環匯 (GPN) 2018 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to Global Payments' 2018 Second Quarter Earnings Conference Call. (Operator Instructions) And as a reminder, today's conference will be recorded.

At this time, I would now like to turn the conference over to your host, Vice President, Investor Relations, Winnie Smith. Please go ahead.

Good morning, and welcome to Global Payments' Second Quarter 2018 Conference Call. Before we begin, I'd like to remind you that some of the comments made by management during today's conference call contain forward-looking statements, which are subject to risks and uncertainties discussed in our SEC filing, 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 during this call speak only as of the date of this call, and we undertake no obligation to update them.

Some of the comments made refer to non-GAAP measures, such as adjusted net revenue, adjusted net revenue plus network fee, adjusted operating margin and adjusted earnings per share, which we believe are more reflective of our ongoing performance. For a full reconciliation of these and other non-GAAP financial measures to the most comparable GAAP measures in accordance with SEC regulations, 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.

Joining me on the call are Jeff Sloan, CEO; David Mangum, President and COO; and Cameron Bready, Senior Executive Vice President and CFO. Now I'll turn the call over to Jeff.

Thanks, Winnie, and thanks, everyone, for joining us this morning.

We are pleased to report another quarter of outstanding operational and financial performance, resulting in the best start to a year since we began running the company nearly 5 years ago.

In sum, we generated double-digit organic revenue growth, expanded adjusted operating margin by 160 basis points and delivered adjusted earnings per-share growth of 37% in the second quarter. Each of these metrics represents an acceleration from exceptional first quarter results.

We are also delighted to announce today that we have entered into an agreement to purchase AdvancedMD, a leading provider of cloud-based Software-as-a-Service, or SaaS, solutions to small- to medium-sized physician practices in the United States. With this transaction, we are further expanding our technology-enabled, software-driven strategy towards the 60% target we established in our Investor Day in March.

AdvancedMD, or AMD, will provide us with direct entry into a new $9 billion target addressable market for software, benefiting from strong secular tailwinds. The small- and medium-sized physician health care software market is highly fragmented, and AdvancedMD is an industry leader at roughly twice the size of its nearest cloud competitor. AMD is also one of the only companies in the industry that provides users with an end-to-end platform encompassing practice management, electronic health records and patient engagement solutions, all delivered on a single instance, multitenant architecture.

As a reminder, we currently have exposure to tens of thousands of dentists and veterinarians through our OpenEdge business. AMD will add direct relationships with 33,000 physicians and 11,000 small- to medium-sized practice groups across more than 100 ambulatory specialties in the United States.

In addition, we have successfully demonstrated the nexus between payments and software in this market, as AMD is an existing OpenEdge partner. We currently capture approximately 20% of AMD's roughly $3 billion annual payment volume opportunities and expect to be able to penetrate this space more rapidly going forward.

With increasing consumerism in health care, in particular in ambulatory specialties core to AMD's business, we see a large and growing payments opportunity that we are now better positioned to capture. Further, we expect to generate synergies from this transaction by leveraging our domestic distribution assets and consolidation of logical corporate functions.

With the acquisition of AdvancedMD, in combination with our investment in ACTIVE Network last year in our preexisting education, university, restaurant and hospitality businesses, our annual software revenue represents roughly 15% of our total revenue. This solidifies Global Payments' position as the market leader in technology-enabled software-driven payments.

In addition to new investments, we continue to make progress on the other 2 legs to our growth strategy: expanding our worldwide omnichannel capabilities and increasing our exposure in the faster-growth markets. We saw ongoing strength in our worldwide e-commerce and omni solutions business in the second quarter, which grew in the high teens year-over-year, further progressing toward the 20% revenue contribution target we set for 2020. As we discussed at our Investor Conference, our focus in this business is largely on SMB customers, and much of our growth stems from enabling e-commerce or omnichannel solutions within a given domestic market or cross border.

In addition, our unique capabilities in hard to serve markets or large multinational corporations also continues to drive significant wins, including 2 signature luxury retailers recently. More to come on this in our third quarter report.

And finally, we remain well positioned in faster-growing markets and are accelerating sales efforts as we expand our distribution and leverage our best-in-class technology and products into new geographies. Together with our partners at CaixaBank, our joint venture with Erste Bank in Central Europe realized strong double-digit growth in the second quarter as we continue to bring differentiated solutions, including e-commerce, to highly attractive underpenetrated markets.

We are also making progress on our pending joint venture with HSBC in Mexico, having received European Union regulatory approval this quarter and still expect to close before year-end.

Our businesses in Asia, led by Ezidebit in integrated and vertical markets and eWAY in e-commerce, continued their track record of exceptional growth.

While successfully executing on the key pillars of our growth strategy, we also continue to wrap more value around transactions to provide customers what they want and need to operate their businesses more effectively. To that end, we have now launched our Xenial premium cloud-based analytics product in the United States, Canada and the United Kingdom. Beyond standard reporting, we are now able to provide restaurants with customer analytics, sales trends, competitive insights, social media management tools and e-mail marketing solutions. We will continue to enrich this platform with additional data elements and features to enable our customers to create and manage a broad range of digital advertising activities.

We are excited about the solid progress we have already made on the multiyear framework we outlined in March. Consistent execution of this strategy proves terrific results for the first half of 2018, and we are well positioned to realize our long-term goals through further investments in technology-enabled software-driven businesses like AdvancedMD.

With that, I'll turn the call over to Cameron.

Thanks, Jeff, and good morning, everyone. We are very pleased to report another quarter of strong financial results. Our ongoing solid execution and differentiated growth strategy continue to manifest themselves in exceptional financial performance.

Total company adjusted net revenue plus network fees for the second quarter was $982 million, reflecting growth of 18% versus the prior year period, once again driven by double-digit normalized organic growth.

Adjusted operating margin expanded 160 basis points to 31.4%, and adjusted earnings per share increased 37% to $1.29.

We are proud of these results and remain encouraged by the momentum in the business throughout the first half of 2018. Importantly, we delivered this strong performance while simultaneously executing on our strategy to expand our software-driven payment thesis through the agreement to acquire AdvancedMD. I will provide more details on this transaction in a moment, but let me first highlight the terrific performance our team delivered globally this quarter.

Starting with North America, adjusted net revenue plus network fees was $719 million, reflecting growth of 18%. Adjusted operating margin expanded 190 basis points to 32.4%, driven by our higher-margin technology-enabled businesses and the addition of ACTIVE Network.

In the U.S., our direct distribution businesses again delivered low double-digit normalized organic growth, accelerating from the previous quarter, while we saw low double-digit declines in our wholesale business, consistent with our expectations.

Our Canadian business again grew in line with our expectations in local currency and foreign exchange rates had a modestly favorable impact to overall North American growth.

Turning to Europe. Adjusted net revenue plus network fees grew 19% driven by double-digit organic growth in local currency. This result was well ahead of the market, reflecting ongoing strength in execution and share gains.

Spain remained a bright spot with local currency growth in the mid-teens for the quarter. Likewise, our joint venture with Erste Bank delivered high-teens local currency growth on the back of a good macroeconomic environment, strong secular trends and solid execution.

In the U.K., we delivered high single-digit organic growth, which was consistent with the first quarter despite what continues to be a challenging macro environment. Results in the U.K. were again driven by transaction and volume growth as we gained additional market share.

Lastly, our e-com and omni solutions business grew high-teen as our unique value proposition continued to resonate in the pan-European market.

Adjusted operating margin in Europe expanded 210 basis points to 47.4%, driven primarily by the strong top line performance.

Our Asia Pacific business also delivered another quarter of mid-teens organic growth, consistent with Q1 results. We saw solid trends across our key markets, including Hong Kong, The Philippines and Taiwan, and Ezidebit and eWAY once again contributed meaningfully to growth in the region. Adjusted operating margin in Asia expanded 130 basis points to 31.5%.

The solid operating performance we delivered this quarter, in combination with disciplined reinvestment in the business, allowed us to generate adjusted free cash flow of $158 million, excluding acquisition and integration costs, up 22% year-over-year despite a 35% increase in capital investment.

Our capital expenditures totaled $59 million and largely consisted of investments to support the development of new product and technology solutions and further enhance our operating platforms.

During the quarter, we also repurchased roughly 1.6 million shares for a total of approximately $180 million.

In late June, we completed the refinancing of our corporate credit facilities, reducing the interest rate spread by 25 basis points. The amendment also increased our revolver capacity by $250 million to $1.5 billion.

In addition to improving our liquidity position and extending the maturity of our facilities, the refinancing also yields meaningful annual interest expense benefits. When combined with the amendment to our Term Loan B announced in March, we expect to realize $5 million to $6 million of interest expense savings annually, net of additional anticipated expense associated with future interest rate hedging activities. This benefit will also help offset the impact of rising underlying rates.

At the end of the second quarter, our gross leverage was 3.3x.

As Jeff discussed, this morning we announced a definitive agreement to acquire AdvancedMD, a leading provider of enterprise software solutions to small- to medium-sized physician practices, for $700 million. We expect to finance the transaction using cash on hand and our existing credit facility, with pro forma leverage increasing modestly to approximately 3.8x as a result. We are targeting closing the transaction in the fourth quarter.

Moving to our outlook, the momentum in our business that allowed us to exceed our expectations in the first half of the year positions us well to achieve our financial targets for the full year. We are, however, facing some incremental pressure from foreign currency and now anticipate FX being a headwind in the third and fourth quarters. That said, we expect the strong underlying trends we are seeing in the business to offset this impact.

We continue to expect adjusted net revenue plus network fees to range from $3.90 billion to $3.975 billion, reflecting growth of 13% to 15% over 2017. This outlook reflects the negative impact of roughly $35 million of foreign currency headwinds relative to our expectations when we last guided in early May.

Adjusted operating margin is forecasted to expand by up to 120 basis points.

Pressure from rising interest rates should be largely offset by our refinancing activities, and we expect net interest in the third and fourth quarters to be roughly consistent with the second quarter, prior to factoring in the additional debt we will incur to finance the AdvancedMD transaction.

Additionally, we are adjusting our effective tax rate forecast for the full year to be roughly 20% to 21%. The reduction in this estimate is driven by further refinement of the impacts of tax reform on our business as well as the incremental benefits we expect to realize as we restructure our international organization to optimize our tax position under the new U.S. regime.

Lastly, we now expect adjusted earnings per share in the range of $5.05 to $5.20, reflecting growth of 26% to 30% over 2017. This outlook reflects approximately $0.10 per share of negative impact from foreign currency headwinds relative to our last update in early May.

Our updated full year guidance does not include any impact from the pending acquisition of AdvancedMD, which we expect to be immaterial to adjusted earnings per share in 2018.

I will close by reiterating how pleased we are with our performance in the second quarter and, thus far, in 2018. The continued execution of our strategy positions us well to achieve our financial expectation as we deliver differentiated solutions for our customers and drive superior results for our shareholders.

With that, I will now turn the call back over to Jeff.

Thanks, Cameron. We have a consistent track record of strong execution and exceeding our own expectations, and the second quarter was no exception. The pending acquisition we announced today represents another investment to expand our software prowess in a key vertical market. AdvancedMD will accelerate the evolution of our business mix and further positions Global Payments as the leader in technology-enabled software-driven payments globally. This investment will provide additional catalysts for continued market share gains in the months and years to come.

I'll now turn the call back to Winnie.

(Operator Instructions) Operator, we will now go to question.

(Operator Instructions) And our first question comes from the line of Georgios Mihalos with Cowen and Company.

Wanted to start off, if we look at the North American business, specifically in the U.S., it looks like your direct business again accelerated a little bit from the first quarter. Wonder if you could talk a little bit about the drivers for that and how should we be thinking about that going forward? If I'm not mistaken, the comps are a touch easier in the back half of the year relative to the first half?

George, it's Cameron. So a couple of comments I would guess as it relates to the second quarter performance versus the [first] quarter performance. We did see some acceleration in our U.S. direct businesses, we're obviously delighted with that, probably upwards of about 1 point, I think, between Q1 and Q2, largely driven by our integrated vertical markets business. So our direct distribution relationship-led channel is pretty consistent Q1 to Q2, in the high single-digit range. It was really our integrated vertical markets business that accelerated slightly from Q1 to Q2 to grow, again, the overall acceleration for the U.S. direct business. As you look to the back half of the year, as we talked to you guys before, we managed that business to high single to low double-digit rates of organic growth. I think our guide would suggest that we expect to be in that range as we get into the back half of the year. You'll recall or you are recalling, I think, directly Q3 last year because that would have been a hurricane impact in the business. I don't know if that's dramatic enough to call out as maybe a significantly easier comp, quite frankly, but I think as we look towards the back half of the year, again, we feel very confident in the ability to continue to grow that channel in the high single or double digit pace we have been now for the last probably 6 to 8 quarters.

And Georgios, it's David, maybe a little bit more color just from a performance standpoint. We are very happy with where the businesses have started the year. As Cameron pointed out, the vertical markets businesses are off to a very strong start, that includes particularly integrated payments of the OpenEdge business, our education businesses in both schools and universities, so TouchNet and School Solutions are really well ahead at the start of the year. On the core sort of sales question, interestingly enough, we are really happy with where we are from the sales perspective across the United States and North America, actually the world, and I'll come back to that in just a second. But sales across the board are in very good shape, we're off to a good start in core sales and the direct book, which is what Cameron was describing earlier as sort of the direct non-vertical markets, had a couple of different record months over the course of the last 6 months. Really very happy with the sales there. Really happy with sales in OpenEdge in the vertical markets. Canada sales are ahead. And actually, Asia and Europe sales are ahead as we start the year. So as Cameron just said in the kind of core prepared remarks, we're really happy where we stand halfway through the year.

Great. Nice to see the momentum. And then I guess, Jeff, the AdvancedMD acquisition, anything you guys are able to share around the growth rate that you expect there, revenue contribution, EBITDA, anything that can kind of help us think through the business financially?

Georgios, it's Jeff. I'll start and I'll ask Cameron to add some of the financial color that you just asked about. So we are delighted to announce a partnership with AdvancedMD. As you know, in our technology-enabled channels, we target low double-digit growth organically for those businesses, so clearly Cameron will give you more color, but needless to say, we are looking at markets that are large. In the case of health care, we talked about their physician practice management business, the small- to mid-sized division in the United States being $9 billion target addressable market, highly fragmented, where I think we said in our prepared remarks, we're twice the size of their nearest cloud competitor. We also like the fact that they are already in payments, particularly with us, OpenEdge is a partner for what we do. I think we said they have 20% of their payment stream, which we size currently today at $3 billion annually of volume. You may remember when we announced back that network a year ago that was also about $3 billion annually payments volume at the time. So when we step back and look at some of the largest addressable vertical markets, which is really our focus and our specialty here in the United States, we certainly think that health care, by definition, is kind of one of them. And we especially think that the small to midsize physician practice management business, in particular, where the payments overlay a business we are already in, in the case of partnered software is very attractive for an owned software assets that we already mentioned. Cameron, you want to comment on the financial question?

Yes, Georgios. Again, I think Jeff talked about the growth rate of the business. We do view this as a low double-digit growing business, very consistent with the rest of our integrated and vertical markets businesses, and that would be our expectation going forward. So at that level, we would view it as accretive to the overall rate of growth of Global Payments, which would be important as well. For 2018, we were expected to do probably around $125-ish million of revenue, again growing at low double-digits into 2019. So that would be our expectation as we look through the business in 2019. From an BITDA and margin standpoint, we -- this is a business that is still scaling, as Jeff kind of characterized in his commentary. I think as we looked at the business, obviously, coming into Global Payments, as we get into 2019, we'll give you more color as we head into the year to what we think the implications would be. It is a business that we think will be accretive to margins as we get out a little bit further in time for Global Payments as it relates to 2019 and may moderate our margin expansion a little bit as we further scale the business, leverage distribution to drive faster rates of growth in the business. But overall, a very attractive financial profile and one that we think obviously is going to be accretive to growth, accretive to margins of Global Payments over time.

Our next question will come from the line of Glenn Greene with Oppenheimer.

Just want to follow up on the AdvancedMD, maybe a little bit more color, just trying to better understand a little bit. It sounds like their market share based on that $125 million is still very, very low in a pretty big market. But wanted to understand the payments component, is it just the 20% tie-in with OpenEdge? Or do they have their own component? And where can you take that 20% of their payments volume today?

Glenn, it's David. I'll start and let the other guys chime in as well. What you just described at the beginning of your question is exactly what we liked about the market, highly fragmented. We were buying the #1 competitor in the small- to medium space by a long shot, much larger than its cloud-based competitors. I just said twice the size of the nearest cloud base, but also a market full of legacy traditional providers who are on-prem with more limited software capabilities. So a great opportunity with a very strong direct sales model that we have. Obviously, we look to that almost primarily or first when we're performing due diligence on a deal. So we are really happy with the pieces and the opportunity in the market. Fragmented is what we like. The fact that they're the largest but small, that seems like a really good thing to me as we think about the future of the business and the low double-digit growth that Cameron just described. So really happy with those pieces. As a payments matter, there are kind of a couple of components to payments, maybe 2 or 3. Fundamentally is the one you mentioned, which is OpenEdge. So we have about 20% of their payments volume, that means there is 80% to address that is going to a different [card] provider for a copay fundamental at its simplest level. I don't know why that number isn't really, really a lot higher, just inside the next year or 2. We'll focus together on joint sales as one of our key revenue synergies to drive that payments penetration to OpenEdge integrated payment to 30%, 40%, 50% over the coming years. No reason that can't happen, no reason that can't happen particularly when we're one company together, we'll (inaudible) with 2 companies as you well understand. There are also some payments around bill payments, an electronic billing and payment that happened at the back end on the acquisition. Nice little payments opportunity there, something we're good at when you link this terrific rhythm software platform, again the only cloud based single-platform that's available in the market itself to the payment process. So really good payment fundamentals. And as you well know, we want to wrap value around the payment and the technology and the software is the perfect fit for a technology-driven -- our software-driven technology-enabled [set.]

A follow-up question would be the Europe churn from the quarter, seemed to accelerate as well. I heard some of the comments but I was surprised at the U.K. strength, and sounds like Erste is doing really well. So just a little bit more color on the Europe strength and the organic growth there?

Glenn, it's Jeff. I'll start, and I'll ask Cameron to add some more of the financial and data-related details. So I would say it's really just a continuation of the trend. We've made, as you know, the last number of years very significant investments in our technology footprint globally that, for these purposes in your question, particularly into Europe. One of the things that we called out was our integrated and vertical markets business in Europe, as well as our e-comm and omni solutions business, the primary market for which for us, for these purposes, is really Europe, particularly in the European Union post SEPA and PSD2 and the like. So very attractive target market for us. We kind of called out a couple of significant wins in the quarter. We don't want to spend too much on time on that, because we would intend to spend a lot of time in the third quarter call going to an update, as we do annually, on our e-comm and omni business. I would say a continuation of the trend, Glenn, which is to say why we invested so significantly over the years in e-comm omni. In all our businesses, but especially here in Europe, why do we enter faster-growth markets? Because we think that those are attractive, but we also think we can layer on top of those our leading-edge technology. In fact, we called out e-comm and products in the case of Erste Bank in Continental Europe. So I would say, Glenn, I view the quarter very much as a confirmation, probably of the last number of quarters of trending. And probably most pleasing in the United Kingdom, as Cameron mentioned in his comments, the notwithstanding macro headwinds as you've seen FX, same-store sales, retail, GDP growth, notwithstanding that, we still saw very consistent volume and transaction growth trends in the second quarter that we saw in the first. Again, I think that's attributed to our teams there, but particularly a further validation of the investment we made in technology and in targeting in those markets. I think Cameron called this out, but a lot of it undoubtedly giving the macro backdrop is pure and simple market share gains. I think we've been saying that for the last number of quarters.

This is Cameron. A couple of comments. If you look at Q1 to Q2, a little bit of the acceleration as we talked about before was in the e-comm and omni business and the Erste Bank. Those are the 2 things that stand out for me. On the e-comm and omni, I think Jeff described kind of how we are positioned strategically very well. And, obviously, we are seeing that manifest itself in a nice rates of organic growth in that channel over the course of the first half of the year in 2018, but even more so in the second quarter. Erste JV I think is really a function of you are seeing now the value of having them migrated onto our platform. Our ability now to sell products and solutions into those markets that are very distinctive relative to what traditional buyers in the Czech Republic, Romania, Slovakia are able to deliver is very powerful and, obviously, that's tied in very attractively to our organic growth in that business. So we are delighted with that performance. And it really speaks to, I think, in a microcosm, the value of managing our business on this common platform globally, our ability to distribute products and solutions ubiquitously across the markets that are very differentiated.

Our next question will come from the line of David Togut with Evercore ISI.

Nice to see the acceleration in organic growth.

Thanks, David.

Thanks, Dave.

The U.K. results were particularly strong, given the broad payment trends we are seeing in that market. Can you comment a bit on what you're seeing in terms of open banking? U.K. is really the first of the broad European markets to adopt consumer ACH payments in open banking. So I'd be curious if, a, if you are seeing any traction from some of those initiatives?

Dave, it's Jeff, I'll start. So what I would say is the fastest growing piece of our U.K. business really are -- is debit and particularly Contactless debit. So we certainly have seen a very meaningful acceleration in the use of that, particularly in places like in transit. So for lower ticket items, the ability for consumers to use different forms of payments. There, as you know, David, it's a little bit less about using your phone and a little bit more for consumers about just taking out their wallets and putting it on top of the NFC receptor. So Contactless is something that Visa, MasterCard, the networks talk a lot about here in the United States. But that time has already come, David, in Europe, in the United Kingdom and to a certain extent in Asia. That's really not a new trend. I would say that the last number of quarters, we've seen very substantial acceleration of our debit businesses in the U.K. And I think the clearest example of that is consumer usage in places like the -- in places like the 2. I know that the networks are hopeful that, that can be extrapolated it into other markets like the United States, but the U.K. is probably the market leader in that technology.

Understood. And then congrats on Xenial. I'm just curious, how is Xenial positioned against Square for restaurants, which just rolled out as well? I mean, if you look at the feature functionality, what are the main differences in how the product is positioned in the market?

Sure, David, this is David. A couple of distinctions maybe around the answer. The Xenial we're describing today, it was actually a set of analytics products that we are really excited about rolling out in Canada, the U.K. and we already rolled out in the U.S. at the end of the year. As a restaurant matter, we are very comfortable with our restaurant positioning. And the enterprise class, which I think is your direct question, with Xenial, with the rest of our software products, we have a combination of terrific technology, extensive and scalable software solutions to high-volume customers includes multiple stations, different payment solutions, multicurrency, flexible pricing, all the things you need to run and operate, just as you would expect because we've been in this business for years, so no surprises there whatsoever. We can uniquely combine that with high-volume payment recording and analytics, so very happy with where we sit there. We're also, I would tell you, very comfortable with our price points against the competition in that sort of higher end of the market. So it's a very large target market. We and others can unseat some pretty nice traditional competitors at the

high end of the market. Let me pause for a second, take it back a little bit further. We start with sales are running ahead in the United States, where actually, I think, we're growing very well. We actually don't see Square on a lot of sales this (inaudible) quite frankly. For most of their business, they're serving a smaller customer. Our market is going to be a little higher than that. And again, as I said a moment ago, as you head toward the higher end of the bank card volume, where you really do link in the software with Xenial, we're really, really comfortable with our solution and fundamentally with a big advantage when it comes to servicing our relationship. Remember, I've talked a lot about building local and meaningful relationships with customers. The higher you get, the more technology you enable, the more the relationship is going to matter, we believe. We sell on that. And we think the competition is more limited in that regard. And then sort of fundamentally, I think we haven't seen us lose business to Square. So high end of the market, very comfortable with technology, I'm really glad you asked that question. The low end of the market, we don't play that well. We play the middle of the upper end and we are very comfortable with our sales results to date.

And our next question will come from the line of Ashwin Shirvaikar with Citi.

Good results and the acquisition team's consistent with the strategy you guys laid out, so congratulations on that. Two questions, and I'll ask both of them at once. The first one is the margin performance year-to-date is pretty solid, and I guess the question is why not take up the outlook, is there an offsetting set of incremental investments that you guys continue to make? Obviously, there is a pricing opportunity as well. So can you talk, I guess, first of all about the margin performance and the ability to take up outlook? And then the second thing is, clearly from a macro standpoint, there's a lot of worrying headlines, tariffs, trade war, Brexit, things like that, how do you factor that into guidance, if you could broadly talk about that given your global presence?

Ashwin, this is Jeff. I'm going to start actually with your second question. I appreciate you asking the 2 upfront so we can kind of categorize it, and I'll [kind of round] it accordingly. So I'll start with the second question on the macro, and then I'll ask Cameron to talk about what's embedded in our outlook. So the short answer to what you asked about, the macro is no, we've not seen an impact on the tariff stuff and the trade discussions. I would tell you the most important driver of our business, as we said over time, is the health of the consumer, the rates of GDP growth, obviously the U.S. just had a very high GDP print the other day. And I would say this is probably in the quarter, in our view, where we are today is a continuation of the trend, both globally in terms of the expansion of GDP. I would say from a macro point of view and this will dovetail with what Cameron's going to describe, where the only difference now versus the last time we spoke, our last earnings call, is probably the FX, the foreign currency-related environment, but I would tell you that from my point of view today the consumer remains extremely healthy, and we have yet to see any impact to our business from the questions you asked. Cameron, do you want to talk about the outlook?

Yes. Ashwin, that's probably a good jumping off point for the outlook around margins, which is a really good question. So what I would say is first of all we are delighted obviously with the margin performance we've seen kind of year to date, up 150 basis points year-over-year for the first half relative to last year's performance. If we look to the back half of the year, there's a couple things I would call out. The first is what Jeff just mentioned. FX is obviously, based on our outlook for currency, as I mentioned in my prepared remarks, we see FX being a headwind in the back half of the year. It's going to be a headwind to revenue, headwind to EPS, but also a headwind to the margin. So as I look at the margin guide today, there's probably at least 20 bps of FX headwind in that margin guide relative to where we were back in May. So I think that's probably the first important point to call out. The second is, and we said this kind of coming into the year, with tax reform we are taking that opportunity to invest in the business and some of those investments will ramp as we work through the year. So as we get into the back half, some of that opportunity to reinvest back into the business is, obviously, ramping up and that will I think put a little pressure on margin expansion relative to what we talked in the first half of the year, but obviously, still for the year a very healthy margin expansion, well above our, say the, sort of [died] on a cycle basis for margin expansion for the business. And to me, that's a really good thing. One of the things I'm most proud about -- I think we're most proud about is the ability to generate the type of consistent financial performance we have while still meaningfully investing in the business (inaudible). We are not starving the business for capital, we are not starving the business for investments, we are investing in the future, while also, obviously, delivering on the promise we believe we have in the business today. So that, I think that's a very good thing, and we're always balancing the level of investment in the business with obviously our desire to continually expand margins in the business over time.

Our next question comes from the line of Darrin Peller with Wolfe Research.

Let me start off just on your strategy around iPOS building out internationally and kind of any updates around that. Obviously, it's doing -- it's outperforming in the U.S. for a long time now. So just curious to hear how that's going in the U.K., and Canada and maybe what the competitive dynamics are there?

Darrin, David here, I'll start. So actually very happy with the steady rollouts of iPOS. I would actually maybe broaden it a little bit make it more of a technology answer. And so integrated payments are a core part of the way we're selling now in Canada and the U.K. The combination of integrated and semi-integrated solutions is certainly helping with the above market performance you've seen us post in Canada and the U.K. and across Europe for the last several quarters, as Cameron particularly commented a little while ago. When you think about iPOS specifically, we've got a much broader Xenial rollout going on as we speak. So we've talked about the settings. We mentioned analytics today, which rolled out to Canada and the U.K. but beyond that, we are rolling out restaurant functionality over the course of '18 and '19, particularly full roll out in '19 in Spain, later in '18 in Canada, '19 in the U.K., all those processes are continuing to pace, as is our full roll out to QSR, table service and enterprise in the United States over the course of '18. We'll combine that with Xenial [gift] analytics and other reporting products. So right now, we have the ability to sell analytics on top of what you might think of as sort of non-iPOS payment technology in Canada, U.K., and Spain. We have analytics with iPOS in U.S., Canada and U.K. and rolling out more and more consistent cloud-based product over the course of '18 and '19. In such a way that we expected in the middle of '19, toward the end of '19 to have the full suite of all of our software capability available in all of our major Western markets.

I'd add to that, Darrin, to what David said that we've also been successful in rolling out our university product, TouchNet, to markets outside of the United States. It's a software based solution and clearing the e-comm and omni business, we are selling a lot of technology too, which we called out. But I know we'll spend more time on it in the third quarter. And then lastly I don't want to overlook Australia, I mentioned in my prepared remarks, New Zealand and Asia Pacific with our Ezidebit, our integrated vertical markets in Australia, New Zealand and our eWAY e-commerce products. Those continue very healthy rates of revenue (inaudible) after we consummate those partnerships. So I would say that David is right, focused specifically on iPOS. But I think more generally outside the United States, our ability to take the integrated vertical markets technology-enabled software assets into a multinational environment, you've seen the fruits of that in those results today.

Okay. That's really helpful, guys. Just one quick follow-up. When we look at the pricing opportunity in the U.S. maybe just quick comment on where you still feel like you are maybe coming out of Heartland? And then kind of on the U.K. side, just considering the U.K. market regulatory headlines around pricing in that industry, I mean I'd just be curious to hear your thoughts. It sounds like you guys are pretty transparent in your pricing model, Interchange plus, but any thoughts on the impact that this could have or may or may not have going forward?

Darrin, David again, and I'll let Jeff pick on the U.K. situation, I'll talk about a little bit United States. So we believe we have enormous amount of remaining economic value opportunity in the United States. It comes really from the service we offer, and we are still in the mode where we're matching economics to really create value. So we're not having jump fees and things like that. In fact, what we are looking at is saying, we provide this world-class service on industry-leading infrastructure, high-quality reporting compliance, high-touch customer service, so let's take a look at whether or not we're pricing for that service appropriately and we want to be historically priced for that service appropriately. So we started, as you'll recall, from a year or more ago by better aligning our new sales economics and tools with the level of service we provide. Now we have the ability to go back through the services we provide and find folks who maybe aren't meeting contractual obligations, find folks who are sort of in long-term below-market condition and kind of ratably and progressively make sure we address those things and not (inaudible). So again, not a broad-based approach to jump fees, more specifically targeting the match of economic value to what we provide in service value. So we are rolling that through. In doing that in that measured fashion, I'd tell you we've got a long runway ahead of us in terms of being able to provide more and more economic value, more and more economic terms on top of the services we sell and the accelerated sales results we've got in the first [place.]

I'd add to what David said, Darrin, your second question that the U.K. has been historically (inaudible) and I expect to be going forward an intensely competitive market. You've had a number of not just existing competitive market by entrants and new market entrants. In fact, over the last number of years, iZettle, Adyen, Square, people who've entered the U.K. market. So the first thing I'd say is, it's always been competitive, our markets are generally competitive but for these purposes, the U.K. has been intensely competitive and I expect it to remain that way. And of course there's legacy competitors there too, like Worldpay and Barclays. And (inaudible) perspective pro forma for the AMD announcement this morning, the U.K. is roughly 8% of our revenue. But nonetheless, intensely competitive market, and I don't expect that to change. The second thing I'd say is for years, we've been interchanged plus pricing in the U.K., which means changes and interchange get passed through, that's what interchange costs mean, to all sizes of merchants, small, medium and large. Third, I think you touched on this, we're highly transparent in our pricing and billing. I think as you know, in some markets like in Canada, we're actually a bank and regulated as such. Obviously, the context of what we do is highly regulated by folks like the Financial Conduct Authority in the United Kingdom and of course we've amassed our, generally -- that most markets have their own set of rules about transparency on pricing. Given our bank background in markets like the U.K., given the fact that we are a bank in certain markets like Canada and in a (inaudible) number of (inaudible) partners in all of our markets, particularly the United Kingdom for these purposes, we are very transparent and the market is highly competitive. Lastly I'd say, there is a lot of switching in places of merchants, in places like the U.K., in that market you tend to see 15% to 25% term rates, the vast majority of which is people choosing different providers hence the attractiveness for new people like Square, iZettle, et cetera, Adyen, kind of coming into that market. So I would say sitting here today and given how we operate, we really don't expect this to have any kind of a material impact to our business. I think we just answered someone else's question this morning about the products and services we bought into that marketplace. I think David talked to -- just expressed on how we add value to transactions here in the United States, applies to the U.K. and our other markets, which is to say that we try to charge fairly for the products and services that we (inaudible) make investments along those lines. So we feel good about where we are, and I don't see that really changing meaningfully for us.

And our next question comes from Tim Willi with Wells Fargo.

I had one question, I guess, around technology in the back office and operations. So you talked a lot about technology strategy on the front end and driving revenue and product. Can you just talk about what you're doing with data, machine learning behind the scenes that may be driving or at some point will help to drive additional margin expansion as you improve and streamline, not just a topline driven revenue margin story, but maybe more on the backside?

Yes, Tim, it's David, I'll start and let the other guys chime in because we're all touching pieces of itself around the enterprise side of the business. It's actually a fantastic question because we think about it in the same way. The very same back-office tools that allow us to stage data to roll out analytics products like the Xenial products we described earlier today, the ability to kind of rollout these solutions that give you daypart sales and let merchants set [insights] with new and repeat customers and launch campaigns and manage social media, all of that same data is sitting leverageable for other use as are the tools that phase it there. So whether that's the ability of our finance folks to help us with forecasts and (inaudible) analysis and opportunities for improving the enterprise, a little more importantly and maybe more specifically, the margin -- or the directly margin, (inaudible) not. It is the ability to actually be better at the way we serve customers. We do try and differentiate, as you well know, on service and on implied touch. So gosh, these tools are really right in the sweet spot of our strategy going forward the next couple of years. So we think about the combination of AI sort of artificial intelligence from our products, we are employing that. As we speak, we've got a lot of stuff in beta, specific business units in our university, we actually have a robot that answers questions right now and directs calls. I think we call him Stan, I can't remember his name off the top of my head, but regardless, we are using everyday AI to augment analytics and help us drive the enterprise further, and to your point, drive margin over time. So as an example, we've got prototypes out for intelligent layer on top of analytics that help us with decision-making. We are using in the call service -- call centers already natural language processing, machine learning to answer questions. Again, you may or may not want to talk to a human but you do want quick service and want the answer right away. To the extent we can make that a better experience, we are going after that. The applications including voice-enabled assistants, accelerated processing, we do have some testing of automated resolution customer queries -- pause for 1 second. Financial services remain the land of exception management. At the end of the day, all the coolest software in the world still doesn't work perfectly all the time across communication vendors, Internet providers and things like that, so you've got to manage exception. You've also got to enable more self-service for chargebacks, payment managing, even batch recon, that's our reconciliation on these charges and transactions. So using AI and analytics for that, boosting our productivity, boosting our ability to turn, so it's the more value-added activities like building product and selling instead of answering questions. So actually we are pretty intrigued, you can probably just hear it from my tone, the more of this we invest the more excited we get about the opportunity to scale the back end. As Cameron described earlier, to put money back into that front-end revenue-producing customer touching side of the business. Let's talk a little bit more about it going forward, maybe not in the next couple of quarters but as we [go forward].

Great. I just had a follow up on AMD, I want to make sure I understand it, I missed some of the earlier comments, I apologize, but is the primary payment flow of AMD the consumer payment to the physician? Or are you also touching the payment -- the possibility to touch the payment from the insurance provider back to the health system or the physician?

Yes, so the absolute primary piece of the payment is the thing with the copay, so it's fundamental to having the consumer checking out, which you will recall is the core business we enable in OpenEdge. When you check out, we automatically update patient records and scheduling, send off the forms of the claim to the Signas of this world, et cetera. There is an element of billing and payment opportunity at the back and it's further down the road that we are pretty anxious about, and given my history, my [passion,] I'm a little interested in that payment flow as well. But the core of this is what we know really, really well, the OpenEdge card processing payment.

Tim, it's Cameron, I'll add just a couple of comments. One thing we haven't really touched on as it relates to AdvancedMD is they're really focused on ambulatory practices. So these are outpatients, and they're also focused on those specialties where there's more consumerism in health care. So as we think about the opportunity, obviously there is an existing base of payments that we can further penetrate. But longer term, we are going to be more and more in specialties where there will be an increasing amount of consumer-oriented payments relative to insurance billings and whatnot as it relates to health care payments going forward. So that's part of the attractiveness of the business from our standpoint. So as we look at it again from a financial profile standpoint, that's why we are confident obviously with the ability to continue to drive that low double-digit rate of organic growth in the business going forward, why we see the business as being accretive from an EPS standpoint in 2019 and going forward. All of that, it creates a very nice backdrop or a financial profile for AMD that we think is highly attractive for us.

Our next question comes from Andrew Jeffrey with SunTrust.

I wanted to follow up on David Togut's question a little bit around Xenial and restaurants. And David Mangum, very much appreciate the color competitively. One of the things that I think that has come up a lot, and it came up yesterday on Square's call too is self-service onboarding, and I think that surprised a lot of people from a scalability standpoint, and I appreciate the high customer touch and the nature of the customer, but can you comment a little bit on whether or not that's a trend that you're seeing in your business and something you might want to pursue going forward?

Sure, and happy to, Andrew. It is something we want to pursue. In fact, it's something we've already pursued. So that exists. I don't know that I think about that as a massive trend fundamentally changing the market at all. Faster onboarding, the ability to be transacting right away are all just the kinds of services that we all need to offer. I recognize that many "traditional competitors" in the space can't offer that. But no, the idea of being able to get onboard immediately, maybe even coming back and doing the underwriting a little bit later, yes, absolutely exists, it is something we enable as well market-by-market around the world. We're working hard to get better and better up in this space. Part of our competitive differentiation, when I say high-touch high-service means you know your customer. It doesn't mean you're not applying technology, not onboarding quickly, not enabling transactions immediately, not settling batches the first night you bring the reports back. It means, hey, I know my customers well. I know and I speak the restaurant language, the hospitality language, the physician language and in the case of AMD, the University language. It's being able to be more and more vertically fluent, speak the language of your customer and provide them that kind of relationship and service. It by no means is a replacement for having to be right on the cutting edge of technology as well.

Appreciate you elaborating on that. And Jeff, I might ask perhaps you can expound a little bit on some of the competitive comments in Europe, particularly around sort of the next-gen e-comm acquirers. Are you -- did I understand in your prepared remarks to say that you think global thrives because it's more of a specialized player, hard-to-reach markets, domestic e-comm? Is that the right way to think about the competitive differentiation at least today in Europe and perhaps APAC?

So Andrew, it's a great question. I think if you go back a little bit to what we described in the March Investor Day, where we had a bunch of slides on what we thought how the market was stratified and how we compete, I would say if you look at that, we really compete 2 ways in our e-comm and omni business. The first thing is our core, as it always is, is SMB. So Adyen, for example, talks about this in their prospectus, that the top 10 customers I think they are 1/3 of the business and these are all e-comm only. We think about us by way of based on what they said. The thing about the way we go to market, SMB is our core, those are generally omni, meaning virtual, they're both e-comm as well as physical acceptance and in particular in Europe, as I described in response to David Togut's question, across a number of geographies, across the European Union. So when you think first, Andrew, about SMB, e-comm as well as omni in the European region, there are a lot of folks who fit the bill on all those type of points that I'd just highlight. I think by far, that's the predominate means of kind of what we do (inaudible) them. Point number two, across border, which we referenced in our prepared comments too, there, I think, our global footprint where we're physically in 30 countries but doing business across border, especially e-comm in more than 50 with over 140 currencies, there I do think there is a lot of value to first having a single provider in all those markets. So while we certainly overlap with a number of the folks competitively hitting 1 geography, increasingly, we see a trend toward smart multinational corporates picking one provider to solve all their payment needs. We believe that some of the markets that we are in, Taiwan, would be an example, Singapore, Malaysia, New Zealand, go down the list, Hong Kong, there aren't a lot of providers cross-border in those markets, plus Europe, across most of the EU, who can really provide the most sophisticated multinational (inaudible) not SMBs, with all the payment solutions they need just 1 technology environment. You put those 2 together, which is SMB, kind of our core, online as well as physical store, combined with complicated multinational business here where a single provider in all the markets that can possibly be in. As I said, I think in the invest rate, in some cases when we do some of these RFPs, you might be one or 2 providing that, because those needs are really hard to solve. So that really is the genesis of our mode of competition and how we go to market e-comm and omni. And I think we've laid out this most recent quarter, but certainly over the last number of years, what that's meant in terms of our growth. Because again this quarter, coming in the third quarter, we'll talk more about how that business is performing and what we continue to expect, but we are well on our way, as we described in the Investor Day, to move to a 20% of our revenue growth, of our revenue in 2020 to be coming from our e-comm and omni [servicing] businesses.

And our last question comes from Paul Condra with Credit Suisse.

Cameron, I just wanted to ask about the software revenue, you said 15%. Should we think about that as recurring SaaS revenue? Could you put a margin profile on it? And then how should we think about that growing?

Yes, it's a very good question, Paul. So you are right to think about that as a highly recurring revenue stream for us. Vast majority of that is SaaS or it relates to products today that we are in the process of converting to SaaS platforms, but the vast majority of that is going to be SaaS for us today, highly recurring, highly visible, AdvancedMD is a good example of that. We looked at the revenue profile on AdvancedMD and we see that as 95-plus percent recurring revenue in that business. So very attractive, obviously, revenue profile and naturally, given our strategy, that's a portion of the business you should expect to see continue to grow over the course of time, both organically and inorganically as we drive our software-driven payment strategy towards that 40% target, obviously, that complements the 20% target Jeff just highlighted for e-comm and omni, bringing our total technology-enabled target to 60% by that 2020 time frame. So again, that is a highly attractive aspect of the growth profile of the business. We see those SaaS payments at a minimum growing in the low double-digit, some are going to be growing more quickly than that but, obviously, contributing very nicely towards any growth over the course of time. From a margin standpoint, you should assume by and large those businesses should be at or above the corporate margin at a minimum. Some are still scaling, to be fair, so over the course of time some of them are going to scale to being at or above the corporate margin. But certainly, our expectation is all those businesses over time should be obviously accretive to the overall margin profile of the [stated] company.

Great. Then I guess just for the follow-up in terms of M&A, I mean you're not going to be terribly leveraged coming out of this deal. So should we think of kind of an annual deal pace, the way that you guys are thinking about it, of this kind of size or any kind of changes or insight you can give us on the strategy?

Paul, it's Jeff. I would just say our pipeline remains full. I think you're right in what we said, we don't view 3.3x today, 3.8x levered pro forma as being anywhere but right in our sweet spot in terms of what our goals are that we articulated before. Our pipeline is full, I hope it doesn't take another year for other deals to come to pass in the technology enablement world prospect. But at the end of the day, the most important thing for us is the strategic fit, the cultural fit and the financial returns so we can generate as we advance our strategy, so time will really tell as it relates to what we are looking at. I would say in general, we couldn't be more pleased with AdvancedMD where our strategy is, where we are along the path, well down the path toward the 60%. But we articulated obviously, inorganic growth mathematically is a part of that. We love that AdvancedMD beyond how good the business is, is the fact that it exposes us more directly to the health care vertical market, which is a big chunk of the U.S. economy. There are other vertical markets in the U.S. that we don't have significant exposure to that we also look at. So '18 but we are very pleased with where we are now and pleased with where we are heading in terms of our strategy.

And Paul, it's Cameron, I'll just add maybe a couple points to that. One, as we've talked about historically, our priority remains to invest and grow the business. We talked very clearly, I think, at the Investor Conference about the 3 pillars of growth, where we want to continue to invest to drive growth across those aspects of our business. So rest assured we are working very hard every day to find opportunities that fit strategically, fit culturally, fit financially, are accretive to our rate of revenue growth, accretive to our margins, accretive to earnings, (inaudible) All those things are very important to us. I wouldn't necessarily want to put a target out there as it relates to -- I know others in the space like to do that, but I think that implies they're going to do deals regardless of strategic fit, cultural fit, financial fit and we are not that sort of investor. So we're obviously, to Jeff's point, working on a very full pipeline now. I think we remain very confident in our ability to find opportunities that fit the criteria that we have for the business, and we will be able to continue to grow towards the targets we have established through, obviously, organic and inorganic growth and I think eventually leads (inaudible) that.

On behalf of Global Payments, thank you for joining us this morning and thank you for your interest in us.

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