環匯 (GPN) 2011 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to Global Payments' first quarter fiscal 2011 earnings conference call. At this time, all participants are in a listen-only mode. Later we will open the line for questions and answers. (Operator Instructions). As a reminder, today's conference will be recorded. At this time I would like to turn the conference over to your host, Vice President of Investor Relations, Jane Elliott. Please go ahead.

Good afternoon, and welcome to Global Payments fiscal 2011 first quarter conference call. Our call today is scheduled for one hour. 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, as these forward-looking statements made during this call speak only as of the date of this call.

In addition, some of the comments made today may refer to certain measures for first quarter fiscal 2011 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 furnished as an exhibit to our Form 8-K dated October 11, 2010, which may be located under the Investor Relations area on our website at www.GlobalPaymentsInc.com.

Now, I'd like to introduce Paul Garcia. Paul?

Thank you, Jane. And thank you, to all of you for joining us this afternoon. I am generally pleased with our quarter, which produced overall results as expected. And, I am pleased to affirm that we are on target to achieve our full year financial estimates. Fiscal 2011 timing of results is somewhat unusual, as we expect a more pronounced amount of our earnings per share to be generated in our fourth quarter. David will discuss both the drivers of these expected results, as well as our Q1 in more detail in just a moment.

First, the highlights of the quarter and some recent events. In September, we celebrated the launch of China UnionPay, Renminbi Direct Merchant Acquiring in Beijing. A significant number of customers attended the launch, including many prestigious hotels in Beijing. These customers can now utilize one integrated point of sale application for Visa, MasterCard, CUP, JCB, and American Express. We were honored to have senior CUP executives and representatives of The People's Bank of China in attendance as well. We are are justifiably proud to be the only Western Company acquiring Renminbi transactions in The People's Republic of China. We expect steady growth as we expand further in other Chinese provinces, and it is important to note, that we currently process over $2 billion in annual CUP volume in Asia.

Speaking of our Asia Pacific region, we had an excellent quarter, almost doubling operating income over prior year, and increasing operating margin significantly. We believe that Asia will offer both accretive revenue and margin growth as we continue to expand throughout the region. We are also on track with our Global Service Center, or GSC, in Manila, Philippines. This state-of-the-art facility will initially handle customer support for a portion of our international operations, but it is poised to provide long-term cost effective worldwide services.

Our UK businesses, our Russian operations and our US ISOs, our US direct and our US gaming businesses, all performed very well in the quarter. With regard to the UK in particular, we are on track to complete our back end migration by the end of third quarter fiscal 2011. This migration will provide overall service flexibility within our merchant operations and greater pricing capabilities.

This was the quarter we were to have completed the US G2 migration. As you know, G2 is our single front end authorization platform, which offers efficiencies of operation from both a utility and a cost perspective. We have converted most of our Asian authorizations and tens of thousands of US customers to G2. We based our US migration plan on the execution in Asia and on initial successful US testing.

However, during final US testing, we identified exceptions that suggested the potential risk of a less than seamless migration for certain merchant and terminal types. With the goal of ensuring that our merchant base has a perfect migration experience, we have expanded our testing window and have elected to migrate our largest customers and ISOs after peak retail season. Therefore, US G2 will most likely not be fully migrated until next fiscal year. We are reaffirming our earnings expectation, which of course means that the anticipated $2 million in G2 savings will be covered elsewhere.

Moving on to Canada. I am pleased to announce that we have executed a Visa sponsorship agreement with a financial institution in Canada, commencing in March 2011. We also continue to pursue our own bank, and anticipate having multiple solutions for sponsorship in Canada. Our sales efforts are going well, and to that end, we signed three large merchants representing over $1 billion in annual dollar volume.

Now, turning to Brazil. Brazil offers a unique opportunity to enter a previously closed market. The Brazilian market is large, with nearly $250 billion in credit and debit card payments per annum and this market is growing at approximately 20%. Until just recently, there were only two service providers, one for Visa and one for MasterCard. A merchant wanting to accept a bank card had no choice but to call one of these providers. The Brazilian government hoping to stimulate product innovation and competitive pricing, recently mandated an end to the past duopoly.

As there are initially no meaningful bank portfolios available, this is more of a greenfield opportunity. Consequently, we are holistically building our Brazilian market presence. To that end, we have hired a leader with significant Brazilian payments experience, and we are in the throes of establishing our sponsorship, referral and operating partner agreements. We will provide more color on Brazil as well as global acquisition opportunities as they develop.

I'll now turn the call over to David.

Thanks, Paul. I'll review currency, segment operating performance and outlook, cash flow and capital, and the quarterly timing for earnings this year. During the first quarter, on a year-over-year basis, the dollar weakened against the Canadian dollar and strengthened against the British pound, about as we expected. In aggregate, currency changes benefited revenue and normalized earnings by $1 million and $0.01 per share, respectively. Our outlook for the remainder of fiscal 2011 continues to assume 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. The net effect likely creates a modest currency headwind for us in 2011. Fluctuations in exchange rates, of course may cause variances to our outlook.

North America merchant services revenue grew 11% for the quarter, driven by US merchant services revenue growth of 15%. US results reflect continued strong performance by our ISO channel, which helps drive 19% overall transaction growth. Average ticket amounts were flat sequentially from the fourth quarter, and down 4% from last year. Our US business performed about as we expected in Q1, and our revenue expectation for low double-digit growth in 2011 remains unchanged.

Transactions in Canada were flat for the quarter, while average ticket amounts were down 2% over last year, and flat with the fourth quarter of 2010. In local currency, Canadian revenue declined 6%, reflecting a challenging environment that is resulting in spread compression. We have taken immediate steps to put in place a number of new expense and revenue initiatives to offset the effect of the spread compression on overall fiscal 2011 North American operating income. In Canada, for 2011, we continue to expect local currency revenue to be about flat with prior year, with modestly improving performance in the second half of the year.

Our North America merchant services operating margin was 20.1% for the quarter, as compared to 25% in last year's quarter. North America operating income for the first quarter was affected primarily by the Canadian results, the loss in June of a large US merchant we discussed last quarter, incremental investments in IT infrastructure, and seasonality in our greater giving business. As we anticipated, international merchant services operating income increased by 9%, as compared to last year, despite a revenue decline of 2% in the first quarter, resulting in 330 basis points of operating margin improvement to 30.4% for the quarter.

The revenue decline in international was driven by an unfavorable British pound exchange rate, and a revenue reduction associated with our discontinuing processing for some high risk, lower margin international merchants we discussed last quarter. We saw strong revenue performances in Russia and Asia Pacific, and international merchant services operating income growth overall was fueled by continued margin expansion in the UK, Asia Pacific and Russia. Our annual expectation for overall international revenue growth in US dollars remains unchanged at low single digits, and we expect material margin expansion in international this year.

Total normalized Company operating margins from continuing operations for the first quarter were 19.4%, down from 21.8% last year, but up from Q4 margins of 17.4%. We expect fiscal 2011 operating margins in North America to be down compared to last year, with offsetting margin expansion in our international segment driving our overall Company operating margins, to be slightly down to as much as flat compared to our 2010 margin. Our normalized results for the quarter exclude $3.2 million or $0.03 per share of one-time expenses related to employee termination and relocation benefits, including $1.1 million of start-up costs associated with the Global Service Center in the Philippines, of which the vast majority relate to severance. Our normalized results also exclude a $2.5 million one-time non-cash write-down of a deferred tax asset we established in July 2009, when we purchased the second half of our UK business. The write-down resulted from a legislative reduction to the UK tax rate of 1%.

During the first quarter, we generated free cash flow of $59 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. During the quarter, we spent $25 million of capital expenditures for infrastructure, terminal purchases, and initial build-out costs related to the Global Service Center. Our full year expected outlay of $85 million remains unchanged. With about $55 million relating to ongoing capital expenditures and specific capital investments of about $12 million on the Global Service Center, and about $17 million on a new data center.

In August, we repurchased about 345,000 shares of our common stock, using the remaining $13 million of our fiscal 2007 authorization, at an average share price of $37.64. For those of you tracking cash earnings, we expect amortization expense for continuing operations after noncontrolling interest for fiscal 2011 to be 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. Our normalized effective tax rate for the quarter was 30%, and we continue to expect our full year 2011 normalized effective tax rate to be about the same as fiscal 2010, about 29.5%, with the first half of the year slightly higher than the second half.

Finally, we achieved our internal financial plan in aggregate for the quarter, and we are on track to achieve our full year estimate. I want to provide some additional color to help you with modeling 2011 on a quarterly basis. We expect second quarter earnings per share to be around our first quarter level. We expect a seasonally weaker third quarter.

We then expect our fourth quarter to be quite strong, with strong seasonal performance in our US businesses, and stable performance in Canada, augmented by strong seasonal performance from greater giving and the completion of the UK back end migration in the third quarter, which allows us to modify certain pricing elements in that market.

Now I'll turn the call back over to Paul.

Thank you, David. Based on our current outlook for continuing operations, we continue to 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 are also reaffirming our 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.

As I reflect on our market position, the continued growth of worldwide payments and the strategic opportunities available to us in fiscal 2012 and beyond, I am very confident about our future. Operator, we will now go to questions.

Thank you. Ladies and gentlemen, we will now conduct a question-and-answer session. (Operator Instructions). Our first question today comes from Dan Perlin from RBC Capital Markets. Please go ahead.

Thanks, guys. Just a couple questions. Can you help us think about the kind of headcount reduction, labor arbitrage that you guys are seeing as you think about this Philippine service center? Like can you compare the cost of labor here versus what you're getting there and then potential headcount reductions?

Sure, Dan. This is David. It's about $0.35 on the dollar. It really is position-driven depending whether you're dealing with non-customer facing, customer care, or other sort of operations jobs but it's about $0.35 on the dollar for the long-term, so as you might imagine as we look out to kind of exiting this year with the facility hopefully up and ready to run, we're feeling pretty good about how that helps us position ourselves from an expense perspective for the long term.

You've got I think some 600 people in Baltimore and I think another 300 or so at another data center. What is the -- what's your expectation to bring the headcount down from that level? So we've got the $0.35 on the dollar. Help us with the absolute number.

I mean, I think we're not going to go all the way toward an absolute number right now. We have strategy that involves worldwide cost leverage investment levels, we will both complement current levels as well as reduce current levels depending on market. We'll start with non-customer facing, and over time we'll begin to add other pieces of operations as they belong in an offshore center including any sort of clerical or operational role you could imagine. We're not going to parse specific counts. Just know we'll exit the year having moved the United Kingdom and the associated services with it from India to the Philippines and will have begun the move of other pieces of our infrastructure there with a center that's fully authenticated and ready to have incremental adds over the course of the subsequent quarters and years.

Is the greenfield in Brazil assumed in guidance?

Dan, this is Paul. So the answer is yes, it's going to be next fiscal year until we see anything meaningful out of Brazil. It truly is greenfield. As we said, it's a holistic approach to building a market, so it's going to be some time before we get any revenue of any note at all, and we're thinking that will be next fiscal year.

To put a finer point on it for this year, the staffing, so having a leader down there who is exploring the market and helping us work on deals and transactions is obviously in our numbers. To the extent we begin to see revenue or even heightened investment level, it's not necessarily in our numbers for fiscal 2011.

Okay. It sounds like you guys have a better handle on the Canadian situation versus the last couple conference calls. Can you enlighten us as to what you've learned?

This is Paul, Dan. Canada in kind of a normal year is a single digit grower with accretive margins. So it's a nice model. Throws off a lot of cash, does a good job, pretty dependable. Occasionally you get lucky and you're handed an opportunity and it outperforms significantly, which it has. This year, and part of last, was a bit of a disappointment. Canada didn't perform as we had hoped. Consequently we made some hard decisions about some expense reductions. We also introduced some new initiatives for revenue enhancement and I think this is the key point. We believe we exit this fiscal year, fiscal 2011, and go into fiscal 2012 with Canada back on track and that's our expectation.

Back on track is defined as growing equal to the market with margins that are no longer compressing?

Exactly right.

Okay. Thank you.

Thank you.

Thanks, Dan.

I'll hop off.

Our next question will come from Bryan Keane from Credit Suisse. Please go ahead.

Yes, hi, good afternoon. I just wanted to follow up on Canada. I guess the question I have is how do you know that the market will get better in Canada? Obviously the competition there has been pretty fierce. So could you just talk about why you're confident that improves going forward in the Q4 and as you exit this fiscal year.

Okay. Bryan. So what we are confident about is the expense side. So we have 100% control over that, and we are making some reductions that we absolutely have 100% clarity on. So we are confident, and that's why I can make a statement like we're going to exit the year and see a pretty marked turnaround in Q4.

So now you talk about the top line. We've actually been successful in signing a lot of deals. We've resigned big deals and the efforts are pretty good. Our relationship with CIBC and National Bank of Canada have never been stronger. We're getting good referral channels. We're feeling very good about that.

We're also introducing some other revenue initiatives and at the risk of sounding a little coy, it is truly for competitive reasons, I don't want to go into a lot of detail, but we think coupled with expense reductions, these revenue initiatives that we once again are confident, because we've seen it work elsewhere, will produce some meaningful results so we should come out of this thing looking pretty smart. Jeff, do you want to add any clarity?

I think that's absolutely right. If we continue to win large customer business, so I'd add that in the midst of all this we feel confident about our ability to continue to win relative to pretty stark competition, and as Paul noted in his comments, we also are exactly where we want to be on the Visa sponsorship issue that we talked about in the last call. If you bring it all together, Bryan, we feel like we're in the right place with our Canadian business.

And maybe one other piece, just purely economically, Bryan, the retention that began to show up sort of the second quarter of last year, among other issues from a metrics perspective has stabilized, and really as you head into the November quarter, a little bit into our third quarter, you will annualize some of the heightened spread compression that we literally began to see in the November quarter last year, which obviously sets us up for a stable Q4 from the perspective of the metrics.

Could you guys talk a little about the margins in the US business, how do you guys feel about that, where they sit today and are you satisfied and what do you expect kind of going forward?

Bryan, it's David again. I think we're satisfied from an execution perspective in the US business. Remember that the margins in the US business are affected in outsized fashion by the gross level of accounting, the gross versus net accounting we do for the ISO. So at some level in terms of US margins in percentage terms, we're fighting a losing battle in just the US which is obviously why we pay a lot of attention to international margin expansion and total Company opportunities, but in terms of execution, the pieces of the US are operating fairly well.

We see our core direct card business hanging in there fine in a tough market. Remember that we lost that large profitable customer in June, so on a year-over-year basis, you're going to see challenging comps for that card business. The check and gaming business is making nice progress.

Greater giving is a very seasonal business in Q4. It's operating in Q1 about as we expected, but not a contributor, in fact, it has a deleterious effect on operating income and margin for North America on a year-over-year basis. But all in, the US business is off to about the start we expected.

And are the US ISO margins flat year-over-year on an apples-to-apples basis? Are they down slightly due to pricing or just give us a little color there.

So they're down slightly, and I think that's a fair assumption almost any time sequentially with the ISO margins, if you think about the direct contribution. Remember that a lot of our ISO contribution comes from a true 80/20 rule, which means that the big guys really are out driving the bulk of the volume and the growth. The big guys by definition get improved pricing over time, if for no other reason than sheer volume drives lower pricing, which means there's an impact on margins overall. In return we get huge scale benefits, and very nice processing benefits, but the margins are directionally down, sequentially without question.

Last question for me, Paul. Love to get your updated thoughts on Durbin and Durbin amendment on your guys' plans going forward, maybe to p capitalize on some of the merchant acquiring revenue if you can capture any of the extra pass-through interchange. Thanks.

All right, Bryan. Well, we're going to get some clarity on Durbin out of the Fed in December. We're all looking forward to that. There's a fair amount of data available publicly, including a lot of material that has been presented for consideration, what expenses should be included, et cetera. It's all pretty interesting stuff.

The bottom line is there's some conjecture on just what this results in. I think it's probably inappropriate for me to just hazard a guess, but clearly it results in a reduction, almost 50% of all of our transactions are signature debit. So clearly, there is an opportunity to, at minimum, offer our merchants reduced fees which takes margin pressure off. There are scenarios where you may keep some of that, so I'm not going to broadcast precisely how that is, other than to say, once again, this is a very competitive market and if anyone gets too greedy, they're going to lose their business.

It's an opportunity for us to take businesses, and it's a sobering thought for us to be too aggressive. So that's a careful balance. We'll look at that as we go forward, and it starts with getting better information out of the Fed.

Okay. Thanks so much.

You're welcome.

Our next question will come from Darrin Peller from Barclays Capital. Please go ahead.

Thanks. First question is, I think the last few years you didn't necessarily have the seasonality, the material pickup in revenue in your fiscal Q4, at least that we can tell, and I guess to that end, is the majority of the pickup really related to price adjustments in the UK and if so, could you help quantify that a little more.

This is David. There actually are three or four things that happened in the fourth quarter. So I'll zip through all of them and without specifically citing them, I can help you with the relative size. The first part of Q4 for us is a comment Paul made earlier about Canada returning to stable performance really on a Q4 basis, so that's part one. That will obviously have a big sequential impact as well, Q3 versus Q4 because Canada has a traditionally seasonally light Q3. If you marry, Canada gets more stable to traditional seasonality effects and swings you get a substantial impact from the Canada of Q4. You have traditional US seasonality and that is more traditional. It's not a stabilizing question.

If you keep going up the income statement, we expect the new implementations that we've talked a lot about in our check and gaming business to really hit their stride on a run rate basis in Q4. So they come into play over the course of Q2 and Q3, we have a true full quarter effect in Q4. That's a solid number. And then the next biggest number on the way up is greater giving, which is the not for profit asset we bought a little under a year ago, and that by tradition seasonally has its biggest quarter by far in our Q4, which is the season that most not-for-profits are doing their auctions and other events. So it will literally earn far more than its full year income in Q4 alone. So material impact from that business alone sort of on our North America numbers.

The single biggest number, that you can almost take these other numbers I just quoted you and add up to is the opportunity for reconfiguring our approach to market, our approach to pricing from a value perspective in the UK. It's clearly the single biggest item to that list, but the list in total is pretty substantial when you add it all up.

Darrin, this is Paul. I would add something too. One of the reasons that I'm feeling pretty good about our year and also feeling pretty good about next year, is that with the exception of greater giving, which is truly a fourth quarter phenomenon, we exit the year with all of the metrics that David just shared, very much continuing to add benefit as we go into next year. And then add to that the question that Bryan asked, that I wasn't going to be pinned down on completely, but clearly Durbin will offer some benefit to be determined. So you add that and some other operating benefits we're going to get, we're going to receive benefit from, and it's a pretty nice story.

Okay.

Coming together.

One final piece of color relative to it and some of you guys cover tech firms, some of you cover software firms. Q4 could look a little like a software Q4 on a relative earnings basis to the other three quarters. That's not the wrong way to think about Q4 from sort of a sequential or from a flow perspective.

Sounds like about at least half of that is not exactly recurring. In other words, it's not like the typical seasonality for you. It's just because of the increase in certain pricing adjustments this year. That's kind of expect a map out for this year versus other years.

I would call out two things from that perspective. That's an excellent way to sort of put a final point on it, Darrin. One is the opportunity for pricing benefits. The other is this steady build-up of check and gaming implementations. So they're not traditional seasonality type events either. This is us taking market share and really exiting the year in a very strong position from a check and gaming perspective.

Thanks.

Once again, Canada stops being a headwind. At minimum, it's not a headwind. UK, we get a big tailwind from it.

Right.

So all good.

One more question. This has come up before but I guess to add on around Durbin. Given the more near-term potential shift towards PIN debit, likely to be associated with Durbin, the bill. Could you provide more clarity again on the revenue yield then or profitability differences between PIN versus signature for you guys?

Yes, Darrin, it's David. The simplest way to think about this is signature economics look a lot like card economics. PIN is obviously a fraction of that. If you were taking percentage margins, we make perfectly good profit and roughly equivalent profit on each, but the absolute dollars in play on signature look like credit versus PIN, they're obviously a fraction of that. And as just a reminder from a metrics perspective, it's almost 60% of our transactions that are signature debit.

It's still less than 10% that are PIN. I would also just mention just by way of thinking about sizing, signature has actually grown faster than PIN the last quarter or so, so a bit of a turn from where the market was in the previous six, seven quarters. So just changing trends a little bit at the margin but very interesting trends to watch as we head toward other events that are outside of our control.

Got it. Thanks, guys.

Thank you.

Our next question will come from Jason Kupferberg from UBS. Please go ahead.

Thanks. Good afternoon, guys. Just wanted to start with a question on the G2 deployment update in the US, and can appreciate you guys taking kind of a risk averse approach here in terms of pushing out the timing here. How should we think about the potential downstream impact of the US deployment pushout on Canada and then the UK? I think you had been targeting Canada for end of fiscal 2012 and UK of mid-fiscal 2013. Does any of that potentially change as a result of the delays in the US?

Jason, it's David. It likely does. We're hesitant to put a date on Canada and the UK now until we have more precise dates for a full US migration so I would say safe to assume it does but we don't have an exact date for you right now.

Okay. And then can you give us some sense of where you're going to make up the G2 savings in the US? I know it wasn't a huge number, about $2 million or so, net, but any specifics around where we should expect that to come from?

I would say we're going to be careful with hiring in the first place. The trick with this business is it's difficult to stop, because all the costs are variable and move with revenue so it really is headcount related. It's not just the US making up for the US, though. We'll see all our colleagues around the world helping row this boat to make up for the $2 million, so you'll find it in international margins as well as in the US, trying to offset dollar for dollar whatever it can.

And then on the UK side, obviously a lot hinging on the back end migration here by the end of the fiscal third quarter. Maybe if you could just give us a sense of kind of the confidence level there that you guys will definitely be done in time to actually extract the pricing benefits which are going to obviously fuel some of the boost to your Q4 P&L.

I'll do that, Jason. The issue is that the G2 migration is very complex, but yet we actually had success in lots of Asian countries. As we said earlier, tens of thousands of US merchants have already migrated to G2 in the US, and we're going to get through this. It is going to yield what we would like it to yield, and I think we have to be cautious in giving other dates, so I think that speaks to David's caution when asked about how does it impact Canada and the UK. I would say remains to be seen, but I think it's probably a cautious approach is a smart approach.

But let me emphasize once again, it works. What we have up and running is working beautifully. Customers give us raves, and we have every confidence that this is going to happen. Now, the back end for the UK is a very different piece of work. Doesn't have the variables, it does not -- that is not complex, but it's a different type of complexity, and it's also something we've done for years and years and years with lots and lots and lots of countries. Successfully, on target.

So we have every expectation, plus quite frankly, we have literally have weekly updates on this, because we understand how important it is. So the team is feeling comfortable. We are feeling comfortable, and that's the confidence that we want you to feel in us reaching that objective.

Okay. Just last one from me. Anything you can tell us in terms of percentage of your customers or your transactions or your volume that might be split between kind of bundled pricing versus more cost plus or interchange plus pricing just as we think ahead to how pricing models might change in a post Durbin world.

Jason, it's David. We haven't traditionally broken that out or disclosed that. I think it's a fair question, but one we ought to think about as we head more towards changes in the macro environment, changes in the regulatory environment. Obviously a chunk of the volume is absolutely interchange and assessment pricing, plus some sort of market. The exact chunk, give us a little time, we'll come back to that one, relative to what it's going to mean if regulatory things change the way we all think.

That's fair. Thanks, guys.

Thanks, Jason.

Our next question will come from Andrew Jeffrey from SunTrust. Please go ahead.

Hi, guys. Thanks for taking my question. Appreciate it. Forgive my incredulity here, but we seem to be having the same conversation materially every quarter. The US is getting tougher. Canada is puts and takes, nice job on international margins. You've got a lazy balance sheet. You've been talking about doing a major strategic deal, Paul, for quarters now. How long do we need to wait for you guys to do something strategic to return capital to shareholders?

Well, I would say, Andrew, I think that certainly is pointed but I don't blame you entirely. Let's start with the last part. The deals. So we do feel pretty comfortable in our deal pipeline and we're hopeful we'll have something to talk to you about in the not too distant future. There's some very interesting international opportunities and we're pretty comfortable we're going to take advantage of them, hopefully in a time frame that's more immediate than distant.

In terms of the Canadian story, I think Canada has been as I said, a headwind. We do have solid plans in place that we have complete visibility into for expenses, and just from our success in signings and resignings, and some of the revenue initiatives, I'm feeling pretty good about Canada. Now, the ISO headwind is the ISO headwind and it's not going to change. The ISOs on a net basis are wonderful margins but as they grow, it does of course cause a headwind.

That's why we are actively involved in expanding other markets and we are a complete story. It's not just a US story, a Canadian story or even an Asian story. It's all combined. Asia doubled net income. We have margins that are 20%. We think those are 30%. They were zero not too many years ago in Asia. That continues to build, including fourth quarter. We exit the year with that.

So I would say not too much longer to your not rhetorical question. Not too much longer and how much do you have to wait. I think that not too much longer for some news on acquisitions, hopefully. Not too much longer to see execution on what we promised. Not too much longer to see what we hope is margin expansion as we get into fiscal 2012.

Andrew, this is David. From a balance sheet perspective, what I'd say is we repurchased on the order of $100 million worth of stock in the last couple of quarters, that we deemed to be excess to our needs relative to growth, which we still think is the first and best use of our capital. You should expect us to still be opportunistic relative to buybacks but it is not our first focus right now from a balance sheet perspective. Our first focus is Paul's answer a moment ago, which is opportunities for strategic growth.

I don't mean to denigrate the business. It's a great business. I'm looking at it strictly from a public equity perspective, which is that it's been several years now of trends that have been sort of up and down, and it's one thing if that's the way it's going to be and that's the way the business is going to run. And it's another if -- I'm just trying to get a sense of should we expect something meaningful to happen on the strategic front, or is that just given the environment, and given that a lot of the big US commercial banks have dance partners, is that just not a realistic expectation? It may just be that that's where we are.

Let's talk about that for a second. I talked specifically about international opportunities and the couple of opportunities I referred to were international. The opportunities to do things domestically exist. There are a number of properties that changed hands recently that were of some size. It's not necessarily something we're focused on. In terms of financial institutions, we are very focused on that in the US. As you said, some of them are just not available, but some of them are. And some of them are coming available. So that's a little longer term. I'm not going to have an announcement on that in three months, but that is a longer term opportunity, but that does exist, Andrew.

It's Jeff. Just to add on to that, I would say that our pipeline of opportunities globally, including in the United States, is as lengthy as it has been. From my perspective, I think the ability to have the balance sheet flexibility and the ability of Management to focus on deals that we want to do including in the United States, is very important and we want to make sure we do the right series of deals and I think our capital position allows us to do it. So I think you should assume that things that have come down the pike in the last period of time are all things that we've considered, and we're looking for the ones that are most complementary for what we want to do. If we substantially look at the balance sheet for other purposes, I think we'd put ourselves in a position where we wouldn't be as attractive a partner if that's something we wanted to undertake in the near term, and I don't think that's where we are yet as a corporation.

Right. I totally agree with all those things. I'm just trying to gauge timing. Because if it's imminent then that makes a lot of sense. And if it's not, then maybe it's time to reconsider what the balance sheet looks like.

I think that's a fair point. So we have some we think near term opportunities and let's see if we can execute on them.

Okay.

Feel pretty good about them or I wouldn't be mentioning them.

I appreciate that. David, housekeeping issue. How much available cash do you have on the balance sheet right now?

It's actually a little less than it was. Last time we quoted a good six months ago it was 250. So it's a little less now, given the buybacks, but it's probably in the same range, 240 to 250.

Thank you.

Our next question will come from Kartik Mehta from Northcoast. Please go ahead.

Thank you. Good afternoon, Paul and Dave. A lot of questions on Canada. I just wanted to get your perspective on, you said you've made some changes there, reduced your headcount there. I'm wondering, have you made any Management changes there or is there a need to do anything from your perspective?

That's a fair question, Kartik. I would say that I am very supportive of our management up there. So how could they -- how could we have disappointing last year and heading into this year not where we want to be? I would tell you that the only thing I could say that we didn't collectively respond quickly enough to changes. We have now, Management has embraced it. They are bringing in business. They are continuing to make our partners happy with us up there and they're motivating the troops in a challenging environment. So I tell you, I feel pretty good about these guys. They're good, solid producers and I don't anticipate any changes.

Paul, you talked about Brazil and doing a greenfield there. Seems like that's a different model that you followed to expand internationally. I'm wondering what gives you confidence that you can have success in Brazil, going greenfield, since you've never followed that model.

That's an excellent question, Kartik. The reason we haven't followed the model to add fuel to your fire is it's been very -- I would say it would be hubris probably to go into these markets and a greenfield basis and think because we've been successful in this market or any other market we could be successful in a brand-new market, particularly a foreign market.

So the difference in Brazil is, it's completely thrown open. So you have this duopoly that has been completely broken up and everybody is kind of on a level playing field. Now, the financial institutions obviously bring all their branches and they're getting some of these portfolios from CLO and from [Hedicard]. So the opportunity is a unique one. The market is in flux.

So we enter with a significant bank partner, as probably as strong as anybody, with our expertise in this business, with a great Management team ready to go. Take a little while to build it, but so will everyone else's. So this is a unique opportunity. I wouldn't encourage you to think we're going to greenfield anywhere else because we won't, but this is basically if you want to be in Brazil right now, you can wait until these banks build portfolios and try to buy them, or you can jump in and try to fill the presence and we opted for the latter.

Paul, just your expectations on what kind of impact the Durbin amendment could have to the interchange rate, not its impact on your Company but impact on the interchange rate.

Kartik, I think we all heard the same kind of guesses, some 25 basis points, 75 basis points, 50 basis points. I mean, you've kind of seen it all over. I think we have to see what the Fed does. I think they generally have accepted some expenses. I think probably correctly so. So let's see what they come up with. So I'm not going to guess because I don't want to look foolish, but those are kind of the two stakes we've kind of heard, from 25 to 75.

And then just one last question, David, for you. Your free cash flow expectations for the year?

We actually don't have free cash flow expectations out there for the year, Kartik, we haven't guided to it. We expect to be a hair down from the last year. And a hair is probably understating it, a little bit down from last year, given we expect to spend on the order of $30 million more in CapEx this year than last year for the Global Service Center and the new data center.

Thank you very much.

Sure, thank you.

Our next question will come from Jim Kissane from Banc of America. Please go ahead.

Thanks, guys. First question for David, going back to the North American margins. Can you give us a sense what portion of the decline was related to Canada and what portion was the US on a year-over-year basis? Thanks.

Happy to, Jim. The majority is Canada as you might expect, given that we expect to have sort of steadily stabilizing performance over the course of the year there. Remember, though, when we think about the US, it is a contributor to the change in margin year-over-year. We lost our most profitable customer in the US in the first quarter, so it was there last year. It's not there this year.

The Greater Giving acquisition was not in the numbers a year ago, and it's a loss, an outright loss of close to a $0.01 actually literally in Q1 it was a zero, in Q1 last year. A loss of $0.01 this year, on the way to that Q4 profit I talked about earlier. We also are investing a little bit more in our technology group and you see some of that affecting. That really rolls through as US. We could argue that unfairly burdens the US and North America with what are effectively worldwide investments in networking but it is what it is. It appears in our North America income statement but the majority is still Canada, to your point.

Seemed like Canada got more competitive relatively fast over the past two to three years, and can you give us a sense on the pricing environment, generally, region by region? Are you seeing any of your markets get more competitive? Less competitive.

You mean worldwide or within Canada?

Regionally, worldwide.

Okay.

Take a look at Asia, US specifically, Canada, UK.

I'd be happy to. I'll take a spin around the globe and see if Jeff or Paul have anything else to add to it. I would describe US pricing trends as fairly stable. Remember, Jim, we don't compete for a lot of big box retailers and major national merchants in the states. So we're competing in the small to medium space, and although competitive, as it's been for decades, I would describe the competition level as stable.

If you move up to Canada, I think you're correct in surmising it is more competitive there over the last couple years. You could argue that a couple of the entrenched competitors, Global Payments included, set up a little bit of that competition opportunity given the opportunity to reprice cards with the premium card upgrades that happened with Visa and MasterCard about a year and a half ago, but nonetheless, it's a very attractive, mature market with high profit margins so as you might imagine others are entering it from a competitive standpoint, it is highly competitive now and that's part of this dynamic of annualizing spread compression on the way to our fourth quarter.

In the United Kingdom it's a highly competitive market. Our business there does range from major retailers on down to smaller merchants so we have a great mix of business there, but I don't consider that market right now materially more or less competitive than it was a year or so ago. You've had a lot of moving parts from an ownership perspective of a couple of the assets over there. We think they're going to turn now toward a focus on making a fair amount of profit and so we think that environment should stay stable for us from an outlook perspective.

Stable in Russia. Let's see. In direct acquiring businesses, we go east. In Asia I don't believe we've seen major pricing competition changes. In fact, we think we're executing very well there and perhaps driving some of our competitors into tough situations, but the margin overall, the spread overall really hasn't changed materially on a market by market basis. The most competitive place or the place where our financials show most of the impact of more competition is indeed Canada, as you asked in the beginning part of your question.

That was really helpful. Just last question, I guess on the acquisitions, Jeff and Paul, you're looking at a lot of things. Seems like you're passing or getting priced out. Is the issue valuation consistently? Is it cultural and strategic fit? The ability to integrate? Kind of give us a sense.

I think I'll start, Jim and I'll ask Jeff to jump in. So the opportunity kind of got to do what David just did. The opportunities in the US have been more just not really for us. The opportunities internationally, we don't believe we've missed too many. And quite frankly, those are lining up pretty nicely. We have a strong appetite for those and hopefully you guys will like them as much as we do. We'll see how that works out.

It's Jeff, Jim. I don't think that valuation has really been an issue across any of our regions in which we compete for acquisitions. I think we've got part of the reason we have a very flexible capital structure is to make sure that we're well positioned when those transactions do come up for competitive bidding. So I feel very good about our ability to compete in these things. I feel very good about our ability to manage them and integrate them. I think the issue, as Paul alluded to, has been, is that the right cultural and strategic physician for us and I think you know what our growth targets are. We need to make sure that things are additive to what we've been telling you in terms of where we're aiming and I would say that's a significant issue as we think about where to spend our dollars.

Great. Thank you.

Thanks, Jim.

Our next question will come from John Williams from Goldman Sachs. Please go ahead.

Good evening, guys, thanks for taking my question. Very quickly, just, you had mentioned 20% transaction growth. Could you possibly give us a little more color on the contributions from the ISO versus the direct channels within that growth rate?

Yes, John, it's David. Be happy to. Without quantifying it, the ISO growth is north of the 19% and really fuels the entirety of the growth. The rest of our channels are solid performers but it really is the ISOs who drive 19% plus growth and then in the mix of the math, you get the 19% on a net basis. So they're growing in the 20s to put it a little more bluntly.

Did you say who the sponsor was in Canada? I know you mentioned you have the sponsor.

We did not. It's a financial institution and we're going to keep that confidential.

The thought process in terms of pursuing sort of a dual channel view of the market up there? Is it that you had already committed time and effort to doing the licensing so you might as well just do it?

It's Jeff, John. We continue to pursue a number of alternatives for Visa sponsorship in Canada. We continue to be on file with the regulators for our own financial services vehicle. We talked to a number of other financial institutions in addition to the one that we currently have under contract. I think the message we were trying to communicate is we're exactly where we want to be in Canada from a licensing point of view. We're going to continue to explore additional ways to make it even more efficient. But we're very happy today with where we are from a sponsorship perspective in Canada.

Just one last thing. So you had mentioned average ticket down about I think it was 4% in the US and 2% in Canada and was just curious, looks like you're still seeing the mix shift toward the larger merchants, it sort of jibes with what we saw from FirstData. Have you been able to figure out any reason why the signature debit channel is growing faster than PIN? I mean, it seems like the opposite of what we had seen through the downturn and probably in the first few quarters after that. Is there something specific that stands out in terms of behavior, why consumers are using signature?

John, it's David. I don't think anything stands out. We have looked around analytically. What you'll hear, particularly in the recent trajectory is going to be the Reg E changes that can affect consumer behavior at the point of sale. That could be in the mix of what we're talking about. But honestly, analytically, we have not proven that out, no.

No sense that the exclusivity has changes to that for Visa and Mastercard, and for the networks that have had any impact on consumer behavior at this point?

No, not at this point.

Thanks, guys. Appreciate it.

Thank you.

We will take the last question from Tien-Tsin Huang from JPMorgan, after which Mr. Garcia will give his closing statement. Mr. Huang, please go ahead.

Great. Thanks. Good afternoon. Just a few follow-ups if you don't mind. Just the deal pipeline just as a follow-up, I think to Jim and Andrew's questions, did you say there's obviously been a lot of activity with MBC, and RBS, Mercury, et cetera, did you say those deals were outside of your consideration, and if so, should we interpret that to mean you're more interested in adding product than scale? Trying to understand sort of the direction of what you're looking for in the United States.

Let me comment. So first of all, you did mention RBS, right? So the RBS deal, that's -- we would be very interested in that, but we're precluded because of our market share in the UK.

Right, right.

The other deals, it's awfully tough to kind of comment on that but I will tell you, I can comment on Mercury. Mercury's our customer. Mercury's a great deal. Mercury is a deal that we were interested in and we probably should have stretched a little more. I think that's a great property. But that doesn't necessarily mean, Tien-Tsin, that we're interested in buying other independent service providers, that we are a little circumspective about buying ISOs that have large commission only sales forces. That's happened once before. It wasn't well executed upon.

Plus we're competing with our customer. So we're very circumspective. More Mercury-like models we have some interest in but the properties you mentioned are more commission salespeople and consequently that's our answer. I don't know if that's helpful.

It is. It is. Also sounded like you're more interested in adding to growth but I was curious if you would be willing to sacrifice this if you could diversify and perhaps enhance the margin profile or diversify away from the ISO model.

It's David. I think we'll talk little bit more about this next week when we're with you. To amplify something Jeff said a little while ago, the filter through which we're looking at these does start and stop with growth, top line, margin expansion, obviously earnings and EBITDA growth as well, and that really is the filter. That can put you into some new complementary markets, a couple of the ones Paul touched on a moment ago. It could put you in to other international markets. That doesn't mean you get perfect metrics on every one of those line items, but that really is the filter through which we're assessing these. Some of the different names that you'll hear of deals that have actually occurred in the last few months do and don't filter well through that screen and that really is where we start. Sometimes that requires full diligence to get through that screen. Sometimes you can take a look at it through the surface, and know it's not going to make the screen. As I say, we'll talk more about it next week from a strategic standpoint but that is the screen through which we're running these things.

Let me just add, Tien-Tsin, when David says we'll be talking next week, we're of course talking about our Investor Day, October 20 at the NYSE.

Thank you.

You're welcome.

I'll be there. I know it's the top of the hour. Maybe if I could rapid fire a few quick ones. Just the $3.2 million in nonrecurring charges this quarter, is that comparable to the $14 million that you called out last quarter? I think that was tied to the Manila deal.

If we go back to the pieces of that, the footnote itself speaks to the direct carve-out for Global Service Center, it's $1.1 million of that, and that's the one we'll make sure we quote. The rest of it is some random severance stuff that we did at the end of last year, that's some executive relocation. I mentioned in the prepared comments we had the write-down of deferred tax asset in the United Kingdom. That comes about from a 1% legislated rate change, tax rate change in the UK from 20% to 27%, and FAS-109 has you go ahead and revalue that asset at the moment that tax rate is announced or enacted. It's not really effective until April. So it has literally next to no effect on our effective tax rate for this fiscal year, but you write down or revalue and we ended up writing down the value of that deferred tax asset at the moment the legislation was enacted.

Got it, so the increment to 1.1, were those contemplated in your original sort of guidance targets?

The original, 14, no, they weren't. We obviously are thinking we're going to slide that inside the 14. We've got three more quarters to run first before we come to that conclusion.

Two more. Global Payments gaming commentary, I guess the margin profile some of those signed deals, I'm curious, is it margin enhancing? Dilutive? Because the incumbent would suggest that the margins were quite low, so I figure I'd ask it publicly.

It's a couple great questions because there really are two divergent answers to that. The new implementations I'm describing aren't by definition large gaming providers, moving providers. They obviously have existing providers, but our core business is still non-Strip, Native American type facilities, and that's the bulk of these new implementations. Anything that's a major take-away from another provider, remember, is we still think going to be non-Strip so it's not going to be quite the commodity processing you're used to. It's gaming cash events only for us, so again, not necessarily the same commodity processing to which you're used to seeing. It could well be in that asset alone slightly margin dilutive, or margin dilutive, but in the mix, we're talking about a number of implementations of our traditional Native American small business customers, where we make a perfectly fair profit, and if we're able to add to that a large customer, two or three over time, it works out great from a volume and process perspective.

And Tien-Tsin, it's Jeff. I would add to that, in a lot of these instances, while price is always an issue, and it's a very competitive market as you say, I think product and service in a lot of these implementations has been key to winning those RFPs, so it's always got to be price-competitive. I think we feel very good about our technology and our product and our service delivering that business.

I would also, Tien-Tsin, this is Paul. I would also add that even as -- even if some of this pricing is aggressive, what David said is an important point, that we're focused primarily on tribal lands and riverboats, et cetera. It's a little different profile. But the leverage model's the same, so we can leverage our infrastructure, add very few costs and that stuff is very nicely profitable.

Okay. All right. Last one. UK repricing, is that -- is this analogous to what we saw in Canada in terms of repricing for value, or am I way off base there? Lastly, just on the share repurchase, what would it take to re-up the buyback authorization? Thanks, guys.

So in order, no, it's nowhere near the size of what you saw us probably model back into what happened in Canada. It's quite substantial and it's enough to move the meter sequentially and it sets us up well for FY 2012 we believe, if we execute well. But it's nothing like the numbers I'm sure you have modeled for Canada. In terms of the buyback, mechanically, operationally, it will not take -- will not be difficult for us to amp up the buyback again. I'd still point you back to our order of capital which is for growth and for finding more growth assets and then opportunistic buybacks at this stage. Andrew's questions earlier were fair, and the kinds of questions we ask ourselves all the time, but for the moment it's focused on growth and opportunistic buybacks. It would not be difficult for us to be opportunistic if the market suggested it was the right thing to do.

If we can execute on some of the acquisitions that we think are looking pretty good I think l you'll see a more aggressive response from us.

Glad to hear. See you next week.

Thank you, look forward to it, take care. Ladies and gentlemen, thank you so much for joining us and we do look forward to seeing you next week at the New York Stock Exchange, October 20 for our Analyst Day. Thank you for your ongoing interest in Global Payments.

Ladies and gentlemen, this conference will be available for replay starting today at 8 PM, and ending at midnight on October 15th, 2010. If you wish to listen to the replay, please dial 1-800-642-1687, or international participants may dial 706-645-9291. To access the replay, you will be prompted for the conference ID number which is 10621575. Again, if you wish to listen to the replay, please dial 1-800-642-1687, or international participants may dial 706-645-9291. To access the replay, enter the conference ID number, which is 10621575. This concludes our conference for today. Thank you for your participation. You may now disconnect.