10-QPeriod: Q3 FY2007

GLOBAL PAYMENTS INC Quarterly Report for Q3 Ended Aug 31, 2007

Filed October 4, 2007For Securities:GPN

Summary

Global Payments Inc. reported a solid 19% increase in revenue for the three months ended August 31, 2007, reaching $311.0 million, primarily driven by growth in its domestic direct and Asia-Pacific merchant services channels. While consolidated operating income saw a modest increase to $66.2 million, the company experienced a slight dip in its consolidated operating margin to 21.3% from 24.4% in the prior year. Net income grew by 5% to $43.6 million, with diluted earnings per share rising to $0.53 from $0.51. The company's merchant services segment demonstrated robust revenue growth of 21%, but its operating margin decreased due to channel mix shifts and expansion in the Asia-Pacific region. The money transfer segment, however, faced revenue growth challenges (6%) and a significant decline in operating income (20%) and margin, attributed to increased price competition and operational model costs. Investors will note the significant share repurchase activity, with $67.9 million spent in the quarter under a $100 million authorization, signaling a commitment to returning capital to shareholders.

Key Highlights

  • 1Total revenues increased 19% to $311.0 million in the three months ended August 31, 2007, driven by domestic direct and Asia-Pacific merchant services.
  • 2Merchant services segment revenue grew 21% to $276.0 million, though operating margins for this segment declined to 27.6% from 32.1%.
  • 3Money transfer segment revenue increased 6% to $35.0 million, but operating income decreased 20% to $3.7 million, with margins falling to 10.6%.
  • 4Consolidated operating income rose 4% to $66.2 million, but the operating margin compressed to 21.3% from 24.4%.
  • 5Net income increased 5% to $43.6 million, leading to diluted EPS of $0.53, up from $0.51 in the prior year.
  • 6The company repurchased 1,821,320 shares of common stock for $67.9 million during the quarter under a $100 million share repurchase program.
  • 7Operating cash flow significantly increased to $38.1 million from $22.4 million, primarily due to favorable working capital changes.

Frequently Asked Questions

The primary drivers of revenue growth for the three months ended August 31, 2007, were the company's domestic direct merchant services channel and its Asia-Pacific merchant services channel. The domestic direct channel saw a 24% revenue increase driven by a 30% growth in processed credit and debit card transactions.

The operating margin for the merchant services segment decreased from 32.1% to 27.6% due to a shift in the sales channel mix towards the ISO channel, which generally has a lower margin, and the ongoing integration and growth of the newly acquired Asia-Pacific merchant services business, which also has a dilutive effect on the overall margin.

The money transfer segment experienced a 20% decrease in operating income and a decline in its operating margin. This is attributed to increased price competition, a strategy of price leadership leading to lower revenue per transaction, and the costs associated with a fixed-cost, branch-owned model at the point of sale. Additionally, factors like increased immigration enforcement, a downturn in the US housing market, and an improving Mexican economy may be reducing customer volumes.

The company generates significant liquidity from operations, with cash and cash equivalents totaling $270.5 million as of August 31, 2007. Operating cash flow increased substantially due to working capital improvements. Global Payments also has a $350 million unsecured revolving credit facility and a Canadian credit facility for working capital and strategic acquisitions. The company actively repurchased shares under a $100 million program and has a cash flow strategy focused on debt repayment, capital investments, acquisitions, dividends, and share repurchases.