環匯 (GPN) 2010 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Global Payments fourth quarter fiscal 2010 earnings conference call. At this time, all participants are in a listen-only mode. Later, we will open the lines for a question and answer. (Operator Instructions) At this time, I would like to turn the conference over to your host, Vice President of Investor Relations, Jane Elliott. Please go ahead.

Joining me on the call are Paul Garcia, Chairman and CEO; Jeff Sloan, President; and David Mangum, EVP and CFO.

Before we begin, I would like to remind you that some of the comments made by management during the conference call contain forward-looking statements that are subject to risks and uncertainties that could cause actual results to vary, which are discussed in our public releases, including our most recent 10-K. We caution you not to put undue reliance on forward-looking statements, and forward-looking statements made during this call speak only as of the date of this call.

In addition, some of the comments made today on this call may refer to certain measures for full year fiscal 2010, which are not in accordance with GAAP. Management believes these results more clearly reflect comparative operating performance. For a full reconciliation of normalized to GAAP results in accordance with Regulation G, please see our press release filed as an exhibit to our Form 8-K, dated today, July 27, 2010, which may be located under the investor relations area on our website at www.globalpaymentsinc.com.

Now, I would like to introduce Paul Garcia. Paul?

Thank you, Jane.

And thanks for joining us this afternoon for our fiscal 2010 full year. And I should add, in the worst economy we've experienced in 75 years, we delivered solid financial performance with revenue growth of 12% to $1.642 billion, and normalized diluted earnings per share from continuing operations of $2.54, or 21% growth compared to last year. Currency rates provided a lift to our financials during the year, and accordingly, full year revenue and normalized EPS growth rates were 11% and 15%, respectively, on a constant currency basis.

For our fourth quarter, we achieved revenue of $425 million, which represents 16% growth, and normalized diluted EPS from continuing operations of $0.58, or 35% growth over the last year. On a constant currency basis, revenue and normalized diluted EPS grew 12% and 14%, respectively. Now, I would like to address several specific initiatives.

First, I'm pleased to announce that we signed a new multi-year referral agreement with CIBC. We remain strong, supportive partners and we look forward to providing compelling merchant solutions for CIBC for many years to come. In regard to future visa sponsorship in Canada, we have a number of alternatives, including new bank sponsors and direct membership through our own Canadian loan company. We will choose the most advantageous approach to ensure a timely implementation well in advance of the March 2011 conclusion of the CIBC Visa sponsorship agreement.

Next, I'm pleased to announce that we are on schedule to migrate our US platforms to G2, our proprietary front-end authorization system, by the end of September. We successfully migrated a number of US merchants over to G2 in test fashion this summer. Based on the September migration date, we anticipate G2 generating approximately $4 million of cash savings in fiscal 2011, excluding depreciation expense of $2 million. The US migration represents annualized cash savings of $6 million, with annual depreciation of about $3 million.

We are currently targeting Canada to be converted by the end of fiscal 2012, and the UK to be converted by the middle of fiscal 2013. It may be helpful to remind everyone that G2 provides Global Payments with a huge competitive advantage in terms of both economic leverage and product delivery. The significant scale advantages, in addition to the expanding level of savings we expect to achieve as we migrate, will become apparent as we grow volume and transactions over the coming years, with very low incremental front-end costs in multiple markets around the world.

We also continue to execute our strategy of leveraging our back-end platform, which performs pricing, settlement, and other back office functions. We anticipate completing the UK migration to our own back-end system at the end of the third quarter of fiscal 2011. We expect this migration to provide overall service flexibility within our merchant operations and substantially greater pricing capabilities.

I'm also pleased to announce the opening of our new Global Service Center, or GSC, in Manila, Philippines. Over the long-term, we anticipate this center will handle many of our customer and operational support functions. The center will initially focus on our international operations, and will eventually supplement services for all of our regions around the world.

Lastly, I'm delighted to announce that HSBC recently received approval from the Beijing Bank Card Market Coordination Committee. This is the final step in a multi-year process to secure direct processing of [RemMB] transactions in China. Consequently, I am pleased to say that we will begin offering CUP card acquiring services to Chinese merchants by the end of the summer.

Now, here's David to discuss the financial details. David?

Thanks, Paul.

I plan to review our fiscal 2010 results, and then turn to fiscal 2011 expectations. During the fourth quarter, on a year-over-year basis, the dollar weakened against the Canadian dollar and the British pound. On a sequential basis, however, the US dollar strengthened against the British pound and weakened against the Canadian dollar, about as we expected.

US merchant services revenue grew 18% for the quarter, driven by our ISO channel, and overall US transaction growth of 19%. Average ticket amounts were slightly down sequentially from the third quarter, and down 6% from last year.

Overall, debit growth continues to outstrip credit growth. Total debit represents about 60% of our US transaction base, with PIN debit representing less than 10% of total transactions. Canadian transactions grew 7% for the quarter over last year, while average ticket amounts were slightly down sequentially, as compared to third quarter, and down 2% on a year-over-year basis. In local currency, Canadian revenue declined a little less than 1%. We continue to believe that macroeconomic conditions there remain challenging, resulting in spread compression, and pressure on our total North America margins.

International merchant services delivered revenue growth of 9% in Q4, primarily driven by strong performances in Russia and the Asia-Pacific region. Asia-Pacific revenue grew 28% for the quarter, due in part to strong growth in dynamic currency conversion.

Total normalized company operating margins from continuing operations for the fourth quarter were 17.4%, up from 17.3% last year. Full year 2010 normalized operating margins from continuing operations were 19.8%, essentially flat with last year's 20%, which we regard as solid performance, given the challenges we faced this year. Earnings from normalized continuing operations for the fourth quarter benefited a bit from an effective tax rate of 28.8%, which reflects the improved performance of our Asia-Pacific business. Our full year 2010 normalized effective tax rate was about what we expected at 29.5%.

We completed the sale of our money transfer businesses at the end of May, and received $85 million in proceeds, which we used for our stock repurchase program. We completed our $100 million share buyback program in the quarter, purchasing about 2.4 million shares at an average price of $41.97.

For FY 2010, we generated free cash flow of a little over $250 million. We define free cash flow as net operating cash flows, excluding the impact of settlement assets and obligations, less capital expenditures, and distributions to noncontrolling interests. As of May 31, 2010, we have placed $54.9 million of G2 assets into service, and we expect to begin depreciating the US portion starting in October 2010. We expect annual US G2 depreciation to be about $3 million initially, with $2 million for the partial year in 2011.

Turning now to our current expectations for FY 2011; from a foreign exchange perspective, our outlook for fiscal 2011 assumes that the US dollar remains constant or slightly weakens against the Canadian dollar, and remains constant or slightly strengthens against the British pound, Czech koruna, and the Russian ruble. We believe the net effect likely creates a modest headwind for us in 2011. Fluctuations in currency rates, of course, may cause variances to our outlook.

For the US, we anticipate overall revenue growth to be in the low double-digit range for fiscal 2011. We expect continued strong performance from the ISO channel, though perhaps a slightly slower overall growth rate given the sheer size of that channel, and solid US direct and check and gaming growth.

Last month, we lost a merchant from our US direct business. While less than 1% of US revenue, the account was highly profitable. The loss will remove approximately $0.06 of earnings per share, representing two percentage points of earnings growth from overall company diluted earnings per share in fiscal 2011. Our 2011 earnings and growth guidance, of course, incorporates this one-time loss.

In Canada, we expect local currency revenue to be about flat with prior year. In total, we expect margins to be down a bit in North America, driven by ISO growth, and the challenges through which we are working in Canada.

For international, first, we anticipate annual revenue growth in the mid to high teens again for Asia-Pacific. In Europe, as we annualized the Russian acquisition, revenue growth understandably will slow a bit. We expect solid mid single-digit revenue growth in Russia to offset declines in our business in the Czech Republic, where some of the large customer renewals we discussed in fiscal 2010 will not annualize until later in fiscal 2011. In the UK, we are in the process of exiting some high risk, low margin international acquiring business that came to Global Payments via the original acquisition, to better align with our overall approach to risk management. This will not have a meaningful effect on overall international profitability, but will reduce UK local currency revenue growth in 2011 to low to mid single digits. Regardless, we anticipate another year of strong double-digit profit growth from the UK.

Given the anticipated strength of the US dollar, we expect overall international revenue growth in US dollars to be in the low single digits. We expect international margins to continue to expand nicely in 2011 due to ongoing scale benefits in Asia, strong operating profit growth in the UK, and continued progress in Russia. We expect total company operating margins to be as much as flat with our 2010 margin of about 19.8%. We expect the 2011 effective tax rate to be consistent with 2010, with the first half of the year slightly higher than our full year rate, and we expect LIBOR to increase steadily over the course of the year. We expect diluted shares to approach $81 million for the year.

We anticipate spending about $55 million in ongoing capital expenditures, primarily for terminals in Canada, the UK, Asia-Pacific, and Russia, and infrastructure investments. In addition, we expect to incur one-time capital investments of about $12 million on the Global Service Center, and about $17 million on the new data center we discussed last quarter, for a total outlay of as much as $85 million for the year. Our 2011 normalized EPS expectations of $2.68 to $2.77 excludes $14 million, or $0.12 of start-up costs relating to the new Global Service Center.

For those of you tracking cash earnings, amortization expense for continuing operations after noncontrolling interest for the fiscal year 2010 totaled about $30 million. Total normalized stock compensation for the year totaled about $15 million, which excludes amounts related to the money transfer divestiture and certain one-time termination benefits. For fiscal 2011, we expect acquisition-related amortization expense of about $29 million, and stock compensation of about $17 million. Please note that amortization will fluctuate over the course of the year due to currency translation. And now I'll turn the call back over to Paul.

Thanks, David.

Based on our current outlook for continuing operations, we expect fiscal 2011 annual revenue of $1.735 billion to $1.770 billion, or 6% to 8% growth over fiscal 2010. This would be 7% to 9% growth on a constant currency basis. We also expect fiscal 2011 diluted EPS from continuing operations of $2.68 to $2.77, reflecting 6% to 9% growth over fiscal 2010, which would be $2.71 to $2.79, or 7% to 10% growth on a constant currency basis over last year.

Before we go to questions, I want to take a moment to discuss our long-term opportunities. The adoption of electronic payments around the world continues to fuel both our industry's overall growth and our organic growth. We continue to believe that our mix of businesses in mature markets that yield higher margins and investable cash flows, and in earlier stage long-term growth markets, such as China, Russia, and India, provide a solid platform for both near and long-term growth. As I consider our Company's growth prospects, I'm excited about our unique position in Asia, particularly China, our leadership position in Russia, and our market position in the UK.

In addition, the opportunity to expand into new and existing markets is stronger than ever before. Speaking of expansion, and based on the inherent operating leverage in our business, which will be further enhanced by the Global Service Center and the rollout of G2, and the full benefit of the back-end UK migration, we are confident that FY 2012 and beyond will witness tangible margin expansion. Operator, we will now go to questions.

Thank you ladies and gentlemen. We will now conduct our question and answer session. (Operator Instructions) And we'll go first to Tien-Tsin Huang of JPMorgan.

Great. Thanks so much. I'll ask on the GP side, the cost savings projections that you laid out. I'm curious, what's the calculation for that savings? Is it just savings from converting to the new platform and sunsetting the old, and does it capture high incremental margins as volume grows? Maybe you could just elaborate on that.

Tien-Tsin, this is David. The base calculation for the first year is just what you described. It really is what would have been our run rate expenses for the year on the legacy platforms we expect to shut down over the course of October, November, December post the migration. Those go away. And then what comes back in is the lower cost platform. So, less resources necessary to run the platform, lower operating costs in general when you think of maintenance and base depreciation on the equipment itself. So, that's the initial calculation for the first year. Your question is certainly pressing in that as we go beyond this, into the future years, is where we really see a lot of the benefit of G2 coming in. We get a really true compounding effect, increasing returns leverage from this platform, when you begin to put all new volume onto a platform with very low incremental costs. Now, if you go out, you heard, in Paul's comments, you go out a year or two, begin to lay all of your Canadian, and you pay volume on top of that, then you've got essentially all of your worldwide platforms on one platform. That really is where the true sizable benefits will begin to come in from G2 in the long-term, but you're exactly right in characterizing '11 as the year where it's really just the substitution effect of new slightly lower costs for the old legacy costs, and then follow it up with lower step functions as we go forward and layer more and more volume on top of the same single platform.

Okay, got it. And then the startup expenses in the Philippines, I think the $0.12, is that Service Center going to ultimately replace your existing Service Center, or is it really more supplemental? I'm trying to gauge if this is an added cost or part of the broader consolidation effort.

Well, it's part of a broader effort at long-term margin expansion and cost control, so it is not by definition going to replace our existing centers. It will complement our existing centers. But remember, we obviously believe we'll see more and more volume transactional and dollar volume, which will drive more and more calls to our call center, more and more chargebacks, more and more of the activities that fill a center like this. So, we think this will add an enormous amount of cost leverageable capacity to our infrastructure. So, we'll have the ability to both balance our different loads of calls, and begin to drive most of our growth to the offshore platform that will come at cheaper incremental cost as well.

Okay, great. Maybe just one more on the CIBC front, glad to hear the extension there. Any change in the economics net of the sponsorship change there that we need to consider?

Tien-Tsin, this is Paul. The answer to that question is no.

Okay, good. That's easy and clear answer, then. Maybe just last one and I'll let it go. Just for you, Paul, do you have a view on long-term EPS growth for Global Payments? Obviously there's a lot of moving pieces going on. You laid out your strategy, et cetera. I'm curious if there's a new thinking here that we have on long-term earnings growth for Global.

You know, Tien-Tsin, you're correct to pick up in the first time in our 10-year history, we've actually talked about a fiscal year, a whole year forward. We've never done that before.

Right.

And we did that intentionally with a lot of circumspection. And the reason is that we feel very comfortable with the margin growth opportunities from G2, from the Global Service Center, from the back-end migrations, particularly the one in the UK. Obviously, just the inherent leverage within the business and the growth prospects around the world-- you add those together, it has to boil down to margin improvement. We said, you know, we feel that strongly. Let's just say it. So, we said it.

Okay. Very good. Thanks so much, guys.

You're welcome. Thank you.

We will go next to Jim Kissane with Bank of America Merrill Lynch.

Thanks, and great job, guys. Paul, following up on Tien-Tsin's question there, maybe your updated thoughts on financial reform now that it's been signed, in particular the interchange regulations.

Jim, that's a--that's--we could spend the rest of the call on that.

I got you.

I mean--this Durbin bill now, it's in the--we're speaking specifically about Durbin, not Dodd Frank bill. The Durbin bill has--it's in the hands of the Fed now, so we got to wait and see what they do. But I will tell you, and I've said this to you personally over the years, I believe interchange is going to come down right. Interchange is coming down. I think I've been validated in that, and I think it was obvious to everyone it had to. There's too many forces that would conspire to have any other outcome but that. So, interchange is coming down. The--I've also always said that interchange comes down, it's good for all the processors. We are in that bay, where that rising tide lifts all those ships, so we're part of that. So, clearly there's a benefit. Also, I hasten to say that even, even the author of that bill, Mr. Durbin, has never suggested--in fact, they have actually come out and said the opposite, that they do not believe that our industry, the acquiring industry, is anything but highly competitive, and they have actually said that. So, no one is suggesting that we deregulate it; however, with that said and done, we got to be cautious about our pronouncements. You got to be fair in how you would share those savings. It's clear that big merchants, especially those pass through, get it all. Smaller merchants are not going to get as much. Here's the beauty of that. If somebody gets greedy, I will take their business. If I get greedy, they will take mine. And there are hundreds of service processors out there competing for that. Free enterprise will dictate the answer. I think it will be a good one at the end of the day for everybody. And I think that's a lift for all of us. One last thing, this is going to happen. I mean, I just--next summer, this is going to happen. We're going to see it out there, and we're going to be talking about it.

That's helpful. Thanks, Paul. And a quick question and clarification for David, just the accounting policies around expensing, or capitalizing the Manila facility? Just--

Sure, Jim. There actually is very little capitalized. We're not going to capitalize. There are no development costs, for example, that go into building the facility. It really is the startup costs to get a facility out there, get it running, get it furnished. So, there's some capital around the furniture, but the traditional capital with the furniture with a regular depreciation life, et cetera. This is not a--we're not creating intangible assets here, I guess is probably the easiest way to answer that question.

Got you. And since Jeff is there, maybe Paul, obviously pipe in here. The M&A environment, maybe the pipeline out there, what valuations look like, and your appetite at this point given G2 and the comments you said about the inherent leverage?

Sure,Jim it's Jeff. I'm happy to address that. Just given my background, that's obviously an area that I've spent a lot of time on historically. I would say, from our perspective, there's a fairly full pipeline of potential transactions that we're seeing currently. I think we're well positioned on almost all those. If you think about what we've done historically, and I've worked with the company on most of these, with CIBC and HSBC, for example, I think we've got a great track record of management integration and execution, and getting synergies and additional revenue growth out of deals we've done before. And I also think our balance sheet is such that we're in a very good capital position. So, I think from our point of view, Jim, we actually see a lot of opportunity there, and it also plays into an area that I've spent a lot of time in. In terms of pricing, which is the other element of your question, that's going to vary with the capital markets and with who the buyer group is. I would say we feel very good in the current environment about our ability to compete very effectively for transactions that we're most interested in relative to our historical competition.

Great, thank you very much.

We'll go next to Jason Kupferberg with UBS.

Just wanted to start with a question on the guidance for FY '11, and the top and bottom growth are obviously about the same here, and you guys talked about a flattish margin profile year-over-year in '11. So, what are really the most significant offsets preventing better earnings growth this year? You're getting some G2 savings, unclear if that's necessarily as much as people might've thought, but is it just that you're going to continue to see more mix towards the ISO channel? And then I know you have the direct merchant loss in the US that you guys called out. But are there other factors here preventing the operating leverage from starting to come through?

No, Jason. I don't think there are any new factors. We really do have an enormous amount of ISO growth that continues to fuel a lot of our North American progress. We talked a little bit about the UK on the call. We'll still grow on--on the prepared comments, we'll still grow income there double digits despite exiting some businesses there that don't match our risk profile. The only other element to keep in mind, as we've talked a lot the last two or three quarters, we have some issues to work through in Canada. We think they're macro driven, but they relate to retention and new sales and just spread compression in general. It will take us a little while to work through those during the course of the year, so you probably won't see the full progress we might expect on an annual basis from our Canadian entity. But I don't think there are any hidden surprises inside the pieces of the guidance. I think you can put your finger on them in the question.

Okay, and then walk us through the thought process with the Global Service Center in terms of excluding those startup expenses from the guidance. At high level, it sounds like you're investing in the business, and that's positive because you're tying that to your expectation for more volume and transaction growth over time. But just how you guys think about from a policy perspective, what to include and exclude.

Right. Well, I think from a policy perspective, we're looking at a significant one-time investment, with the return over the next three to ten years and beyond. In fact, there's arguably terminable value to the return on this thing. So, when we think about policy, we discuss it, for example, with the board or internally amongst the management team, really is about an investment with a significant one-time impact that has great returns over a long period of time. That really comes--that really is the summary at the end of the day. There's no arcane internal process around this. We've got a capital investment, pretty significant expense investment, with really no offsetting benefit until you get to 2012 and beyond.

Okay, and just last one for me on the regulatory front, I know you guys reiterated that PIN debit is less than 10% of your transactions in the US. Would you expect that percentage to increase over time if the debit interchange rates get lower, much, much closer to the PIN debit rates due to the Durbin amendment?

Jason, I have to tell you that I think the bigger pony is in the signature. While I think PIN debit will go down, PIN debit is already highly competitive. I think it will get less expensive. But I think there's going to be a bigger adjustment in the signature debit side. That's 50% of the volume in the US, 50%. And that's pretty much standard across the board. I mean, clearly our experience, but I don't think that's atypical. So, that would be--that's going to be the bigger impact. If I just take the spirit of your question, will you get a shift into more, more PIN and signature? The card issuers haven't been heard from yet either.

Right.

They are part of this. They may, I'm not suggesting this, but they may offer additional benefits for people to use a credit card, and not necessarily. And so, that's another piece of this that needs to work through. So, I would say--I would think immediately you're not going to get a lot of switch. I think the merchant only has so much opportunity to actually influence the consumer payment. That's the big fallacy in this whole discussion, you only have so much opportunity. At the end of the day, the consumer's going to pick. And what's in their wallet may be more determined by their financial institution. So, there's a little more chapter to be played out here.

Jason, maybe to augment that with a pure growth side of the answer, if you had a view of our metrics at a more detailed level, which unfortunately you don't, but when you take our transaction growth, you talk about PIN and signature. Although if you look at our full year, although PIN debit is growing faster than signature, it's only a hair faster than signature. Debit overall is growing rapidly.

Okay. Those comments are helpful. Thanks, guys.

You're welcome.

We'll go next to Kartik Mehta with Northcoast Research.

Hi, good afternoon. I just wanted to understand a comment you made on Canada. Is it more economically related to the issues you're running through there, or is it a company-related or something specific I guess with Global Payment that's causing some of the headwinds for FY '11?

Kartik, I believe, and we believe it starts with macroeconomics. And from there, you, you start with an environment where tough to grow, tough to convince consumers to come into your establishment. You end up in a situation where major merchants can more significantly discount and traffic customers into their stores, which will create a little bit of spread pressure from acquirer like us, given they are operating at spreads a fraction of those middle and small market margins. To that, you might see a little bit more attrition, which could be as simple as bankruptcies. And we've seen a number of those in our metrics over time. Beyond that, overall the idea of spread compression to the market overall. Final piece of the puzzle is a more growing presence of ISOs there, which obviously created a little more competition at the low end of the market. And in addition, if they're a piece of our growth, as they are, they also come in slightly lower margin than the rest of the business. So all in, you start with a root cause of macro challenges in a difficult environment, and you move on to retention and new sales. We actually think our execution is steadily improving. I've talked before about getting--having to work through a couple of quarters, annualize some of the spread, and really have our investments in retention and new sales come to fruition. As an example, that level of execution, we literally recently renewed our largest customer in Canada. So, we think we're making slow and steady progress that will be tangible as we get to the later part of '11, into '12.

And let me add, if I may Kartik, this is Paul, that Jeff Sloan, one of the areas that he's going to be focusing on, right ought of the gate here, is in fact Canada, working with their management team. And we have excellent products and excellent services, but there are some things that we could probably do better. And we are focused on those, and Jeff will be a great help in bringing clarity to that.

Thanks, Paul. Paul, you talked about margins in FY '12, and you sound extremely confident. I'm wondering, is that confidence a result of what's happening with G2 and the UK, even though you continue to execute well on the ISO business in North America? And that obviously puts pressure on your margin. So, even with that pressure, you believe that the other benefits are so great that margins should continue--should improve in FY '12?

Yes. Kartik, I think you said that perfectly. The back-end, the GSC, the Global Service Center, and G2, all come together, even with a headwind of the ISOs continuing to grow very nicely. That growth's going to slow a little bit, it has too. It's the law of large numbers, but, yes, we consider all of that, and feel confident enough to make that statement.

And then you talked about acquisitions. Are there opportunities more domestic or international now? I know in the past we've really focused on international. But I'm just wondering, if anything's changed in that landscape.

The answer's both. There are some--first of all, I would say that I think there are more opportunities, and the marketplace is richer and riper now than I remember in years and years and years. So--but they are everywhere. I mean, there are some in the US. There are opportunities in South America. There are opportunities in Asia, and opportunities in Europe. And we're literally pursuing all of them. So, Jeff, why don't you give a little more color.

Yes, Kartik, I would say that the US remains the largest market opportunity just in terms of the payment pie in front of us. Obviously, we're spending a lot of time there, and there is, I think, a lot of opportunity that we're seeing currently in the United States in terms of M&A potential. But back to what Paul said, I also think there's opportunities globally coming out of the current economic environment for us to really make a difference as we've done in the past with our other financial institution-related transactions to really move the ball forward in the M&A area. We're looking at those as well. So as I think--as we think about fiscal '11 on the M&A side, I think the key thing for us is to make sure that we're seeing the opportunities that are out there, which I believe we are, and we're evaluating the right way, which I also believe that we're doing. So, I think we feel very good about where we are in that business today, and I would look for us to spend a lot of time in those areas.

And then just one last question, Jeff. You talked about pricing for acquisitions. I'm just wondering, demand for acquisitions, we hear a lot of talk about so much private money or private venture capital on the sidelines. Is there more, more competition for these acquisitions, and could that have an impact on price?

Yes, Kartik, it's a great question. I would say that it's always been a highly competitive market. So, competition today is really any different in my experience than it was over the last economic cycle. I would say what's different today, from my point of view, is that our relative position in that marketplace with the history that we've got on the execution side with our management team, with the deals that we've done, and executed, I think, very well on, coupled with where we are from a balance sheet point of view. I do think today that, relative to past cycles, is very distinctive. While the competition hasn't changed in my experience, I think our positioning within the competition has really improved, and I think we're in a very good position in that market.

I would just add one thing. I think, Kartik, we're seeing more sponsors, less strategic. That's a bit of a change. And, you know, that will be interesting to see how that plays out, too.

Thank you very much. Appreciate it.

You're welcome.

We'll take our next question from Tim Willi with Wells Fargo.

Thank you. Good afternoon. Two questions, both I guess around the competitive environment. Number one, if you could just talk a bit about the customer that you identified that was going to cost you about $0.05 to $0.06 a share. Just any thoughts you might share as to why you're confident that that's more of a one-time event, per se, as being indicative of any competitive pressure you may see or expect to see in North America?

Yes, very fair question. So, what happens is this was a--this was a customer that started with us in a relatively new service as a small customer, and had a small customer rate. This customer grew to be a significant customer with us for years. And the rate never caught up. We, quite frankly--they were paying a small customer rate, and they were becoming a sizable customer. This, this was not something that we handled well. It came to the customer's attention. They were justifiably angry, and kind of fired us with prejudice. So, let me be very frank. So, that's not--any of that is not good; however, I will tell you, we have scrubbed everything. This is a unique scenario. This was a super unique scenario because you saw the impact on this. You could imagine the spreads being charged to this guy. It was a super unique scenario. It does not exist. We're not going to be coming to you in future quarters and saying there's other scenarios like this. It truly is unique.

Now, was this one merchant or was this a selling organization? I can't remember if you identified--

We didn't say, but it was actually a merchant. We did say it was a merchant. We did Tim to qualify. It's not an association. It's a merchant.

And then just second, around competition, maybe tying it into the M&A discussion, with so much activity that appears to be out there. Number one, do you have any observations around competitive behavior of some of your primary competitors, as a whole, in North America? Second, if we were to see some of the activity in the books that are being circulated actually occur, would history, or your knowledge of the industry lead you to believe that there could be any kind of change in the competitive dynamic as it now exists, if we start to hear about properties changing hands and deals getting done? Should we think about competitive issues any differently?

Yes, I think there's a couple things. I'm going to let the team jump in on this one because this is a very good question. The competitive landscape has changed. So, the elephant in the room is the individual with the largest market share, is focused on a number of things. There's still a formidable competitor, but they are not out making a lot of acquisitions, and they are going through some management structure and that does have an impact, in all fairness. Once again, they are still formidable. I don't wish them ill, but that's just the reality. We have another very large competitor also here in Atlanta. Their CEO has announced that he's leaving. And he's a very talented guy, quite frankly. And it's a loss for them and it's a gain for where he's going. He's going in a noncompetitive industry. But he's a very bright guy, but once again, that organization's more than one person, and they have some very good talent and they will still remain a tough competitor. The ISO environment--lot of books floating around, ISO, some are ours, some are not. Not all ISOs are exactly the same. Some really are more like direct merchant acquirers, where others are more traditional ISOs with lots of commission-only sales people. And, some of these have been successfully offered, some are in process, and some have actually been withdrawn. I think that this market continues to consolidate. I think that, by definition, changes things. But as I said to the earlier question that was asked, I think we're seeing more sponsors and less strategics. That, in and of itself, is pretty unusual. And we believe we're in a unique position. We're strategic. By definition, we have opportunities to make acquisitions and then consolidate them to our platforms, and come up with big savings that a sponsor by definition usually can't. So, we're pretty enthusiastic. Do you guys want to add something?

Yes, Tim, it's Jeff. I guess what I would add to that is that consolidation and competition has been the nature of this business for a very long period of time. From our perspective, what we'll leave you coming out of the marketplace is opportunities like this, or opportunities for us to get bigger in our core business. So, we welcome a lot of the competition, consolidation that we're seeing. And your question about activity changing the nature, that's how we look at our business--I don't see that at all. I see this really as an opportunity for us to deploy capital, to continue growing amid businesses that we're already in, that we know, and that we like. We really see it as additional opportunity beyond what we currently do.

Okay, great. Thank you.

We'll go next to Glenn Greene with Oppenheimer.

Thank you. I guess the first question would be on Europe. It looked like the growth really slowed down, at least year-over-year, and somewhat sequentially as well. Is it the UK? Is it Czechoslovakia? Is it pairing back already some of those lower margins--lower margin business in the UK? Just a little more color on the slowdown in Europe.

Sure Glenn. It is indeed the list you described. So, it is the continued challenge in the Czech Republic that I referenced earlier on the call. I think that we've got a couple more customers renewing and that'll affect us this year--one for the full year, one for half year, one for about a quarter of the year--in addition to some challenging economic environment in the Czech Republic. That's a part of it, and that will obviously carry over into '11. On the UK directly, yes, we began to exit what we call the international acquiring merchants, international acquiring business in the fourth quarter. So, that's--that's a headwind for us in Q4, when you look at the business sequentially or year-over-year. In addition, currency hit us pretty hard in the UK on the top line, a little on the bottom line as well for that matter, in the fourth quarter. So, you bring those couple things into combination, that's sort of your Europe answer for the fourth quarter. I think I would relate that to '11, too, while we're on the topic, just that it will take us a little while to watch that year-over-year growth in the UK come back to a very high positive number that we expect by the end of the year because this international acquiring business will be fully off--the pieces that we expect to go will be fully off in Q1. Then of course we'll have grow overs in Q1, 2 and 3, on the way back to getting back to annualizing it in Q4.

Any way to directionally size what that business is that you're exiting?

There isn't really a good way, because at the end of the day we really don't want to announce the number to the competitor to which it's going. We obviously spent a lot of time with our customer there who brings us this volume, helping them have a fairly seamless exit to a competitor who is more willing to process some of the business that we historically don't. It's tough to size. At the end of the day, if I take you back to sort of the overall view of the guidance, we're looking at low to mid single-digit growth in the UK in local currency. Now, what that means is this international acquiring portfolio will obviously decline, and our core card business there is going to grow double digits. So, we're pretty happy about that. It's probably worth me emphasizing that, double-digit revenue growth in the UK absent this international acquiring merchant base going away. So, that's low to mid single-digit in local currency. We expect currency to hurt us likely in the UK over the course of the year when you compare sort of July exit rates to where you think the curve's going to be come into next year. We think currency is going to be a headwind in the UK. So, those are the pieces of the UK. I can't probably size it much better than that for you, Glen.

That's great. That's helpful. Then, just a different direction, just an update on where we stand in terms of ISO renewals, and also the pricing environment related to ISOs as we go into '11.

We have--Tim, this is--

It's Glenn.

Glenn, this is Paul Garcia. We have renewed all of our big ISOs, and they have multi-year renewals. We've gotten that--we got that accomplished actually months ago. So, that's behind us and we feel very good about it.

Okay, and then, David, just one more on the Service Center in the Philippines. Is there a way to think about the ongoing cost run rate after the startup costs that I would assume would be incremental?

There isn't a great way, Glen. As we get towards '12, I can help you more with that. Let us get it started. We'll obviously be pulling it out all year long for you. We'll probably have a pretty good exit run rate Q4 of '11 that will tell you how we start into '12 and beyond. Then it would be incremental growth, and there based on volume. So if it's okay with you, let's watch as the year goes on and shapes, and I think you'll have a pretty consistent view that'll help you out as we get into the latter half of '11.

I want to add something here too, Glenn. This obviously is a sensitive subject because it concerns people who are performing these functions in some cases in other places. So, this Center is initially being constructed. It can be sized. It can expand. And at the end of the day, it will be less expensive to perform a function there than it is where we perform a function today. So, it is part of the margin expansion.

Okay, great. Thank you.

Thank you. And operator, I just want to add one other thing before we go to another question. The first question from Tien-Tsin, he asked were there any change in the economics of CIBC. And I said no. That is correct. There is nothing material. CIBC has approximately 1000 branches that refer business to us. We did change the metric, which is confidential. But we did satisfy how the customer wanted to be paid, and to give them encouragement to give us more and more merchant referrals. And we're working with their management team to do that. There were some changes in that, but clearly nothing material.

Okay, operator, next question?

We'll go next to Dan Perlin with RBC Capital Markets.

Thanks. So, now that you're going to be processing these cup transactions, can you remind us how we should be thinking about the margins or the spread around that? Are they going to look more like your direct business, or are they going to look more like your ISO business?

It's--Dan, Paul. It's going to be direct, what we have right now in Asia, we're processing cups in many places, just not yet in mainland. We're also processing lots of Visa and MasterCard transactions in mainland. For example, the Apple Stores get lots of plays. There was a big article in the Times a couple weeks ago about them. Apple is opening another 20 in Asia. Big ones in Shanghai and Beijing are doing exceedingly well, that's our customer. We make similar spreads on that business. A couple via similar spread to a debit card, not a credit card. So it's a PIN-based debit transaction with similar cents per transactions, very similar to the US.

Okay, and then on G2, the--just so I'm clear, the--you talk about $4 million cash savings in '11. I think you said depreciation starts in October. And my understanding was a big part of the cost savings comes from the termination of your maintenance service agreement that you had. When are you going--when does that actually get terminated? It seems like you're recognizing depreciation in advances, actually terminating that.

Right, Dan, we're recognizing appreciation when the platform comes into service to get the matching principal right. You are exactly right. All the costs, maintenance being one of them, for all the different boxes and pieces don't all automatically come off ten one. There are effectively duplicate expenses in the October, November, December timeframe. And you really don't begin to see costs peel away until the second half of the fiscal year.

Right. And it was also my understanding the biggest piece of the cost savings ended up being that maintenance piece. There's not a lot of headcount reductions, not a lot of incremental resources that could really get shifted here. It seems like that was the bigger chunk. So, as we think about modeling that out, the big hit's going to come positive post-December? Is that what you're saying?

That's exactly right. I could not have said it better.

Oh, you could have. The--so, the revenue growth in the US was quite strong on a sequential basis. And that's just a function of ISOs, continually ramping up and you're seeing some improvement in direct. I wasn't clear on that.

Yes, for the fourth quarter specifically, it's ISO-fueled. It's some improvement in direct that we think carries into '11. And then it is real improvement in check and gaming. It's sequential growth in check and gaming for the first time in quite some time that we think sets us up for a very strong year in check and gaming in 2011.

Did you recently win that Harrah's contract from GCA?

You know, this is--this is Paul. And--

Hi, Paul.

We don't comment on that. And I will tell you that we are delighted with our business in the check business and the check gaming business. I will also tell you that I believe we're taking market share, if any of that is helpful Dan.

That's great. It's first time I've heard you comment on positive results in check and gaming in that context.

Let me hasten to say, that business is doing very well.

Okay.

And we are forecasting for that to continue. Primarily fueled on the gaming side. The check--

Right, right.

And to put a finer point on it, for the last year or so, as you can imagine, there wasn't a lot of volume in gaming industry peer the end, much less the check industry as well. So Q4, just to say it again, is the first real tangible sequential revenue growth we've seen in that business for a while. As we look out to '11, we expect more sequential growth, and very strong year-over-year growth in that business.

Got it. And then would you care to comment on what you're seeing so far, or if you take it to the first quarter, or the next month out for US? Because I know that as we think about [matrons], June looked like it was weaker for a lot of other transactions. I'm just wondering if you saw the same type of trajectory.

Yes, Dan, our trajectory, our metric trends are very consistent with the overall things you've seen out there, June being a little weaker than May. June wasn't so much a big surprise. Obviously we're sitting here in July, so we're able to incorporate what happened in June into our view. The other way to say it, at a really much higher level, it was a little weak. It wasn't wildly inconsistent with April or May.

Okay.

That's kind of how we've looked at the rest of the year. Whether you're talking about US, Canada or other markets, you get to the macro level, we're really not anticipating it being a wildly better or wildly worse environment when you get to a consumer spend or transaction and volume level.

Great. And then one last question for Paul, and then I'll jump off. Paul, do you care to define what you mean by tangible for '12? Thanks.

Oh, Dan. No. I would say you will notice it.

Noticeable, got it.

Thank you.

Thank you.

We'll take our next question from Greg Smith with Duncan-Williams.

Hi, guys. You guys discussed dynamic currency conversion helping you out in Asia, and I know Visa made some changes. What's the latest--is there anything that Visa's done that's going to negatively impact you, or has that issue been settled?

It has not been settled. So, people who really aren't you up to speed on what's happened, so Visa has put a moratorium. I think it will be settled. I will tell you, it's a nice piece of business for us. None of the existing business is impacted, but, Greg, everything in the future that wasn't processed as being implemented is put on hold while Visa works through this. They say there were some bad actors, we're not amongst them who were taking too aggressive of a stand. I think this works through. There's probably a revenue share that's going to happen, would be my guess. I think this pie is big enough to do just that. And I think it gets resolved. And hopefully, by the October call, we'll have a little more color for you.

Okay. And then, Paul, Brazil, any update on potential opportunities for Global down there?

Yes, I'll tell you, Brazil is probably, Greg, a once in a lifetime opportunity. And you can be sure that we are very focused on that. I mentioned the October call just a second ago. We have a strategy in Brazil. It's not quite ready for prime time, but I hope in October to give you a tangible update on just what we're doing in Brazil. We are--there's the tangible word again, but we are very focused on doing something meaningful there, and I look forward to filling you in on it.

Thanks a lot. Excellent. And then last question, just the cash on the balance sheet, David, what was the sort of freely available cash at quarter end?

Right, Greg, it's nearly $270 million. There about $500 million that's a combination of settlement funds, reserves, and capital that's not entirely ours, so shared with JV partners. Its almost about $270 million of available cash.

Okay, perfect. Thanks, guys.

Thank you.

We'll take our next question from Bryan Keane with Credit Suisse.

Hi, good afternoon. I missed some of the call, but I heard the G2 cost saves for fiscal year '11, and I know a lot of us been waiting a long time for the G2 cost saves. So, I was hoping to get a little color on beyond that, what's the potential cost saves?

Well, Bryan, it's David. Just to reiterate what it looks like for '11, it's $4 million of what we would call cash savings offset by $2 million of depreciation, for $2 million impact on '11. On a full-year basis, that would be six in three for a $3 million impact. As you go out, you go out a year or so, when we layer Canada and the UK on top of this, the number obviously gets bigger. The direct, tangible, immediate number gets bigger. And then as I have said before, the real incremental value, the real version of increasing returns leverage for G2 comes from layering all new volume worldwide onto this platform. So, you know, we're off to a fine start in the US relative to the number on annualized basis. It gets bigger in Canada and the UK when we add those in. And then from there, it's a matter of growth on a much more leverageable, lower incremental cost platform for the long-term.

Okay. But there's no--we're not quantifying it beyond this year, this fiscal year really?

No, and I realize you missed the piece of it, the dates for Canada and the UK are a little bit further out, and little too early to fully quantify.

Okay, and then just wanted to ask about the North American operating margins. I know there was probably a pretty big gain there from Canada. I know there was $0.06 positive gain on the quarter, but I assume Canada was even a little higher than that, since you probably had offsets in Europe. Just wanted to make sure I understood what was in--dragged down that margin a little bit. Then, if I heard you correctly, David, did you say that the US margins will actually increase this year while the Canadian margins will draw up a little bit and kind of creating that slight offset for next year?

Yes, actually, I didn't think quite that way, but that is the net effect. That's exactly right. Canadian margins, as we invest a little bit and work on our execution in that market, will dip a little bit as they did in 2010. US EBIT will grow. Actually, in US dollars, EBIT will grow in both markets, but US EBIT will grow, and US margins will improve. Remember, as we talk about the US, it's often a conversation about business mix. The ISOs are sort of as inevitable as death and taxes. The question is what does our direct business do? It's growing nicely in the year. And then check and gaming, which literally we're expecting double-digit growth from check and gaming in 2011, with nice leverage. That's a nice margin business, the net of all that, the mix, should bring about nice EBIT growth, and improvement in margin in the US. Now, all in--excuse me, let me rephrase. EBIT growth in the US, the ISOs will swamp that from a margin perspective. So all-in North American margins will go down, but really, solid EBIT growth in the US for the year, which we're pretty pleased about.

Okay, and anything in particular in this particular quarter on the margins?

No, not really. So you're asking about Q4 of '10 versus Q3, Bryan, relative to North America?

Or just year-over-year, I was looking at. It's down about 160 basis points, but with that gain, that's a pretty big gain you have from Canada. That's in that number as well. I just would have assumed that the margins would have been a little bit higher.

Yes, I understand. I think that unfortunately, as I mentioned earlier, the ISOs are inescapable, and we had a very strong Q4 ISO quarter. A lot of that is fees, which become 100% pass-throughs, so you really won't see the full income benefit you might hope to see on the year-over-year basis.

Brian, this is Paul Garcia. Let me add something, too. We did talk, I don't know if you caught this part, we did talk about actually expanding margins in FY '12 and beyond. And the reason for that is G2 is one, so we get increasing amounts of savings in G2 on a greater volume base. The Global Service Center, which we talked about, where we will perform certain services less expensively, more efficiently. And back in migration. So, we do see a bright prospect on the horizon.

And then I'm going to just step back for one second again on your question earlier, Brian, just to make sure we're painfully clear. US EBIT, we expect to grow in '11. That does not by definition mean US margins go up given the ISO accounting effect. And then in Canada, local currency basis, margins will go down a bit, reflecting our investments in the things we're fixing there.

Okay. Then last question, international margins next year seem like they are going to continue to increase, and just what are the drivers there? Thanks a lot. Congratulations.

Thank you.

Thanks, Bryan. You're absolutely right. So, in terms of international margins, a fair amount of this is cost controls. And really being able to continue to integrate successfully the UK business. A fair amount of this is more progress in Russia, and then it's scale itself in Asia. So, let's pull apart the pieces there for a second. We're expecting in local currency in the UK, low to mid single-digit growth with FX headwind. We're literally expecting, though, the cost performance as we complete some of the integration process in the UK, to drive our ability to have double-digit profit growth there. That will obviously drive incremental margin expansion, when you think about what that means for revenue versus expense. In Russia, you recall as it came into the business a little over a year ago, it was roughly a break-even business. It's obviously done better than that over the course of the year. We expect continued improvement. So solid growth wed to solid profit--progress in that market. An then Asia is a continual story of ongoing scale, high to mid teens growth in revenue, ongoing scale benefits. You see very nice progress. All of that, offset a little bit by challenges in the Czech Republic that we talked about before, don't get much different for fiscal '11. When you marry those things together, you're really actually making pretty nice progress. It will be a year of significant, and we think steady margin expansion on a quarterly basis over the course of fiscal '11.

Okay. Very helpful. Thanks for the color.

Thanks, Bryan.

We will take the last question from Robert Dodd with Morgan Keegan.

Hi, guys. Congratulations. Just a question on the Czech Republic really. Since you've acquired that business, many years ago, it's been a bit of a struggle. It seems to have been a bit of a struggle to get the renewals in place and to drive the scale there. Are you looking to make incremental investments to maybe get out of kind of a landlocked in the adjoining business coming out of Czech and expand there. You have some in Russia, etc. Is there anything you've got in the works to really make-- generate a hockey stick effect in Czech.

Well, it's a wonderful question and a very fair question, Robert. This is Paul. That business is in the indirect business, and the problem with that, while it was a great entre point into a market, we have not been able to morph that into a direct acquiring model. Our customers, we'd be competing with them. We are talking to them about morphing that with us, and that's an ongoing dialogue. Then, of course you have the reality of five customers making up the majority of your revenues and profitability. Those contracts come up every three years or so, and you get hammered on them. It's a tough model. Fortunately, it's one I just have--it's there and it's a very small piece of my business. I'm far from giving up on the Czech Republic, but I'm not prepared to double down either. I wouldn't look for me to buy more indirect processors. That's unlikely. I will morph that. We're going to grow around it. It's a bit of a headwind, but something that we still are growing nicely in Europe, even with that. And, by the way, these renewals are behind us for a while, but it will once again come up again. We are working on a solution.

And, Robert, this is Dave. Just to add a little to that, it's a tough model when you're just renewing large bank customers, but it's also wed to a tough economy. Macro, which is the elephant in the room for everything we discuss relative to Global Payments and probably any other processor right now, is not our friend in that market either.

Got it, thanks.

You're welcome.

At this time, we will turn the call over to Mr. Garcia for his closing statement.

Thank you, operator, and thank you all for joining us on our call today. We appreciate, as always, your support of Global Payments.

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