Global Payments Inc. (GPN) Q3 2016 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. And welcome to the Global Payments’ Third Quarter Fiscal 2016 Conference Call. At this time, all participants are in a listen-only mode. Later, we will open the lines for questions-and-answers. [Operator Instructions] And as a reminder, today’s conference call will be recorded. At this time, I would like to turn the conference over to your host, Vice President, Investor Relations, Andrew Langford. Please go ahead.

Good morning and welcome to Global Payments fiscal 2016 third quarter conference call. Our call today is scheduled for one hour. Joining me on the call are Jeff Sloan, CEO; David Mangum, President and COO; and Cameron Bready, Executive Vice President and CFO. Before we begin, I’d like to remind you that some of the comments made by management during today’s conference call contain forward-looking statements, which are subject to risks and uncertainties discussed in our SEC filings, including our most recent 10-K and subsequent filings. These risks and uncertainties could cause actual results to differ materially. We caution you not to place undue reliance on these statements. Forward-looking statements made during this call speak only as of the date of this call, and we undertake no obligation to update them. In addition, some of these comments made on the call may refer to certain measures such as cash earnings, adjusted net revenue and free cash flow, which are non-GAAP measures. For a full reconciliation of cash earnings, adjusted net revenue and other non-GAAP financial measures to GAAP results, in accordance with Regulation G, please see our press release furnished as an exhibit to our Form 8-K filed this morning and our trended financial highlights, both of which are available in the Investor Relations area of our website at www.globalpaymentsinc.com. Now, I’d like to introduce Jeff Sloan. Jeff?

Thank you, Andrew. And thanks everyone for joining us this morning. We are pleased to report another quarter of very strong results. We accelerated organic growth across our key markets with particular strength in our United States and United Kingdom businesses, continuing our track record of solid execution globally. Importantly, we are also on track with our pending acquisition of Heartland Payment, which we expect to close later this month. For the third quarter of fiscal 2016, we grew net revenue 6%, expanded margins 50 basis points, and increased cash earnings per share 17%, all this despite absorbing significant incremental foreign currency headwinds. On a constant currency basis, each of these metrics exceeded our expectations, reflecting the successful execution of our strategy and operational excellence across the organization. Now for more detailed highlights. We are especially pleased with our performance in North America, where we believe we continue to grow faster than our markets by capturing share and verticals at attractive growth and margin characteristics. Organic net revenue growth for our U.S. direct business accelerated in the quarter compared to the second quarter of fiscal 2016. OpenEdge continued its streak of mid to high-teens growth. Our gaming business also continued to deliver strong organic growth coupled with sound execution of the FIS gaming acquisition that was completed in June. In Europe, our UK business continues to execute exceptionally well with significant organic revenue growth. Our results also reflected benefits from the EU interchange regulation that became effective in December of 2015. Outside of the UK, Spain maintained its strong track record with yet another quarter of double-digit volume and transaction growth, well in excess of the market rate of growth and Spanish GDP. We remain pleased with the performance of our European e-commerce gateway business, Realex, and we are poised to enter the Spanish market with new omnichannel offerings in the coming months following the UK launch last fall. In the Asia-Pacific region, we produced strong revenue growth on a local currency basis, despite ongoing macroeconomic headwinds in Greater China. Our strategy to diversify distribution in the region by entering new geographic markets and partnerships has been successful. Ezidebit had another outstanding quarter, accelerating growth to 20% plus on a local currency basis. Our BPI joint venture also continues to perform in line with our expectations. We’ve been able to offset macro weakness by solid execution illustrated by margin performance in Asia, which significantly exceeded our expectations. We are also building upon our successful partnership with Ezidebit with the acquisition of eWAY, a payment gateway and e-commerce technology company in Australia. Similar to Realex in Ireland, eWAY is a leading provider of payment solution to developers and software partners with approximately 25% of the online market. The combination of eWAY’s cutting edge products with Ezidebit complements our global omnichannel solution strategy and will create the leading payment technology company in Asia-Pacific with nearly 40,000 merchant customers in Australia and New Zealand. We have made considerable progress on our pending acquisition of Heartland Payment Systems, which we look to close later this month. This transaction will accelerate transformative growth at a time when both businesses are executing strongly. And we continue to be impressed with the people we have met at Heartland. As we have done successfully with APT, PayPros, Ezidebit and Realex, we are confident in our ability to accelerate sales growth at Heartland. The goal of our integration is to ensure a frictionless transition post close, building on the momentum that Global Payments and Heartland have each had individually as one combined company. We are even more confident in the synergies that we described at the time of the transaction announcements and could not be more pleased with our proposed partnership. We look forward to welcoming our new colleagues shortly. Now, I will turn the call over to Cameron.

Thanks, Jeff, and good morning, everyone. We’ve made substantial progresses as a business in fiscal 2016 and are delighted to report another quarter of strong adjusted net revenue growth, operating margin expansion and cash earnings per share growth despite significant FX headwinds. Total company net revenue for the third was $497 million, reflecting growth of 6% versus the third quarter of fiscal 2015 or 11% on a constant currency basis. Importantly, normalized organic net revenue growth on a constant currency basis was high-single-digit for the quarter at the high-end of our cycle guidance. Operating margins expanded 50 basis points to 28.7% for the quarter or 110 basis points on a constant currency basis. Cash earnings per share increased 17% to $0.70 or 28% on a constant currency basis. North America net revenue grew 6% in the quarter with operating margin expansion of 70 basis points to 27.2% despite unfavorable currency trends in Canada. Normalized organic net revenue growth in our U.S. direct channels was high-single-digits for the quarter and accelerated sequentially relative to fiscal second quarter performance. Canada delivered solid growth in local currency, in line with expectations, driven by stable fundamentals. The weak Canadian dollar impacted North American net revenue growth by several hundred basis points. As Jeff noted, our European business performed exceptionally well again this quarter, posting revenue growth of 8%. Adjusting for adverse currency exchange rates, especially the British pound and euro, European constant currency net revenue growth was 68%. Operating margins in Europe for the quarter increased 10 basis points to 49.7%. Asia Pacific net revenue grew 9% on a constant currency basis despite continued macroeconomic weakness in Greater China. Reported net revenue growth in Asia-Pacific was 3% as a result of significantly unfavorable foreign currency exchange rate. We are particularly pleased with operating margins in Asia-Pacific for the quarter, which expanded by over 600 basis points. This was driven primarily by growth in our higher margin businesses, predominantly Ezidebit as well as expense management across the region in light of the broader macro trends. Capital expenditures in the quarter totaled $21 million. Free cash flow, defined as net operating cash flows excluding settlement assets and obligations less capital expenditures and distributions to the non-controlling interest was $77 million. In connection with our planned acquisition of Heartland, we’ve been engaged in a variety of financing related activities over the past few months. In February, we amended our existing credit facilities to retain them post closing of the Heartland transaction. At the same time, given strong interest from existing and new lenders, we entered into a new $735 million delayed draw term loan A facility to fund a portion of the cash consideration for the transaction. The new term loan A facility, which we expect to be more cost effective then our term loan B, allowed us to reduce the size of the term loan B component of the transaction financing by $735 million to $1.045 billion. In addition, in March, we successfully completed syndication of the $1.045 billion term loan B facility on terms and conditions more favorable than we expected, in December. As a result of these activities, we now expect the weighted average pro forma interest rate on our debt facilities to be in the range of 3.75% to 4%, as compared to the 4% to 4.25% range we anticipated at the time of the announcement of the transaction. We expect this will generate a meaningful amount of annual interest expense savings relative to our original pro forma assumptions. As we approach the closing of the Heartland transaction later this month, we intend to resume our normal capital allocation policies immediately thereafter. Although our near term priority is to return to our targeted leverage ratio, we retained sufficient capacity to continue to pursue the capital allocation program we have employed with much success over the past few years. As evidenced by the eWAY transaction, we remain interested in select acquisitions that augment our strategies globally. Likewise, you should assume that we will return to being a consistent buyer of our stock as means by which to return capital to shareholders. Now turning to our guidance for fiscal 2016, on a constant currency basis, we expect net revenues to be towards the high end of our guidance range of 10% to 12% growth over fiscal 2015. Given the continued weakness we have seen in foreign currencies relative to the U.S. dollar, in particular the British pound, we expect reported revenues to be towards the low end of our previous guidance range at of $2.06 billion to $2.10 billion. We are increasing our cash operating margin expectations and now anticipate margins will expand by at least 100 basis points in fiscal 2016 on a constant currency basis. Cash earnings per share are now expected to grow 16% to 19% over fiscal 2015 and range from $2.93 to $3. Finally, please note that our outlook does not include the impact of the Heartland’s acquisition that we expect to close later this month. We anticipate that the addition of Heartland will add $80 million to $100 million to our net revenues and have a de minimis impact on cash earnings per share for fiscal 2016. I’ll now turn the call back over to Jeff.

Thanks Cameron. We are delighted with our team’s accomplishments this quarter and this fiscal year. Looking ahead, we’re eager to finalize our transformative partnership with Heartland. This merger furthers the four pillars of our strategy described in our October investor day, grow and control direct distribution through the addition of 300,000 in merchants; add distinctive products and services in new markets, such as the K-12 and university educational markets; leverage our combined technological and operational advantages by increasing transactions nearly 50% on a pro forma basis; and continue to invest in our global businesses to generate superior returns. This is truly an exciting time and I look forward to speaking with you in July as one combined company. Andrew?

Before we begin our question-and-answer session, I would like to ask everyone to limit their questions to one with one follow-up in order to accommodate everyone in the queue. Thank you. Operator, we’ll now take the questions.

Thank you. [Operator instructions] Our first question comes from the line of Ashwin Shirvaikar of Citigroup. Your line is now open.

I guess the first question I have is with regards to the margin trajectory. And you’ve now performed, I guess better than expected on margin for a couple of years here. I’m wondering how much more is there in terms of margin improvement ex the Heartland synergy? I mean basically Heartland was not a factor. And can you go through, as you look at the company in the present shape, what are the factors that continue to drive margin improvement; is it primarily scale, revenue mix, scale or what are the factors?

Ashwin, it’s Jeff; I’ll start and I’ll ask Cameron to join me as well. First, I don’t think we’ve got pretty of run rate -- runway on margin enhancement. I think as we said, probably a number of times in last couple of years, we view margins on a standalone basis in the low thirties as achievable and sustainable; even with terrific margin performance today, we’re still not at that level. I think to get to your question about what’s driving that growth, undoubtedly scale is an important element in that but I think it’s really been a conscious decision in our part to shift our mix toward businesses that we view as attractive, and by attractive I mean growing faster than the rate of market growth with better margin characteristics. So, if you look for example at OpenEdge, which we talk a lot about that used to grow, as we said in our prepared remarks, at rate 2 to 3 times the rate of market growth. If you look at Realex, if you look at Ezidebit, these are all businesses, Ashwin, that first are growing very rapidly compared to their markets, but second, provide us with opportunities for further margin enhancement prior to Heartland. So, I don’t think we’re in the early innings of where we can take the margins that gives us obviously a lot of comfort as we look toward Heartland to think about what we might do together as one combined company. Cameron?

Yes, Ashwin, the only thing I would add to that -- couple of points. First, if you look at our guidance for this year, it sort of implies almost 30% margin -- growth of as we noted over 100 basis points year-over-year. We still have a lot of room relative to overall target level of low 30s to continue to expand margins from here on a standalone basis. In addition to the items Jeff described, the other things I would call out specifically are, one, the acquisitions we continue to do, improve scale and markets that we find attractive that have good dynamics where our businesses are geared towards higher margins solutions such as for example, the eWAY transaction that we just executed and its contributions to our Australian business and what it will to do margins in Australia to continue to improve those from their already attractive levels. The last thing I would mention is we continue make investments in our infrastructure to improve our operational leverage. We continue this transformation, we started out on several years ago, to move away from the holding company, operating company model, the business utilized from many years to the single unified operating company structure that David described at the investor conference back in October. That’s still in process. And I think that continued evolution provides a nice tailwind for margin expansion over time as well.

Okay. And then, I guess the follow-up is really on Heartland. Your comments that Heartland -- the progress you are making on Heartland is better than where you are expected to be. Was that primarily, Cameron, a direction of your commentary on interest expense or were you also talking about other things such as conversations with clients, feedback you are receiving in the market, things like that if you could comment on that?

Yes, Ashwin, it’s Jeff. I’ll certainly start. No, more it’s on a strategic side. So, what I would say is as we spend more time with our future colleagues at Heartland, we’ve been more and more impressed with the quality of the people, the quality of the culture and the business that Bob and the team have built over a period of decade at Heartland. I think David had said in the December call that there was roughly a little overlap between Heartland, its vertical markets and our markets, even though we’re both SME focused. Our view on that continues to strengthen, meaning there is relatively little overlap, as we see it. And as I said in my prepared remarks, we believe that we are even more confident today in the synergies that we described in December, sitting here in April. So, really, I was referring to the strategic rationale for the transaction and what we believe the receptiveness is and has been to-date with our partners at Heartland as well as with potential customers. Cameron, of course was commenting more on the financials but as well as commenting on the strategic objectives.

Yes, Ashwin, my comments in the script around the financing obviously serve to bolster the overall confidence in the transaction as well. Taking the financing risk off the table as we have in the first quarter of calendar ‘16, obviously it was a meaningful step towards executing the transaction. And obviously being able to do that on terms and conditions that were far more favorable than we would have expected back in December when we announced the transaction, again, gives us a nice tailwind as we look to close later this month and begin operating as a combined company in the next several weeks.

Thank you. Our next question comes from the line of Bryan Keane of Deutsche Bank. Your line is now open.

I just want to ask about the UK strength. Is that directly related to the changes in the EU regulation or is that something different?

Hey Bryan, it’s Jeff. I would say it’s probably something different, meaning we probably had now 18 months of very solid new sales growth, organic sales execution in that market, yet the benefit of the interchange regulation really got picked up in December of 2015. So, certainly, the performance in the UK that I think we described last quarter on the call has significantly exceeded our expectations, really all-year implies, the last 18 months, just a little bit more of that. As it relates to the interchange benefit as we discussed in the context of Spain and also in the case of United States when we had Durban, 4 or 5 years ago, we view the interchange benefit’s a little bit more temporal. That’s just a function of over what period of time that will rationalize within the marketplace. But that business as it relates to that element of its growth has also met what our expectations were heading into the third quarter. So, it’s a little bit more of the latter of what you said in the former.

And do you expect the EU interchange benefit in the UK to last for a significant period, or is it hard to tell how long it will last for?

No, I think Bryan, it’s very similar what we said about Spain and the United States markets, and other markets in which we’ve experienced it. We tend to think about it in 12 months increments for obviously reasons that you can imagine. This actually startles a number of fiscal years here, so it just started in December for us, given our May fiscal year. So, I’d say Bryan, as we usually assume something like 12 to 18 months, until we get back to levels that predate, the interchange change, our actual experience has been closer to 18 to 24 months in terms of what we saw in the United States. I think sitting here, in Spain, and we’re probably 18 months after the inspection in September of 2014 in Spain, we’re still today Bryan at higher levels of spread in Spain than we were before, the adoption in the first place 18 months later.

Okay. And then just a quick follow-up, Cameron, I think you said $80 million to $100 million in net revenue for Heartland expectations. I guess, is that over four to five-week period and I guess, what we’ll all do is, we’ll extrapolate with that meetings for next year. Is there any seasonality in that number that you can guide us to as we build our models for fiscal year ‘16 and ‘17?

Sure, Bryan. And of course, we’ll give you more color in July, obviously when we have our call as to what we would anticipate for Heartland for a full fiscal ‘17 for us. But to the first part of your question, yes, I mean, reflects sort of a four to five-week period. We don’t know exactly when it’s going to close. Obviously we know when their shareholder date is and we’ll look to close as quickly thereafter as possible. But we don’t know the exact date on which it will close, hence the range. There is also obviously some work to do to ensure that they’re completely aligned with our net revenue reporting convention. We believe that the estimate we provided obviously is aligned but we need to get under the hood a little bit further to make sure that’s the case as well. Their business is probably going to be seasonally similar to ours. So, to the extent that you want to try to extrapolate these numbers into a fiscal ‘17 early view, I’d suggest their seasonality is not going to be materially different than what you’d see in our business and that should help give you some color as to how to shape it for fiscal ‘17.

Thank you. Our next question comes from the line of George Mihalos with Cowen. Your line is now open.

Great, thanks for taking my question. I caught the commentary around the U.S. direct growth. Could you guys talk a little bit about what you’re seeing in the ISO channel and then maybe somewhat related to that the rumored or expected migration of a large customer there off to a competitor’s platform, how’s that coming along?

George, this is David, happy to help with a couple of those questions there and let Cameron add any details that I miss. In terms of the ISO channel, it’s really business as usual for us; it was another flat quarter from a revenue perspective. That means all the growth that Cameron is talking about the acceleration growth comes from our direct control channels. So, another very consistent quarter we’ve been talking about the ISO for quite some time as a flat, maybe low single-digit grower; it continues perform in that range. As to the migration you’re talking about, maybe I’ll be even more specific. I appreciate though the way you’ve phrased your question. You’re really talking about Mercury. And the migration in Mercury accounts that will be leaving us, did actually occur over the course of this past quarter, so by the end of our February, the month of February, our third quarter, the migrations were completed. As we’ve talked about any number of times that impact is already reflected in the guidance, you can tell from the performance we delivered in the United States this quarter, just how minor this migration is in terms of affecting Global Payments overall.

Great, thanks for that.

I’ll just add a couple of comments very quickly, as to the first part of your question, U.S. direct growth on a normalized basis organic was high single-digit for the quarter, accelerating sequentially over Q2, probably 50 to 100 basis points something in that range. So, we’re obviously very pleased that continues to be laid by OpenEdge, going mid to high teens, yet again. Obviously we’re now three years past the acquisition of APT and going on to for PayPros and continuing to perform again at growth levels that we find very, very attractive and the momentum remain very strong for that business. So, very pleased with our U.S. performance in Q3, as you noted.

That’s great to hear. And just a quick follow-up on Spain, I think you guys made a commentary, the spreads are obviously higher than what they were prior to the interchange benefit coming through but have the spreads stabilized on a quarter-over-quarter basis, so if you compare the February quarter to the November quarter?

They have stabilized, they’ve stabilized just above levels that Jeff noted before the interchange benefits but they’re quite stable right now. And then I think I’d add to that what’s really driving Spain is incredible sales growth, incredible volume growth that continues in the mid teens volume and transaction growth, both. So, we’ve got a little extra spread from back in the day plus that volume and transaction growth. We’re in a great place in Spain right now.

Thank you. Our next question comes from the line of Oscar Turner of Suntrust. Your line is now open.

So, we’ve seen some news on the backlog or EMV certifications, so just had a couple of questions on that. One, is this something that you’re seeing within your merchant base? And two, does this backlog have any long-term implications for acquirers?

Yes, Oscar; it’s Jeff. I’ll start and David can provide some commentary too. So, first, I saw the same series of article. The first thing I’d say relative to those articles is unlike some of our peers, we’re independent, not owned by a bank. So, clearly, the implications of that article were that there were some relationships between bank ownership on the issuing side, on the acquiring side, and just so we all recognize that that wouldn’t really not apply to us as it relates to the specific article, I think that you’re referring to. As it relates to certifications, I think you see strength of ours has been early rollout, the EMV we announced probably a year ago, at this point, a little bit more than the year ago, a suite of products and services, EdgeShield and GlobalShield that were EMV compliant with encryption and tokenization and NFT all wrapped into one. So, I think everybody has had to push on the certification side, given the complexity of the U.S. broader ecosystem. So, I don’t think that’s different really for anyone. But I would say that we’re very proud of the fact that we were in market. And I think problem was probably very similar. In market very early on with the certifications, so we really on our side have not seen any meaningful impact as it relates to the certifications, the way that article really had alluded to as I read it. David, do you want to…

Yes. Well, I think the key is the last couple of things you mentioned, Jeff and that we don’t view EMV as a compliant exercise; it’s a part of a security solution we’re bringing to market, based on merchant demand. At the same time, we also are bringing to market what is global expertise in EMV. We’ve rolled out EMV all over the world, as you might imagine, all the way back to Canada five years ago, which is probably the most recent example of needing to bring EMV to market to improve security for the merchants. When you think about the focus on security suites and solutions, we’ve been able to drive some new sales around security but EMV itself is in no way an economic tailwind for us. It’s a process for us in terms of migration of making sure the ecosystem is more secure. From that perspective from the ecosystem perspective, our metrics are really right in line with what you might see from the industry at large. Measured migration, consistent migration is our theme driven by merchant demand, after merchant education from Global Payments. One thing I would note for you though is when you think about our key direct portfolios, things like OpenEdge, which is full of dentist offices, veterinary clinics, drycleaners; those are not high demand verticals for EMV migration. So, we’re working at the pace our merchants want to work, we’re trying to drive more education, drive more migration. As Jeff noted before, our certifications are in very good shape. We’re just moving along with the market and in some cases a little ahead of the market. One more reminder in terms of percentages when you see them banded about by industry players, we have a very focused portfolio as is Heartland on small to medium merchants around the country. You won’t find big box retailers in our portfolio; you won’t find them by and large in Heartland’s portfolio either. So, just remember that when we talk about the level of migration, the pace. We’ve had a lot of small to medium merchants to go through as does the rest of the industry. We’re going through them very consistently, very happy with the progress I think our merchants are as well. We’re managing chargebacks of the merchants which may be a follow-up you might want to ask in terms of there’s a minor uptick but very manageable so far. And I think again that’s the result of years of global experience managing EMV, managing the shift and being able to help our merchants through it.

Okay, thanks. And just a small follow-up to that. About what percentage of your merchant base is updated for EMV, so either that’s upgraded as far as hardware goes or that’s able to actually process an EMV transaction?

Yes. I don’t think we’re going to quote any specific percentages. I would stick with we are very consistent with the industry stats you see at large. We’re very happy with the progress. And I think our merchants again are driving it from a demand perspective. But just know that whether you’re talking about terminals in place that are ready to be enabled or actual enable transactions, we’re pretty consistent in our key verticals and a little bit ahead of the market. And the industry says it’s about 20%, that obviously includes an awful lot of big box retailers because there’s been a great deal of movement in the last few months from very low single digits up to that 20 percentage kind of mark you’ve seen in the press in the last couple of weeks. That’s a lot of big box retail. But it’s really nice progress for the industry. I think we’ll keep making more progress on the global side obviously as we go forward.

Hey Oscar, it’s Cameron. I just want to add one other note to a pattern to David’s response. If you’re thinking about this question, obviously there’s an industry element too, but there’s maybe a financial element as well. There seems to be a fair amount of confusion in the market as it relates to the financial impacts of EMV and some of that’s driven by in the space; there’s a lot of issuers who also do acquiring etcetera, etcetera. I think for Global Payments in particular, EMV has certainly not been a tailwind, as it relates to our financial results. I think I still view it frankly as a headwind in the sense that we had to make investments into our systems, and I’m still waiting for the return on that investment to some degree. Over time, obviously, I think we expect that to come. But to David’s point, our focus has really been heretofore on ensuring that our merchants have all the tools available to them to become complaint working at a pace that aligns with their desires to become EMV complaint. We haven’t really viewed it as an economic return opportunity thus far. So, the conventional wisdom is EMV’s been a tailwind for all the acquirers, that’s really not the case for us, but we have been I think managing through it very, very effectively.

Thank you. Our next question comes from the line of Steven Kwok of KBW. Your line is now open.

Great, thanks for taking my questions. Just going back to eWAY, could you talk about how big it is in terms of what the financial impacts are?

Steven, it’s Cameron, I’ll just jump in quickly. So, purchase price wise, it’s small. I mean it’s sort of 50ish million U.S. So, it’s not a particularly large asset but it’s a very nice, I think of it as a product add to our existing position in Ezidebit business in Australia; it obviously enhances our omnichannel solution strategy that we spoke at great length about in October at our investor day. I think bringing that asset to our portfolio into Australia really positions us to accelerate our omnichannel solutions capability in market. And we’ve really looked at it very simply as a buy versus build opportunity. We’re delighted with Realex and what it’s been able to bring to our portfolio. As we noted in our prepared comments, we launched the bundle in the fall in the UK, we’re bringing it to Spain in the not too distant future. But as it related to Australia, this was a very unique opportunity to buy the market leader from an e-com point of view, coupled with our existing presence with the Ezidebit, which we’ve been thrilled with their performance to create the leading technology enabled distribution platform in the Asia-Pacific region. So, it was a fantastic opportunity. And one of the side benefits of structuring the Heartland transaction the way we did is we’ve maintained the financial capacity to be able to do these types of things and we’re obviously delighted to have eWAY as part of the family.

Got it. And then just could you update us on perhaps your M&A pipeline as well?

Sure. Steven, it’s Jeff, I’ll respond to that. So obviously, we announced product expansion today with eWAY. As we said in December at the time of the Heartland announcement, we continue to have term sheets out in a bunch of regions, primarily in Asia and in Europe; of course, we’re pretty full up here in the United States and in the North America with the depending close of the Heartland transaction. So, I think as you look at eWAY and as you look at Erste, which we expect to close by the end of this fiscal year, I think to Cameron’s point, those are pretty good examples of the types of transactions that we have sheets out on today, which is to say while towards the lower end of what we’ve invested in transaction nonetheless very meaningful from a strategic and new markets point of view. And I would look to seeing some more of those as well as Cameron mentioned in his remarks, a return to the normal cadence of capital allocation that we’ve been doing as a company over the last 3.5 years.

Thank you. Our next question comes from the line of Tien-tsin Huang of J.P. Morgan. Your line is now open.

Hi, good morning. I’d just want to first start on Asia-Pac; I guess the margins there a nice upside. How much this is from the proactive cost cutting -- I think you mentioned given I think China and how much impact have you seen from a macro perspective from China? Can you quantify some of that? Thanks.

Yes. Tien-tsin, it’s Jeff, I’ll start. So, one of the things that we pointed out in our prepared remarks is that we’ve been very successful in Asia-Pacific by adding new markets and by increasing our presence in markets that have been performing well. So, we’ve talked a lot about Australia, we just responded to Steven talking about eWAY and Ezidebit. Of course we have our joint venture with Bank of the Philippines Islands which are also performing in line with our expectations and we’ve been in that market before the JV and increased our size and have the second largest presence in that market thereafter. As a result, we’ve been able to grow -- to answer your question, we’ve been able to grow the Asia-Pacific business 9% on a constant currency business this quarter. So, I’d say, we’re still getting very good growth. And Greater China, which I define as Mainland China, Hong Kong, Taiwan and Macau, as a percentage of the business in Asia-Pacific and so reduce from probably number of years ago probably around half of it to maybe around 30% currently. And that’s largely is a result of targeted additions in other markets like Australia, New Zealand and the Philippines. We also continue to grow very well in markets like Singapore, beyond the two or three that I just listed. So, I’d say there’s been a fair amount of revenue growth and about two-thirds of Asia-Pacific, Tien-tsin, coming from markets other than as a percentage of revenue, other than Greater China, providing in the case of Ezidebit 20% plus growth. It’s not really going to have a dramatic an impact on the revenue growth in any one quarter, Greater China that is. So, I think a lot of it’s coming from the mix of business, particularly that Ezidebit is at a much higher margin than the overall company as well as Asia by itself and that’s how I think about it. Cameron, you can comment maybe a little bit on the expense side.

Sure. I’ll just start maybe, Tien-tsin, on Ezi. So, I would note first and foremost, we’re a year plus beyond the acquisition. We’ve now, I think in our minds fully integrated Ezidebit, so that is creating an environment where incremental margins at Ezi are improving. And obviously it’s already higher than our Asia average margins, and it’s increasing from there and accelerating from there. So, I think that’s contributing to it. But as it relates to the expense side, I think what we really try to do is look at our core business in Asia-Pacific outside of Australia and to some degree the Philippines where we have the joint venture with BPI and really try to rationalize the size of the expense base relative to the outlook for that market over the next 12 to 18 months. And the reality is, we do expect continued weakness in China, hopefully we’ve seen before, but we don’t expect it to rebound dramatically in the near-term. So, we really try to reposition the business to ride out what we expect to be a soft spot in the cycle in the Greater China market and position the business for continued success. And I think you’re seeing the results of that play through in margins this quarter.

So, just as my follow-up, I think I’ll ask on Canada. Just any update on volume and spread performance, any callouts there, I think we’re all watching the growth very closely?

Yes. I think, I’ll start by saying we’re delighted with the performance of our Canadian team this year. Their ability to forecast, predict and manage their business to produce results in line with our expectations in light of what is obviously a continued soft macroeconomic environment has been fantastic. So, I’ll start there. I think we continue to see sort of our code for stable fundamentals is the combination of stable low-single-digit transaction volume growth and relatively stable spreads. So, when we talk about fundamentals for Canada, our expectation is the combination of transaction volume growth and stable spread is going to produce low-single-digit growth in local currency in that market. We’ve been consistently doing that now for probably 8 to 10 quarters I would say. And I remain very pleased with how that team has performed in light of the broader macro issues.

And maybe, Tien-tsin, this is David, a little commercial for Canada, we’re ahead on sales. So, when you lay on top of that sales growth and new product introductions, things like OptBlue that we can rollout on a global basis, you got that little bit extra to help make you feel more confident, managing those stable conditions and stable metrics that Cameron was describing.

Thank you. And our next question comes from the line of Dave Koning of Robert W. Baird. Your line is now open.

Yes, hey guys. Nice job and I guess first of all just on Spain. I’m wondering if that could be a nice catalyst for growth or improving growth into next year. I know you said spreads are still up but is revenue right now down because spreads on year-on-year basis are probably still down and the minority interest line was pretty weak this quarter. So, I’m just wondering if Spain right now is even though good in a little tougher spot but basically set to really nicely to accelerate and help next year?

Yes. Dave, it’s David. I think that’s a really interesting question in that. Where Spain it’s right now is flat to slightly up in terms of revenue growth, which is really remarkable when you think about annualizing that interchange benefit and it’s of course driven by the amazing sales we get out of the branches and the resultant volume and transaction growth in mid teens. So, you’re exactly right. As we look ahead, I can think through fully annualizing spread changes et cetera as we head toward September, it is accelerating as we speak in terms of market share and penetration and it will be a piece of the European growth story that Cameron was describing earlier as we go forward, no question about it.

And David, it’s Cameron. The only thing I’ll add to David’s point more specifically, we annualize the annualization of interchange reductions in September. So, when you’re growing transaction and volumes at the rate we’re growing, once you get beyond that date, obviously you should be top line growing at similar levels, which creates a nice tailwind, growing into the back half of fiscal ‘17 in Europe, as we start to annualize the interchange reductions in the UK.

Yes, that all make sense, great. And I guess secondly, as we look out, next quarter, you’ll be giving guidance on fiscal ‘17 and we’ll all be looking at Heartland and everything else going on, but is there anything as we look back over the last year or so, is there anything we need to think about from a comp standpoint so that we’re starting to think about the quarters right in the future, is like the Q1 comp for Q1 ‘17, a really tough one or is there anything one-off that we need to be starting to think about now?

Well, I think, your point on Q1 is a good one. As we said in October, when we had our first quarter call, Q1 was an exceptional quarter this year and not one that we expect to duplicate, notwithstanding that there seem to be a view that we’d duplicate it in Q2. And despite having a very good quarter, it wasn’t quite as good as Q1. So, I do think that’s a fair point as you think about setting your model up for fiscal ‘17. Outside of that, it’s just again and I talked to many of you guys about this, it’s assessing the FX impacts on results and trying to figure out how to overlay those on top of annualization of acquisitions that we’ve made and how all that plays through the financials. Obviously happy to talk more offline as to how to think about that but obviously the volatility around FX and the amount headwind we’ve seen from FX does make it little bit difficult from time to time to try to get reported results forecasted correctly quarter-over-quarter, year-over-year.

I would say, Dave, though, it’s Jeff, that’s exactly right. I would say that the Company as you know from our descriptions before, it’s going to go from about half the revenue being in the United States and half outside being dollar denominated into two-thirds post Heartland dollar denominated, so what Cameron projected right and first we saw with our three regions. And so, regionally I would hope and looking at Cameron and saying this, I would hope it would be easier to model, coming out just given the next 50% dollar denominated the overall Company going to two-thirds. So, my hope is well those things are exactly right that in terms of the impact as a whole on overall company revenue and all the company earnings, I’m hopeful that more straight forward but as Cameron said, the devil is in the detail. So, I’m sure we’ll get that.

Thank you. Our next question comes from the line of Tim Willi of Wells Fargo. Your line is now open.

Thank you, good morning. I had a question on just the e-commerce omnichannel; obviously you’ve talked a lot about this in the last year. So, given the success in the UK, and you talked about moving this into Spain, could you may be just review, like lessons learned, what has worked really, really well that you think is very exportable into other regions and may be areas either it’s competition or product where there were areas that needed to be improved and you’ve probably done that but may be hindered some of the performance that if there were any in terms of that, just give us better feel for the momentum and the potential?

This is David. A couple of lessons learned. We’re finding very strong demand for the bundled solution in the UK. The place where we’re working hard is just probably on the joint sales proposition and being able to take what you might think of as a traditional sale and marry to it a more technology enabled piece of the sale; so, the gateway, marry to the acquiring, marry to reporting, marry to the fraud and credit management you have to be able to provide. All those tools are there. Probably the place where we’ve learned the most lessons have been on making those joint sales calls and enabling and equipping traditional sales folks to be able to sell either the early stages of e-commerce enablement to small to medium merchant or sell the entire bundle. The good news is with the demand we’ve had and the lot of execution we’ve seen, it has not affected our sales trajectory but we’re very pleased with the sales coming at back of the demand, but it isn’t more technical sale. So being able to equip your sales people on a global basis to sell more technology enabled transaction processing is a challenge of its own. We feel like we’ve learned a lot in that really integrations in the UK and Ireland that will serve us well in Spain particularly. It’s allowed us, Tim, to think more specifically about how you target a market and how you focus a piece of the sales force on the micro payments from sales and micro merchants, a piece of the sales force on small to medium, and then joint calling of experts may be from Ireland in addition to Spain on large to national merchants and certainly joint calling between all of your regions as well as your technical experts in the place like Ireland where Realex based on multi-regional or multi-market or regional accounts. So, really how you go to market has been where we’ve learned lessons. And again, we’re fortunate enough to be learning them in a situation where the sales are right at target, or above in many cases. So, we feel good about those pieces. And if you step back a little bit and think about this, the second and third piece of this is really partners and software developers. As you enter new markets, you want to continue the momentum you have with channel partners, so ISVs, cart providers, folks like that. You also want to develop and foster your relationship with developers, the PrestaShops of this world, and you’ve seen the press even from other providers in e-commerce world. So, in specific markets, you’ve got certain ISVs, cart providers, as well as the software providers. You are also taking your regional partners with you. So being able to go to market and manage the direct sales, as I described earlier, in a specific region, the face-to-face marry to the technology, as well as local channel partners, local software providers and with that an overlay of the regional folks and in many cases the global software providers. It’s a little tricky and it comes down again to market segmentation and how you compensate and drive the direct sales force to certain behaviors you want to target the segments, make sure they don’t trip over each other, and make sure that you can drive joint sales. That’s all a bit in its infancy in global, we’re really-really pleased with the thesis, so pleased that we went ahead and deployed $50 million of more capital in Australia to continue executing the same strategy where we can take this bundle with Ezidebit and eWAY to market and driving a deeper penetration, what’s already the leading provider of small to medium size retail e-commerce in Australia. So, long winded answer, I realize, but it’s actually been a great deal of learning, a great deal of really excellent execution by our teams in Ireland and in the UK, and now about to be in Spain, this led us to feel really good about the execution levels we are seeing relative to something we spent a lot time describing at the Investor Day in October, omnichannel, global capabilities that we think we are uniquely positioned to sell.

Thank you. Our next question comes from the line of Kevin McVeigh of Macquarie. Your line is now open.

Cameron, can you give us a sense of -- there has been obviously so much FX pressure. Do you feel like we are starting to anniversary that and maybe you think about say any kind of relief as we think about ‘16 into ‘17, and just any particular thoughts on the noise coming out of the UK as well around the potential exits, just as it relates to currency as well?

It’s a great question, Kevin. I would say we’re still seeing some weakness in certain markets, particularly in the pound. And today is another example, I would point to today not only is the U.S. dollar sort of secularly strong, the volatility in some of these major currencies is down, see even pound moving 1.5 or 2 points intraday, for example, obviously makes it very difficult to forecast FX with any sort of certainty as we think and look forward. I think we are as we get into fiscal ‘17, particularly as we get into the back half of fiscal ‘17, hopefully going to be in an environment where we are starting to anniversary some of the stronger headwinds. But, I certainly don’t think that we are approaching any time soon an environment where the U.S. dollar is going to weaken relative to most of the major currencies around the world to which we have exposure. I think we are in a sort of secular bull market for the U.S. dollar, I expect that to continue for some time, there’s just not a lot out there that would cause me to believe that dollar is going to weaken. But as we continue to anniversary some of these bigger moves, for example, we anniversary the strong euro move in Q3 of this year, unfortunately that was more than offset by an equally strong move downward in the pound, at relatively the same time. So, where we have a good exposure to a fair number of currencies to Jeff’s already point, part of the benefit of the Heartland transactions is it does de-risk currency exposure to the Company, on a macro basis, will be two-thirds U.S. dollar denominated business going forward and that obviously will diminish some of the FX exposure that we have globally. But, I am hopeful to get into an environment where in ‘17 where we’re seeing most of the strong headwinds begin to diminish to some degree.

Thank you. And our last question comes from the line of Jason Kupferberg of Jefferies. Your line is now open.

I wanted to just ask a question regarding plans for the Heartland sales force, if we just think about retention, integration, et cetera, any latest thinking there?

Jason, it’s David. I think the thinking is very similar to what we described to you in December, that’s in a large part of why we’re so attracted to the Heartland acquisition that sales force, it’s trajectory, it’s been remarkable at couple of years. The deeper we’ve gone into our homework on integration, the happier we are with what we found. So, our plans are really very similar to what they were in December. We don’t want to screw this up. So, we’re going to keep the performance plan consistent, we’re going to keep the bills of right with which you are familiar and keep using those to drive organic growth. As the management matter, we’re very impressed with the team; we spend a lot more time with them. So, I think not a lot of changes at all, as you might imagine going forward. And their trajectory right now is really impressive. So, it’s more a matter of making sure we can figure out how to accelerate that with more product, maybe a different way to think about, enhancing the traditional distribution with again additional product out of Heartland commerce and the other business units, that are already in place there, so really pleased with the thesis, really pleased with the sales force and trajectory, no plans to change anything we described you in December.

The only thing I’d add Jason, it’s Cameron, when you think about our entire approach to integration, it’s really behind the sales force, behind the customer, such that the objective is to not disrupt anything that’s happing from a sales and sales momentum point of view, nor to create conflict at the customer level that’s going to distract the sales, professionals from continuing to grow and expand the business. Our objective is to accelerate growth through that channel as we’ve been able to do with many of the previous acquisitions we’ve done. And the integration that we’re going to do will be behind the scenes, so that it won’t impact the momentum that we’re expecting to be able to achieve from an organic sales point of view.

That’s helpful. And just to switch gears a little bit to the OpenEdge business, at our payments conference yesterday, there was a lot of positive commentary just about the amount of runway that remains for this channel. So, I just wanted to get an understanding from Global’s perspective as far as which verticals you’re most excited about, in terms of remaining runway, any updates on the size or growth of the dealer and developer network there?

I’ll start and let these guys chime in if anything I miss. So, we continue to be very pleased with OpenEdge, it still grows in the mid to high teens, the revenue production is really, really impressive that’s all at increasing margins that are higher than the company’s margin, so back to several of the other questions earlier today. In terms of existing verticals, we remain very, very low penetrated. That’s not perfect grammar. But really, I don’t think we have a vertical that’s more than 20% penetrated anywhere in any of our key verticals. So, you think of vets and dentists; we talk about those a lot, pharma, we think about parking garages, all those very low levels. And we’ve got at sales force that’s focused on driving deeper penetration into those verticals. At the same time though, we’re looking for the places to grow. So, we mentioned, the Heartland, discussed it before, where we don’t have an education vertical in OpenEdge, we don’t do restaurant and hospitality, the opportunity to drive deeper penetration in those verticals by OpenEdge that complements the direct sales force about what’s your actually first question, it’s there, it’s real, we continue to work on that in integration planning. The other couple of things we have is we literally entered a new vertical in the United States that we weren’t in before just in the last couple of weeks. We entered the unattended payment vertical United States with a brand new partner, large ISV who plays in that space, you’re talking about car washers, more parking, vending things like that, that’s new and unique for OpenEdge. So, a brand new vertical, effectively with 0% penetration in that vertical as we sit here today but we know how to manage the ecosystem partners, merchants, leads and marketing to drive that and then maybe happy with news of all in terms of how we think about growing that OpenEdge beyond just the United States. The global opportunity is real. We’re really pleased to announce we actually have opened up OpenEdge and launched it in the UK this quarter. So, we have a staff there, dedicated sales folks, dedicated product folks. Remember back to October in the Investor Day, one of our key pillars of accelerating global growth was the global expansion of integrated payments, OpenEdge driving the Canada, driving the United Kingdom. So, we have now launched our business in the UK, we can bring that dedicated and product in ecosystem to the United Kingdom to work with ISVs to drive the benefits of technology integration that don’t exist in the UK, as they exist in the U.S. today. And still we can drive existing partners into the United Kingdom. So, U.S. based ISVs and software providers provide near-term sales opportunities. In fact, we’re going to bring a few customers live in the UK in just next few months, coming from U.S. based ISVs where we’re extending their franchise, extending the integrated payments benefit out to UK for them. So, more to come on this, but really OpenEdge is poised for more global growth but still continued excellent execution in the United States as we go forward.

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