Global Payments' CEO Discusses F3Q2014 Results - Earnings Call Transcript

Apr. 3.14 | About: Global Payments (GPN)

Global Payments Inc. (NYSE:GPN)

F3Q 2014 Results Earnings Conference Call

April 3, 2014 5:00 PM ET

Executives

Jane Elliott - Executive Vice President and Chief of Staff

Paul Garcia - Chairman

Jeff Sloan - President and CEO

David Mangum - Senior Executive Vice President and CFO

Analysts

George Mihalos - Credit Suisse

Bryan Keane - Deutsche Bank

Jason Kupferberg - Jefferies

Glenn Greene - Oppenheimer

Matthew Roswell - RBC Capital Markets

Brett Huff - Stephens

Jennifer Dugan - Sterne Agee

Tien-tsin Huang - JPMorgan

Kevin McVeigh - Macquarie

Steven Kwok - KBW

Tom McCrohan - Janney

Ashwin Shirvaikar - Citigroup Incorporated

Andrew Jeffrey - SunTrust

Operator

Ladies and gentlemen, thank you for standing by, and welcome to Global Payments' Third Quarter 2014 Earnings Conference Call. (Operator Instructions) As a reminder, today's conference will be recorded. At this time, I would like to turn the conference over to your host, Executive Vice President and Chief of Staff, Jane Elliott. Please go ahead.

Jane Elliott

Thank you. Good afternoon, and welcome to Global Payments' Fiscal 2014 Third Quarter Conference Call. Our call today is scheduled for one hour. And joining me on the call are Paul Garcia, Chairman; Jeff Sloan, President and CEO; 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 which are subject to risks and uncertainties discussed in our SEC filings, including our most recent 10-K and 10-Q. 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 obligations to update them.

In addition, some of the comments made on this call may refer to certain measures, such as cash earnings, which are not in accordance with GAAP. Management believes these results more clearly reflects comparative operating performance. And for a full reconciliation of cash earnings to GAAP results in accordance with Regulation G, please see our press release furnished as an exhibit to our Form 8-K filed earlier today. The press release is also available in the Investor Relations area of our website at www.globalpaymentsinc.com.

Now I'd like to introduce Jeff Sloan. Jeff?

Jeff Sloan

Thank you, Jane, and thanks, everyone, for joining us this afternoon. We delivered solid results for the quarter, growing revenue by 7% and cash earnings per share by 10%. As a result, we are raising our annual fiscal 2014 cash earnings per share expectations and tightening the range to $4.06 to $4.11 or 11% to 13% growth. Our performance demonstrates that we continue to gain momentum as we drive sustainable growth by executing the right strategies in each of our markets.

Globally, we focus on building and growing our direct distribution channels while concurrently leveraging our worldwide technology platforms. Here in North America, for example, we are pleased to have completed our PayPros acquisition in early March.

This transaction marks a continuation of our strategy to pivot toward direct sales channels in our largest market. I’m delighted to report that we are already seeing early wins as we begin to integrate the best of the APT and PayPros businesses.

Now for quarterly highlights. We are pleased with our international performance, reflecting solid execution on our strategic initiatives, with particularly strong performance in our international eCommerce channel. We also continue to make progress in our Asia business as evidenced by the double-digit revenue growth that David will describe shortly.

We are delighted to report that North America continues to deliver solid results both in the United States and Canada. The U.S. results were driven by strong performance across our direct channels, headlined by our integrated solution business. And of course, we are very pleased with recent sales momentum in our gaining business and in movement of our integrated businesses into Canada.

Canada delivered another quarter of stable performance. Revenue growth was driven by 5% credit transaction growth and assessment based changes. As previously noted, these changes were partially annualized during our fourth quarter.

Especially noteworthy this quarter is the expansion of our North American operating margins. We believe our margins demonstrate successful execution of our distribution strategies. This progress of course does not yet reflect the confirmation of the PayPros acquisition given its March 4th close day.

Now, I will turn the call over to David.

David Mangum

Thank you, Jeff. We are pleased by the solid business performance across all of our markets during the quarter. North America revenue grew 5% with U.S. revenue growth of 6% and transaction growth of 6%. Canada revenue grew 11% in local currency for the quarter and we continue to expect a mid-to-high single-digit revenue growth in local currency for the full year.

North America cash operating income grew 9% to $69 million. Cash operating margin grew about 60 basis points over prior year to 16%. Our full year expectations for North America cash operating margins remain unchanged at flat to slightly increasing compared to prior year.

International revenue grew 10% for the quarter in U.S. dollars. Europe delivered solid revenue growth with particular strengths in our e-Commerce business in Spain. Asia-Pacific revenue grew 10% over last year with pricing and new assessments driving growth in our base business.

International cash operating income of $66 million grew 8%. Cash operating margin decreased about 60 basis points to 35% as a result of continued strong growth in our e-Commerce channel and investments in Asia. We are on track for stable cash operating margins in international for the full year.

For the quarter, total company cash operating margin was 18.2%. This included over $3 million of an expected full year $17 million incremental security spend. Excluding the security spend, total company cash operating margin for the quarter would have increased about 30 basis points over prior year to 18.7%.

Currency trends were roughly in line with our expectations for the third quarter. However, movements in rates for Canada and Russia are likely to be more challenging in the fourth quarter than we previously expected. We now expect that foreign currency translation will represent a modest headwind to cash earnings per share for the full year. Our expectations, of course, reflect this. We continue to expect that both GAAP and cash effective tax rates will approach 29% for the full year.

For fiscal 2014, we expect PayPros to contribute modestly to U.S. revenue and be about neutral to cash earnings per share. We are in the beginning stages of executing an integration plan for PayPros that will continue through fiscal 2015.

PayPros represents an important milestone in the execution of our strategy to control direct sales, expand technology-enabled distribution and drive more revenue and earnings growth from our direct channels. As growth slows in our ISO channel and we add PayPros to the mix at the beginning of the fourth quarter, our 90 or so active ISO partners in United States now represents in aggregate a low double-digit percentage of total Global Payments’ operating income and thus contributed about 20% to North American operating income.

We generated free cash flow of $88 million this quarter. We define free cash flow as net operating cash flows excluding the impact of settlement, assets and obligations, less capital expenditures and distributions to non-controlling interests. Capital expenditures totaled $20 million for the quarter and we continue to anticipate our fiscal 2014 capital expenditures will total about $90 million. Our total available cash, including working capital at the end of the quarter was about $320 million.

During the quarter, we completed the $100 million accelerated share repurchase program we announced in October of 2013. We also purchased the 155,000 shares in the open market during the quarter. We are pleased with the refinancing we closed at the end of February.

We now have about $1 billion of debt capacity available to fund future growth initiatives and share repurchases. And on that note, we are delighted to announce that our Board of Directors approved an additional share repurchase authorization of $250 million. We now have about $365 million of total authorization remaining for potential further share repurchases.

We are increasing our annual fiscal 2014 cash earnings per share expectations and tightening the expectation range to $4.06 to $4.11, reflecting 11% to 13% growth over fiscal 2013. We are maintaining our annual revenue expectations of $2.51 billion to $2.56 billion, or 6% to 8% growth.

We remain on track to achieve stable total company cash operating margins for the fiscal year, including the negative affects of the $17 million incremental stable functions in security spending.

Now, I would like to turn the call back over to Jeff.

Jeff Sloan

Thanks, David. We were executing well on our strategies around the world and we maintain substantial capital flexibility to achieve our goals. We believe that we have made the pivot towards critical mass of direct distribution, while maintaining a careful balance to create value for our shareholders, partners and employees.

I’ll now turn the call over to Jane.

Jane Elliott

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

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Our first question today comes from George Mihalos with Credit Suisse. Your line is open.

George Mihalos - Credit Suisse

Hey, guys. Thanks for taking my question and congrats on the quarter. Just wanted to start off on the PayPros side sort of, what is the expectation from a revenue standpoint in the fourth quarter? Are we talking somewhere around $25 million, or so $1 million and sort of neutral on an EBIT basis?

David Mangum

Hey, George, it’s David. Yes, you’ve got it right. If you recall our disclosure at the time we closed that we gave you kind of the run rate, the last 12 months being about $100 million of revenue. So, $25 million is a possibly good assumption for Q4. And then you get to earnings neutral when you think of nice solid business with nice margins. But we are in the beginning stages of a long-term integration to combine the best of our APT and our PayPros now into the best of Global Payments. So we wash that in for the fourth quarter. You’ve got about earnings neutral for the quarter.

George Mihalos - Credit Suisse

Okay. Great. And just maybe you can help us think of the margin profile longer-term for the PayPros business, and is it safe to say that ex the PayPros acquisition for 4Q, that margins would clearly be up on the North American side? Thank you.

Jeff Sloan

So, George, I’m going to sound like I’m repeating myself relative to what we said on the order of the year ago, when we first bought APT, which is we’ve just bought a business that operates at a higher margin than Global Payments, that is expanding that margin with profitable growth and is the same kind of growth profile we saw with APT. When you bring the numbers I just described into the total company for the quarter, you really don’t make a material difference at all to margins.

So the trajectory you have us on for the year for North America, for total company. So for the year for North America that’s flat to slightly increasing margins. It’s unchanged bringing PayPros and so anything you would have in your model previously really for Q4 to kind of roll that forward, PayPros is not going to make a difference to them. And similarly for the total company at that level, they were expecting stable margins in total and margins that would otherwise be expanding were not for the security investment, PayPros doesn’t make a big difference there. The difference of PayPros comes over the years to come.

Operator

Your next question is from Bryan Keane with Deutsche Bank. Your line is open. Bryan Keane, your line is open.

Jeff Sloan

Operator, let’s go to the next question. Maybe Bryan can come back.

Bryan Keane - Deutsche Bank

Can you hear me? Can you hear me?

Jeff Sloan

Sorry, Bryan, were you on mute?

Bryan Keane - Deutsche Bank

Yeah. Sorry about that. I just wanted to ask about the Russia situation. I know you guys had some exposure to Russia and obviously the political landscape there, just curios to know if you could talk a little bit about your Russia business, how big it is and any expected impacts there?

Jeff Sloan

Yeah, Bryan. It’s Jeff. I will start and then, David can provide some additional financial commentary so. I think you touched on the right point. I do believe that what’s going in Russia is primarily a political event. And with potential events, it is difficult to handicap what may happen in the coming days and weeks. We continue to monitor Russia and evaluate the business situation. But you just heard David expressed our guidance raise for fiscal 2014, which of course includes our current evaluation of the Russian situation. So, we don’t expect as David mentioned in his prepared remarks, this situation to have a material effect on fiscal ’14. David, you want to add some?

David Mangum

I think I’ll add to that is just remember Russia is a fast-growing, it’s a very small piece of Global Payments overall.

Bryan Keane - Deutsche Bank

Have you guys actually seen any impacts of the Russian business so far or nothing to date?

David Mangum

Well, I think what I had said, I would point you right back to our full-year expectation. They are unchanged. We’ve obviously done best we can to assess what’s going on but our expectation is unchanged.

Bryan Keane - Deutsche Bank

And then just wanted to ask on the U.S. business, the growth rates, 6% was kind of in line but anything any kind of sales, same-store sales weakness that you saw, anything you can describe further to give us color on the U.S. market? Thanks.

David Mangum

Yeah. I think it’s a great question and kind of interesting when you pull apart the pieces. As you add in PayPros and think about it, I would first point you to 6% revenue growth was matched by 6% transaction growth, which if you think of the history of Global Payments is really quite an interesting combination of metric and dollars. We used to see really rapid ISO growth that would drive high transaction growth and have a big delta between that and the actual revenue growth, much less the actual operating income growth you might see coming through on the bottom line.

At this stage in terms of same-store and some of the other metrics, average tickets very stable, spreads stable, transaction is growing like revenue which you are seeing and part of why we’ve sort of enhanced for the moment the way we were talking about the way the channels work and fit together is nice fast-growing direct revenue channels coming in like APT and as we add PayPros, at the same time the ISOs is slowing down which is, when you combine that with Canada is what’s allowing to see the operating income growth and the margin leverage you see in the third quarter for North America.

Bryan Keane - Deutsche Bank

Okay. That’s helpful. Thanks, guys.

David Mangum

Thanks, Bryan.

Operator

Your next question is from Jason Kupferberg with Jefferies.

Jason Kupferberg - Jefferies

Hey. Thanks, guys. And just a follow-up on PayPros, the color in Q4 is helpful, but how should we be thinking about on kind of a go-forward basis annualized, I mean, what sort of what cash EPS accretion can we see from PayPros?

David Mangum

Hi, Jason, it’s David. Obviously, we are not going to talk about 2015, so we are not ready to project PayPros. I would say the way to think about it again, it’s a nice margin business coming into Global Payments. Add to that, the integration costs, while we try and create in the best of the assets we have. We obviously expected to be accretive, but it will be -- whatever accretion will be, it will be held down a bit by integration cost, but more to come as we get to July and really talk to you about 2015.

Jason Kupferberg - Jefferies

Okay. And then Mercury has obviously filed to the public here, so they’ve got some public disclosure out there now about their contractual relationship with you guys indicating that they are migrating some of their processing services in-house. Can you just clarify for us what exactly they are taking in-house versus what you guys are going to continue to provide to them? I think your contract runs through 2018. Is there any kind of material revenue headwind we should be starting to think about at some point in time from the piece that they are migrating in-house?

Jeff Sloan

Jason, it’s Jeff. I will start. So that the first thing I would say is we think, it’s very good news that Mercury is going public. We wish them a lot of success. They are a good partner of ours and have been for a very long period of time. And as far as the partnership, we are only going to be successful as they are also successful. So I think you touched on one of the key points, which as we mentioned last July in our prepared remarks that our contract, our relationship with them has been extended to 2018, which is of course in their documentation. So we are going to have a very strong long-term relationship with Mercury based on what you mentioned, based on what we have described.

Now between the two of us, we are providing both transactional as well as non-transactional services. For Mercury through that period, over what period of time and in what form, it’s going to vary depending on what they would prefer to do, what we would like to do. So some of that description is in the S-1. I also would add that our relationship with them is not just in the United States but also in Canada. So, actually in multiple geographies with Mercury. So from our perspective, it’s a complex long-term relationship. We are going to be partners for quite an extended period of time. And our relationship with them of course is reflected in David’s prepared remarks, again our guidance for fiscal 2014. David, would you add any?

David Mangum

No, I think you summarized it.

Jeff Sloan

So we will see how it plays out and we are very excited for them and we are sure we will be very successful and we think that’s ultimately to their benefit as well as ours.

Jason Kupferberg - Jefferies

Okay. Understood.

Jeff Sloan

Thank you.

Operator

Your next question is from Glenn Greene with Oppenheimer.

Glenn Greene - Oppenheimer

Thank you. Good afternoon. A couple of clarifications on some of the discussion the guys have been asking. The first on the full year guide. I think I guess some of the questions I have been getting or you sort of include -- just want to think about the figure guide. So including $25 million or so for PayPros, it sounds like there is some incremental FX type wins. I think David you called up Canada and Russia. Could you just give us some context of why you didn’t raise the full year guide? Is it just you sort of still within the high end of the range? Did anything slow in the core business? I guess just a little bit color on how you thought about the full year guide given the fact that PayPros should be additive?

David Mangum

Yes. And Glenn let me make I answer your question precisely. That’s a revenue guidance question.

Glenn Greene - Oppenheimer

Yes, exactly.

David Mangum

So here is a way to think about. I think it’s a starting point. I go back to the commentary on the United States revenue. The ISOs as a channel have been slower this year than previous years and frankly a midway little slower than we expected. Given that slowdown which of course is happy net news to Global Payments, we think it will from a performance, earnings and margin perspective. But given that slowdown in revenue, one might want to model us to low to middle end of the revenue range. When you bring in then the increment of PayPros, you are adding on the order of estimated $25 million or so. I believe you still are in the range and then you raised the right finer point to this which is our range always is designed to accommodate possible range of that outcomes.

Certainly as we enter the quarter, we see the U.S. dollar strengthen further against the Canadian dollar and against the ruble than we would have expected three months ago much less nine months ago when we first set up the year. So if you bring all these things together, you end up really with the same range you had before. Again, I would say for a number of happy reasons quite frankly.

Glenn Greene - Oppenheimer

Okay. That’s clear. And then just follow-up on Jason’s question as it relates to Mercury, I will sort of talk about the ISO business, I guess, and you sort of talked about the ISO business for most of this year has been slowing largely due to the large numbers. Is that the primary factor or some of it that Mercury has already transitioned some of their volumes in-house? I guess the question we are all trying to get our arms around is not necessarily on fiscal ’14, because we know that’s sort of baked into your guide. But is there like a big headwind we should be thinking about as we go into ’15 and ’16?

Jeff Sloan

I think the way to think about this is what we have been saying the ISOs is a channel, I think is a sheer size and the sheer amount of revenue and transactions that comes from them have been slowing down. That’s true across as I have said and their counts are broadly 90 or so active ISOs. That’s the right way to think about the ISO channel. We gave you the rough sizing in aggregate of the channel. That sizing is spread across 90 different active, literally active ISOs.

And so I would about the channel in that way, anything else would be a little bit of speculation to have relationship evolve and what the future looks like and we will report that as we go along, as we reach milestone in those certain things. But right now we have what we know and that’s baked into our expectations for ’14.

Glenn Greene - Oppenheimer

One more, would you be comfortable giving us the ISO percentage of North America or aggregate revenue along with the operating income disclosure which was very helpful?

David Mangum

Yes. It’s actually not a matter of comfort. For me, it’s a matter of -- I am not sure how relevant it is at this stage. I think the income is far more interesting. I certainly think the way we perform this year indicates to you what we are managing through the income and hopefully as a result of margin impact of all of our versus channels around the world. The fact we might have some grossed up revenue, quite frankly in some cases might not even help you think through how the channel is evolving over time.

Glenn Greene - Oppenheimer

Okay. Thanks a lot.

David Mangum

Thanks, Glen. Appreciate it.

Operator

Your next question is from Matthew Roswell from RBC Capital Markets.

Matthew Roswell - RBC Capital Markets

Yes. I was wondering if you are willing to give us the Asia Pacific transaction growth. You mentioned that it was up on pricing and assessments.

David Mangum

I don’t have that in front of me. We really aren’t quoting and breaking up the markets other than U.S. where that important comparison of transactions of revenue growth is rolling on. I would say you transaction growth is certainly less than revenue growth in Asia because that revenue growth in the base was a feature of pricing along with some new assessments from the networks. So you are on the right track, but we’re trying not to break out market by market each piece of transaction growth.

Matthew Roswell - RBC Capital Markets

Okay. And then I was wondering if you have seen any change in the Canadian consumer and some concern about possible slowdown up there?

Jeff Sloan

Yes, Matt. It’s Jeff. No, we have not. I think if you look at the credit transaction growth which was in my prepared remarks for this quarter, and if you look the last several quarters that we described, we had very healthy growth this quarter in Canadian credit transaction growth which in our view really is a fundamental sign of the health of the Canadian consumer. And that is obviously -- the last several quarters were obviously significantly higher than it was a year and half or two years ago. So I would say if anything we see a consistent stable performance out of their Canadian consumer.

Matthew Roswell - RBC Capital Markets

Thank you.

Jeff Sloan

You are welcome.

Operator

Your next question comes from Brett Huff with Stephens.

Brett Huff - Stephens

Good afternoon, guys. How are you?

David Mangum

Hi, Brett.

Brett Huff - Stephens

Question on margins going forward. I know there is lots of lever that you guys have been able to work on both from a mix point of view and I know you’re consistently working on the expense base in the fit -- more efficient technology. I think I guess this question is for you David I am not sure, but can you just give us a highlight -- we know about the security spend, but maybe you could tell us or remind us again is that -- I don’t think that’s a step function up again next year, I think it’s a run rate. But beyond that, what other initiatives do you have going on that we should think about that help you guys battle that ISO dilution on the margin other than just if that growth is slowing a little bit?

David Mangum

Sure, Brett, great question. So you are quite right about the security spend. We expect our security investment to scale now like the rest of the infrastructure. In any given years we go into the year the infrastructure departments or their accounting or their IT receive a budget target that says the service of scale of your cost per transaction has to go down year after year after year. We are not going to skimp or scrimp on security spending, but with this one-time investment -- investment increment we saw in ’14, we’ll not repeat itself as another big giant investment increment. And in fact the way we think about it now is that security is a number one priority for the company which it should be and then maybe that stands in front of another investment we would have otherwise made, as we think through the pieces of 2015, ’16, ’17, ’18 and beyond.

If you then stop for a moment and sort of think through the other drivers of margin, I would point you to other -- you mentioned it wanted to set aside for a moment. I would go back to the ISOs to the extent they continue to grow more slowly, that reduces the headwind we have been struggling against for several years quite frankly and that's helpful. Remember too, we just got PayPros which again is coming in as a higher margin. This is pre-integration costs, but then we will scale no doubt routinely from there on in, just as we’ve seen APT do over the last year and so.

And then probably the final piece of the puzzle that’s a little difficult to see on the surface of the income statement right now, surely Canada, which to the extent we continue to see what Jeff pointed out a moment ago which is healthy credit transaction growth, this past quarter was 5%, and as I’ve said before manageable spreads. Now you have your second biggest asset helping it and helping push the company forward from operating income and margin perspective. That's an important decision we are seeing for the first time this year in some time and we would expect that trend to continue again as long as those credit transactions growth numbers remain healthy. We have a nice piece of the puzzle.

Brett Huff - Stephens

That's helpful. Thanks. And then just another question on the Caesars deal, can you size that for us at all or more color?

Jeff Sloan

Yes, it’s Jeff. All right. We don’t really breakout as a matter of policy separate customer relationships financially. I would tell you that as you know for the last several years as we have announced publicly, we already had a piece of the Caesars business. So it’s additive to what we currently had, but I can’t really give you a lot of metrics around the revenue or profitability except that it’s additive to our current book.

David Mangum

Maybe I’ll add a little color only in that, you can read other disclosure out there and suggest you that all of the services encompass and other disclosers are not services we perform necessarily. We do some of that through partners. So the numbers you might have seen bandied about are not the appropriate numbers for Global Payments, the services we offer linked to what Jeff just described. So just bear that in mind. Having said that, we are thrilled to expand our relationship with Caesars.

Brett Huff - Stephens

Great. That's helpful. Thank you.

David Mangum

Thanks, Brett.

Operator

Your next question comes from Jennifer Dugan with Sterne Agee.

Jennifer Dugan - Sterne Agee

Yes, hi. I wanted to ask about the acquisition pipeline, I know that's probably a funny question to ask, you’ve made couple of really great acquisitions here. But should we be looking for you to slow down a little bit as you work on integration and focus more on buybacks or do you still have a pretty active acquisition pipeline?

Jeff Sloan

No, we still have an active acquisition pipeline, Jennifer. We balance very carefully our acquisition investments versus our balance sheet, our debt capacity and our repurchase work. So as David announced in his prepared comments, we have about a $1 billion of available debt capacity and roughly another $300 million of available cash as he described. So I wouldn’t look at it and say that because we have done deals like PayPros or APT that we don’t have sufficient available capacity.

In fact, one of the reasons we worked on a very successful refinancing in February was to make sure that we have debt capacity to balance those going forward. So it’s a plentiful pipeline, we are opportunistic. But as you think the additional repurchase authority that we described in our prepared remarks, it gives you an indication of how we are balancing investments in acquisitions versus investments in repurchases. And I think as we’ve said previously, we have a very good track record of consummating those repurchases over time and that's why we would expect us to do.

Jennifer Dugan - Sterne Agee

Okay, great. And then in terms of the next acquisitions or joint ventures, are those more likely to be here in the states or overseas in Asia? I think we are still kind of waiting to see some more action in expanding the Asia footprint. What might the timing beyond that?

Jeff Sloan

That's a great question. So as I said before Jennifer, the major of the battle is whether something is available for sale first, and then second is that a good partner and third is what to the returns look like, especially in comparison to repurchasing more stock. So I would tell you that we have a very active pipeline. As it relates to Asia, which is at the source of your question, we are certainly actively looking at markets in Australia and South Korea, we are not currently present in. And then markets that we are present in today that we like to be figure in, those includes India, Mainland China and the Philippines and we’re in each of those markets and we’d like to have more scale going forward.

So by far the most important thing is it is available, but those markets I indicated, we’re very actively looking at transactions in. And so I think we’ve said in our January Investor Day, at that time we have looked at 55 transactions over the previous two years and I think we have done three. At that time, that gives you a sense just in terms of your handicapping Jennifer that it tried to give precise dates because we tend to walk away from 95% of the things that we see using the criteria that I mentioned. But we are keenly focused on expanding our footprint and we will balance that versus repurchases to generate better returns.

Jennifer Dugan - Sterne Agee

Okay, great. Thanks.

Operator

Your next question comes from Tien-tsin Huang with JPMorgan. Your line is open.

Tien-tsin Huang - JPMorgan

Hi. Great. Thanks. Glad you gave that ISO disclosure. That’s great to have. I am just curious the slowdown that you guys talked about. Anything specific in there that drove the slowdown, maybe this quarter, and also just looking ahead, thinking about U.S. transaction growth, how should we benchmark that to say whatever these amounts, cards metrics or some of the other industry numbers out there, can we still assume you can grow at a premium, even with this sort of ISO trend?

David Mangum

We continue to say that -- I think that I can’t point to any one thing, which is part of what I think we often talk about the large numbers relative to the ISO trend. I can’t find any one specific thing when we analyze again 90 or so and how the pieces are coming together. I think if you look forward and you think of the businesses we are processing for APT and for PayPros and marry to the rest of the direct book, it’s fair to expect those businesses to transact at a higher rate than market they are doing that today. They are growing faster than market whether you want to measure that on a revenue income or transactional basis unless you don’t break it out. So you can’t see it, I think you can imagine it’s implicit in some of the numbers we report and that may give some color when you keep thinking about as we go forward with the ISO trend continues.

Jeff Sloan

I would add that Tien-tsin that of course our gaming business, the announcement that we made the other day which we are pleased to have additional business with Caesars. Our gaming business we believe today is growing more quickly than market and hopefully pro forma with Caesars than it -- we expect those rates to continue. So back to David’s point, as you look at the very pieces of engines of growth that we have been investing in, at least in my opinion those businesses are growing in excess of the relative market rates.

Tien-tsin Huang - JPMorgan

Okay, that's good to know. I am just trying to think if we’re sort of closer to the bottom with the six and it feels like with PayPros, we would be, but I guess we will take a view on that. Just my follow-up, just thinking about Canada pricing outlook, I think both Jeff, you and David said, spreads are fine and that the comps are coming up, I mean how is the pricing outlook or spread outlook look in Canada now?

Jeff Sloan

Yes. Tien-tsin, it’s Jeff. I will start. Those spreads have been relatively stable, so we are very pleased with where the business is situated today. The most important thing in my opinion Tien-tsin is as we referred to our in prepared remarks, 5% credit transaction growth which is about the majority of how we get paid in Canada, it really provides a lot of opportunity and flexibility for us to grow that business normally going forward.

So as we said before, going back to Investor Day in January of ’13, our focus really was on stabilizing Canada. As we have said in our guidance, we don’t expect the 11% local currency growth in revenue to continue indefinitely. And in fact as I mentioned, the fourth quarter we anniversary that a bit, we start with mid single digit credit transaction growth. There is a lot we can do to affect the low single-digit revenue growth out of long-term that we gave you in January of 2013.

Tien-tsin Huang - JPMorgan

Okay. That’s good to know. One more quick housekeeping, if you don’t mind, unencumbered cash at this point now given on those buybacks and PayPros closed much forth. I think you said in the Q, what should we use as unencumbered cash?

Jeff Sloan

Yeah. We use that $318 million, Tien-tsin. If you just take a look at the balance sheet, it’s a little bit illusory in that. We had their stage cash for the PayPros closed. We’ve drawn down the debt, so it’s look like $660 million or so in the balance sheet.

Tien-tsin Huang - JPMorgan

Right.

Jeff Sloan

So if you realize that three or four days later we closed PayPros, the number at the end of the quarter unencumbered available that you might add to the depth for total capacity is

$300 million.

Tien-tsin Huang - JPMorgan

Got it. Thanks guys. Appreciate it.

Jeff Sloan

Thanks, Tien-tsin.

Operator

Your next question comes from Kevin McVeigh with Macquarie.

Kevin McVeigh - Macquarie

Great. Thank you. Hey, you really had a nice boost in the buyback. Any sense on another accelerated or opportunistic, just how we should think about the capital been put to work over the balance of this year?

David Mangum

Yeah. Sure, Kevin. It’s David. I think that you should as always expect us to be routinely in market buying back stock. But I think we’ve shown you that we move aggressively when we do give an authorization when we move forward to make a decision to buyback. We buyback aggressively and quickly, so nothing should surprise you as we look forward. Just remember further on the call, our 2014 expectations exclude any spend of that incremental authorization.

Kevin McVeigh - Macquarie

Got it. And then just in the ISO channels, over the course of time, do you have any target in terms of where that ultimately settles as a percentage of operating income as you kind of consolidate PayPros and APT in aggregate? Any sense of how we’re thinking about that longer term? And is there any type sensitivity to what it would accrete to from a margin perspective based on becoming less concentrated, if you will?

Jeff Sloan

Yeah. I think in reverse order, the key to the margin is just in the first place having less of an ongoing headwind because it’s growing, because the ISO channels formally grew faster than the rest of the channels, that’s made a lot of difference, obviously combined with the healthier Canada. Those two alone are sort of the linchpins that then having the rest of the pieces of the sort of asset allocation pie really work well together. You think that the longer-term trends, we’re going to continue to focus on direct distribution and things we control at the merchant relationship level.

We’re going to continue to focus we believe on higher growing pieces of that asset. How the curves working at what rate ISOs move? Interestingly enough, we don’t control. We hope our partners are widely successful in that and they continue to grow. They continue to grow for a very long time, but they will become we believe an ever shrinking piece of the overall pie of Global Payments. But we got a sense of their place in the pie now. We are comfortable where they are now in terms of being the minority of North America and the significant minority of total company.

So we have the pieces we can manage in much the same way Jeff described, being able to manage Canada, if we have solid credit transaction growth, we have things we can manage in Canada. Where the ISOs are now, they are great partners. They are good piece of the overall portfolio of Global Payments. From a direct-to-sell, we are investing in high-growth asset. So that curve should continue down in terms of their overall share. At what rate depends on how quickly we grow and how we quickly we acquire.

Kevin McVeigh - Macquarie

Understood. Thank you.

Jeff Sloan

Thank you

Operator

The next question comes from Steven Kwok with KBW.

Steven Kwok - KBW

Hi. Thanks for taking my question. Just a quick follow-up on the PayPros acquisition, I was just wondering how long does it typically take for you to integrate the acquisition? If we look back at APT, how long did that take?

David Mangum

Maybe, I’ll start and Jeff will take over as well. I think that these are very different acquisitions. APT, it was a year and a half ago, as we sit here, was our first material foray into integrated payments. Now, we have bought another market leader in the same space. We have a unique opportunity to combine the best of both, whether you are talking about sales channels and sales approaches, how we go to market, how we serve customers, how customers see the technology, how the dentist offices interact with the technology, what it looks like, our partners integrate with it.

So that creates a more complex integration. Again, you are taking two $400 million acquisitions, combine them into the best of long-term and make one-on-one equal three Steven. And so that can take a little bit longer than when you buy a standalone business and you’re talking about integrating, accounting and finance and HR, which can be done fairly quickly. So, we’ve got a lot of work in front of us. It’s the work we’ve done before. It’s where we are quite good at doing. And we’ve got great energy and we’re off to a great sale start you heard in Jeff’s prepared comments from the combined entity. But there’s a lot of work to do and recall, we just closed this most exactly a month ago.

Jeff Sloan

I would just add to it, David, that Steven that APT was one of our existing ISOs at the time. So by definition, while there are things certainly to be done, they were in general wasn’t entirely true but it was mostly true, that they were on our platform using our systems et cetera. PayPros is not one of our existing ISOs prior to our acquisition about a month ago. So additional thing that David said, we also need to look at that when you think about the scope and the timing on an effective integration.

Steven Kwok - KBW

Got it. And then just a follow-up around the European environment. Today, we saw some headlines around the European Parliament voting around the payments proposals. Was curious about your thoughts of any potential impacts, whether it’s -- does it bring some potential opportunities around the European marketplace for you? Thanks.

Jeff Sloan

Yeah. Steven, it is Jeff. I would say and I was just there for about a week and a half visiting our people and our partners in both in the U.K. and in Continental Europe. I would say that it’s consistent with our features that in many of our markets including for these purposes, Europe and the EU, that interchange is likely to come down. So much of that legislation of course, if is addressed more squarely in interchange or in particular cross-border interchange.

I think that is not just consistent with our thesis but good news for us. As cost of acceptance decline, the demand for all products and services should increase. The fact that we own a number of markets across Europe makes our technology in operating environment even more attractive to potential merchant partners because many of these rates as you’ve described are expressed as cross-border. So we really have that experience and have those people in market to drive additional demand for our products and services.

And then lastly, I would say, that from an M&A pipeline point of view, I think change is a good thing. But I think the markets changing. Additional complexity may drive a number of partners. We’ve been talking to the potential partners to think about partnering with us in some of those markets that we’ve been focusing on over time, as they try to figure out what these changes mean for their standalone businesses.

So while interchange is a pass-through for us, it doesn’t impact us. Certainly, bank partnerships, it will impact the banks issuing businesses and those are conversations that we have. We were there in the last week and a half. So, I’m probably a bit more optimistic sitting here today, having been through first that trip at second reading about where the EU is and where this is on that topic about our ability to find more partnerships in parts of Europe that were not physically present today.

Steven Kwok - KBW

Great. Thanks for taking my questions.

Jeff Sloan

You are welcome.

Operator

Your next question comes from Adam Dahms with Baird. Adam Dahms, your line is open.

Jeff Sloan

Operator, why don’t we go into the next question?

Operator

Your next question comes from Tom McCrohan with Janney.

Tom McCrohan - Janney

All right. Thanks for taking the question. Hi, guys.

Jeff Sloan

Hey, Tom.

Tom McCrohan - Janney

Can you give us your view on how the ISO industry will evolve over the next several years given merchant acquisition, merchant underwriting appears to be migrating quickly through technology providers, either no tablet solution providers, X square and shopkeeper or Integrated Point Of Sale providers such as accelerated PayPros and Mercury?

Jeff Sloan

Tom, it’s Jeff. So, of course, I think you hit the nail on the head. We have, of course, share of that thesis. So the last $850 million of acquisition that we’ve done in the company were in PayPros, APT and CyberSource in that order. And the common thing among the three was technology-enabled distributions with additionally attractive margins. So we obviously share the thrust of what you described.

I think at the other day if you look out three to five years now, Tom, I think that mobility and tablets and integrated solutions are certainly going to be a very big part of what the industry does globally especially here in the United States. But I think there is always going to be a market for traditional ISOs in that business.

I think you are likely to see additional business models evolve over time but the quality of the application matters as much as what tablet device that you are selling. So I think for us and our peers becoming more of a software, I think, would become technology services company today but becoming more of a software provider was important that we have our own proprietary applications to drive acceptance at the point of sale.

I think our business model incorporating not just transactional or basis point fees but also incorporating software-as-a-service type fees as an addition are all very important things for us and our partner than the ISOs to do in our business. But I always think it is going to be a good business for what our ISOs, our 90 active ISOs do today going forward.

Now as David described, I think that will be a very healthy viable business but I do think there maybe impacts around the rates of growth in that business. So to go back to what we described this quarter, prior quarters, where we’re investing, where I sort out the answer is that areas that we think because we are technology enabled has better than market rates of growth.

And I would answer it as that’s where we see the growth, the incremental growth coming from but there will still be growth in the ISO businesses. But I do think that those would be slowing and that’s the fact that you’ve seen in the last three or four quarters as we’ve been describing our ISO business in our earnings calls.

Tom McCrohan - Janney

Okay. I just got a quick follow-up. Could you, Jeff or David, just give a quick update on your relationship or partnership with ShopKeep and how’s that progressing? Thanks.

Jeff Sloan

I’ll talk about that Tom. So we are very pleased about partnership with ShopKeep. We have deployed ShopKeep here in the United States and I’d add beyond that, that we have tablet providers as well as mobile and dongle providers, in some cases our own in many of our markets around the world. So it’s really a U.S. conversation with ShopKeep but its a worldwide conversation as it relates to our own dongle and five markets in Asia and as it relates to our partnerships with Intuit and PayPal mobile for example in the U.K.

So ShopKeep is a very important element of that. We’re selling that through our own website here in the U.S. We are very pleased with how that’s progressing. But to go back to your first question, I think that will be part of this solution but I don’t think that will be the only solution if we look out three to five years in terms of how we distribute our products going forward.

Tom McCrohan - Janney

Thank you.

Jeff Sloan

Sure.

Operator

Your next question comes from Ashwin Shirvaikar. Your line is open.

Ashwin Shirvaikar - Citigroup Incorporated

Thank you. Congratulations guys on the quarter.

David Mangum

Thanks.

Ashwin Shirvaikar - Citigroup Incorporated

And especially appreciate the clarity around Global’s evolving strategy here going forward. You guys provide a lot of qualitative detail on PayPros integration . Could you quantify perhaps what it means in terms of specifics with regards to what should we expect in dollar terms over the next 12 months?

David Mangum

Ashwin, it’s David. It’s hard to be a lot more specific than we’ve been. So let’s start with how we think it’s incrementing into the fourth quarter and than we can speak a little bit more about the characteristics of the asset itself. So we talked about is on the order $25 million of incremental revenue coming in for fourth quarter than we had for the bulk of the quarter.

We talked about it coming in earnings in neutral as we get started owning the asset. That includes the idea of integration expenses offsetting fundamental profitability in the business that operates at a higher margin than Global Payments in total. As we go forward, we expect that margin to increase certainly over the longer-to-medium term. I appreciate you giving the opportunity to give a longer term answer to this question.

Over the course of 50, we have more integration expenses continue to operate the business. You have a double-digit revenue growth at higher margins in Global Payments, again pre the integration conversation and at margins we expect to expand over the next one, two, three years.

So quite frankly yet what we expect is something that performs quite like APT did, come in as a nice grower, enhance the growth and combined the best of the two businesses in the Global Payments, enhance it again and drive incrementally stronger and stronger margins over time. Again -- as Jeff just said moment ago our thesis technology-enabled distribution growing faster than market with sustainable competitive advantage.

Ashwin Shirvaikar - Citigroup Incorporated

Got it. Could you also talk about the outlook for the traction of products like DCC. Can that continue to be a tailwind and what else is added to the pipeline that kick in, sort of, keep adding to that?

David Mangum

Yes. Sure. So maybe building on, Jeff described increasing software applications. Jeff described the tablet applications that may reach other types of merchants over the longer term either directly or via partnerships. You mentioned DCC. It’s a great example. DCC to this day is still not fully rolled out in all of our markets around the world. It’s been very successful, as you well know in Asia. It’s been very successful in Spain. It’s just starting out in North America. It’s just starting out in the United Kingdom for example.

So that’s an opportunity, more installment payment plan is an opportunity. The Web in a box solutions for small-to-medium sized merchants around the world, an opportunity which is rolling out now as you know we have -- we have an uncapped opportunity in e-Commerce, in our own customer base and in our target customer base around the world for small-to-medium sized merchants. And if you would go around market by market, we think there is opportunity in each market for new products, specific to each of those markets.

Finally, I think I might add to that although it’s not a product, certainly given the breadth of our solutions and our scope across Europe, fundamental change, interchanging cost structure of Europe, from an interchange in a regulatory procedures, opportunity for company like ourselves which has the domestic presence but the ability to go cross border as well.

And then as you well know, we see significant growth in our e-Commerce solutions but we’re partnering with other folks like the PayPal around the world. So more and more of that are coming in, other network solutions are coming to market that should create broader acceptance for some of the networks that aren’t Visa and Mastercard over the medium-to-longer term as well. That should be rolled out in the United States, Canada, United Kingdom over the next year or two as well.

Ashwin Shirvaikar - Citigroup Incorporated

And that’s very useful. Thank you.

David Mangum

Thank you.

Operator

We will take the last question from Andrew Jeffrey from SunTrust.

Andrew Jeffrey - SunTrust

Hey guys. Thanks for taking the question. Hey David, I guess, the first one would be housekeeping for you as we think about cash, even margin in North America accounting for PayPros. Do you know what the angle or what the quarterly amortization addback might look like? Have you gotten that far yet?

Jeff Sloan

No , we really haven’t Andrew. In fact, having just closed it, we’re just getting started on what first accounting analysis will look like. So I really don’t have a number for you for that one yet.

Andrew Jeffrey - SunTrust

Okay. But suffice to say, it’s not dilutive to margin anyway, right? You have been pretty clear about that?

David Mangum

We can…

Jeff Sloan

Sure.

David Mangum

…elaborate on cash margin. So on that front, yes. When you add in whatever first accounting is going to be, when you get the GAAP, that’s the part that I can’t answer right now.

Andrew Jeffrey - SunTrust

Right. Okay. And integration, you are going to call that out or is that going to be part of your sort of, just all rolled up into your report as cash segment in the margin?

David Mangum

Yes. Coupled with -- let me draw a distinction because you have raised a really good question. The general sort of T&E and things like that and the odd consulting and things like that, those are the kinds of integration expenses that are going to hold down the incremental cash profitability of PayPros, initially as we go through the integration process. Let me park that for a second, the other side of integration, the severance and those kinds of things that will be called out as one-time charges.

Andrew Jeffrey - SunTrust

Got it. Okay. So, ongoing sort of work its way in your reported results.

Jeff Sloan

Yes. And thanks for allowing me to clarify that.

Andrew Jeffrey - SunTrust

Okay. And then, Jeff, you mentioned in your prepared remarks, [quoting] integrated solutions rest of world, I think what you said was Canada specifically. Could you elaborate on that a little bit, just as far as market structure and whether there are any investments or go-to market changes we’ll have to make to gain traction with integrated or more direct solutions rest of world?

Jeff Sloan

Yes. It’s a great question, Andrew. So we now see here today that we had entered Canada with our APT integrated solutions offering, so the answer to your question narrowly and I will come back more broadly in the thesis is yes. We had to do a fair amount of customization for APT’s product suite for example for EMV, which of course is coming to United States on October 5 of 2015 but already exist today in Canada. We also had to make adjustments to the APT product suite for in RAC, which as you know is specific to Canada and is a big chunk of the Canadian market but that type of debit is very different here in the United States and different in other markets.

So if we go back to the way we described the APT at our last Investor Day in January of 2013, we think and really our business case was predicated at the time around capturing a lot more of the U.S. market and as we said, we believe we were less than 10% penetrated in the revenue opportunity of the U.S. market at the time. We probably also said, they were far less than 10% penetrated of markets outside the United States. Canada being the most obvious adjacent market and was very important to us strategically although not for the business case, but strategically to expand that business outside the United States, because we think we are early in the U.S., but we believe we are very early in markets outside the United States.

So, we’ve had folks selling into the value-added resellers and enterprise software channel in all of our market for probably a couple of years now, including in Canada. So, we know that sales proposition can be very attractive in those markets, but we didn’t have as some of the product suite that we needed to offer world-class products and services into those new territories. So the importance of APT going into Canada is not only, do we already have sales in that market, but now we have something to sell that we think is sufficiently distinctive, that it should drive additional growth revenue and profitability.

So, I know that, our folks at APT and our folks at Canada here at the company are very excited about doing that. We of course are also looking at other markets around the world including Europe, Asia and Latin America to see whether those markets are next now that we’ve brought APT into Canada. So to a certain extent, we are very pleased with how we are doing with APT as you know, but there would be a bit of shame on us if we looked out five years from now and we didn’t take that model and do that everything that we could do given our multi-national footprint outside of our home markets.

Andrew Jeffrey - SunTrust

Okay. Thank you very much.

Jeff Sloan

Thanks, Andrew.

David Mangum

Thanks, Andrew.

Jeff Sloan

Thank you very much, operator and thank you for everyone for dialing into our third quarter earnings call on behalf of Global Payments.

Operator

Ladies and gentlemen, this concludes our conference for today. Thank you for your participation. You may now disconnect.

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