anywhere in any our key verticals So you think we talked about their is lot forma we think about garages all those very low levels and we got sales force that's focused on driving deeper penetration into those verticals at the same time that we're looking for other places to grow so we mentioned Heartland description before we don't have education vertical in OpenEdge we don't do restaurant and hospitality the opportunity drive deeper penetrations those verticals by OpenEdge to complement the direct sales force about which you asking first question in first question. If there it's real we continue to work on that in integration planning the other couple of things we haven't we literally entered a new vertical in United States we were in before just in the last couple of weeks we enter the under payments vertical United States with brand new partner large IFC to plays in that space you talking our car losses more parking, lending things like. That's a new and unique for open it so a brand new vertical effectively were at 0% penetration that vertical as you sit here to date.

But we know how to manage the ecosystem of partners, merchants, leaves and marketing to drive that and then maybe happy of news of all in terms of how we think about growing that OpenEdge beyond just the United States the global opportunity is real we are really pleased to announce we actually have opened up OpenEdge and launched it in the UK this quarter. So we have staff there dedicated sales folks, dedicated product folks remember about to October in the Investor Day one of our key pillars to accelerating global growth with global expansion integrate payments OpenEdge driving the Canada, driving United Kingdom.

So we have now launched our business in the UK. We can bring that dedicated in product and ecosystem to the United Kingdom to work with ISVs to drive the benefits of technology integration that don't exist in the UK as they exist in the US today and that's still we can drive existing partners in the United Kingdom. So US based ISVs and software providers provide near term sales opportunities. In fact we are going to bring a few customers live in the UK in just a next few months coming from the US based ISVs where we're extending their franchise, extending the integrated payments benefit of the UK for them.

So more to come on this, but really OpenEdge is poised for more global growth but still continued extra execution in United States as we go forward.

 

Jason Kupferberg:

Okay. I appreciate the color. Thanks.

 

David E. Mangum:

Thank you.

 

Jeffrey S. Sloan:

On behalf of Global Payments, thank you very much for joining us this morning and for your continuing interest in Global.

 

Operator:

Ladies and gentlemen, thank you for participating in today's conference. That does conclude today's program. You all disconnect. Have a great day everyone.