10-QPeriod: Q3 FY2006

GLOBAL PAYMENTS INC Quarterly Report for Q3 Ended Aug 31, 2006

Filed October 6, 2006For Securities:GPN

Summary

Global Payments Inc. (GPN) reported solid financial results for the quarter ended August 31, 2006, demonstrating significant year-over-year growth. Revenue increased by 16% to $260.3 million, driven by robust performance in both its Merchant Services and Money Transfer segments. Net income saw a substantial increase of 35% to $41.5 million, translating to diluted earnings per share of $0.51, up from $0.38 in the prior year. The company's operating margin also improved to 24.4%, reflecting effective cost management and revenue growth. The acquisition of a majority stake in HSBC's Asia-Pacific merchant acquiring business, completed in July 2006, is expected to contribute to future growth. Key drivers for the strong performance include expansion in North American direct merchant services and international money transfer operations. While the company faces ongoing competition and pricing pressures in certain channels, its strategic initiatives, including geographic expansion and operational efficiencies, appear to be yielding positive results. Investors should note the impact of new accounting standards for share-based compensation and the successful integration of recent acquisitions.

Key Highlights

  • 1Revenue increased 16% year-over-year to $260.3 million, driven by strong performance in both Merchant Services and Money Transfer segments.
  • 2Net income grew 35% to $41.5 million, with diluted earnings per share rising to $0.51 from $0.38 in the prior year.
  • 3Operating margin improved to 24.4% from 22.5%, indicating effective cost management and revenue leverage.
  • 4Merchant Services revenue increased 16% to $227.3 million, with operating income up 30% and margins improving to 32% from 29%.
  • 5Money Transfer segment revenue grew 18% to $32.99 million, though operating margin slightly decreased to 14% from 16%.
  • 6Completed acquisition of a 56% ownership interest in HSBC's Asia-Pacific merchant acquiring business on July 24, 2006, adding new geographic reach.
  • 7Adoption of FAS 123R for share-based compensation led to an increase in Sales, General, and Administrative expenses, but the overall impact on net income was managed.

Frequently Asked Questions

Revenue growth was primarily driven by increases in the company's domestic direct merchant services offerings and its money transfer segment. Expansion in North America and international markets, along with the early contribution from the HSBC Asia-Pacific acquisition, also played a significant role.

The acquisition was completed on July 24, 2006, and its operating results are included from that date. It contributed $5.486 million in revenue during the quarter and is expected to be a key driver of future growth in the Asia-Pacific region. While it had a dilutive effect on the merchant services operating margin in the short term, it is expected to be non-dilutive to earnings per share.

The adoption of FAS 123R, effective June 1, 2006, has increased the reported Sales, General, and Administrative expenses due to the recognition of share-based compensation costs. For the three months ended August 31, 2006, $4.9 million in share-based compensation costs were recognized, with $4.0 million specifically related to employee stock options. This accounting change did not materially impact reported net income or basic EPS but shifted the classification of some cash flows related to stock options from operating to financing activities.

The company generated $22.4 million in net cash from operating activities, though this was a decrease from the prior year due to working capital changes, particularly in settlement processing assets and obligations, prepaid expenses, and income taxes payable. Investing activities used $74.1 million, largely due to the HSBC acquisition. Financing activities provided $2.8 million. The company believes its cash on hand and borrowing capacity are sufficient for its foreseeable needs, with plans to potentially renew or replace its US Credit Facility.