環匯 (GPN) 2012 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to Global Payments first-quarter fiscal 2012 earnings conference call. At this time, all participants are in a listen-only mode. Later, we will open up the lines 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.

Thank you. Good afternoon, and welcome to Global Payments' fiscal 2012 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, Senior Executive Vice President and CFO.

Before we begin, I'd 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. Forward-looking statements made during this call speak only as of the date of this call.

In addition, some of the comments made on this call may refer to certain measures, such as cash earnings, which are not in accordance with GAAP. Management believes these results more clearly reflect comparative operating performance. For a full reconciliation of cash earnings to GAAP results in accordance with Regulation G, please see our press release furnished as an exhibit to our Form 8-K dated October 4, 2011, 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 thanks everyone for joining us this afternoon. I am pleased to report that we are executing well across all of our businesses, as evidenced by our strong results for the quarter. First-quarter fiscal 2012 revenue grew 23% to $543 million.

Cash earnings per share grew 21% to $0.88, and cash operating margins increased to 22.3% for the quarter. As a result of this performance, and our $100 million stock buyback program, we are increasing our full-year cash earnings per share expectations to a range of $3.46 to $3.54 or 12% to 15% growth over 2011. David will discuss both the drivers of this increase, and our Q1 results in more detail, in just a moment, but please note that our expectations exclude any effect from Durbin Legislation.

Speaking of the Durbin Legislation, which as you know reduced interchange rates on most debit transactions effective October 1st, just several days ago, our market strategy will allow all of our customers to benefit. Although we anticipate the net impact to be positive for Global Payments, we believe that these benefits will be transitory. We plan to provide more detail concerning the impact of the Durbin Legislation for our second quarter, when we report our results in January.

Now, for first-quarter highlights. North America delivered revenue growth of 12% in the quarter, driven by our US ISO channel, strong growth from our gaming business, and solid performance from our direct channel. Canada delivered the stable quarterly results we anticipated, and our business there is performing on target. Our international segment produced another quarter of strong results, with revenue growth of 59%, fueled by all regions. These results include the addition of Spain, which performed well during the quarter, coupled with solid performance across Europe, and continued robust growth in Asia. I'll now turn the call over to David.

Thanks, Paul. We are pleased with the start to our fiscal 2012, with strong cash earnings, and we are gratified to be executing well in this challenging macroeconomic environment. North America merchant services revenue growth of 12% was about what we anticipated, benefiting from US transaction growth of 12%, strong growth in gaming, stable performance in Canada, and a favorable Canadian exchange rate. Additionally in Canada, local currency revenue grew 5%, and transactions grew 4%. North America cash operating income was up 5% for the quarter over prior year.

Our international segment performed a little better than we expected for the first quarter, due to the combination of strong organic results across all of our businesses, a joint venture marketing feature up in Spain and pricing benefits in the UK. International cash operating margin increased to 39.9% compared to 34.9% in the prior year, with over one-third of the expansion attributable to the true-up in Spain. We generated free cash flow of $67 million, representing 13% growth over last year. We define free cash flow as net operating cash flows, excluding the impact of settlement assets and obligations, less capital expenditures and distributions to non-controlling interests. During the quarter, we spent $12 million on capital expenditures, and we continue to anticipate our full-year fiscal capital expenditures to be about $85 million to $90 million.

During the month of September, we completed our $100 million share repurchase program, purchasing a total of 2.3 million shares. During the first quarter, we purchased about 1.7 million shares at an average share price of about $43. This program was largely funded by our US credit line. As a result of our share repurchase program, we now expect our diluted share count to be about 80 million for the year. We continue to expect both GAAP and cash effective tax rates to be about 30% for fiscal 2012. Our first-quarter GAAP and cash tax rates were up as we anticipated, coming in at 34.1% and 33.7% respectively, due to an adjustment in the UK related to a legislated corporate tax rate.

During the first quarter, on a year-over-year basis, currency changes benefited both GAAP and cash revenue and earnings by $15 million, and $0.05 per share, respectively. From a currency perspective, we still expect the US dollar to continue to strengthen over the course of fiscal 2012, given recent foreign exchange rate movements. As a result, we continue to believe the aggregate effect of currency will likely be about neutral to slightly positive to our earnings per share in fiscal 2012, when compared to 2011. Fluctuations in exchange rates, of course, may cause variances to our outlook.

Based on these results, and our current outlook and assumptions, we now expect total cash operating margins to expand by as much as 50 basis points over our fiscal 2011 cash operating margin of 20.9%. All of our financial expectations exclude the impact of Durbin, and we plan to provide you with the margin effect related to the initial Durbin implementation next quarter. In terms of a sequence of quarterly earnings per share, we expect our strongest quarter of earnings to be Q4, with Q2 earnings roughly corresponding to those of Q1. And now, I'll turn the call back over to Paul.

Thank you, David. Once again, based on our current outlook and assumptions, we are increasing our annual fiscal 2012 cash EPS expectations to a range of $3.46 to $3.54, reflecting 12% to 15% growth over fiscal 2011. We plan to expand cash operating margins by as much as 50 basis points for the total Company for fiscal 2012. All expectations, of course, exclude the impact of Durbin. I am pleased with our Company's financial and strategic performance, and our global market position. I am confident that we are on track to successfully execute our strategies for growth. I'll now turn the call over to Jane.

Before we begin the question-and-answer session, I'd like to ask everyone to limit their questions to one with one follow-up, in order to try to accommodate everyone in the queue. Thank you, and 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 is from the line of Kartik Mehta with Northcoast Research.

Good afternoon, Paul and David. Paul, as you look at the guidance you gave for last year for fiscal 2012, you kind of look at the results of 1Q 2012 and your expectations now for fiscal year 2012, what's been the biggest change in your opinion that's given you the confidence to raise guidance and basically beat numbers for the first quarter?

I think, Kartik, two things that David highlighted. One of course, is the share buyback. And secondly, we had some out-performance pretty much across businesses, but in particular, in Spain. So you put those two together, and that's a pretty good chunk of it. David, add a little more color, please.

Be happy to. I think those are the main points, Kartik. We hoped to get out of the gate hot, off to a good start. We think we did. It's one of the unique situations where across the board, as Paul pointed out, each of the businesses performed well, so we think we can sustain a little bit of that performance. We also can maybe bank a little bit of that performance as of Q1, and then roll forward, recognizing that at the end of the day this is just Q1, and there's a lot more to go. We have a challenging macro environment, as you well know. We're one quarter of the way through the year and we're going to watch foreign currency quite closely as the year goes on.

Kartik, I have to say the obvious, too, we always hold ourselves to a much higher standard, and we have objectives that -- we push people to reach objectives that will produce these kind of results. So we are working very hard around the Company. Everybody produced as expected, and we're feeling, even in the macroeconomic environment that David referenced, even with everything we're reading, we are feeling good about the year. We're feeling confident in the guidance we gave, and we can do that into the teeth of this kind of environment, I think is a good thing.

And then just as a follow-up, Paul, you made an interesting statement about Durbin. I think you said you should benefit, should be a positive for Global. Trying to dissect that statement. Are you implying that Global has a great chance to gain some market share because of Durbin, or that you're going to put out some programs that will help you maybe monetize Durbin more than you anticipated?

Yes, I would say for the former than the latter. I think that we -- our position has been very balanced here, Kartik, meaning that, I think the spirit of this legislation and I think the competitive nature of our industry is going to pretty much dictate that we all share this appropriately with the merchant. Some people have one position on the far left. Some have the position on the far right. I wouldn't say we're in the middle.

I think we're more towards one or the other polls than the other. But it is clearly our position that over time, this gets competed away anyway. I think you can write that down. Because we've seen that over the years. And that's quite frankly, one of the reasons Senator Durbin isn't looking around at our industry, because it's highly competitive.

So I believe our position is that we're going to share a significant amount of this, all of it with lots of people, and that I think that will put us in a very competitive position, number one. But I also think our position is not all merchants are created equal. There are big merchants and there are tiny merchants, and for anyone to suggest that a little merchant would have the same deal as a big merchant, it's just not commercial. I don't think even little merchants expect that. Even understanding headlines from some of our competitors that would make some suggestions otherwise. I don't know if that's helpful.

Thank you, Paul. I appreciate it.

You're welcome, Kartik.

Your next question is from the line of Tien-Tsin Huang with JPMorgan.

Thanks. I wanted to ask about Europe. That was obviously way better than we expected, again this quarter. You guys mentioned Spain, but we've been getting a lot of questions obviously about what's happening with Europe. How cyclical do you think the business is in Europe today as it stands versus some of the opportunities that you guys have been putting in place that are above and beyond the cycle, if that question makes sense.

It does, Tien-Tsin. I think -- this is Paul. I think Dave's going to jump in here in a sec too. The spirit of the question here is, all we hear is bad news from Europe, so how is it you're putting up numbers like this?

I would say the Spanish economy is far from recovered, but I would tell you we're growing that business very, very nicely and I think that is kind of a microcosm of what's going on. Ditto with the UK. We're absolutely gaining market share, and that business is doing very well, and at or ahead of our expectations. Ditto with Russia. I think the Czech Republic is doing fine as well. So all of those businesses are performing in tough economies, and Spain I think, is probably the most illustrative of the question you're asking. And that is, the Spanish economy is not doing great. Our business is doing well. Why is that? Because we're introducing innovation. We're adding sales resources. We have a terrific partner, and we're really knocking the cover off the ball.

So I think unless people just stop buying things, I think the prognosis for us is pretty rosy. I think the amazing thing is, talking to other people in our industry, we're all doing pretty well. I mean, it's -- forget about what we're reading. Actually, if you look at the earnings from our industry in particular, and other industries, quite frankly as well, we're all doing pretty well. So, I know the words and the music don't go together, but that's the fact.

Maybe, Tien-Tsin, to take it down a little from there, obviously there was no Spain in the numbers last year, so that's a big chunk of the growth, which no doubt you have expected in your model. The UK pricing initiatives are holding, much as we modeled, so we're feeling quite positive about that. That's an important point. We continue to see the international acquiring growth, so the card-not-present business we process in the UK that we saw tick up in Q4 stayed consistent into Q1, so more nice growth there on the top line, and then of course FX gave us a bump this quarter. It's a weird situation where, while the dollar keeps strengthening on a year-over-year basis, we're actually getting the benefits of FX, where sequentially it's strengthening, so we've got that bit of a disconnect, which can be challenging to think through sometimes. All the pieces as Paul pointed out are executing solidly against their original plan, and we've gotten these little bit of bumps that drive really outsized growth led by the Spain acquisition.

Got it. Thanks for that.

Your next question is from the line of Dan Perlin with RBC Capital Markets.

Thanks. I just wanted to kind of come back to that same point a bit. It's been a while, actually, since you put up a quarter like this, where a lot of things kind of all fell to the bottom line. I'm just wondering how you're balancing Spain. Last quarter you talked about investments in the back there. Something I think is clearly doing better, and I don't know if that's a function of your level of investment in that asset, or the success of this innovation in salespeople that you talk about.

And then the international acquiring business typically comes with much lower margins, and so if that continues to drive growth in the future and FX becomes a headwind, how should we be positioning the margin profile in the back half? And then I have one other follow-up.

Sure, Dan. It's a great series of questions inside your one question.

I get two, by the way, I think.

We expect another great series in your second question. To go in a bit of the order you described, the Spain ramp-up in terms of sales investment is continuing at pace. The folks we're hiring there are not fully productive. We really don't expect them to be fully productive until calendar 2012. What is promising are the early returns and the early sales results from those sales resources. The mechanics there are a little bit ahead of where we might have thought.

Frankly, in the grand scheme of total Europe, much less total international, much less total Global Payments, it really doesn't even round to anything, but we are off to a good start. Spain itself, again, wasn't in there last year at all. Then we had that little bit of a marketing true-up as we sorted things out with our partner there, relative to some underwater merchants that dated back to the time of the deal. All that is all in the mix as we go forward. We don't expect another true-up, so you shouldn't expect more of that.

Moving to the UK, you're exactly right on the international acquiring business. Now in the mix of Europe, with the relative profitability of the pricing benefits and the fact that we're taking market share in the UK, that's been sort of masked as we speak right now in terms of the margin level. So that's an example of the business operating as planned. We hope to see international acquiring business grow well. If it does that in tandem with the core business, that's great news.

And really, to go back to a question related almost to something Paul was saying earlier, the contingence question, macro was tough in the UK, you've seen the retail stuff, We have a diversified portfolio there as we do most of our countries, so we're still seeing market share gains really along the lines that you might hope to see from us from all the other sectors, while volume itself in retail may not be the greatest thing in the world right now. That's okay as long as we stay diversified across Europe and even within the business themselves. So the pieces actually work as you roll that all up into the ball that is Europe, drives very nice profit.

Now, you made a great point about FX. Year-over-year it helped us, and that was a part of what we would have expected. FX frankly for us in Q1 was right on, where we thought it might be. It's nice to be lucky sometimes on something that is completely out of your control. As the year goes on, we'll see the expectation of the dollar will strengthen against the other major currencies, particularly the Euro, as you might expect. What that will mean is, we'll get a little bit of benefit year-over-year in Q2. It will flatten out in Q3, and then will get clipped and go in the other direction for us so it will be a headwind in Q4. Out of all that balance is how we end up driving margin expansion of the approaching 50 basis points now and was really part of the model when we started the year as well.

So no huge change. We saw FX about where we thought it would be in Q1. We have a new jumping off point as of yesterday for FX. We brought that into our outlook. We still allow for the dollar to strengthen further against these currencies. Now, the rate and pace, if it's a repeat of 2008, we're obviously going to have a lot to talk about, but as long as it stays somewhere in the range of what we're thinking then the pieces work and on balance, you'll see this big Q1 that sets us up with a fast start, and then we hold on as it turns the other direction come Q4.

Dan, this is Paul. Let me just emphasize. That's an important point and we have seen -- we've seen some discussion about FX in some of the preliminary notes and the point is that FX headwinds had been figured in. So we're not suggesting that the dollar gets weaker here. Just the opposite. We figured that in. As David said, if something dramatic happens beyond what he referred to in 2008, was like a 30% swing or something, that was crazy, other than that, we're feeling very comfortable.

Excellent. And then just the last one, you talk about the direct business in the States, that's the first time I've heard you call that out in a while with any significance at least in this order. What's going on with the local currency growth in Canada, with 5% of an acceleration in the quarter. Then I'll jump out.

Okay, Dan. Jeffrey, why don't you take those?

Dan, in the US business, we'll start with that, then we'll go to Canada which was your second piece. In the US business, I think we've done a very good job over the last number of quarters in realigning our sales resources in the US to make sure, just like they are for example in gaming, that our sales resources are dedicated to those verticals where we can make the most difference from a return point of view. So we focused management toward measurable sales goals, meaningfully enhanced quota as part of this fiscal year and I'm delighted that we're actually performing well, as David suggested, along those goals, through the first quarter with our bank partners and in our other vertical lines of business. So, it was a conscious decision by us to enhance the quota, to introduce new products, and to measure performance as best we could against those goals, and it's worked out well.

Second as relates to Canada, and David can comment on FX movements, but second as relates to Canada, very similar to the US, we refocused our Canadian business to minimize attrition trends, which we've seen in Canada over time, and to similarly realign our sales resources in a way that also expanded our quota. Just like in the United States, we're very pleased with the quota of revenue performance in Canada through the first quarter.

Dan, this is David. Maybe a little more color. In US dollars, obviously we got a fair amount of help from FX but your question is about local currency. This is really right about where we hoped Canada would start the year. We were hoping for sort of a stable Canada again in Q1, coming out of a stable Q4, we think we saw that. We had comparables in the prior year that we think allow us then to have this solid kind of stable outlook for Canada for the full year.

Super. Thank you, guys.

The next question is from the line of Chris Brendler with Stifel Nicolaus.

Hi. Thanks, good afternoon. Can you just talk about the US for a second? I think I heard transaction growth of 12%. I think it was 17% last quarter. Anything unusual in there? Are we seeing a slowdown in the US? Can you give us any color?

Be happy to, Chris. This is David. There really isn't a slowdown. Inside of the Company, as you might imagine, we tend to look at this on a per-day basis, and we don't talk about that a lot, but the reality is we had I think three less days Q1 of this year compared to last year. Without that change, if we normalized it again on a per-day basis, you'd see it right in the range of what we reported last time, so we still think we're seeing perfectly solid growth in the US. When the days get straight, you'll see that come out of the metrics as we go forward the rest of the year.

Okay, great, thanks. My second question would be on Durbin. Could you help dimension at all what the margin impact will be in the US? We know -- I think we know it's going to be a negative reported operating margin, should be neutral to EBITDA and cash flow. But just how much of a margin hit are we talking about in the US, once the indirect side of your business starts to benefit from the Durbin impact? And maybe qualitatively, do you have any feel for, at this point, what your ISOs are planning to do? I know it's going to be difficult to have these conversations, but do you think you're going to see a lot of that pass through, or do you think they're going to try to keep a lot of it initially? Thanks.

Yes, I'll do the first part, and I'll let Paul answer the second part of it, Chris. We're going to stick qualitatively in terms of characterizing Durbin or any of its impacts to our reported results on this call, for any number of reasons. You understand the complexity from a marketplace perspective, for the introduction of Durbin and none of the constituents, Global Payments included, knows what we don't know about the impact, so we'll be back to you in January what we see actually in Q2.

Having said that, we certainly know that any piece of Durbin that our ISOs keep will be reflected as both revenue and expense to Global Payments. So we will be very clear, we think, in terms of reporting that margin impact, so we'll have a reported margin. It will be what it will be. We'll be very clear about the impact with and without the spread changes related to Durbin, and we'll calculate that, and we'll show it to you in a fairly obvious fashion, so that you can see how the underlying businesses perform and how we're doing against our original goals and our current expectations which of course exclude the impact of the spread changes due to Durbin.

So quite honestly, if you have an assumption or a view, market wise that the ISOs may keep a substantial portion of Durbin you might actually expect to see an awful lot more revenue and a lot more expense, a pretty big margin impact on Global Payments, and as I said before, we will do our best to disclose that to you as clearly as possible, so you can take a look at the underlying performance of the business with and without that spread impact. Paul?

I would add on to that. The one comment I think you made, Chris, was that this would be neutral to EBITDA. I think we never said that. We're saying that this will have a positive impact, we just don't know exactly what that means, and we are in fact going to -- we are in new ground here, and we're taking a conservative approach, and we're trying to probably reduce expectations on what that is. But it's clearly positive, absolutely, positively, end of story, and the guidance does not take that into consideration.

In terms of what the ISOs are going to do, I think David's right. I think that a conservative assumption would be that the ISO's are going to be more aggressive. The ISOs are the smaller customers, they're going to be more aggressive. Our own portfolio are big guys and medium-sized guys which is a very different footprint.

My question -- I was talking about the indirect channel when I was talking about the margin.

Got it.

One more if I could slip one more in. Any thoughts on the B of A situation with the $5 debit fee? Just an opinion there, do you think we're going to see an impact on debit volumes as more banks start charges for debit cards? And I'll hop off. Thanks for your color.

Sure, Chris. I have to be honest, I just don't know. I think we all predicted this. We've seen this movie before. It was played in Australia, and this is precisely what happened, and we all said that. So if anyone is feigning surprise, I think they're being a little disingenuous. We knew this was going to happen. This is one of the reactions we thought the issuers would have.

It's a commercial reaction, and I think this will play itself out. What kind of impact that has on usage remains to be seen, and that is why we are being very cautious in disclosing anything other than actual. Let us get a quarter. Let us see what this really does, and we're going to share what's important with you. And I think that's -- I think that is the most responsible approach at this point.

I would agree. Thank you very much.

You're welcome. Thank you. Good questions.

Your next question is from the line of Moshe Katri with Cowen.

Hey, Moshe.

Thanks for taking my question. Sequential growth in Asia was a bit weaker than usual, especially looking at some of the seasonal patterns. Maybe you can talk a bit about that. And then I have a follow-on after that. Thanks.

Sure, I'd be happy to. I guess I would point out it was still 18% growth year-over-year, so we feel pretty good about the growth overall. Sequentially, you'll see changes in patterns based on consumers and spending. As you well know, Moshe, that's a big travel and shopping series of markets for us. So we don't see any real weakness. We saw a little less DCC than we saw the quarter before, which may indicate the timing of certain travel, business travel particularly, but really no single thing stands out in terms of the pieces, and as we look out for the rest of the year, we're right on track for what we thought we would do in Asia as well.

Should we expect an acceleration of sequential growth on an ongoing basis out of Asia and obviously this has been a very strong source of growth for the Company in the past. That's why I'm asking.

Well, let me phrase it to you in a slightly different way. If you're talking about the rate of sequential growth, don't know, won't or can't promise that. We expect to see sequential growth in Asia, really the rest of the year. Some of that will depend on the timing of any other product or anything else that goes on in the market, and as you well know, we are fully rolled out in our DCC across the region, so really everything's kind of in the run right now. We'll hit in the later quarters, some grow-over challenges on a year-over-year basis.

You'll recall we had a major retailer introduce brand-new products in the Asian market starting in Q2 of last year and outsized growth continued in those markets Q2, Q3 and Q4. So we'll hit some grow-over on a year-over-year basis, but yes, I do expect sequential growth from Asia into Q2, again into Q3 and then Q4 sometimes in Asia isn't quite as seasonal as Q4 as you see in the rest of the world. So it may look like Q3, but this is only the outlook now. We'll be back to you with more updates in January, but we expect a very strong year with Asia where the only thing to talk about relative to growth is the growing over the full introduction of DCC region-wide, and this single retailer from last year.

Is there any way to quantify the benefits from the pricing increases in the UK on the P&L, whether it's revenues or margins for the quarter?

I'd point you back to Q4 when we were walking -- we were talking about the end of Q3 of 2011 we were walking through the mechanics of how Q4 would look, and what the jumping off point would be for 2012. I'd point you there because we really aren't breaking out the individual pieces of the revenue performance, particularly given that we're essentially on track with everything this year. So as we headed into Q4, we talked about a number of things happening in the US, [greater giving] seasonality and some of the other pieces of the business, then we talked about the UK pricing benefits in a full quarter of Q4 being a couple to a few cents, depending on how you're modeling, how the pieces came together. You obviously take that kind of pricing increase, and you model in some level of attrition, modest attrition. We're seeing some of that as we head into Q1, but it's right on again the way we modeled, which is certainly fortunate for us as we start the year. So I realize, I'm giving you a qualitative answer to an empirical question, but it's really as far as we can go on the UK right now.

Thanks, guys.

The next question is from the line of Darrin Peller from Barclays Capital.

Thanks, guys, can we touch a little more on the margins on the international segment? I mean, pricing in the UK, I know was implemented last quarter. You previously I think suggested that la Caixa is still building out, so the expenses are still there. What actually is driving this material pickup in the international margin side and can you just comment on Visa, how sustainable that is.

In addition to your point about UK progress, Darrin, a couple other things in the quarter. Currency is our friend if you're looking at this on a year-over-year basis, so that's a chunk of this, and it's a chunk that we expected and a number of you and your colleagues expected as well. The other piece is this marketing true-up in Spain, which is a big chunk. I said over one-third of the international margin expansion comes from that alone. That part isn't sustainable. It's a true-up.

We move forward just running the business together with our terrific partner, Caixa Bank there. But that particular item does not recur and that's part of why when I was describing earlier to Dan's question, we have good guys helping us with FX in the margins. We get off to a hot start, and we kind of hang on and execute well for the rest of the year. That's a piece of it. The FX is a bit of a similar story to Spain, in that Q1 is a helpful quarter on the way to Q4 being an unhelpful quarter, if that's a word. Those two pieces don't necessarily sustain. You get back to raw business performance driving expansion over the rest of the year.

All right, Dave. So like you just said, one-third of the -- that's one-third of the year-over-year increase or sequential increase?

Year-over-year.

All right, so one-third is from that driven in Spain. How much of that would you say is incremental from last quarter on the pricing in the UK?

Conceptually, none, because pricing doesn't hold at 100%. You come back to, again, business performance generally and again we're off to a good start. As Paul pointed out in an earlier comment, Global Payments Europe and Russia are all contributing at the margin. UK is executing well, and Spain is off to a good start.

That's great. One follow-up, on the spread in the US, the spread between transaction growth and revenue growth seems to have continued to narrow to the point where I think it's almost the same now, isn't it, 12%?

It was for this quarter, yes.

I mean, historically there used to be a pretty big gap where generally transaction growth far outpaced on the revenue side. Should we expect to continue this for modeling purposes?

I don't think you should, for two reasons. One is we have a transactional growth anomaly this quarter on a year-over-year basis. Transaction growth of 12% reflects a quarter where we had three less days than the same quarter last year. On a per-day basis you would find us more in the mid-teens, more in the range you've seen in the last quarter or so. That would give you your gap of mid-teens down to 12% revenue growth, which would feel a little more logical to you.

Now, if you can handle that for a second, the second part of the explanation is the other business lines in the US are growing well, and growing faster than your model will demonstrate historically. By that I mean the gaming business, where we signed a large account away from the dominant provider in that space, our Greater Giving business growing on the order of double digits, depending on the quarter, and our direct business as Jeff described earlier, really performing well this year. So those three things married to an ISO growth you already know is double digits, means that the revenue growth is creeping up and total US revenue growth, excuse me, Darrin, I want to be clear there, total US revenue growth is indeed creeping toward the transaction growth, but that's actually a good thing. It means all the business units are executing, driving total growth a little higher.

And then the transactional metric, you'll find that gap be a little less when all the businesses are firing on all cylinders. Contrast that with a time when say gaming is not performing as well, two years ago, and you'll see a wider delta, a wider spread between revenue growth and transaction growth.

Would you mind, Paul, if I squeezed one last in around Durbin and some of the changes we've seen real quickly. On the front of -- two things, one, on the Durbin -- on the new interchange schedules introduced by Visa, MasterCard, especially by Visa with the small ticket items. Obviously, you're seeing a much more material increase on the fixed price on the small ticket items now. Have you seen any, heard any pushback from smaller merchants on that front?

Darrin, that's a very perceptive point. I have to tell you, no one's really talking about it and you are exactly right and it's almost an unintended consequence. The bottom line is that if you have a small average ticket and we have particularly some ISOs that have merchants like this, not so much us. If you have an average ticket under $10, this is going to cost you money. Your rate is actually going to go up about 30% on the interchange level. Particularly on the Visa side. MasterCard, almost as much, but not quite as much. I think the answer is, we haven't really gotten kickback on that yet, but I think you will. It's certainly not as advertised, particularly by some of our competitors, but not everyone is going to get a rate increase even if you give 100% of it back.

And still no color from Visa or anybody on the network participation fee? Still waiting?

Well, we are having ongoing dialogue. I would say that there is some positive developments but nothing we are prepared to share with you at this point.

Okay, guys. Thanks a lot.

All right, Darrin, thank you.

Your next question is from the line of Jason Kupferberg with Jefferies.

Thanks, guys. Just wanted to come back on the margin, just to clarify. Specifically, in North America, is there any change in the full-year fiscal 2012 operating margin assumptions for North America specifically? I know obviously overall margins, you're taking the guidance up there, which is great to see. Is that all driven by international, or is there any change in the North American expectation as well?

Jason, it's David. I guess some of it depends on where you're modeling in the range and how the pieces work in the assumption. Most of the upside indeed come from international, but we're off to a nice enough start in North America, that we think it could be a contributor as well. Certainly most of the answer is international.

Okay. That makes sense, based on the help you got in Spain and so forth in Q1. Just to follow-up on the balance sheet. Obviously market valuations moderated quite a bit since your last call and I'm just curious, have you guys seen that reflected enough in seller expectations to make conversion of your M&A pipeline perhaps more likely over the next three to six months and you might have thought back in July?

Jason, it's Jeff. I'll address that one. The first thing I'd say about our M&A business that is we're very pleased with the amount of in-bound deal flow, so as with most things when you see a lot of volatility in valuations, that causes a number of prospective sellers to think about whether now might be a good time to reapproach the markets. They've seen the highs, and they're worried about where the market is going, so I think we still get a very good amount of deal flow coming in, notwithstanding the volatility is the first thing.

The second thing I'd say is with dislocations, especially outside the United States and the financial services markets, we would expect, and we believe that we're beginning to see more opportunities among financial institutions globally, for asset dispositions to raise capital, so I think that's also another positive effect in our M&A pipeline of the volatility you're seeing in the markets.

The last thing which I think may have been a principal part of your question is what will valuations do, and is it harder or easier to get a deal done now? I would say volatility makes things a little bit more difficult because prices change fairly dramatically intra-day or from day-to-day but I haven't yet experienced that in terms of our pipeline. So I feel like we are entering this new quarter with very good deal flow, good pipeline. I think we're optimistic that a lot of volatility especially among FIs, outside the United States will lead to additional flow. So far, so good.

Your next question is from the line of Andrew Jeffrey with SunTrust.

Hi. Thanks for taking the question.

Hi, Andrew.

Hi. Paul, one of the things we heard about intra-quarter was perhaps that First Data was backing off a little bit in the ISO channel from a competitive standpoint. Has anything changed from your US ISO business? It sounds like you're making headway in direct. I'm wondering about that channel. It's been such a powerful growth driver for you. Are you feeling that's a little less onerous on a competitive basis than it's been?

That's a tough one. I think that we really haven't lost any ISO momentum. We're growing around it, which is our plan all along. I think it's -- I'm not going to comment directly on First Data, but I would say that I think it's fair to say that it is -- we've kind of reached a level where there isn't any significant movement with any of us, or significant momentum, with any of us signing each other's ISOs. I think it's kind of stabilized, and I think pricing is probably one of those in all fairness, Andrew. So the ISOs continue to be a strong driver for us in terms of top line, and continue to be double-edged sword on the margin side. But at the end of the day, they produce some lovely earnings and that continues. I think it will continue for some time.

Okay. But maybe a little less of a headwind to the incremental margin than what you've seen in the past?

I think that is probably for this year I would say, we're not forecasting any big hit from that, so yes, you're correct.

Okay. And then with regard to UK pricing, I think David, in your prepared remarks, you mentioned that it held. I'm just wondering if you could give a little more color on that. If there's some thought around the sustainability of sort of the unbundled pricing as the competition in the market plays catch-up, or was that kind of a place holder comment?

Andrew, we do think the unbundling of pricing is the beginning of a broader market trend. You'll find for transparency reasons, and for regulatory reasons, you'll see more and more of that in the UK. So we don't view this quite as the same sort of transitory spread change we've all come to see more often in various markets around the world, from the big substantial changes. So we do think this is a part of a revised baseline for the market. We hope it allows us to have some competitive advantage from new accounts that will help fuel longer term, as well as near term growth from sales perspective, and allow us to take some market share. But we do expect to see our competitors taking similar approaches to unbundling pricing, and we sort of concluded at the end of that, as with any price increase you get pieces of it back due to attrition, but you don't necessarily bring it all back, given that we've now really much better linked the value we provide our merchants on a service-by-service basis, item-by-item on the invoice to the actual charging we give them.

So it should -- we can think about it as being a tailwind for the next couple quarters at least, albeit a modest one.

I think that's fair.

Thanks, Andrew.

Your next question is from the line of Sanjay Sakhrani with KBW.

Thank you. I'll ask my two questions upfront. They've kind of been answered, but I thought I would ask them again. On capital management, appreciate the dynamics that you guys completed the share repurchase, but kind of what are the expectations on a go-forward basis? Just on the economy, I understand kind of the card space is generally doing better than kind of the broader economy, but just are you guys seeing any discernable trends, if you look at same-store sales patterns outside of market share gains? Thank you.

Sure, this is David. I'll try the buyback capital and let Paul speak a little bit about some of the macro trends we're seeing. I think we've been quite consistent. We'll remain so on the approach to the prioritization of capital deployment. We still believe the highest and best use of our capital is to deploy it for market expansion and global growth. Acquisitions, partnerships, whatever we can do to drive global growth.

We have also, though, said before that we'll routinely buy back stock, both as a regular matter to offset dilution, and opportunistically. Of course, it's difficult to define opportunistically in this market, but opportunistically as well. I guess I would remind everyone we bought back in the spring of 2010. We just did this program now. All of this in the context of retaining our commitment to remain a version of an investment grade-rated Company which we believe makes us the partner of choice for financial institutions and for our network partners around the world. That means maximum leverage of 2 to 2.5 times EBITDA, so that's the construct within which we manage then, the capital deployment.

Again, back to first priority being global growth and expansion. Second being returning capital in some other form. At any time, we're assessing our outlook on deals and Jeff described that a moment ago, in answer to another question, against other uses of capital. I think this quarter hopefully demonstrates to you that we're not averse to using some debt to buy back stock. We have a certain view of this and the return on it that doesn't make us shy away from using back a little bit of debt to buy back stock but it's unlikely you'll see us run up to our max leverage buying back stock, either, given the other growth opportunities we find around the world. So having said all of that, it should not surprise you to see us back in the market buying back stock again, sometime in the near term, but we're assessing all those pieces with those two clear priorities all the time.

And Sanjay's question about the general economy, and are we seeing any discernable trends, like same-store sales, and is all of our gain coming from just market share gain? Well, I think a meaningful portion is coming from market share gain, and I think to earlier questions, that's an important point, because that is sustainable. We're just starting to get the fruits of some of those labors, and we're feeling very good about that. I think depending on the sector, overall, I would say no discernable overall trends. We're still seeing gains. Now, you could actually have lower same store sales overall, but credit is going to take -- credit debit is going to take a higher proportion so we could actually get an increase, which is typically the case. The softer segments are some retail and restaurants, pretty much generally, continue to be a little challenged.

Great. Thank you.

Thanks.

Your next question is from the line of David Koning with Baird.

Hi, guys. I just wanted to touch on North America EBIT growth. It's been mid-single digit growth on a year-over-year basis the last few quarters now which is a nice trend after some declines prior to that, but it's been about flat on a constant currency basis for the last few quarters, despite what revenue trends you mentioned were pretty good across the direct channel, Canada, Greater Giving, those were all pretty positive. So I'm just wondering how should we see North America EBIT on a constant currency basis going forward? Is there a chance for that to start to grow again, or do you kind of expect it to be more of this flat kind of flattish growth?

Yes, Dave, we expect flattish to modest growth, and it will depend on the quarter and the timing and the sequencing of investments. North America has a number of features. It obviously has Canada, which we're looking to see sort of stabilize this year, and we think that's a reasonable goal for that business. We expect the businesses in the US to push forward. At the same time, North America also sees some of the results from the investment in infrastructure and IT, which will then take you back in the other direction. So by the time you're done with all of the mix of what rolls into North America, you end up back to the number you're talking about. That's not a contribution margin of what's coming from the business. It really is an operating margin, after some of the true running of the business costs get allocated back to North America, and that holds it back a little from what you might be expecting. It doesn't mean we're holding it back from outsized growth, but the core results of the business as reported internally, would look a little bit better in terms of the progress about which you're asking.

Great. As a follow-up, just touching on FX once again, I think when you last reported, the Canadian dollar was at nearly a 5% premium to the US dollar. Now it's at a 5% discount. So that's a pretty material change, but it sounds like the change that's happened, is pretty much in line with your guidance. So is it fair to say if the Canadian dollar has held where it was when you last reported, that would probably contribute to some upside, and now what we've seen is more in line with your guidance, and if it would continue to weaken, that could contribute to some down side. Is that kind of the sum of everything you said?

That's the sum if we look at the Canadian dollar in isolation. FX for us is really five currencies, three of which are really quite large in the grand scheme, but yes, your logic is correct. We didn't see anything that shocked us. We do have another jumping off point, which allows us to take a look at the rest of the year. I don't by any mean to suggest we got everything right, looking out for the rest of the year. We don't have a crystal ball any better than yours, actually, it's probably not as good as yours. But yes, your base logic if you pick Canada in isolation is correct in terms of how to think about things.

Okay, thank you, and great job this quarter.

Thanks, Dave.

Your next question is from the line of Glenn Fodor with Morgan Stanley.

Thanks for taking my question. At the last analyst day, you spoke about e-commerce as an area of focus. I wonder if you could give us an update there, progress, increasing share. What are your thoughts on recent announcements by PayPal and how would you expect e-commerce yields to migrate over time? Large drop-off over time? Holding steady? Possibly increase? Just want to get your outlook there. Thank you.

Okay, Glenn. There's a lot of questions in that.

Par for the course for this call, though.

Well said. So it's -- the questions inherent in that are merging payments, what's going on with that. Is PayPal friend, foe, ally, what's going on, and e-commerce, does that drop off or continue to grow? We're very bullish on e-commerce. We think it continues to grow. We need more exposure to e-commerce. One of the reasons Jeff is here is to build our domestic exposure. Our international exposure, actually, is pretty good. We continue to expand that as well.

We think that it's obviously a huge growth area. We are putting resources, investments, product and personnel into growing that literally in every market, number one. Number two, PayPal is a good partner of ours and we absolutely think that our job is to deliver payments to our merchants. If there's something in it for us and we believe there should be because we can deliver lots of merchants, then we are -- I don't want to say agnostic; it's too strong of a word, but we are open. If their customers are interested in using it, and our customers are interested in offering it, then we would be in a position to facilitate it. The way we facilitate that would ensure that we share in that revenue stream in a meaningful way, in a commercial way, in a way that's not dissimilar to the way we're sharing it today. That's our plan. And we're staying close to everything, and every development on that.

Just to add, Glenn, a little more color, this is David. We have a meaningful e-commerce business in Asia that's doing quite well. We have a meaningful e-commerce business in the UK. We have real e-commerce opportunities in Spain over the medium and long-term. You may have seen an announcement we had a few weeks ago where we introduced some solutions. We had a full e-commerce platform for small to medium-sized merchants that will be rolling out in the US and in Canada over the coming months and then beyond that for the rest of the world. Similar solutions and partnerships are in process in all the other markets around the world. So we're attacking this on multiple fronts. In some cases, we're starting really with the first customer, in some ways, but we'll be building it out. This opportunity isn't going away in the next year or two. We're building out toward long-term growth across the world in eCommerce.

Thank you.

Thanks, Glenn.

Your next question is from the line of Tom McCrohan with Janney.

Hi, everyone. Can you remind -- can you remind us on how much of your volume is PIN debit and if there is a shift back to spending away from debit on to credit cards because banks are raising fees for usage? Is that good or bad for you guys, and why. And then lastly, if there is a way, just to give us a contribution this quarter from Spain, bundled in obviously with all the international segment. Thanks.

Sure, Tom. If you're looking at the US, really our metrics haven't changed. We quote the transaction. But it's a reasonable proxy. [[technical issue] I'm going to keep going and trust that the operator will fix it. We're still at less than 10% of our transactions as PIN debit, over 50% as SIG debit, the bulk of it, the remainder obviously being credit. Those are really the basic splits.

Part three of your question before I got confused by the feedback was about Spain and the breakout. We're really not going to call out Spain, we really do manage the total Europe revenue line and look at the growth there. I point you back to where we first bought the asset in December. We talked about it being a little bit dilutive to GAAP earnings, a little bit accretive to cash, coming in at a relatively lower margin, contributing on the order of $30 million of revenue last year, and then we talked about our sales investment in ramping. We're off to a good start in Spain, we're feeling good about the pieces. Certainly with the marketing true-up, it performed at a higher margin level than we anticipated for Q1, then we go back to how quickly can we ramp the investment in the sales force on the way to them creating margin leverage for us in the long-term, and that really is the story for fiscal 2012 for Spain.

The point about do all these forces in the market that we've seen playing out over the last couple months, and we continue to see, does that cause consumers to use a credit card more than they do a SIG debit or a traditional PIN base. If it's transactional, and what kind of impact will that have. If that happens, and it is volume coming from PIN based, that is actually good news for us. We make more money on a credit card than we do a debit card.

Of course, we have more expenses associated with a credit card. Chargebacks, there's a lot more to that. The consumer has quite frankly more protections as well. That's a different transaction. Although we have similar margins, we have higher revenues from that, and produces more EBITDA. That would be a good fact but it is not something we're taking -- we are modeling in. We are waiting to see. I personally think that could happen but let's see.

Could I ask you a quick follow-up on that, on the protections? So do you think there is a possibility that the protections afforded someone on a debit transaction could be tinkered with by the card networks to accelerate more of a shift back to credit? The protections are currently better, but is there any possibility that the core networks are maybe due to fresh pressure from the banks, maybe remove all protections for debit just because the credit product is a more advantageous product for the banks?

Tom, I have to tell you, I do not think there's a possibility. I can't imagine. I don't think that would be in anyone's interest. The banks are interested in providing great services for their customers. I'm sure they have a huge amount of introspection before they introduce a fee, and they do that I think in a balanced way too. I don't think anyone is going to mess with what's in people's wallet in any significant way in terms of the benefit. I just can't imagine that. I would be shocked, appalled and in opposition.

I guess I only bring it up because you've got Durbin out there again, rattling the cages on credit. Maybe there's going to be more noise than fact. I just feel there's headline risk the next few weeks, next couple months from all this noise coming out of Washington, if that's something that could pop up, what the likelihood that would become a reality. But [it doesn't] look like there is any way that is going to be a reality.

I just can't imagine but it's certainly interesting theater.

Thanks, guys.

Thanks, Tom.

Your next question is from the line of Robert Dodd with Morgan Keegan.

Hi, guys, I'll try and keep it short. It goes back to UK pricing. If we look at Canada a few years ago, a big price increase, most of it got -- pretty much all of it got around to competitive issues over the next couple of years. You obviously don't think a big pricing or a big keeping of the Durbin spread would be sticky in the US, because competition would drive it out, so what is it that gives you the confidence in the UK where you've taken this pricing increase. Obviously, you think some of it will turn away. What gives you the confidence you think most of it will stick?

Primarily Robert, this is not a simple spread change. In fact, the spreads didn't change much at all. What you're talking about is mapping value from individual services on a very transparent and clear invoice, in a regulatory environment that's asking for more transparency. So instead of a price increase, you may have changed the base. That doesn't mean it all lasts, nor that it all lasts forever. I do think it's fundamentally different than just a spread change in a given market in any one time.

Got it. Thanks.

Okay. Thank you. We would now like to turn the conference back over to Mr. Garcia for closing remarks.

Thank you, ladies and gentlemen, for your interest in Global Payments.

Ladies and gentlemen, this conference will be available for replay starting today at 7.00 PM Eastern time, and ending at midnight on October 21, 2011. If you wish to listen to the replay, please dial 800-642-1687 or international participants can dial 706-645-9291. This concludes our conference for today. Thank you for your participation. You may now disconnect.