Ladies and gentlemen, thank you for standing by, and welcome to Global Payments 2018 Second Quarter Earnings Conference Call. At this time, all participants are in a listen only mode. Later, we will open the lines for questions and answers. And as a reminder, today's conference will be recorded. At this time, I would now like to turn the conference over to your host, Vice President, Investor Relations, Winnie Smith.
Please go ahead.
Good morning, and welcome to Global Payments' 2nd quarter 2018 conference call. Before we begin, I'd like to remind you that some of 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 ks 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 refer to non GAAP measures such as adjusted net revenue, adjusted net revenue plus network fees, adjusted operating margins and adjusted earnings per share, which we believe reflective of our ongoing performance. For a full reconciliation of these and other non GAAP financial measures to the most comparable GAAP measures in accordance with SEC regulations, please see our press release furnished as an exhibit to our Form 8 ks filed this morning and our trended 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 Sloane, CEO David Mangum, President and COO and Cameron Brady, Senior Executive Vice President and CFO. Now, I'll turn the call over to Jeff.
Thanks, Whitney, and thanks, everyone, for joining us this morning. We are pleased to report another quarter of outstanding operational and financial performance, resulting in the best start to a year since we began running the company nearly 5 years ago. In sum, we generated double digit organic revenue growth, expanded adjusted operating margin by 160 basis points and delivered adjusted earnings per share growth of 37% in the 2nd quarter. Each of these metrics represents an acceleration from exceptional first quarter results. We are also delighted to announce today that we have entered into an agreement to purchase AdvancedMD, a leading provider of cloud based software as a service or SaaS solutions to small to medium sized physician practices in the United States.
With this transaction, we are further expanding our technology enabled software driven strategy toward the 60% target we established at our Investor Day in March. AdvancedMD or AMD will provide us with direct entry into a new $9,000,000,000 target addressable market for software, benefiting from strong secular tailwinds. The small to medium sized physician healthcare software market is highly fragmented and AdvancedMD is an industry leader at roughly twice the size of its nearest cloud competitor. AMD is also one of the only companies in the industry that provides users with an end to end platform encompassing practice management, electronic health records and patient engagement solutions, all delivered on a single instance multi tenant architecture. As a reminder, we currently have exposure to tens of thousands of dentists and veterinarians through our OpenEdge business.
AMD will add direct relationships with 33,000 physicians and 11,000 small and medium sized practice groups across more than 100 ambulatory specialties in the United States. In addition, we have successfully demonstrated the nexus between payments and software in this market as AMD is an existing OpenEdge partner. We currently capture approximately 20% of AMD's roughly $3,000,000,000 annual payments volume opportunity and expect to be able to penetrate this base more rapidly going forward. With increasing consumerism in healthcare, in particular in Ambulatory Specialties core to AMD's business, we see a large and growing payments opportunity that we are now better positioned to capture. Further, we expect to generate synergies from this transaction by leveraging our domestic distribution assets and consolidation of logical corporate functions.
With the acquisition of AdvancedMD, in combination with our investment in active network last year in our pre existing education, university, restaurant and hospitality businesses, our annual software revenue represent roughly 15% of our total revenue. This solidifies Global Payments' position as the market leader in technology enabled software driven payments. In addition to new investments, we continue to make progress on the other two legs to our growth strategy, expanding our worldwide omni channel capabilities and increasing our exposure to faster growth markets. We saw ongoing strength in our worldwide e commerce and omni solutions business in the Q2, which grew in the high teens year over year, further progressing toward a 20% revenue contribution target we set for 2020. As we discussed at our investor conference, our focus in this business is largely on SMB customers and much of our growth stems from enabling e commerce or omni channel solutions within a given domestic market or cross border.
In addition, our unique capabilities in hard to serve markets for large multinational corporations also continues to drive significant wins, including 2 signature luxury retailers recently. More to come on this in our Q3 report. And finally, we remain well positioned in faster growing markets and are accelerating sales efforts as we expand our distribution and leverage our best in class technology and products into new geographies. Together with our partners at CaixaBank, our joint venture with Erste Bank in Central Europe realized strong double digit growth in the second quarter as we continue to bring differentiated solutions including e commerce to highly attractive underpenetrated markets. We are also making progress on our pending joint venture with HSBC in Mexico, having received European Union regulatory approval this quarter and still expect to close before year end.
Our businesses in Asia led by EasyDebit in Integrated and Vertical Markets and eWay in e Commerce continued their track record of exceptional growth. While successfully executing on the key pillars of our growth strategy, we also continue to wrap more value around transactions to provide customers what they want and need to operate their businesses more effectively. To that end, we have now launched our Xenial premium file based analytics product in the United States, Canada and the United Kingdom. Beyond standard reporting, we are now able to provide restaurants with customer analytics, sales trends, competitive insights, social media management tools and email marketing solutions. We will continue to enrich this platform with additional data elements and features to enable our customers to create and manage a broad range of digital advertising activities.
We are excited about the solid progress we have already made on the multi year framework we outlined in March. Consistent execution of this strategy produced terrific results for the first half of twenty eighteen, we are well positioned to realize our longer term goals through further investments in technology enabled, software driven businesses like AdvancedMD. With that, I'll turn the call over to Cameron.
Thanks, Jeff, and good morning, everyone. We are very pleased to report another quarter of strong financial results. Our ongoing solid execution and differentiated growth strategy continue to manifest themselves in exceptional financial performance. Total company adjusted net revenue plus network fees for the Q2 was $982,000,000 reflecting growth of 18% versus the prior year period, once again driven by double digit normalized organic growth. Adjusted operating margin expanded 160 basis points to 31.4 percent and adjusted earnings per share increased 37% to $1.29 We are proud of these results and remain encouraged by the momentum in the business throughout the first half of twenty eighteen.
Importantly, we delivered this strong performance while simultaneously executing on our strategy to expand our software driven payments thesis through the agreement to acquire AdvancedMD. I will provide more details on this transaction in a moment, but let me first highlight the terrific performance our team delivered globally this quarter. Starting with North America, adjusted net revenue plus network fees was $719,000,000 reflecting growth of 18%. Adjusted operating margin expanded 190 basis points to 32.4%, driven by our higher margin technology enabled businesses and the addition of Active Network. In the U.
S, our direct distribution businesses again delivered low double digit normalized organic growth, accelerating from the previous quarter, while we saw low double digit declines in our wholesale business, consistent with our expectations. Our Canadian business again grew in line with our expectations in local currency and foreign exchange rates had a modestly favorable impact to overall driven by double digit organic growth in local currency. This result was well ahead of the market, reflecting ongoing strength and execution and share gains. Spain remained a bright spot with local currency growth in the mid teens for the quarter. Likewise, our joint venture with Erste Bank delivered high teens local currency growth on the back of a good macroeconomic environment, strong secular trends and solid execution.
In the UK, we delivered high single digit organic growth, which was consistent with the Q1 despite what continues to be a challenging macro environment. Results in the UK were again driven by transaction and volume growth as we gain additional market share. Lastly, our ecom and omni solutions business grew high teen as our unique value proposition continued to resonate in the Pan European market. Adjusted operating margin in Europe expanded 2 10 basis points to 47.4 percent, driven primarily by the strong top line performance. Our Asia Pacific business also delivered another quarter of mid teens organic growth, consistent with Q1 results.
We saw solid trends across our key markets, including Hong Kong, the Philippines and Taiwan, and EZ debit and eWAY once again contributed meaningfully to growth in the region. Adjusted operating margin in Asia expanded 130 basis points to 31.5%. The solid operating performance we delivered this quarter in combination with disciplined reinvestment in the business allowed us to generate adjusted free cash flow of $158,000,000 excluding acquisition and integration costs, up 22% year over year despite a 35% increase in capital investments. Our capital expenditures totaled $59,000,000 and largely consisted of investments to support the development of new product and technology solutions and further enhance our operating platforms. During the quarter, we also repurchased roughly 1,600,000 shares for a total of approximately $180,000,000 In late June, we completed the refinancing of our corporate credit facilities, reducing the interest rate spread by 25 basis points.
The amendment also increased our revolver capacity by $250,000,000 to $1,500,000,000 In addition to improving our liquidity position and extending the maturity of our facilities, the refinancing also yields meaningful annual interest expense benefits. When combined with the amendment to our Term 1B announced in March, we expect to realize $5,000,000 to $6,000,000 of interest expense savings annually, net of additional anticipated expense associated with future interest rate hedging activities. This benefit will also help offset the impact of rising underlying rates. At the end of the second quarter, our gross leverage was 3.3x. As Jeff discussed, this morning we announced a definitive agreement to acquire AdvancedMD, a leading provider of enterprise software solutions to small to medium sized physician practices for $700,000,000 We expect to finance the transaction using cash on hand in our existing credit facility with pro form a leverage increasing modestly to approximately 3.8x as a result.
We are targeting closing the transaction in the 4th quarter. Moving to our outlook, the momentum in our business that allowed us to exceed our expectations in the first half of the year positions us well to achieve our financial targets for the full year. We are however facing some incremental pressure from foreign currency and now anticipate FX being a headwind in the 3rd and 4th quarters. That said, we expect the strong underlying trends we are seeing in the business offset this impact. We continue to expect adjusted net revenue plus network fees to range from $3,901,000,000 to $3,975,000,000 reflecting growth of 13% to 15% over 2017.
This outlook reflects the negative impact of roughly $35,000,000 of foreign currency headwinds relative to our expectations when we last guided in early May. Adjusted operating margin is forecasted to expand by up to 120 basis points. Pressure from rising interest rates should be largely offset by our refinancing activities and we expect net interest in the 3rd and 4th quarters to be roughly consistent with the 2nd quarter prior to factoring in the additional debt we will incur to finance the AdvancedMD transaction. Additionally, we are adjusting our effective tax rate forecast for the full year to be roughly 20% to 21%. The reduction in this estimate is driven by further refinement of the impacts of tax reform on our business as well as the incremental benefits we expect to realize as we restructure our international organization to optimize our tax position under the new U.
S. Regime. Lastly, we now expect adjusted earnings per share in the range of $5.05 to $5.20 reflecting growth of 26 percent to 30% over 2017. This outlook reflects approximately $0.10 per share of negative impact from foreign currency headwinds relative to our last update in early May. Our updated full year guidance does not include any impact from the pending acquisition of AdvancedMD, which we expect to be immaterial to adjusted earnings per share in 2018.
I will close by reiterating how pleased we are with our performance in the Q2 and thus far in 2018. The continued execution of our strategy positions us well to achieve our financial expectations as we deliver differentiated solutions for our customers and drive superior results for our shareholders. With that, I'll now turn the call back over to Chad.
Thanks, Cameron. We have a consistent track record of strong execution and exceeding our own expectations, and the Q2 was no exception. The pending acquisition we announced today represents another investment to expand our software prowess in a key vertical market. AdvancedMD will accelerate the evolution of our business mix and further positions Global Payments as the leader in technology enabled, software driven payments globally. This investment will provide additional catalyst for continued market share gains in the months years to come.
I'll now turn the call back to her.
Before we begin our question and answer session, I'd like to ask everyone to limit their questions to 1 with one follow-up to accommodate everyone in the queue. Thank you. Operator, we will now go to questions. Thank
Thank you. And our first question comes from the line of George Mihalos with Cowen and Company. Your line is open.
Great. Good morning, guys, and congrats on another strong quarter. I wanted to start off, if we look at the North America business, specifically in the U. S, it looks like your direct business again accelerated a little bit from the Q1. Wonder if you could talk a little bit about the drivers for that and how should we be thinking about that going forward?
If I'm not mistaken, the comps are a touch easier in the back half of the year relative to the first half.
Hey, George, it's Cameron. Good morning. So a couple of comments, I would guess, as it relates to the Q2 performance versus the Q3 performance. We did see some acceleration in our U. S.
Direct business. We're obviously delighted with that, probably upwards of about a point, I think, between Q1 and Q2, largely driven by our integrated vertical markets business. Our direct distribution relationship led channel was pretty consistent Q1 to Q2 and in that high single digit range. It was really our integrated vertical markets business that accelerated slightly from Q1 to Q2 to grow, again, the overall acceleration in the U. S.
Direct business. As we look to the back half of the year, as we talked to you guys before, we managed business, the high single to low double digit rates of organic growth. I think our guide would suggest that we expect to be in that range as we get into the back half of the year. You'll recall or you are recalling I think directly Q3 last year because that would have been a hurricane impact in the business. I don't know if that's dramatic enough to call out as making it a significantly easier comp, quite frankly.
But I think as we look towards the back half the year again, we feel very confident in the ability to continue to grow that channel on the high single digit base we have been now for the last probably 6 to 8 quarters.
And George, it's David. Maybe a little bit more color just from a performance standpoint. We are very happy with where the businesses have started the year. As Cameron pointed out, the vertical markets businesses are off to a very strong start. That includes particularly integrated payments of the OpenEdge business, our education businesses in both schools and universities, so TouchNet and School Solutions are really well ahead at the start of the year.
On the core sort of sales question, interestingly enough, we're really happy with where we are from a sales perspective across the United States, North America, actually the world for that matter. I'll come back to that in
just a second. But sales across the board
are in very good shape. We're off to a good start in core sales and the direct book, which is what Ken was describing earlier as sort of the direct non vertical markets. Had a couple of different record months over the course of the last 6 months. Really very happy with the sales there, really happy with sales in open engine vertical markets. Canada sales are ahead and actually Asia and Europe sales are ahead as we start the year.
So as Cameron just said in the kind of the core prepared remarks, we really have a very fantastic year.
Great. Nice to see the momentum. And then I guess, Jeff, the AdvancedMD acquisition, anything you guys are able to share around the growth rate that you would expect there, revenue contribution, EBITDA, anything that can kind of help us think through the business financially? And again, congrats on the quarter.
Thanks, George. It's Jeff. I'll start and I'll ask Cameron to add some of the financial color that you just asked about. So we're delighted to announce a partnership with AdvancedMD. As you know, in our technology enabled channels, we target low double digit growth organically for those businesses.
So clearly Cameron will give you more color. But needless to say, we're looking at markets that are large. In the case of health care, we talked about your physician practice management business, the small to midsized physicians in the United States being a $9,000,000,000 target addressable market, highly fragmented, where I think we said in our prepared remarks are twice the size of the nearest cloud competitor. We also like the fact that they're already in payments, particularly with us. They're not going to be a partner for what we do.
I think we said we have 20% of their payment stream, which we size currently today at $3,000,000,000 annually of volume. You may remember we now back to the network a year ago, that was also about $3,000,000,000 annually of payments volume at the time. So we step back and look at some of the largest addressable vertical markets, which is really our focus and our specialty here in the United States. We certainly think that health care by definition is kind of one of them. And we especially think that the small to midsize physician practice management business in particular with the payments overlay, a business we are already in, in the case of partnered software, is very attractive for its own software assets for the reasons that we mentioned.
Kevin, do you want to comment in the financial question?
Yes, George. Again, I think Jeff talked about the growth rate of the business. We do view this as a low double digit growing business, very consistent with the rest of our integrated and vertical market businesses. And that would be our expectation going forward. So at that level, we would view it as accretive to the overall rate of growth of global payments, which I think is important as well.
For 2018, we were expected to do probably around $125 ish million of revenue, again growing at low double digits into 2019. So that would be our expectation as we work through the business in 2019. From an EBITDA margin standpoint, this is a business that is still scaling. I think it's Jeff kind of characterized in his commentary, I think as we look at the business, obviously coming into Global Payments as we get to 2019, we'll give you more color as we head into the year to what we think the implications would be. It is a business that we think will be accretive to margins as we get out a little bit further in time for Global Payments as it relates to 2019 and may moderate our margin expansion a little bit as we further scale the business, leverage distribution to drive faster rates of growth in the business.
But overall, a very attractive financial profile is one that we think obviously is going to be accretive to growth, accretive to margins for Global Payments over time.
Thank you. Our next question will come from the line of Glenn Greene with Oppenheimer. Your line is open.
Thank you. Good morning. Good results again.
Good morning.
Yes, just want to follow-up on the AdvanceMD, maybe a little bit more color. Just trying to better understand a little bit, it sounds like their market share based on that $125,000,000 is still very, very low in a pretty big market. But wanted to understand that the payments component, is it just the 20% tie in with OpenEdge or do they have their own component? And where can you take that 20% of their payments volume today?
Yes, Glenn, it's David. I'll start with the other guys chime in as well. What you just described in the beginning of your question is exactly what we like about the market. Highly fragmented, we're buying the number one competitor in the small and medium space by a long shot, much larger than its cloud based competitors, I've just said twice the size of the nearest cloud base, but also a market full of legacy traditional providers who are on prem with more limited software capabilities. So a great opportunity, but it's a very strong direct sales model that we have.
Obviously, we look to that almost primarily our first one performing due diligence on a deal. So we're really happy with the pieces and the opportunity of the market. Fragment is what
we like. The fact that they're the largest but small, that seems
like a really good thing to me as we think about the future of the business and the low double digit growth that Cameron and Jeff Davich described. So really happy with those pieces as a payments matter. There are kind of a couple of components to payments, maybe 2 or 3. Fundamentally, it's the one you mentioned, which is openings. So we have about 20% of their payments volume.
That means there's 80% to address that's going to a different card provider for a copay fundamental at its simplest level. I don't know why that number isn't really, really a lot higher just by the next year or 2. We'll focus together in joint sales as one of our key revenue synergies to drive that payments penetration to OpenEdge integrated payment to 30%, 40%, 50% over the coming years. No reason that can't happen, no reason that can't happen particularly when we're 1 company together. We'll talk with 2 companies as you There are also some payments around bill payments and electronic billing and payment that happened at the back end on behalf of physicians.
Nice little payments opportunity there. It's something we're good at when you link this terrific rhythm software platform. Again, the only cloud based single platform that's available in the market itself to the painting process. So really good payment fundamentals. And as you well know, we want to wrap value around the painting.
Paint, meaning technology, meaning software, it's a perfect fit for our software driven technology enabled strategy.
Thanks. That was very comprehensive, David. Follow-up question would be the Europe strength in the quarter seemed to accelerate as well. I heard some of the comments, but I was surprised that the U. K.
Strength and sounds like Erste is doing really well. Just a little bit more color on the Europe strength and the organic growth there.
Yes, Glen, it's Jeff. I'll start and I'll ask Cameron to add some more of the financial and data related details. So I would say it's really just a continuation of the trend. We've made, as you know, over the last number of years, very significant investments in our technology footprint globally, but for these purposes in your question, particularly into Europe. One of the things that we One of the things that we called out was our integrated vertical markets business in Europe as well as our e comm and omni solutions business, the primary market for which for us for these purposes is really Europe, particularly in the European Union, post SEPA and PSD2 and the like.
So very attractive target market for us. We kind of called out a couple of significant wins in the quarter. We don't want to spend too much time on that because we do intend to spend a lot of time on the Q3 call going through an update as we do annually on our e comm and omni business. But I would say a continuation of the trend, Glenn, which is to say why we invested so significantly over the years in ecom, omni, in our businesses, but especially here in Europe. Why do we enter faster growth markets?
Because we think that those are attractive, but we also think we can layer on top of those our leading edge technology. And in fact, we call that e comm and new products in the case of VersaBank and Continental Europe. So I would say, Glenn, I view the quarter very much as a confirmation, probably over the last number of quarters of trending. And probably most pleasing in the United Kingdom, as Tamar mentioned in his comments, the notwithstanding macro headwinds, which is in FX, same store sales, retail, GDP growth, notwithstanding that, we still saw very consistent volume and transaction growth trends in the second quarter that we saw in the first. Again, I think that's a tribute to our team there, but particularly a further validation of the investments in moving technology and in targeting in those markets.
I think Cameron called this out, but a lot of it undoubtedly given the macro backdrop is pure and simple market share gains. And I think we've been saying that for the last number of quarters.
Yes, Camaron. I'll just add a couple of comments. If you look at Q1 to Q2, what about the acceleration as we talked about before was in the e comm and omni business and the artistic banking. Those are the 2 things that stand out to me. On e comm and omni, I think Jeff described kind of how we're positioned strategically very well.
And obviously, we're seeing that manifest itself in nice rates of organic growth in that channel over the course of the first half of really 2018, but even Q2. First of JV, I think it's really a function of you're seeing now the value of having them migrated onto our platforms, our ability now to sell products and solutions into those markets that are very distinctive relative to what traditional acquirers in the Czech Republic or maybe Slovakia are able to deliver is very powerful and obviously that's driving a very attractive way to organic growth in that business. So we're delighted with that performance and it really speaks to, I think in a microcosm, the value of managing our business on a semiconductor platform, globally our ability to distribute products and solutions ubiquitously across the markets that are very differentiated.
Okay, great. Thanks.
Thanks, Glenn.
Thank you. Our next question will come from the line of David Togut with Evercore ISI. Your line is open.
Good morning. Nice to see the acceleration in organic growth.
Thanks, David. Thanks, David.
The UK results were particularly strong, given the broad payment trends we're seeing in that market. Could you comment a bit on what you're seeing in terms of Open Banking? UK is really the first of the broad European markets to adopt consumer ACH payments and open banking. So I'd be curious if, A, if you're seeing any traction from some of those initiatives?
Hey, David, it's Jeff. I'll start. So what I would say is the fastest growing piece of our UK business really is debit and particularly contactless debit. So we certainly have seen a very meaningful acceleration in use of that, particularly in places like in transit. So for lower ticket item, the ability for consumers to use different forms of payment.
There as you know, David, it's a little bit less about using your phone and a little bit more for consumers about just taking out their wallets and putting on top of the NFC receptor. So contactless is something that Visa, Mastercard, the networks talk a lot about here in the United States, but that time is already funded in Europe, in the United Kingdom and to a certain extent in Asia. That's really not a new trend. I'd say that the last number of quarters, we've seen very substantial acceleration of our debit businesses in the UK. And I think the clearest example of that is consumer usage in places like the 2.
I know that the networks are hopeful, but that can be extrapolated to other markets like the United States, but the UK is probably the market leader in that type of product.
Understood. And then congrats on Xenial. I'm just curious how is Xenial positioned against Square for Restaurants, which just rolled out as well? I mean, if you look at the feature functionality, what are the main differences and how the product is positioned in the market?
Yes, sure, David. This is David. A couple of distinctions maybe around the answer. The Xyngular we're describing today was actually a set of analytics products that we're really excited about rolling out in Canada, the UK, and you already rolled out in the U. S.
At the end of the year. As a restaurant matter, we're very comfortable with our restaurant positioning. And in the enterprise class, which I think is your direct question,
with Xenial, with the rest of
our software products, we have a combination of terrific technology, extensive and scalable software solutions for high volume customers. It includes multiple stations, different payment solutions, multi currency, flexible pricing, all the things you need to run and operate, just as you'd expect because we've been in this business for years. There are no surprises there whatsoever. We can uniquely combine that with high volume payment, reporting and analytics. So very happy with where we sit there.
We're also, I would
tell you, very comfortable with
the price points against the competition and that sort of higher end of the market. So it's a very large target market. Me and others can unseat some pretty nice traditional competitors at the high end of the market. Let me pause for a second and take it back a little bit further. To start with, sales are running ahead in the United States, but we actually think of the point very well.
We actually don't see Square in a lot of sales situations, quite frankly. For most of their business, they're serving smaller customer. Our market is going to be a little bit higher than that. And again, as I said a moment ago, as you head toward the higher end of the bank card volume, where you really do linking the software with XENIO, we're really, really comfortable with our solution. And fundamentally, we have a big advantage when it comes to servicing our relationship.
Remember, I talk a lot about building local and meaningful relationships with customers. The higher you get, the more technology you enable, the more the relationships going to matter, we believe. We sell on that, And we think the competition is more limited in that regard. And then you can sort of fundamentally, I'd say we haven't seen us lose business to Square. So high end of the market, very comfortable with technology, really glad you asked the question.
Low end of the market, we don't play that well. We play the middle to upper end, and we're very comfortable with our sales results today.
Thanks so much. Extremely helpful.
Thanks, David. Thank you.
And our next question will come from the line of Shirvaikar with Citi. Your line is open.
Thank you. Hi, Jeff. I can tell. So good results and the acquisition seems consistent with the strategy you guys laid out. So congratulations on that.
Two questions and I'll ask both of them at once. The first one is the margin performance year to date is pretty solid. And I guess the question is why not take up the outlook? Is there an offsetting set of incremental investments that you guys continue to make? Obviously, there is a pricing opportunity as well.
So can you talk, I guess, first of all, about the margin performance and the ability to take up outlook? And then the second thing is, clearly from a macro standpoint, a lot of worrying headlines, tariffs, trade war, Brexit, things like that. How do you factor that into guidance, if you could broadly talk about that given your global trends? Thanks.
Thanks, Ashwin. This is Jeff. I'm going to start actually with your second question. I appreciate asking the 2 upfront, so we can kind of categorize it and our side about it accordingly. So I'll start with the second question on the macro and then I'll ask Cameron to talk about what's embedded in our outlook.
So the short answer to what you asked about the macro is no, we have not seen impact on the tariff stuff and the trade discussions. I would tell you the most important driver of our business, as we said over time, is the health of the consumer, the rates of GDP growth. Obviously, the U.
S. Shift has had a
very high GDP print the other day. And I would say this is probably in the quarter in our view as to where we are today. It's a continuation of the trend really kind of globally in terms of the expansion of GDP. I would say from a macro point of view and this will dovetail with what Cameron's going to describe, the only difference now versus the last time we spoke on our last earnings call is probably the FX, the foreign currency related environment. But I would tell you that from my point of view today, the consumer remains extremely healthy and we have yet to see any impact to our business from the questions asked.
Cameron, you want to talk about the outlook?
Yes. Ashwin, that's a probably good jumping off point for the outlook around margins, which is a really good question. So what I would say is, 1st of all, we're delighted obviously with the margin performance between kind of year to date of 150 basis points year over year for the first half relative to last year's performance. As we look to the back half of the year, there's a couple of things I would call out. The first is what the FX is obviously based on our outlook for currency, as I mentioned in my prepared remarks, we see FX being a headwind in the back half of the year.
So it's going to be a headwind to revenue, headwind to EPS, but also a headwind to margin. So as I look at the margin guide today, there's probably at least 20 bps of FX headwind in that margin guide relative to where we were back in May. So I think that's probably the first important point to call out. The second is, and we said this kind of coming into the year, with tax reform, we are taking that opportunity to invest in the business And some of those investments will ramp as we work through the year. So as we get into the back half, some of that opportunity to reinvest back into the business is obviously ramping up and that will I think put a little pressure on margin expansion relative to what we
saw in the first half of
the year. But obviously still for the year, very healthy margin expansion, well above our stated sort of guide on a cycle basis for margin expansion for the business.
And to me, that's a
really good thing because one of the things I'm most proud about, I think we're most proud about is the ability to generate the type of consistent financial performance we have while still meaningfully investing in the business you've got to do for growth. So we're not starving the business for capital. We're not starving the business for investment. We're investing in the future while also obviously delivering on the promise we have in the
business today. So that's I think that's
a very good thing and we're always balancing the level of investment in the business with obviously our desire to continually expand margins in the business over time.
Got it. Thank you for that. I'll catch up with you on the 10 am follow-up as well. Thanks.
Thanks, Adam.
Our next question comes from the line of Darrin Peller with Wolfe Research.
Let me start off just on your strategy, hey, around IPAWS building out internationally and kind of any updates around that. Obviously, it's doing it's outperforming in the U. S. For a long time now. So just curious to hear how that's going in the UK and Canada and maybe what the competitive dynamics are there?
Yes, Darren, David here. I'll start. So actually very happy with the steady rollouts of IFAW. I would actually maybe broaden it a little bit, make it more of a technology answer. Integrated payments are a core part of what we're selling now in Canada and the U.
K. The combination of integrated and semi integrated solution is certainly helping with the above market performance. You've seen us post in Canada and the UK and across Europe for the last several quarters, as Tanner particularly commented a little while ago. When you think of iPods specifically, we've got a much broader XENIO rollout going on as the speakers will talk about in other settings. We mentioned analytics today, which is rolled out to Canada and the UK.
But beyond that, we're rolling out restaurant functionality over the course of 2018 2019, particularly full rollout in 2019 in Spain, later in 2018 in Canada, 19 in the UK, all those processes are continuing to pace, as is our full rollout to QSR table service in enterprise in the United States over the course of 2018. We'll combine that with Xeno Gif, analytics and other reporting products. So right now, we have the ability to sell analytics on top of what you might think of as sort of non iPaaS payment technology in Canada, UK and Spain. We have analytics with Ipaas in U. S, Canada and U.
K. And rolling out more and more Western markets.
I'd add that, Darren, to what David said that we've also been successful in rolling out our university product, TouchNet, to markets outside of the United States. It's not just software based solution, including the e comm and omni businesses. We're selling a lot of technology too, which we called out, but I know we'll spend more time on in the Q3. And then my last point, I want to overlook Australia. As I mentioned in my prepared remarks, New Zealand and Asia Pacific with our EV debit, our integrated vertical markets in Australia and New Zealand and our e way e commerce products.
Those continue at very healthy rates of revenue represented in many years after we consummate those partnerships. So I would say that Dave is right, focused specifically on iPods. But I think more generally outside the United States, our ability to take the integrated broker market, technology enabled software assets into a multinational environment. We're seeing the fruits of that in those results today.
Okay. That's really helpful, guys. Just one quick follow-up. When we look at the pricing opportunity in the U. S, maybe just quick comment on where you still feel like you are maybe coming out of Heartland.
And then kind of on the U. K. Side, just considering the U. K. Market regulatory headlines around pricing in that industry, I mean, I'd just be curious to hear your thoughts.
It sounds like you guys are pretty transparent in your pricing model, interchange plus, but any thoughts on the impact of the this could have or may or may not have going forward?
Yes. Darren, David again, and I'll let Jeff take on the U. K. Situation. I'll talk about a little bit the United States.
So we believe we have an enormous amount of remaining economic value opportunity in the United States. It comes really from the service we offer, and we're still in the middle. We're matching economics to where we create value. So we're not inventing junkies and things like that. In fact, what we're looking at is saying, we provide this world class service on industry leading infrastructure, high quality reporting compliance, high touch customer service.
So let's take a look at whether or not we're pricing for that service appropriately. And I'll be historically priced for that service appropriately. So we started, you'll recall from a year or more ago, by better aligning our new sales economics and tools
with the level of service we provide.
Now we have the ability to go back through the services we provide and find folks who maybe aren't meeting contractual obligations, find folks who are sort of in long term below market conditions and kind of ratably and progressively make sure we address those things and that's the infrastructure. So again, not a broad based approach to junk fees, more specifically targeting the match of economic value to more of providing service value. So we're rolling that through. In doing that in that measured fashion, I'd tell you we've got a long runway ahead of us in terms of being able to provide more and more economic value, more and more economic returns on top of just the services we sell and the accelerating sales results we've got in the first place.
I'd add to what David said, Darren, your second question that the UK has been historically, is today and I expect to be going forward an intensely competitive market. You've had a number of not just existing competitive market entrants and new market entrants. In fact, over the last number of years, iSettle, Adient, you've got a less square of people who've entered the UK market. So the first thing I'd say is, it's always been competitive. Our markets are generally competitive.
But for these purposes, the UK has been intensely competitive and I expect it to remain that way and to legacy competitors there too like Worldpay and Farpoint. And that looks like perspective, pro form a for the AMD announcement this morning, the UK is roughly 8% of our revenue. But nonetheless, an intensely competitive market, I don't expect that to change. The second thing I'd say is for years, we've been Interchange Plus pricing in the UK, which means changes in interchange get passed further, that's what Interchange Plus means, to all sizes of merchants, small, medium and large. 3rd, I think you touched on this, we're highly transparent in our pricing and billing.
I think as you know, in some markets like in Canada, we're actually a bank and regulated as such. Obviously, the context of what we do is highly regulated by folks like the Financial Conduct Authority in the United Kingdom and of course Visa and Mastercard generally most markets have their own set of rules about transparency and pricing. Given our bank background in markets like the UK, given the fact that we are a bank in certain markets like Canada and we're a direct number of Visa and MasterCard in all of our markets, particularly in the United Kingdom for these purposes, we're very transparent and the market is highly competitive. Lastly, I'd say there is a lot of switching in places of merchants in places like the U. K.
In that market, you tend to see 15% to 25% term rates, the vast majority of which is people choosing different providers tends to see attractiveness for new people like Square Eye Dental, etcetera, adding to kind of come into that market. So I would say sitting here today and given how we operate, we really don't expect it to have any kind of material impact to our business. I think we just answered someone else's question this morning about the products and services we brought into that marketplace. I think David's philosophy that we just expressed on how we add value to transactions here in the United States applies to the U. S.
And our other markets, which is to say that we try to charge fairly for the products and services that we're delivering to make investments along those lines. So we feel good about where we are, and I don't see that really changing anything for
us. Thank you. And our next question comes from Tim Willi with Wells Fargo. Your line is open.
Hi, thank you and good morning. I had one question, I guess, around technology in the back office and operations. So you talked a lot about the technology strategy on the front end and driving revenue and product. Could you just talk about what you're doing with data, machine learning behind the scenes that may be driving or at some point will help to drive additional margin expansion as you improve and streamline not just a top line driven revenue margin story, but maybe more on the backside?
Yes, Tim, it's David. I'll start and let the other guys sign in because we're all touching pieces of the telephone around the enterprise run. It's actually a fantastic question because we think about it in the same way. The very same back office tools that allow us to stage data to roll out analytics products like the union products we described earlier that the ability to kind
of roll out these solutions
that we give you, and pay part sales
and that led merchants have been set
to new and repeat customers and drive campaigns and then social media. All that same data is sitting in leverageable for other use as other tools that saves the data. So whether that's the ability of our finance folks to help us with forecast and analysis opportunities for improving the enterprise. But more importantly, and maybe more specifically than margin, we're directly margin more important, so we're not, It's the ability to actually be better at the way we serve customers. We do try and differentiate, as you well know, on service and on high touch.
So Gus, these tools are really right in the sweet spot of our strategy going forward the next couple of years. So we think about the combination of AI, sort of artificial intelligence from our products. We are employing that. As we speak, we've got a lot of stuff in data, in specific business units, actually in the university. We actually have a robot that answers questions right now and directs calls.
David from Spain, I can't remember his name off the top of my head, but regardless, we are using everyday AI to augment analytics and help us drive the enterprise further and to your point, drive margin over time. So as an example, we've got prototypes out for intelligent layer on top of analytics to help us with decision making. We are using in the call centers already natural language processing, machine learning, answer questions. Again, you may or may not want to talk to a human, but you do want quick service and you want the answer right away. To the extent we can make that a better experience, we're going after that.
The applications including a voice enabled assistance, accelerated processing, we do have some testing of automated resolution customer queries. Pause for one second. Financial services remain the land of exception management. At the end of the day, all the coolest software in the world still doesn't work perfectly all the time across communication vendors, local Internet providers and things like that, so you've got to manage reception. You've also got to enable more self-service for chargebacks, payment managing, even fast recon, that's our reconciliation to unused charging and transactions.
So using AI and analytics for that, boosting our productivity, boosting our ability to turn folks to more value added activities like building products and selling instead of answering questions. So actually we're pretty intrigued right here from my tone. The more of this we invest, the more excited we get about the opportunity to scale at the back end and do what Cameron described earlier, put money back into that front end revenue producing, customer touching side of
the business. So let's start to
talk a little bit more about it going forward, maybe not in the next couple of quarters as we go forward.
Great. And then I just had a follow-up on AMD. I want to
make sure I understand it. I missed some of the earlier comments, I apologize. But is the primary payment flow of AMD the consumer payment to the physician or are you also touching the payment or the possibility to touch the payment from the insurance provider back to the health system or the physician?
Yes. So, Jim, the absolute primary piece of the payment is think of it as the co pay. It's fundamental to consumer checking out, which you'll recall is the core business we enable in OpenEdge. When you check out, we automatically update patient records and scheduling, send off the forms, the claims, the signals of this world, etcetera. There is an element of billing and payment opportunity at the back end that's further down the road that we're pretty interested about.
And given my history, you might imagine I'm a little interested in that payment flow as well. But the core of this is what we know really, really well, the OpenEdge card processing payment flow.
Well. And Tim, it's Cameron. I'll add just a couple of comments. One thing we haven't really touched on as it relates to AdvancedMD is they're really focused on ambulatory practices. So these are outpatient and they're also focused on those specialties where there's more consumerism in healthcare.
So as we think about the opportunity, obviously there's an existing base of payment that we can further penetrate. But longer term, we're going to be more and more in specialties where there will be an increasing amount of consumer oriented payments relative to insurance billings and whatnot as it relates to healthcare payments going forward. So that's part of the attractiveness of the business from our standpoint. So as we look at it from, again, a financial profile standpoint, that's why we're confident, obviously, with the ability to continue to drive that low double digit rate of organic growth in the business going forward, why we see the business as being accretive from an EPS standpoint in 2019 and going forward. All of that, it creates a very nice backdrop for a financial profile for A and D that we think is highly attractive for us.
Great. Thank you very much. That's all I had. Thanks, Tim.
Thank you. Our next question comes from Andrew Jeffrey with SunTrust. Your line is open.
Hey, good morning. Thank you for taking the question. I wanted to follow-up on David Togut's question a little bit around Xenial and restaurants and David Mangum very much appreciate the color competitively. One of the things that I think has come up a lot and it came up yesterday on Square's call too is self-service onboarding and I think that surprised a lot of people from a scalability standpoint and I appreciate the high customer touch and the nature of the customer. But could you comment a little bit on whether or not that's a trend that you're seeing in your business and something you might want to pursue going forward?
Sure. Happy to, Andrew. It is something we want to pursue. It's actually something we've already pursued. So that exists.
I don't know that I think of that as a massive trend fundamentally changing the market at all. Faster onboarding, the ability to be transacting right away are all just the kinds of services that we all need to offer. I recognize that many traditional competitors in the space can't offer that. But no, the idea of being able to get on board immediately, maybe even come back and do the underwriting a little bit later, yes, absolutely exists. It's something we enable as well.
Market by market around the world. We're working hard to get better and better. That's in the States, part of our competitive differentiation. When I say by touch, by service, It doesn't mean you're not applying technology, not boarding quickly, not enabling transactions immediately, not settling batches the 1st night and bring reports back. It means, hey, I know my customers well.
I know and I speak the restaurant language, the hospitality language, the physician language, in case of AMD, the university language. It's being able to be more and more vertically fluent, speak the language of your customer and provide them that kind of relationship and service. It by no means is a replacement for having to be right on the cutting edge of technology as well.
Okay. Yes, I appreciate you elaborating on that. And Jeff, I might ask, perhaps you can expound a little bit on some of the competitive comments in Europe, particularly around sort of the next gen e comm acquirers. Are you did I understand you in your prepared remarks to say that you think global thrives because it's more of a specialized player, hard to reach markets, domestic e comm. Is that the right way to think about the competitive differentiation at least today in Europe and perhaps APAC?
So Andrew, it's a great question. I think if you go back a little bit to what we described in the March Investor Day where we had a bunch of slides and what we thought how the market was stratified and how we compete. I would say if you look at that, we really compete 2 ways in our e comm and omni business. The first thing is our core, as it always is, is SMB. So, Adient, for example, tossed out this in their prospectus that the top 10 customers, I think, are a third of the business and those are all e comm only.
If you think about us by way of based on what they said. But the way we go to market SMB is our core. Those are generally omni, meaning virtual, they're both e comm as well as physical acceptance and in particular in Europe, as I described in response to David Togut's question, across a number of geographies across the European Union. So when you think first, Andrew, about SMB, ecom as well as omni in the European region, there are a lot of folks who said the deal and all those touch points that I just highlighted. And I think by far that's the predominant means kind of what we do kind of point number 1.
Point number 2, the cross border, which we referenced in our prepared comments too, there I think our global footprint, but we're physically in 30 countries, between business cross border, especially ecom in more than 50 with over 140 currencies. There I do think there is a lot of value to first having a single provider in all those markets. So while we certainly overlap with a number of the folks competitively in any one geography, increasingly we see a trend towards smart multinational corporates picking 1 provider to solve all their payments. I believe that's some of the markets that we're in. Taiwan would be, an example, Singapore, Malaysia, New Zealand, go down the list.
Hong Kong, there aren't a lot of providers cross border in those markets plus Europe across most of EU we can really provide the most sophisticated multinationals. Now I'm on that one, not SMBs, with all the payment solutions they need with one technology environment. You put those 2 together, which is SMB, kind of our core online as well as physical store combined with complicated multinationals for a single provider in all the markets they can possibly be in. As I said, I think in the investor rate, in some cases, when we do some of these RFPs, you might be 1 of 2 providing that because those needs are really hard to solve. So that really is the genesis of our mode of competition and how we go to market become an omni.
And I think we've laid out this most recent quarter, but certainly over the last number of years what that's meant in terms of our growth. Because again, this quarter coming in Q3, we'll talk more about that business is performing and what we continue to expect. But we're well on our way, as we described in the Investor Day, to move toward 20% of our revenue growth of our revenue in 2020 to be coming from our e comm and omni solution.
Very thoughtful as usual. Thanks.
Thanks for your compliment.
Thank you. And our last question comes from Paul Conderau with Credit Suisse. Your line is open.
Thanks, Craig. Good morning, everybody. Cameron, I just wanted to ask about the software revenue. You said 15%. We think of that as recurring SaaS revenue?
Could you put a margin profile on it? And then, how should we think about that growing?
Yes, it's a very good question, Paul. So you're right to think about that as a highly recurring revenue stream for us. The vast majority of that is SaaS or relates to products today that we're in the process of converting to SaaS platforms. But the vast majority of that is going to be SaaS for us today, highly recurring, highly visible. AdvancedMD is a good example of that.
We look at the revenue profile of AdvancedMD, we see that as 95 plus percent recurring revenue in that business. So very attractive, obviously, revenue profile. And naturally, given our strategy, that's a portion of the business you should expect to see continue to grow over the course of time, both organically and inorganically, as we drive our software driven payment strategy towards that 40% target. Obviously, that complements the 20% target, Jeff, just highlighted pretty dominantly, bringing our total technology enabled target to 60% by that 2020 timeframe. So again, that is a highly attractive aspect of the growth profile of the business.
We see those SaaS businesses at a minimum growing in the low double digits and we're going to be growing more quickly than that, but obviously contributing very nicely to organic growth over the course of time. From a margin standpoint, you should assume by and large those businesses should be at or above the corporate margin at a minimum. Some are still scaling to be fair. So over the course of time, some of them are going to scale to being at or above the corporate margin. But certainly, our expectation is all those businesses over time should be obviously accretive to the overall margin profile
Great. Thanks. And then I guess just for the follow-up in terms of M and A, I mean you're not going to be terribly leveraged coming out of this deal. So should we think of kind of an annual deal pace the way that you guys are thinking about it of this kind of size or any kind of changes or insight you can give us on the strategy?
Paul, it's Jeff. I would just say our pipeline remains full. I think you're right in what you said. We don't view 3.3 times today, 3.8 8 times lever pro form a as being anywhere but right in our sweet spot in terms of what our goals are that we've articulated before. Our pipeline is full.
I hope it doesn't take another year for other deals to come to pass in the technology enablement world for us. But at the end of the day, the most important thing for us is the strategic fit, the cohort fit and the financial returns that we can generate as we advance our strategy. So time will really tell as it relates to what we're looking at. But I would say in general, we could be more pleased with AdvancedMD where our strategy is, where we are along the path, well down the path over 60%. But we articulated obviously inorganic growth mathematically is a part of that.
We love that AdvancedMD beyond how good the business is, It's the fact that it exposes us more directly into the healthcare vertical market, which is a big chunk of the U. S. Economy. There are other vertical markets in the U. S.
That we don't have significant exposure to that we also look at. So stay tuned, but we're very pleased with where we are now and pleased with where we're heading in terms of our strategy.
And Paul, it's Cameron. I'll just add maybe a couple of points to that. 1, as we talked about historically, our priority remains to invest in growth of this. We've talked very clearly, I think at the investor conference about the 3 pillars of growth, where we want to continue to invest and drive growth across those aspects of our business. So rest assured, we're working very hard every day to find opportunities that fit strategically fit culturally, fit financially, are accretive to our rate of revenue growth, accretive to our margins, accretive to earnings as the BankMD is.
All those things are very important to us. I wouldn't necessarily want to put a target out there as it relates to, I know others in the space like to do that, but I think that implies you're going to do deals regardless of strategic fit, cultural fit, financial fit, and we're not that sort of investor. So we're obviously, to Jeff's point, working on a very full pipeline now. I think we remain very confident in our ability to find opportunities that fit the criteria that we have for the business, and we'll be able to continue to grow towards the targets we've established through obviously organic and inorganic growth. And I think EventSMB is a great example of that.
Great. Very good. Thanks. Have a good morning.
Thanks, Paul. Thanks, Paul. On behalf of Global Payments, thank you for joining us this morning and thank you for your interest in us.
Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program. You may all disconnect. Everyone have a great day.