環匯 (GPN) 2020 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to Global Payments Second Quarter 2020 Earnings Conference Call. (Operator Instructions) And as a reminder, today's conference will be recorded.

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

Good morning, and welcome to Global Payments Second Quarter 2020 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 about expected operating and financial results. These statements are subject to risks, uncertainties and other factors, including the impact of COVID-19 and economic conditions on our future operations that could cause actual results to differ materially from our expectations. Certain risk factors inherent in our business are set forth in filings with the SEC, including our most recent 10-K and subsequent filings. We caution you not to place undue reliance on some 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 financial measures, such as adjusted net revenue, 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. The press release and investor presentation on our collaboration with Amazon Web Services announced today are also available on our website.

Joining me on the call are Jeff Sloan, CEO; Cameron Bready, President and COO; and Paul Todd, Senior Executive Vice President and CFO.

Now I'll turn the call over to Jeff.

Thanks, Winnie. We are pleased with the solid performance we delivered in the second quarter of 2020 despite the pandemic, driven by consistent execution and the outstanding dedication of our team members. We are grateful to all of our nearly 24,000 people worldwide for their exceptional service to our customers during this challenging time. I think the best way to describe the second quarter is that it would have been difficult to imagine in early April that our businesses would perform as well as they did through June.

As the markets we serve around the world have reopened, we are encouraged by the improving trends we have realized. Our customer base overall remains healthy, and our businesses generated sequential improvement in May over April and in June over May. And several of our businesses delivered absolute growth year-over-year in June with a number achieving record new sales performance.

Our business is as strong today as it has ever been, and our mix enabled us to perform better than many of our peers as we had expected. We benefited by entering the crisis in extraordinary condition, and the timing and quantum of our actions taken early on enabled us to hold operating margins roughly flat to last year this quarter. We also generated strong free cash flow in each month, including April, highlighting the durability and resiliency of our business model.

We continue to make substantial progress on our technology-enabled, software-driven strategy this quarter, further validating our pure-play payments model and widening our competitive moat. We are delighted today to announce a new multiyear go-to-market collaboration with Amazon Web Services, or AWS, to provide an industry-leading, cloud-based issuer processing platform for customers regardless of size, location or processing preference. With AWS as our preferred cloud provider for issuer services, we will deliver innovative payment solutions at scale globally in a secure cloud-based environment, enabling best-in-class experiences for our issuer clients and their cardholders.

Together, we will leapfrog traditional analog means of distribution and redefine how issuer products and services are sold and consumed in the digital age. Together, we are bringing technologies that generally have been available only to nimble start-ups to traditional institutions at scale, leveling the playing field for innovation with immense benefits to consumers globally. Our unparalleled legacy of reliability, performance and experience, combined with AWS's cloud leadership, will future-proof our businesses to meet the increasing demands of a connected, frictionless digital world.

Our transformative alliance will also substantially expand our pool of revenue opportunities. First, our collaboration broadens our geographic reach as AWS's worldwide footprint reaches nearly every corner of the globe. No longer will we be limited to geographies where we have a TSYS physical data center location for issuer services. Delivering our capabilities via Software-as-a-Service, or SaaS, means that we can build, test and scale in more markets more quickly than before.

Second, we will meaningfully expand our prospective customer base to include financial institutions of all sizes, new market entrants and retailers. Historically, TSYS's issuer business was bifurcated into a large bank business in North America and Western Europe, primarily served through TS2 and an on-premise license business served through PRIME everywhere else. Truth be told, our distribution resources were not proactively targeting small to midsized banks in the United States, new financial technology entrants and embedded payment service providers, and we have needed a fully end-to-end, cloud-native solution set to be successful in many of those markets.

Now we have a unique opportunity with one of the largest technology companies to disrupt those markets on a differentiated basis. Beyond cloud availability zones that span the world, AWS is a global feet on the street sales presence from Amsterdam to Zurich. AWS will work uniquely and closely with our sales team from lead generation and project scoping all the way through the commercialization and implementation of Issuer Solutions. In sum, we believe that our target addressable market for Issuer Solutions will more than triple, providing ample additional opportunities to grow and build on our track record of capturing market share.

Third, we will unbundle our services through the use of open APIs and deconstructive micro services, which will allow us to sell elements of our issuer SaaS solutions via a new business model on an a-la-carte basis. In addition to dramatically expanding our target addressable market for institutions of all sizes, we will eliminate the need for time-consuming physical conversions and enable customers to quickly and efficiently implement the functionality and services they need and want while minimizing risk. Our collaboration will touch and support every element of the card life cycle from origination, provisioning, risk management and servicing to billing and ongoing delivery. We will provide end-to-end digital solutions to delight our clients and their cardholders, delivering platforms that run entire issuing businesses at scale.

Fourth, the new platform's cloud-based architecture allows us to capitalize on modern open banking initiatives, giving clients the ability to customize the services they need with greater speed to market and product flexibility. Resources can be scaled up and down in the cloud so customers can use just what they need. This means making enhancements will be even more efficient and clients can get to market sooner. We can build, test, deploy and scale specific capabilities quickly to continuously innovate and deliver tailored, frictionless and fully digital experiences pretty much anywhere in the world. And cloud computing means near real-time redundancy with databases that are replicated across multiple availability zones without interruption. Importantly, this infrastructure is software-driven, encrypted and auditable.

Institutions globally are not going to move backwards to legacy mainframe-based systems. The digitization of financial services will accelerate, catalyzed by the pandemic. Issuers will increasingly move toward newer cloud-native technologies over time that leverage the talent base prevalent in today's market, increasing resilience and compliance in light of the regulatory requirements in the marketplace now and in the future. And for customers' cardholders, a cloud-based issuing environment will provide the user experience consumers now demand. That means reliable connected services across any channel available when, where and how consumers choose. It means increased cardholder engagement, support for emerging payment options and cloud-enabled resiliency to meet always-on expectations.

Fifth and finally, we have a lengthy track record of forging industry-leading partnerships and cross-selling across all aspects of our business. Together with Amazon, we will look to capitalize on opportunities for collaboration across all of our businesses, and we expect to generate substantial revenue over time. We expect areas for exploration to include our unified commerce platform and transaction optimization across our merchant businesses and digital consumer experiences with Netspend.

We also continue to make progress against our strategic objectives by [bringing] in July to expand and extend our relationship with our partners at CaixaBank, one of the largest banks in Europe and Spain's leading financial group. We have committed to meaningfully increase our ownership in our joint venture, Comercia Global Payments, from 51% to 80%. CaixaBank has also agreed to extend our partnership until at least 2040, 10 years beyond the existing maturity date.

Our ability to invest further in our worldwide businesses during the pandemic highlights the underlying financial strength of our company and provides another proof point of the ongoing success of our differentiated strategies. We are proud of the company that we keep, and we have no better partner than CaixaBank. We often say that our long-standing partners who see us operate day in and day out know us best. Their confidence in us further reinforces our competitive position as the partner of choice to the most sophisticated and complex financial institutions globally.

In addition to meaningfully advancing our strategies in the second quarter of 2020, we are also very pleased with the quality of our sales execution. We are excited to announce that we have signed a new multiyear issuer agreement with TD Bank in the United States and in Canada, one of TSYS's largest FI partners. TD is the sixth largest bank in North America, serving over 26 million customers and also ranks as one of the world's leading online financial services firms with more than 14 million active digital customers. This important renewal highlights the distinctive durability of our customer relationships globally and the trust that many of the largest institutions place in us.

We continue to see strong new sales trends in a number of our merchant businesses during the second quarter despite the impact of the pandemic. We have seen record sales of our e-commerce and omnichannel solutions across our businesses globally as customers move quickly to implement online ordering and virtual payment solutions in response to changing consumer preferences. For example, in our Heartland business, new accounts for online payments increased 58% year-over-year in the second quarter with record sales performance for our e-commerce team in this channel. Heartland also delivered its best overall new sales month in the last 2 years in June.

In our Global Payments Integrated business, new sales for the quarter were consistent with our original budget expectations despite COVID-19, while new partner production is trending 30% above plan on a year-to-date basis, reflecting the strength of our differentiated capabilities in this channel. We also continue to see strong bookings performance in a number of our vertical market software businesses. In the health care vertical market, for example, AdvancedMD's ability to deliver cloud-based technology solutions, including virtual telemedicine capabilities to physician practices throughout the United States, drove record bookings in the second quarter and record revenue for the month of June.

We believe we've been able to capture further share as customers have increasingly looked towards safety and size and track record and consumers continue to shift purchasing habits and prefer safer commerce. As a reminder, our e-commerce and omnichannel businesses today already account for 20% of our total merchant revenue, consistent with the target we set in March 2018 for year-end 2020, so well ahead of schedule.

And our issuer and business and consumer segments also had meaningful exposure to e-commerce trends, highlighting the diversity and breadth of our business mix post our TSYS partnership. We have invested significantly in our unified commerce platform, which allows us to provide one payment solution worldwide through a single API, enabling higher acceptance rates and lower fees. And we provide our leading omnichannel capabilities with the same means of integration for our core SMB merchants as well as for the most sophisticated MNC customers globally. We are unique in our ability to offer local sales and operation support physically in 38 countries and services cross-border into 60. That scale and reach, particularly in many of the harder-served markets we operate in today, is a significant barrier to entry.

This quarter, we were pleased to have signed an e-commerce partnership with Louis Vuitton for acceptance services across 14 countries in Europe where we deliver a uniform solution and seamless experience virtually. We also are pleased to have recently signed agreements with Dolce & Gabbana, Molton Brown and PARK NOW. Further, we went live with our Citi partnership in the second quarter. We are now pursuing customers jointly with Citi in the United States and the United Kingdom, and we'll be adding Canada this quarter.

It's worth providing some context around the size of our e-commerce-related businesses in our other segments. We estimate that roughly 40% of our issuer transactions and that nearly 30% of our Netspend transactions come from card-not-present or e-com channels. In combination with our acquiring businesses, we generate roughly 1/4 of our total revenue from online efforts.

We are also seeing increased demands for safe commerce solutions across our businesses. We believe Global Payments is the leading deployer of NFC technology worldwide, and we are rapidly enabling contactless acceptance for merchants as the pandemic alters consumer behavior. Other solutions we have been implementing include social commerce, pay by link, mobile payments, telesolutions, virtual terminals and digital wallets. For example, in the enterprise quick service restaurant vertical market, our Xenial business launched its socially safe restaurant experience platform, which includes embedded features like guest lists and touchless payments. We are currently in discussions with several large QSR and fast casual chains about use cases for this technology.

And our gaming business launched 2 transformative solutions in the second quarter with its VIP mobility and VIP financial center for touchless payments and no contact funding at casinos.

Finally, our issuer business is also a leader in the evolution of contactless solutions, and we are excited to have recently partnered with Mastercard and digital wallet provider, Xtend, to create new ways for cardholders to use virtual cards for everyday spend in a rapidly changing digital payments landscape globally.

While execution is always at a premium, that is especially true during a crisis. The TSYS merger significantly enhanced our business mix and scale and has been a source of strength. We continue to make great progress on integration this quarter, and we still anticipate delivering at least $125 million in annual run rate revenue synergies and at least $350 million on annual run rate expense synergies within 3 years of closing. And of course, we announced last quarter that we undertook actions to generate an additional $400 million of annualized cost savings in response to COVID-19, and those remain on track as well.

During the second quarter, we successfully brought Vital POS to Canada, as we said we would, and early sales transfer for Vital in the Heartland channel are encouraging. The migration of partner banks from TSYS to the Heartland brand is underway, and we are building a new sales force to specifically support these historically underserved bank relationships around the U.S., extending our expansive distribution capabilities. Further, our Global Payments Integrated sales teams have been consolidated and are now operating under a unified best practices, processes and measurement. And the majority of our recent new partner wins combine our leading OpenEdge ecosystem and the TSYS Genius platform.

We are also in discussions with multiple Global Payments bank partners outside of the U.S. regarding TSYS's issuer processing solutions. We expect the AWS collaboration to catalyze those opportunities and to provide more worldwide. Additionally, we have current in-depth discussions with multiple customers across several geographies regarding our ability to marry issuer processing with our acquiring capabilities globally to optimize transaction flows.

On the expense side, we are tracking ahead of our merger plan targets this year and see additional opportunities coming from the pandemic. As just one example, we now plan to close additional operating facilities globally and rationalize remaining physical space requirements following the success of work-from-home arrangements for nearly 95% of our team members.

Before I turn the call over to Paul, I would like to comment on 2 strongly held values at our company: people who make a difference and diverse perspectives. I want to share what those mean to us. These principles mean that we will stand against races of intolerance and injustice in all their forms. We respect, honor and celebrate the diversity of our team members and the differences among us. Standing together as one company, we will continue to work to drive positive change for the communities in which we live and work and stamp out injustice. We are grateful and fortunate to be in a position to contribute our talents to do just that.

Paul?

Thanks, Jeff. I want to reiterate how pleased we are with the solid financial performance we achieved this quarter, which was enabled by strong execution and the best-in-class service our team members delivered for our customers in a challenging environment.

For the second quarter, total company adjusted net revenue was $1.52 billion, reflecting growth of 71% over 2019. On a combined basis, our adjusted net revenue declined 14% from the prior year with an approximate 1 point headwind from adverse foreign currency exchange rates. We believe this top line result highlights the diversity and resiliency of our business mix. And while our revenue was not immune from the global pandemic, our adjusted operating margin substantially exceeded our expectation, declining a modest 40 basis points to 37% as a result of the swift and significant actions we took to address the COVID-19 impact, our continued strong execution and the realization of expense synergies related to the merger, which continue to track ahead of plan.

The net result was adjusted earnings per share of $1.31 for the quarter, a decline of 13%, which also includes more than 1 point of impact from adverse foreign currency exchange rate movements. From top to bottom, this performance was better than anticipated at the time of our last quarter call, and we are encouraged by the recovery across our businesses.

Starting with Merchant Solutions. Adjusted net revenue decreased 21% on a combined basis to $906 million for the second quarter, which includes a 50 basis point headwind from currency. Adjusted operating margin declined 430 basis points to 41% as our cost actions partially insulated us from the full marginal impacts of the pandemic. Despite the impact of COVID-19 on payment volumes more broadly, our technology-enabled portfolio remained a bright spot for the quarter, in particular, we saw strength in our e-commerce and omnichannel solutions globally, delivering growth of 16% during the quarter, excluding T&E, as we moved quickly to assist customers in the shift to online fulfillment.

Our unique omnichannel value proposition, including UCP, continues to resonate with customers and drive new wins, and we believe we are well positioned to gain share as growth in this channel accelerates due to the pandemic.

Further, Global Payments Integrated also proved relatively resilient, thanks to the unmatched breadth of its more than 4,000 ISV partnerships across over 70 vertical markets, many of which are consumer nondiscretionary-oriented. The decline in adjusted net revenue for GPI was meaningfully better than the overall merchant business for the quarter. And importantly, this business has recently returned to growth.

As for our own software portfolio, booking trends remained favorable with record achievements in several of our businesses during the period. Customer retention also remained strong, and our leading SaaS solutions continued to support the operations of a diverse set of customers and organizations across their respective vertical markets.

Turning to our relationship-led businesses. In addition to the strong e-commerce results and the Heartland channel that Jeff mentioned, the business delivered record new sales for its restaurant POS solution this quarter and saw the number of new users of its online ordering platform triple sequentially. Additionally, Heartland's payroll sales also set an all-time record this quarter. In Europe, we saw solid improvement as we moved through the quarter as our largest market started to reopen. We are also benefiting from continued expansion of social commerce in the U.K., Spain and Central Europe. Finally, in APAC, while there had been some fits and starts due to moving in and out of restrictions, overall volumes have also continued to improve with each month.

Moving to Issuer Solutions. We delivered $414 million in adjusted net revenue for the second quarter, representing a 4% decline on a constant currency basis from the prior year period as bundled pricing and services volumes are helping to mitigate the impact of transaction-level declines. Normalizing for the effect of the single product turndown by 1 client in the second quarter last year and our commercial card portfolio, which is being impacted by limited travel spending, issuer revenue would have been roughly flat for the quarter and positive for the month of June. We also ended June at an all-time high number of traditional accounts on file.

Our issuer business has a strong track record of innovation to the benefit of our customers. And we are excited about the opportunity we have to bring our leading technologies, products and services to new markets and new customers on a cloud SaaS basis in collaboration with AWS in the future.

Adjusted segment operating margin per issuer expanded a very strong 640 basis points to 42.8% as our efforts to drive efficiencies in this business more than offset pressure from lower transaction volumes.

Finally, our Business and Consumer Solutions segment delivered adjusted net revenue of $217 million, representing growth of 11% from the prior year, its highest quarterly revenue growth in nearly 3 years. Netspend benefited from strong trends in gross dollar volume, which increased 19% for the quarter, driven in part by our support of the disbursement of over $1.4 billion in stimulus funds under the CARES Act. Netspend is also facilitating the distribution of unemployment and other government support to both existing and new customers during this challenging time. Additionally, we continue to be pleased by the performance of our DDA products with account growth of over 30% from the prior year despite a difficult economic backdrop.

Adjusted operating margin for this segment improved 770 basis points to 32.3%, and this marked our best quarter for both absolute adjusted operating income and adjusted operating margin in 10 years, highlighting the great progress we have made in this business during the last year.

In addition to the solid financial outcome we produced across our businesses for the full quarter, it is notable that our performance improved in each month during the period. We were also pleased with our adjusted free cash flow generation of $382 million for the quarter, consistent with the first quarter, and we exited Q2 with approximately $640 million in available cash in excess of our operating needs. We reinvested approximately $104 million of CapEx back into the business during the quarter, also consistent with our first quarter levels and in line with our revised guidance for capital spending to be in the $400 million to $500 million range for the year.

We continue to prioritize new product and technology investments to enhance our leading portfolio of pure-play payment solutions and extend our competitive advantages.

In early May, we successfully issued $1 billion in senior unsecured notes maturing in 2030 at an interest rate of 2.9%. The transaction was credit neutral with the full proceeds used to pay down our outstanding revolver and serves as an opportunistic refinancing of our $750 million of notes outstanding that are due in April 2021 at a rate of 3.8%. As a result, our next significant maturity is not until 2023. And we ended the quarter with a leverage position of roughly 2.5x on a net-debt basis or roughly 2.8x on a gross basis.

In sum, we cannot be better positioned with our investment-grade balance sheet, strong cash flows and solid liquidity, which provide us significant financial flexibility to continue to pursue strategic priorities opportunistically as markets stabilize. Our pipeline remains strong, and we are actively assessing opportunities for us to enhance our scale and capabilities across our payments technology and software businesses.

To that end, our financial strength enabled our agreement with CaixaBank to increase our ownership and our joint venture to 80% and extend our partnership through 2040.

As we look ahead, while we are not providing guidance at this time given trends remain dynamic and difficult to predict, I think it's worth providing some additional color on how our businesses are performing currently. Starting with our merchant businesses. Our performance continues to track very similarly to what you're seeing coming out of the networks in terms of credit trends. And in addition to the accelerating demand for our differentiated omnichannel solutions, we are now seeing domestic volume growth return to several of our international markets.

In issuing, we have a similar dynamic as our volumes are in line with the networks. In fact, excluding our commercial card portfolio, this business has returned to growth. Finally, Business and Consumer Solutions is currently performing well, and we are encouraged by the continuing growth in active accounts.

As I described on our last call in May, several of our businesses are relatively more resilient in this environment, and our results prove that to be the case. Indeed, our diverse business mix and outstanding execution have allowed us to outperform many of our peers. We are grateful for our market leadership and global scale and payments, which drove these results and positions us to be the beneficiary of the proliferation of technology and software in our industry well into the future.

And with that, I'll turn the call back over to Jeff.

Thanks, Paul. The results of the second quarter highlight the wisdom of our pure-play payment strategy and the strength of our business model at scale. Today's announcement of our new collaboration with AWS and the expansion and extension of our joint venture with CaixaBank further deepened our competitive moat for years to come.

We are operating as well as we could possibly be in the current environment. When this crisis ends, as all crises inevitably do, we will emerge stronger than ever with sustained share gains. We look forward to delivering the future of payments.

Winnie?

(Operator Instructions) Thank you. Operator, we will now go to questions.

(Operator Instructions) Our first question will come from the line of John Davis with Raymond James.

First thing I wanted to touch on was the improvement in July. Maybe just help frame the magnitude in which businesses you've seen the greatest improvement. And then second, AWS, and if you expect the partnership to accelerate product introduction, and if it includes more focus on debit considering it expands market to include smaller banks.

Yes, John. So this is Paul. I'll take the first question. And maybe the second one, Jeff and Cameron may want to comment on. But yes, for -- so far in July, we saw very similar trends to what we saw in June from a business line standpoint. So if we look at the merchant segment are integrated was kind of the highlights there as far as returning to growth. If we move to kind of issuing, we talked about in June, if you kind of took out the comparison year-over-year from commercial card, we actually had essentially growth in June, and we're expecting that same thing to play through in July.

We're also in business and consumer, the same kind of trend from kind of a positive picture in business and consumer. So the trends that essentially happened in June, which were an improvement from May or are playing their way through July, and we're expecting some of that to continue throughout the quarter. Obviously, the recovery will impact that.

But Cameron, I don't know if you have anything else to add on the merchant side.

Yes. John, the only thing I would add is our trends continue to look very much similar to what you're seeing in the networks, particularly as it relates to their credit trends. And July showed an improvement over June. That pace of improvement has slowed. But again, you're seeing that coming out of the networks as well as essentially everything is really open at this point.

I would say one encouraging highlight from July, certainly, from my standpoint, is even though you saw a few outbreaks and a little bit of retrenchment in some markets and some new restrictions being put back in place, I think trends continued to stay -- be stable throughout the month and obviously, even slightly improving over what we saw in June as well. So I think that's encouraging as markets continue to open.

These are very U.S.-centric, I would say. If you look at the rest of the world, Europe continues to reopen, and we're seeing the benefits of that as we work through July. Asia is a little bit of a story of mixed signals coming out of different markets. Some markets remain closed or maybe are reclosing, while others are starting to reopen. But the overall trend, I'd say, in Asia remains fairly positive as it relates to volume recoveries as well. So I think we're encouraged by what we've seen. Obviously, there remains a fair amount of uncertainty for the balance of the year, but the trends continue to be reasonably encouraging and very much in line with what you're seeing coming out of the networks as well.

And John, it's Jeff. I'll touch on your second point around AWS. So first, as it relates to distribution, you asked about smaller banks. So as we said in the prepared remarks, really, the unique collaboration between us and AWS is designed to encompass every type of prospective customers. That's true not just by geography, as I mentioned, but also true by size of institution. So as I mentioned and what I said upfront, historically, that was not the focus of TSYS's issuer business in the United States. And now jointly with AWS, it will be.

One of the slides we put together talks about today, the end-to-end customer life cycle and how we stay in the entirety of that. And that starts with lead generation, all the way through sales qualification, sales engineering, all the way through the billing. We'll we doing that jointly with AWS. So I would say there's really no type of institution, new entrant new bank, small bank that we're not going to approach from a distribution point of view, and that is very different given where TSYS was historically.

As it relates to debit, which you also asked about, this also spans every type of product that we have that they will be capable of having both today and in the future. So debit would also be an area that we're focused on coming out of it. We do have a significant debit business at TSYS, primarily outside of the United States. As part of the transformation, we'll be bringing that business inside of the United States. There's real no element of our ecosystem in issuer that's not transformed by this collaboration with AWS.

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

Jeff, Cameron, Paul, congratulations on this performance in a tough environment. I think my first question is a planning question. Just sort of going back to your comment on the up and down recovery in volumes. How are you balancing that with when you -- when do you pull back on those in-year cost controls that you announced right away and as well as your decisions as they relate to any longer-term investment? Can you talk a little bit about the balance of when some of those costs come back and so on?

Yes. Ashwin, it's Jeff. I'll start. Well, I would say, in answer to your question, we reaffirmed today really all of our expense targets, including the COVID-19-specific cost control. So as Paul mentioned in his prepared remarks, there's a fair amount of uncertainty for the remainder of the year given the pandemic and the macroeconomic outlook globally. And I think until we get some more certainty about where the world is heading, the duration of the pandemic and the depth of it, it's very hard for us to do other than what we did this morning, which is reaffirm where we're headed

We do have the capability and the flexibility to pivot very quickly, if that's something that we want to do. But given our statement this morning, we're really not in a place to do that yet today. Rather, I think the prudent thing to do is to continue to operate, realizing it's going to be an up and down, as you say, kind of environment with gains 1 week and the like that may or may not persist. So for the time being, I think we're in a really good place. And obviously, that's something, as we do with our businesses, we reassess continually.

And Ashwin, it's Cameron. The only thing I would add on the product side since you raised that is we continue to invest in products throughout the pandemic and I think, obviously, working very hard to make sure the business is well positioned for the recovery and what the world looks like post recovery. As we announced in the call, we rolled out Vital to Canada this quarter. We launched the Heartland retail solution this quarter as well. We are launching an omnichannel version of Vital that integrates our online ordering capabilities into the legacy Vital platform. That will be rolled out in Q3. We've made, obviously, significant enhancements in our UCP platform. That is the foundation for some of the success we highlighted on the call today as well. And we continue to invest in our social commerce solutions, particularly in Europe, as we've seen significant uptake in those in Spain and the U.K. in particular.

So from a product standpoint, I think we've really used this opportunity during the pandemic to double down on our product initiatives and really make great strides in continuing to differentiate ourselves from a product and solution capability in the market.

Got it. And then one of the key investor questions to come from the last 1.5 months, 2 months has been the small business health as well as the impact on that from just call it reopening versus stimulus and what's the relative impact of it. Can you talk a little bit about that in the context of your portfolio? And how much does the next stage of getting stimulus past matter?

Yes. Ashwin, it's Jeff, and I'll ask Cameron to jump in, too. So the first thing I'd say, and we said this in our prepared remarks, is that our performance given our mix in all of our businesses, especially given our mix, was better than what you saw from the networks last week, hands down. I mean that's just the fact. And I would say that indicates that there's been no differential SMB underperformance just given the mix of businesses we have relative to the payment networks. We thought that was going to be the case. It's nice to see it confirmed with their actual performance through the period. And as we said at the beginning of our commentary, our businesses really remain and our customers really remain very healthy.

Cameron, you want to add a little bit more into some of the details?

Sure, I'd be happy to. To Jeff's point, Ashwin, I think the overall health of the customer base that we have today is really quite good, notwithstanding the environment that we operate in today. And from a performance standpoint, the merchant business performed pretty consistently with what you saw on the network, putting aside the overall company performance, as Jeff highlighted, which was clearly better as a revenue and net income and EPS matter.

So I think as we look at the portfolio today and because we are SMB-focused, that has not disproportionately impacted us on the negative sense relative to what you've seen coming out of the networks. And frankly, we were also very successful in supporting our customers throughout this difficult period with various concessions that we made, offerings of new products for free for a period of time. We facilitated the distribution of nearly $0.5 billion of PPP loans to customers through our lending partner to over 5,000 of our small- to medium-sized business customers. So I think we feel good about the efforts we've made to support them through what's been a difficult time as well as, thereby, ability for the future as the recovery continues to take shape here in the U.S. in particular.

And as for further stimulus, Ashwin, to get to your question, who knows what ultimately will happen from a governmental point of view here in the United States. But I would just point out that a lot of businesses are overseas. Not everybody, not every market had PPP or anything like it. So there's plenty of examples. And I think Cameron and Paul alluded to this in our commentary where we're net growing year-over-year in markets that didn't like PPP or consumer disbursement. So while 70% of our business, of course, is right here in the United States in the merchant side, a healthy 30% of it or $1.5 billion is not. And in that commentary, really, nobody else had something exactly comparable to the PPP. So time will tell. And really, it has taken various forms. But in those markets, as we said, in domestic Spain, in Continental of Europe, we've returned to net growth year-over-year without those kinds of things.

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

I know a lot of hard work goes into these results, so well done. I want to ask on the AWS side, just the question of is this offensive or a defensive move from Global Payments. Is this more about winning new modern card issuing contracts or about migrating existing? And maybe if you could share the cost to stand up the technology. I'm just guessing here, are you going to run an instance of TS2 inside AWS in parallel with your existing solution for some time? Just trying to better understand it, if you don't mind.

Yes. Tien-Tsin, it's Jeff. I'll start, and then Paul is going to provide some of the financial commentary. But listen, I think it's offensive. I think, at the end of the day, the way we look at the world is this is based on overwhelming feedback from our partners and customers today in financial services that what they would like to see from us over the next number of years. So we're listening to what our customers wants us to do. We're looking at where to see if technology needs to be a number of years, a number of years down the road. So it is going to take us a few years to put this technology into effect, but it's not going to be a big bang. It will be gradual improvement throughout. So we'll have the ability to release very API and micro services modules over the next period of time.

So we view this based on customer feedback we've got and our view as to where the world is going as the right next step. But in all fairness, TSYS was doing that for quite some time prior to the merger with Global Payments in September of 2019. So this is another step along the journey that TSYS has been on for a considerable amount of time. That's kind of point 1 technology set.

Point number 2, I would not overlook the impact of the distribution side. So as I said in our prepared remarks, today and historically, TSYS is very much confined to environments where TSYS can build a physical data center to host the information that needs to be hosted with card issuers, particularly for larger card issuers. That's no longer going to be constrained in the context of AWS given their physical but also, of course, their virtual size.

The second thing is, historically, you really needed a cloud-native, end-to-end environment to pitch kind of neobanks. The neobanks and new entrants in the financial services space, this will get us there.

And third, as I mentioned before, from a collaboration point view, it's really unique that AWS and us being supporting the entire life cycle of pitching and selling all the way through to billing. So dramatically expand the sales resources that we would always have at the fingertips by TSYS and Global Payments. So from that point of view, I think pretty clearly, offensive.

Paul, do you want to comment on the financials?

Sure. Yes. And Tien-Tsin, on your question around the costs, no, this will be managed in our overall cost base of the Issuer Solutions segment. As Jeff mentioned, obviously, we've been doing some of this for several years now. And so we do not see an uptick in cost, or really, from a CapEx standpoint, this will be managed in our overall CapEx budget at this kind of normalized level, so no tweak there on the cost side. In fact, over time, obviously, we'll get some efficiencies, but you'll see us softening our physical footprint, cost on data centers and some other things. So it's blended into the cost base.

Got you. No, I'm glad to hear you going all in on cloud. It's very important. Just a quick follow-up, just on the relationship side. It sounds like good bookings, especially in restaurant. Just overall, given what you said about pipeline, your ability to deliver against it virtually, any issues there? Or it sounds like it's going as planned. I know we'll bump up into the holidays pretty soon. So just curious if that's still an issue or not.

Tien-Tsin, can you ask that question again, the second question? I kind of -- we kind of lost what you said...

Yes, you were breaking up a little bit.

Yes. I'm sorry. I'll try to ask you a little clearer. Just the ability to implement new projects, especially on the merchant side virtually, because I know we're getting to the holidays and hopefully getting some sign-ups coming up here, so just curious if there's any hold back there in your ability to deliver the work virtually.

Yes. It's a really good question, Tien-Tsin. It's something that we worked on very hard, as you can imagine, throughout the course of the pandemic with the vast majority of our resources around the globe and our team members working from home, in a remote environment. I would say, thus far, we're delighted with our ability to deliver new product, new capability and execute in what has been a challenging environment. Obviously, people are used to working side-by-side with each other, and the collaboration and effectiveness that comes from that is -- it's hard to replicate that in a remote environment. But our teams have performed admirably.

And the thing that I'm struck by every time I get on a call with one of our product teams with the business is the level of collaboration and how quickly the TSYS and Global Payments teams have come together and how effective we've been in introducing new product and new capability in a very short period of time.

As I said, we've met every milestone that we had, frankly, put in place prior to the pandemic around new product rollouts for 2020 and remain on track to hit our remaining milestones for the balance of the year. So I feel good about how we're executing in this environment. It's not without a lot of effort, as you can imagine, and I appreciate you highlighting that. But thus far, I would say the teams have performed extraordinarily well. And we're very excited about the new product and innovation we've been able to bring to the market and we'll continue to do through the balance of this year and heading into 2020 as well -- 2021 as well.

Your next question comes from the line of David Togut with Evercore ISI.

Would be curious for your perspectives on the rollout of QR codes by a number of the pure-play online payment companies and how does this interact with GPN where you have the relationship at the physical point of sale. Is there just a sharing of economics? Or is there an incremental sort of economic fee work QR code is being used?

Yes. David, it's Jeff. So what I would say is we probably have as much experience as anybody at QR code acceptance. We enable more -- as we said in our remarks, we enable more NFC acceptance, and we enable in more markets than really anybody else with extensive partnerships with Alipay, WeChat Pay. Those have obviously looked outside Asia into North America and into Europe. So I would say relative to QR codes, we welcome more of those in more of our markets because of our record of doing that across Asia, North America and Europe.

The second thing I would say is if you go back to the issuer side of the equation with AWS, this is going to enable us, as it will, many things. This will enable us to move even more quickly on new means of adoption for payments. So I think by making it our entire environment, from a transformative point of view, cloud-native and cloud-enabled, that's only going to facilitate the faster rollout as you've seen with us already in terms of contactless, in terms of our Xtend announcement this morning with Mastercard for virtual cards. That only make us, I think, more helpful in terms of rolling out products like QR more directly.

The last thing I'd say in response to your question on economics is, when you think about QR codes, there's a variety of ways to load those. So depending on who you're talking about, if it's PayPal, it's generally via card, although it's obviously also debit. In ACH, although card is the majority, I believe of how PayPal loads occur today. If you look in Asia, what you'd see is ACH via bank loads through Ali. But at the end of the day, the merchant wants to accept whatever payment scheme the cardholder and the consumer is presenting. So they're generally not to the exclusion. Meaning when you have QR codes in place, it doesn't mean that the merchant at the end of the day is going to say, don't give me some other card or I care about how you loaded cards in the first place. So from that point of view, our economic opportunity really doesn't differ among the different types. And I would tell you, at the end of the day, really, the only entity here is cash. So the more cash and check that we get out of the point of sale, the more we move towards safer commerce, which includes QR code, the better for the Global Payments at the end of the day. So innovation, pace of change, multi-nationalization of payment types, this is nothing but good news for our business.

Appreciate that, Jeff. Just a quick follow-up. Just the go-to-market approach in Europe, both with the Issuer Solutions side and merchant plus layering in AWS now, how do you size the market opportunity in Europe? Historically, the big banks have been more in-house across a range of merchant and Issuer Solutions. Do you see that opportunity opening up now from a new business standpoint?

Well David, I'm glad you asked that. Of course, I'm delighted to have you on today with the announcement of expanding and extending our partnership with Caixa because I know that you're rightly focused on the opportunities in Europe. So I'd say a few things in response to what you asked. First, on the issuer side, we have fantastic opportunities globally, including in Europe, with TSYS on the issuer side and Global Payments on the merchant side. So we made tremendous headway there in the 9 months since we announced the closing of our merger. I'm as optimistic today as I ever have been on completing a number of issuer deals with TSYS with global relationships worldwide, but including, in particular, [lighter] comment in Europe. And that, of course, was before AWS. So the way we talk about TSYS and Global Payments is that on a combined basis, we have 1,300 FI customers around the world. I would tell you, financial services is a very big piece of AWS's footprint today, and obviously, it's a very large business. We've certainly thought about our ability to bring AWS into the fold as it relates to our conversations with our current customers, and I believe that they're doing the same with us on the issuer side. So that's only going to expand that pool of opportunities from the 1,300 that we have today at legacy Global Payments and TSYS.

And then on the merchant side, I think you should look at the Caixa announcement as a harbinger of other things that may come. We've seen this with Erste in Continental Europe with us a number of years ago. We've obviously seen the Caixa in 2010 but the expansion today. I think the reason to drive financial institutions today to do that relate to the ECB's point of view on what impact COVID-19 and the pandemic may have on the macroeconomic environment and the balance sheet health and capital ratios of those companies.

So David, it's never a bad time to do something with us. But I would say this reminds me a lot of what we saw in '09, '10 and '11, which is we'll go through a macroeconomic dislocation, and that provides a fantastic opportunity for us to do more we've been able to do. So I think stay tuned and more to come, and I'm pretty optimistic about the health of our business in Europe.

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

All right. You clearly outperformed us on the merchant segment quite a bit. And just curious, if you can subsegment the pieces, whether it's e-com or integrated or other parts of your direct business, what was surprising to you the most in the quarter and held -- how it help up in this environment? And maybe if you can talk about structural market share, where you're seeing yourselves really pull ahead of the pack because of your technology in this environment. And then I just have one quick follow-up.

Yes. Darrin, it's Cameron. I'll start off and ask Jeff and Paul to jump in if they have any additional comments. So look, I would say across the board in merchant, we've been pretty pleased with how the business has performed throughout the pandemic. Obviously, and we called this out specifically in the script and Jeff commented on it earlier, our integrated business performed extraordinarily well, I would say, throughout the pandemic. A lot of that is due to the strength of our partnerships in that channel, our focus on consumer nondiscretionary channels, by and large. But the overall performance in that business clearly led the pack as it relates to overall merchant business in the second quarter. And obviously, that has continued in July, and we expect to see that continue through the balance of the year as well.

I think our vertical market business was obviously a, by and large, good story as well. Obviously, Software-as-a-Service, subscription-based revenue streams withstood the pandemic very well. We saw great performance in a number of those channels. Obviously, a couple of those businesses were more negatively impacted with schools being closed for much of the second quarter as well as our gaming business being exposed to closures of physical brick-and-mortar casinos. Obviously, those businesses were more negatively impacted. But on balance, I would say, our vertical market business performed well as a result of the focus on more recurring revenue streams, subscription-based revenues in those channels.

And I would say, lastly, our relationship business here in the U.S. performed quite well also. Notwithstanding, it's more focused on consumer discretionary verticals as well as being more SMB-focused across the different businesses, it withstood, I think, the pandemic very well. A lot of that was due to our ability to continue to sell effectively in this environment to offer new product and capability to our customers. And I think that's really the point that I would highlight as it relates to the second part of your question, I think from a product and innovation standpoint, we're really at the intersection of what our customers were demanding and obviously, the impacts of the pandemic. Our ability to roll out online ordering capability, safe commerce capabilities in our different vertical market businesses, our ability to deliver those quickly, ubiquitously, with ease and to be able to integrate them with existing card-present capabilities as I think we're uniquely positioned to be able to do, I think that allowed us to really win in this environment, continue to gain share and positions us well, I think, for a very bright future as we really have the products and solutions and the capabilities and we have the distribution mode to be able to deliver them very quickly to customers in a difficult environment. And I think that's one of the hallmarks of the second quarter that I would highlight.

Yes. I think, Darrin, it's Jeff. I would just say this is a continuation of the theme that we've had for years here, which is a further movement toward technology enablement and differentiating distribution of what we've been doing. So if you look at, as Paul and Cameron said, the businesses that have performed best, our integrated business, our e-com and omni business, elements of our Heartland business that are specific to omnichannel delivery, our exposure to emerging markets, those are the same themes that we've had for a really long period of time. To be able to get 95% of our workforce working from home in relatively short order, those speak to, I think, and then obviously, the culmination today as announced at AWS, really on the issuing side, across the full life cycle of what we're selling globally in the issuing business.

We wouldn't be in the position we're in today if we hadn't started turning many, many years ago toward technology enablement. So I think as difficult as an environment as it is on the macro because of the terrible effects of the pandemic, nonetheless, I think this is a culmination of years of investment in differentiated distribution and technology, and I think you're seeing it all. At the same time, I would say, to normalize for the macro, this might be the best quarter we've ever produced in a macro-neutral environment, and I think that's a culmination of many quarters of investment.

Okay. All right. That's really helpful, guys. It's good to have those offerings now especially. Jeff, just real quick follow-up is on M&A. Are we still in an uncertain such an environment that you'd want to hold off? Or would you say you'd be more willing and active now? And what areas would it be now? Would it be still software focus or a little bit more on the operating leverage and the scale side on acquiring or others?

So Darrin, we just announced a deal this morning. (inaudible) We're obviously pretty active and not kind of waiting. It just so happens with a good long-standing partner of ours, but nonetheless, a deal this morning. So I would say our pipeline -- as I think Paul said is in his remarks, our pipeline is very full. Our balance sheet is at 2.5x in terms of leverage. So I think we're ready now. Obviously, everyday brings more information about what's going on in the marketplace. So we're certainly open for business. We're certainly looking. Ultimately, it depends on the facts at the time. Certainly, sitting here today, we feel very good about where we were with our partners over at CaixaBank and good enough to make a significant increased investment back into that business. So I would say we're open for business, and we continue to look.

In terms of what we're looking at, it's really across the board. We're looking at software deals. We're looking at competitive takeout deals, looking at deals in new geography. I don't think there's really any limit on what we can do in terms of what we're looking at.

Our final question will come from the line of George Mihalos with Cowen.

Congrats on a very robust quarter. Paul, just a question on the issuer segment, maybe a 2-part question there. One, the margins were up something like 600 basis points year-over-year. I'm curious if there's anything onetime there, if it just has to do with discretionary cost cuts. And related to the outlook for issuer, I think you said it's sort of tracking network metrics where I think their process transactions are now low single-digit positive. Is that the right way to be thinking about how the business is performing in July? Or do we need to take that number and discount it from what you're seeing in the commercial card business?

Yes. George, yes, 2 things there. One, on the margin side, yes, you're right, we were very pleased with the 640 basis points. You saw in the first quarter, we were 450 basis points, so it is better. But there's nothing onetime there that we'd call out. We're going to be tracking really strong on the margin front given all of the cost things that we're doing on that business. So nothing kind of onetime or anything unusual to call out there other than just the robust cost management that we've put into that business.

And then on the volume side for issuer, yes, we, from an authorization and transaction volume standpoint, look, just like the credit, Visa credit numbers that you see out there. So nothing differential I would point out. It's just you're seeing kind of from an overall standpoint, the fact that only a portion of our revenue mix is transaction volume-related. So we're kind of growing through that pull-down. So that -- those numbers that you're seeing out of the networks on the volume side given our market share look very similar to what we're seeing both from a June and a July standpoints.

Okay. That's great. Good to hear. And then, Jeff, congrats on the AWS partnership. Maybe just 2 quick questions there. I guess, firstly, some of your digital peers, the stripes of the world and obviously, [adding] and the like, they have issuing platforms going after sort of digital marketplaces and servicing them. Is that an area that maybe Global will now look at? And then as it relates to servicing FIs, my sense would be that you're not interested in coupling a core processing solution with what you're doing on the issuing side. Is that fair to assume?

Yes. So in your first question, George, what I would say is new entrants, neobanks, retailers, the Ubers of the world, the answer is they're all in scope. So I think what we've been able to do here in this collaboration with AWS is more than triple our target addressable market for opportunities. I really don't think that there's any area of the marketplace either by segment or geographically that is any longer out of scope with AWS. That's kind of your first point, and that's done on a differentiated basis with us.

On your second point, no, I don't believe it changes our view on core processing. In fact, quite the opposite. So I think our perspective historically is that we're probably undersized in terms of distribution assets and legacy TSYS issuer going after the size of the landscape that we wanted to go after. But I think what we've been able to show is, notwithstanding that, that post the merger, our announcement with Truist in May, our announcement of the TD renewal today and (inaudible) our announcement of the collaboration with AWS means that we're going to leapfrog what I would call analog distribution, which is I believe core processing is, and go directly into technology-enabled distribution with probably one of the largest or the second-largest technology part of the world, namely AWS. So I think we've been able to do here with AWS is circumvent the traditional method perhaps of referral into the issuing side by collaborating and leading with technology, which is the exact same strategy we've had for a number of years, of course, in our merchant business. So rather than reopening whether core processing is important to that sales cycle, which I think we should not post the merger, I think we're going essentially from directly to cellular without stopping a landmine of core processing.

Well on behalf of Global Payments, thank you for your interest in our company, and thank you for joining us this morning.