環匯 (GPN) 2013 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to Global Payments second quarter fiscal 2013 earnings conference call. At this time, all participants are in a listen-only mode. Later, we will open 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, Senior Vice President of Strategic Planning and Investor Relations, Jane Elliott. Please, go ahead.

Good afternoon, and welcome to Global Payments fiscal 2013 second 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 today, January 8, 2013, 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 with our solid performance in the second quarter of fiscal 2013. Revenue grew 11% in the second quarter, to $589 million, and cash earnings per share grew 8% to $0.93. We have increased our full-year EPS expectations, which David will detail later in the call.

I am also pleased to note that the acquisition of US-based Accelerated Payment Technologies, or APT, and the purchase of HSBC's remaining 44% ownership interest in our Asia-Pacific joint venture are both complete. APT will allow us to leverage industry-leading technology by adding new merchants through existing value-added reseller partners and through establishing new VAR relationships. I am delighted to tell you that APT has hit the ground running and is performing well. The Asia-Pacific transaction will, of course, now allow us to more fully leverage our presence in this strategic region. To that end, we are encouraged by our prospects and the receptivity of those with whom we have already met.

Next, I am happy to provide an update on our PCI recertification process. We are delighted to announce that we have essentially completed our remediation work as anticipated, and the required documentation is in the process of being provided to the Qualified Security Assessor for verification. This verification allows the networks to evaluate the results and return us to the list of PCI-compliant service providers. This was truly a collaborative effort, and first and foremost, we owe a debt of gratitude to our customers and partners for their unwavering support. I also wish to thank the card networks for their expertise and professionalism throughout this process. Their job, and they do it well, is to protect the cardholder and ensure the integrity of the payment system. Through it all, we continue to sign new customers, securely process record transaction volumes, and grow our business around the world. I am truly thankful for my colleagues' daily efforts that made all of this possible.

Speaking of around the world, we have received approval from Visa and MasterCard a for license to process in Brazil, and we anticipate certification of our platforms by the end of the fiscal year. We also signed a new agreement with Intuit, the makers of QuickBooks, to be the payment services provider for Intuit Pay, a new integrated mobile-payment solution that targets the UK SME business segment. This is in keeping with our strategy to power mobile-related payments globally for companies that wish to offer value-added payment services for their customers. We continue to benefit from our partnership with la Caixa, as the bank leverages its financial strength by expanding through acquisitions. In addition to increasing the joint venture's footprint, some of these financial institutions have merchant-acquiring businesses. To that end, our joint venture, Comercia, closed on a merchant-acquiring business from Bank Civica, valued at approximately $23 million in December.

We also announced that our Board has doubled our share repurchase authorization to a total of $300 million. This increase underscores our confidence in the long-term prospects of Global Payments. I will now turn the call over to David. David?

Thank you, Paul.

We were pleased with our results in the quarter. Good overall business performance and a low tax rate drove strong cash earnings per share growth. International revenue grew 11%. In local currency, Europe performed well, especially given macroeconomic conditions, driven by strong revenue growth in the UK and Russia. Spain also performed well, growing local currency revenue at a high single-digit rate. Asia-Pacific revenue increased 1% over last year, as volume continued to track below our original expectations across the region. Based on the current trends and the macroeconomic environment, we now expect low to mid single-digit revenue growth from Asia for the full year. International cash operating income of $62.2 million was up 15% over prior year. Operating margin of 37% increased 150 basis points versus prior year.

North America merchant services delivered revenue growth 11% in the quarter, driven by US transaction growth of 13%. We believe we saw a fairly modest financial impact overall, due to Hurricane Sandy, which we believe speaks to the diversity of our US merchant customer base. Canada's revenue declined 7% in local currency on a year-over-year basis, which was consistent with our expectation. We expect Canada's local currency revenue to decline modestly for the full year.

For the quarter, North America cash operating income, or EBIT dollars, were $73.3 million, approximately flat with prior year, with cash operating margin of 17.4%. Second-quarter GAAP and cash tax rates were about 28% and 26%, respectively, a little lower than we expected. Year-to-date GAAP and cash tax rates are each now 29%. We expect both GAAP and cash effective tax rates to approach 29% for the full year of fiscal 2013, and thus expects to report higher tax rates in Q3 and Q4 as compared to the second quarter.

We generated free cash flow of $32 million, which included cash outflows related to the processing system intrusion. 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, capital expenditures totaled $25 million, primarily related to intrusion remediation activities and data-center initiatives. We continue to anticipate our full-year fiscal capital expenditures will total about $110 million.

Regarding our data intrusion remediation efforts, during the second quarter, we reduced our estimate of fraud losses, fines, and other charges by $31.5 million, resulting in a credit of $14.5 million in total processing system intrusion costs for the quarter. We based our initial estimate of fraud losses, fines, and other charges on the operating regulations published by the networks and preliminary communications with the networks. We have now reached resolution with certain networks, resulting in charges that were less than our initial estimates. However, we continue to anticipate that full-year 2013 expenses for the data intrusion will total $25 million to $35 million, as insurance proceeds will now possibly occur in fiscal 2014 rather than 2013.

In the second quarter, we closed a new senior unsecured term loan of $700 million and increased our existing revolving line of credit by $150 million for a total increase in capacity of $850 million. We used the term loan proceeds to pay down $280 million of our existing revolver debt and to complete the APT acquisition of $413 million. We funded the $242 million for the Asia-Pacific transaction with a combination of cash and a draw on our revolver and now have remaining capacity approaching $600 million. Regarding our stock repurchase program, our total authorization is now $300 million. During the quarter, we purchased a total of 190,000 shares at an average price of just under $43 per share for a total of about $8 million. Just under $290 million remain authorized for further buybacks.

We continue to anticipate fiscal 2013 revenue of $2.36 billion to $2.4 billion, representing 7% to 9% growth on a reported basis and 8% to 10% growth on a constant currency basis. Given the solid performance in the second quarter, we now expect cash earnings per share in a range of $3.61 to $3.68, resulting in 2% to 4% growth over fiscal 2012, or 5% to 7% growth on a constant currency basis. This outlook does not assume any impact from future share repurchases.

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

Thank you, David. I continue to believe that our Company is in a great position to benefit from the ever-changing payments environment. Our global market position and our execution on strategic initiatives will provide us with a platform for sustained growth. I'll now turn the call over to Jane. Jane?

Before we begin the question-and-answer session, I would 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. Operator, we will now go to questions.

Thank you. Ladies and gentlemen, we will now conduct a question-and-answer session.

(Operator Instructions)

Tien-Tsin Huang, JPMorgan.

Good quarter, here. I wanted to ask about, maybe Paul, just get the question out of the way. The ISO channel, any change in relationships, there, worth noting? I know there's been some noise out there in the marketplace?

Thank you, Tien-Tsin. No, there's been nothing that of any note or any materiality. Our ISOs have been growing very nicely and been incredibly supportive during the last period, so we are very pleased with our ISO channel. I appreciate giving me a chance to address that one because there has been a lot of noise out there.

Okay, so no change there. Good to know.

Just as my follow-up question, then I'll jump off -- Europe is doing well. I guess, Asia, you did take it down. Is it really all cyclical? How are you performing there versus the broader market? Is this a good opportunity to maybe add more sales and to try and drive some better performance, here, relative to the cycle? Just curious what the short-term thinking is on Asia?

Tien-Tsin, the performance from Asia, we -- when we took that business over, we grew it very nicely, and then we added product. But, you get to a point where you're limited by the number of referral channels you have, and HSBC is a fabulous partner.

We found ourselves adding reasonable number of merchants; and on a net basis, we are growing the business. We annualized some new product introductions and some additional revenue generators, and we are in need of new sources. So, there's a couple ways to do that. You can add organically to your sales force, and we are slowly doing that in PRC in particular, but having new referral channels and partners is the biggest opportunity.

Now, we have not been able to do anything with that because of the past exclusive relationship -- that, now, terminates. And although, of course, HSBC will always be in a very important position and never be disadvantaged, we are having conversations. And as I mentioned in the script, many of those are actually been very well received. I have to tell you that I am very encouraged by our conversations to date. I made a comment, I think in the last earnings call -- I said in one year, if we don't see something of some significance -- now, that's nine months, so I want you to know that we are very focused on making some things happen.

The opportunity in Asia is about taking advantage of our first mover, adding new referral partners, slowly adding organic sales, introducing some new products -- and, we're going to hit a lot of that, quite frankly, next week, too, at our Investor Day at the NYSE we will talk a little bit about all of this, too.

Tien-Tsin, this is David, maybe a little more tactically -- our new sales are on track across the region. We do believe we are taking market share. We believe what you are seeing, in terms of the results, really is consistent with macro and not unlike what you hear from other similarly situated companies in the region, wherein between average ticket and transactions, we are just not seeing the kind of growth we thought we'd see entering the year.

We do believe that actually does create an opportunity to take more market share with these referral partners Paul's describing. We have a couple more we expect to bring online late in the year. As you can tell from what we expect from the region, we obviously are expecting higher growth, particularly in Q4 versus what you've seen year to date at this point.

So, we think the business, itself, is executing on track. It is in a tough situation from a macro. And then, the real opportunity, as Paul says, is the long-term opportunity of new partnerships, new referrals, new markets, and new products, and we are working hard on all those things.

Let me add to that, too, Tien-Tsin, with what David said. We had -- it's not about getting 8% or 9% or 10% or 11% or 12% growth out of that market. It is about a much more aggressive target, and that's what we are focused on. And we, quite frankly, believe that market can deliver that.

Roman Leal, Goldman Sachs.

First, with respect to Canada, can you comment how Canada is tracking relative to your expectations? I know you have a lot of different initiatives there. Are we close to seeing an inflection point there?

Yes, Roman, it's Jeff.

We did see in Canada, as David described, an improvement in the rate of decline in the second quarter versus the first quarter. And, if you listened to David's prepared remarks, we are looking for that to continue throughout the remainder of the fiscal year. We also saw, Roman, very good transactional growth in Canada versus what we believe our competitive market to be, and certainly, versus Canadian GDP. We have also seen, Roman, very good new-sales growth in terms of revenue in Canada.

So, what I would say about Canada is it remains a balance of transaction growth, new sales, with a diminution in spread and the weakness across economies that we have seen over a period of time. But, I think you can see in the results in the quarter some improvement, and the guidance from David, relative to where we are trending. It remains a balancing act. It remains difficult to pick a precise end date as to when that will be easier, but I do think that we are managing that mix consistent with what our expectations are.

David, do you --?

Yes, I think we have become better at predicting it. You, obviously, can sense it's performed, perhaps, a shade less than we might have thought than originally when we started the year. You can tell that from the language in the prepared comments, but we are becoming better at predicting, particularly, the spread declines -- the kinds of things we might be able to either control, or be able to analytically predict, which gives us a little bit more confidences as we head later in the year.

I will add, I think Jeff just eluded to this, Roman, we are adding merchants. We are growing the business transactionally. We are actually adding more transactions, so we have a nice growth in that. And, it's all about the spread issue.

We are controlling attrition -- merchant attrition is down. From those measures, it's pretty good. This will work its way through. I think we are hesitant to give an exact time, but it is working its way through.

From all the metrics we have seen -- and regardless, we understand that this is something that we have to grow around. Canada has a lot of very positive things. First off, a ton of cash, and we use that cash elsewhere. Every market is what every market is, and we've got to take all of that, put it together, and grow the Company, regardless of what Canada throws our way.

Kevin McVeigh, Macquarie.

I wonder if you could give us -- it seems like you're making nice progress on the data intrusion, when we could expect the record of compliance to be back, based on where we are in the process?

Kevin, this is David. In terms of the ROC remediation, the PCI remediation, we are right on the goal line. We believe we are literally on the one-inch line, to use a football metaphor since it's playoff time in the NFL.

Sure.

We are literally in the process of handing over our work to our QSA while we clean up some final items. Once that QSA certifies, it's onto the network for their own evaluation. We're thinking -- and of course, we don't control this. We don't control this process, but we are thinking -- we believe we are looking at a matter of weeks to return to the list of PCI-compliant companies.

We think we have done exactly what we hoped to do. We are literally on that one-inch line, really making great progress, and this is probably an appropriate moment for me to echo something we said in the prepared comments -- the networks have been fantastic through this process; professional, sophisticated, rigorous, but also appropriately supportive. They do a great job. So, working with them in partnership, we feel like we are, as I said a couple times earlier, right on the goal line.

Super. Then, it sounds like, from a reserve perspective, you took down the reserve. Just so we are clear on that, I know that didn't impact the reported EPS. Was that just part of the one-time reserve, and that's why it was brought down? Could you just clarify that for me?

Yes, be happy to, great question. If you go back to July to our year end, we recorded estimates for the various fraud-related expenses, fines, fees, charges, all those things that might come given our liability for the data intrusion. Those were estimates based on our own reading of how the bylaws worked for each of the various networks involved in this and based on any preliminary communications we might been able to have with some of those networks.

As we, then, progressed a few months later, we have gotten to the final charges from some of the networks, not all of them at all. And, good news for us and for our shareholders, those final charges, particularly for the fraud-related stuff, have come in lower than our estimates in July, and hence, you see what is essentially a $31 million reversal of that original July accrual coming through the GAAP results for the quarter.

Interestingly enough, it actually turns you into a net-credit position for data intrusion for the quarter, which is a little odd to see on the face of income statement.

Super. Thank you very much.

Bryan Keane, Deutsche Bank.

I wanted to ask about Europe -- it looked like it popped pretty good in the quarter. I was a little bit surprised by the strength. Is there a constant currency revenue growth number we can think about there, David, and maybe why it popped? And then, how do we think about it in the next two quarters, that European segment, for growth rate?

All right. Bryan, it's a great question.

We really are seeing very nice growth, particularly in the UK and Russia, very nice local currency growth, as I stated, in Spain, but that flips to a negative when you translate the euro because we're looking at the full year. So yes, constant currency growth for Europe for the quarter, year over year, would be about 15%. That would be the revenue number, just roughly that range, Bryan, when you aggregate all the pieces, and then you bring it down a little bit for FX. This wasn't our largest FX impact quarter, as you can tell from the earnings release itself, it's really -- that's almost right on the FX related impact you see. So, really good growth in that quarter; and again, particularly from those markets, with really solid performance from central Europe, as well, something we don't often talk about, but worth mentioning that we had solid performance there.

When you go out to the out quarters, for Q3 and Q4, we are thinking we see another solid quarter of local currency growth in Q3, maybe a little less so in Q4, as we had a lot of big items happening for us across Europe in Q4. But, I think you are going to see very consistent performance in Q3 and Q4 from Europe. And, it's going to look a lot like the full year stuff we've talked about, this sort of local currency in mid-single digit to high-single digit in your UK and your Spain, much higher than that in Russia, about flat from GPE, and just kind of nice washing of all those results in combination.

Okay. That's helpful.

Then, just on the segment operating margins, I guess I'm thinking about it sequentially as we go into the third quarter, we know that the third quarter is a little bit weak, but maybe you could talk about the North American segment margin, international segment margin -- what we can expect, sequentially? Because, if my math's correct, we might actually get to EBIT growth in North America, year over year, in the third quarter? Thanks so much.

Thank you, Bryan. A couple things to look at -- I think you, depending on how you math and how you want to model, you may well see EBIT growth in North America in Q3, which would be a nice thing to chat about at that point. If you're looking at the margin sequential performance, maybe flattish in Q3 to Q2 for North America, plus or minus. It could be down a little bit; it could be up a little bit. And, really similar in Q4 when you get to the out quarter as well, so roughly flattish margins over the course of Q2 through Q4 in North America.

When you get to our international results, I think you'll actually see us tick down in margins in international in Q3 and Q4, and that really shouldn't shock you when you think about the moving pieces of our international margins, which include Asia, challenged a little bit for growth as we said, but while still absorbing both some investment costs as well as some new technology costs for some of the platforms to which we've moved.

So, thinking about the pieces there, you could see international margins challenged a bit there, as well as in the UK, a lot of our revenue growth is coming from our international acquiring product, which comes at a lower margin. As that continues to roll through Q3 and Q4, that will roll down a bit. And in addition, in Spain, we've got some nice new products rolling out, but still Spain, overall, may have some margin challenges when you translate all of this to US dollars, given what the euro is doing year over year.

Super, thanks so much.

Craig Maurer, CLSA.

Regarding your comments that you have received your license to process in Brazil and that you could see yourself getting started there by fiscal year end, I was wondering if you could talk about who your partner is going to be for affiliation because that might help size the opportunity that you have down there? Thanks.

Hey, Craig, it's Jeff.

We are going to talk a lot more about that next week at our Investor Conference. What I would say is it is a local Brazilian commercial bank, in market, which is important to note. It comes with, not just sponsorship, but also with referral, and they have an existing book of business, which is also important to note.

What I would say, though, is our task in Brazil is this is really a startup in market, which is very different from what we typically do. So, I think what you'll hear from us next week is, it's terrific that we have sponsorship and referral from a bank in Brazil, it's great that we got the licensing, as was described in the prepared remarks, but it's also going to be important for fiscal '14 and beyond that we expand that base to include additional referral banks beyond the one that we'll discuss next week.

And I think also think, Craig, it's important for us to continue to look at acquisitions and other joint ventures in market because, as you know, given the size of our Company and given the history of how we've developed these businesses, we are really going to try to look for step-like functions in a market as attractive as Brazil. And, the best way for us to get there is to find additional partnerships augmenting what we are already going to discuss next week about where we are. So, we are happy with where we are, and we do this as a nice initial piece of foray into an attractive market.

Okay, and thanks for that. And, a follow-on question regarding your China business. Is my understanding correct that in China you need province-by-province regulatory approval to move forward? That is, it isn't just a question of sales reach, but it is a question of actual approval from local governments?

So Craig, that is true for CUP acceptance, so we are the only non-Chinese CUP acquirer, meaning that our salespeople, in a number of regions, we have five and counting -- big regions, I mean we're talking about hundreds of millions of Chinese citizens living in these domains. Our salespeople can directly sign merchants for CUP acceptance in renminbi, in local currency. Now, we are working on a more country-wide approach. That's working its way through the various regulatory channels; but in the interim, we continue to hammer away at region by region.

Now, for bank card, we are not restricted. We can sign Visa and MasterCard and American Express and Diner's Club and JCB and others country wide, throughout the PRC. And, there's no restrictions that relate to that at all, and we are indeed doing that. And, those would be mostly the brands that you probably recognize in a lot of big Chinese cities that have a lot of tourist activity in particular because the Chinese citizens don't really use Visa, MasterCard, they use CUP card.

So, there's two markets you're chasing, people that come into China and use their plastic from their country; and then, the Chinese citizen, and that's the big opportunity, quite frankly.

With knowing that the merchant discount rate is capped legally in China, how are the spreads compared to other regions you guys participate in?

Yes, it's -- they're pretty robust at the end of the day. The, the Visa MasterCard spreads, I think, are in keeping to high end, and the CUP spreads, for a debit spread, are actually very high. They actually mandate pricing that is actually very favorable.

And Craig, that's a very important distinction. You have cross-border traditional spreads for the bank cards, [type line and AmEx], et cetera, and then strong -- remember, those CUP cards are almost all debit cards, but strong, relative, debit spreads for those. It's a very important distinction.

Okay. Thank you very much.

Jason Kupferberg, Jefferies.

I want to ask a question on the US business. Are you hearing anything incremental from either your direct sales force in the US, or any of your ISO partners in the US, about any kind of additional competitive pressure from any of the newer entrants in the market?

Jason, are you talking about things like Square and things like that in particular, or --?

Yes.

Okay. Yes, I would say, Jason, that our ISOs are primarily competing with Square in that space, and they, based on the numbers we've seen -- one in particular, that is now advertising. In fact, advertised, I think, at the BCS Bowl last night. I saw an ad for them. They are after that space and have been for quite some time, for years, I believe, and really having some success. I think they're kind of head to head with them. The rest of them not so much -- us, almost never, and -- but don't take that away as we don't have robust competition.

The competition is and remains robust in all the spaces we're in. But, in terms of new entrants, I would say Square is chasing that and a couple our customers are as well. We are going to have a little more about our strategy at Investor Day next week on that, and we hope to see you there to take you through that, so that's the answer.

Okay. That's helpful. Then, on the share buyback side, obviously, good to see the additional authorization, and I think there was some language in the press release that you intend to execute on the authorization, which is encouraging. Can you help us a little bit just from a timing perspective? Do you think we'll see a meaningful amount of the authorization actually exercised this fiscal year?

Jason, this is David, we really can't comment on the timing of a buyback. I can tell you that we have a track record of executing our buybacks and that's probably as far as we can go.

Okay, fair enough. Thanks, guys.

Greg Smith, Sterne, Agee.

In Canada, the upcoming price change from Visa and MasterCard, what's your latest thoughts on is that an opportunity or is it more of a risk?

Yes, Greg, it's Jeff.

I think that's an opportunity. I think we've discussed on other phone calls, whenever there are changes in any direction from a network point of view, in any market really, those are generally good news for us. In particular, in the Canadian market, it has been a number of years since there have been any changes to that network environment. So, we view the announcements from Visa, and most recently from MasterCard, as good news for us in that market. And, we welcome those changes in the coming months.

Now, let me just add that the market -- that is a very competitive market, and merchants are very well served. And, this was a, I'm sure, a long, hard decision from the associations to do this. They feel confident that there are reasons that justify it. What we are able to do is round -- do two basis points here or there. It's nothing of any mammoth proportion, but it does give us that opportunity, as you picked up Greg, so that's all good news.

Okay, great. Then, maybe David, on the APT acquisition, can you give us some metrics, maybe what volume was in the quarter, or how we should think about a run rate or revenue if you could possibly?

Greg, it's a great question. It's a tough one to answer because we had more than 90% of APT's volume, and hence, revenue, on our platform already. So, you will recall, the incremental revenue was really modest, and quite frankly, not material to the Company for the rest of the year from October on. It's obviously, then, not material for the two months ended November. So, I really struggle to give you a whole lot of insight into those volumes. They've all already been here.

The key for us with APT, as you know, is what do we do with that business in '14, '15, '16, adding new VARs and really diving deeper and penetrating more into the existing VAR channel of those spaces. So, I guess I'd come back to and say this, the incremental revenue for the year is really quite small. It's really immaterial. They're off to a very good start. They're a little ahead of their numbers. But, a little ahead is low six figures kind of numbers we are talking about, now, for those first two months, given that we already had the revenue on the platform.

And then, we're still on track, we believe, for the same -- we said about neutral at the earnings line. We obviously don't expect to miss our numbers on those new acquisitions, so we feel like they're off to a very good start. Maybe more to come, when we've got five months of actuals, come the end of the February quarter.

Okay. Thanks.

Brett Huff, Stephens Incorporated.

Quick question on incremental margins and potential leverage opportunities going forward. I know that there's investment in data center modernization, maybe there's some new products rolling out. I know there's going to be some APT help as we roll forward. I guess, David, maybe this question is for you. Can you just enumerate the opportunities that you all see in terms of increasing incremental margins going forward?

Yes, happy to, Brett. Maybe, if you'll indulge me, we can set aside currency FX for a second, and speak a little bit to some of the international businesses on more of a constant currency basis.

Great.

You pointed out technology. I think that's absolutely fair. We are investing substantial amount in new network infrastructure and new data centers this year. We don't expect to have that investment recur; in other words, to the extent we added a few million dollars of expense to that this year, we're not going to add a few million of expense on top of that next year.

So, we expect to begin to see immediate scale benefits in '14 and beyond for the investments we have made in '13. And really, as you well know, the real benefit from that kind of investment is going to come from '15, '16, '17, '18 and beyond because we believe what we've been building is the infrastructure for transaction processing for the next 10 years for this business.

We do have a fairly robust pipeline of new product that we, quite frankly, have struggled to get out over the last nine months because we have been so focused on breach, breach investigation, and breach remediation, so we hope to see that roll out in probably over the course of fiscal '14, calendar '13 and that, hopefully, will bring with it the opportunity for new incremental revenue at high margins, again in '14, '15, '16, and beyond.

As you keep rolling through the pieces of the Company, you are correct in the US to identify APT as the linchpin to any potential expansion there. And, we obviously believe that's quite the possibility, and again, that's a '14, '15, '16 conversation, with some nice little bumps just happening with the increment, as you'll recall, the increment that's coming in in fiscal '13. Remember, recall that APT is bringing in more than [50] basis points of positive margin impact to our North America margins just for this partial year, and there's more of that to come.

So then, let's go abroad for a moment. We still believe there are more scale benefits to be had in Spain, still more scale and more growth opportunities in United Kingdom. Certainly, Russia represents a great opportunity for continued rapid growth in the double digits. The business is scaling nicely, and that's a core adoption acceptance story, wherein it's a very straightforward sort of scale benefit. You add more and more volume and the bottom line continues to improve in Russia.

Then, you have the final piece of that puzzle is probably Asia, where at the end of this year, we will have absorbed the increased IT expenses in Taiwan. And then, the question becomes, really, what Paul and I answered together earlier to another question on Asia and its contingent, which is the combination of continued execution, improve sales performance, where applicable, in a very targeted fashion, marry to more and newer referrals channels. And potentially, new markets and new partners should drive long-term benefits there. So, those are the sort of positives as you go around the globe.

That's helpful. And then, one last -- this is just a balance sheet question. The $242 million liability goes away, presumably, when you report next quarter on the HSBC -- related to HSBC bringing in the rest of that business right?

Yes, that's right. And, you saw that was sort of created almost in fantasy land because it really was a movement the quarter before from redeemable non-controlling interest, which had been showing what that put was in terms of fair-market value, and then paid-in capital sort of create really just geography change on the balance sheet up to that new commitment. That commitment then washes away with the purchase. You're exactly right.

Okay. Thanks for your time.

George Mihalos, Credit Suisse.

Just was hoping you guys could dig into maybe the growth of the direct non-ISO channel in the US, what you're seeing there? And, over the long term, is there an opportunity to accelerate growth for APT?

George, it's Jeff. I'm going to start, and then Paul and David, certainly, can add to it. We were -- in the United States -- we'll talk more about it in next week -- but the United States, we have a lot of very attractive vertical markets, on a direct basis, that we have been investing in.

Two I would highlight for the quarter, to get at your question, are our gaming business, and we are very pleased with our growth on a direct basis in gaming in the quarter, on a revenue basis, and then our Comerica joint venture, here, in the United States. Both showed very good growth in the quarter and are key to our performance. Those are areas where we have direct control over the sales force, they're on our P&L, and those are very attractive businesses from a growth and a margin point of view, and that's before you get into APT. So, it's a core part of what you see in the quarter, and I'm sure David can provide more color on that.

Then on APT, one of the things that we really liked about APT is it came with a very nice quota-based salary and commission-based sales force, which is also now part, since October 1, of Global Payments. As David mentioned in his answers to one of the questions from Brett, we have seen good performance in APT since October 1 -- that, of course, includes revenue as well as contributions.

So, I would say, looking ahead, to answer your question, if we look at some of the vertical markets we are in ex ISO, you look at gaming, you look at Comerica, and you look, now, at APT, we have been pretty pleased with the direct sales positioning of those businesses. And then, overall, from a quarter point of view in all the direct in the United States, we have been pleased with its performance to date.

Dave, do you want to --?

Okay. Then, just one follow up to shift gears, going back to APAC, David, I think you spoke about a bit of an acceleration in the back half of the year skewed more to the fourth quarter. Should we be looking more double-digit revenue growth in the fourth quarter from APAC, and is there any reason why double-digit growth in APAC is not sustainable looking out over the long term?

George, great combination question. I would not necessarily look for double-digit growth in Q4, but it's certainly on the table if you think about what we're saying in terms of the range for Asia, somewhere between high single and low double is possible in Q4, but I wouldn't suggest you count on double in Q4. We expect a couple things to come together in that timeframe. One is these new referral channels that we have signed become more productive and are generating actual volume come Q4. We have got a couple of promotions that are going on, and a couple of reprices that good on that help Q4.

I think on a long-term sustained basis, there's no question you should be expecting double digit. And, Paul said it quite rightly earlier, the real trick to Asia is how do you arithmetically or logarithmically expand Asia, not just grow it, 10% to 15% year after year after year, and that's really what we're focused on doing. In terms of jumping off into '14, I'm not ready to talk about that now. Let's see how Q3 and Q4 play out, and we'll talk some more about '14 tactically at the right time.

All right, thanks, guys.

Tim Wojs, Baird.

Hey guys, nice job.

Thank you.

Just looking at EPS seasonality, I think typically, you've seen a little bit of step down in cash EPS in Q3, and then a little bit of step up in Q4. I'm just wondering with the tax rate going up and some of the things you said about North America, how we should think about cash EPS seasonality in the back half of the year.

Yes, great question, glad you asked. We expect a fairly typical Q3, which to your point, would be sequentially down from Q2, and in rough proportion to the percentage of earnings that prior Q3s have delivered to the Company. So, last year's Q3 was on the order of 24% of the full year's earnings, this would be plus or minus, maybe, in the same ballpark. And then, same for Q4, we've developed over the last three years a bit of a hockey stick into Q4 relative to earnings performance, and we expect some version of the same.

If you look at last year, again compared to this year, you might see a version of the same type of distribution, wherein generally speaking, in Q3 you have the worst seasonal quarter for every one of our businesses through the holidays, and then sort of the shorter quarter into February, and then a really strong seasonal Q4. And, that's generally true US, Canada, UK, even Russia, and even across a little bit into Asia, and it's also true for Spain. So, glad you asked the question, I would think it will look an awful lot, generally speaking, like the proportions we saw last year.

Great. Then, just on FX, what types of rates are you assuming in guidance now? Are you assuming recent rates or maybe rates from the beginning of year, just a little clarification on that?

Yes, great question as well. Each quarter, when we have this conversation with investors, we update our outlook for FX based on actuals as of, frankly, the day before.

Okay.

So, when we look at this particular quarter, we look at the rest of the year -- and this is a topic of conversation amongst investors and analysts, generally speaking, I'd tell you our outlook for the full year really remains unchanged in aggregate from where we were a few months ago to the end of the year. That doesn't mean the rates on a country-by-country basis have matched what we expected, but generally speaking, what we've seen even in the first six months is dead on almost an aggregate what we thought we'd see. For the three months ended this last quarter, as you know our revenues increased by about $900,000 and earnings by about $0.01, but for the six months ended for the year to date, we are down $15 million of revenue and down earnings of about $0.03.

For the rest of year, here's what we're expecting -- on a sequential basis, we think the US dollar very slightly strengthens against the Canadian dollar, the British pound, and the euro. If you stop and say -- what does that mean for the full year given what we have to date? That means, year over year, full year, you've got slight strengthening against the pound; very, very slight strengthening against the Canadian dollar; more pronounced strengthening though, obviously, against the euro, the koruna, and the rouble.

Then, given the profitability of those markets when you are talking about wherever we are seeing strengthening, that's how you aggregate to kind of an $0.08 bad guy for the year. And, I know I saw a couple notes out about FX helping and maybe some good guys there. We actually saw the dollar weaken a bit against some of our currencies in December. I'd tell you, a little more color, those same rates swung right back the other way so far in January as of yesterday.

Obviously, it's difficult to predict, and quite frankly, I'm trying not to be in the business of too deeply trying to predict this stuff. I would say, again, that the rates so far this year have been dead on what we thought they would be, and hence, the conversion to our financials have been right about what we thought. There's the outlook in detail. Maybe it's a little more than you wanted, but I thought I'd get it all out there.

No, that's great. Thanks.

Dan Perlin, RBC Capital Markets.

I wanted to revisit Europe for a second. I appreciate the 15% constant currency number, but I didn't hear what was the reason for the growth. Is it -- when you parse this out a little bit in terms of pricing opportunities, strategically, did you put in market relative to a bit of a market rebound? Is there a significant mix towards Russia that was disproportionate this quarter relative to the UK? Because, that number was stronger than I also was looking for.

I think you have to add one more, too, Dan, just business performance, adding merchants, taking market share. I think we enjoyed all of that.

Okay, so you're saying (multiple speakers) it's pricing, it's market share, we added a bunch of people? Was it typical blocking and tackling and all of a sudden it just started hitting this quarter or --?

Go ahead, David.

Dan, a couple of things that are happening. We are seeing -- there are really three keys -- Paul has provided the foundational answer, there are three key markets and three primary things happening to drive the kind of growth you saw.

First is Russia, where we are seeing really rapid growth -- two things, adoption, and sort of acceptance, a general adoption, 140 million Russians transacting more and more. Also, a little bit more of the year-over-year impact of the Alpha acquisition, which is now fully annualized, but we got some help from that in the quarter. So, outsized growth in Russia from Alpha, married to really just strong growth in general, organically, in Russia.

A Spain business that has growth in, again, the high singles, but really growth you might not expect from Spain given macro when you stare at us from the outside. That's being fueled by the partnership with la Caixa, in general, the sales and the execution Paul described, but also by new products including DCC we've introduced in the Spanish market.

Then, the final piece of the puzzle is the UK, where we're seeing solid performance, even though the macro's challenging. Average tickets are challenging in a market like UK, as you might expect given macroeconomic, but we're seeing really nice card-not-present growth in our international acquiring platform there. Now, with that comes a little less profitability, little lower margin, which you can see in some of the other parts of income statement, when you look at international, but it's really driving great growth for the United Kingdom overall for the quarter.

Okay. That's very helpful.

Then, if I could revisit the notion of referral partnerships, I have -- I guess my question is, when you talk about first-mover advantage, sometimes that worries me a little bit in terms of giving up pricing to gain share early on. It doesn't sounds like that, but if you could just talk a bit about how that might play into the equation? Then, the last thing I have in relation to that, is there anything unique and different that would surprise us about how some of these have to be accounted for? Thanks.

Dan, I'm sorry, you cut out at the beginning of your question. Was that a question about some of the mobile partnerships or the markets --?

I'm sorry, I'll repeat it.

The question was in the referral partnerships that you guys are looking forward to, hopefully later in the year, when you talked about being first-mover advantages in those markets as one of the things that are exciting, sometimes that kind of is indicative of having to give up pricing early on in those relationships to gain that kind of share early on. I'm just -- one, I want to know if that's something that we can just alleviate and we don't have to worry about.

And secondly, is there anything that's unique and different that would surprise us about how some of these partnerships have to be accounted for?

Got you, so great question. You're really speaking to the commentary about Asia and the new partnerships and sort of the tail helping a little bit with the Q4 hockey stick in Asia. The answer to your question is these are very traditional looking referral arrangements. These aren't ISOs, so we don't have the beginnings of ISO accounting in Asia with stuff on the table in Asia right now.

What you do have is an expanding referral basis and an expanding source of the kind of leads we need to close and grow more rapidly in the markets in which we already operate. Maybe the opportunity to accelerate those, since we can now, after having closed the acquisition of the other 0.5 of Asia, actually talk to other partners who might not otherwise have wanted to process through a joint venture with a competing bank. So, it's actually very traditional. And really, I don't think you'd find, if you saw the details, any sort of risk to how you understand referral partnerships work around the world from a market perspective, just right down the middle for Asia, right now.

Okay, so there's no disproportion fixed cost versus variable costs or anything like that in that market?

No, it's the usual -- the more we can get these leads, the more we can get more merchants, and then the fixed cost leverage is what comes into play as soon as we can process it.

Got it. All right, thank you, guys. Good quarter.

Thanks, Dan.

We will take our final question for today from Steven Kwok with KBW; after which, Mr. Garcia will give his closing statement.

Just one quick question on surcharging, I believe merchants have the ability to surcharge at the end of the month if they choose to, but they also need to notify the networks and the merchant acquirers, as well, was wondering if you could provide any context around any indications on merchants, whether they're looking to do that or not, and what your thoughts are there? Thanks?

Yes, Steven, it's Jeff. Those rules just came out -- those operating regulations just came out from the networks right before Christmas and the holidays, so you are right, the effective date is the end of January. The merchants do have to give their acquirers, the networks, 30-days advance notice, is what I believe you're referring to, of the desire to surcharge, and there's a fair amount of training, signage, and changes to billing statements that have to go into effect to enable that to happen.

Sitting here today, I'm not aware of widespread notifications to us, or other acquirers for that matter, of the desire to surcharge. We are making changes to our operating rules pursuant to what the networks have asked us to do as part of the settlement to enable surcharging. I'd also point out it is restricted in a number of states in the United States by state law, so the networks are subject to that and the settlement is as well.

So I think, Steven, more to come, but there have not been a lot of initial pre-notifications 30 days in advance of the end of January to enable the surcharging. I do think that some will try it, and we'll probably have more of an update on that as time goes on.

All right, thanks.

Thank you, Operator.

Thank you, ladies and gentlemen, for joining us this afternoon. I want to remind you all that next week, on January 17, we will be at the NYSE for our Investor Conference. I look forward to seeing you all there. Thank you so much.

Ladies and gentlemen, this conference will be available for replay starting today at 7.00 PM Eastern Time and ending at midnight January 22, 2013. If you wish to listen to the replay, please dial 855-859-2056, or international participants can dial 404-537-3406.

This concludes our conference for today. Thank you for your participation. You may now disconnect.