環匯 (GPN) 2012 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to Global Payments fourth-quarter year-end 2012 earnings conference call. At this time, all participants are in a listen-only mode. Later we will open the lines for questions and answers.

(Operator Instructions)

As a reminder, today's conference will be recorded. At this time I would like to turn the conference over to your host, Senior Vice President of Strategic Planning and Investor Relations, Jane Elliott. Please go ahead.

Thanks. Good afternoon and welcome to Global Payments fiscal 2012 fourth-quarter and year-end conference call. Our call today is scheduled for one hour. Joining me on the call are Paul Garcia, Chairman and CEO; Jeff Sloan, President; and David Mangum, Senior Executive Vice President and CFO.

Before we begin, I would like to remind you that some of the comments made by Management during the conference call contain forward-looking statements that are subject to risks and uncertainties that could cause actual results to vary, which are discussed in our public releases including our most recent 10-Q and 10-K. We caution you not to put undue reliance on forward-looking statements. Forward-looking statements made during this call speak only as of the date of this call. In addition, some of the comments made on this call may refer to certain measures such as cash earnings, which are not in accordance with GAAP. Management believes these results more clearly reflect comparative operating performance. For a full reconciliation of cash earnings to GAAP results in accordance with Regulation G, please see our press release furnished as an exhibit to our Form 8-K dated today July 26, 2012, which may be located under the Investor Relations area on our website at www.globalpaymentsinc.com. Now, I would like to introduce you to Paul Garcia. Paul?

Thank you, Jane. And thanks everyone for joining us this afternoon. I would like to begin with an update on the data intrusion and the substantial progress we've made to date. I am pleased to report that our investigation is now completed and we are actively executing the remediation plan. In regard to returning to the lists of PCI compliant service providers, a qualified security assessor, or QSA, is conducting an independent review of our active remediation activities. Please be assured that we are progressing as rapidly as possible. In the meantime, we continue to sign new merchants and process transactions around the world for all card brands with the same high level of service our customers have come to expect. Given the challenges we faced this year, I am pleased with the revenue and earnings growth we delivered in fiscal 2012. Revenue grew 18% to $2.2 billion and cash earnings per share grew 15% to $3.53 over prior year. Excluding the impact of acquisitions and debit legislation, our core cash operating margin expanded ten basis points to 21%.

Our North American segment benefited from solid US transaction growth fueled by our ISO and direct channels, partially offset by continued pricing pressure in Canada. Internationally, Europe's strong results were driven by the addition and growth of Spain; the February 2011 UK back-end migration; and significant market share expansion in Russia. Our Asia business grew more modestly but continued to improve its contribution to income growth in the international segment. Additionally, during fiscal 2012, we successfully completed three targeted acquisitions, increasing our distribution in Russia, adding a merchant-acquiring business in Malta, and expanding our e-commerce presence in the US by acquiring the CyberSource portfolio.

We also expanded our domestic footprint in China. Recently, we added three new regions for China UnionPay acquiring -- Jiangsu, in Sichuan provinces, and the city of Shenzhen. These significant geographies collectively represent over 175 million people. And we continue to make progress on adding other new regions. It is important to note that we remain the only non-Chinese merchant acquirer licensed to process CUP [RAM MB] transactions in the People's Republic of China. Additionally, I am absolutely delighted to announce we have signed an agreement to acquire the remaining interest in our joint venture in Asia/Pacific from HSBC. Our partnership in Asia/Pacific now evolves from a joint venture to a marketing alliance. Our performance in Asia/Pacific with HSBC's support has provided a strong foundation for long-term growth. We intend to leverage our presence there to increase our market penetration across the region. We could not ask for a more supportive partner than HSBC. The strength of their brand and reputation is unparalleled and we look forward to playing our small part in their global strategy.

Turning to fiscal 2013, even in a challenging global macro-economic environment, we anticipate 8% to 10% revenue growth on a constant currency basis. Canada remains a modest headwind as we navigate through competitive market conditions. However, I want to remind you that Canada will continue to provide significant cash, which helps fuel other investment opportunities. In 2013, we will continue our technology investment program, with the expectation that these investments will both strengthen our technology infrastructure and improve our long-term operating leverage. We will also increase our investment in Asia as we continue to execute our expansion plans in that region. We intend to use our capital flexibility in 2013 to make additional strategic acquisitions and we also intend to return cash to shareholders through our newly authorized share repurchase program. Now I will turn the call over to David.

Thank you, Paul. For our fourth quarter, we delivered solid financial performance with revenue growth of 15% to $597 million and a cash earnings per share of $0.97 or 13% growth. These results exclude special charges. The pre-tax charge in the fourth quarter related to the data intrusion was $84 million and includes an estimate for charges from the payment networks, cost of the investigation, as well as initial expenses related to remediation. We anticipate that in 2013 there will be adjustments and additional net charges of $25 million to $35 million after insurance proceeds of as much as $28 million are applied. As all the costs are finalized, we true up our estimate for charges from the networks and we execute remediation. Other special charges in the fourth quarter included employee termination benefits and the settlement of two contractual disputes. Our cash operating income increased 15% to $123 million with operating margin of 20.5% which was flat with prior year reflecting the unfavorable effect related to the debit legislation and the three acquisitions we discussed last quarter.

Now let's move on to our segment results. North America merchant services revenue grew 17% for the quarter with US revenue growth of 25% and US transaction growth of 13%. Canada declined 9% for the quarter with transaction growth similar to last quarter at 6%. International revenue increased 10% for the quarter compared to last year with Europe and Asia producing 11% and 5% growth respectively. North America operating income or EBIT dollars grew 11% in the fourth quarter. International operating income grew 17% in the fourth quarter with another quarter of strong margin improvement of 230 basis points year-over-year.

During the fourth quarter on a year-over-year basis, currency changes negatively affected revenues and cash earnings by about $9 million and $0.03 per share respectively, with the most significant impact from the Canadian dollar and the euro. The impact on revenue and earnings for the full year 2012 was slightly positive, adding $2 million to revenue and $0.01 to cash earnings per share, as we had anticipated. For fiscal 2012, we generated free cash flow of $258 million. We define free cash flow as net operating cash flows, excluding the impact of settlement assets and obligations, less capital expenditures and distributions to non-controlling interests. Our capital expenditures totaled $110 million for the year, about half of which relates to data center and network infrastructure initiatives.

Now let's turn to 2013. We expect North America revenues to grow at a high single to low double-digit level. This reflects consistent growth in the United States of low double-digits and we expect Canada to decline slightly in local currency due to continued market-based pricing pressures. We anticipate that our international revenues will grow in the mid-single digits in US dollars. We expect Asia/Pacific to return to low double-digit growth. We expect mid-single digit growth rates in local currency in the United Kingdom and in Spain. We expect the Czech Republic's revenue in local currency to be about flat. Russia continues to perform strongly for us and we expect it to grow over 20% in local currency. When you translate this performance into US dollars, given the strengthening of the dollar, this results in low single digit growth overall in a difficult macro-environment in Europe.

Our fiscal 2013 outlook includes incremental technology spending, which affects our earnings growth by as much as 2 percentage points. This is a continuation of the program we initiated prior to the data intrusion and represents a transformation of our data center, network, and underlying processing infrastructure, along with compliance spending related to card network initiatives like EMV and the fixed acquirer network fee or FANF. Additional technology spending related to security remediation has not been included in our cash earnings expectations.

In North America, excluding increased technology spend, we expect cash EBIT dollars to be about flat compared to last year with our core US business modestly increasing, offset by a decline in Canada. Internationally we expect EBIT dollars to increase in the mid-single digits on a reported basis. We expect overall Company cash operating margins to decline approximately 150 basis points on a reported basis. We expect foreign currency to negatively affect cash earnings per share this year by approximately $0.08, assuming downward pressure from all currencies with the most significant impact coming from the euro in Spain and the British pound. We expect these currency headwinds to be more heavily weighted in the first half of fiscal 2013. We anticipate our effective tax rate to be approximately 29% and our diluted share count to be about 80 million.

We expect the Asia acquisition to close during our fiscal second quarter. This transaction extends the period of our existing deal so that HSBC will provide exclusive referrals to Global Payments until 2021. The purchase price is $242 million. Given that we already fully consolidate the joint venture, the accounting for the acquisition will not change our revenue or operating income. It will, however, eliminate the impact of the net income attributable to non-controlling interest from Asia. There will be no incremental purchase accounting amortization on a GAAP basis. Assuming an October 1 close date, we expect as much as $0.07 of cash earnings per share from this acquisition and this is included in our expectations for 2013. We expect our capital expenditures will be about $110 million.

Our total available cash, including working capital, as we enter 2013 is approximately $270 million and our credit facility has approximately $370 million available. In terms of the sequence of quarterly earnings per share, we expect first quarter cash earnings per share to be slightly down over Q1 of 2012 as a result of currency translation. We expect the distribution of quarterly earnings to be roughly consistent with that of 2012. Based on our current assumptions, and including the Asia acquisition, we expect annual fiscal 2013 revenue to range from $2.360 billion to $2.400 billion, reflecting 7% to 9% growth and our cash earnings per share to be in the range of $3.59 to $3.66 reflecting 2% to 4% growth over fiscal 2012. On a constant currency basis, we expect revenue to grow 8% to 10% and cash earnings per share to grow 4% to 6% over fiscal 2012. These expectations exclude any impact from potential share repurchases. And now I will turn the call back over to Paul.

Thank you, David. As I reflect on our fiscal 2013 objectives, I want to highlight the fact that we will be growing transactions processed worldwide at a double-digit rate in a very challenging economic climate. We will also continue to grow US EBIT and our European businesses are extremely well-positioned for both organic and inorganic expansion. The data intrusion incident will soon be behind us and we will emerge with a world class technology infrastructure offering future operating leverage. Lastly, and I believe the most exciting opportunity of all, is the ability to expand meaningfully across Asia.

To be clear, I am not satisfied with our 2013 earnings expectations. Our Company has historically performed at a much higher level and I have every expectation that we will return to those performance levels. However, I believe it is prudent in a year in which we will be dedicating significant resources to building our systems infrastructure to be cautious in regard to our earnings growth. Our faith in our future and our desire to return value to our shareholders is underscored by our Board's approval to purchase up to $150 million of our Company stock. I will now turn the call over to Jane. Jane?

Thanks, Paul. Before we begin the question-and-answer session, I would like to ask everyone to limit their questions to one with one follow-up in order to try to accommodate everybody in the queue. Thank you and operator, we will now go to questions.

(Operator Instructions)

Dave Koning, R. W. Baird.

First of all I was just wondering, in North America it looked like an almost unnaturally high both revenue growth and margin. I was wondering, it almost looks like there might have been a term fee or some sort of one time item. I'm just wondering what maybe that might have been?

Sure, Dave. This is David. It's not really one time items. A couple of things going on there. First is strong seasonality out of the ISO channel. In addition, as you know, if you're comparing it year-over-year rather than sequentially you'll have the effective debit legislation. The beginning of FANF billing occurred, as well -- the new FANF billing that is rolling out across the market right now. Also in our Q4 in the United States which will roll North America, you have the typical greater giving seasonality where that small business unit does more than 100% of its earnings for the year in Q4 alone. And I think on a full-quarter basis, again depending on whether you're comparing sequentially or year-over-year, remember that our CyberSource relationship evolved from an indirect net revenue relationship to a gross revenue. So all of those pieces come together for a very strong Q4, really about what we expected, really frankly, an overperformance in revenue but in terms of rolling it down to the EBIT line, about what we expected.

Okay, great. And then my follow-up question, just in APAC, you are calling for a little bit of deceleration relative to -- it used to always be, it seemed like 20% or 15%, 20% or more and you're calling for deceleration and I know China is coming on. Is that something that you'd expect to have some sort of reacceleration in the next year or two or three years as some of those Chinese transactions came on more strongly?

Yes. That's a part of the answer and just to make sure I'm answering your question. You're speaking to the revenue across Asia, the growth?

Yes.

Yes, so if we think about Asia for the full year in 2012 as a 7% grower and in particular 5% in Q4, we really expect low double-digits, as we said earlier in the prepared comments, in Asia, and that is -- it has to do with a number of things. One of them, quite frankly, is the comparables get a little bit easier. Remember, this past year we were rolling over very tough comparables, large retailer, rolling out new products, and the fact that we had rolled out our own new product sequentially over the course of the year before. So that comparable gets a little bit easier, it gets a more normalized year-over-year comparable, which is always helpful. We do have a accelerated rollout and we do expect accelerated growth in China to your point. And as you also correctly pointed out, the end result of that is additional sales folks and some other infrastructure in China as we add these new regions so it doesn't all drop then to the operating line. And then finally we have got a number of scheduled rollouts of new products and/or promotions across the regions that we think fuel us back to the level of growth one would expect from these Asian markets.

Okay. Great. Thank you.

Jim Kissane, Credit Suisse.

Hello, thanks, and congratulations on the HSBC deal. And following up on that, can you really discuss how you will operate that business differently now that you have complete control? And then maybe David if you can give us some insight into terms of valuation in terms what you paid on an EBITDA basis?

Well I will take -- as you suggested we will do it in that order. So this is Paul. The opportunity here is all about expanding our market share in some areas where HSBC had a rather small presence. Not because they lacked the desire or the intent, but they were quite frankly limited by a number of forces, China and India in particular. So we are going to be focused on expanding those markets with some additional partnerships going forward. Now how our relationship changed with them is basically just economic in terms of referrals, in terms of partnership, in terms of all the branches directing new business towards us, that continues. In fact it continues to 2021? David, is that correct?

That's correct.

2021. So that's all terrific. That's all terrific news. But the real sizzle to that steak, Jim, is taking advantage of these opportunities in China and taking advantage of these opportunities in India, which we have been talking about for a very long time and in not too many days from now that's where I'm heading.

And then, Jim, if I may put a finer point on it. That's an extension of our exclusive referrals to 2021, which we are pleased about. Now, speaking to the purchase price of $242 million, I will probably stay away from a specific multiple but -- certainly on the EBITDA -- but let me characterize it a bit. I think this will help. We arrived at that number in collegial conversations with the bank that I think appropriately reflect the growth in Asia to date as well as the opportunity for further growth in Asia. And double-digit grower, the opportunity Paul has just described, certainly is going to put you in that range where you expect a healthy multiple and it is just that -- low double-digit multiple. But without putting a precise number on it, I think it reflects the growth we have achieved and the scale we have achieved, as well as the future growth and I think both parties were pleased with the outcome.

Okay, so low double-digit multiple --

I think that's the way to think about it. Yes.

Jim, this is Paul again. I think you have to really have listened to what David said, though, to get the feel for it. Without HSBC, we would not have been in that market. Now they are not participating to the tune of 44%. And the real opportunity will be forthcoming. They won't be participating economically. They deserve to be compensated somewhat for that and that's partly what this was in all fairness.

And you know what you are buying. I get that. And one last question. David, I was a little confused in terms of the remediation costs on data security. So you are not including any estimate in your 2013 guidance and then you talked about a $25 million and that was after insurance so it sounded like one was a charge and you have not included any estimate in terms of ongoing remediation. Is that right? Maybe--?

So let me try and parse it a little more clearly. We don't intend to reflect remediation costs in 2013 in our cash earnings per share as we go through the year. So it's clearly not in the cash earnings per share expectations. Now having said that as we look to our GAAP expectation, it's difficult for us to precisely estimate the true-ups right now. There is a full process the networks go through. It's very rigorous, it's frankly incredibly impressive as you sit on the other side of it and work with the networks at the level of sophistication that goes into this. But it takes some time to roll out as they do the right thing for issuers, consumers, and in all fairness, the acquirers and processors involved, as well. So it's difficult for us to estimate any true-ups to our current estimates for charges from the networks. To that you would marry remaining investigation costs that have accrued to date, as well as remediation costs. Those we can estimate a little bit better.

But overall it's difficult for us to put a precise number on it. So we'd offered you in the prepared comments and also in the footnotes to, I think, schedule 9 of the press release, is we believe the range will probably appear to be something on the order of $25 million to $35 million net of insurance. Now, we have $28 million of remaining insurance capacity. So that would put you in the $50 million to $60 million kind of range gross, $25 million to $35 million net. And as we go through the year, we will be churning those charges up and recording actuals and we'll certainly report those and obviously, we expect to have a far better feel for a more precise estimate as we report Q1. But that really -- those are the pieces. So it won't be in cash regardless. We have tried to keep a fairly clean cash year-over-year view so you can assess the progress as a Business on that side with security remediation to be charged to GAAP but difficult to put a precise number on. Hence, our GAAP earnings expectation ranges does not yet accommodate whatever the remediation plus true-ups will be as we go through, particularly, heavily, the first two quarters of 2013.

Thanks, David.

Tien-Tsin Huang, JPMorgan.

David, I wanted to ask on the 150 bp in margin decline for fiscal '13. Can you break that up or decompose that for us between FX, I think you said, incremental tech and compliance costs? Anything you can do to break it up would be great?

Yes, be happy to, Tien. And so let me walk through a few of the pieces. As usual, with Global Payments, the single biggest piece is the impact of the ISO channel in the United States. Now remember that ISO impact is going to include the ongoing effect of the debit legislation changes as well as the impact of FANF billing, which is -- we're really just rolling that in now so there may be risk to further margin issues there but I think it's at the margin at best. Margins issues at the margin, sorry about that. Remember also related to the ISO, CyberSource moves from an indirect relationship, quite profitable on the face of the P&L, to becoming an ISO as well. That's already implicit in some of what you saw in our Q3 and Q4 results. But that really is the biggest chunk right there. Now having said that, you have a number of other smaller things that take us to the other direction, as well.

The continued spread declines in Canada, which we expect to be able to partially offset with some other actions we are taking in Canada. But still the spread declines are what they are. They are a profit in what is a very profitable piece of our Business overall. We have got investment costs in Asia, which are really small but a part of the pieces -- one of the pieces of this. We have got the tech investment that we referenced in our prepared comments on the overall infrastructure. Currency, as well. Particularly as currency hits some our higher margin jurisdictions like United Kingdom and Spain, which has been growing in its margin nicely, and then remember, we did, and this is quite small, but we did bring in the alpha, the Russian acquisition, as well as the Malta acquisition, at lower margins. So let me go back and summarize those a bit. Biggest single chunk is the ISO, including the CyberSource change and then all sort of roughly the same size incrementally, Canada, tech investment, currency with a little bit more from Asia and the acquisitions from last year to take you to your roughly 150 bps plus or minus.

Okay. Okay. ISO the biggest and the rest is pretty much equal. So just my follow-up, the Canada component, I think the guidance seems very reasonable, given what you've talked about. But is there a chance to revive growth there? Maybe with new products like DCC or something else on the horizon? Or is it pretty much it is what it is?

Tien-Tsin, it's Jeff. I think there is absolutely an opportunity to do that. You've noted in our release recently that we have rolled out DCC in Canada recently. One of our avenues of minimizing any headwind that Paul referred to in his comments is new products, additional sales, and to be honest, some of the expense actions that we referenced in the fourth quarter of 2012. And in that fourth quarter, there was a very small piece of fiscal 2012 that had the impact of those expense reductions, for example. And I also mentioned on the last call that we've actually rolled a fair amount of the operations into US, into the Owings Mills service center, as well. Very little of that just given the time of year was encompassed in the fourth quarter of 2012 fiscal. And we will have the full-year effect of that in fiscal '13. So there's a variety of attack, Tien-Tsin, to make that modest headwind even less than it might otherwise be and very much as David alluded to in the fourth quarter of fiscal '12, we are very focused on growing North American EBIT dollars in the aggregate, as David described, and I would say our focal point, therefore, is to turn that headwind into something that generates additional EBIT dollars in that market.

Got it. Great. Thanks so much.

Roman Leal, Goldman Sachs.

Great. Thank you all. If we just -- on the share buyback, can you give us some sense of how much flexibility you have to actually execute on that buyback and I guess, given your commentary that a lot of these pressures from currency will be heavily weighted toward the first half, would you be -- are you looking at potential using that a little bit more in the first half versus the second half?

Roman, I can -- this is Paul. I can say this. That we -- I think actions speak louder than words. We have announced several of these in the past and it's been our practice to execute upon them in a fairly quick manner. Other than that, I think it would be inappropriate to give you exact data on that. But we put these out, we execute them. David, anything to follow up on that?

No, I think you summarized it.

Okay.

Okay. And as we think of what's left to do here with the breach. You are obviously still actively trying to get back on the PCI list of providers. Can you walk us through the process or maybe -- what kind of [inyan] are you in there and what's really left to be done there?

So it's a couple ball games to use that metaphor. We finished one game. It's a double-header. So we finished our investigation. And now we are at a point where we are working with all of the card associations and they are taking all of this data and compiling it and trying to understand any other liabilities associated with it. And as David mentioned, this process they have in place is unbelievably thorough. And quite frankly it really works. I mean, I could tell you from someone who has seen it from a vantage point I'd never want to see again. But this is -- they are very professional people who are focused on this and they are doing a really terrific job. Now, with that said and done, we are so focused on getting this RoC back, I can't tell you. But we will clearly, we have every expectation that we will clearly get this back before the end of the calendar year. Hopefully we will get it back quicker than that but our Company, working collaboratively with all of the brands, is just ticking off all the boxes, Roman, to make sure that happens. So in terms of innings on that I would say that game is probably a bottom of the second.

Okay. Okay and then finally on the M&A pipeline, you are obviously very focused on Asia/Pacific. And you also made commentary on Europe. If you had to maybe pick where you are mostly focused on or where you see the most attractive pipeline, would you say it's in a continental Europe deal or something in Asia/Pacific?

It's a little bit -- we call it the steak or lobster choice here. They both delicious; they're both different. So the -- let's take continental Europe. The issues in Europe. We have partner in Spain who is doing terrifically. They are making acquisitions. I think there will be excellent opportunities to do some more there at very advantageous prices. There are -- because what's going on in Europe, there are opportunities in some big European countries for some brands you would recognize and we would be foolish not to take a full advantage of that if we could. Now, moving over to China and India, which I mentioned in particular, HSBC had been hamstrung, Roman, in the past from really operating and they were limited to 40-something branches in India, for example. So we now have an opportunity to work with others and we've had a lot of conversations that have only been notional. Now question have real conversation about expanding our presence there and what we bring to that party and how we make that happen. If you forced me, I would say those are probably the most momentous for the Company. But the opportunities in Europe are actually quite nice, too.

I would just add to that, Roman it's Jeff, that we go where the opportunity is. So a lot of this is driven by where we see the supply of good companies. I think Paul is right to point out the tailwinds we see for our Business in M&A in the markets he described. I would also say that we see a lot of activity in the United States today, to somewhat lesser extent in Canada, and we actually now are seeing a fair amount of activity in Latin America, including in particular in Brazil. Some of that in those markets is driven by capital. Some is driven by some of the changes that you have seen in some of those marks, particularly in the Brazilian marketplace. So to a certain extent it's a function of what availability is but I would say in all the markets that Paul described, including in the US, we feel like we have a tailwind and the trend is really going in the right direction.

Great. Thanks.

Kevin McVeigh, Macquarie Holding.

I wonder if you could clarify, the incremental technology spending, if I heard it right, it is going to be about 2% of revenue in 2013. How much of that will be recurring year-to-year versus one-time in nature, as we think about 2014 and on?

All right. So to clarify, Kevin. It negatively affects cash earnings growth by as much as 2 percentage points. So it's not 2% of revenue.

Okay.

It's an add guide to earnings growth on the 2 points.

Okay.

And what we are trying to do, we are trying to complete an investment cycle related to our core technology infrastructure so networks, data centers, transaction processing engines that we started last year, as you may recall, at the end of that pipeline, at the end of the process, we hope to have a better, mostly fixed-cost infrastructure that's more leveragable for the long term of the Company. So as we head into '14 on this specific investment thread of the core processing infrastructure, physical and logical, we don't think that's a headwind in 2014. We think 2014 is where you normalize and begin to see some of the benefits of that fixed cost. The fixed costs really come in for the long term and as you well know that's how we are thinking about our investments -- whether strategic, technical, product, et cetera. So I think that's the way to think about that specific set of investments in the core infrastructure that are negatively affecting our earnings growth this year. As they did a little bit in 2012 as well, you may recall.

Super. Thank you.

Bryan Keane, Deutsche Bank.

Hello, guys. My first question for David, just looking at the operating margins by segment, it looks like North America is probably going to be down maybe as much as 200 to 250 basis points. After the fourth quarter was only down 100, I just want to see what else could be in there or what else is driving that. I know we talked about a lot of different moving pieces but I would be interested to know why the drop is so significant? And then, second piece to that is that the international margins doesn't look like the EBIT is growing like it used to and what's causing that to come to a halt?

Yes, sure. So with North America at the margin or on the margin, Bryan, the first change on the year-over-year basis, since we're going to say it is relative to changes, is the ISO growth that continues to negatively affect it, which is being enhanced now by the flip of CyberSource from an indirect net revenue high-margin customer to an ISO lower-margin. Same customer, now growing wildly for us as we access that portfolio and continue to get the referrals but flipping up in terms of the accounting treatment. Married to the full-year impact of the debit legislation from last year and the introduction of the FANF billing as we go through 2013. Then you have the FX impact on Canada. And then also the sheer negative revenue performances, of course, resulting in negative earnings performance from Canada overall. And then as you may recall, the majority of our technology spending, it's allocated to the North American segment. And that's a big number affecting that margin as well in the North American side. So that -- and by the way, you are back of the envelope guesstimate of that 200 plus basis points is right in the ballpark.

So if you move now to international, you are right, there is an implicit slower earnings growth coming from international and it really has to do with a couple of features. One is, as you might imagine, we are cautious on the macro, particularly in Europe. We all read the same headlines, the same articles about Spain, especially. And remember now we have businesses in the UK, Spain, Malta, Czech Republic, so we more and more near term quote-unquote euro and European exposure, and that'll hold things down a bit, and then of course FX, materially impacts the growth rate in international. In several points of growth depending on your modeling assumptions from an international segment perspective would go away due to FX on a year-over-year basis.

Okay. And just let me ask one follow-up to Paul. Paul, you mentioned cash EPS growth of 4% to 6% is not what the GPN story is about. So help us feel a little bit better about the future GPN story as we get past fiscal year '13. What can change? Because a lot of these issues seem like they are structural and not quick fixes?

Well, Bryan, I appreciate that opportunity. And David said a big piece of it, we are building a technology platform that is going provide to operating leverage. That is a big one. The investments in Asia, which are a piece of that headwind are going to be -- and by the way, if we didn't make those investments in Asia, you should be disappointed in us. They are going to pay real dividends. The FX, who knows which way that goes, which way those winds blow. That is -- we just deal with that and quite frankly the more we expand internationally, the more we will be buffeted by those winds. But I think that's a good thing. And then Canada is the last piece of that. And I think Jeff gave a pretty articulate -- sorry, Jeff, a very articulate answer as to what the upsides are there. So we are being cautious as we look at this year but that's not our expectation. We have smart people running this and we have every expectation that we are just not going to sit back and accept that. So, Bryan, the long answer to that question is, this Company will return. We have answers for every one of those headwinds. We have plans in place and you will see us pivot nicely.

Okay. Thanks for the color.

Moshe Katri, Cowen and Company.

Thanks. So Asia/Pacific was done sequentially. That's what I see here in my table and then Europe had a significant moderation in revenue growth. Is it possible just to touch on that, what happened in Asia/Pacific, and then I'm assuming as you said that you have currency headwinds in terms of comps in Europe. But you had a drop from 28% growth in February to 11% growth in May. So are we starting to see some of the macro headwinds impacting growth and if so maybe you can talk a bit more about where we are seeing that impact in the slowdown?

Sure, so in Asia relative to Q4, it really wasn't very far off of our expectations. There was a little bit of mix moving between our DCC and our e-commerce products. But really the way to think about Q4 is to look forward to what changes we had into 2013 which are the rollout of some new promotions and new products that did not occur in Q4. Married to getting it through the easier comps and some of those kind of things and return it to double-digit growth. I take your point, sequentially it was down, as we thought through the programs and the promotions, we did not launch any in Q4. They are really launching earlier this year, or at least their effect would be earlier this year. So that number itself didn't really strike us as sort of a shocking number off of whatever we might have expected. Now when you are talking about overall international growth, and again I want to make sure I answer the question you asked, you're comparing--?

Well, I'm talking about Europe. Europe, I think in May, was up 28% year-over-year and then -- sorry, in February -- and then in May, Europe was up 11.4% year-over-year. That's a big drop. Some of it is currency but some of it seems to be just related to a core slowdown in the business. Maybe you could talk about that?

Well, I'm not sure you see a slowdown in the business. What you really find are a couple of things going on across Europe and I'm going to over-answer your question to make sure we talk about the moving parts. Recall particularly when you look at anything related to Europe on a year-over-year basis and pick a quarter. We closed the acquisition in Spain in December a year ago and so you've got some quarters with that comparable, some without that comparable, which changes your metrics drastically. Then also recall the timing of the United Kingdom re-price, which was effective February of a year ago. So it fully annualizes as you head into our Q4 of this year, our May quarter, where before it had been fueling an awful lot of growth, as you may recall. So I don't think you're seeing a fundamental slowdown in our businesses across Europe, in terms of their performance or the quality of the operations or the quality of how we are running the businesses. Now you do, and you raise a fair point, you do have to deal with macro realities in places like Spain, and in the UK, et cetera. But the fundamentals of the businesses continue to add merchants, to add volume, and they continue to grow and operate well. FX then kicks in as well on top of being maybe cautious on macro. But please recall that the really material comparable changes that come out of that re-price as well as the timing of Spain.

So if Europe slows down even more next year, isn't there more margin risk for the entire operation just given the fact that Europe is highly profitable?

Well, I would say this, as we look out at the macro, we are not expecting anything to get materially better or materially worse. Certainly if things get materially worse in -- pick a geography -- everything we are discussing could change depending on the geography, the size, and the magnitude of the impact.

All right. Thanks.

Jason Kupferberg, Jefferies and Company.

Just wanted to circle back for a second to make sure I'm parsing the different pieces of the IT investments and make sure I've got it straight. So clearly there was pre-breach IT investment going on. And then there is presumably some incremental ongoing breach-related IT security-related expenses in fiscal '13. I'm not talking about the additional $25 million or 28 $million of one-time-ish charge but just ongoing investments, presumably. So I just wanted to validate if that, in fact, is correct and is that post-breach, ongoing IT security costs, are those in the 150 basis point decline for fiscal '13 margins or are they not? I was not clear.

Right. So let me parse that. Jason, it's a great question. Thanks for asking. Let me parse it a little bit more. So I think you've correctly characterized the core technology infrastructure spend, it's in the numbers, it's part of the ongoing, expected to create leverage for the long term. Then there is a security remediation piece of this that will carry through 2013. Again, I think the bulk of it is obviously early in the year because it includes remediation and work on the RoC, as well as appropriate remediation to make sure we've got the appropriate level of an ongoing security posture. That is, generally speaking, all in the number that I suggest, that $25 million to $35 million net. Some of that will return as run rate, probably in 2014. Our view of that is that in 2013, a lot of investments, some of it returns to the run rate in 2014 but it returns in a manageable form to 2014. So modest handful of earnings per share, shall we say, in 2014 coming out of the investment level. And that's really I think the way to think about that investment. But generally speaking, yes, there is ongoing security inside of the ongoing business in cash earnings but that investment in enhancing our posture married to remediation because the two, quite frankly, are inseparable, as we go through the remediation process with our partners. That's all set aside from the cash earnings for 2013.

Okay. Okay. That's helpful. And then just to go back to Canada, obviously you took the charge in the quarter which you had already told us about. The competitive conditions are what they are. I just wanted to get a sense from you guys on where you see Canada right now -- like have you taken it as far as you can in terms of things you can control and now it's just up to the macro environment and the competitive dynamics or are there Global Payments-specific initiatives that are still ongoing that you will continue to implement that will generate better performance for Canada, maybe not even in fiscal '13 but beyond? I just wanted to get a sense of, are we going to be a perpetual holding pattern in terms of top line in Canada, just because of the market structure or are there some initiatives within your control that you are focused on implementing to fix this? Beyond the cost take-out that obviously you just did. I know you had talked about some client retention tools over the last couple of quarters, for example?

Jason, it's Jeff. On Canada, I think the answer is there is a lot more we can do, so in addition to the stuff I mentioned before that I think you touched on, there are certain markets that we are not really well-represented in, in Canada. One would be the e-commerce or card-not-present business. So we talked about DCC, which we had a release on, and we've chatted about that a minute ago. But in certain markets like card-not-present e-commerce in Canada, we have a very small presence and we feel like we are under-represented there. So we are very pleased in what we have done in the United States in that market in the last number of months. We are certainly taking an intense look, Jason, at becoming bigger in that business, which will help both our growth and I think, ultimately, our margins. That's an additional item to help the business.

The other thing I would say is that to a certain extent the economy in Canada in our fourth fiscal quarter really was in the same place as it was in the third quarter, meaning, as we chatted about before, the third quarter where we thought the economy in Canada was worse than it was in the first and second quarters. In the fourth quarter it was really flat to the third quarter. So many of the trends that we saw in the third quarter that we reacted to are the same. They are not any worse and we are assuming that will persist. So spread compression continues but if, as David mentioned before, if the economy stays where it is, no better, no worse, coming out of the fourth quarter, we feel like we have taken all of the right actions to make this a modest headwind or not even one as we enter fiscal '13 but I will be disappointed if we didn't do more by way of card-not-present, additional products like DCC, and targeted sales in Canada to better position it into '14 and beyond.

Okay. Understood. Thank you.

We will take the last question from Chris Brendler with Stifel Nicolaus, after which Mr. Garcia will give his closing statement.

Can you just give us a little detail perhaps on both the UK and Spain as for where those numbers tracked either on a revenue or, even better, on a transaction basis? During the quarter, how much of a slowdown did you see through the month of May and even June, if you could, and then what kind of spending slowdown is embedded in your guidance because as you noted, there are some pretty concerning headlines over there and we have seen some other issuers reports and significant several hundred, almost, I think several hundred basis slowdown at American Express in their Spain portfolio. Can you just give us a little color, just trying to figure out how conservative your international guidance is? Thanks.

Sure, Chris. This is David. So if you look at Q4 on the year-over-year basis, you see 11% growth. That obviously is enhanced by the re-price, as well as a few other pieces. That is the starting point. And it is obviously fueled a little bit by the acquisitions in Russia and Malta. I think the core, which is what you are asking about, of the UK and Spain, is we expect mid-single-digit growth from each of those markets. Now that's the combination of a couple of things -- our market position in the United Kingdom and we continue to take market share in the United Kingdom. So in local currency, mid-single-digit growth based on really good execution in the United Kingdom. We are not expecting high single-digit in some of numbers you have seen before. In Spain, we are looking for mid-single-digit as well, in local currency. Probably, maybe a little less than we might expect from the UK, given macro and really in Spain that's demonstrating the value of the partnership we've built with la Caixa -- their brand, their solid financial standing, their access to the market and their continued growth, help us as we work together fuel growth in a market where by all rights that should be pretty darn difficult to do.

So the pieces there are mid-single-digit, which reflects a little bit of an assumption that macro is tough in both those markets but still expects good execution from our teams there and we see no evidence to suggest why they wouldn't execute as well as they did the year before. Now obviously when you translate that to US dollars, you're going to come back the other way and shrink that. In fact, particularly in Spain, you can imagine, what a huge impact in the year-over-year basis from the euro, the big changes we saw if you think about where the Euro was beginning of last year to where we kick off this year, that mid-single-digit growth is going to look the other direction in Spain on a year-over-year basis, by definition as you work through your model. Same thing won't happen in the UK but you will see a bit of a reduction. So I would characterize our view of Europe as prudent and cautious but still expecting we will continue to take market share the way we have in the past.

Okay.

And Chris, this is Paul Garcia. And that's where the growth is coming from. We are not expecting any tailwinds from greater card usage, et cetera. Just the opposite. We are getting our growth because we are signing more merchants, typically at the expense of someone else.

I'm wondering if the overall macro spending is falling, even if you are getting share, you are growing slower. How do your mid-single-digits for both of those compare to what you put up this quarter? I would hope that it would be a little lower. And then also in the North American region, the US revenues slowdown that you are projecting for 2013, is there any assumptions for Durbin and that benefit starting to wane in your guidance? Thanks.

So thank you for clarifying. The answer is yes. The growth expectations are lower for those markets in 2013 than they were in 2012 and on the US side, relative to the debit legislation, it's fully in the numbers, as you have no doubt heard in your market checks. You haven't seen a lot of deterioration or attrition of that. So for us to be perfectly frank it's just in the numbers and part of processing for our merchants these days and we don't think about it separately and probably won't be talking about it much separately unless it's the margin-based conversation as we sort of annualize things over the course of 2013.

Okay, thanks. And I'm just going to squeeze in one more since I'm the last guy here. The acquisition of the HSBC business in Asia/Pacific, the cash you spent there relative to the cash you are spending on a buyback, can you just give us a little more color? Because if I do the math of buying back $280 million of additional stock at these levels, it's a lot more accretive than $0.08. So I just -- the strategic benefits and the analysis that you went through in weighing those two options, help me feel a little more optimistic and a little more bullish on using that excess cash for acquisition at this point?

Sure. Be happy to and I will tell you quite honestly, that was not a difficult calculus for us at all.

Okay.

The opportunity in Asia, the growth available in those markets, the growth available particularly in China or India for the long term, the value of the extension of our relationship with HSBC and the ongoing partnership with HSBC stands with no problem financially next to the near term use cash on a buyback.

Okay. So fair to say in future years hopefully a lot more accretive than $0.07?

Absolutely. Fair to say.

Well let's also be clear. That's for a partial year.

Yes. Okay. Great. Thank you.

Okay. Well, first of all, thank you to everyone for joining us on today's call. As a reminder, you may have noted in the earnings release that we plan to have an Investor Day at the New York Stock Exchange on October 11. We plan to provide additional information over the coming weeks and, of course, it will be available via webcast for those who can't attend. Thank you very much.

Ladies and gentlemen, thank you for your participation. You may now disconnect.