環匯 (GPN) 2014 Q2 法說會逐字稿

Thank you for standing by, and welcome to the Global Payments second-quarter fiscal 2014 earnings conference call.

(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, Executive Vice President and Chief of Staff, Jane Elliott. Please go ahead.

Thank you. Good afternoon, and welcome to Global Payments' fiscal 2014 second-quarter conference call. Our call today is scheduled for one hour, and joining me on the call are Paul Garcia, Chairman; Jeff Sloan, President and CEO; 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 which are discussed in our public releases, including our most recent 10-K, that could cause actual results to vary. 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, 2014, which may be located under the Investor Relations area on our website, www.GlobalPaymentsInc.com.

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

Thank you, Jane. And thanks to everyone for joining us this afternoon. We delivered strong results for the quarter, growing revenue by 8%, and cash earnings per share by 15%.

As a result, we are raising our annual fiscal 2014 cash earnings per share expectations by $0.05, to a range of $4.03 to $4.10, or 10% to 12% growth. We are pleased to confirm that we remain on track to achieve stable total Company cash operating margins for the full year. This performance demonstrates that we are executing the right strategies to drive sustainable growth across our regions.

Now, for quarterly highlights. I am delighted to report that North America continued to deliver strong results, both in the US and Canada.

The US results were driven by strong performance across all channels, headlined by our integrated solutions business. Canada had another quarter of stable performance, with 5% credit transaction growth, and low single digit spread declines on a comparable year-over-year basis.

In addition, Canadian revenue benefited from assessment-based pricing changes. We are also pleased with our international performance, reflecting strong execution on our strategic initiatives in all our markets in Europe and Asia. Now, I will turn the call over to David.

Thank you, Jeff. We are gratified by the strong business performance across our markets during the quarter.

North America revenue grew 6%, with US revenue growth of 6%, and transaction growth of 8%. Canada revenue grew 11% in local currency for the quarter, and we now expect mid to high single digit revenue growth in local currency for the full year.

North America cash operating income grew 6% to $78 million, with cash operating margin of 17.4%. Our full-year expectations for North America cash operating margins remain unchanged at flat to slightly increasing, as compared to prior year.

International revenue grew 12% for the quarter in US dollars. Europe delivered solid revenue growth in all markets, with particular strength in our e-commerce business, Global Solutions, and in Spain. Asia-Pacific revenue grew 10% over last year, driven primarily by strong transaction growth and successful product launches from our largest customer in the region.

International cash operating income of $70 million grew 12%, with cash operating margins increasing to 37.3%. We continue to expect stable cash operating margins in international for the full year.

Currency trends were generally in line with our expectations for the quarter, and we continue to expect foreign currency effects to be about neutral, to a slight headwind for cash earnings per share, for the full year. We continue to expect both GAAP and cash effective tax rates to approach 29% for the full year.

For the quarter, our total cash operating margin was 19.4%. This includes over $4 million of an expected full-year $17 million incremental security spend. Excluding the security spend, our total cash operating margin for the quarter would have been 20.1%, an increase of 30 basis points over last year.

We generated free cash flow of $91 million this quarter. 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.

Capital expenditures totaled $21 million for the quarter, and we continue to anticipate our full-year capital expenditures will total about $90 million. Our total available cash, including working capital, at the end of the quarter was $280 million.

During the second quarter, we entered into an accelerated share repurchase program for $100 million, which we expect to complete by the end of the third quarter. When we complete the accelerated share repurchase, we will have $125 million on our current authorization for potential further repurchases.

As a result of our strong performance, we are increasing our annual fiscal 2014 cash earnings per share expectations by $0.05, to a range of $4.03 to $4.10, reflecting 10% to 12% growth over fiscal 2013. We are maintaining our annual revenue expectations of $2.51 billion to $2.56 billion, reflecting 6% to 8% growth.

We are on track to achieve stable total Company operating margins for the full fiscal year. This includes the negative effect of the $17 million incremental step function security spending in the current fiscal year. And now, I'll turn the call back to Jeff.

Thank you, David. We are executing well on our strategies around the world, and we maintain substantial capital flexibility to achieve our goals. 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 accommodate everyone in the queue. Thank you. And operator, we will now go to questions.

(Operator Instructions)

Our first question today comes from Dan Perlin with RBC. Please go ahead.

I wonder if you could just elaborate a little bit on what the dynamic is, that's playing out in Europe. I know you mentioned Spain was strong, and your e-commerce partnership there, but I'm just wondering if you could provide maybe something a little more detailed, in terms of the dynamics that are building in that region. Thanks.

Sure, Dan. This is David.

Europe is an amalgamation of a number of markets and services, they actually are all performing about on our plan for the year. So we're pleased about that. If I walk through them one by one, maybe that will help a little bit with the color about which you're asking.

It's headlined by the largest single asset there, there's our United Kingdom business, which is a mid to high single digit grower. It's growing in very solid fashion, delivering very nice profit, had a good second quarter. On top of that, or with that, actually comes our Malta business, which goes hand in hand with the United Kingdom.

In Spain we continue to see, what from the surface is probably just remarkable growth, double-digit revenue growth. We think we'll do high single for the year in Spain. Right now we're running a little bit ahead of that.

We had a very strong first quarter as you'll recall with the DCC product, driving a lot of tourist based revenue in Spain over the course of that quarter. So Spain continues to move along, given the remarkable partnership we have with CaixaBank there, the marketing they drive to this asset, and then just really good execution in that business overall.

In Russia, we have a terrific sort of secular adoption acceptance story, going with high teens growth, mid-teens growth quarter after quarter, as we continue to see more and more Russians transacting and more and more acceptance at merchant locations around the country. We do have a Global Payments Europe business, which is our indirect business, which is performing right on its expectations for the year. That's never going to be a fast grower, as you know.

You bring all those pieces together, you're sitting right on the edge of high single-digit growth in Europe, double-digit, depending on the quarter, and that's before we talk about Global Solutions, which is our e-commerce platform which is growing very well this year. Recall, we have one large customer in that, whom we service all around the world, with the exception of the United States. But in addition we've added 40, 50, 60 customers to that platform in the last year, so much smaller than our lead customer, but we continue to build out the volume on that platform.

So when you bring together a big asset like UK running in the mid to high single-digits, and operating at, right at its plan, a solid Spain asset growing double digits, nice growth in Russia, and then marry that to an e-commerce platform that's growing in the double digits as well, you have really, really nice performance overall in Europe.

Yes. And the UK growth, is that a function of pricing opportunity that you've identified, or is that just cyclical rebounds in volumes?

There's always pricing in every market we serve, that's helping from time to time, or about flat, depending on the timing of which period about which we're discussing. In the UK alone, credit is solid, in terms of the metrics, debit is very solid. We've added some very nice new customers over the last year or so.

And then I'll ask one more, even though I'm going to go over my allotted two. Are there any proof points that you can talk to about this partnering situation that's really provided incremental growth in particular in this quarter, or something you see coming down the pipeline? Thanks and I'll hop off.

Dan, it's Jeff. I'll start, and David can add as well.

We really don't get into specific customers, and how they translate to revenue and profit, in a given period. I would say, as we think about our partner of choice, it's really a few things.

First, when you think about the announcements we made around mobility and the ecosystem we've built, and we've announced this in prior calls in this fiscal, I believe, with people like PayPal on mobile, Intuit on mobile, O2, Telefonica, etcetera, I don't think we would have them as customers, if we weren't an incredibly good partner. And the nature of those relationships really varies, in terms of what we provide to them, based on who the partner really is. So I think you could look at each one of those as a very good example about the success of our partner of choice model.

Second, I think we're very good joint venture partner, and David discussed rightly our terrific performance in Spain with Caxia at our Comercia business and while that transaction was a number of years old, I don't think we'd have that kind of performance in a market like Spain, which as you know, has macroeconomic challenges, and that kind of execution, without a very good relationship, and partnership with a terrific partner at Caxia. I think those are two examples of how partner of choice really translates into something distinctive for Global Payments.

Great. Thank you.

Your next question comes from the line of Tim Weiss with Baird.

Nice job. I guess, just looking at the model for Q3 and the back half of the year, I think typically EPS is down about mid single digit in percentage terms sequentially. I just want to make sure that there's nothing that we should be aware of in Q3 this year, that that trend wouldn't hold.

No, Tim, this is David. There's nothing new or different about trends. As you know, I often like to talk about how to think about the quarterly flow, based on what percentage of full-year earnings does each quarter contribute.

And that, as we sit here today, reporting to you on Q2, is unchanged in terms of what our view of Q1, Q2, Q3 and then Q4, what each of those will contribute towards the $4.03 to $4.10 range that we've now established, with the raise today. And as you know, that looks an awful lot like the distribution we saw in each of FY13 and FY12.

Okay. Okay. That's helpful.

And then just on Canada, another good quarter there. Is there a way to give us a little bit of a bridge between maybe transaction growth, and then what you're seeing just from a pricing perspective, and then maybe a market share perspective?

I'll start, Tim and David can add additional color. So as we said in our prepared comments, we saw mid single digits credit transactional growth year-over-year in Canada, and very low single digit spread declines in that market. That is a pretty good indicator of what that business is doing on a normalized basis, without some of the network pricing actions that have taken place over the last period of time, which generally get added on the assessment side to our revenue stream, and then of course, in some cases, we have margin on top of that.

So one way to think about, how is that business really in a normalized environment, is our prepared remarks of mid single digit credit transactional growth, which is mostly how we get paid, coupled with low single digit spread declines is a good way to think about it, relative to the low double-digit local currency revenue growth that David cited in his comments.

To add a little more color, maybe, those are the very dynamics we've been discussing to you probably going back four quarters now, that to the extent we see manageable spread declines married to our traditional transaction declines. Again, I use the same time word twice, we have a very manageable situation in Canada, and so we continue to see those solid metrics. That would then be the outlook from here on as well.

Great. Thanks a lot. Nice job.

Your next question comes from Roman Leal with Goldman Sachs.

Nice job. First, on the capital allocation efforts, it's good to see another round of buybacks.

Just help us think through what the next step is in terms of -- you're always balancing what you see in M&A opportunities versus buybacks. Anything changed in that dynamic at all?

It's Jeff. We have, as David mentioned in his prepared comments, two-thirds of $1 billion dollars of available capacity today, between cash on hand that is available, coupled with existing financing capacity. So I would say nothing's changed there.

We obviously generate a lot of free cash flow in the quarter, which also helps. So with that kind of firepower there's really no change in our capital allocation philosophy. I would also say that we view our M&A pipeline as being full, which it what has been for a period of time, and we intend to continue with the same kind of capital allocation, in terms of strategies that we shared with you and the public previously.

I think Roman, just to put a finer point on a couple of those pieces, you're quite correct, we think the first and best use of the capital, the excess capital, is global expansion. We continue to look at that. As Jeff said, we have a full pipeline.

Let us get through the current accelerated share repurchase, which closes this quarter, and see where the pipeline stands, and see what we want to do next. I think we've certainly shown you over the last 12 to 18 months, when we talk about buybacks, we're committed to doing them on an ongoing basis, and committed to doing them as a core part of the strategy, married to M&A.

Look for us to come back to you with more communication. Let us close out the current ASR.

As a follow-up, Jeff, recently I think you articulated maybe a slight change in the type of M&A deals that are in the pipeline. I think the kind of phrase you used was we're not looking only for home runs, we're also looking for singles and doubles and more technology oriented M&A deals. Is that a change of just the actual deals that are available, or is that something that you are -- constituting because you just see the distribution and technology makes a lot more sense than maybe in other sorts of distribution channels?

Thanks, Roman. We're always looking of course for grand plans, not just home runs and doubles, but I appreciate what you said. So I think the answer is, we feel very good, for example, about our transaction with APT, which we announced in August of 2012 and closed in October of 2012, and we've now in for over a year. Very comfortable with how that's performing.

I do think that's given us a perspective that's slightly different in our business, than it may have been historically, as we feel very good about making transactions and investments in that area. We can find more of that type of thing, given our experience with APT, of course we'd be very open minded about it.

I would say also our business is changing as an industry. So this isn't just APT or experience in that area.

I think, as you've seen over the last couple of years, the importance of technology to our business, the importance of preserving our role in the financial intermediation of what we do, the importance of expanding in geographies that we're already in, as David said, as well as additional geographies, that are attractive that we're not in today. We mentioned before for example Australia, South Korea and Japan, as three examples in Asia. Those are all important for us fulfilling our strategy.

I think we recognize as our business changes that not every deal going forward in this environment is going to look exactly like every deal that we've done historically over the last 13 years as a public Company. So first, I think it's comfort level with what we've done, in particular with APT and deals like that, and second, an acknowledgement that our business is changing, and we need to make those investments to get ahead, and skate to where the puck is going to be in our business in the future.

Thanks.

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

Wanted to ask about first transaction growth in the US. Looked like what 8% I think I heard. Can't remember the last time it was in the single digits. Is that cyclical, or something else going on there?

Hey, Tien-Tsin, it's David. It was 8% for the US, you heard correctly. It was 9% last quarter, so we're right where we were before.

I think what you're seeing, and this is a happy piece of really how the US and North America are coming together, a bit of a slowdown from the ISOs. As you well know, on the face of the income statement, that's not a bad thing, particularly when you've got other assets, our integrated payments assets headlined by APT growing very nicely, expanding margins, et cetera, so that 8% is really quite consistent with where we were last quarter.

Even exiting last year, it was only 10% in Q4, so we're right in line with where we were.

Nothing to read into cyclically or from a structural standpoint in your mind?

Only in my comment about really what works out to be a happy thing for us in aggregate, which is the ISO channel growing a little bit slower, at the same time, our direct integrated payment based assets are growing very well.

Got it. Just on the EPS revision, just wanted to clarify. I heard the margin commentary, no change, and then the revenue guidance, no change there. So the guidance -- what's the $0.05 comprised of, I suppose, is what I'm asking.

So let's walk through that a little bit and I'll give you probably far more color than you actually want. First off, I'd suggest that we all think about the $0.05, there's a bit of illusory component to the $0.05, in that it's actually a little bit of a higher increase than you might think when you look beneath the covers.

With the recent upward movement in the share price, we now expect our accelerated share repurchase, the one we announced last quarter, to probably deliver $0.01 less in earnings per share than we announced last quarter. That's really given, again, the fact that share prices moved from $50 roughly when we announced this on the first of October, up to, and you'll see in the 10-Q we filed about half an hour ago or an hour ago, the average price of our repurchases so far has been below $55. Of course, yesterday, the stock closed nearly $65.

You think about that, first off, we're really happy to have executed that in an accelerated fashion. Second, the only downside to that, and this is a very happy outcome, is we'll likely only see $0.04 of incremental EPS instead of the $0.05 we announced. So we think of this as a bit of a $0.06 increase, just for business and operating purposes.

So if you then talk about what are the components of this. Our performance in Q2 was right about where we expected. We're getting nice performance in Europe, as I outlined a little bit in answer to Dan's question.

We saw Asia kickback to a higher revenue growth rate than we've seen in the past. Yes, some of that is with a large customer and a product release, but that doesn't mean that customer is going away next quarter, necessarily, it just means he won't necessarily see the same huge uptick.

So really, it's about business performance. And having the increments, relative to our expectations, be just a little bit north of where we were a quarter or so ago. So we're really happy, quite honestly, with where we stand, and it is these components, Canada executing well, Europe executing well, Asia executing well, US executing well.

So you pull all that together, and quite honestly, other than a little bit of an increase to earnings, we think we have the same outlook we had, whether it's margin at a segment level, international versus North America, or total Company level, that we had just a quarter ago. But we're rolling through this year pretty well, and feel good about the rest of the year.

Terrific. Got it. Thank you.

Your next question comes from the line of George Mihalos with Credit Suisse.

I wanted to start off on the margin front, specifically North America. You reiterated your outlook for flattish margins year-over-year there, yet over the back half of the year you're going to have a bigger headwind from FX in Canada. Maybe what's performing a little bit better than your expectations to allow you to reiterate it?

George, a couple things. One is, I'd point back to your first point. FX is not wildly different from what we thought, when we started the year. It's a little bit worse in Canada, as you might imagine, particularly given the recent movement, but it's not wildly worse than we might have thought.

First, know that the headwind created by FX when you translate that Canadian growth into US dollars is not maybe as bad as you might think, from the outside looking in. If you then marry that to, we've got a US business where the ISOs are a little slower than we might have thought, we get a little bit of help there from the margin line.

And we've got again these integrated payments businesses that are a little ahead of what we might have thought as we started the year. The end of that happy mixture is, we're right on track with where we thought, even with FX being a hair worse than we might have thought, going into the year, from a Canadian perspective.

That's great. Second question from me, looking at APAC and the good growth you saw there, you called out the successful launch from your large partner there. What would the growth rate have been ex that partner, or maybe another way to ask that is, how should we be thinking about growth now over the back half of the year?

I would think about it this way. First, you know we're not going to pull out the growth of any specific customer, but know that customer obviously isn't large enough to be a factor of 4 or something on top of the growth.

We've seen, I think, a very solid recovery toward solid metrics in Asia overall over the last quarter or so, so it's performing fine. This extra growth from the large customer is kind of the cherry on top.

And then long-term for APAC, there's no reason that business should not be able to drive double-digit growth. Is that safe to say?

We don't believe there's any reason to believe otherwise. We have a mixture of markets there, that include some relatively mature markets like Taiwan, a little bit of Hong Kong to that as well, all the way to the other end of the spectrum, with really early stage markets that should grow well over time as we improve our distribution across the region.

Those would be your Indias, your Chinas, a little bit of Philippines. We do need, as you know, to round out our distribution capabilities across Asia, but our expectation is that that's a fast grower for a very long period of time.

Thanks. Congrats on the quarter.

Your next question comes from the line of Bryan Keane with Deutsche Bank.

Just wanted to follow up. On the ISOs, the slower growth, is that a function of slower transaction growth inside the ISOs, like a same store sales number, or is that a little bit of a share shift, where they could be doing it on their own, or they shift shares somewhere else to another processor?

It's a great question. I think it's not much other than the law of large numbers. So when we analyze what's going on, we don't see a share shift away from our ISOs to other channels at all.

And I think if you look at some of the external reporting and analyses and surveys that have gone, that supports that conclusion thus far. I think that within the ISOs themselves, we don't believe anyone has moved any volume away from us, and we would have pretty good insight into that. So right now, I think all you're seeing is a very large channel, very large numbers, but continuing to grow and grow in absolute transaction counts, it's just not going to be the same percentage level as it's been in the past.

Okay. That's helpful. Then just a question on the international margins.

On a year-over-year basis, they were slightly up, that's the first time in a couple quarters. Just want to make sure I understand, what's driving a little bit of a margin improvement in international, and then as we go forward the next couple quarters, is that sustainable, a slight improvement year-over-year, or do they fall back down?

So it's a good question. For this quarter, we get a little bit of help from Asia because the metrics have snapped back. It's not just a large customer, who you might imagine, we probably don't have the greatest margins on that customer's revenue anyway.

We had a solid quarter in Asia, which is nice for a change, and it was a nice sign of continuing improvement there. When we have good quarters in each of UK and Spain, you'll find slightly better margins than you would have had the year before, than you might have thought as you were building your model.

When I look out to Q3 and Q4, I don't think margins are going to be -- they're going to vary around being flat with each of those quarters. You could be slightly down in Q3, depends on how the seasonality affects us across the international markets. You could be around flat in Q3, which is about what we expect, and again, same in Q4, though Q4, I think is more likely to be up year-over-year than flat or down.

Super. Thanks so much.

Your next question comes from the line of Tim Willi with Wells Fargo.

Two quick question. One is, can you just give an update on Brazil and any thoughts about that operation and its trajectory or progress, as you look out through the balance of fiscal 2014?

Tim, it's Jeff. So we're pleased with where we are in Brazil. Our transaction with our partner Caxia closed during the quarter, and we think that's gone well.

We're off to just under a couple thousand merchants live on us today in Brazil, and we intend to continue to grow that throughout the fiscal year. We've added that, as we've added transaction count, mainly that's on the sales side, but also includes infrastructure, business there is based in Sao Paulo and also a bit of Brasilia. We're very happy with how we're doing, and we're getting ready to manage, as most of Brazil starts to think about the World Cup in June and July of 2014, and then the Olympics a couple years thereafter.

Okay. Then my follow-up, and I'll hop off, was with APT. Any thoughts about geographic expansion into places like the UK, or Spain, or Hong Kong or any markets where let's say within a 12 to 24 month window there would be geographic expansion opportunities for that type of platform?

Yes, it's a great question, Tim. So we are actually in the process of bringing APT today to Canada. So the most obvious market for us, outside the US, which is most similar for a variety of reasons, for APT's business, is Canada.

I believe that we're in pilot this quarter in Canada, with APT, on an integrated basis. We think we're early in that market for what we're doing with a native solution, that is, for a Canadian customers in Canada, rather than customers in the US, just going cross-border into Canada. So Canada's the next most obvious market, and we're already doing that.

Thereafter, we looked at each one of our markets. We've got all of our sales folks in most of our markets around the world, including in Europe and Asia, and we're also looking at bringing that business to Brazil.

So while the initial business case for APT was really focused on successful execution of that business plan, I think we all agree, as we discussed in January at the Investor Day, that we would be missing something at the end of the day, if three or five years from now, all we have was a very good and well-performing US business. Because while we think that we're early and underpenetrated in the US, we firmly believe that we're early and underpenetrated in markets outside the US. So we think there's a great opportunity for APT, and we're very excited to be entering into Canada this quarter with that product.

Great. Thanks very much.

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

This is Ramsey El-Assal for Jason. Can you give us an update on the CUP partnership, adding more cities to China, where we stand there?

Sure. So we have a very good partnership with CUP in China, and that involves, by the way, not just mainland China, but that involves the rest of the world too. We have a very active partnership and relationship outside of mainland China.

We do feel like our ability to expand into the rest of the People's Republic of China is a very good opportunity for us. We've had active discussions with CUP about it, and many of the investments that David had described over the last couple of quarters into our Asia business have gone into mainland China, to get ready for that expansion of the business throughout all of China.

So it's very important to us. I think our relationship is very good with CUP, both in China and around the world, and I think they too fit into the partnership mode that we described earlier.

Okay. And then I wanted to ask about the DCC, the Direct Currency Conversion solutions. Are the timing and magnitude of the roll-out of that solution across your business happening according to plan?

And I guess sort of what -- I would imagine that's pretty high quality revenue. What kind of inning are we in, in terms of rolling that out across your business? Is there a lot of space out there left for it, or is it pretty much installed where you want it to be?

I would tell you there's actually a lot of room left from that product. It's a recent roll-out in Spain.

It's been quite successful for some period of time in Asia. We've talked about that before relative to annualizing into Asia's growth.

It is available without a huge level of penetration in North America and in the rest of Europe, so we still think -- I don't want to necessarily pick an exact inning, but we still think it's relatively early days, particularly in those last few markets I described, and there's still room there. As I said earlier, there's the occasional seasonality to it.

Summer being a big tourist season in Europe, you might see more rather than less. If we're sort of waving our hands over that and talking about full years and roll-outs, there's still a lot of room for further roll-out of that product around the world.

All right. Thanks a lot for taking my questions.

Your next question comes from the line of Glenn Greene with Oppenheimer.

I guess, Dave, for the first question, going back to North America margins, which is sort of thinking about it for the quarter as opposed to the full year, and maybe got spoiled a little bit by last quarter's healthy margin expansion, but kind of like looking at this quarter, and thinking was flat year-over-year, despite the benefit of 11% constant currency in Canada, so I was just trying to reconcile those dynamics.

Yes. That's a great question, Glenn. So if you think about the pieces of North America I think you're right to put your finger on the first question being a little bit of Canada. Now, recognize that Canada, when you translate that nice growth in local currency, was the hardest hit of any market we have by currency translation.

So by the time you bring all that back in US dollars, you don't have 11% anymore. You've got something substantially less than that.

That's part of why, as we sit here today, we're talking about Canada that will do mid to high single in local currency, which by the time you marry that to US, mid to high single, even our total North America US dollar growth isn't going to approach that Canadian optics of double-digit, we posted year-to-date. So recognize a chunk of that came back the other way.

Beyond that, in any given quarter, you've got timing of investments, expenses, et cetera, so there's really not a lot going on. I would also suggest to you that flat margin is a nice place to be.

We're still on track for everything we've got, everything we expected for the full year there, and remember too, that Canadian growth is fueled by assessments. So with the assessments are going to come a dilutive impact on margins overall, before we even talked about the currency translation.

Got it. That's helpful. Drilling down on the US a little bit, you talked about those to Tien-Tsin's question, but maybe you could put a little bit more of a fine point on the components of the revenue growth, sort of thinking about the ISO channel, versus direct versus APT. Is it reasonable to think the ISO revenue growth was in line with that 8% transaction growth, and is APT still mid-teens?

The way I'd answer that without calling each is that in line or even perhaps a little below the transaction growth is the ISO channel right now. That obviously can vary from time to time, depending on fees and timing. Know that APT is well above that, and obviously well into the double digits, yes.

Okay. Thank you.

Your next question comes from the line of Kevin McVeigh with Macquarie.

Could you just give us, so we have the numbers, where we were in terms of the ASR in terms of absolute dollars now? And then as we think about that into Q3?

I can. We announced $100 million ASR. As you well know, Kevin, what happens is, you take delivery of essentially 80% of that into the share count at the time you announce it, and then over time the actual purchases are effectuated by our broker-dealer, then you settle up at the end. So we haven't settled, we don't have a final accounting for it.

But I know enough now to tell you when I look at the average price, that we're going to get a little less earnings, again for a happy reason, with a $65 stock price, a little north of that as we sit here, at the moment. But the mechanics really are, we'll finish that this quarter, we'll finish -- we'll round out having spent the full $100 million. It will be whatever it will be in terms of the final share exchange for the final count of shares delivered to us, and then we'll take a look at where we are from a capital planning perspective, as we're describing earlier.

If I did my math right, it looks like you bought a little less in Q2 than Q1. Was that just a function of where the stock was, or anything in terms of just different priorities for the remaining capital on the balance sheet?

It's a function of where the stock is. It's a function of when we entered into the ASR relative to previous purchases in Q1, under a 10B5. And then it's just how quickly the things roll through.

Things roll through in ASR based on stock price itself, volumes, et cetera, as they do with any other buy. So there's nothing to be seen there in terms of the strategy around buying, because when you enter into an ASR, you are ceding to the broker-dealer the timing and pace of the buybacks, then you settle with them at the end of the period.

Super. Thanks so much.

Your next question comes from the line of Brett Huff with Stephens Inc.

A big picture question on -- a question -- a follow-up to a question that was asked earlier on the geo expansion focus, versus the let's buy technology pieces, and use our distribution channel focus. And I'm curious, which of those two -- I guess not thinking in terms of M&A really, but in terms of growth.

As you guys see big growth drivers in the next couple years, do you still see geographic expansion as the most likely biggest growth driver, and driving more pieces of technology, or more value-add through your existing geos, do you still see that as number one and number two, or could you see that flip given -- Jeff, you mentioned this, given your desire to protect where you are in the value chain, and protect your distribution system?

As I said before, I think you have to start all M&A conversations with what's actually for sale, because you really are looking for the right partnership and the right transaction. You typically you have a lot of irons in the fire, to make sure that you are the right partner, you're at the right place at the right time.

I would say today, Brett, we actually do both at the same time, because we're not exactly sure what order our partner is going to want to proceed in. From a geographic expansion point of view, for example, we're most focused in Asia, in Australia, South Korea and Japan, and markets that we're not in from an expansion point of view, and of course getting bigger in India and mainland China, in terms of markets that we're actually in today.

In Latin America, we're obviously in Brazil. We'd like to be bigger in Brazil. We're not in Mexico, and some other markets directly in Latin America today, which we would like to be, so we're focused on those as well.

In Europe, I think we're opportunistic as I've said on prior calls. We haven't seen transactions and assets there that have the right rate of return to make us feel comfortable to pursue them, so doesn't mean that we don't see opportunities.

We see opportunities all over the world, but it does mean, as David mentioned, that we do balance from a capital allocation point of view, what our returns are. And to date we haven't really seen those across Europe, although an exception to that would be in markets like Spain, where we have a terrific partner in Caxia, and we've been able to add portfolios like [Sipica], because we find those economics to be attractive, because of our joint venture Comercia.

And then in North America, I would say we see opportunities continually in the US. Those tend to be more technology enabled, to the point that you were making, and less -- by definition, less expansion in the sense that there's a region that we're not in. We're in all of the US, and in all of Canada.

So it's less about the regions necessarily by definition, and more about are there vertical markets that we can make a difference in, and are there technologies like APT and Integrated, that we think we can really make additional returns in for pursuing those avenues. To come back to where you started, I think we're opportunistic on all these things. It really depends on what's available and what those returns are.

Great. That's helpful. Just quick follow-up.

David, on the P&L, there was a fairly large other operating benefit that we saw, just larger than what we had modeled in the past. Was there anything unusual there, that we should think about?

When you say other operating, are you talking about on the GAAP income statement? Are you talking about other income?

I'm sorry, other income. I apologize

From a cash earnings perspective or --?

I was looking at it from just a strait-up GAAP.

Straight-up GAAP what you're seeing there is the gain on Brazil. So when we had our partners at Caxia enter into the 50/50, they put $2 million into the venture, and then as I think we discussed, they also committed to incrementing their investment level up until it matches our like to date investment level.

So that initial capital inflow resulted in a gain, and that's what you're seeing on the GAAP income statement.

Do you back that out? How do you adjust that, if at all, for the cash?

We back that out for cash earnings purposes.

Okay. All right. That's what I needed to know. Thank you for your help.

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

Had a question on the ISO channel, and trends you're seeing, in the spread of the interchange. Can you just talk about the trends you're seeing there? I think last quarter you mentioned there was some expectation that there was some prices or fees that the ISOs were going to possibly layer on during the quarter, if you actually saw that happen, what the impact was on the spreads there?

Yes, Tom, it's David. The ISOs, I think what we tend to say about the ISOs and fees is the piece of the ISOs that are difficult to predict for us tend to be when they choose to fee their customers.

So we have, as you might imagine, a reasonable forecast model of how their transactions flow, and what that's going to turn into, in terms of their spreads and how it drives revenue for the Company, and then our per transaction rate to them, what that's going to mean for real revenue and economic benefit for the Company. Then if they happen to fee their customers on top of that, that's 100% revenue, 100% expense for the Company, and it affects margins.

As you look at Q2, our last reported quarter, the actual fees were really not different from what we thought going in. Hence, we're really not talking about them today in terms of variance analysis or something analytic, that's going to affect your view of the model.

but from time to time those will vary and to the extent an ISO decides, particularly one of our larger ISOs decides to heavily fee a customer in any given quarter, that can affect revenue growth to the positive, but margins to the negative. But really not a lot on that, nothing new, nothing to quantify for Q2.

Great. Given the very well publicized data breach at Target, is there any takeaways from that, that you feel compelled to share with us, in terms of implication longer term for the merchant acquiring industry? Thanks.

Tom, it's Jeff. I'll start. I'm sure David will contribute as well.

Listen, I think it is absolutely something, as you know that we're very focused on, given the exposure in the industry, and given our background. As you mentioned a number of times, we're investing $17 million incrementally this year in added security, and that of course is a cost of doing business in, in our industry.

It's certainly unfortunate in terms of what's going on at Target. I really don't know the details, any more than you do. I do think changes over time from the networks like EMV will help certain aspects of what's going on in the industry, but they're not cure-alls.

So for example, EMV by itself doesn't really address non-face-to-face or card not present transactions. I don't know all the specifics of Target, but that is an area people are focused on. You probably saw the networks announce in the last few months that they're also looking at tokenization for some of the mobile and other types of transactions, to further enhance security.

So we're big proponents of all of those things. We're obviously making substantial investments in our own infrastructure, but I'm not sure if there's anything other than what we've seen to date that would change our view or anyone's view in the industry as to how important security is, and the fact that there are bad guys out there.

I think that's very well said. I would just say, no one knows better than we what the folks at Target are going through. We have a lot of empathy for them, and wish them well. It's certainly a reminder to all of us to stay vigilant, but I can't add anything to what Jeff had to say.

Your next question comes from the line of Chris Shutler with William Blair.

So just a couple of quick questions. One, I just want to clarify on the reconciliation in the back of the press release, it says there's about $3.3 million of termination costs that you added back in the quarter, and just wanted to clarify what headcount reductions you've been doing, and where, and to what extent does that benefit the guidance?

So Chris, that's a couple of movements that had to do with our leadership transition, and having nothing to do with anyone on this call, to be very specific, and it had actually absolutely no benefit to the cash earnings for this year.

Okay. Got you. And then just one quick one on the ISO comments, just wanted to clarify. The slowdown in growth there at least the slight slowdown in growth, is what purely being driven by the ISOs themselves, or is there any decision on your part to kind of consciously slow that down?

No, it's not a decision on our part, Chris. I think David hit the nail on the head, with his comment before. It really is growth rates related to the law of large numbers.

If you think, Chris, about the comparisons over the last three or four years in terms of rates of growth, you had things like Durbin, and regulatory reform come down the pike, which as they annualized, substantially at the time, increased the rates of revenue growth. And then from a transactional point of view, to the extent that it lowered the cost of acceptance for merchants, also had the beneficial effect of changing demand in the market for card acquiring services, as price reductions in general to the extent that they're passed through, do.

I think as David said, you're really lapping large growth rates and large numbers. That's really our view of what you're seeing.

And to add to what David said as well, I do think this is probably the second or third quarter that we've gone through with you in a row, where we've seen the law of large numbers impact the rate of growth of the ISO business. I really view it as nothing new.

Thanks a lot.

Your next question comes from the line of Ashwin Shirvaikar with Citibank.

So second good quarter in a row, just a reminder, it's three year that makes a trend.

Thank you very much. We'll take your word for that.

My question was really about just going back to the slower ISO growth, and I get the law of large numbers comment. But as you think of North America and particularly the US, you have APT doing well, the ISO portion potentially slowing.

Could you comment on sort of -- comment on the eventual direct versus indirect ratio that you want to get to, and what you're doing to further increase the direct portion, it's clearly more profitable as well.

Yes, Ashwin, it's David. It's a great question. A piece of this was just said a moment ago, are out of our control.

The ISOs are great partners. We served them well for the last decade and beyond. They'll continue to grow.

It's certainly incumbent on us to continue to grow our other channels around them, and make sure that we, with the partner of choice strategy, have arrayed a series of channels and distribution mechanisms that allow us to grow for the long term, hence our focus on integrated payments, our focus on either directly or with partners, driving access to mobility, mobile payments, tablet processing, whatever is going to be the paradigm that merchants use, and consumers use, for processing over time.

That kind of complexity is nothing but good for us. So I think it's fair for us to say, if we were to look out, we expect an ever greater proportion of direct distribution based revenue, in other words, revenue we control more directly, merchants we control more directly.

Look for us to do that organically with investments in additional channels, investments in additional technology like rolling out the mobility we've rolled out over the last two years. But also, that's obviously a core part of the M&A strategy Jeff has described a couple times in the questions earlier tonight.

Okay. Does that down the road -- I know you guys have not talked about G2 for a while, but down the road, does that affect how G2 eventually rolls out in your client base?

No, I really don't think so. It's an interesting question. I think it affects how we bring transactions to G2, and to our other front ends around the world.

And we're happy and capable of processing -- or happy to and capable of processing any transaction coming to us in any fashion around the world. That can be coming to us on a mobile device acting as a terminal, it can come to us, bring a transaction from a mobile device functioning as a wallet, in a completely different application of mobile.

We're happy to process any transaction anywhere in any fashion. From there, it can go to whatever authorization engine and platform we process, because we'll enable that to accept transactions from any adapter, or any device.

Got it. Thank you.

We will take the last question from Steven Kwok with KBW, after which Mr. Sloan will close the call.

Just a quick question around the tax rate. Was there anything particular in this quarter, and then I believe you're guiding to a full year of about 29%. Just wanted to see what the moving pieces are, what to expect in the coming quarters?

Yes, nothing particularly odd this quarter, Steven. In fact, we're on sort of a similar path to the flow of last year.

Because of the way some of the tax rates change, particularly in Europe, we typically will have our highest tax rate in Q1. We posted 30.8% on a cash basis. The face of the P&L tax rate in Q1, we just posted 27.8%.

On the way to approaching 29%, you should see quarters similar to this one over the course of Q3 and Q4, but there are no one-timers or anything like that. This is actually the pattern we expected for the year.

Thank you.

Thanks very much everyone for joining us this evening.

Ladies and gentlemen, this concludes our conference for today. Thank you for your participation. You may now disconnect.