Global Payments Inc. (GPN) Q4 2011 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by, and welcome to Global Payments Fourth Quarter Fiscal 2011 Earnings Conference Call. [Operator Instructions] And as a reminder, today's conference will be recorded. At this time, I would like to turn the conference over to your host, Senior Vice President of Investor Relations, Jane Elliot. Please go ahead.

Good afternoon, and welcome to Global Payments Fiscal 2011 Fourth Quarter and Year-End 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 the 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 normalized and cash earnings, which are not in accordance with GAAP. Management believes these results more clearly reflect comparative operating performance. For a full reconciliation of normalized and 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 July 21, 2011, which may be located under the Investor Relations area in our website at www.globalpaymentsinc.com. Now, I'd like to introduce Paul Garcia. Paul?

Thank you, Jane, and thanks, everyone for joining us this afternoon. I am pleased to report that we delivered fiscal 2011 revenue growth of 13% to $1.860 billion, and normalized diluted earnings per share from continuing operations of $2.77 or 9% growth compared to last year. These results reflect the top end of the range of expectations we previously provided. For our fourth quarter, we delivered exceptional financial performance, with revenue growth of 22% to $520 million, and normalized diluted EPS from continuing operations of $0.76 or 31% growth. This translates to a total company operating margin of 17.8% compared to 17.4% for the same quarter last year. Now for the highlights of the quarter, I continue to be pleased with our joint venture in Spain, which delivered better-than-expected revenue for the fourth quarter. We have begun investing in sales strategies like those we successfully employ in the U.K., and we have added over 50 salespeople. We believe these sales investments, combined with "la Caixa's" powerful brand and 5,000 plus brands footprint will drive considerable market expansion and long-term growth. North America delivered revenue growth of 14% in the quarter, primarily driven by a performance in our U.S. ISO channel, substantial growth from our Gaming business and seasonal strength in Greater Giving. Canada also delivered favorable results as we anticipated. Our International segment produced another quarter of excellent results, with revenue growth of 49%, fueled by all regions. These results include the addition of Spain, benefits from our successful February platform migration in the U.K. and continued strong growth in Asia. Russia continues to deliver solid growth, and Central Europe performed well in the quarter as well. Finally, I'm pleased with the progress we made expanding our global footprint, and improving our economies of scale across the company. As a result, I am delighted to report that our current financial outlook for fiscal 2012 includes the expectation that we will expand total company operating margins by as much as 30 basis points. Please note that this does not include any impact from Durbin activity, but does include the negative impact of our growing investment in Brazil. David will describe this in more detail in just a moment. I will now turn the call over to David. David?

Thank you, Paul. I plan to briefly review 2011 results, and then detail our fiscal 2012 expectations. During the fourth quarter, on a year-over-year basis, currency changes benefited revenue and normalized earnings by $12 million and $0.04 per share, respectively. North America Merchant Services revenue grew 14% for the quarter, with U.S. revenue growth of 16% and U.S. transaction growth of 17%. Canada delivered local currency revenue growth of 2% for the quarter, with transaction growth of 1%. North America normalized operating income or EBIT dollars were up 7% for the quarter over prior year. International revenue increased 49% for the quarter compared to last year, and operating margin increased to 27.6% compared to 25%. The elevated revenue growth was fueled by our Spain acquisition, while margin improvement reflects the successful U.K. migration and continued growth in Asia and Russia. For fiscal 2011, we reported $3.08 of cash earnings per share compared to $2.80 for a growth of 10% over prior year. Cash earnings exclude the impact of acquisition-related amortization, special and non-recurring charges, and their related tax effects. We reported total cash and cash equivalents of about $1.4 billion at May 31. This balance is not representative of our actual cash available, as it results from our quarter ending after holiday weekend. Our total available cash at the end of the quarter was over $240 million. Finally, for fiscal 2011, we generated free cash flow of $303 million, representing 19% growth over last year. We defined free cash flow as net operating cash flows, excluding the impact of settlements, assets and obligations, less capital expenditures and distributions to noncontrolling interests. During the year, we spent $99 million on capital expenditures and we anticipate our full year fiscal 2012 capital expenditures to be about $85 million to $90 million. Turning now to our current expectations for FY 2012. For fiscal 2012, we plan to report our financial results on a GAAP basis and on a cash basis. Please refer to Schedule 10 in our earnings release for reconciliation of our GAAP and cash outlook for 2012. From a currency perspective, our outlook for fiscal 2012 assumes that over the course of the year, the U.S. dollar remains about constant against the Canadian dollar, and remains constant or slightly strengthens against the British pound, the euro, the Czech koruna and the Russian ruble. We believe the aggregate effect will likely be about neutral to slightly positive to our earnings per share in 2012 compared to 2011. Fluctuations and exchange rates of course may cause variances to our outlook. For the U.S., we anticipate overall revenue growth to be in the low double-digit range for fiscal 2012. We expect strong performance from the ISO channel but perhaps a slightly slower overall growth rate given the sheer size of the channel, and solid growth from the rest of the U.S. In Canada, we expect local currency revenue to be about flat or grow in the low single-digit range. In total, we expect cash operating margins to be down slightly in North America, driven by ISO growth. However, we again anticipate North America EBIT dollars to grow. In Europe, we expect revenue growth of over 25%, driven by the addition of Spain, solid U.K. growth, and growth fueled by continued card adoption in Russia. We anticipate our Asia Pacific business will grow in the low to midteens as we annualize the robust performance the business posted in fiscal 2011. We expect overall International revenue growth in U.S. dollars to approach 25%. We expect International cash margins to expand considerably in 2012, due to ongoing scale benefits across the region. We expect corporate expenses to grow as we now operate a fully functional service center in the Philippines and increased investments in our technology infrastructure. We expect our Global Service Center to be about breakeven in 2012 and provide savings thereafter. In terms of the sequence of 2012 quarterly earnings per share, we expect first quarter cash earnings per share to grow over Q1 of 2011, but to be down a bit sequentially compared to Q4 of fiscal 2011. As the strong singular performance we post in Q4 settles down and our tax rate increases a little. We expect strong cash earnings performance in both Q2 and Q4, with less earnings in Q3. Based on our present outlook and with our current assumptions, we expect total company cash operating margins to be flat to up as much as 30 basis points compared with our fiscal 2011 cash operating margin of 20.9%. All of our financial expectations exclude the impact of potential Durbin-related activities, but include the impact of our increasing investments in Brazil. For fiscal 2012, we expect both GAAP and cash effective tax rates to be about 30%. We expect our diluted share count to approach 82 million shares. And now I'll turn the call back over to Paul.

Thank you, David. Based on our current outlook, we are providing full-year fiscal 2012 annual revenue expectations of $2.1 billion to $2.150 billion or 13% to 16% growth over fiscal 2011. We are also providing annual fiscal 2012 cash EPS expectations of $3.35 to $3.43, reflecting 9% to 11% growth over fiscal 2011. We plan to expand cash operating margins by as much as 30 basis points for the total company for fiscal 2012. All expectations, of course, exclude the impact of the Durbin amendment. Finally, I am delighted with our company's financial and strategic performance and our global market position. I'm confident that we will continue to successfully execute our strategies for growth in an ever-changing payments environment. I'll now turn the call over to Jane.

Thanks, Paul. Before we begin question-and-answer session today, I'd like to ask everyone to limit their questions to 1 and 1 follow-up in order to try to accommodate everyone in the queue. Thank you. Operator, we will now go to questions.

[Operator Instructions] Our first question comes from Tien-Tsin Huang with JPMorgan. Tien-Tsin Huang - JP Morgan Chase & Co: I guess my first question, the revenue guidance up 13% to 16%, it sounds like margins flat to up 30, but the EPS guidance I guess is only up 9% to 11%. So it sounds like, David, something happening below the line, can you help clarify that?

Yes, I'd be happy to, Tien-Tsin. There are probably a number of factors that we could go through in more detail. Below the line as you might imagine, just to speak specifically to your question, the biggest thing that happened to interest income or expense, the net gets worse as you go into the year. We'll have a full year of the debt associated with the Spain acquisition. That's probably the main thing and then tax is about flat. But if you indulge, and I'll go through all the pieces and see if all fits together a little bit better. And some as we repeat of the prepared comments, but I'll walk it all through with a little more color. You got your low double-digit growth in the U.S. and remember, that's the combination of strong double-digit growth in the ISO. With that comes the concurrent deleterious effect on margins and I'll come back to that a little bit later, when I get to the end of the conversation, but I want to point that out, that's kind of where we start out a little bit of hole on margins just in the beginning of the year, and then, really solid growth for the direct card business, more double-digit growth from gaming, so nice performance across the board in the U.S. we expect. In Canada, we're looking for a stable performance coming up of what we've characterized as stable Q4 of 2011. So there, we're really thinking we return to essentially market growth in local currency. That means roughly flat to perhaps low single-digit growth in local and that ought to turn into a little bit of help from FX. Now, we take that down to North American income, we do expect then cash EBITDA to grow but cash operating margin to decline due to the effect of the ISO growth and our increasing investment in Brazil. So if we part that for a moment and move to international, in the U.K. we continue to expect the core card business to grow nicely. We get a little help from repricing related to the back-end migration. And the part of the growth and part of why you're not seeing quite as much turn itself into the earnings line, is a lot of the growth you'll see in International and frequently, our U.K. business, is coming from the International Acquiring business, from which we're looking for a big year, and as you know, that operates at a substantially lower margins than the rest of the businesses over there. So all in, we think it's strong, local currency growth in the U.K., but a fair amount of that growth again comes at a lower margin from that international acquiring. We do expect Central Europe to return to growth in 2012, not material growth, but turning positive. Should be a nice change in trend, with Russia continuing its pattern of solid growth, tied to increasing card payment adoption and acceptance. Now of course Spain is the key to that revenue growth, and you know where we jumped off with Spain, which was for this year and in 2011, fairly modest cash earnings, dilutive to GAAP and normalized on the order of approaching $30 million U.S. or so of revenue for the year. We obviously expect that revenue to increase substantially, as we have a full year on one side and half year on the other. That said, with Spain, what we're doing is driving growth, but also, investing heavily in the sales force. So you have that dynamic that I'll ask you to recall as well. So that outside growth there, we'll fuel that over 25% growth in Europe we talked about. Maybe a little bit of currency help as well. But not all of those pieces fuel off a lot of earnings growth for obvious reasons. Spain, the plan what we can do there long term, is an example and international acquiring business. In Asia, we have a Dynamic Currency Conversion products fully rolled out. I expect to see growth slow a bit, we've talked about that major customer before where we've got the bulk of their introductory product growth really in 2011, but we get solid growth overall in Asia and continuing build on the margin line there. So then obviously total international then is set to approach 25%, and its expansion there, despite the moving parts I just described, it really fueled the total company expansion. It's really important for me though to reiterate, we do expect corporate expenses to grow. We'll see the impact of the fully operational service center, but also, increased investments in our technology infrastructure for data center and network infrastructure expansion and additional compliance. So you pull all that together and you aggregate all those color to the total Global Payments level, you've got the North America revenue growth low double digits, the EBIT dollar growth there, even including the negative impact of Brazil. Still the margin challenge created by the success of the ISO channel. Internationally, we've got the high revenue growth, significant margin expansion, but also a series of sales investment in places like Spain, and then you see the investments in our Corporate segment. Then you'll see again as I said before, the net interest expense increases, so we have a full year, the impact of Spain, tax rate is about flat year-over-year and there's 1 other below the line item that's really important to keep in mind here, which is the share count. So -- and I don't believe this is in very many models, but we expect shares increase to approaching 82 million shares with stock grants and just the normal routine things we do to operate the business. That will reduce incremental EPS in your model, frankly, quite substantially, at the high-end of the range. So those are the 2 below the line answers, our share count and interest to your direct question. The end result of that is the earnings range and the revenue range we discussed. So if you pull then, that back to the margin expectation, the flat to approaching 30%. Remember, we start off the year with substantial ISO growth that drives margins down, that's the starting point. Before we ever start with margin expansion around the world. And really, the way we thought about this 2012 outlook, so the way I think about it, is we've created a plan here that I think does a nice job of balancing the short and the long-term. By that I mean, we believe we have the business asset to executing the level that allows us to expand margins in 2012, but we're not solely running this business for 2012 results. We're trying to balance delivering good progress in 2012, we're also maintaining our focus on the long-term. To that end, we're investing additional data center, technology network infrastructure capabilities that I described, that we expect to support this business and drive the business for the long-term. We're investing in new products, including the ability to participate in the various mobile and alternative payment initiatives we all expect to see come to fruition over the next few years. We're investing in sales force capabilities in Spain and around the globe. Increasing our investment in Brazil, all of which are incorporated in this outlook. They may, these investments, provide headwinds to maximizing margin expansion in 2012, but we certainly believe these are prudent investments in sustaining our competitive advantage and increasing our leadership position in the markets we serve around the world. So sorry for the long-winded -- I thought I'd get to the whole thing from top to bottom, and lay it all out there. Tien-Tsin Huang - JP Morgan Chase & Co: That's -- it's good to hear. I wish I could mix it all into the model as easily.

That's what we do later. Tien-Tsin Huang - JP Morgan Chase & Co: But I think that gives me a framework to work with. My follow-up and I'll jump off, I think it makes a ton of sense to not talk about Durbin, but obviously, that's a big caveat, after everything you just talked about. But maybe if we can just distill it down, is it safe to say that it's still sort of this neutral to positive impact? Even assuming the cost you have to bear to get compliant with the new rules?

Tien-Tsin, this is Paul Garcia. I think it's safe to say that it is positive. It's going to be a net positive for the company. Now as you said, we appreciate that, we have not included it. The truth of the matter is, Durbin, the whole situation is nascent. I mean it hasn't developed yet. And although we clearly have our own internal strategy, until all the pieces play out with all the players, we can't fully comment. But even then, Tien-Tsin, to be honest, it's October 1 that's affected. Even then, I don't think it's going to be in anyone's best interest for us to kind of parse all the components. But I will tell you, we will provide some appropriate color as the year progresses, and once again, it's absolutely a net positive for us.

Our next question today comes from Darrin Peller from Barclays Capital.

Just a first quick question on the European segment. When we look at the revenue increase in Europe, I understand there's now 3 months of "la Caixa" versus 2. But the increase was pretty substantial for that 1 month extra, which I'm assuming is mostly going to be the U.K. price increase which you alluded to earlier along with Russia, I guess. But I would have imagined that the price increase is almost entirely going to pass through to the margin. And so can you just help us understand the specific puts and takes on that area as to why the margin wouldn't expand more internationally? I understand there's some investment in "la Caixa," but how substantial is that?

Darrin, I'll walk you through the pieces because the geography to which you pointed is actually one where everything moved forward in Q4 on a sequential basis, particularly on the revenue line. Not all of it translated necessarily into earnings. So you put your finger on the first side, in which is the full quarter of Spain, and you've already modeled a view of that as we said before sort of modestly cash accretive. And then on a normalized, the GAAP side, not so much. You also have a strong fourth quarter sequentially in Central Europe, couple of nice one-time service and software implementations there, strong quarter in Russia and a very strong international acquiring quarter in our U.K. business. And remember, international acquiring is that piece of the business that operates at a lower margin. And then you lay the impact of the back-end migration and some of the recast of the pricing on top of that. So the pieces that contributed really were not -- the majority of this is not the price at all. In fact it's a minority item on the list. So it's a nice piece that aids in sequential increase in earnings per share, when you watch things tick up over the quarter. But it's just 1 piece of a puzzle that when you take the total company earnings, progress in Canada, progress in the U.S., progress in Europe, et cetera, those pieces all come together. So I think, obviously, it's an excellent question and that you think you'd see a little bit more drop. When you break it down to the product lines and geographies themselves, the pieces don't come together in quite that way.

As a quick follow-up, I mean it seems like you've set, as a company-wide been set up for a year. I mean maybe, Paul, you can help me out with this. Set up for a year on the front with some benefits from "la Caixa," benefit from this price changing in the U.K., as well as potential benefit. And we somewhat benefit from Durbin. It seems like at least from that perspective, those perspectives you will have growth, decent growth rates, at least top line for the year. And I'd be curious to know what you're planning on doing? I mean what kind of strategic rationale do you have for the next year to help position yourself for continued type of growth in '13 and beyond?

Darrin, that's a great question. And I'll tell you that, that is part of David's answer for why aren't we maximizing margin in fiscal '12. What you heard him say is that if we didn't make the investments we're making, if we didn't invest in infrastructure, if we didn't invest in Spain, if we didn't invest in Brazil, if we didn't do the things that -- by the way, we're not breaking out. We are just sucking that up as part of our guidance, that if we -- and of course, have the reality of the ISO growth, but if we didn't do all those things, I think you would see much more aggressive margin growth. But those are investments that will allow us to continue to expand margins in the future. Also, we do have plans, they are proceeding to leverage our infrastructure systemically, our entire system's infrastructure, as well as the entire Global service center in Manila. Now this year, we're going to exit that without being a headwind. It becomes quite, a reasonable tailwind. So I think this is pretty well set up. Now once again the only thing I would disagree with, it doesn't include Durbin. Durbin falls to the bottom line kind of thing. And that's kind of to be determined what happens with that.

Our next question today comes from Jason Kupferberg with Jefferies & Company. Jason Kupferberg - Jefferies & Company, Inc.: I just wanted to dig into the margins a little bit more if I could. 0 to 30 on a cash basis x Durbin I get that, help us understand on a GAAP basis, how margins are going to trend year-over-year, what would be the range?

The margin range is for GAAP, give me just 1 second here.

Jason, do you have a follow-up while David is doing that?

I think on a GAAP basis, Jason, you're going to find them ticking up a little bit as well, not wildly different from the type of numbers we're talking about for cash. So on the order of that 30 bps, could be a little bit less. Some of that's going to depend on the purchase accounting and amortization and what FX does there, and that creates a delta as you know. But generally, they track each other fairly well, kind of in all levels as we look at the rates, so the comparative rates, obviously the growth rate is higher in GAAP, given as we head into 2012, we no longer have the various carve outs we were dealing with in 2012. Jason Kupferberg - Jefferies & Company, Inc.: Okay, but the GAAP margin outlook there also excludes Durbin just because we don't know?

Yes, everything excludes the... Jason Kupferberg - Jefferies & Company, Inc.: Just a follow up then, Paul, maybe just to get your opinion on more of a -- an industry question post Durbin, and if we think about some of the anti-exclusivity provisions of the Durbin amendment, I'd love to get your thoughts on -- from the issuers perspective, how you think that they might comply there, and then how it might affect you guys? And what I mean by that is, do you think that they'll go to exclusive debit cards and rip off the existing PIN debit network and replace it with an affiliated PIN debit network? Or will they simply add an affiliated PIN debit network alongside the existing affiliated one to be compliant, if you catch my drift there?

I do. Jason, as I commented earlier, it is nascent. So I think we're waiting to see just as you are. I suspect though that we haven't heard the last from the card issuing community, including how many signature debit cards continue to be issued, and continued to be used by consumers. We don't know that. That's another piece of the equation. So I think there's a lot to be developed. I think there's some opportunities for the issuers here, you pointed to one of them. I think there's a requirement, that's the latter part of your statement that they're going to have to have dual bugs available. Therein lies, somewhat of an opportunity of course for the merchant acquirers. We have some opportunities to do something with that, not that I can comment a lot on that. But I think you follow that drift. So I think it's going to be a very interesting kind of year. And by the way, this isn't the last thing we're going to see here. I mean Durbin, I don't think hopefully, we'll see much more federal activity I mean at the federal level. But I think we'll see some non-legislative movements in all of these fees. I think that's a continuing trend. And that's, once again, a nice tail wind for all of us.

Our next question today comes from Sanjay Sakhrani from Keefe, Bruyette & Woods Sanjay Sakhrani - Keefe, Bruyette, & Woods, Inc.: Just wondering -- I know a lot of questions were asked on the operating margin, but I was just wondering in the North American segment, how low could those margins go? I mean was all of the deterioration this quarter specific to the ISO mix? And then second question was just on HSBC, obviously they're a good partner of yours, and they've also been talking about some strategy changes. I just wondered how that affects you guys?

This is David. I guess I'm not too sure how to tell you how far margins can go. If the bulk of the growth in our U.S. business continues to be ISO-driven, and that means by definition, the bulk of the growth in our North America business is ISO-driven, they can continue to proceed down. I think what you're hearing us say is, we're putting together the assets worldwide to begin to be able to bend that trend and shape that trend a little differently as we head into 2012. We made a little progress on 2011, and we're going to advance the ball, we think in 2012. So they can continue to go down. I don't know how to answer the how far can they go, but I think I'm answering your question by saying, they continue to be down, given the revenue mix and the channel mix we have right now in North America. And then part 2 of the question?

Okay, before we get to part 2, I’m going to ask Jeff Sloan to answer the HSBC question, Sanjay, but I would add to what David said 2 things: To Darrin's earlier question about how do we keep this kind of momentum going and what are the drivers for margin expansion and growth in the future? It's just kind of an interesting footnote. We just had our 10th anniversary, we are adding more revenue in fiscal '12 than the entire company produced prior to our spend, which is pretty extraordinary. And where that revenue in large measure is coming from is high margin, new markets, international. Now when David talked about international, that is a piece of the U.K. That's what we call the big, super large customers. But the overall margins from these businesses are just terrific. And that we're getting terrific growth from all the International markets and we intend to continue to capitalize that and expand it. We're getting great growth in reasonable margins from a U.S. business too, ditto with Canada. The ISO is a headwind and that's the way that accounting works. And we also have talked about providing more, some more color on as much of that as we can going forward and there are competitive reasons that we are thwarted to do so. So we continue to struggle with that. Now Jeff, would you answer HSBC?

Sanjay, it's Jeff Sloan, I'll say a few things about your question on HSBC. First, they're a terrific partner of ours not just here in the United States but really around the world, so really is very much a multinational relationship. Not dependent on any 1 geography and were very pleased with our partnership. The second, as you know, and I think David and Paul just touched on this, we're really diversified by channel, by distribution channel here in the United States. We spent a lot of time just a second ago talking about the ISO channel, but we're not overly dependent in the 1 channel here in the U.S. and that includes our variety of bank partners. So as we sit here today, we're not troubled by anything that's been out in the press about anyone else's strategy, as far as we can tell sitting here. And obviously, that's something that needs to be played out over time. But we're very pleased on how they're doing and we'll leave it at that.

Our next question comes from Julio Quinteros with Goldman Sachs.

So just to sort of go back to -- and this is more for just my own education, Paul, I've heard you say a few times that Durbin is good for you, but I haven't actually heard you say why. Maybe you guys talked about this in the past, can you just walk through what the sort of 1 or 2 thoughts on why you guys feel this is good for you guys?

Yes, Julio, this is a bit of a slippery slope. So here's the bottom line. The Durbin amendment effective October 1, will, as the Fed defined it, even with the adjustments, will yield a pretty significant reduction, particularly in SIG debit, with a higher average ticket. And just to weight the nature of how this is basis points and cents per transaction, so it's pretty big reduction. Now with the great majority of our merchants, clearly our large merchants, in terms of volume, we have what's called interchange and assessment. So that's a passthrough. They get the full benefit of it. But the smaller merchants, you have discretion whether you give that all to them or not. The competitive nature of this business is such, and we've had 1 competitor that was very public about giving every bit of it away to every single merchant regardless of size. So you consider the reality of the competitive environment and you make decisions. But every basis point you keep is a basis point of profit. And you, of course, temper that with you don't want to lose that merchant. You want to offer a fair competitive deal. So that's the strategy we have in place. It's not a strategy, Julio, that we'd be well served discussing in a public environment or any environment except internal. And -- but just be assured that there will be opportunities for us to keep some of that appropriately. I mean the thought that a very large merchant and a very small merchant are treated exactly the same is not how it works in a free enterprise system. So we recognize that but it also does not mean that if you treat anybody inappropriately or unfairly, they'd vote with their feet. And our attrition numbers are something we're proud of, meaning it's very low. So very windy answer, is that Durbin is going to be beneficial for us for some pricing opportunities. It's also beneficial for us even if we gave 100% of it back, and that it takes a little pressure off of pricing renegotiations. You're having a very happy discussion at any level, whether you give some of it back or all of it back, you're having a very happy discussion with somebody and guess what, your rate is going down, in some cases, materially. So you're a merchant of any size, you're going to feel pretty good about that and you're going to feel good about us about that. So that's pretty much the sum.

So just my quick follow-up, to the extent that you guys can talk about any type of normalized basis point margin expansion, kind of after fiscal '12. So the flat to 30 basis points heard that for fiscal '12, I've heard everything in terms of what you guys are doing there, so that makes a lot of sense. But how do we think about this sort of beyond fiscal '12 in terms of sort of sustainable margin expansion trajectory? I mean obviously, there's always the balance of investments that need to be made, but do you guys foresee that flat to 30 as kind of the range or is there a different way to think about what the potential beyond margin expansion could be beyond fiscal '12

Julio, this is David, I think we're going to focus on fiscal '12 for this call and we'll come back to fiscal '13 and beyond. But do know that our comments earlier were directed -- we are trying to run the business for the long-term, as well as showing you how the assets of the business come together in the shorter term. But we're going to stick to 2012 on this call.

Julio, I will add one thing, we clearly understand it's our job to drive margin expansion. We get that. So and part of the beauty of the business is, it does have leverage opportunities.

Our next question comes from Glenn Fodor with Morgan Stanley.

I was wondering if you can update us on competitive environment with regard to pricing and retention? Were there any notable wins or losses of partners in the quarter, and have yields changed on of your retained business at all?

So Glenn, it's David. At the metrics level, there is no change in trajectory and our key metrics, and particular, focused on retention. No change at all in any of our geographies and I can sort of say that across the globe. In terms of key wins, no single key win is necessarily material to us, so we really don't have a lot to talk about there, and you won't hear us list those off at any really given time. I'm -- sure Paul, you want to add to that?

I would say, Glenn, that we'd love to give you a list of those. Actually we had some pretty significant wins, but David is correct, it's not material, especially when we are talking about the numbers we're now producing. But we had a number of nice new signings literally in every geography, on major hotel groups throughout Asia and Europe. So a pretty nice merchant here in the U.S. Canada we did very nicely, we have a number of things we could talk about, but we could fill up a call with those, and I think I'm happy to say now, we're at size. But directionally, I understand the spirit of your question, and the question is, are we winning? We're winning deals and we're winning in every geography, and we're very pleased with that.

I was wondering if you could shed a little color on any efforts you have underway for exploring growth channels in the U.S. outside of acquisitions. I mean can we envision any actions taking place that diversify the U.S. business? Perhaps a little bit more away from the ISO business to kind of water that down a bit?

Sure, Glenn, it's Jeff. I'll answer your question. We are primarily organized by vertical here in the United States. I view our partnerships with our ISOs as a key vertical for us. But we think about go to market in terms of what verticals are we in and what verticals do we want to get bigger in. We're very proud of our gaming vertical, which David and Paul talked about in the press release. We're very proud of our Greater Giving vertical which we view as partly VAR in terms of what they do. So I would look for additional expansion in those markets in particular, Glenn, on an organic basis, with more investment in the Gaming business, more investment in things like Greater Giving. We've got a differentiated VAR proposition in that business, for example. We have some other large verticals that we currently have at the university level. Like here in the United States, at the community bank level, and I would look for us to grow bigger in all those areas. And we primarily manage it by those verticals, and that's how we measure quota and that's how we measure productivity. So I think it's less about verticals that we're not in. And finding new ones, and more about getting much bigger in the verticals that we're already in that we're pleased with.

Go ahead, Glenn.

On the community level, is this looking at partnerships like you have with Comerica or something like.

Yes, I think we're very flexible. So typically Glenn, the way we do it is, we're very open with folks about how they want to partner with us. One is why Comerica, which is really a formal JV. We also have deals where they're just referrals and we have deals where they're really just revenue shares. But we continue to expand our community banking base of businesses, we used to use that as an example. And we are much higher today in that business in terms of number of referring branches than we were just a year ago. And I think our hallmark there is flexibility, I think that's something we're pretty good at.

Our next question comes from Jim Kissane with Bank of America.

Paul, can you give us a sense of your appetite for stock buybacks and maybe, combine with that, the pipeline for M&A, and how you kind of balanced the 2 here given where the stock is?

Jim, our first and primary use for our dollars is to make acquisitions. And we are very focused on doing those all over the world and we hope to make progress in that regard every day. But stock buybacks from time to time makes sense, and we had those discussions with our board, and we executed a successful one not too long ago. So that's always out there too, but I would be misleading if I tell you to expect a huge one. I think it's more in line with kind of the dilution of options et cetera. That's kind of our general thinking. So first and foremost, acquisitions, and secondly, kind of tidy up some of that. David do you care to add a little on that?

I will. That's exactly right, just maybe a little more color, Jim. You will see us routinely buying back stock, you'll see us balancing that based on the priorities Paul described. The first is, being able to expand our markets on a worldwide basis by deploying the capital for growth. In the absence of that, as we build cash balances and you'll recall, I think Jim that the majority of our cash balances are still abroad. So we won't be repatriating cash in order to initiate a buyback, we balance the growth opportunities against the building balances and frankly, eyeball to stock price and think about returns, then we will come back to you on that. But for the moment, our capital is set to be deployed for further growth opportunities. We think that's the right priority for the company as it stands right now, but we will be routinely back in the market as time goes on.

And Jim, it's Jeff. Just on the overall pipeline I would say that today in 2011, we've been very pleased with the amount of deal inflow that we've been seeing. So it's been a fair amount of volume that we've reviewed. I would say in comparison to prior periods, that's been quite equally distributed around the world, including here in the United States and including elsewhere. And I believe that we continue to be in a very good position to execute that strategy as I think I said probably a couple of quarters ago, I do believe that we're the partner of choice, and have been looking at a number of deals in the less number of months, I think continue to believe that

You're not carving it out anymore, but it sounds like the Manila startup costs continue, but probably more moderate pace. Can you maybe quantify what's left this year, and is it possible to kind of bracket what the investment in Brazil is for this year?

Sure, Jim, I'll add a little more color to each of those 2. You're thinking about the Global Service Center investment and exactly the right way. Where we are about as we enter the year is, it's not at full capacity, but it's fully operational. So as we add more resources to that center over the rest of the year, we'll exit 2012 -- we think fully productive and beginning to deliver savings for the company as we head into 2013. What that means in sort of financial terms is that for 2012, there is a piece of what I would call and hope this term resonates, an allocated overhead ,that's left over for the additional capacity. Additional seats and cubes and things like that, awaiting the next addition of employees over there. So that's a few pennies for this year. And frankly, the Brazil investment is right alongside it. A few pennies incremental for this year and those 2 create a little bit of headwind. But to your point, we're not carving out ,it's baked into the numbers on both sides in terms of earnings, as well as whatever it's doing to margins. But hopefully that helps size it a bit for modeling.

Our next question comes from Dave Koning with R. W. Baird David Koning - Robert W. Baird & Co. Incorporated: You haven't talked too much about Canada today and I know it's been a much more stable market in the last few quarters than kind of prior to that. I'm wondering on the margin side, even though you expect kind of flat to slight growth, is it still a very competitive pricing market, and if you expect margins to continue to trickle down a bit or is that also just stable just like the revenue?

David, It's Jeff. I'll start with the market dynamic in the revenue, and David, I think we'll comment on the margin characteristics in Canada. So I think we ended up the fourth quarter exactly where we want it to be and what we said previously and David addressed that in his comments with a stable Canada and a Canada going in the right direction, not just in the fourth quarter but also for fiscal '12 in terms of expectations, which David laid out. I would say it's a very intensely competitive market. That has not changed most recently. But I do think our ability to be very competitive and productive in that market that adds to revenue, is something that we're very pleased with. And it's very consistent with what our expectations are heading into the fourth quarter, but also into fiscal '12. So I'd say from our perspective is we already want to be in terms of the goals that we laid out in the fourth quarter knows, probably in Canada, we moderate very closely in the event if anything changes, but we're pleased to be where we are from a revenue and a pricing point of view there.

And Dave, it's David. If you build on that the reality of the market is such that with that level of competition and a little bit of introduction if Isis at the margin that we've discussed previously, sort of by definition, the very high contribution margins we see there, which as you know are before the full operational cost we service out of the U.S. for that business, will be ticking down. And what Jeff has described as the kind of execution levels we're looking for to be able to manage that tick down in the greater context to Global Payments, and we think we're in that situation right now.

And I think as David described in his prepared remarks, we've been able to add EBIT dollars on a consolidated North America basis, notwithstanding the factors that David just alluded to. So I think we're very happy with where we are ending Fiscal '11 relative to where we earlier in the year. David Koning - Robert W. Baird & Co. Incorporated: And then just my follow up, just the U.K. benefits from the platform conversion there, is that something like the Canadian pricing a few years ago? Where kind of what the ISO described around Durbin is something that could be a big benefit now, but 12 to 18 months out, it might subside as it becomes more competitive. Is the U.K. platform benefit, is that similar to that, that 12 to 18 months out, some of the benefit gets competed away, or is that something that feels pretty stable for a longtime?

Dave, I would say more of the latter than the former. It's a little -- it's different, it's quite different from what we saw in Canada. So the answer to the question to be clear is this was more an adjustment, not a pricing increase. We were guessing on interchange levels, we were estimating payments, I mean estimating charges. This is a sophisticated system that in many cases, actually does produce a lower charge for a merchant on a certain transaction. We think these are very sticky, we of course, watch that very carefully. Now, is the business competitive, highly, right? It's a highly competitive market. But I would say just as action itself, with Canada, we were a little more aggressive, and that did have an impact on how long one can enjoy that, that's not the case. This -- it was commented on earlier, you see U.K. kind of carrying through, it does. And U.K. benefit will continue to enjoy that, we believe for fiscal '12.

Our next question comes from Tim Willi from Wells Fargo.

The two questions I had. One, the first 1 on Brazil and then a follow-up. I'm just sort of curious, as you moved down the road with Brazil now, how would you gauge your thoughts about the trajectory of investments? Are you putting more into it now than you thought when you first decided to go de novo? Do you think that there is a likelihood for all the right reasons that you might even get more aggressive than you currently think to sort of a feel for how that's moving?

Tim, this is David. Right now, the investment is on sort of a run rate basis aren't materially different from what we described to you. They are incrementing up because we are working on multiple themes they want, in other words, we're bringing platforms forward, product forward as well, but they're not materially different from the trajectory. What we're talking about is annualizing the building run rate we've had over the course of fiscal 2011, and that's turning into the negative effect I described in Jim Kissane's question earlier. That's all pointing toward being in market and successfully matching the delivery of the platform to having some referral partners and some sponsors in the market to help us be able to execute in the market. To the extent we see initial success, we absolutely will move on that and essentially, accelerate investment. But that would be matched to beginnings of revenue delivery and real transactions and real volume. But again, gated by the idea that you said in your question, I'm just going to take it for the broader audience, it is greenfield. We're starting with transaction number 1, when that transaction comes through. So we've watched it very closely. We measure it very closely, and to be perfectly honest, we can throttle it, and that's really how we'll manage it as we go forward.

And then my follow-up sort of touches on I guess Durbin, a bit. But given Durbin and issues around routing rules and arguably, two-tiered structures, then throwing in the rapidly moving mobile sort of payment environment. Paul, as you look out at how dynamic payments maybe has once become again here, and you think about revenue opportunities per transaction for global payments, whether it's new products and services, just being able to, I don't want to say confuse people or take advantage of it, but it creates windows to mark things up and sell new products, how do you think about your revenue per transaction on a go-forward basis? Because of payments getting more complicated as it may be what we've had to deal within the last couple of years? Does it open windows for you to create new products and services to maybe get more reps per transaction?

I think Tim, the long or short is the answer is yes. And I think in the barest cases, well it becomes more commoditized, I think exactly the opposite. I think precisely what you just said. I think that our job is deliver whatever the consumer wants to our millions of merchants worldwide. And those relationships with the merchants are key, our ability to provide those services are key and there's real value in bringing all of these parties together. These evolving parties, from PayPal to mobile payments to Isis, to all the things you mentioned and all the things we haven't seen with mobile payments around the world. That is our value proposition, and I am encouraged by the future opportunity to bring real value and make real money.

Our next question comes from the line of Tom McCrohan from Janney.

I had a quick question. The new IRS reporting requirements, can you touch on that? How prepared are you folks as far as complying with those new regulations and are those costs baked into your guidance? Is it something that could be called out next year as normalized?

Tom, it's Jeff Sloan, I'll start with the operational side of what you asked, and the customers phasing side, and I think David will add a point of view on -- across. So as you know, the IRS rules go into effect on January 1 of '12, but this year it's been a data collection exercise to make sure that we have the ability to do TIN matching. So we've had that ongoing throughout the course of the year to clean up our systems, clean up our customers' data and make sure it matches with the TINs in the IRS database. So I would say, we're completely and fully prepared for the effective date of January 1 of '12, and that's been an ongoing process here for some time, in particular, including through calendar of 2011. So it's in operational now, it's very good about where we are. David?

And financially, Tom, the costs are already baked into this I mentioned earlier, an answer to 1 of the questions it might have been Tien-Tsin's early, that we have technology investments in network infrastructure and data centers and compliance, this is a piece of that compliance. So there are more costs to come. As Jeff said, we're feeling very good about where we are, we're ready, we've got more costs, we're coding things, testing things et cetera. But we are ready but the costs are fully baked in.

Our next question comes from Brett Huff from Stephens Inc.

A little bit bigger picture question. I've been pleasantly surprised by the data we've seen from the Fed in terms of balances on credit cards and also some from competitors, studies that have come out. Both the volumes on credit cards and even debit cards, as well as the transactions continue to pick up nicely. But I'm most curious about credit. There's theories out there, one is that the top half of the spenders are not feeling the recession as much, and are therefore, getting more spend-y. The other theory is that the folks who are living paycheck to paycheck are now turning to credit cards as a financing vehicle again. What do you guys see and does that continue from a cyclical trend?

Brett, I'm going to give you actually kind of a worldwide perspective in all the markets we're in. We like what we're seeing, we're seeing and even when the economy was looking pretty dismal, we were seeing some pretty reasonable usage and volume numbers and average transaction numbers. So but we're seeing that actually improve a little bit, nothing went down terribly, but it's improving a little bit. So I share your optimism, and based on the data we've seen, it's looking by the way, there's a major thunderstorm here in Atlanta if you just heard it, that wasn't David falling over. So anyway, we too see what you see, and we're pleased with the data. David, would you care to add anything to that?

Our core metrics have remained stable for a while. We haven't seen a bend in the trend. But the developing surrounding metrics of the industry at large, I would concur with your opinion and your question as well. So hence our sort of view that things are rolling along, and staying in a fairly stable place, maybe with the opportunity to improve over some period of time.

And then follow up is, we haven't talked, your growth was great and it sounds like it's going to be great next year, but in that mix, is in a whole lot of card not present, and I wondered, it was a little bit of a tangent, similar to the mobile question before. But how do you guys see that fitting into your strategy? I know you've talked about liking that kind of portfolio if you could find it. But how do we -- is that one of those verticals that you would be willing to get bigger in, I guess?

The answer is absolutely. And the ironic thing is, we're actually pretty big internationally. We have less exposure in North America to it. So we are focusing in one of the reasons Mr. Sloan is sitting next to me is to do simply that, Jeff, do you care to be our final word here before we wrap up?

Yes, around the world, Brett as Paul said, we actually have quite a few C&P, large C&P-related customers. Many in the retail and hotel areas as Paul mentioned. I would say here in the United States, Greater Giving, for example, through its ePhilanthropy. Some of our large retailers where we do multichannel distribution, both the physical stores, as well as on the Internet. Our good examples of folks we have relationships with in the C&P world. But Paul is right. One of my mandates and responsibilities here is to increase that for the sheer reason that, that's growing faster than the general market. So it's something we do now we feel like we're good at doing it. But we need to get bigger in it. And that's one of our imperatives as Paul described.

Both organically and inorganically.

Ladies and gentlemen, we have reached the allotted time for questions and answers. I will now turn the conference back over to Mr. Garcia for closing remarks.

Well, thank you, all, for joining us on today's call. We appreciate your support as ever of Global Payments.