GPN

Business Context and Reporting Period

Company: Global Payments Inc.
Filing Type: Form 10-Q (Unaudited)
Reporting Period: Three months ended August 31, 2008
Business Overview: Global Payments is a high-volume processor of electronic transactions and a provider of consumer money transfer services. The company operates through three segments: North America Merchant Services, International Merchant Services, and Money Transfer. A significant event during this period was the acquisition of a 51% majority interest in HSBC Merchant Services LLP in the United Kingdom on June 30, 2008, for approximately $439 million.

Key Financial Metrics

Note: Debt figures include a new $200 million term loan and $10.6 million in lines of credit outstanding as of August 31, 2008.

Material Changes vs. Prior Period

• Revenue Growth: Revenues increased 30% year-over-year, driven by 16% growth in North America Merchant Services and a 176% surge in International Merchant Services due to the HSBC UK acquisition.
• Profitability: Operating income rose 41% to $93.1 million. Net income increased 32% to $57.5 million.
• Segment Performance:
  • North America: Revenue up 16%; Operating income up 17%.
  • International: Revenue up 176%; Operating income up 297%.
  • Money Transfer: Revenue up 5%; Operating income up 20%.
• Balance Sheet: Total assets increased from $1.45 billion to $1.70 billion, primarily due to goodwill and intangible assets from the HSBC acquisition. Cash decreased by $168 million due to the acquisition outflow, partially offset by financing activities.
• Restructuring: No restructuring charges were recorded in the current quarter, compared to $1.0 million in the prior year.

Guidance, Outlook, and Risks

• Fiscal 2009 Guidance:
  • Revenue: Expected to range from $1.64 billion to $1.68 billion (29% to 32% growth over fiscal 2008).
  • Diluted EPS: Expected to range from $2.37 to $2.45.
• Management Commentary: Growth is attributed to organic expansion in North America and the strategic entry into the UK market. Management noted a favorable foreign currency impact of $8.6 million on revenue and $0.03 on diluted EPS.
• Recent Acquisitions: On September 9, 2008, the company announced an agreement to acquire ZAO United Card Service in Russia for $120 million. On September 4, 2008, the Asia-Pacific subsidiary acquired a merchant acquiring business in the Philippines for $20 million.
• Risks and Contingencies:
  • Redeemable Minority Interests: Significant potential redemption obligations exist for HSBC UK (estimated max $421.4 million, redeemable starting 2013) and HSBC Asia (estimated max $95.6 million, redeemable starting 2011).
  • Market Conditions: Management cited a weakened economy and downturn in the U.S. and Spanish housing markets as negative factors for the Money Transfer segment.
  • Interest Rate Risk: The new $200 million term loan carries a variable interest rate (3.595% at quarter-end, rising to 5.11% by September 30, 2008).

Investor Verification Checklist

• Acquisition Integration: Verify the timeline and cost of integrating HSBC Merchant Services LLP operations and the impact on future operating margins.
• Debt Servicing: Confirm the impact of the new $200 million term loan on future interest expenses, especially given the variable rate structure and recent rate increases.
• Minority Interest Obligations: Review the terms of the "Put Options" held by HSBC UK and HSBC Asia to understand potential future cash outflows for share repurchases.
• Money Transfer Segment: Monitor the trend of branch closures in the U.S. and the impact of the housing market downturn on transaction volumes.
• Deferred Gains: Note the $2.8 million deferred gain on the sale of a 20% interest in Global Payments Credit Services (GPCS) and the conditions required for its recognition.