GPN

Business Context and Reporting Period

Company: Global Payments Inc.
Filing Type: Form 10-Q (Unaudited)
Reporting Period: Three and six months ended November 30, 2008
Business Overview: Global Payments is a high-volume processor of electronic transactions and a provider of 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 June 30, 2008, acquisition of a 51% majority interest in HSBC Merchant Services LLP in the United Kingdom.

Key Financial Metrics

Note: Cash and cash equivalents include $126.7 million in Merchant reserves which are not restricted but are designated for collateral purposes.

Material Changes vs. Prior Period

• Revenue Growth: Revenues increased 30% year-over-year for both the three and six-month periods. This growth was driven primarily by the HSBC UK acquisition (International Merchant Services) and organic growth in North America.
• Profitability: Net income increased 28% for the quarter and 30% for the six-month period. Operating income increased 42% for the quarter and 41% for the six-month period.
• Segment Performance:
  • International Merchant Services: Revenue surged 192% (quarter) and 184% (six months) due to the HSBC UK acquisition.
  • North America Merchant Services: Revenue grew 12% (quarter) and 14% (six months), though average transaction ticket sizes decreased due to economic conditions and a shift toward smaller merchants.
  • Money Transfer: Revenue grew modestly (2% quarter, 4% six months) despite a 15% decrease in domestic transaction volume, offset by higher pricing and branch closures.
• Debt Structure: Total debt increased significantly from $1.5 million to $201.6 million, primarily due to a new $200 million term loan entered into in June 2008 to fund the HSBC acquisition.
• Foreign Currency Impact: Currency fluctuations reduced revenues by $23.3 million for the quarter and $14.8 million for the six-month period.

Guidance, Outlook, and Risks

• Guidance: Management expects fiscal 2009 consolidated revenues to range from $1,550 million to $1,580 million (22-24% growth). Diluted EPS is expected to range from $2.14 to $2.21.
• Economic Outlook: Management anticipates continued declines in average transaction ticket sizes in the U.S. due to a weakened economy and lower consumer spending. This trend is expected to persist for the remainder of the fiscal year.
• Acquisitions: The company announced an agreement to acquire ZAO United Card Service (UCS) in Russia for $109 million, expected to close in the second half of fiscal 2009.
• Risks and Contingencies:
  • Foreign Exchange: Significant exposure to currency fluctuations in the UK, Canada, and Asia-Pacific, with no hedging strategy in place.
  • Consumer Spending: Reduced consumer confidence and spending directly impact transaction volumes and revenue.
  • Redeemable Minority Interests: The company has put options with HSBC Asia and HSBC UK that could require the purchase of minority interests totaling up to $517.3 million in the future.
  • Integration Risk: The company is integrating HSBC UK operations and relies on HSBC for financial reporting data during the transition, which affects internal controls.

Investor Verification Checklist

• Verify the integration progress and financial performance contribution of the HSBC Merchant Services LLP acquisition.
• Monitor the impact of foreign currency exchange rates on future earnings, given the lack of hedging.
• Assess the sustainability of revenue growth in the Money Transfer segment amidst declining transaction volumes and economic downturns in key markets (U.S. and Spain).
• Review the status of the pending $109 million UCS acquisition in Russia and associated regulatory approvals.
• Track the company's ability to service the new $200 million term loan and manage increased interest expenses.
• Confirm the timeline for fulfilling capital contribution requirements for Global Payments Credit Services (GPCS) to recognize the deferred $2.8 million gain.