環匯 (GPN) 2014 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to Global Payments' Third-Quarter 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 Third-Quarter conference call.

Our call today is scheduled for one hour. 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, which are subject to risks and uncertainties discussed in our SEC filings, including our most recent 10-K and 10-Q.

These risks and uncertainties could cause actual results to differ materially. We caution you not to place undue reliance on these statements. Forward-looking statements made during this call speak only as of the date of this call, and we undertake no obligation to update them.

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, filed earlier today. The press release is also available in the Investor Relations area of our website at www.globalpaymentsinc.com.

Now, I'd like to introduce Jeff Sloan.

Jeff?

Thank you, Jane.

And thanks everyone for joining us this afternoon. We delivered solid results for the quarter, growing revenue by 7% and cash earnings per share by 10%. As a result, we are raising our annual FY14 cash earnings per share expectations and tightening the range to $4.06 to $4.11, or 11% to 13% growth.

Our performance demonstrates that we continued to gain momentum as we drive sustainable growth by executing the right strategies in each of our markets.

Globally, we focus on building and growing our direct distribution channels, while concurrently leveraging our worldwide technology platforms.

Here in North America, for example, we are pleased to have completed our PayPros acquisition in early March. This transaction marks a continuation of our strategy to pivot toward direct sales channels in our largest market. ¶

I'm delighted to report that we are already seeing early wins as we begin to integrate the best of the APT and PayPros businesses.

Now, for quarterly highlights.

We are pleased with our international performance, reflecting solid execution on our strategic initiatives, with particularly strong performance in our international e-commerce channel. We also continued to make progress in our Asia business, as evidenced by the double-digit revenue growth that David will describe shortly.

We are delighted to report that North America continued to deliver solid results, both in the United States and Canada. The US results were driven by strong performance across our direct channels, headlined by our integrated solutions business.

Of course, we are very pleased with recent sales momentum in our gaming business and the movement of our integrated businesses into Canada.

Canada delivered another quarter of stable performance. Revenue growth was driven by 5% credit transaction growth and assessment-based changes. As previously noted, these changes will partially annualize during our fourth quarter.

Especially noteworthy this quarter is the expansion of our North American operating margins. We believe our margins demonstrate successful execution of our distribution strategies.

This progress, of course, does not yet reflect the consummation of the PayPros acquisition, given its March 4 close date.

Now I will turn the call over to David.

Thank you, Jeff.

We are pleased by the solid business performance across all of our markets during the quarter. North America revenue grew 5%, with US revenue growth of 6% and transaction growth of 6%.

Canada revenue grew 11% in local currency for the quarter and we continue to expect mid- to high single-digit revenue growth in local currency for the full year.

North America cash operating income grew 9% to $69 million. Cash operating margin grew about 60 basis points over prior year to 16%. Our full-year expectations for North America cash operating margins remain unchanged, at flat to slightly increasing compared to prior year.

International revenue grew 10% for the quarter in US dollars. Europe delivered solid revenue growth, with particular strength in our e-commerce business in Spain. ¶ Asia-Pacific revenue grew 10% over last year, with pricing and new assessments driving growth in our base business.

International cash operating income of $66 million grew 8%. Cash operating margins decreased about 60 basis points to 35% as a result of continued strong growth in our e-commerce channel and investments in Asia. We are on track for stable cash operating margins in international for the full year.

For the quarter, total Company cash operating margin was 18.2%. This included over $3 million of an expected full-year $17 million incremental security spend. Excluding the security spend, total Company cash operating margin for the quarter would have increased about 30 basis points over prior year to 18.7%.

Currency trends were roughly in line with our expectations for the third quarter. However, movements in rates for Canada and Russia are likely to be more challenging in the fourth quarter than we previously expected. We now expect that foreign currency translation will represent a modest headwind to cash earnings per share for the full year.

Our expectations, of course, reflect this. We continue to expect that both GAAP and cash effective tax rates will approach 29% for the full year.

For FY14, we expect PayPros to contribute modestly to US revenue and be about neutral to cash earnings per share. We are in the beginning stages of executing an integration plan for PayPros that will continue through FY15.

PayPros represents an important milestone in the execution of our strategy to control direct sales, expand technology-enabled distribution, and drive more revenue and earnings growth from our direct channels.

As growth slows in our ISO channel, and we add PayPros to the mix, at the beginning of the fourth quarter, our 90 or so active ISO partners in the United States now represent, in aggregate, a low double-digit percentage of total Global Payments' operating income, and thus contribute about 20% to North American operating income.

We generated free cash flow of $88 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 distribution to non-controlling interests.

Capital expenditures totaled $20 million for the quarter, and we continue to anticipate our FY14 capital expenditures will total about $90 million. Our total available cash, including working capital, at the end of the quarter was about $320 million.

During the quarter, we completed the $100 million accelerated share repurchase program we announced in October of 2013. We also purchased 155,000 shares in the open market during the quarter.

We are pleased with the refinancing we closed at the end of February. We now have about $1 billion of debt capacity available to fund future growth initiatives and share repurchases.

On that note, we are delighted to announce that our Board of Directors approved an additional share repurchase authorization of $250 million. We now have about $365 million of total authorization remaining for potential further share repurchases.

We are increasing our annual FY14 cash earnings-per-share expectations and tightening the expectation range to $4.06 to $4.11, reflecting 11% to 13% growth over FY13. We are maintaining our annual revenue expectations of $2.51 billion to $2.56 billion, or 6% to 8% growth.

We remain on track to achieve stable total Company cash operating margins for the fiscal year, including the negative effect of the $17 million incremental step function in security spending.

Now I'd like to turn the call back over to Jeff.

Thanks, David.

We are executing well on our strategies around the world, and we maintain substantial capital flexibility to achieve our goals. We believe that we have made the pivot toward critical mass of direct distribution while maintaining a careful balance to create value for our shareholders, partners, and employees.

I will now turn the call over to Jane.

Thanks.

(Caller Instructions)

Thank you.

Operator, we will now go to questions.

(Operator Instructions)

George Mihalos with Credit Suisse.

Congrats on the quarter.

Just wanted to start off on the PayPros side. What is the expectation from a revenue standpoint in the fourth quarter? Are we talking somewhere around $25 million or so and neutral on an EBIT basis?

Hello, George. It's David.

Yes, you've got it right. If you recall our disclosure at the time we closed it, we gave you the run rate, the last 12 months of being about $100 million of revenue. So $25 million is a perfectly good assumption for Q4, and then you get earnings neutral when you think of nice, solid business with nice margins.

But we are in the beginning stages of a long-term integration to combine the best of our APT and our PayPros now, into the best of Global Payments. So when you wash that in for the fourth quarter, you've got about earnings neutral for the quarter.

Okay, great. Just maybe you can help us think of the margin profile, longer-term for the PayPros business?

Is it safe to say that ex the PayPros acquisition for 4Q that margins would clearly be up on the North American side? Thank you.

George, I'm going to sound like I'm repeating myself, relative to what we said on the order of a year ago when we first bought APT, which is we've just bought a business that operates at a higher margin than Global Payments, that is expanding that margin with profitable growth and is the same kind of growth profile we saw with APT.

When you bring the numbers that I just described into the total Company for the quarter, you really don't make a material difference at all to margins.

So the trajectory you have us on for the year, for North America, for total Company -- so for the year, for North America, that's flat to slightly increasing margins -- it's unchanged bringing, PayPros in.

So anything you would have had in your model previously, really for Q4, if you roll that forward, PayPros is not going to make a big difference to them and similarly for the total Company.

At that level, they were expecting stable margins in total, and margins that would otherwise be expanding, were it not for security investment. PayPros doesn't make a big difference there. The difference of PayPros comes over the years to come.

Bryan Keane with Deutsche Bank. Your line is open.

Bryan Keane, your line is open.

Operator, let's go to the next question. Maybe Bryan can come back.

Can you hear me?

Sorry, Brian. Were you on mute?

Yes, sorry about that.

I just wanted to ask about the Russia situation. I know you guys have some exposure to Russia. And obviously, with the political landscape the way it is, just curious to know if you could talk a little bit about your Russia business -- how big it is and any expected impacts.

Brian, it's Jeff. I will start and then David can provide some additional financial commentary.

You touched on the right point. I do believe that what's going on in Russia is primarily a political event. With a political event, it is difficult to handicap what may happen in the coming days and weeks.

We continue to monitor Russia and evaluate the business situation. But you just heard David express our guidance raise for FY14, which of course includes our current evaluation of the Russian situation. So, we don't expect, as David mentioned in his prepared remarks, the situation to have a material effect on FY14.

David, you want to add some?

I think all I would add to that is just remember Russia, though fast growing, is a very small piece of Global Payments overall.

Have you guys actually seen any impact on the Russia business so far? Or nothing to date?

Well, what I would say, I'd point you right back to our full-year expectations. They are unchanged. We've obviously have done the best we can to assess what's going on, but our expectations are unchanged.

Okay. Then just wanted to ask, on the US business, the growth rate, 6%, was in line.

But anything, any sales, same-store sales weakness that you saw and you can describe further to give us color on the US market? Thanks.

Yes, it's a great question and interesting when you pull apart the pieces, as you add in PayPros and think about it.

I would first point you to 6% revenue growth was matched by 6% transaction growth, which, if you think of the history of Global Payments, is really quite an interesting combination of metric and dollars. We used to see really rapid ISO growth that would drive high transaction growth and then have a big delta between that and the actual revenue growth; much less, the actual operating income growth you might see coming through on the bottom line.

At this stage, in terms of the same stores and some of the other metrics, average tickets very stable; spread, stable; transactions, growing like revenue.

What you are seeing, and part of why we enhanced for the moment the way we are talking about the way the channels work and fit together, is nice, fast-growing direct revenue channels coming in like APT and, as we add PayPros. At the same time, the ISOs is slowing down, which is, when you combine that with Canada, it's what's allowing you to see the operating income growth and the margin leverage you see in the third quarter from North America.

Okay. That's helpful. Thanks, guys.

Jason Kupferberg with Jefferies.

Just a follow-up on PayPros. The color in Q4 is helpful. ¶

But how should we be thinking about, on a go-forward basis, annualized? What cash EPS accretion can we see from PayPros?

Jason, it's David.

Obviously, we are not going to talk about 2015; so we are not ready to project PayPros. I'd tell you the way to think about it, again, is a nice-margin business coming into Global Payments.

Add to that, though, integration costs, while we try and create again the best of the assets we have. We obviously expect it to be accretive; but whatever that accretion will be, will be held a bit by integration cost.

But more to come as we get to July and really talk to you about 2015.

Okay. Mercury has obviously filed to go public here, so they've got some public disclosure out there now about their contractual relationship with you guys and indicating that they're migrating some of their processing services in-house.

Can you just clarify for us what exactly they are taking in-house versus what you guys are going to continue to provide to them? I think your contract runs through 2018. ¶ Is there any material revenue headwind we should be starting to think about at some point in time from the piece that they're migrating in-house?

Jason, it's Jeff. I will start.

The first thing I would say is we think it's very good news that Mercury is going public; we wish them a lot of success. They are a very good partner of ours and have been for a really long period of time.

As part of the partnership, we are only going to be successful if they are also successful. So you touched on one of the key points, which is, as we mentioned last July in our prepared remarks, that our contract and our relationship with them has been extended through 2018, which is, of course, in their documentation.

We are going to have a very strong, long-term relationship with Mercury based on what you mentioned and based on what we have described. Now, as between the two of us, we are providing both transactional as well as non-transactional services for Mercury, through that period.

Over what period of time and in what form, is going to vary, depending on what they would prefer to do, what we would like to do. So some of that description is in the S-1.

I also would add that our relationship with them is not just in the United States, but also in Canada. So we are actually in multiple geographies with Mercury.

From our perspective, it is a complex, long-term relationship. We are going to be partners for quite an extended period of time. Our relationship with them, of course, is reflected in David's prepared remarks around our guidance for FY14.

David, would you add any?

No, I think you summarized it.

We will see how it plays out. But we are very excited for them, and we are sure they will be successful. And we think that's ultimately to their benefit as well as ours.

Okay. Understood.

Glenn Greene with Oppenheimer.

A couple of clarifications on some of the discussion that the guys have been asking.

The first on the full-year guide. Some of the questions I've been getting are you include -- just want to think about the full-year guide -- including $25 million or so for PayPros, it sounds like there are some incremental FX headwinds. I think, David, you called out Canada and Russia.

Could you just give us some context of why you didn't raise the full-year guide? Is it just so that you are still within the high end of the range?

Did anything slow in the core business? Just a little bit of color on how you thought about the full-year guide, given the fact that PayPros should be additive.

Glenn, let me make sure I answer your question precisely. That's a revenue guidance question?

Yes.

Here's a way to think about it. As a starting point, I'd go back to the commentary on the United States revenue.

The ISOs, as a channel, have been slower this year than in previous years' and frankly, admittedly a little slower than we expected. Given that slowdown, which of course is happy net news to Global Payments if you think of where we are performing from an earnings and a margin perspective, but given that slowdown in revenue, one might have wanted to model us toward the lower to middle end of the revenue range.

When you bring in, then, the increment of PayPros, you are adding on the order of an estimated $25 million or so, leaves you still within the range. Then you raise the right final point to this, which is our range always is designed to accommodate a possible range of FX outcomes.

Certainly, as we enter the quarter, we see the US dollar strengthening further against the Canadian dollar and against the ruble than we would have expected three months ago, much less nine months ago when we first set up the year. So if you bring all these things together, you end up really with the same range you had before -- again, I would say for a number of happy reasons, quite frankly.

Okay. That's clear.

Then, to follow-up on Jason's question, as it relates to Mercury, I will talk about the ISO business. You talked about the ISO business for most of this year has been slowing largely due to the law of large numbers.

Is that the primary factor, or is some of it that Mercury has already transitioned some of their volumes in-house? The question we are all trying to get our arms around is not necessarily in FY14 because we know that's been baked into your guide. But is there a big headwind we should be thinking about as we go into 2015 and 2016?

Well, I think the way to think about this is what we've been saying. The ISOs as a channel, you think of the sheer size and the sheer amount of revenue and transactions that come from them, have been slowing down. That's true across, as I said on the fair counts, there are broadly 90 or so ISOs. That is the right way to think about the ISO channel.

We gave you the rough sizing in aggregate of the channel. That sizing is spread across 90 different active -- literally active -- ISOs, and so I would think about the channel in that way.

Anything else would be a little bit of speculation as to how relationships evolve and what the future looks like. And we will report to as we go along, as we reach milestones and those sorts of things. But right now, why have what we know; and that's baked into our expectations for 2014.

One more -- would you be comfortable giving us the ISO percentage of North America or aggregate revenue along with the operating income disclosure, which was very helpful?

It's actually not a matter of comfort. For me, it's a matter of I'm not sure how relevant it is at this stage.

I think the income is far more interesting. I certainly think the way we performed this year indicates to you what we are managing to is the income, and hopefully, as a result, the margin impact of all our various channels around the world.

The fact that we might have some growth step revenue, quite frankly, in some cases, might not even help, if you think through how the channel is evolving over time.

Okay. Thanks a lot.

Matthew Roswell from RBC Capital Markets.

I was wondering if you would be willing to give us the Asia-Pacific transaction growth? You mentioned that it was up on pricing and assessments?

You know, I don't have been in front of me. We really aren't quoting and breaking out the markets, other than the US, where that important comparison of transactions to revenue growth is rolling on.

I would say to you, the transaction growth was certainly less than revenue growth in Asia because that revenue growth in the base was a feature of pricing along with some new assessments from the networks. You are on the right track; but we are really trying not to break out market by market each piece of transaction growth.

Okay. Then, I was wondering if you have seen any change in the Canadian consumer? There's some concern about possible slowdown up there?

Yes, Matthew. It's Jeff.

No, we have not. I think if you look at the credit transaction growth, which was in my prepared remarks for this quarter, and then if you look at the last several quarters that we described, we had very healthy growth this quarter in Canadian credit transaction growth, which, in our view really is a fundamental sign of the health of the Canadian consumer.

The last several quarters were obviously significantly higher than it was a year and a half or two years ago. So I would say, if anything, we see a consistent, stable performance out of that Canadian consumer.

Thanks.

Brett Huff with Stephens.

Question on margins going forward. I know there's lots of levers that you guys have been able to work on, both from a mix point of view and I know you are consistently working on the expense base and the more efficient technology.

I guess this is a question for you, David; I'm not sure. But can you just give us the highlights?

We know about the security spend, but maybe you could remind us again. Is that -- I don't think that's a step function up again next year; I think it's a run rate.

But beyond that, what other initiatives do you have going on that we should think about that help you guys battle that ISO dilution on the margin other than just that that growth is slowing a little bit?

Sure, Brett. Great question.

You are quite right about the security spend. We expect our security investment to scale now like the rest of the infrastructure.

In any given year, as we go into the year, the infrastructure departments, whether they're accounting or they're IT, receive a budget target that says you are supposed to scale -- your cost per transaction has to go down, year after year after year.

We are not going to skimp or scrimp on security spending. But with this one-time investment increment we saw in 2014 will not repeat itself as another big giant investment increment.

In fact, the way we think about it now, is if security is the number one priority for the Company, which it should be, then maybe that stands in front of another investment we would have otherwise made as we think through the pieces of 2015, 2016, 2017, 2018 and beyond.

If you then stop for a moment and think through the other drivers of margin, I would point you to -- although you mentioned it and wanted to set it aside for a moment -- I would go back to the ISOs, though, to the extent they continue to grow more slowly, that reduces the headwind we have been struggling against for several years, quite frankly, and that's helpful.

Remember, too, we just bought PayPros, which again is coming in as a higher-margin business pre-integration cost but then will scale, no doubt routinely from there on in, just as we've seen APT do over the last year or so.

Then probably the final piece of the puzzle that's a little difficult to see on the surface of the income statement right now, is really, Canada, which, to the extent we continue to see what Jeff pointed out a moment ago, which is healthy credit transaction growth -- this past quarter was 5% -- and as I've said before, manageable spreads.

Now you have your second biggest asset helping it and helping push the Company forward from an operating income and a margin perspective. That's an important distinction we are seeing for the first time this year in some time.

And we would expect that trend to continue; again, as long as those credit transaction growth numbers remain healthy, we have a nice piece of the puzzle.

That's helpful. Thanks.

Just one other question. On the Caesars deal, can you size that for us at all or more color?

Yes, it's Jeff, Brett.

We really don't break out, as a matter of policy, separate customer relationships financially. I would tell you that, as you know, for the last several years, as we have announced publicly, we already had a piece of the Caesar's business. It's additive to what we currently had.

But I can't really give you a lot of metrics around the revenue or profitability, except that it's additive to our current book.

Maybe I will add a little color, only in that you can read other disclosure out there, and suggest you that all of the services encompassed in other disclosure are not services we perform, necessarily. We do some of that through partners.

So the numbers you might have seen bandied about are not the appropriate numbers for Global Payments. The services we offer are linked to what Jeff just described, so just bear that in mind. Having said that, we are thrilled to expand our relationship with Caesars.

Great. That's helpful. Thank you.

Jennifer Dugan with Sterne Agee.

I wanted to ask about the acquisition pipeline. I know that it's probably a funny question after you've made these couple really great acquisitions here.

But should we be looking for you to slow down a little bit as you work on integration and focus more on buybacks, or do you still have a pretty active acquisition pipeline?

No, we still have an active acquisition pipeline, Jennifer. We balance very carefully our acquisition investments versus our balance sheet, our debt capacity, and our repurchase work.

As David announced in his prepared comments, we have $1 billion available of debt capacity and roughly another $300 million of available cash, as he described. I wouldn't look at it and say that because we've done deals like PayPros or APT that we don't have sufficient available capacity.

In fact, one of the reasons we worked on a very successful refinancing in February was to make sure that we have that capacity to balance those going forward. So it's a very full pipeline. We are opportunistic.

But I do think the additional repurchase authority that we described in our prepared remarks gives you an indication of how we are balancing investments in acquisitions versus investments in repurchases. And I think as you said previously, we have a very good track record of consummating those repurchases over time; and that's what I would expect us to do.

Okay, great. And then in terms of the next acquisitions or joint ventures, are those more likely to be here in the states or overseas in Asia?

I think we're still waiting to see some more action in expanding the Asia footprint. What might the timing be on that?

That's a great question.

As I said before, Jennifer, the majority of the battle is whether something is available for sale first. Then second is, is it a good partner? And third is, what do the returns look like, especially in comparison to repurchasing more stock?

I would tell you that we have a very active pipeline. As it relates to Asia, which is the source of your question, we are certainly actively looking at markets in Australia and South Korea that we are not currently present in and in markets that we are present in today that we'd like to be bigger. Those include India, mainland China, and the Philippines. We are in each of those markets, and we would like to have more scale going forward.

By far the most important thing is, is it is available. But those markets I indicated, we are very actively looking at transactions in.

And I think we said in our January Investor Day, at that time, we had looked at 55 transactions over the previous two years, and we had done three at that time. That gives you a sense, just in terms of your handicapping, Jennifer, that it's hard to give you precise dates because we tend to walk away from 95% of the things that we see using the criteria that I mentioned.

But we are keenly focused on expanding our footprint, and we will balance that versus repurchases to generate better returns.

Okay. Great. Thanks.

Tien-Tsin Huang with JPMorgan.

I'm glad you gave that ISO disclosure. That is great to have.

I'm just curious. The slowdown that you guys talked about, anything specific in there that drove the slowdown maybe this quarter?

Also, just looking ahead, thinking about US transaction growth, how should we benchmark that to say whatever -- Visa, MasterCard metrics, or some of the other industry numbers out there -- can we still assume you can grow at a premium, even with this ISO trend?

Tien-Tsin, it is David.

I can't point to any one thing, which is part of why we often talk about the law of large numbers relative to the ISO trends. I can't find you any one, specific thing when we analyze, again, the 90 or so and how the pieces are coming together.

I think as you look forward, and you think of the businesses we are processing for APT and for PayPros and married to the rest of our direct book, it's fair to expect those businesses to transact at a higher rate than market.

They're doing that today. They are growing faster than market, whether you want to measure that on a revenue, income or transactional basis.

We obviously don't break it out, so you can't see it work. But I think you can imagine it's implicit in some of the numbers we report. That may be some color we need to keep thinking about as we go forward if the ISO trend continues.

I would just add to that, Tien-Tsin, that of course our gaming business, with the announcement that we made the other day, which we are very pleased to have additional business with Caesars, our gaming business, we believe today is growing more quickly than market. And hopefully, pro forma with Caesars in it, we expect those rates to continue.

So back to David's point, as you look at the various pieces of engines of growth that we've been investing in, at least in my opinion, those businesses are growing in excess of their relative market rates.

Okay. That's good to know. I'm just trying to think if that's -- if we are closer to the bottom with the [6%]. And it feels like with PayPros we would be, but we will take a view on that.

Just as my follow-up, just thinking about Canada pricing outlook, I think both, Jeff, you and David said, spreads are fine. I know that the comps are coming up. But how does the pricing outlook or spread outlook look in Canada, now?

Tien-Tsin, it's Jeff. I will start.

Those spreads have been relatively stable. We are very pleased with where the business is situated, today.

The most important thing in my opinion, Tien-Tsin is, as we refer to in our prepared remarks, 5% credit transaction growth, which is the vast majority of how we get paid in Canada, generally provides a lot of opportunity and flexibility for us to grow that business normally going forward.

As we've said before, going back to our Investor Day in January of 2013, our focus really was on stabilizing Canada. As we've said in our guidance, we don't expect 11% local currency growth in revenue to continue indefinitely.

In fact, as I mentioned, the fourth quarter we anniversary that a bit. But if we start with mid-single-digit credit transaction growth, there is a lot we can do to effect the low-single-digit revenue growth outlook long-term that we gave you in January 2013.

Okay. That's good to know.

One more quick housekeeping, if you don't mind. Unencumbered cash at this point, now, given -- I know there is buybacks and PayPros closed March 4, I think you said in the Q -- what should we use as unencumbered cash?

Use $318 million, Tien-Tsin. If you just take a look at the balance sheet, it's a little bit illusory in that we had there staged cash for the PayPros close. We'd drawn down the debt, so it looks like $660 million or so on the balance sheet.

If you realize that three or four days later we closed PayPros, the number at the end of the quarter, unencumbered available that you might add to the debt for total capacity is $300 million.

Got it. Thanks, guys. Appreciate it.

Kevin McVeigh with Macquarie.

You really had a nice boost to the buyback.

Any sense on another accelerated or opportunistic -- just how we should think about that capital being put to work over the balance of this year?

Sure, Kevin. It's David.

I think that you should, as always, expect us to be routinely in market buying back stock. But we've shown you that we move aggressively when we do deal with an authorization, when we move forward, make the decision to buy back, we buy back aggressively and quickly. ¶

Nothing should surprise you as we roll forward. Just remember, for everyone on the call, all the 2014 expectations exclude any spend of that incremental authorization.

Got it.

And then just in the ISO channels, over the course of time, you have any targets in terms of where that ultimately settles as a percentage of operating income as you consolidate PayPros and APT in aggregate? Any sense of how we are thinking about that longer-term? ¶

And is there any type of sensitivity to what it would accrete to from a margin perspective based on becoming less concentrated, if you will?

Yes. In reverse order, the key to the margin is just, in the first place, having less of an ongoing headwind because it's growing -- because the ISO channel formerly grew faster than the rest of the channels. That's made a lot of difference, obviously, combined with a healthier Canada. ¶ Those two alone are the linchpins. Then having the rest of the pieces of the asset allocation pie really work well together.

When you think about the longer-term trends, we're going to continue to focus on direct distribution and things we control at the merchant relationship level. We are going to continue to focus, we believe then, on higher growing pieces of that asset.

How the curves work and at what rate ISOs move, interestingly enough, we don't control. We hope our partners are wildly successful and that things continue to grow -- they continue to grow for a very long time. But they will become, we believe, an ever-shrinking piece of the overall pie of Global Payments.

Hopefully you've got a sense of their place in the pie now.

We are comfortable with where they are now, in terms of being the minority of North America and the significant minority of total Company. We have the pieces we can manage in much the same way Jeff described being able to manage Canada.

If we have solid credit transaction growth, we essentially can manage in Canada. Where the ISOs are now, they are great partners; they are a good piece of the overall portfolio of Global Payments.

From a direct perspective, though, we are investing in other high-growth assets. So that curve should continue down in terms of their overall share. At what rate depends on how quickly we grow and how quickly we acquire.

Understood. Thank you.

Steven Kwok with KBW.

Just a quick follow-up on the PayPros acquisition.

I was wondering, how long does it typically take for you to integrate the acquisition? If we look back at APT, how long did that take?

Maybe I will start and Jeff will take over as well.

I think that these are very different acquisitions. APT, a little over a year and a half ago as we sit here, was our first material foray into integrated payments. Now we've bought another market leader in the same space.

We have a unique opportunity to combine the best of both, whether you are talking about sales channels and sales approaches; how we go to market; how we serve customers; how customers see the technology; how the dentist offices interact with the technology; what it looks like; how our partners integrate with it.

That creates a more complex integration. Again, you are taking two $400 million acquisitions, combine them into the best and want to try make one and one equal three, Steven. So that can take a little bit longer than when you buy a standalone business and you are really talking about integrating accounting and finance and HR, which can be done fairly quickly.

We've got a lot of work in front of us. It's work we've done before. It's work we are quite good at doing; and we've got great energy, and we are off to a great sales start, as you heard in Jeff's prepared comments, from the combined entity.

But there's a lot of work to do; and recall, we just closed this almost exactly a month ago.

I would just add to what David said, Steven, that APT was one of our existing ISOs at the time. So by definition, while there were things certainly to be done, they were in general -- it wasn't entirely true, but it was mostly true -- that they were on our platform, using our systems, et cetera.

PayPros was not one of our existing ISOs prior to our acquisition, about a month ago. So in addition to everything that David said, we also need to look at that when we think about the scope and the timing on an effective integration.

Got it.

Just a follow-up around the European environment. Today we saw some headlines around the European Parliament voting around the payment proposals.

Was curious around your thoughts of any potential impacts, whether it's bringing some potential opportunities around the European marketplace for you? Thanks.

Steven, it's Jeff.

I would say, and I was just there for about a week and a half visiting our people and our partners, both in the UK and in Continental Europe. I would say that it's consistent with our thesis, that in many of our markets, including for these purposes, Europe and the EU, that interchange is likely to come down. Much of that legislation, of course, is addressed more squarely at interchange or, in particular, cross-border interchange.

I think that is not just consistent with our thesis, but good news for us. As cost of acceptance declines, the demand for our products and services should increase.

The fact that we are in a number of markets across Europe makes our technology and operating environment even more attractive to potential merchant partners because many of these rates, as you described, are expressed as cross-border. We already have that experience and have those people in market to drive additional demand for our products and services.

Lastly, I would say, that from an M&A pipeline point of view, I think change is a good thing. But I think the markets changing in additional complexity may drive a number of partners who we've been talking to and potential partners, to think about partnering with us, in some of those markets that we've been focusing on over time, as they try to think about what these changes mean for their standalone businesses.

So while interchange is a pass-through for us -- it doesn't impact us -- certainly bank partnerships, it will impact the banks issuing businesses. And those are conversations that we had when we were there the last week and a half.

I'm probably a bit more optimistic sitting here today, having been through first that trip, but second, reading about where the EU is and where Visa is on that topic, about our ability to find more partnerships in parts of Europe that we are not physically present in today.

Great. Thanks for taking my questions.

Adam Dahms with Baird.

Adam Dahms, your line is open.

Operator, want to go to the next question?

Tom McCrohan with Janney.

Can you give us your view on how the ISO industry will evolve over the next several years given merchant acquisition? Merchant underwriting appears to be migrating quickly to technology providers, either tablet solution providers like Square and ShopKeep or integrated point-of-sale providers such as Accelerated, PayPros, and Mercury.

Tom, it's Jeff. Of course, I think you hit the nail on head. We, of course, share that thesis.

The last $850 million of acquisitions that we've done at the Company were in PayPros, APT, and CyberSource, in that order. The common thing among the three was technology-enabled distributions with additionally attractive margins. We obviously share the thrust of what you described.

At the end of the day, if you look out three to five years from now, Tom, I think that mobility and tablets and integrated solutions are certainly going to be a very big part of what the industry does globally, especially here in the United States.

But there's always going to be a market for traditional ISOs in that business. I think you are likely to see additional business models evolve over time where the quality of the application matters as much as what tablet device that you are selling.

So I think for us and our peers, becoming more of a software -- we're going to become a technology services Company today -- but becoming more of a software provider, where it's important that we have our own proprietary applications to drive acceptance at the point of sale.

I think our business model incorporating not just transactional or basis point fees, but also incorporating software-as-a-service type fees, as an addition, are all very important things for us, our partners, and the ISOs to do in our business.

But I always think that there's going to be a good business for what our ISOs, our 90 active ISOs do today, going forward. Now, as David just described, I think that will be a very healthy, viable business; but I do think there may be impacts around the rates of growth in that business.

If you go back to what we've described this quarter and prior quarters, where we are investing, where I started out in the answer, is in areas that we think, because they're technology-enabled, have better than market rates of growth. I would answer it as, that's where we see the growth, the incremental growth coming from. But there would still be growth in the ISO businesses.

But I do think those will be slowing; and that's a fact that we've seen in the last three or four quarters, as we've been describing our ISO business in our earnings calls.

Okay.

As a quick follow-up, can you, Jeff, or David, just give a quick update on your relationship or partnership with ShopKeep and how that's progressing?

Sure. I will talk about that, Tom.

We are very pleased with our partnership with ShopKeep. We have deployed ShopKeep here in the United.

I'd add, beyond that, that we have tablet providers, as well as mobile and dongle providers, in some cases our own, in many of our markets around the world. It's really a US conversation with ShopKeep. But it's a worldwide conversation as it relates to our own dongle in five markets in Asia and as it relates to our partnerships with Intuit and PayPal mobile, for example, in the UK.

ShopKeep is a very important element of that. We are selling that through our own websites here in the US, and we are very pleased with how that's progressing.

But to go back to your first question, I think that will be part of the solution. But I don't think that will be the only solution, if you look out three to five years, in terms of how we distribute our products going forward.

Thank you.

Ashwin Shirvaikar.

Especially appreciate the clarity around mobile (inaudible) strategy here going forward.

You guys provided a lot of qualitative detail on PayPros and integration. Could you quantify, perhaps, what it means in terms of specifics with regards to what should we expect in dollar terms over the next 12 months?

Ashwin, it's David.

It's hard to be a lot more specific than we've been. Let's start with how we think it's incrementing into the fourth quarter, and then we can speak a little bit more about the characteristics of the asset itself.

What we talked about is, on the order of $25 million of incremental revenue coming in for fourth quarter -- again, we had it for the bulk of the quarter. We have talked about it coming in earnings neutral, as we get started owning the asset. That includes the idea of integration expenses offsetting fundamental profitability in the business that operates at a higher margin than Global Payments in total.

As we go forward, we expect that margin to increase, certainly, over the longer- to medium-term. And I appreciate your giving me the opportunity to give a longer-term answer to this question.

Over the course of 2015, we'll have more integration expenses, continue to operate the business. You have a double-digit revenue grower at higher margins than Global Payments, again, pre- the integration conversation and at margins we expect to expand over the next one, two, three years.

Quite frankly, what we expect is something that performs quite like APT did. Come in as a nice grower, enhance the growth. When we combine the best of the two businesses into Global Payments, enhance it again, and drive incrementally stronger and stronger margins over time.

Again, and to go back to something Jeff just said a moment ago about our thesis, technology-enabled distribution, growing faster than market, with a sustainable competitive advantage.

Got it.

Could you also talk about the outlook for retraction of products like DCC? Can that continue to be a tailwind? What else is there in the pipeline that you can keep adding to that?

Yes, sure. Maybe building, as Jeff described, increasing software applications.

Jeff described the tablet application that may reach other types of merchants over the longer-term, either directly or via partnerships.

You mentioned DCC; it's a great example. DCC, to this day, it's still not fully rolled out in all of our markets around the world. It's been very successful, as you well know, in Asia; it's been very successful in Spain; it's just starting out in North America; it's just starting out in the United Kingdom, for example. So that's an opportunity.

More installment payment plans is an opportunity. Web in a box solutions for small- to medium-sized merchants around the world, an opportunity we are just rolling out now. As you know, we have, we believe, untapped opportunity in e-commerce in own customer base and really in our target customer base around the world of small- to medium-sized merchants.

If you were to go around, market by market, we think there's opportunity in each market for a new product specific to each of these markets.

Finally, I might add to that, although it's not a product, certainly given the breadth of our solutions and our scope across Europe, fundamental changing cost structure of Europe, from an interchange and a regulatory (inaudible), there's opportunity for a Company like ourselves, which has both domestic presence but the ability to go cross-border as well.

And then as you well know, we see significant growth in our e-commerce solutions, where we are partnering with other folks like a PayPal around the world -- so more and more of that to come. Then other network solutions are coming to market that should create broader acceptance for some of the networks that aren't Visa and MasterCard over the medium to longer term as well.

All that to be rolled out in the United States, Canada, United Kingdom over the next year or two as well.

That's very useful. Thank you.

Andrew Jeffrey from SunTrust.

Thanks for taking the question.

David, the first one would be housekeeping for you. As we think about cash, even margin in North America, accounting for PayPros, do you know what the angle or what the quarterly -- the amortization add back might look like? Have you gotten that far yet?

No, we really haven't, Andrew. In fact, having just closed it, we are just getting started on what the purchase accounting analysis will look like. So I really don't have a number for you, for that one yet.

Okay. But suffice to say, it's not dilutive to margin in any way? Right? You have been pretty clear about that.

We tend to focus on the cash margin (multiple speakers), so on that front, yes. When you add in whatever purchase accounting is going to be when you get to GAAP, that's the part that I can't answer right now.

Right. Okay.

Integration, are you going to call that out or is that going to be part of your -- just all rolled up into your report as cash segment EBIT margin?

Let me draw a distinction here because you raised a really good question.

The general T&E and things like that, the odd consulting and things like that, those are the kind of integration expenses that are going to hold down the incremental cash profitability of PayPros initially as we go through the integration process. Let me park that for a second.

The other side of integration, the severance and those kinds of things, that will be called out as one-time charges.

Got it. Okay. So ongoing works it's way into your reported results?

Yes and thanks for allowing me to clarify that.

Okay.

Then, Jeff, you mentioned in your prepared remarks, reporting integrated solutions rest-of-world -- what you said is Canada, specifically. Could you elaborate on that a little bit, just as far as market structure and whether there are any investments or go-to-market changes you might have to make to gain traction with integrated or more direct solutions, rest-of-world?

Yes. It's a great question, Andrew.

We announced the other day that we had entered Canada with our APT integrated solutions offering. So to answer to your question narrowly -- and then I will come back more broadly in the thesis -- is yes, we had to do a fair amount of customization for APT's product suite.

For example, for EMV, which of course is coming to the United States in October of 2015 but already exists today in Canada, we also had to make adjustments to the APT product suite for Interac, which as you know, is specific to Canada and is a big chunk of the Canadian market. But that type of debit is very different here in the United States and different in other markets.

So, if we go back to the way we described APT at our last Investor Day in January of 2013, we think, and really our business case was predicated at the time around capturing a lot more of the US market. And as we said, we believed we were less than 10% penetrated in the revenue opportunity of the US market at the time.

We probably also said that we are far less than 10% penetrated of markets outside the United States, Canada being the most obvious adjacent market. And it was very important to us strategically, although not for the business case, but strategically, to expand that business outside the United States because we think we are early in the US, but we believe we are very early in the markets outside the United States.

So we have had folks selling into the value-added resaler and enterprise software channel in all of our markets for probably a couple of years now, including in Canada. So we know that sales proposition can be very attractive in those markets.

But what we didn't have is some of the product suites that we needed to offer world-class products and services into those new territories. The importance of APT going into Canada is not only do we already have sales in that market, but now we have something to sell that we think is sufficiently distinctive, that it should drive additional growth, revenue, and profitability.

I know that our folks at APT and our folks at Canada, here at the Company, are very excited about doing that. We of course are also looking at other markets around the world, including Europe, Asia, and Latin America, to see where those markets are next, now that we've brought APT into Canada.

So to a certain extent, we are very pleased with how we're doing with APT, as you know. But there would be a bit of shame on us if we had looked out five years from the now and we didn't take that model and do everything that we could do to, given our multi-national footprint outside of our home market.

Okay. Thank you very much.

Thank you very much, Operator.

Thank you for everyone for dialing into our Third-Quarter Earnings call on behalf of Global Payments.

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