Global Payments Inc (GPN) — Q4 2017 Earnings Call Transcript

Good morning, and welcome to Global Payments' fourth quarter and fiscal year 2017 conference call. Our call today is scheduled for one hour. 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-KT and any 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 during this call speak only as of the date of this call and we undertake no obligation to update them. Some of the comments made on this call refer to non-GAAP measures such as adjusted net revenue, adjusted net revenue plus network fees, and adjusted earnings per share, which we believe are more reflective of our ongoing performance. For a full reconciliation of these and other non-GAAP financial measures to the most comparable GAAP measure in accordance with SEC regulations, 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. Joining me on the call are Jeff Sloan, CEO; David Mangum, President and COO; and Cameron Bready, Senior Executive Vice President and CFO. Now, I’ll turn the call over to Jeff.

Thanks, Isabel, and thanks, everyone, for joining us this morning. We are pleased with our performance in the fourth quarter and our exceptional results for the year. 2017 was one of our best years ever as a company by nearly any measure. We sustained strong business momentum in the fourth quarter, delivering double-digit normalized organic revenue growth, 170 basis points of margin expansion, and adjusted earnings per share growth of 23%. Each of these results exceeded our expectations as well as the cycle guidance we set forth at our last Investor Day in October 2015. These results were again fueled by continued share gains across our technology-enabled businesses. Our integrated and vertical markets and e-com and omni-solutions businesses maintained their track record of double-digit revenue growth, highlighting consistent, solid execution. We also secured significant wins and achieved substantial milestones across these businesses in the quarter. We are delighted to announce that we have reached an agreement with Gather, a leading hospitality event management SaaS business, owned by Vista Equity Partners, to be its new payments technology partner. This is the second Vista portfolio company to select Global Payments as its partner in as many quarters. And we’re also very pleased to report that our e-com and omni-solutions business grew well into the double digits for the holiday season. For calendar 2017, we delivered the fastest rates of organic revenue growth, margin expansion, and adjusted earnings per share growth in our history. These outstanding results demonstrate the underlying power of our differentiated business model, which we have continued to evolve further into software-driven, vertically fluent solutions globally. With the investments we have made to expand our capabilities in these areas over the past several years, we expect our technology-enabled channels to represent an increasingly larger proportion of our business going forward. We are delighted to announce today an agreement with our longstanding partner, HSBC, to establish a new joint venture in Mexico. This joint venture will provide payment technology services to the fast-growing Mexican market where HSBC has a leading presence and significant merchant base. As we have successfully done with our other partnerships around the world, we intend to leverage our best-in-class technology, products, and sales capabilities to drive accelerated growth. This transaction demonstrates our ongoing commitment to expanding our direct distribution into new, faster growth payments markets globally with attractive fundamentals, further distinguishing us from our peers. We also continue to make substantial strategic investments in our ongoing businesses to provide for future growth and invest in our people while also giving back to our communities. Our capital investment plans reflect increased investment in our next generation worldwide omni-channel platform; the rollout of our U.S. direct sales model to Canada, the United Kingdom, and selected markets in Asia Pacific; further investment in cloud-based delivery models for our core products; and the accelerated rollout of software products like Xenial outside the United States. We also recognize how fortunate we are to be in the position we are in. To that end, as a result of the newly enacted tax reforms here in the United States, we plan to make incremental investments in our people, our technologies, and our communities this year. For example, we plan to accelerate our investments in extending our U.S. direct sales model around the world. We also intend to invest in new career development programs and additional diversity and inclusion efforts for our people worldwide. Finally, we plan to double our charitable contributions to our local communities based on feedback from our employees to benefit those most in need. In the aggregate, these significant initiatives represent a low eight-figure amount of potential investment globally. We look forward to seeing everyone in two weeks at our next investor conference here in Atlanta. We are very excited to share our vision for the Company over the next three years, building on the substantial progress since our last event in 2015. In particular, we will discuss why we believe our model of technology enablement is unique within our industry, demonstrated by the sustained rate of revenue and earnings growth we have delivered since 2015 and expect to continue to produce in the future. Before I turn it over to Cameron, I want to reiterate how delighted I am with the performance of our team worldwide that led us to delivering the best results on record in 2017. And we did this while making the necessary strategic investments in the business that will not only position us well in 2018 but will also allow us to accelerate growth for years to come.

Thanks, Jeff, and good morning, everyone. 2017 was a fantastic year for Global Payments with a number of significant accomplishments to highlight. First, we largely completed integrating Heartland, exceeded our original expense savings expectations, and built a solid foundation for future revenue synergies. We also again successfully refinanced our credit facilities to optimize our capital structure and reduce expense while executing on the deleveraging plan we committed to in connection with the Heartland transaction. And we continue to meaningfully invest in expanding our software-driven, vertically fluent solutions globally, including the acquisition of the communities and sports divisions of ACTIVE Network in the third quarter. Importantly, we accomplished all of this while producing exceptionally strong financial performance throughout the year. Total Company net revenue for 2017 was $3.52 billion, reflecting growth of 24% versus 2016. Normalized organic net revenue growth for the full year was low double digits, a significant achievement for our business. Operating margin in 2017 expanded 120 basis points to 29.9% and adjusted earnings per share increased 26% to $4.01 per share. For the fourth quarter, total Company net revenue was $939 million, a 15% increase over the fourth quarter of 2016. Operating margin expanded 170 basis points to 30.3% and adjusted earnings per share grew 23% to $1.07. North American net revenue was $688 million, reflecting growth of 14%. In the U.S., our direct distribution business delivered 9% normalized organic growth, led by our integrated and vertical markets business while our wholesale business saw a mid-single digit decline. Canada performed in line with expectations in local currency with slightly favorable Canadian foreign currency trends adding modestly to results. Operating margin in North America expanded 90 basis points to 30%. Margin expansion was driven by strong net revenue performance across our U.S. direct channels, in particular our higher-margin, technology-enabled businesses, and the realization of expense synergies from Heartland. As expected, ACTIVE Network slightly diminished margin expansion in North America in the fourth quarter due to the seasonality of the business. We again saw strong performance in Europe with adjusted net revenues growing 17% in the fourth quarter, benefited by several hundred basis points of foreign currency tailwind. Spain again grew double digits in local currency, despite some disruption in the quarter from political unrest in the Catalonia region. We also saw double-digit growth in our Erste JV as we are beginning to bring differentiated solutions to customers across our Central European markets. Our e-commerce and omni-solutions business grew well into the double digits in the quarter as we continue to penetrate the pan-European market. Operating margin in Europe expanded 190 basis points to 47.9%. Our Asia Pacific business continued its strong performance this quarter, reporting net revenue growth of 11%. We saw solid trends across our key markets in Asia, including the Philippines, Singapore, Taiwan, and China. And Ezidebit and eWAY continued to surpass our expectations, once again contributing approximately 20% organic growth in the quarter. Operating margins in Asia expanded 410 basis points to 34.1%, primarily as a result of strong net revenue performance and the benefits of increased scale across the region. Excluding integration costs, we generated free cash flow of approximately $261 million this quarter, bringing our total for the year to $777 million. We define free cash flow as net operating cash flows excluding the impact of settlement assets and obligations, less capital expenditures and distributions to non-controlling interests. Capital expenditures totaled $45 million for the quarter. In terms of leverage, we ended 2017 with gross leverage of approximately 3.9 times, including the incremental debt added to fund the ACTIVE Network acquisition. Excluding this debt, our gross leverage would have been approximately 3.4 times at December 31, 2017, below the target we established when we announced the Heartland acquisition. In addition, as a result of tax reform legislation passed in December, which I will address more thoroughly in a moment, we repatriated in excess of $300 million of cash subsequent to year-end to further reduce debt. Consequently, as of today, our leverage is approximately 3.6 times. As Jeff discussed, today, we announced the definitive agreement to form a 50-50 joint venture with HSBC in Mexico. We are delighted to further build on our long history of partnership with HSBC, this time in Mexico, an attractive growth market with strong secular fundamentals. As a result of the structure for this venture, we will not consolidate its financial results for financial reporting purposes. We expect to finalize formation of the joint venture late in 2018, subject to the receipt of regulatory approvals and satisfaction of customary closing conditions. Before turning to our outlook for 2018, I want to provide an update on two topical items, tax reform and the adoption of ASC 606, the new revenue accounting standard. Starting with tax reform, in Q4 2017, we recorded a net tax benefit of approximately $158 million to reflect the impact of the U.S. Tax Cuts and Jobs Act of 2017 passed on December 22nd. This amount included a $222 million benefit related to the revaluation of our net deferred tax liabilities, based on the new U.S. statutory tax rate of 21%. This benefit was partially offset by an incremental estimated provision of $64 million, associated with the mandatory transition tax imposed by the new tax law on our foreign earnings, not previously subjected to U.S. tax. This transition tax will be paid over the next eight years, on an interest-free basis and results from the conversion of the U.S. federal system to a territorial regime. The significant net benefit associated with the implementation of the new tax law was excluded from our adjusted earnings results for the fourth quarter. In addition to these impacts in Q4, tax reform will also serve to lower our effective tax rate going forward, as a result of the decrease in the U.S. statutory tax rate. The transition to a territorial tax regime in the U.S. should also allow us to manage our global cash resources more efficiently and repatriate foreign source earnings in the future without incurring additional U.S. taxes. As a reminder, Jeff noted earlier, we do plan to reinvest a substantial portion of the benefit of lower statutory taxes in the U.S. back into the business in 2018, and our guidance for the year reflects that expectation. More to come on that in a moment. In terms of the adoption of ASC 606 in 2018, there are three noteworthy impacts to our reporting to highlight. First, under ASC 606, we are required to report GAAP revenues net of fees paid to payment networks rather than gross, with these amounts being reflected as a cost of service, as they have been historically. Secondly, for our gaming business, revenues associated with our cash advance solutions are now required to be reported net of associated commissions paid to casinos. It is worth noting that neither of these changes have any impact on operating income, net income, or earnings per share. Lastly, in addition to these changes in GAAP revenue presentation, under ASC 606, we expect to capitalize slightly more customer acquisition costs than we have historically and we’ll amortize these costs over a longer period of time, which will have a modestly favorable impact on operating income in 2018. For external reporting purposes going forward, we will naturally report GAAP results, reflecting ASC 606, as noted above. For non-GAAP reporting, we will now report an adjusted net revenue plus network fees metric which we believe better reflects how we manage our business and is largely consistent with our historical non-GAAP adjusted net revenue reporting convention, except with respect to the netting of gaming cash advance commissions. In addition, we will report adjusted operating margin, based on the adjusted net revenue plus network fees metrics, which again is largely consistent with our historical reporting convention. With that as a backdrop, I would ask you to reference the slide we have provided to bridge to our outlook for 2018. We are delighted to provide our outlook for the year which reflects a step up in expected growth for our business. We are also providing additional transparency with respect to our North American wholesale business. We expect adjusted net revenue plus network fees to range from $3.88 billion to $3.97 billion, reflecting growth of 12% to 15% over a comparable 2017 amount of $3.45 billion. For the sake of clarity, the netting of casino commissions reduces 2017 reported amounts by approximately $68 million and impacts 2018 by an estimated $73 million. Excluding our North American wholesale business, we expect adjusted net revenue plus network fees to grow 15% to 17% over 2017 results on a comparable basis. We expect adjusted operating margin calculated based on our adjusted net revenue plus network fees metric to expand by up to 110 basis points from our 2017 adjusted operating margin of 30.4% on a comparable basis. Adjusted operating margin expansion includes a net benefit of approximately 20 basis points, resulting from the implementation of ASC 606 success, net of the impact of reinvestment of tax reform benefit as Jeff highlighted earlier. As a result of tax reform, we are forecasting our effective tax rate to be in the range of 22% to 23% for the year, down from approximately 26.5% in 2017. Due to the timing of enactment of this new legislation and the lack of specific U.S. treasury guidance today, there remain a number of uncertainties with respect to the implementation of this new law. Our guidance reflects our best assessment of the impacts on our business, but we will continue to refine this over the coming months. It is worth noting that based on our outlook for 2018 we do not currently expect any limitation to our ability to deduct interest expense from the new tax law. Our total weighted average shares outstanding for the full year is expected to be approximately 160 million. Finally, we expect adjusted earnings per share to range from $4.95 to $5.15, reflecting growth of 23% to 28% over 2017. With respect to the more detailed assumptions that underlie this outlook, we expect North America adjusted net revenue plus network fees to grow low teens in 2018. This reflects normalized growth in our U.S. direct channels of high single to low double digits, partially offset by our wholesale business, which we expect to decline from approximately $175 million in 2017 to a range of approximately $140 million to $145 million in 2018 due to certain wholesale customers converting from direct ISO relationships to indirect, and expected attrition during the year. We expect Canada to grow low single digits in local currency. We expect North America adjusted operating margin to expand for the year as we continue to grow our higher-margin technology-enabled business and realize the final remaining synergies associated with Heartland. In Europe, we expect adjusted net revenue plus network fees on a local currency basis to grow high single digits. We expect favorable foreign currency tailwinds to impact reported growth by a few hundred basis points. Adjusted operating margin in Europe is expected to be flat to slightly up for the year. Asia Pacific is expected to deliver adjusted net revenue plus network fees growth in the low double digits. Adjusted operating margin is expected to expand in 2018, but now that we have achieved margins in Asia approaching the mid-30% level, we are reinvesting more back into the business to sustain growth going forward. We anticipate that we will invest $210 million in capital expenditures in 2018. For purposes of modeling, our outlook for the year assumes we will utilize the majority of our forecasted free cash flow to pay down debt, which will result in leverage of well below three times at the end of the year, which is lower than our targeted leverage ratio. Consequently, we expect to have meaningful capacity to continue to pursue our capital allocation priorities during 2018, including additional acquisitions and partnerships to advance our strategy and capital returns to shareholders. To that end, our Board recently increased our share repurchase authorization to $600 million from approximately $250 million, providing us a great deal of flexibility to return capital to shareholders as appropriate. That said, our outlook for 2018 does not include any future share repurchases. We cannot be more pleased with our performance for 2017 and we remain excited about the momentum we have entering 2018. As our guidance for 2018 suggests, excluding our North American wholesale business, we expect to be able to deliver faster rates of top-line organic growth going forward. In addition, as a result of the substantial progress we have made in evolving our business mix, we believe we can now sustain higher rates of adjusted earnings per share growth in the future as well. Naturally, we will discuss our long-term outlook more extensively at our investor conference here in Atlanta on March 1st. We will look forward to seeing you all there.

Thanks, Cameron. As we look forward to our investor conference next month, it is worth reflecting on just how much our business has evolved over the past several years. At our core, we no longer just deliver simple payments; we are a payments technology company that offers distinctive, defensible, and comprehensive vertical-specific software solutions that help merchants run their businesses more efficiently. And we seek to wrap value-added services around every transaction, further deepening our relationships with our customers. We offer these technologies around the globe in more markets than our peers, in conjunction with a market-leading, unified, and compelling omni-solution. And it is these solutions that underlie our ability to continue to accelerate growth over the next several years. The best is yet to come. Isabel?

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

Great. Good morning, guys. Just wanted to ask, as it relates to the fourth quarter, the 9% growth in the U.S. direct, I think that decelerated just a touch from 3Q. Just wondering if there’s anything to call out there that may have impacted that number?

Hey, George, it’s Cameron. Good morning. I wouldn’t point out anything specific regarding that. It’s mainly rounding on the margin. We rounded up to 10% in Q3 and down to 9% in Q4. We did have one less processing day in Q4 of 2017 compared to Q4 of 2016, which affected the results a bit. However, we guided our business to high single digits, around 7%, 8%, 9%, and we achieved 9% for our direct business. Overall in North America, including the wholesale business, we were at 8%, which aligns with our expectations. We’re pleased with that outcome. Looking ahead to our guidance for 2018, we anticipate a noticeable increase in growth. Our guidance suggests a growth rate of 12% to 15% on a comparable basis for 2018 compared to 2017. This includes normalized organic growth of about 9% to 11%, and if we exclude the wholesale business, it represents normalized organic growth of around 10% to 13%. As we move into 2018, we feel confident about the momentum in our business from an organic growth perspective. The Q4 results were solid and aligned with our expectations, and we’re extremely excited about the potential outcomes in 2018.

George, this is David. Maybe a little bit more color at a level below that. Sales productivity remains high, the momentum is terrific, leadership is executing well, e-commerce growth, weighted double digits in the U.S. All the pieces as an execution matter are going well and set up for the acceleration that Cameron is describing.

Okay. That’s great color, really appreciate that. And then, just as a quick follow-up, I know you guys have been talking about sort of maintaining high single-digit organic growth in Europe. That’s been the target for a while; that’s in the guide for 2018. But, should we be thinking that sort of first half growth in Europe will be stronger than back half, just given the comparisons, or maybe just any sort of cadence you can walk us through there?

Yes. Georgia, it’s Cameron, again. The way to think about it is we guide Europe on a local currency basis, the high single-digit rates of organic growth. Now, obviously, currency tailwinds are going to impact those results as it did in Q4. I think you’re right, as it relates to 2018, I think our current outlook would suggest that European growth on a reported basis would be better in the first half of the year because we do expect more currency tailwinds. Obviously, given the volatility we’re seeing around currency, rates, it’s hard for me to predict with great precision what the back half of the year is going to look like. So, I think your overall thesis is generally right. Overall, we manage that business to local currency growth and we are forecasting for 2018 high single-digit rates of local currency organic growth in Europe.

Thanks. Good morning and congrats on the strong results.

Thank you, Dave.

You saw some very strong operating margin expansion in the December quarter, 190 basis points year-over-year. You’ve been largely in an investment mode in Europe as you kind of work on the Erste JV. How should we think about operating leverage going forward in Europe, especially given the strong organic growth profile that you have?

Dave, it’s Cameron. Let me just talk about the mathematics, and maybe I’ll let Jeff comment a little bit about just the investments we’re making in Europe and how we think about our business. I’d remind you, that business today is margins are in the high 40% range. So, when margins are at that level, I would say we’re not really anticipating a great deal of margin expansion in Europe, going forward. We’d like to be able to maintain stable to slightly up margins in Europe. That is our expectation for that segment. A little bit of what you saw in Q4 was obviously lapping some of the investments that we made in the back half of 2016 as we worked to integrate Erste, as talked about previously. So, that integration is largely behind us. And obviously as a result of that, we produced strong margin expansion in Q4 really on the backs of strong net revenue growth in Europe and again, just lapping those integration benefits in 2017.

Yes. Thanks, Dave, for the question. So, I would say, as we addressed in our prepared comments that we continue to roll out our technology enabled businesses globally. I think Cameron in his remarks commented on the Erste joint venture and the fact that that’s now into double digits. And I think that’s a good template for other businesses, including when we close the HSBC new partnership, which of course will be in Mexico. But, I would say, it’s a few things. We continue to take our technology and bring it overseas, making investments in terms of new products and additional salespeople into markets that we think are faster growth. Erste, clearly in Continental Europe is a good template for that. So, we hope, we will be in Mexico when we look to close that deal later in 2018. So, if you think about our integrated and vertical markets business that we’ve been bringing overseas, you think about our e-com and omni business, which historically had its genesis overseas, those are really resident and accelerating in Europe. The other thing we mentioned, Dave, on our phone call was we’re going to accelerate our investment in additional direct sales, not just here in the United States, but really around the world. We’re very pleased with our existing sales folks globally, but we think there is an ability to take our direct sales model, which as you know, in the case of some of our businesses is mostly or largely commission-based, and to take that model into newer markets. So, as we called out in our commentary, in 2018, we’ll make incremental investments by way of bringing some of those models to markets like the United Kingdom, which is one of those that we highlighted as part of our remarks. You throw that stuff together, Dave, we feel pretty good about our ability to continue to grow those markets at very attractive rates. These are some of the investments we’re making.

Thanks for that. Just as a quick follow-up, Jeff. I’d be curious for your thoughts about how the merchant acceptance footprint in Europe is expanding for electronic payments, especially post-interchange caps; both Visa and Mastercard have called out some expansion recently, especially in Germany?

Yes. Dave, I think you are exactly right and I think you’ve been on this point for quite some time and really rightly so. I think, this started with SEPA, as you just alluded to. And as we’ve talked about before, PSD2 and now GDPR are really kind of upon us. As we said, we think that PSD2 is really directed at financial institutions and really opening up via API, the ability to get broader access into financial institution DDA accounts. As you know, we are not a bank in Europe. The way we go to market, this is like e-commerce and Realex. In Ireland, it is largely through developers and APIs. So, Dave, I think if you combine the cross-border incentives that you’ve seen by lowering of cost through SEPA with the openness that we’ve seen through PSD2, which is now here in 2018, that should be really nothing but good news for our business over the next number of years.

Thank you. I’ll add to the Europe question. Europe you came in a little bit better than what we had. So, I’m curious how healthy is the end market, especially in the UK? I don’t think, Cameron, I heard any UK comments, curious competitively macro-economy wise, how the UK is performing?

Yes. Tien-tsin, this is Cameron. Good morning. I would say, the UK in Q4 performed very much in line with our expectations. It had been for the last couple of quarters, I think, low double-digits on a local currency basis, as we talked about previously. That’s not our expectation for growth in the UK. It was closer to high single digits in this particular quarter with obviously about 800 basis points of currency tailwind benefiting the overall Europe results. And that’s largely driven by the pound and our performance in the UK, so high single-digit performance. I would say retail sales in Q4 in the UK were fairly poor overall and certainly down relative to what we’ve seen over the course of the year. That’s not an uncommon phenomenon in the UK, frankly heading into the winter, even after a strong tourism season this past summer. But I think we would view the overall market as fairly stable. I think we remain very pleased with how our business is performing there. We believe we continue to gain share in the market that’s otherwise growing probably in the low single-digit rate. We’re growing at least at high single digits in that market, and that’s our expectation going into 2018 as well. So, I think our franchise is well-positioned. To that comments Jeff made earlier, I think we’re bringing new technology, more differentiated solutions to that market that are helping us to gain share. And I think we remain very well poised to continue to grow that business at that targeted high-single-digit rates going into 2018 and beyond.

Yes. Tien-tsin, it’s Jeff. I would say what we saw in the fourth quarter in the UK in terms of retail sales is very similar to what we saw in the fourth quarter of 2016. I think it’s very similar to what Visa said about their experience with retail sales in the UK in the December time period. Nonetheless, we think we’re growing at least 4 times the rate of market growth, currently in the UK. I’d chop that up to a few things. First, I think, like most of the rest of the world, we really target the SMB customers. So, while we have a national business across all of the United Kingdom, we make most of our money and certainly most of our revenue and our pretax from SMB. And obviously, we’re very selective by way of vertical market in terms of which SMB areas that we’re in. I think you can see that reflect in the sustained market share gains that we’re seeing around the world, but in particular, in light of your question, in the United Kingdom. The second thing, as I mentioned a few minutes ago in light of David Togut’s comments, we continue to make investments in Europe, but for these purposes in the United Kingdom. More sales, we talk about expanding our direct sales footprint in Europe, including the United Kingdom. The UK was one of the early markets, next to Canada that we brought our integrated and vertical markets from the U.S. into, over the last number of years. And to be candid, Europe and in particular the UK is where our e-com and omni business also targeted at SMB and cross-border multinationals really is also domiciled in addition to Ireland and Spain. So, I think, Tien-tsin, you’re seeing a continued share gain in Europe and in UK on our side, really driven by the way we go to market, the investments we made, and of course I’ve given away a little bit of the story in a couple of weeks and more to come in the Investor Day. But, I think it’s a continuation of the trend that you’ve seen over the last number of years.

Got it. It’s great to see. This is my quick follow-up, I know, just on the U.S. direct, I know we all split hairs over high single versus low double-digit growth, but what is the swing factor that’s maybe under your control to get you to that low double? Because, I know you are running above market. So, to get to low double, what needs to happen under your control?

Yes, Tien-tsin. I believe we are already on that path. As Cameron mentioned, as we move into 2018, our expectations for our U.S. direct business are set at high single digits to low double digits. This is likely the highest growth guidance we've provided for this business during my eight years with the Company. To address the broader context of your question, I genuinely think we are already achieving this. The reason for this accelerated growth compared to the past stems from our investments in distribution and technology over recent years. In fact, we've invested approximately $7 billion over the last five years, primarily through M&A and technology. The U.S., representing nearly three-quarters of the Company, stands as the primary beneficiary of these investments. You'll receive further details in a couple of weeks regarding our business mix. As I mentioned in our prepared remarks, we continue to anticipate a shift in our mix towards our technology-enabled businesses as a larger share of the Company going forward. This is indicative of what is, without a doubt, the fastest rate of organic revenue guidance we have ever shared for 2018.

Tien-tsin, this is David. Maybe to add a little more color to that, I like phrase sort of splitting hairs over this. What we see in the business is really building momentum. We have the sales force that we will expect to add on the order of 200 plus net new sales folks this coming year, all increasingly selling technology-enabled, software-driven solutions. So, we’re not selling bricks on countertops. And again, I don’t want to get too far than two weeks from now, but we’re selling solutions to customers that drive uniquely low merchant attrition rates, drive higher growth, obviously stickier solutions. All that’s built into the kind of growth numbers that Cameron and Jeff are describing. The execution level is very high. So, rather than split hairs over sequential this and sequential that, we’re growing faster than anybody in the market here at the end.

Thanks, guys. Good morning. I might have missed it, but can you just give us a number for the ACTIVE Network contribution? I know, last quarter you gave it to us, I think it was $14 million and 2 points. So, I just want to have that as a comparison reference.

Yes. It was around the midpoint of the range that we had provided to you previously, going into the quarter, Dan, which was 40 to 45.

Okay. Regarding the positive mix shift, could you provide a breakdown of the contribution within North America in terms of percentage mix? You mentioned that wholesale is declining by 20%. I would like to understand more about the dynamics driving that conversion from direct to indirect, and specifically how this contributes to the positive mix shift. We have one aspect with wholesale, but it would be helpful to have insights on the other two components as well. Thank you.

Yes. We've provided the wholesale figures for North America. For Canada, I believe you're aware that it generates just over $300 million annually in U.S. dollar revenue; the rest comes from our direct business in the U.S. It's fairly straightforward. The U.S. direct business combines our integrated and vertical markets, which we aim for low double-digit growth in that channel. The remaining portion comes from our traditional direct sales force, which is increasingly focused on technology-enabled, software-driven solutions. This segment targets high single to low double-digit growth. Overall, we anticipate a North American business, excluding wholesale, poised to grow at high single-digit or low double-digit rates as we enter 2018, which exceeds our historical expectations for this business.

I’d also say, Dan, that regarding your question about the ISOs, there are a few key points. First, for several years, as you’ve heard from us, we’ve had ISOs convert from ISO-related contracts to selling technologies to what we refer to as indirect customers, who purchase our technologies at wholesale prices. So, part of the anticipated decline is due to the ongoing mix shift among existing ISO customers, as they transition to our direct customer base as indirect customers, and that trend is continuing. Secondly, while I believe we will always have a component of the ISO business within Global Payments, I want to emphasize that we are increasingly not bringing on new ISOs as customers. When contracts expire with current ISOs, we often choose not to renew them. Therefore, Dan, it’s really a combination of transitioning from one type of customer to another, which affects our revenue, and this has been occurring over time, along with our focus on direct distribution, where we have invested $7 billion in acquiring new accounts.

Thank you. Good morning. I just wanted to ask a question. In the press release, you talked about raising growth target, given your business mix and more of your technology solutions and investments. And Cameron referenced it as well. Certainly, clearly you’re going to talk about it more at the Analyst event. But could you just give a little bit more color on what you are thinking and why you’re sort of confident in that, and what do you sort of mean by raising growth targets?

Sure, Glenn, this is Cameron. I’ll start off. As you mentioned, we are being cautious about getting ahead of ourselves regarding the March 1st Investor Day. We want to ensure you have every reason to attend, just joking. As we've outlined in our script and discussions today, this is reflected in our guidance for 2018. Considering the success we've had in shifting our business mix over the past several years, we are continuing to emphasize technology-enabled and software-driven solutions, as well as our accomplishments in e-commerce and omni-channel efforts globally. We are increasingly leveraging our sales force to sell these differentiated product offerings, while at the same time, our wholesale business continues to decline as a portion of the overall company. We believe we are positioned to raise our expectations for organic growth on a top-line basis moving forward. Historically, since the merger with Heartland in 2015, our growth has been in the high single digits, averaging around 7 to 9 percent. Clearly, we anticipate that number will reach 15, but we still think it will settle around 7, 8, or 9. We will provide further details at the investor conference in a couple of weeks. Additionally, regarding our business excluding the wholesale segment, we plan to phase that out over time. As Jeff mentioned, we're not signing new ISOs and typically do not renew them when their terms expire. Some ISOs are increasingly shifting from direct to indirect relationships with us, which will further reduce this segment. So, when we examine the business we are managing, it largely excludes the ISO wholesale channel in North America. We believe the investments we've made will position us for higher rates of organic growth beyond the historical 7, 8, or 9 percent. Including the ISO business, we expect to drive sustained growth in adjusted earnings per share above our historical targets, which have been in the mid-teens range. While we’re not aiming for 25 percent annual earnings growth, we believe we can consistently deliver adjusted earnings per share growth above the mid-teen level moving forward, which presents an attractive opportunity for investors. We see our ability to maintain and compound adjusted earnings per share growth at a high teens level as a promising opportunity for this business as we look ahead to 2018 and beyond. As you noted earlier, we will share much more at the investor conference. We feel our guidance for 2018 provides a clear sense of where we see this business heading over time, and we look forward to sharing additional details in the coming weeks.

Yes. Glenn, it’s Jeff. I would just add on to that. I know there is a bunch of moving with the ASC implementation and everything else. I think, there is very good schedule that Cameron’s team posted on our website about apples-to-apples comparisons. Cameron hit it head-on. This is the fastest rate of organic revenue growth for 2018 that we’ve guided to you collectively since this group has been here by way of revenue and the like. That is not an accident and well above the 7 to 9, for those purposes of actually including the ISOs within it and well above the 7 to 9 number that we talked back in our last cycle guide, historically. I think Cameron said in his prepared remarks, including the ISO business reflect 9 to 11 on an organic basis, the rest being ACTIVE to get you 12 to 14. So, I think you put that together Glenn, you look at 9 to 11 revenue guide organically for 2018 on a model historically that we told you the 7 to 9, having just finished the year what was low double digits, as I said in the introductory and my comments in the press release, it makes us feel pretty good about where we’re heading.

That’s very helpful. So, my follow-up question maybe for Jeff would be the JV with HSBC. Just a little bit more color around that? What do they bring to the table, how much do you pay to buy into the JV, any other help you could give us in terms of sizing it?

So, Glenn, I will start and ask David to comment a little bit more of the detail of the market in Mexico. So, first, we’re delighted to announce the entry of Mexico. For a long time, of course, we viewed ourselves by the name of Global, as a global company. Yet sitting here in the United States, we were not in all of North America. So, Mexico, going back to Paul’s days, was always a target for us. And we couldn’t be more pleased to have HSBC as our long-term partner. I think they’ve been a partner for us in various forms for half a century, which is how old our Company is through 2017, so yet another partnership following on the heels with HSBC in the United Kingdom, in Asia Pacific and now in Mexico. The other thing I’ll say is that it’s a two-partnership and that is 50-50. We’re both extremely excited about the growth opportunities of the market in Mexico where we have a significant presence. And as a result, we’re going to share the upside and opportunities as equal partners together. David, do you want to go through some of the details?

Yes, happy to. I think it starts, Glenn, with what Jeff said, which is we’re just thrilled to partner with HSBC around the world. This puts us in something on the order of 15 markets around the world where we partner with HSBC. And as you know from our Asia and our UK results, it’s been nothing but wildly successful for the last, I won’t say the 50 years, because I haven’t been around for all those, at least the last kind of 11 or so, you can count from the original Asia deal the Company did back in 2006. So, we think that partnership, that marriage of Global Payments and HSBC, in a market like Mexico where you’ve got 125 million folks in the population, nominal GDP is what 12th or 15th in the world, something along those lines, high growth GDP, and a partner where we know how to work and partner together, this is a great partner that got sort of the fifth largest branch presence on the order of 1,000 in major economic areas, your Guadalajaras, your Monterreys as well as Mexico City itself, lots of ATMs, lots of regional presence, really good business banking and small business franchise, which as you know is core to what we do around the world. So, we love the presence, like the pieces of it, a nice SME merchant presence already which we can grow. So, all those pieces are there. What we plan to do is go apply our U.S. direct sales methodology, U.S. direct sales methods and techniques to the Mexican market. There is nice electronic payments growth, currently not a ton of credit card penetration but nice debit card penetration. So, pretty good model for what we like to do with HSBC, go chase small and medium business, go do it with our U.S. sales model, married to the partnership with HSBC. We’re pretty excited about.

And Glenn, just on your last comment, our investment in the joint venture is going to be less than $50 million. So, it’s a relatively nominal investment for us to have the opportunity and to partner with HSBC. To David’s point, we’ve been very successful with them over the course of a very long period of time in a market that we think has very attractive secular fundamentals going forward. So, we couldn’t be more pleased to be entering that market in the way that we’re doing it.

I appreciate the forward commentary; you guys are obviously receiving very good, which is great to hear. At your last Investor Day, you rooted your growth rate to the economic cycle kind of calling up a single as a mid-cycle. What I’m hearing now is not so much a reference to the economic cycle and more about company-specific positioning. So, is that the correct conclusion? Am I hearing that right? And if so, one of the big things you’ve done obviously is the integrated in vertical. Can you kind of root the conclusion that you’re reaching to the relative opportunity penetration into new markets and things like that, I mean for integrated?

Ashwin, it's Jeff. That's a very good question. To take a step back, at a broad level, we continue to pursue GDP growth. As David mentioned regarding the opportunities in Mexico, we always assess the demographics and economic data of a market before entering. Mexico is no exception. Healthy, growing economies are crucial for our business and for companies like Visa, Mastercard, and PayPal. You asked a perceptive question about how we view the vertical markets we are targeting. You are correct in your observation. Most of the vertical markets we are investing in, such as dental, veterinary, K-12, and universities, have become somewhat insulated from the macroeconomic environment compared to our last Investor Day in 2015. Our integrated and vertical markets business is now approximately $1.2 billion in size, and much of this is in markets that are less sensitive to global economic growth rates, such as schools, universities, dental care, and healthcare. However, similar to Visa and Mastercard, it is essential for us to operate in a healthy economy. For the first time in recent years, all the markets we operate in globally have been experiencing growth, which was not the case for certain regions like parts of China, Brazil, and Russia earlier. Undoubtedly, we have benefited from this trend. Furthermore, the shift towards a software model, the SaaS model, and vertical markets that mainly rely on card-present transactions, while having less exposure to big box stores and specialty apparel, are critical for the sustainability of our business. As Cameron indicated in response to Glenn's question about the economic cycle, our investments and the changes in our business mix give us confidence in providing our most optimistic revenue growth outlook for 2018, even as we are now seven or eight years into an expanding economy in the United States, which constitutes three-quarters of our business.

Ashwin, this is David. I think what you’re also hearing is increasing confidence, given our execution at being able to globalize the solutions Jeff described. Our revenue synergy tracker alone this year where we did deliver over 50 basis points of growth that we talked about, and we’re on track for the over 100 basis points of growth for 2018, all fuels this increase. And we’re selling the software solutions we own in markets around the world, great track record there. We already know about the globalizing of integrated payments, increasing these more and more enriched solutions with analytics and other services on top, again, uniquely globalizing those types of things.

Got it. Thank you for that. So, I guess, look to be hearing more about that on Investor Day. Quick follow-up is back on that synergy comment that you had. Does that take into account any pricing impact? How are you thinking about the pricing in the Heartland client base?

Yes. Ashwin, it really doesn’t align with our traditional approach to pricing. To clarify, we have not implemented any broad-based repricing of Heartland, which has been consistent since 2015. We have spoken about charging appropriately for the value we are creating. This means that when we introduce new analytics and data products, they should be priced competitively. Additionally, when existing customer relationships reach the end of their initial contractual terms, we will consider the market conditions at that time. It’s important to note that we have not made these adjustments at Heartland, whether in the fourth quarter of 2017 or since our partnership began in April 2016. Therefore, these elements have not been reflected in the results you’ve seen. Moving forward, we certainly plan to manage our pricing strategy more closely to market trends and will make the necessary adjustments for contracts that are maturing, which have not yet happened.

Yes. So, I have I guess just two numbers questions. The first one being if we exclude tax reform, it seems like that’s maybe a 5% to 6% EPS benefit, so core EPS 18% to 22%, in that ballpark. Is that kind of what you are thinking?

I think you’re pretty close there, Dave. I would put it right around 20, at the midpoint.

Okay. So, nicely above cycle guidance?

That’s right.

I would say nicely above current cycle guidance, Dave.

Got you. Okay, great. And I guess, secondly, your free cash flow conversion in a group of great free cash flow across FinTech, yours is like way above anybody else, a 125% of adjusted net income. Is that sustainable? Maybe not at that level, but above earnings, is that sustainable?

Yes, I think it is. I mean, we feel very good about our ability to convert obviously EBITDA into free cash flow of the business, and I think 2017 is evidence of that. I think if we look at 2018 and beyond, I think we remain very confident in our ability to continue to convert it at a fairly high pace. As our CapEx guidance suggests for 2018, we are reinvesting a fair amount back into the business. Our guide is $210 million off of I think an actual of around 185 for 2017. So, we continue to invest in the business. And I think that’s a very important thing to highlight. We’re not producing these results by virtue of starving the business. We’re investing in technology, we’re investing in solutions, we’re globalizing these solutions, we’re globalizing unique distribution capabilities. We’re doing all this at a time when we’re still producing exceptionally strong financial results, investing in the business for future growth. And I think that’s a big part of what underlies our confidence and the ability to grow the business at the level that we’re forecasting going into 2018 and beyond. If you take our 2018 guide even at the midpoint and you overlay that, a little bit of a commentary you heard today around cycle guidance or adjusted earnings per share growth going forward, it’s not hard to see something close to or at maybe 6 in 2019. As a reminder, we did 3.19 for 2016. So, almost 90% growth over a three-year period; that’s pretty attractive compounded earnings growth for a business of this nature. I don’t know anybody else with a similar characteristic business putting out that type of growth.

Jeff, I’m really encouraged to see the growth you’re achieving, particularly in Europe. Could you explain how Europe’s development around ISV and omni compares to the U.S.? Specifically, considering that the U.S. seems more mature since ISVs have been established for a longer time. How does Europe stack up in comparison, and how much longer do you expect this impressive growth to continue over the next few years?

Great question, Andrew. So, what I would say is, I typically think that Europe is really just being in a first inning of ISV, VAR penetration. The size of those economies, the maturity of technology in Europe as well as in Asia for that matter really puts it at the very beginning of the game. The way I could think about it, Andrew, is if Global Payments were a public company on the FTSE, we’re probably one of the two or three largest technology companies listed in the United Kingdom. I think we’re doing great here, but we’re somewhere in the S&P 500, and it’s probably not in the top 100. And that gives you a sense of size by way of market value as to how those two markets compare. So, I would say we’re in the first inning. I think we’ve been in ISV VAR land in Europe. I think we’ve been successful in taking our integrated and vertical markets businesses from the United States, we’re a net exporter of those businesses into Canada and then into the UK and into Europe. The e-com and omni businesses have already been domiciled there historically because of common purchasing area that you see in the EU, even though there are different countries pre and post SEPA. But we’re very early on there. By way of comparison, I’d say the U.S., maybe we’re in the fifth inning of ISV VAR land. And I would also say that our ability to continue growth in the United States, I said this in my prepared remarks, but another double-digit organic revenue performance in integrated and vertical markets, the vast majority of which is here in the United States in the fourth quarter. And as Cameron said for our guide, obviously, we expect to continue to try to guide to the low to mid-teens organic numbers for 2018 when the U.S. is three quarters of the company, of course, that’s where it’s coming from. But I would say, here in the United States, it’s a little different and answer to your question is the only software model. So, I think where we’ve been distinctive and we’ll talk about this on March 1st is, with great market share gains, call it 2x the rate plus of market growth in our partner model. But now the own, the whole vertical stack of opportunities in the United States and we’ll look to export that, Andrew, not just to Europe, but also to Asia. In fact, I think as David has mentioned, bringing our Campus Solutions, TouchNet into the United Kingdom where we have a very large share of universities are ready, it’s something we’ve done, bringing our Xenial restaurant hospitality business into the cloud from the United States into Europe, it’s something that we have been doing and have done. So, I think we have the ability by way of some of the owned assets to really catalyze, Andrew, a bit of growth in Europe. I think there is no denying that we’re probably in the first inning in Europe with where that technology stuff is, yet we’re still growing at 4x the rate of market growth today.

Okay. That’s great detailed answer. And just a quick follow-up, can you comment a little bit on the cadence perhaps of just the wins? Is it one a quarter; is this how we should expect going forward?

Yes. Andrew, it’s Cameron. I don’t know that I would put a particular sort of targeted cadence around those opportunities. I think, as we indicated when we announced that arrangement back in our second quarter earnings call, we feel very good about the portfolio of companies that they have. We feel obviously encouraged about our ability to continue to provide differentiated technology-enabled payment solutions to those businesses. And we think we have a nice pipeline building with them. But again, we feel as if we have to earn every one of those opportunities. Every arrangement is a unique arrangement with one of their portfolio companies. I think we have the right cadence around how we’re approaching those conversations. But I don’t want to put a particular target as to how we’re going to continue to build on the successes we’ve seen over the last couple of quarters. Obviously, it would be nice to do at least one a quarter, but our focus is really on making sure we can demonstrate a value proposition to those companies that works for them and making sure we’re doing it on economic terms that work for us. And I think we’ll continue to have a lot of success with that.

On behalf of Global Payments, thank you very much for your interest in joining our call this morning. And we look forward to seeing everyone in Atlanta at our next Investor Day on March 1st.