環匯 (GPN) 2015 Q4 法說會逐字稿

Welcome to the Global Payments FY15 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 morning and welcome to Global Payments FY15 conference call. Our call today is scheduled for one hour.

Joining me on the call are Jeff Sloan, CEO, David Mangum, President and COO, and Cameron Bready, Executive Vice President and CFO. Before we begin, I'd like to remind you that some of the comments made by Management during this 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 any subsequent filing.

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 and net revenue, which are not in accordance with GAAP. Management believes these measures more clearly reflect comparative operating performance.

For a full reconciliation of cash earnings, net revenue, and other non-GAAP financial measures to GAAP results, in accordance with Regulation G, please see our press release furnished as an exhibit to our Form 8-K filed this morning and our trended financial highlights; both of which are available in the investor relations area of our website at www.globalpaymentsinc.com.

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

Thank you, Jane, and thanks, everyone, for joining us this morning. We are pleased with our strong performance in FY15, demonstrating another year of solid execution that resulted in substantial growth across our markets.

For the year, we delivered reported revenue growth of 9% and grew cash earnings per share 18%. Additionally, we increased margins by 60 basis points representing the first reported annual margin expansion since 2006.

We expect continued positive momentum in FY16 as we execute our strategy to expand direct distribution, leverage our technology, and prudently deploy capital. In FY15, we enhanced our geographic footprint by entering Australia and New Zealand with the addition of Ezidebit and Ireland with the acquisition of Realex Payments. Coupled with our acquisition of the FIS gaming business in the United States, our FY15 acquisitions greatly augmented our product and technology capabilities and added significant additional distribution.

We remain focused on expanding distribution in strategic markets globally. Together with our partner CaixaBank, we really announced a joint venture with Erste Group Bank, one of the largest multi-national banks in Europe, to provide merchant acquiring and payment services in the fast-growing Czech Republic, Slovakia and Romania markets. As we have said recently, now is a favorable time to invest in Europe and we intend to leverage our proven sales capabilities, products, and technologies to drive accelerated growth. We look forward to generating attractive returns with our partners in these new direct markets.

FY15 was also an important year for successful launches of new products and services in the United States including Amex OptBlue, Apple Pay, and Global Shield and Edge Shield, our security solutions for EMV, tokenization, and encryption. Our global footprint combined with our unified worldwide operating environment and scalable technology platform streamlined our ability to efficiently launch similar products into other markets.

For example, we were the first payment technology company to introduce Amex OptBlue to Canada in June. We also launched Apple Pay in the United Kingdom earlier this month. We remain committed to providing our merchants with value added, innovative solutions as we introduce today the technologies of tomorrow.

We committed nearly $1 billion of capital in FY15. In addition to the nearly $600 million allocated to the previously noted acquisitions, we returned almost $400 million to our shareholders through share repurchases and dividends. We remain committed to actively managing our capital base as we enter FY16.

Now for quarterly highlights, we are delighted that our North American business continued to deliver solid results for the quarter. Our US direct channels generated 13% organic revenue growth and Canada continued its steady performance in local currency resulting from stable business fundamentals and effective execution. Our international results exceeded our expectations, primarily driven by organic performance in Europe. We continue to see double-digit volume and transaction growth in Spain for the quarter.

Europe results also include the Realex acquisition that was completed at the end of March. As a reminder, Realex is a leading eCommerce and payment gateway technology provider in Europe. The Realex and Erste Bank transactions highlight our commitment to maintaining a preeminent position in Europe.

Asia delivered consistent organic revenue growth. We also are delighted with our Ezidebit business, which performed in line with our expectations and we look forward to closing our joint venture with the Bank of the Philippines Islands. We expect our recent investments in Asia Pacific to enhance our rate of organic growth across those markets over time.

Looking ahead to this fiscal year and beyond, we have completed the pivot toward the scaled direct distribution model that we have been describing publicly for the last two years. Going forward, we will now provide external reporting metrics that better match the way we manage the business and provide for easier comparative analysis. We're also modifying and raising our expectations for revenue growth, margin, and cash earnings per share growth over the next 3 to 5 year cycle, based on the progress we have made in transforming our business.

We now believe our organic net revenue growth will be in the mid- to high single-digits, operating margins will be significantly raised on a net revenue basis with sustained expansion of up to 50 basis points per annum, and we expect to deliver low to mid-double digit cash earnings per share growth annually. Now I will turn the call over to Cameron.

Thanks, Jeff, and good morning, everyone. I'm also pleased with our FY15 performance, particularly in light of the significant negative foreign currency impacts included in our reported results.

For the full year, total Company-reported revenue was $2.78 billion, a 9% increase over FY14. On a constant currency basis, revenue growth was 12%. Cash operating margins expanded 60 basis points to 19.4% and diluted cash earnings per share increased 18% to $4.85.

For the fourth quarter of FY15, total Company revenue was $707 million, reflecting growth of 5% over the prior year or 10% on a constant currency basis. Operating margins for the quarter expanded 50 basis points to 18.6% and cash earnings per share increased to $1.22.

Highlights for the quarter include the following. North America revenue growth was 4% with operating income growth of 3%, including the impact of significant unfavorable currency trends in Canada. On a constant currency basis, North American margins expanded by 30 basis points.

US revenue growth was 6%, reflecting strong organic growth of 13% from our direct channels and low single-digit growth in our ISO channel. As a reminder, our PayPros acquisition annualized at the beginning of the fourth quarter.

Canada's revenue grew 5% in local currency, resulting from consistent execution and stable fundamentals. In US dollars, Canada's revenue declined 7% as a result of unfavorable currency exchange rates.

International segment revenue growth was 6% in US dollars with margin expansion of 310 basis points. On a constant currency basis, Europe revenue growth in US dollars was 19% where reported revenue growth was 1% as a result of exceptionally unfavorable currency exchange rates, particularly with for the euro. This performance continues to be fueled by strength in Spain, as well as the addition of Realex during the quarter, offset by underperformance in our Russian business.

Asia Pacific revenue grew 27%, driven by mid-single digit organic revenue growth trends, in line with our expectations and the Ezidebit acquisition. International cash operating income grew 16%, including the impact of significant foreign currency headwinds.

We generated free cash flow of approximately $72 million this quarter and $371 million for FY15. We define free cash flow with net operating cash flows, excluding the impact of settlement assets and obligations, less capital expenditures and distributions to non-controlling interests.

Capital expenditures totaled $36 million for the quarter and $93 million for the full year. During the quarter, we purchased 1.3 million shares at an average price of $95.59 per share. Subsequent to the end of the quarter, we settled our previously disclosed accelerated share repurchase program and retired an additional 162,000 shares. Lastly, our total available cash, including working capital, at the end of the year was approximately $195 million.

Before moving to our FY16 outlook, I would like to call attention to the new disclosures we are providing today. As Jeff noted, these metrics are to better align our reporting with how we manage and measure our performance internally, as well as provide for improved comparability with our peers.

First, we are introducing a new net revenue disclosure that reflects the economic benefits of certain wholesale lines of business, such as our ISOs, on a net basis. We will now deduct gross-up related payments associated with these channels from our GAAP revenues in operating expenses. This disclosure does not impact our cash operating income or diluted cash earnings per share, but will affect our cash operating margins.

Further, for FY16 and beyond, we are modifying our reporting convention for cash earnings to exclude expenses associated with share-based compensation. As noted, we believe this will provide for improved comparability with our peers.

Going forward, we intend to both guide and report utilizing our net revenue metric and our new cash earnings convention. In addition, operating margins will be presented on a net revenue basis. For convenience, we have provided FY15 results, including quarterly data, consistent with this methodology on Schedule 10 to our earnings press release.

Now let's turn to our FY16 outlook. We expect our annual FY16 net revenue to grow 6% to 8% from FY15 and range from $2.06 billion to $2.10 billion. Note that this growth rate is approximately 300 basis points higher on a constant currency basis or 9% to 11%.

We expect cash earnings per share to grow 11% to 15% from FY15 and range from $5.60 to $5.78. We also believe cash operating margins calculated on a net revenue basis will expand by as much as 30 basis points in FY16 on a constant currency basis. Actual cash operating margins on a net revenue basis are likely to be roughly flat, due to the impacts of unfavorable foreign currency trends.

On a GAAP basis, we expect annual reported revenue to grow 4% to 6% in range from $2.87 billion to $2.95 billion. Again, this growth rate is approximately 300 basis points higher on a constant currency basis or 7% to 9%.

As a reminder, one of our larger ISO partners was acquired in June 2014 and our outlook assumes this ISO will begin migrating off our platform in calendar 2016. Although this impacts our GAAP revenue for the year, it is not expected to have a material impact on our net revenue, operating income, or cash earnings per share. In fact, our ISOs in the aggregate are becoming an increasingly smaller portion of our business.

For FY16, we expect our ISOs to represent approximately 17% of North America net revenue and 13% of North America operating income and roughly 11% of total Company net revenue, and 8% of total company operating income. We anticipate the distribution of quarterly cash earnings per share as a percentage of annual cash earnings per share to be roughly consistent with that of FY15.

With respect to the more detailed assumptions that underlie this outlook, net revenue to our North American segment is expected to grow at a mid- to high single-digit rate, which includes FX headwinds of approximately 200 basis points. US net revenue growth, which reflects ongoing strength in our direct businesses and the addition of our FIS acquisition, which closed on June 1, is expected to be in the high single to low double-digit range. Canadian net revenue growth assumptions remain in the low single-digits in local currencies.

We expect North America cash operating income to increase in the mid- to high single-digit range compared to last year. North American margins are expected to expand in FY16, despite the anticipated FX headwinds from Canada.

We anticipate that international net revenues will grow at a mid- to high single-digit rate in US dollars, including currency exchange headwinds across all markets, particularly in the first half of FY16. We anticipate these FX headwinds will impact growth by approximately 500 basis points to 600 basis points for the year. We expect margins to be roughly consistent to down modestly, largely due to currency impacts.

We expect annual net revenue growth for Europe on a US dollar basis to be low single-digit, but high single to low double-digits on a constant currency basis. Asia is expected to deliver US dollar revenue growth in the high teens, driven by the addition of BPI and Ezidebit, which annualizes in October. International expectations include impacts from the Realex transition and the BPI transaction, which is expected to close toward the end of the first quarter. However, our outlook does not include the announced joint venture with Erste Bank, which we do not expect of a material impact on the Company's FY16 cash earnings per share or capital plans.

For FY16, we expect share-based compensation expense being excluded from cash earnings to amount to approximately $0.20 per share, roughly the same as FY15. Our effective tax rate is projected to approach 27% and our diluted weighted average share count is expected to approach 66 million shares for the year. Consistent with past practice, our guidance does not include any future share repurchases. Lastly, we anticipate the FY16 capital expenditures will total approximately $105 million.

For FY16, we will continue our disciplined and balanced approach to capital deployment. Consistent with that strategy, our Board of Directors approved an additional $300 million share repurchase authorization, which expands our total capacity to approximately $400 million and further demonstrates our ongoing commitment to prudent capital management on behalf of our shareholders.

I will now turn the call back over to Jeff.

Thank you, Cameron. Building on the solid foundation from FY14, we delivered yet another year of strong results in FY15. As our FY16 and new cycle guidance suggests, we remain committed to accelerating growth across our markets.

We have now completed our pivot toward direct distribution. We are confident that we can obtain our heightened net revenue cash operating margin and cash earnings per share growth goals even though the bar continues to be raised. We believe our positive momentum, ability to successfully execute on our growth strategies, and capital deployment capabilities will continue to drive value for our shareholders, partners, customers, and employees.

Before I turn the call back over to Jane, we will be hosting an investor conference in Atlanta on October 20. More details regarding this event will be forthcoming soon. We hope to see you all there. Jane.

Thank you. 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)

Tien-tsin Huang, JPMorgan.

I'll ask first on Canada, maybe. Just been doing some research there. I heard the low single-digit outlook for the year. I'm curious what the spread assumption is for guidance or what the spread dynamics are today, given some of the changes going on there?

Hey Tien-tsin, it's Cameron, good morning. I would say for Canada for FY16, the outlook is roughly consistent with what we've seen over the last probably two years.

Canada, for us, continues to be a stable market, which is really the combination of transaction growth and spread and we expect that trend to continue as we look forward to FY16. For 2015, as you noted, I think we performed a little better than our guidance, which was low single-digit growth in local currency. But as we roll into 2016, I think we still view Canada has a low single-digit growth market in local currency and that's going to be the combination of stable transaction volumes and spreads over the course of time.

Got it. Got it. I heard the new targets make sense.

The sustained margin expansion of the 50 bps, is that primarily just coming from better incremental margin business from the direct channels that you're building on? And did I hear correctly that in 2016, you're looking for 30 bps in constant currency? So what's the delta between the 30 and the longer term 50?

Yes, Tien-tsin, it's Jeff. I'll start and then Cameron will join in on the 2016 guidance.

The answer to your question is, yes, it's from a better mix of businesses, as well as leveraging our infrastructure in our technology platforms. So if you look at, first, the FY15 results for the US direct business organically, we were really in the double-digits of organic revenue growth all year in FY15 in US direct. As Cameron guided for 2016, we expect that to continue.

So we've invested pretty substantially across our businesses, but in particular, in the United States on a direct business. I think we're reaping the benefits of having made that investment.

I'd also say that we talked in our prepared remarks about our unified operating structure that we put in place last couple of years, as well as new product development. So of course, Tien-tsin, you know we've been very successful with American Express OptBlue here in the United States and now, also, we rolled out in June in Canada. So we think that those things give us sustained accelerated growth in the United States and North America with better margin characteristics, Tien-tsin, than the corporate average. Cameron, you want to talk about the guidance?

Sure. Just a couple things to note on the guidance.

As we said, our cycle guidance was up to 50 basis points annually. For this year, we're guiding up 30 basis points on a constant currency basis for margins.

A couple things to note about 2016 in particular: one is, it's July. I would bear that in mind as you contemplate the guidance we're providing.

Secondly, we did a lot of transactions in FY15, but there's a fair amount of integration work that's still ongoing with respect to those transactions, including Ezidebit, we closed the FIS gaming business on June 1, we have a couple other transaction that we expect to close during the year. So in the near term, obviously as we're integrating those businesses, there's a little bit of headwind on margin, but we're still able to grow through that and expand margins through that. So I think it positions us well for FY17 and beyond.

Understood. Thanks for the detail.

Thanks Tien-tsin.

Dave Koning, Robert W. Baird.

Thanks for all the disclosure, super helpful and good job. I guess my first question is the UK interchange adjustments that are coming on in December, is that really much in the guidance? It didn't look like in Europe you're guiding to anything overly aggressive, so I'm just wondering if that was in there or not?

Dave, it's Cameron. I would say yes, it's in there.

The important thing to recognize about Europe is just the impacts of FX headwinds in FY16 that is having an impact on the local currency growth that we would otherwise expect to realize for the year. As we said for Europe, we expect low single-digit revenue growth for FY16. On a constant currency basis, that's going to be high single-digit. So that's really going to be driven by what you're expecting in the UK in the back half of the year with the benefit of the lower interchange regulations coming into play.

As well as, as you'll remember, we'll annualize the benefits we've seen in Spain come the end of first quarter, so that obviously is a grow over that we have for the back half of the year, as well. So when you balance those things out on a local currency basis, we would expect high single-digit revenue growth in Europe, which is, I think, accelerated from what we have seen largely led by strength in the UK, on the heels of the benefits of the EU regulation coming into effect.

Okay, that's helpful. And I guess my follow-up question and separately, the ISO business, the net revenue presentation you said it's 11% of total revs this year and about 8% of EBIT. I would've actually thought that, on a net basis, that ISO processing business was really high margin above the Company average, but obviously, it's below, given it's less of an operating income percent than revenue.

So I would've thought like 40% margins. Maybe you can just talk a little bit about the margin dynamics?

Yes, some of it is the convention that we're utilizing for addressing the business, so we're backing out residuals, but assessments are not being backed out. So, that's part of the reason that the margin profile may be a little bit different than you would expect, perhaps, on paper. So I think that's part of the driver.

I think on a wholesale basis, the margins aren't terribly dissimilar to what we see from our retail business around the globe. But it is probably a little bit lighter when the assessments are in revenue as we [abut] them.

Yes, Dave, it's Jeff. I would just add to that.

If you think about where we've been investing, especially in the United States with OpenEdge, those are very high margin businesses, the direct business we've been investing in. So OpenEdge gaming, for example, in the United States. And then of course, we said this at the time when we invested in Ezidebit in Australia and New Zealand, but, Dave, I think we said that had about a 40% margin at the time that we did the deal a year ago.

So I think that we have the happy answer of having significant investment expansion of our businesses with very attractive margins and that's how I would look at it, Dave. Rather than so much the ISO business is in one place, I would say the other businesses that are growing very quickly have a far better profile than the average.

Great. Well, thanks. Good job.

Thanks Dave.

Ashwin Shirvaikar, Citibank.

Thank you, guys, and congratulations, good solids results here. My first question is on capital deployment.

So you guys mentioned that you were more focused on integration of the deals already completed or in progress. With that then imply that you're less focused on M&A, that the M&A outlook is maybe muting out a little bit and any incremental parts on capital structure?

Yes, Ashwin, it's Jeff. So we've announced, I think, it's five acquisitions now in the last 12 months or 13 months, but we still have a very full pipeline, particularly in Europe and Asia.

So I would say that we don't see any diminution in the outlook for M&A. Of course, as we've said all long, it takes the right partner in all these transactions. But I wouldn't look at any of the announcements we've made or statements to indicate it's anything other than kind of full steam ahead on the capital deployment side.

Okay. And Cameron, if you could walk us through sort of the -- there are a lot of moving parts here, so the year-over-year comparison of what goes on with FX with the acquisitions, with the changeover of the accounting. If you could give us a bridge, you might have had that. If so, I missed it. I apologize, but if you could give us a bridge of how do you get from the exit growth rate to a full-year growth rate for next year?

Sure. I'll be happy to. Let me start with just providing a couple of specific details in case you didn't capture them in my prepared comments.

First of all, we're guiding to do net revenue growth of 6% to 8%, which is really 9% to 11% on a constant currency basis. So to me, that's the right sort of starting point for the conversation is the 9% to 11% number on an adjusted net revenue basis. I think, as you think about the way we've been talking about our direct distribution business this year that 9% to 11% is fairly consistent with the growth that we've seen in the direct distribution business throughout the course of FY15.

So we look at the organic normalized growth rates, 2015 to 2016, they're going to be roughly the same. They're 7%, 8% on a constant currency basis, depending on the quarter, which aligns, I think, very well with the organic growth we've been generating in the business on a normalized basis this year. So I think the growth trends are very much intact year-over-year.

Obviously, there's a lot of moving pieces, as you correctly described, but when you normalize for the transactions and you address currency, you're going to see a normalized organic growth rate in the 7%, 8% quarter-to-quarter and we feel like that is, obviously, a trajectory that we can continue to achieve as we pitch forward in time. I'm happy to address any other specific questions, but that would be my general comment about how we look at FY16.

No. That's very helpful. Thanks.

Thank you.

Thanks Ashwin.

Dan Perlin, RBC Capital Markets.

The longer-term cycle guidance for margins of 50 basis points per annum, I was wondering if you could maybe help conceptualize how we build up to the 50 basis points? Are you contemplating the ability to have more pricing opportunities long-term, just given the nature of the industry? Or is it that you really feel as though you've got kind of the economies of scale and you can drive your unit costs down to have the confidence to have 50 basis points?

Or is it just an incremental mix benefit as well? I know you're going to say all, but if you could parse it that would be helpful.

Yes, Dan, it's Jeff. I'll start and I'll ask David to join in, too, in a moment.

So the first thing I'd say is, on a comparable basis, if you look at 2015 over 2014, we would've seen a very similar margin expansion story to the 50 basis points that we're describing today on a constant currency basis. So I really, first, view it, Dan, as an extrapolation of how the Company's been operating for the past couple of years, point number one.

Point number two, as you know in our business, the marginal economics are very good in what we do. So we tend to think that the vast majority of an incremental dollar of revenue, call it 80%, tends to fall to our bottom line as an operating matter. So of course, the faster we grow, the more transactions that we do, generally the higher the margin and the more profitable that we are. That's particularly true as we've pivoted more toward direct distribution and more of a retail business; in a way, a bit from the historical legacy of the Company as a wholesale business.

So those things lifted margin in 2015 over 2014 and we expect it to lift margin 2016 over 2015. We've also been benefiting from the investments we've made in product and technology. David, you want to talk a little bit, for example, about some of the things we talked about?

I'd be happy to, Dan. When you think about the cycle, it becomes a fairly easy conversation around the operating Company thesis that the guys described in the prepared comments. As we operate as one Company, we have the opportunity to drive the products and drive additional leverage all across the Company as we make progress.

So for example, the one we've touted before is American Express OptBlue, which has rolled out brilliantly in the United States, it's beginning its rollout in Canada, off to a very good start, it will find its way to Europe over time, as well, as you know, and eventually to Asia. We have a similar inventory of products like that, that we expect to help us drive growth and drive incremental profitability over the next several years.

At the same time, we have the opportunity to operate the Company more efficiency with the same paradigm, whether that's operations, credit risk, and again, even product and product development. So those pieces come together nicely.

And then we're working closely with all the businesses around the world to rollout what I would call global capabilities for things like integrated payments and omni-channel commerce. You saw us purchase Realex to be able to add to our stable of products to be able to drive any kind of transaction anywhere at anytime. That kind of omni-channel processing is where we're going to drive an enormous amount of highly profitable growth, we believe, over the next several years.

Finally, maybe the most apparent one to you, as you look at particularly our US results today, is the success of integrated payments. They were driving continued organic mid-teens volume out of the OpenEdge business in the United States and the Ezidebit business in Australia and New Zealand with the ability to expand those globally. Right now, we're working hard on taking that sort of dedicated ecosystem of partners lead generation sales closure into Canada, as we speak, and really, it's exciting, if anything, for us right now. One of our large partners in the United States is expanding with us into the United Kingdom, as we speak. So you can see the beginnings of a global approach to integrated payments that's really something unique that only Global Payments can do right now.

Great. And then quickly, on the recently announced JV, I'm just wondering -- I know it's not going -- it's doesn't sound like it's going to be material in 2016, but with la Caixa and the other opportunities that you've built out, is there other parts of like the portfolio that we're not just paying attention to that could also be bolted on into other JVs to make that more meaningful in 2016? And then is there opportunity to leverage your legacy MUZO business, given that the Czech Republic had been a hit or miss market for you guys?

Dan, it's Jeff. I think the answer is absolutely.

Part of the guidance around 2016 is that we need regulatory approvals in three different jurisdictions, as a relates to Erste, Czech Republic, Romania, and Slovakia. So it's a little bit of just to get pre-approval, it takes a little more time, Dan. So, I think it's less a comment about the economics of the transaction and more a comment that, that will take us a little bit longer than we typically do and obviously, we'll be updating that as we get closer, but that's one answer.

The second thing I would say is absolutely, if you look at what you referred to as MUZO, what we call Global Payments Europe, today that is a business, prior to the Erste JV, that was 90%, what I would call, indirect, Dan, meaning our customer was the bank but not the merchant and 10% direct, meaning 10% of the business had the merchant as its end customer. Pro forma for the JV, that's going to be much closer to 50/50.

So if you think, Dan, what we've tried to do here in the rest of our businesses globally, but especially here in the United States, we've spent over $1 billion of capital in the last several years migrating to more of a retail business than a direct merchant relationship business for all the reasons that you're familiar with. We think we're doing the same thing now with GPE.

So if we can continue that trajectory and turn that into more of a direct business at a very opportune time in Europe where the common European payments area with costs coming down for our customer base while the exchange rate in this area is going in our favor, we think we have the ability to create a really meaningful cross-border omni-channel business the way David described it a few minutes ago. Strategically, we think it's a very important step for us and our GP colleagues.

Dan, it's David. I'd say one other thing.

I think we have a pretty good track record of taking ventures like this, integrating them, migrating platforms as appropriate so we can lever product and drive the direct distribution we believe we're good at operating around the world and then driving increasing returns. That's really the same pattern for that deal as it's been for our previous deals.

Thank you, guys.

Thanks, Dan.

Glenn Greene, Oppenheimer.

First question, I just wanted to touch on OpenEdge, specifically APT and PayPros, maybe get an update there. Are they still tracking toward high teens revenue growth? I know you had the integration of PayPros going on and sort of dragged our margins for a bit, but more specific, within FY16, how should we think about the aggregate margin profile for the OpenEdge business?

Yes. Glenn, it's David and I think you've put your finger on the correct metrics. At the end of the day, we believe we're going to drive organic mid-teens to high teens volume and revenue growth in OpenEdge, as we've done since we first purchased OpenEdge three years ago and we added PayPros to it, but first purchased -- excuse me, APT three years ago and added PayPros to it a little over a year ago. That business is right on track for its US performance.

It is actually fully integrated. We've got some platform work to do, but its sales force level, the piece of it that drives the initial sale in that organic growth, fully integrated and operating as one unit as we roll into 2016, which allows us now to think about the global expansion of OpenEdge that I described a little bit earlier, in answer to Dan's question, as we complete our migration into Canada and actually think about other markets in Europe going forward.

Okay. And then Jeff, I know previous to the change to the adjusted revenue reporting, you had be talking about a long-term operating margin goal of 25%. And obviously with the change reporting that kind of blows it out of the water, but how should we be thinking about the long-term? I know you've talked about the 50 basis points annually, but is there a reasonable expectation over a five-year period where you think aggregate margins could go to?

Yes, Glenn, it's a great question. So I think we can get to the low 30%s. So yesterday's mid-20%s, Glenn, is probably tomorrow's low 30%s.

Okay and the final question, just to level set us all, on a GAAP revenue guide perspective, how much is the Mercury drag?

Glenn, it's Cameron. We haven't specifically identified in our guidance how much of a drag Mercury migration will be in FY16. We expect them to begin migrating in the first part of calendar 2016, so the back half of our fiscal year.

I think the way I would characterize it is the range that we have provided, I think, accommodates a variety of outcomes for Mercury. From they migrate fairly quickly at the beginning of calendar 2016 to they migrate more slowly and tend to be off more towards the middle of calendar 2016. So I think that's part of the reason we have a little wider range on the GAAP revenue is to accommodate a variety of outcomes on Mercury.

Okay, great. Thanks, guys.

Steven Kwok, KBW.

Thanks, guys. Good quarter. I just have one quick question just around, given some of your peers, maybe one of your larger peers may be looking to go public by the end of this year.

Can you talk about the competitive landscape within the space today and do you envision that changing once your peer is public? Thanks.

Yes, Steven, it's Jeff. That's a good question.

So no, I don't think it's going to change all that much. I would say that, first of all, across all of our businesses in our markets, we operate in a very competitive environment. That's been true for a very long time and I expect that to continue to be true, point number one.

Point number two, I think it's nothing but good news for us and I think for our peers to have more public comparable data points for you and our analysts and also for our shareholders. We think we are pretty transparent with the way that we provide our disclosure. As you can see today, we've supplemented that so we can provide you even more disclosure around how we're operating.

We think that compares very favorably to existing public companies and new public companies. So as I like to say, our peers performing well on a comparable basis is really good for the industry and really good for us.

And then just as a follow-up, in terms of what of the specific regions that you guys compete in?

Yes, so you're right in what you said, Steven, it does vary by geography, so I think phrasing up regionally is the right way to go about it. So for example, here in United States, it's largely day in day out, First Data, US Bancorp Elavon and then a number of the First Data joint ventures; certainly [DA], Merchant Services, Wells Fargo and the like is a good partner of ours, too.

But I would say it's largely bank-driven and of course, First Data, too, is a number of bank partnerships, as well (Danub), although I would say that every one of those companies I just mentioned has a slightly different strategy than we do. It's certainly across the board, those are our peers in the United States.

In Canada, of course, Moneris has a large share in that market, which as you know, is two banks. In Europe, it tends to be country-specific, but certainly, in the United Kingdom it's WorldPay and Barclays. Continental Europe, it really varies by country Caixa and [Commercia] joint venture, have the leading share in that market, but certainly, [San Funder] and [BBVA] would be examples of peers in that market. In Asia, Steven, it's really market by market.

It's kind of hard to say. We certainly see banks, like Citibank, in a number of those markets.

In the Philippines, where we've announced our BPI joint venture, there's another large bank, BDO, who's got the largest market share there. We'll have the second largest, post the combination of our JV. So, you can tell by the different names, Steven, it really varies by market.

Got it. Thanks for the color.

Bryan Keane, Deutsche Bank.

Cameron, I was just hoping you could go through the international margin expectations for FY16 again? Sounds like there's some FX that has an impact and then maybe you could just break it out between Europe and Asia-Pacific?

Sure, Bryan, it's Cameron. We haven't provided the [dis-aggregated] margins by Asia-Pacific and Europe, but I'll try to give you a little bit of color on those.

If you look at the international margins on a net revenue basis, kind of year over year, we did guide to roughly flat to slightly down. That's largely due to potential impacts of FX in FY16 that's included in our outlook. The other thing I would note is those margins are in the low to mid-40%s. So in fairness, when you're at margin levels at that range, again, maintaining those margins, I think, is a fantastic outcome.

Obviously, we'll see little bit of FX pressure on that, but again, we do expect them to be roughly consistent, maybe down modestly year-over-year, but not dramatically. As it relates to Asia and Europe in particular, I think Europe's where going to see the most pressure, largely from FX, as I mentioned before. I think Asian margins we expect to expand, largely due to the continued contribution of Ezidebit in Asia-Pacific region, which has a higher margin profile as described earlier, relative to our sort of business as usual Asia-Pacific business that's operating in 11 Asian markets.

So from an Asia point of view, I think the combination of both Ezidebit and the introduction of the BPI joint venture will do a couple of things. One is accelerate growth and then importantly, continue to improve the margin profile in the Asia-Pacific region.

Okay and when you're thinking about then, longer-term about the 50 basis points on a constant currency basis, is that mostly coming then, from the North American side versus international since international are already at such high operating margins?

I think that's probably a fair characterization. If you look at the North American business now and you look at the US business in particular, our largest business on a net revenue basis in the US is now OpenEdge. It's approaching $300 million of annual revenue growing in the mid-teens. So the US business on a net revenue basis is going to be roughly $1 billion; 75% of that is direct and the largest portion of that is OpenEdge.

And that is where we're seeing a lot of margin expansion in the business coming from mix, in addition to all the other things that Jeff and David described earlier around how we're operating the business on a global scale, how we're innovating new products and services that are higher margin relative to the traditional economics of the business. All that's factoring into the margin expansion we expect to realize, but a lot of that is going to come from North America and principally, the US.

Okay, great. Thanks and congrats on the results.

Jason Kupferberg, Jefferies.

I just wanted to start making sure I've got the pieces of the bridge from the 6% to 8% revenue growth guidance for FY16 to the 11% to 15% on the bottom line. I know you said there's about 300 bps of FX headwind on revenue, so not sure how much of that also makes it down to EPS line? Because I know on a reported basis, you're looking for kind of flattish margins and you're not building anymore share buyback into the EPS guidance. Can we just walk through that bridge?

Sure. It's Cameron. I'll start and ask David or Jeff to add any additional color.

You're right on where you started. We're sort of 6% to 8% on FX adjusted basis for net revenue growth year-over-year. We are expecting margins on FX adjusted basis to be roughly flat. And obviously, then, on an op income basis, we are expecting kind of mid- to high single-digit growth on op income.

So we are driving op income growth that is incremental to our net revenue growth, due to the mix of the businesses where FX is having an impact and where it is not. That's obviously dropping to the bottom line in addition to obviously, share repurchases we've executed in 2015 that will fully annualize in 2016 are helping to drive incremental cash earnings per share growth above and beyond the top line revenue growth and operating income growth that we're forecasting.

Yes, and the other pieces, Jason, this is David again, are really the cross-sells and the additional product roll outs I was describing earlier. The ability to roll out OptBlue into Canada to lock in the local currency growth we had, lock in the profit improvement, setting aside FX entirely for a moment, that sets up then how we deal with the FX adjusted growth. Same with the Realex and the omni-channel sales we'll do across the UK and then across the rest of Europe eventually, as well.

It all sets us up for highly leverageable, highly leveraged growth over the middle term, the long-term. And even, we'll see some of those benefits from OpenEdge and some of the other businesses, including Ezidebit, in the short term in 2016 to set up then the parameters that Cameron just walked you through.

Okay. Just as a follow-up, given the huge presence you guys have in the SMB market in the US, I wanted to get your perspective on EMV rollout within that merchant base, what you're kind of seeing now, what you're expecting as we get to the quasi finish line here in October and then beyond?

Because part of our thesis has been between EMV and Apple Pay another mobile payment solutions, a lot of the merchant acquirer and processors have been embracing more of a technology-led consolidated sales approach as opposed to just going in and bidding on processing. So what's your perspective on that?

Yes, our perspective aligns almost perfectly with what you just described, Jason. At the end of the day, you're seeing some fundamental changes. They start with the fact that this is a merchant choice, at the end of the day.

So you need the help of your technology provider, your acquirer in traditional terms, to help you think that through, think through the business case for you history and for your particular business. And also relieve you of the burden of dealing with all the security issues that happen in our industry so you can focus on running your business.

I love the way you phrased the question, because this really is all about SMEs at the end of the day. The large merchants will make their own choice at their own point-of-sale devices. So for us, we've obviously been deploying EMV-capable for quite some time. It's about enabling the EMV terminal estates.

We're really comfortable with our progress. We're rolling through the upgrades, the technologies, we're during the certifications you might imagine, but really, what we're trying to do is help our customers think about their own security needs overall. EMV is just a piece of the puzzle.

So we're selling through Global Shield, which is the security solution we have for our direct business, and Edge Shield, which is the solution we have for the integrated business, a suite of security solutions that you can tailor to your business. They have point-to-point encryption, EMV, token, token fault, and obviously, come with whatever's appropriate terms of PCI compliance.

And then you really do perform that consultative role. As odd as it sounds, dealing with small merchants, it's a one-on-one conversation helping them think through what to do and when.

So setting aside any metrics, as I said before, we're very comfortable with our progress to-date. But at the end of the day, we're actually gaining a little share and nominally, particularly in integrated because we were among the first rollout integrated security solutions we can take across that base. And really, that's the sale we're making for the long-term, as well, is that relationship-based sale where we're driving a serious value proposition that allows them to focus on running their business, whether it's a pharmacy or a vet or any other sort of vertical, and let us focus on the complexity of payments, let us help you deal with Apple Pay, Samsung Android, all the rest of the pieces you might imagine this evolving technology world.

You've heard us use the phrase technology-led distribution, technology-enabled distribution, that's the business we run today. You're exactly right, Jason.

Okay, I appreciate the comments.

David Togut, Evercore ISI.

What are some of the acquisition opportunities, Jeff, that arise from the new regulatory reforms in Europe? In particular, how do the interchange caps, for example, affect a bank's ability to stay in the merchant acquiring business, as opposed to considering a portfolio sale?

Great question, David. Of course, you've got a real, live example from yesterday, which is the announced Erste JV in continental Europe.

Most banks run the acquiring business together with the issuing business. David, as the interchange caps come on board, and in most markets in Europe that's going to be early December, given the EU adoption of those rules, it means, David, on one side of the ledger, they'll be losing potential revenue in fees as interchange comes down on the issuing side.

Therefore, as they look at their portfolio of businesses that they'd run in cards, they then look at the acquiring side and depending on the acquiring nature of their market, if they can find the right partner, there's an opportunity, they would hope and we expect, to be able to grow the acquiring business more quickly to offset any diminution on the interchange side of the issuing business. So for those banks who choose to exit, they've made the decision that they don't think they can grow more quickly or haven't found the right partner.

But for those banks, David, like Caixa in Spain, with whom we did the JV in 2010 or in particular, Erste, with whom we and Caixa announced yesterday, I think they've made the decision that if I can grow my acquiring business more quickly, benefit from the changes in the EU marketplace with rates coming down and having a common acceptance area, perhaps I can offset or even grow my overall core business. But offset the interchange hit coming on the issuing side and that's how it works.

Maybe at the other end of the panel, David, this is David, deal with a partner in terms of thinking through the ramifications of the technology, the platforms that have to do with that complex regulatory environment. You're asking a lot of legacy platforms inside of banks. So the idea of dealing with a partner where you can actually leverage that same technology platform capability across the globe is really an attractive situation on the other side.

Yes, that's a fair point. The level investment, as we've heard in the last couple of questions, David, in terms of new technology and compliance has only gone up. So if you partner the change in interchange on the issuing side with what David just said, which is that the bar continues to be raised, makes it very difficult for most traditional financial institutions, especially in continental Europe, to really go alone.

Is the Erste transaction the beginning of a longer term trend, much the way we saw banks in the US sell their merchant portfolios starting about 30 years ago?

Yes. I believe it is, David.

For a long time, and you've been in the industry for as long as we've been, I think, for a long time, we've been talking about this type of partnership possibility in Europe. But now I think we've seen it, in the case of yesterday with Erste, but now I think we've seen it come to fruition. I think what's driving that as much as anything is what we just talked about a minute ago, which is the common European payments area coupled with the technology and compliance needs at the banks.

So this is one of a number of discussions we're in with banks in Europe and of course, we've also announced a partnership with the Bank of the Philippine Islands, the largest bank by market cap in the Philippines, to do the very same thing. So I do believe that we're in, David, the sweet spot of what I expect to see to be further JVs across Europe.

Understood. Thank you very much.

Tim Willi, Wells Fargo.

Two questions, the first one was if you could just give an update on Brazil and Latin America, in general, just sort of how you're feeling about that operation?

Actually, Tim, this is David. Thanks for asking about Brazil.

We feel, actually, pretty good about it. We're actually up to about 10,000 merchants. It's growing really quite rapidly.

We're adding distribution partners at a steady pace. As you know, that's really the key to driving organic growth in that market. We're obviously still quite small, but 10,000 merchants when it was zero not very long ago, we're very happy with that progress.

We also have a new technology platform that we rolled out a few months ago and really, we're very happy with the product suite. And particularly, I'm happy with our eCommerce capabilities in that market, because I think that's really the place where we can drive growth as opposed to fighting it out merchant by merchant for brick-and-mortar business. So we feel like we're very well-positioned with the eCommerce platform to add additional products on top of that.

So really Brazil in very good shape and we're exploring other markets around Latin America. It really fits into the same answer Jeff gave earlier about M&A and opportunities. Latin America's key geography for us with our partner Caixa, as well, as you might imagine. Much more to come on Latin America over time, but very happy with progress to-date in Brazil.

Great. My follow-up was around eCommerce and omni-channel.

You talk a lot about how you're positioned in Europe with recent acquisitions. I'm curious in the US just how you think about your role, either in the direct channel and if the integrated payments channel in software is opening up opportunities as those customers are using that are using the software are trying to find cross channel capabilities as they build out e-commerce or virtual businesses on top of physical locations?

To what degree, I guess, also, do you hear from your acquirers? Any opportunities or asking you to advance your capabilities as they hear that from their own customers since they're the feet on the ground? Is there anything there going on that we should think about?

Yes, there is, actually. It's a great question and a thoughtful question.

The core of the integrated payments industry tends to be face-to-face transactions where you've integrated payment technology with someone, the software of someone in [ISE] is helping that small business person run his or her business. What's buried below that, and we don't talk about it a lot, but it really will be a key source of growth for us over the next couple of years and integrated in the United States and globally, is the any/any/any nature of payments.

The in-app payments that are happening increasingly at restaurants and retailers, small ones around country. So the enablement of (card-net) capability, the enablement of any sort of omni-channel payment, really will fuel incremental transaction growth we don't see today, as well as the key part of a value proposition to the merchants who are thinking about really working with consumers in a new paradigm today. It's no longer walking in, it's doing your research on a mobile device.

Maybe don't transact on that device because filling out a form on a mobile device is not a great experience today. But it's improving that, allowing then to come into the brick-and-mortar transaction or do it in-app, but also improving the mobile to core part of the product.

So, when you think of the assets we're putting together around the world, the marriage of integrated payments, the software that helps the small business person run his or her business and the ability to accept and process and manage the fraud compliance and security for any form of payment in any channel really is a powerful set of capabilities for putting together.

That's the undercurrent when I talk about the leverage of product and technology around the world over time that helps us support the cycle guidance that Jeff and Cameron are talking about. All that coming together is really the underpinnings of what we're talking about with this confidence in our cycle guidance.

Great. That's very helpful. Thanks much for the time.

Jim Schneider, Goldman Sachs.

Good morning. I was wondering if you could maybe address the cadence of operating margins as you head across FY16? You mentioned mix and some of the potential synergies from the acquisitions as being two possible drivers, but are there other any other things we should think about in terms of how operating margins progress over the course of the year?

Jim, it's Cameron. I'll start off.

I don't really think there's anything too terribly unusual in any particular quarter as we roll through the year. I think we would expect relatively stable margins 2015 to 2016, quarter-over-quarter. You're going to see a little bit of pressure in the front half of the year, largely due to FX, that'll balance out in the back half of the year, should be roughly flat.

Again, as we mentioned before, we're guiding to sort of reported net revenue-based operating margins of roughly flat year-over-year. On a constant currency basis, again, we expect them to be up 30 basis points sitting here today.

So that's really the only color I could give is bear in mind, the impacts of FX in the front half of the year where they'll be more acute. Obviously, in the back half of the year, we expect them to dissipate to some degree, although we still expect a little bit of FX headwind in the back half of the year.

That's helpful, thanks. I realize it's a relatively small part of your business at this point as you provided all that disclosure, but could you maybe just give a sense about your expectation for the ISO business in FY16 versus FY15?

Yes, it's still a good question. It's still about 25% of our US business on a net adjusted revenue basis. So it is still an important part of our business, nonetheless.

As we look at FY16, you have a couple of things going on. As we've talked about before, the growth in that business has been slowing for a couple of years. That trend has not changed, even on the adjusted net revenue presentation that we're now providing.

The other thing that obviously is expected to happen this year, as we commented on in our prepared remarks, is that is the migration of Mercury. Again, we don't have an exact time frame as to when that'll happen and I think our guidance ranges around both adjusted net and gross are meant to accommodate a variety of outcomes for Mercury migration in the back half of our fiscal year. Recognizing, of course, on a net revenue basis, that migration has very little impact on our net revenue, obviously, has a larger impact on our gross revenue.

That's helpful, thank you.

Thanks, Jim. Thanks very much, everybody, for joining us this morning.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may now disconnect. Everyone, have a great day.