Global Payments Inc.
Q1 2012 Earnings Call Transcript

Published: 5 Oct 2011

[Operator:]

Ladies and gentlemen, thank you for standing by, and welcome to Global Payments First Quarter Fiscal 2012 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, Vice President of Investor Relations, Jane Elliot. Please go ahead.

[Jane M. Forbes:]

Thank you. Good afternoon, and welcome to Global Payments Fiscal 2012 First Quarter Conference Call. Our call today is scheduled for 1 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'd 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-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 October 4, 2011, which may be located under the Investor Relations area on our website at www.globalpaymentsinc.com. Now I'd like to introduce Paul Garcia. Paul?

[Paul R. Garcia:]

Thank you, Jane, and thanks, everyone, for joining us this afternoon. I am pleased to report that we are executing well across all of our businesses as evidenced by our strong results for the quarter. First quarter fiscal 2012 revenue grew 23% to $543 million. Cash earnings per share grew 21% to $0.88 and cash operating margins increased to 22.3% for the quarter. As a result of this performance and our $100 million stock buyback program, we are increasing our full year cash earnings per share expectations to a range of $3.46 to $3.54 or 12% to 15% growth over 2011. David will discuss both the drivers of this increase and our Q1 results in more detail in just a moment. But please note that our expectations exclude any effect from Durbin legislation. Speaking of the Durbin legislation which, as you know, reduced interchange rates on most debit transactions effective October 1 just several days ago, our market strategy will allow all of our customers to benefit. Although we anticipate the net impact to be positive for Global Payments, we believe that these benefits will be transitory. We plan to provide more detail concerning the impact of the Durbin legislation for our second quarter when we report our results in January. Now for first quarter highlights. North America delivered revenue growth of 12% in the quarter driven by our U.S. ISO channel, strong growth from our Gaming business and solid performance from our direct channel. Canada delivered the stable quarterly results we anticipated, and our business there is performing on target. Our International segment produced another quarter of strong results with revenue growth of 59% fueled by all regions. These results include the addition of Spain, which performed well during the quarter, coupled with solid performance across Europe and continued robust growth in Asia. I'll now turn the call over to David.

[David E. Mangum:]

Thanks, Paul. We are pleased with the start to our fiscal 2012 with strong cash earnings, and we are gratified to be executing well in this challenging macroeconomic environment. North America Merchant Services revenue growth of 12% was about what we anticipated, benefiting from U.S. transaction growth of 12%, strong growth in Gaming, stable performance in Canada and a favorable Canadian exchange rate. Additionally in Canada, local currency revenue grew 5% and transactions grew 4%. North America cash operating income was up 5% for the quarter over prior year. Our International segment performed a little better than we expected for the first quarter due to the combination of strong organic results across all of our businesses, a joint venture marketing feature-up in Spain and pricing benefits in the U.K. International cash operating margin increased to 39.9% compared to 34.9% in the prior year with over 1/3 of the expansion attributable to the true-up in Spain. We generated free cash flow of $67 million, representing 13% growth over last year. We define free cash flow as net operating cash flows, excluding the impact of settlement assets and obligations, less capital expenditures and distributions to noncontrolling interests. During the quarter, we spent $12 million on capital expenditures and we continue to anticipate our full year fiscal capital expenditures to be about $85 million to $90 million. During the month of September, we completed our $100 million share repurchase program, purchasing a total of 2.3 million shares. During the first quarter, we purchased about 1.7 million shares at an average share price of about $43. This program was largely funded by our U.S. credit line. As a result of our share repurchase program, we now expect our diluted share count to be about $80 million for the year. We continue to expect both GAAP and cash effective tax rates to be about 30% for fiscal 2012. Our first quarter GAAP and cash tax rates were up as we anticipated, coming in at 34.1% and 33.7% respectively, due to an adjustment in the U.K. related to a legislated corporate tax rate. During the first quarter, on a year-over-year basis, currency changes benefited both GAAP and cash revenue and earnings by $15 million and $0.05 per share, respectively. From a currency perspective, we still expect the U.S. dollar to continue to strengthen over the course of fiscal 2012 given recent foreign exchange rate movements. As a result, we continue to believe the aggregate effect of currency will likely be about neutral to slightly positive to our earnings per share in fiscal 2012 when compared to 2011. Fluctuations in exchange rates, of course, may cause variances to our outlook. Based on these results and our current outlook and assumptions, we now expect total cash operating margins to expand by as much as 50 basis points over our fiscal 2011 cash operating margin of 20.9%. All of our financial expectations exclude the impact of Durbin, and we plan to provide you with a margin effect related to the initial Durbin implementation next quarter. In terms of the sequence of quarterly earnings per share, we expect our strongest quarter of earnings to be Q4 with Q2 earnings roughly corresponding to those of Q1. And now I'll turn the call back over to Paul.

[Paul R. Garcia:]

Thank you, David. Once again, based on our current outlook and assumptions, we are increasing our annual fiscal 2012 cash EPS expectations to a range of $3.46 to $3.54, reflecting 12% to 15% growth over fiscal 2011. We plan to expand cash operating margins by as much as 50 basis points for the total company for fiscal 2012. All expectations, of course, exclude the impact of Durbin. I am pleased with our company's financial and strategic performance and our global market position. I am confident that we are on track to successfully execute our strategies for growth. I'll now turn the call over to Jane.

[Jane M. Forbes:]

[Operator Instructions] Thank you, and operator, we will now go to questions.

[Operator:]

[Operator Instructions] Our first question is from the line of Kartik Mehta with Northcoast Research.

[Kartik Mehta:]

Paul, as you look at the guidance you gave for -- at last year for fiscal '12, when you kind of look at the results of 1Q '12 and your expectation now for FY '12, what's been the biggest change in your opinion that's given you the confidence to raise guidance and basically beat numbers for first quarter?

[Paul R. Garcia:]

Well I think, Kartik, 2 things that David highlighted. One, of course, the share buyback; and secondly, we had some out-performance pretty much across businesses but in particular, in Spain. So you put those 2 together, and that's a pretty big chunk of it. David, add a little bit more color, please.

[David E. Mangum:]

Sure, I'd be happy to. I think those are the real main points, Kartik. We hoped to get out of the gate hot. Also a good start, we think we did. It's one of the unique situations where across the board, as Paul pointed out, each of the businesses performed well, so we think we can sustain a little bit of that performance. We also can maybe bank a little bit of that performance as of Q1 and then roll forward, recognizing that at the end of the day, this is just Q1 and there's a lot more to go. We have a challenging macro environment, as you well know. We're 1/4 of the way through the year and we're going to watch foreign currency quite closely as the year goes on.

[Paul R. Garcia:]

Kartik, I have to say the obvious, too. We always hold ourselves to a much higher standard. And we have objectives that -- we push people to reach objectives that will produce these kind of results. So we are working very hard around the company. Everybody produced as expected and we're feeling -- even in the macroeconomic environment that David referenced, even with everything we're reading, we're feeling good about the year, we're feeling confident in the guidance we gave and we can do that into the teeth of this kind of environment, I think, is a good thing.

[Kartik Mehta:]

Yes. And then just as a follow-up, Paul. You made an interesting statement about Durbin. I think you said you should benefit all but should be a positive for Global. And I'm trying to dissect that statement. Are you trying -- are you implying that Global has a great chance to gain some market share because of Durbin, or that you're going to put out some programs that will help you maybe monetize Durbin more than you anticipated?

[Paul R. Garcia:]

Yes, I would say more the former than the latter. I think that we -- our position has been very balanced here, Kartik. And meaning that I think the spirit of this legislation and I think the competitive nature of our industry is going to pretty much dictate that we all share this appropriately with the merchant. Now some people have one position on the far left, someone has the position on the far right. I wouldn't say we're in the middle. I think we're more towards one of the other polls than the other. But it is clearly our position that over time, this gets competed away anyway. I mean, I think you can write that down because we've seen that over years. And that's quite frankly one of the reasons that I think Durbin isn't looking around at our industry because it's highly competitive. So I believe our position is that we're going to share a significant amount of this -- all of it with lots of people. And that I think that will put us in a very competitive position, number one. But I also think our position is not all merchants are created equal. There are big merchants, there are tiny merchants. And for anyone to suggest that a little merchant would have the same deal as the big merchant, that's just not commercial. I don't think even little merchants expect that, even understanding headlines from some of our competitors that would make some suggestions otherwise. I don't know if that's helpful.

[Operator:]

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

[Tien-Tsin T Huang:]

I wanted to ask about Europe. That was obviously way better than we expected again this quarter. I think maybe you guys mentioned Spain, but we've been getting a lot of questions obviously about what's happening with Europe. So how cyclical do you think the business is in Europe today as it stands versus some of the opportunities that you guys have been putting in place that are above and beyond the cycle, if that question makes sense?

[Paul R. Garcia:]

It does, Tien-Tsin. I think -- this is Paul. I think David's going to jump in here in a sec, too, but the spirit of the question is all we hear is bad news from Europe. And so how is it you're putting up numbers like this? I would say the Spanish economy is far from recovered. But I would say that we're growing that business very, very nicely. And I think that is kind of a microcosm of what's going on. We did it with the U.K. We're absolutely gaining market share, and that business is doing very well and at or ahead of our expectations. Ditto with Russia. I think Czech Republic is doing fine, as well. So all of those businesses are performing in tough economies. And Spain, I think, is probably the most illustrative of all of the question you're asking. And that is that the Spanish economy is not doing great, our business is doing well. Why is that? Because we're introducing innovation, we're adding sales resources, we have a terrific partner and we are really knocking the cover off the ball. So I think unless people just stop buying things, I think the prognosis for us is pretty rosy. And I think the amazing thing is in talking to other people in our industry, we're all doing pretty well. I mean, it's -- forget about what we're reading. Actually, if you look at how the earnings from our industry, in particular, other industries quite frankly as well, we're all doing pretty well. So I know the words and the music don't go together, but that's the fact.

[David E. Mangum:]

Yes. And maybe, Tien-Tsin, to take it down a level from there. Obviously there was Spain in the numbers last year, so that's a big chunk of the growth, which no doubt you've expected in your model. The U.K. pricing initiatives are holding much as we modeled, so we're feeling quite positive about that. That's an important point. We continue to see the international acquiring growth. So the card in our present business we process in the U.K. that we saw tick up in Q4 stayed consisted into Q1, so more nice growth there on the top line. And then of course, FX gave us a bump this quarter. So we're in a situation where while the dollar keeps strengthening on a year-over-year basis, we're actually getting the benefit of FX where sequentially it's strengthening, so we got that bit of a disconnect which can be challenging to think through sometimes. But all the pieces, as Paul pointed out, are executing solidly against their original plans and we've got these little bit of bumps that drive -- really outsize growth led by the Spain acquisition.

[Operator:]

Our next question is from the line of Dan Perlin with RBC Capital Markets.

[Daniel R. Perlin:]

So I just wanted to kind of come back to that same point a bit. It's been a while actually since you put up a quarter like this, where a lot of things kind of all fell to the bottom line. I'm just wondering how you're balancing Spain. Last quarter, you talked about investments in the banks there. So something, I think, is clearly doing better. And I don't know if that's a function of your level of investment in that asset or the success of this innovation salespeople that you talked about. And then the International Acquiring business typically comes with much lower margins. And so if that continues to drive growth in the future and FX becomes a headwind, how should we be positioning the margin profile in the back half? And then I have one other follow-up.

[David E. Mangum:]

Sure, Dan. To go in a bit of the order you described, the Spain ramp up in terms of sales investment is continuing a pace. The folks we're hiring there are not fully productive. We really don't expect them to be fully productive until calendar '12. What is promising are the early returns and the early sales results from those sales resources. So the pieces or the mechanics there are a little bit ahead of where we might have thought now. Frankly, in the grand scheme of total Europe, much less total international, much less total Global Payments, it really doesn't even round anything. But we are off to a good start. Of course, Spain itself again wasn't in there last year at all. Then we have that little bit of a marketing true up as we sorted things out with our partner there relative to some underwater merchants that dated back to the time of the deal. All that is all in the mix as we go forward. We don't expect another true up. So you should expect more of that. Moving to the U.K., you're exactly right on the International Acquiring business. Now in the mix of Europe with the relative profitability of the pricing benefits and the fact that we're taking market share in the U.K., that's been sort of massed as we speak right now in terms of the margin level. So that's an example of the business operating as planned. We hope to see International Acquiring business grow well. If it does that in tandem with the core business, that's great news. And really to go back to a question related almost to something Paul was saying earlier, I think, to Tien-Tsin's question, macro's tough in the U.K., You've seen the retail stuff. But we have a diversified portfolio there as we do in most of our countries. So we're still seeing market share gains really along the lines that you might hope to see from us from all of the other sectors while volume itself in retail may not be the greatest thing in the world right now. That's okay as long as we stay diversified across Europe and even within the businesses themselves. So the pieces actually work as you roll that all up into sort of the ball that is Europe, drives very nice profit. Now you made a great point about FX. Year-over-year helped us, and that was a part of what we would've expected. And FX frankly for us in Q1 was right on where we thought it might be. It's nice to be lucky sometimes on something that's completely out of your control. As the year goes on, we'll see -- the expectation of the dollar will strengthen against the other major currencies, particularly the euro as you might expect. What that will mean is we'll get a little bit of a benefit year-over-year in Q2. It will flatten out in Q3, and then will get clipped and will go the other direction for us so there'd be a headwind in Q4. Out of all that balance is how we end up driving margin expansion of the approaching 50 basis points now, and it was really part of the model when we started the year as well. So no huge change. We saw FX about where we thought it would be in Q1. We have a new jumping off point as of yesterday for FX. We brought that into our outlook. We still allow for the dollar to strengthen further against these currencies. Now the rate and pace, if it's a repeat of '08, we're obviously going to have a lot to talk about. But as long as it stays somewhere in the range of what we're thinking, then the pieces work and on balance, you'll see this big Q1 that sets us up with a fast start. And then we hold on as it turns the other direction come Q4.

[Paul R. Garcia:]

And Dan, this is Paul, so let me just emphasize because that's an important point. And we've seen some discussion about FX in some of the preliminary notes. And the point is that FX headwinds have been figurative. So we're not suggesting that the dollar gets weaker here; just the opposite. We figured that in. Now if David said something dramatic happens beyond what he referred to in '08, was like a 30% swing or something, I mean it was crazy. Other than that, we're feeling very comfortable.

[Daniel R. Perlin:]

Excellent. And then just the last one, you talk about the direct business in the states. That's the first time I've heard you call that out in a while with any significance, at least in its order. And then what's going on with the local currency growth in Canada of 5% other than acceleration in the quarter?

[Paul R. Garcia:]

Okay, Dan. Jeffrey, why don't you take those?

[Jeffrey S. Sloan:]

Sure. Dan, in the U.S. business, we'll start with that and then we'll go to Canada, which was your second piece. So on the U.S. business, I think we've done a very good job over the last number of quarters in realigning our sales resources in the U.S. to make sure just like they are, for example, in gaming that our sales resources are dedicated to those verticals where it can make the most difference from a return point of view. So we focused management toward measurable sales goals, meaningfully enhanced quota as part of this fiscal year and I'm delighted that we're actually performing well, as David suggested, along those goals through the first quarter with our bank partners and in our other vertical lines of business. So it was a conscious decision by us to enhance the quota, to introduce new products and to measure performance as best we could against those goals and that's worked out well. Second relates to Canada and David can comment on FX movements. But second as it relates to Canada, very similar to the U.S. We've refocused our Canadian business to minimize attrition trends that we've seen in Canada over time and to similarly realign our sales resources in a way that also expands our quota. And just like in the United States, we're very pleased with the quota of revenue performance in Canada through the first quarter.

[David E. Mangum:]

Yes. Dan, this is David. Maybe a little more color. In U.S. dollars, obviously, we got a fair amount of help from FX, but your question was about local currency. This is really right about where we hoped Canada would start the year. We were hoping for sort of a stable Canada, again Q1 coming out of the stable Q4. We think we saw that. We have comparables in the prior year that we think allow us then to have a -- this solid kind of stable outlook for Canada for the full year.

[Operator:]

Our next question is from the line of Chris Brendler with Stifel, Nicolaus.

[Christopher Brendler:]

Could we just talk about the U.S. for a second? I think I heard a transaction growth of 12%. I think it was 17% last quarter. Anything unusual in there? Are we're seeing a little bit of a slowdown in the U.S? Can you just give us any color?

[David E. Mangum:]

Yes, I'd be happy to, Chris, this is David. There really isn't a slowdown inside of the company as you might imagine. We tend to look at this on a per day basis and we don't talk about that a lot. But the reality is we had, I think, 3 less days Q1 of this year compared to last year. Without that change, we normalize it again on a per day basis. You'd see it right in the range of what you -- what we reported last time, so we still think we're seeing perfectly solid growth in the U.S. And we think when the days get straight, you'll see that come out of the metrics as we go forward the rest of the year.

[Christopher Brendler:]

Okay. Great. And then my second question would be on Durbin. Can you help to mention at all what the margin impact will be in the U.S.? We know -- I think we know it's going to be a negative -- your reported operating margin should be neutral to EBITDA and cash flow. We're just -- how much of a margin hit are we talking about in the U.S. once the indirect side of your business starts to benefit from the Durbin impact? And maybe qualitatively, do you have any feel for at this point what you're ISOs are planning to do? I mean, I know it's going to be difficult to have those conversations, but do you think you're going to see a lot of that pass through? Or do you think those are to keep a level initially?

[David E. Mangum:]

Yes. I'll do the first part and let Paul answer the second part of it, Chris. We're going to stick qualitatively in terms of characterizing Durbin or any of its impacts to our reported results on this call for any number of reasons. You understand the complexity from a marketplace perspective for the introduction of Durbin and none of the constituents, Global Payments included, knows what we don't know about the impact. So we will act in January of what we see actually in Q2. Having said that, we certainly know that any piece of Durbin that our ISOs key will be reflected as both revenue and expense to Global Payments. So we will be very clear, we think, in terms of reporting that margin impact. So we'll have our reported margin. It will be what it will be. We'll be very clear about the impact with and without the spread changes related to Durbin. And we'll calculate that and we'll show it to you in fairly obvious fashion so that you can see how the underlying businesses perform and how we're doing against our original goals and our current expectation which, of course, exclude the impact of the spread changes due to Durbin. So quite honestly, if you have an assumption or review market-wise that the ISOs will -- may keep a substantial portion of Durbin, you might actually expect to see an awful lot more revenue and a lot more expensive, pretty big margin impact on Global Payments. And as I said before, we will do our best to disclose that to you as clearly as possible so you can take a look at the underlying performance of the business with and without that spread impact. Paul?

[Paul R. Garcia:]

And I would add on to that, that the one comment I think you made, Chris, was that this would be neutral to EBITDA. I think we -- we never said that. We're saying that this will have a positive impact, we just don't know exactly what that means. And we are, in fact, going to -- we are in new ground here and we're taking a conservative approach and we're trying to probably reduce expectations on what that is. But it's clearly positive, absolutely positively end of story. And the guidance does not take that into consideration. Now in terms of what the ISOs are going to do, I think David's right. I think that a conservative assumption would be that the ISOs are going to be more aggressive. The ISOs are the smaller customers that are going to be more aggressive. Our own portfolio, our big guys and medium-sized guys, which is a very different footprint.

[Christopher Brendler:]

I didn't mean that was part of the indirect channel when I was talking about the margin pressure -- benefit. One more if I can slip one more in, is there any thoughts on the BMA situation with a $5 debit fee? Just from your opinion there, do you think it's -- we're going to see an impact on debit volumes as more banks start charging for debit cards?

[Paul R. Garcia:]

Sure. Chris, I have to be honest. I just don't know. I think we all predicted this. We've seen this movie before. It was played in Australia, and this is precisely what happened. And we all said that. So if anyone is feigning surprise, I think they're being a little disingenuous. I absolutely -- we knew this was going to happen. This is one of the reactions we thought the issuers would have. It's a commercial reaction, and I think this will play itself out. What kind of impact that has on usage remains to be seen. And that is why we are being very cautious in disclosing anything other than actual. Let us get a quarter, let us see what this really does and we're going to share what's important with you. And I think that is the most responsible approach at this point.

[Operator:]

Our next question is from the line of Moshe Katri with Cowen.

[Moshe Katri:]

Sequential growth in Asia was a bit weaker than usual, especially looking at some of the seasonal patterns. Maybe you can talk a bit about that. And then I have a follow-up after that.

[David E. Mangum:]

Sure, I'd be happy to. I guess I'd point out it was still 18% growth year-over-year, so we feel pretty good about the growth overall. Sequentially, you'll see changes in patterns based on consumers and spending. As you well know, Moshe, that's a big travel and shopping series of markets for us. So we don't see any real weakness. We saw a little less DCC than we saw the quarter before, which may indicate just the timing of certain travel, business travel particularly. But really, no single thing stands out in terms of the pieces. And as we look out for the rest of the year, we're right on track where we thought we'd be this year in Asia as well.

[Moshe Katri:]

Should we accept -- should we expect acceleration on sequential growth and ongoing basis out of Asia? Obviously, this has been a very strong source of growth for the company in the past, that's why I'm asking.

[David E. Mangum:]

Yes, let me phrase it to you in a slightly different way. If you're talking about the rate of sequential growth, don't know; won't or can't promise that. We expect to see sequential growth in Asia really the rest of the year. Some of that will depend on the timing of any other product growth or anything else that goes on in the market. And as you well know, we are fully rolled out in our DCC across the regions. So really everything is kind of in the run rate now. We'll hit in the later quarters some grow over challenges on the year-over-year basis. You'll recall we had a major retailer introduce brand-new products in the Asian market starting Q2 of last year and outsized growth continued in those markets Q2, Q3 and Q4. So we'll hit some grow over on a year-over-year basis. But yes, I do expect sequential growth from Asia into Q2, again into Q3. And then Q4 sometimes in Asia isn't quite the seasonally Q4 you see in the rest of the world. So it will -- may look like Q3, but this is all the outlook now. We'll be back with more updates in January. But we expect a very strong year with Asia where the only thing to talk about relative to the growth is just growing over the full introduction of DCC region-wide and the single retailer from last year.

[Moshe Katri:]

Great. Is there a way also to quantify the benefits from the pricing increases in the U.K. on the P&L with its revenues or markings for the quarter?

[David E. Mangum:]

I'd point you back to Q4 when we were walking. We're really -- actually, frankly, end of Q3 of '11, we were walking to the mechanics of how Q4 would look and what the jumping off point would be for 2012. I point you there because we really aren't breaking out the individual pieces of the revenue performance, particularly given that we're essentially on track with everything this year. So as we headed into Q4, we talked about a number of things happening in the U.S., Greater Giving seasonality and some of the other pieces of the business. Then we talked about the U.K. pricing benefits in the full quarter of Q4 being a couple to a few cents depending on how you're modeling and how the pieces came together. You obviously take that kind of pricing increase and you model in some level of attrition, modest attrition. We're seeing some of that as we head into Q1, but it's right on again the way we modeled, which is certainly fortunate for us as we start the year. So I realize I'm really giving you a qualitative answer to an empirical question, but it's really as far as we can go on the U.K. right now.

[Operator:]

Our next question is from the line of Darrin Peller with Barclays Capital.

[Darrin D. Peller:]

Just can we touch a little more on the margins on the International segment? I mean, pricing in the U.K., I know was implemented last quarter. And you previously have suggested that la Caixa is still building out, so the expenses are still there. So really maybe what actually is driving the seemingly material pick up in the international margin side? And can you just comment on these -- how sustainable that is?

[Paul R. Garcia:]

Yes. In addition to your point about U.K. progress, Darrin, a couple other things in the quarter. Currency is our friend if you're looking at this on a year-over-year basis, so that's a chunk of this. And it's a chunk that we expected and a number of you and your colleagues expected as well. The other piece is this marketing true-up in Spain, which is a big chunk. I said over 1/3 of the international margin expansion comes from that alone. That part isn't sustainable. It's a true-up. We move forward just running the business together with our terrific partner, Caixa Bank, there. But that particular item does not recur and that's part of why when I was describing earlier to Dan's question we have good guys helping us with FX and the margins. We got off to a hot start and then we kind of hang on and execute well over the rest of the year. That's a piece of it. The FX is a bit of a similar story to the Spain in that Q1 is a helpful quarter on the way to Q4 being an unhelpful quarter, if that's a word. So those 2 pieces don't necessarily sustain. You get back to raw business performance driving expansion over the rest of the year.

[Darrin D. Peller:]

All right, Dave, so I mean, like you just said, 1/3 of the -- now that's 1/3 of the year-over-year increase or the sequential increase?

[David E. Mangum:]

Year-over-year.

[Darrin D. Peller:]

All right. So 1/3 is from that Durbin in Spain. How much of it would you say is incremental from last quarter on the pricing in the U.K.?

[David E. Mangum:]

Conceptually none, because the right thing doesn't hold it 100%. So you come back to, again, business performance generally. And again, we're off to a good start. As Paul pointed out in an earlier comment, Global Payments Europe and Russia are all contributing at the margin. U.K. is executing well and Spain is off to a good start.

[Darrin D. Peller:]

That's great. One follow-up on the spread in the U.S., the spread between transaction growth and revenue growth seems to have discontinued to narrow to the point where it gets actually almost the same now. Isn't it 12%?

[David E. Mangum:]

It was for this quarter, yes.

[Darrin D. Peller:]

I mean, historically, there used to be a pretty big gap, right, where generally transactions were far outpaced on the revenue side. Should we expect to continue this for modeling purposes?

[David E. Mangum:]

No, I don't think you should for 2 reasons. One is we have a transactional growth anomaly this quarter on a year-over-year basis. Transaction growth of 12% reflects a quarter where we had 3 less days than the same quarter last year. On a per day basis, you'd find us more in the mid-teens, more in the range you've seen in the last quarter or so. So that would give your gap of let's call it mid-teens down to 12% revenue growth, which should feel a little more logical to you. Now if you hang on to that for a second, the second part of the explanation is the other business lines in the U.S. are growing well and growing faster than your model will demonstrate historically. By that, I mean the Gaming business where we signed a large account away from the dominant provider in that space, our Greater Giving business growing on the order of double digits depending on the quarter and our Direct business, as Jeff described earlier, really performing well this year. So those 3 things that married to an ISO growth you already know is double digits, means that the revenue growth is creeping up, and total U.S. revenue growth, excuse me, Darrin, I want to be clear. The total U.S. revenue growth is indeed creeping toward the transaction growth, but that's actually a good thing. It means all the business units are executing, driving total growth will be a little higher. And then the transactional method, you'll find that GAAP will be a little less when all the businesses are firing on all cylinders. Contrast that with the time and say gaming is not performing as well 2 years ago and you'll see a wider delta, wider spread, between revenue growth and transaction growth.

[Darrin D. Peller:]

Okay. Would you mind, Paul, if I just squeeze one last in around Durbin and some of the changes we have seen really quickly? On the front of 2 things, one on the Durbin -- on the new interchange schedules introduced by Visa and MasterCard, especially by Visa with the small ticket items, obviously you're seeing a much -- I mean, more material increase on the fixed-price material on small ticket items now. Have you seen any or heard any push back from smaller merchants on that front?

[Paul R. Garcia:]

Darrin, that's a very perceptive point. And I have to tell you, no one's really talking about it and you are exactly right and it's almost an unintended consequence. But the bottom line is that if you have a small average ticket and we have particularly some ISOs that have merchants like this, not so much us. But you have an average ticket under $10, this is going to cost you money. Your rate is actually going to go up about 30% on the interchange level, particularly on the Visa side. MasterCard almost as much, but not quite as much. So I think the answer is we haven't really gotten kickback on that yet, but I think you will. I mean it's certainly not as advertised, particularly by some of our competitors. Not everyone is going to get a rate decrease, even if you give 100% of it back.

[Darrin D. Peller:]

Right. And still no color from Visa or anybody on the network participation fee yet? Still waiting?

[Paul R. Garcia:]

Well, we are having ongoing dialogue and I would say that there is some positive developments, but nothing we are prepared to share with you at this point.

[Operator:]

Your next question is from the line of Jason Kupferberg with Jefferies.

[Jason Kupferberg:]

Just wanted to come back on the margin. Just to clarify, specifically in North America, is there any change in the full year fiscal '12 operating margin assumptions for North America specifically? I know obviously, overall margins, particularly in the guidance up there, which is great to see, is that all driven by international? Or is there any change in the North American expectation as well?

[David E. Mangum:]

Yes, Jason, it's David. I guess it somewhat depends on where you're modeling in the range and how the pieces work in the assumption. Most of the upside indeed comes from International, but we're off to a nice enough start in North America that we think it can be a contributor as well. But certainly, most of the answer is international.

[Jason Kupferberg:]

Okay. That makes sense based on the help you got in Spain and so forth in Q1. Just a follow-up on the balance sheet. Obviously, market valuation moderated quite a bit since your last call. I'm just curious, have you guys seen that reflected enough in seller expectations to make conversion of your M&A pipeline perhaps more likely over the next 3 to 6 months than you might have thought back in July?

[Jeffrey S. Sloan:]

Jason, it's Jeff. I'll address that one. The first thing I'd say about our M&A business is that we're very pleased with the amount of inbound deal flow. So as with most things, when you see a lot of volatility in valuations, that causes a number of prospective sellers to think about whether now might be a good time to reapproach the markets. They've seen the highs and they're worried about where the market's going. So I think we still get a very good amount of deal flow coming in, notwithstanding the volatility is the first thing. The second thing I'd say is with dislocations, especially outside the United States in the financial services markets, we would expect and we begin -- we believe that we're beginning to see more opportunities among financial institutions globally for asset dispositions to raise capital. So I think that's also another positive effect in our M&A pipeline of the volatility you're seeing in the markets. The last thing which I think may have been a principal part of your question is what will valuations do and is it harder or easier to get a deal than now. I would say volatility makes things a little bit more difficult because prices change fairly dramatically intraday or from day to day. But I haven't yet experienced that in terms of our pipeline, so I feel like we are entering this new quarter with a very good deal flow, good pipeline. I think we're optimistic that a lot of volatility, especially among FIs outside the United States, will lead to additional flow. So far so good.

[Operator:]

Your next question is from the line of Andrew Jeffrey with SunTrust.

[Andrew W. Jeffrey:]

Paul, one of the things we've heard about kind of into the quarter was perhaps that first day just backing off a little bit in the ISO channel from a competitive standpoint. Has anything changed in your U.S ISO business? It sounds like you're making headway in direct, but I'm wondering about that challenge which has been such a powerful growth driver for you. Are you feeling like that's maybe a little less onerous on a competitive basis than it's been?

[Paul R. Garcia:]

Yes. That's a tough one. I think that we really haven't lost any ISO momentum. We're growing around it, which is our plan all along. I think it's -- I'm not going to comment directly on first data, but I think I would say that I think it's fair to say that it is -- we've kind of reached a level where there isn't any significant movement with any of us in -- or significant momentum with any of us signing each other's ISOs. I think it's kind of stabilized. And I think pricing is probably one of those in all fairness, Andrew. So the ISOs continue to be a strong driver for us in terms of top line and continue to be the double-edged sword on the margin side. But at the end of the day, they produce some lovely earnings and that continues and I think it will continue for some time.

[Andrew W. Jeffrey:]

Okay. But maybe a little less of a headwind to the incremental margin than what you've seen in the past?

[Paul R. Garcia:]

I think that is probably for this year, I would say. We're not forecasting any big hits in that. So yes, you're correct.

[Andrew W. Jeffrey:]

Okay. And then with regard to U.K. pricing I think, David, in your prepared remarks you had mentioned that it held. I'm just wondering if I could be a little more color on that. Is there some thought around the sustainability of sort of the unbundled pricing as the competition on the market plays catch up? Or was that kind of a placeholder comment?

[Paul R. Garcia:]

Andrew, we do think the unbundling of pricing is the beginning of a broader market trend. You'll find for transparency reasons and for regulatory reasons, you'll see more and more of that in the U.K. So we don't view this quite as the same sort of transitory spread change we've all come to see more often in various markets around the world from the big substantial changes. So we do think this is a part of a revised baseline for the market. We hope that it allows us to have some competitive advantage for new accounts that will help fuel longer-term as well as near-term growth from sales perspective and allow us to take some market share. But we do expect to see our competitors taking similar approaches on bundling pricing. Hence, we sort of conclude at the end of that, that as with any price increase, you get pieces of it back due to attrition, but you don't necessarily bring it all back given that we have now really much better linked the value we provide our merchants on a service-by-service basis, item by item on the invoice to the actual charging we give them.

[Andrew W. Jeffrey:]

Okay. So it should -- we can think about it as being a tailwind to the next couple of quarters at least anyway, albeit a modest one.

[David E. Mangum:]

I think that's fair.

[Operator:]

Your next question is from the line of Sanjay Sakhrani with KBW.

[Sanjay Sakhrani:]

I'll ask my 2 questions up front. They've kind of been answered, but I thought I’d ask them again. Just on capital management, appreciate the dynamics of -- that you guys completed a share repurchase. But just kind of what are the expectations on a go-forward basis? And then just on the economy, I understand kind of the credit card or the card space is generally doing better than kind of the broader economy. But just, I mean, are you guys seeing any discernible trends if you look at same-store sales patterns outside of market share gains?

[David E. Mangum:]

Sure. This is David. I'll try the buyback capital and let Paul speak a little bit about some of the macro trends we're seeing. I think we've been quite consistent and will remain so on our approach to the prioritization of capital deployment. We still believe the highest and best use of our capital is to deploy it for market expansion and global growth; acquisitions, partnerships, whatever we can do to drive global growth. We have also said before that we'll routinely buy back stock, both as a regular matter to offset dilution and opportunistically. Of course, it's difficult to define opportunistically in this market, but opportunistically as well. I guess I'd remind everyone we bought back in the spring of 2010. We just did this program now, all of this in the context of retaining our commitment to remain a version of an investment grade rated company, which we believe makes us the partner of choice for financial institutions and for our network partners around the world. That means an actual leverage of 2x to 2.5x EBITDA. So that's the construct within which we manage then the capital deployment. Again, back to first priority being global growth and expansion. Second thing, returning the capital in some other form. At any time, we're assessing our outlook on deals and Jeff described that a moment ago in answer to another question against other uses of capital. I think this quarter hopefully demonstrates to you that we're not averse to using some debt to buy back stock. We have a certain view of this and the return on it that doesn't make us shy away from using that little bit of debt to buy back stock. But it's unlikely you'll see us run up to our maxed leverage buying back stock either given the other growth opportunities we find around the world. So having said all that, it should not surprise you to see us back in the market buying back stock again sometime in the near term, but we're assessing all those pieces with those 2 clear priorities all the time.

[Paul R. Garcia:]

In Sanjay's question about the general economy and are we seeing any discernible trends like same-store sales and is all of our gain coming from just market share gain, well, I think a meaningful portion is coming from market share gain. And I think to earlier questions, that's an important point because that is sustainable. We're just starting to get the fruits of some of those labors and we're feeling very good about that. I think depending on the sector overall, I would say no discernible overall trends. We're still seeing gains. Now you could actually have lower same-store sales overall, but credit is going to take -- credit debit take up a higher proportion so we can actually get an increase, which is typically the case. The softer segments are some retail and restaurants pretty much generally continue to be a little challenged.

[Operator:]

Your next question is from the line of Dave Koning with Baird.

[David J. Koning:]

I just wanted to touch on North America EBIT growth. It's been mid- single-digit growth on a year-over-year basis the last few quarters now, which is a nice trend after some declines prior to that. But it's been about flat on a constant currency basis for the last few quarters despite what revenue trends you mentioned were pretty good across the direct channel, Canada, Greater Giving, those were all pretty positive. So I'm just wondering how should we see North America EBIT on a constant currency basis going forward. Is there a chance for that to start to grow again? Or do you kind of expect it to be more this flat, kind of flattish growth?

[David E. Mangum:]

Yes, Dave, we expect flattish to modest growth and it will depend on the quarter and the timing of the sequencing of investments. North America has a number of features. It obviously has Canada, which we're looking to see sort of stabilize this year and we think that's a reasonable goal for that business. We expect the businesses in the U.S. then to push forward. At the same time, North America also sees some of the results of our investments in infrastructure and IT, which will then take you back the other direction. So by the time you're done with all the mix of what rolls into North America, you end up back to the number you're talking about. That's not a contribution margin of what's coming for the businesses. It really is an operating margin after some of the -- the true running of the business costs get allocated back toward North America and that holds it back a little from what you might be expecting. That doesn't mean we're holding it back from outsized growth, but the core results of the business, as reported internally, would look a little bit better in terms of the progress about what you're asking.

[David J. Koning:]

Okay, great. And then just as a follow-up, just touching on FX once again, I think when you last reported, the Canadian dollar was at nearly a 5% premium to the U.S. dollar. Now it's at a 5% discount. So that's a pretty material change, but it sounds like the change that happened is pretty much in line with your guidance. So is it fair to say if the Canadian dollar has held where it was when you last reported it, that would probably contribute to some upside. And now what we've seen is more in line with your guidance and if it would continue to weaken, that, that could contribute to some downside. Is that kind of the sum of everything you've said?

[Paul R. Garcia:]

That's the sum if we look at the Canadian dollar in isolation. FX for us is really 5 currencies, 3 of which are really quite large in the grand scheme. But yes, your logic is correct. We didn't see anything that shocked us. We do have a new jumping off point, which allows us to take on a look at the rest of the year. I don't by any means mean to suggest we got everything right looking out for the rest of the year. We don't have a crystal ball any better than yours, in fact, it's probably not as good as yours. But yes, you're base logic, if you pick Canada in isolation, is correct in terms of how to think about things.

[Operator:]

Our next question is from the line of Glenn Fodor with Morgan Stanley.

[Glenn Fodor:]

The last analyst day, you spoke about eCommerce as an area of focus. So I was wondering if you can give us an update there, progress and increasing share. What are your thoughts on the recent announcements by PayPal? And how would you expect eCommerce yields to migrate over time? I mean, large drop off over time, holding steady, possibly increase. Just want to get your outlook there.

[Paul R. Garcia:]

Okay, Glenn. There's a lot of questions in that. So I mean, it's a little more...

[Glenn Fodor:]

It's par for the course for this call, though.

[Paul R. Garcia:]

So it's -- I mean, the questions inherent in that are emerging payments, what's going on with that? Is PayPal friend, foe, ally? What's going on? And eCommerce, does that drop off or continue to grow? I mean, we're very bullish on eCommerce. We think it continues to grow. We need more exposure to eCommerce. And one of the reasons Jeff is here is to build our domestic exposure. Our international exposure actually is pretty good, and we're continuing to expand that as well. We think that it's obviously a huge growth area. We are putting resources, investments, product and personnel into growing that literally in every market, number one. Number two, PayPal is a good partner of ours and we absolutely think that our job is to deliver payments to our merchants. If there's something in it for us and we believe there should be because we can deliver lots of merchants, then we are, I would say agnostic is too strong of a word, but we are open if it's -- if their customers are interested in using it and our customers are interested in offering it, then we will be in a position to facilitate it. And the way we facilitate that would ensure that we share in that revenue steam -- stream in a meaningful way, in a commercial way, in a way that's not dissimilar to the way we're sharing in it today. So that's our plan, and we're seeing close to everything and every development on that.

[David E. Mangum:]

And just to add, Glenn, a little more color, this is David. We have a meaningful eCommerce business in Asia that's doing quite well. We have a meaning eCommerce business in the U.K. We have real eCommerce opportunities in Spain over the medium to long term. You may have seen an announcement we had a few weeks ago where we introduced some solutions, really a full eCommerce platform for small- to medium-sized merchants that we'll be rolling out in the U.S. and in Canada over the coming months and then beyond that for the rest of the world. Similar solutions and partnerships are in process in all the other markets around the world. So we're attacking us on multiple fronts. In some cases, we're starting really with the first customer in some of these, but we'll be building it out and this opportunity isn't going away in the next year or 2, so we're building out toward long-term growth across the world in eCommerce.

[Operator:]

The next question is from the line of Tom McCrohan with Janney.

[Thomas C. McCrohan:]

Can you remind us on how much of your buying is PIN debit and if there is a shift back to spending away from debit onto credit cards because banks are raising fees for usage, is that good or bad for you guys, and why? And then lastly, if there is a way just to give us the contribution this quarter from Spain because it's bundled in obviously with all the International segment.

[David E. Mangum:]

Sure, Tom. If you're looking at the U.S., really our metrics haven't changed. We focus transactions, but it's a reasonable property, too. [Technical Difficulty] We're still at less than 10% of our transactions as PIN debit, over 50% as SIG debit. And the bulk of it, the remainder then obviously being credit. So that's -- those are really the basic splits. Now part 3 of your question before I got confused by the feedback was about Spain and the breakout. We're really not going to call out Spain. We really do manage the total Europe revenue line and look at the growth there. I'd point you back to when we first bought the asset in December. We talked about it being a little bit dilutive to GAAP earnings, a little bit accretive to cash, coming in as a relatively lower margin, contributing on the order of $30 million of revenue last year. And then we talked about our sales investment are ramping. We're off to a good start in Spain. We're feeling good about the pieces. Certainly with the marketing true up, it performed at a higher margin level than we anticipated for Q1. Then we go back to the how quickly can we ramp the investment in the sales force on the way to them creating margin leverage for us for the long term, and that really is the story for fiscal 2012 for Spain for us.

[Paul R. Garcia:]

And I think, Tom, that the point about do all these forces in the market that we've seen playing out over the last couple of months and we'll continue to see, does that cause consumers to use their credit card more than they do a SIG debit or a traditional PIN base if it's -- and what kind of impact will that have. If that happens and it is volume coming from PIN base, that is actually good news for us. We make more money on a credit card than we do a debit card. Now of course we have more expenses associated with a credit card, charge backs, and there's a lot more to that. But a consumer has quite frankly more protections as well. But that's a different transaction. Although we have similar margins, we have higher revenues from that and it produces more EBITDA. So that would be a good fact, but it is not something we're taking -- we are modeling in, we're waiting to see. I personally think that could happen but let's see.

[Thomas C. McCrohan:]

Can I ask you a quick follow-up on that on the protections? So do you think there is a possibility that the protections afforded somewhat on a debit transaction could be tinkered with by the card networks to accelerate more of a shift back to credit? I mean, the protections on credit is already better, but is there any possibility that the credit networks maybe because of -- due to pressure from banks just maybe remove all protections for debit just because the credit product is a more advantageous product for the banks?

[Paul R. Garcia:]

Tom, I have to tell you I do not think that is a possibility. I just can't imagine. I don't think that would be in anyone's interest. The banks are interested in providing great services for their customers. I'm sure they have a huge amount of introspection before they introduce a fee. And they do that, I think, in a balanced way, too. I don't think anyone is going to mess with what's in people's wallet in any significant way in terms of the benefit. I just can't imagine that. And I would be shocked, appalled and in opposition.

[Thomas C. McCrohan:]

Yes, I guess I only bring it up because you got Durbin out there again rattling the cages on credit, and maybe there's going to be more noise than fact. That may -- I just feel this headwind risk in actually next couple of months once again from all this noise coming out of Washington. And just wondering if that's something that could pop up and what the likelihood would be that, that would become a reality, but it doesn't look like there's any way that that's going to be a reality.

[Paul R. Garcia:]

I just can't imagine, but it's certainly interesting theater.

[Operator:]

Your next question is from the line of Robert Dodd with Morgan Keegan.

[Robert J. Dodd:]

I'll try and keep it short. And it goes back to U.K. pricing. And if we look at Canada a few years ago, a big price increase. Most of it got, pretty much all of it got around to competitive issues over the next couple of years. You obviously don't think a big pricing or a big keeping of the Durbin spread would be sticking in the U.S., because competition would drive it out. So what is it that gives you the confidence in the U.K. where you've taken this price increase? And obviously, you think some of it's set away, but what gives you the confidence you think most of it will stick?

[David E. Mangum:]

Primarily Robert, this is not a simple spread change. In fact, the spreads didn't change much at all. What you're talking about is mapping value for individual services on a very transparent and clear invoice in a regulatory environment that's asking for more transparency. So instead of a certain price increase, you may have changed the base. That doesn't mean it all lasts nor that it will last forever, but I do think it's fundamentally different than just a spread change in a given market at any one time.

[Operator:]

Okay, thank you, and we'd like now like to turn the conference back over to Mr. Garcia for closing remarks.

[Paul R. Garcia:]

Well thank you, ladies and gentlemen, for your interest in Global Payments.

[Operator:]

Ladies and gentlemen, this conference will be available for replay starting today at 7