Penguin Solutions, Inc.

Ladies and gentlemen, thank you for standing by, and welcome to Global Payments 2018 Fourth Quarter and Year-End Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will open the lines for questions and answers. If you should require assistance during this call, please press star, then zero. And as a reminder, today's conference will be recorded. At this time, I would 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' fourth quarter and fiscal year 2018 conference call. Before we begin, I'd like to remind you that some of the comments made by management during today's conference call contain forward-looking statements, which are subject to risks and uncertainties discussed in our SEC filing, including our most recent 10-K and any subsequent filing. 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 are more reflective of our ongoing performance. For a full reconciliation of these and other non-GAAP financial measures to the most comparable GAAP measure in accordance with SEC regulations, please see our press release, Furnished as an Exhibit, to our Form 8K filed this morning and our Trended Financial 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 Sloan, CEO, and Cameron Brady, Senior Executive Vice President and CFO. Now, I'll turn the call over to Jeff.

Thanks, Wendy. 2018 was an outstanding year for global payments strategically, operationally, and financially. We generated the highest adjusted net revenues plus network fees, adjusted operating margin, and adjusted earnings per share in our company's history. We also continue to execute on our technology-enabled, software-driven payment strategy, further widening our competitive mode. In addition, we deliver double-digit organic constant currency growth and strong margin expansion across our markets each quarter, while also producing the fastest rate of earnings per share growth for the year that we have yet achieved. These results exceeded the raised cycle targets we outlined at our investor conference last March, as well as the initial 2018 guidance we provided at this time last year. Further, we are especially pleased that we were able to build upon the success of our 2017 results, which had set a record for our performance at that time. We have a consistent track record of delivering on our commitments, and 2018 was no exception. Turning to the fourth quarter specifically, we maintained the strong top-line momentum we experienced all year, again delivering double-digit, constant currency organic growth. Notably, we witnessed peak holiday transactional volumes during the quarter, led by our U.S. direct and e-com omnichannel businesses. We also expanded adjusted operating margin by 80 basis points and produced adjusted earnings per share growth of over 24%, rounding out a fantastic 2018. Results this quarter and year were again fueled by our unwavering focus on the three pillars of our growth strategy and broad-based strength across our technology businesses. As a reminder, we expect technology-enabled distribution to represent 60% of our revenue and drive a significant portion of our growth by the end of 2020, with a balanced portfolio across owned SaaS, partnered software, and e-com and omnichannel assets. We made substantial progress against this objective in 2018, and our results highlight the successes our strategic initiatives have produced to date. As it relates to our software-driven payment strategy, we meaningfully enhanced our portfolio during 2018 with the addition of two marquee vertical market businesses, SCICOM, and Advanced MD. It is worth noting that we have a long track record of integrating technology businesses over many years, while also retaining and motivating leadership and accelerating growth. Beginning with APT in 2012, followed by PayPros in 2014, and Heartland in 2016, we have proven our ability to sustain momentum in technology enablement. Our investments have created a differentiated, defensible, resilient, and more predictable model. And we fully expect to do the same going forward as we continue to advance this strategy. The integration of SciComm with Xenial is well underway. We are already going to market with combined solutions, and initial customer reception has been overwhelmingly positive. One early data point. We recently signed a large coffee chain with more than 300 locations in the Pacific Northwest to our existing roster of 50,000 quick service restaurants or QSRs. The restaurant vertical is the quintessential example of the type of market we target. Sizable, worldwide in scope, distinctive, recession resistant, and relatively insulated from disintermediation, especially at the QSR level. Through the combination of Xenial and SciComm, The end-to-end SaaS capabilities we offer to every customer segment of the vertical uniquely position us as a one-stop shop for software, mobile, and payment services in this $4 billion target addressable market worldwide. Our footprint is broad and diverse, spanning restaurants and food service management providers across 60-plus countries. More to come on our market-leading suite of tech solutions in our first quarter of 2019 call. Turning to Advanced MD or AMD, referrals by its specialized sales force to OpenEdge increased 50% year-on-year in the month of January alone, while the team also made hundreds of referrals to Heartland Payroll in the first 60 days post-close. At the same time, the Heartland sales organization has begun leveraging existing relationships with physician practices in the communities they serve to bring new customer opportunities to AMD. The proof is in the performance, and AMD had terrific sales results in the fourth quarter with bookings up nearly 50% year over year to the highest level in its history. As we expected when we announced the transaction in August 2018, the outlook for this business could not be brighter. Finally, Active also had strong bookings momentum once again in the fourth quarter as it continues to acquire new logos and expand business with existing partners, building on a very strong sales performance in the back half of 2018. It's been a year and a half since we partnered with Active, and the business is on track with the financial expectations we outlined at the time of the deal. The fantastic results we have delivered across these assets demonstrate that our approach to managing software businesses is highly effective and bolsters our confidence in our software strategy as we enter 2019. How have we achieved such progress across these businesses? It starts with our disciplined approach to acquisitions and our unwavering focus on identifying opportunities that align strategically and culturally while also allowing us to generate attractive returns. Once we close an acquisition, we follow a core and edge approach to integrating and operating those businesses. Let's take the second one first. Our edge businesses continue to do what they do best, which is ensuring their software solutions maintain market leadership position. The management teams we retain know their customers, understand the product needs of their markets, and are equipped to make the best decisions to drive innovation and improve functionality. Global payments support these priorities at scale with extensive experience in onshore and offshore development, and we provide efficient sources of capital to invest in growth. At the core, we also leverage our capabilities to expand and monetize the payments opportunities transactionally that are inherent in these businesses on a local and global basis. In addition, we provide support through scale technology infrastructure and architecture, compliance and information security, just to name a few. Lastly and importantly, we bring worldwide distribution and significant cross-selling opportunities with localized product offerings and a global sales force to accelerate standalone growth. By marrying our distribution capabilities with their technologies, we are better equipped collectively to enhance rates of sustained growth and scale the combined businesses more effectively. Moving to our partnership business at OpenEdge, I am delighted to report that we signed a record number of new ISV partners in 2018. Notable wins include ChiroTouch, a leading chiropractic practice management software solution, and Tyler Technologies, a software leader in the municipality and local government vertical. And I'm pleased to announce that this momentum has continued into 2019 with the recent signing of one of our largest partners to date in ASI, a leading provider of software solutions to member-based nonprofit organizations worldwide. This partnership highlights the competitive differentiation of our integrated payments technologies In combination with our single API capabilities across our markets, ChiroTouch, Tyler, and ASI are all examples of recent competitive wins for OpenEdge, reinforcing our superior growth proposition in the most attractive vertical markets in integrated payments. Finally, we continue to add VISTA equity portfolio companies as partners, including most recently with PowerSchool in the educational market. PowerSchool provides an innovative K-12 education technology platform fueling school operations, classroom management, student growth, and family engagement. We remain excited about the pipeline of future opportunities in VISTA's portfolio. The second pillar of our strategy, our worldwide e-commerce and omni-channel businesses, continued its track record of strong growth in the fourth quarter. Adjusted net revenues plus network fees for this business have more than doubled over the past three years. Last quarter, we detailed our unique ability to deliver high value-add solutions globally in the virtual and physical worlds for our core SMB customers as well as for sophisticated multinationals. And with the rollout of our unified commerce platform later this month, we'll be able to provide a single payment solution worldwide through a sole instance of one API. We expect some of the largest and most complex omnichannel customers globally to code to this specification, which would drive higher acceptance and lower fees globally. The third element of our strategy is our ongoing commitment to expanding our presence in faster growth payments markets with attractive fundamentals. To that end, we are delighted to announce the official launch of our joint venture in January with our long-standing partner HSBC in Mexico. We are already beginning to leverage our best-in-class sales capabilities, and we expect to bring leading technologies to Mexico in future periods as we have successfully done worldwide. This new partnership highlights the durability and the continued expansion of our relationships with some of the most complex financial institutions globally, a key competitive point of differentiation for global payments. The success of our existing bank joint ventures in markets like Central Europe with Ersta Bank and Spain with CaixaBank makes us the partner of choice for the most sophisticated financial institution counterparts. One final thought on recent industry trends. Technology is transforming our industry, and we believe that we are at the forefront of leading that change. Externally, we go to market with a balanced mix of owned SaaS and partnered software assets with substantial exposure to trends in e-commerce and omni-channel businesses against the backdrop of faster growth payments markets. Internally, we utilize cloud-based SaaS technologies across nearly all of our infrastructure, from sales management to data analytics to finance, accounting, and human resources. In fact, we believe we are the largest user of Google Cloud in financial technology globally as just one point of reference. Over the last five plus years, we've invested more than $2 billion organically in our technology environments, complemented by substantial investments in inorganic partnerships. Competitors without the technological and financial capacity to make those types of investments will increasingly find themselves on the outside looking in and will remain consistent share donors. And they will find their alternatives to be less attractive as time goes on. With that, I'll turn the call over to Cameron.

Thanks, Jeff, and good morning, everyone. 2018 was another outstanding year for global payments. Consistent strong execution of our growth strategy and a constructive macro backdrop allowed us to deliver financial results exceeding our expectations. Despite greater than anticipated incremental headwinds from foreign currency in the back half of the year, particularly in the fourth quarter. For the full year, total company adjusted net revenue plus network fees was $3.97 billion, reflecting growth of nearly 15% over 2017. predominantly driven by low double-digit constant currency organic growth. Importantly, we delivered consistent growth performance across all four quarters, highlighting our top-line durability, supported by our technology-enabled, software-driven payment strategy. Adjusted operating margin expanded 130 basis points to 31.7%, and adjusted earnings per share increased 29.4% to $5.19. We are delighted with the results we were able to achieve, which were not only solidly ahead of our cycle guidance, but delivered while also successfully executing on a full M&A pipeline, including the completion of three software acquisitions and our strategic partnership with HSBC in Mexico. For the fourth quarter, total company adjusted net revenues plus network fees was $1.04 billion, a 12% increase over the fourth quarter of 2017. which includes an approximately 200 basis point headwind from foreign currency, nearly 100 basis points worse than we expected when we guided back in October. Adjusted operating margin expanded 80 basis points to 31.6%, and adjusted earnings per share grew 24.3% to $1.33. Adverse foreign currency exchange rates impacted margin expansion in the quarter by approximately 20 to 30 basis points, and adjusted earnings per share by approximately 3 to 4 cents. North America adjusted net revenue plus network fees was $765 million, reflecting growth of 14%, which included an approximately 100 basis point headwind from the Canadian dollar. In the U.S., our direct businesses again contributed low double-digit organic growth, led by continued strength in our integrated and vertical markets business. Advanced MD and SCICOM's contribution in the quarter was at the higher end of our prior guide. Our wholesale business declined mid-teens, consistent with our expectations and stated strategy to pivot away from this distribution channel. Similar to last quarter, our Canadian business was significantly impacted by weakness in the Canadian dollar, resulting in a reported decline of nearly 4%. North American adjusted operating margin expanded by 160 basis points to 32.3%, despite some pressure from our recent acquisitions, as expected, and adverse foreign currency exchange rates. Moving to Europe, reported adjusted net revenue plus network fees grew 8%, or approximately 12%, on a constant currency basis, well ahead of our high single-digit targeted growth rate. Our U.K. business continues to perform well despite a challenging GDP growth environment, delivering mid-single-digit local currency growth for the quarter. Our Spanish business produced another exceptional quarter, generating mid-teens growth in local currency, aided by a constructive market environment and terrific execution in collaboration with our partner, Caixa. Likewise, our ERSA JV again delivered strong local currency growth as our ability to bring new technologies and solutions to the Czech Republic, Slovakia, and Romania is driving growth well in excess of the market and meaningfully ahead of our own expectations. Our e-commerce and omni-channel solutions business in Europe again grew mid-teens as we continue to enhance our differentiated offering and unified commerce platforms. European adjusted operating margin was 47.7% for the quarter, roughly flat as compared against 2017, largely due to the impact of foreign currency headwinds. Finally, our Asia-Pacific business reported adjusted net revenue plus network fees growth of 10% or nearly 14% on a constant currency basis. Strength was again broad-based across our key markets in Asia, including Hong Kong, Malaysia, Singapore, and Australia. Adjusted operating margin in Asia expanded 30 basis points to 34.4%, as strong organic growth was partially offset by significantly adverse foreign currency exchange rates and reinvestment in the business. Capital investments for the full year 2018 totaled $213 million and again included substantial investments in new product innovation that support future growth opportunities. The strong financial performance we delivered across our businesses and geographies drove adjusted free cash flow of approximately $270 million for the quarter and approximately $860 million for the full year, excluding acquisition and integration costs. This free cash flow generation supported an ambitious capital allocation plan in 2018. During the year, we invested $1.2 billion in M&A to advance our technology-enabled strategy including our acquisitions of Advanced MD and Psycom, as well as Central Education, a small acquisition in Australia we completed in late Q4. Central is a leading provider of cloud-based enterprise SaaS solutions to K-12 schools in Australia, a vertical market we know well, and one where we have already demonstrated the efficacy of our ownership strategies. In addition to acquisitions, we also executed a total of approximately $200 million of share repurchases to return capital to shareholders. Perhaps most importantly, we executed against this capital allocation plan while still ending the year at a leverage ratio of 3.5 times, positioning the business with a strong balance sheet and meaningful investment capacity as we enter 2019. Additionally, we executed a total of $1.25 billion of interest rate swaps in the fourth quarter further reducing our exposure to rising rates. Our debt portfolio is approximately 40% hedged and we continue to expect to be nearly 50% hedged by the end of 2019. Going forward, our priority from a capital allocation standpoint remains investment in the business to support our growth initiatives, including M&A. That said, given our current leverage and expected free cash flow generation in 2019, Absent any near-term opportunities to reinvest in our business, you should expect us to efficiently return capital to shareholders through share repurchases. To that end, our board recently approved an increase to our existing share repurchase authorization, raising the total available to $750 million. As we look ahead to 2019, the momentum in our business positions us to deliver another year of exceptional financial results. For 2019, we expect adjusted net revenue plus network fees to range from $4.43 billion to $4.49 billion, reflecting growth of 12% to 13% over 2018, or 13% to 15% on a constant currency basis. This outlook reflects low double-digit normalized organic constant currency growth, excluding our wholesale business, at the high end of our cycle guidance. It also reflects a 100 to 200 basis point headwind from foreign currency exchange rates, which we anticipate will be heavily weighted to the first half of the year. We expect adjusted operating margin to expand by up to 70 basis points, which is also consistent with our cycle guidance, notwithstanding the negative impact of anticipated as well as slight pressure from our recent acquisitions, as we previously communicated. Absent these items, margin expansion would be in excess of 100 basis points, well ahead of our cycle guidance. With respect to the more detailed assumptions underlying this outlook, we expect North America adjusted net revenue plus network fees to grow low to mid-teens in 2019, which includes anticipated headwinds from the Canadian dollar, predominantly in the first half of the year. This reflects low double-digit normalized growth in our U.S. direct channels, which will be partially offset by a mid-teens decline in our wholesale business. We anticipate advanced MD and SICOM will contribute approximately $125 million and $100 million, respectively, in adjusted net revenue plus network fees in 2019, consistent with our initial guidance. Further, we expect low single-digit growth in local currency in Canada, which we anticipate will be more than offset by pressure from Canadian dollar exchange rates. In Europe, we are forecasting adjusted net revenue plus network fees on a local currency basis to grow high single digits. Based on current exchange rates, our outlook reflects an approximately 500 basis point headwind from foreign currency in 2019, again, with much of this impacting the first half of the year. Adjusted operating margin in Europe is expected to be roughly flat for the year, largely due to the impacts of currency headwinds and further investments we are making to expand our IRSA partnership, into new markets. Asia Pacific is expected to deliver local currency organic growth in the low double digits, while we anticipate currency exchange rates will be a headwind of approximately 300 to 400 basis points. Central will add approximately 200 basis points to growth for the year. Adjusted operating margin is expected to expand in 2019, although it will be somewhat negatively impacted by adverse foreign currency exchange rates. We expect net interest expense of approximately $230 million for the year, which reflects our hedging strategy and the forward curve for interest rates. And we are forecasting an effective tax rate of approximately 20% for 2019. Putting it all together, we currently expect 2019 adjusted earnings per share to be in the range of $5.90 to $6.10, reflecting growth of 14% to 18% over 2018. This includes an approximately 10 to 15 cent headwind from adverse foreign currency exchange rates. Absent this headwind, we would expect adjusted earnings per share in the range of $6 to $6.25, or 16 to 20% growth over 2018. Lastly, we expect capital investments for the year of approximately $230 million. Based on this level of reinvestment and the strong financial performance we are forecasting, we expect to generate adjusted free cash flow of approximately $1 billion in 2019, a significant milestone for global payments. We are delighted with the financial and operational results we delivered in 2018, while also making substantial progress on our strategy. We added leading software assets to our portfolio with AdvancedMV, SciComm, and Central, made investments to further differentiate our e-comm and omni-channel platform, and expanded our long-standing partnerships into new, faster-growing markets. We look forward to building on our successes and delivering another year of strong performance in 2019. With that, I'll turn the call back over to Jeff.

Thanks, Cameron. The differentiated nature of our business model has never been clearer, and those companies not on the forefront of technological innovation in our industry will find it difficult to sustain market rates of growth with increasingly few alternatives. Our record performance in 2018 and our expectations for 2019 underscore how deep the moat we have constructed has become. We don't need a litany of excuses to justify our results. Rather, our performance speaks for itself. 2017 was a year of integration. 2018 was a year of investment. And 2019 was will be a year of reaping what we have shown. We could not be more optimistic about our future prospects. We look forward to delivering on our commitments today, tomorrow, and in the years ahead. Winnie?

Before we begin our question and answer session, I'd like to ask everyone to limit their questions to one with one follow-up to accommodate everyone in the queue. Thank you. Operator, we will now go to questions.

Thank you. Ladies and gentlemen, if you have a question at this time, please press the star, then the number one key on your telephone keypad. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. To prevent any background noise, we ask that you please place your line on mute once your question has been stated. Thank you, and our first question will come from the line of David Toggett with Evercore ISI. Your line is open.

Thank you. Good morning, and congrats on the strong results.

Thanks, David.

Thanks, David. What impact, if any, do you see long-term from the announced FISER for state emerger, specifically on the U.S. merchant acquiring business? Is there anything that they'd be able to do as a combined company in merchant acquiring that you think they're not doing today?

Thanks, David. It's Jeff. I'll start, and I'll ask Cameron to join as well. So I would say the first thing is that it really validates our focus on technology-enabled distribution that we've been following really now for the last five years. If you think about the context of where that combined company is today and what they've announced and where they're heading, they're much more focused on really domestic-only, bank-based relationship distribution. I think we have shown to our investments in technology north of $2 billion over the last five-plus years our consistent ability to to offer enhanced value-added services to our customer base. I would say that while you asked about the United States, if you take the model that we've built, it is particularly attractive to worldwide financial institutions outside the United States. So where we've seen tremendous success, as Cameron outlined in his financial commentary, is really in the areas of Spain with Caixa and continental Europe, central Europe with IRSA, and in Europe with HSBC. where what's really selling with those complicated large financial institutions globally is our technology-enhanced solutions, in particular our vertical market software-based solutions. And I think that those trends are ultimately going to come right here to the United States, particularly toward the larger FIs. So what I would say is if you don't have the financial and technical capacity, David, to make those investments, then I think getting additional scale in relationship-based businesses is going to make sense I don't think that that has particular implications for us given our technology event. But for others in the industry who haven't been able to make those technology investments, then certainly I think heightened competition in the relationship-based area domestically in the United States is something they're going to have to look at a number of years down the road. I think for us, though, it's an opportunity and really a validation of the investments we've made over the last five years.

Understood. Thanks so much. Thanks, David. Thanks, Dave.

Thank you. And our next question comes from the line of Brett Huff with Stevens. Your line is open.

Good morning, guys. Congrats on a nice quarter. Thanks. Cameron, I don't know if you went through this, but did you tell us what the full year margin expansion would have been X the M&A and FX hits? I think you said it was 120 or 30 reported, but did you give us that kind of tweaked number?

No, I didn't. That's a good question, Brad. So for the full year, I talked about it for the fourth quarter, for the full year, the 130 probably would have been 140, 150, something in that ballpark, absent the FX headwinds we saw in the back half of the year and a little bit of pressure from the recent M&A that we've executed.

I think you said the adjusted kind of similar number would be a little over 100 basis points going into this year. What are we spending extra on the 50 BIPs? Is it worse FX or is it a stepped-up investment? Are we taking advantage of sort of a market leadership position here to put the pedal to the metal on investments and leave folks a little bit further behind? What's the reason for that decel?

Yeah, it's a great question, Brad. I would reference back to Jeff's comments. We continue to invest heavily in the business, particularly in our technology environments and our products and innovation to drive a differentiated model. And I think we've seen over the course of time that that has proved to be a very wise thing to do as we continue to widen the moat, we believe, as it relates to our business versus competitors in the space. As it relates to 2019 in particular, I think you have a couple things. We're always balancing, obviously, reinvestment back into the business with what we want to flow through to the bottom line. Secondly, if you recall in 2018, we had a little bit of a tailwind from the adoption of ASC 606. that obviously anniversary at the end of 2018. So a little bit of the benefits you saw in margin in 2018 from that don't exist in 2019. So 2019 is a pretty pure year to look at relative to our cycle guidance, which is up to 75 basis points annually. We're getting a little bit of pressure from the acquisitions as we talked about previously. But, again, absent that, absent FX, we would have been north of 100, which is the relative comparison against a 75 basis point target. So we feel really good about the balance. I think we're striking in 2019 as it relates to reinvestment in the business, as well as obviously continuing to drive strong bottom line growth. Great. I appreciate the detail. Thanks, Brett. Thanks, Brett.

Thank you. And our next question comes from the line of Andrew Jeffrey with SunTrust. Your line is open.

Hi, good morning. Thanks for taking the question. Jeff, could you elaborate a little bit on your commentary regarding the rest of world vertical software momentum? Given that Europe in particular I think is somewhat behind the U.S. in terms of integrated and vertical software, could 19 be a year where we reach a tipping point in terms of adoption It sounds like maybe you're talking about or suggesting there might be some other FI partnerships out there for you, too.

Yeah, sure, Andrew. Thanks. It's Jeff, and I'll start. So, listen, I think we're in the first or second inning, really, in Europe, in both the partnered as well as the owned software model. If you look at the number of ISV partnerships we have in the United States, just global payments, those probably exceed the entireties of most of the individual markets that we look at. If you look at our own software businesses in the United States, I think you probably see a pretty similar stream. What I was really referring to was when you talk to our large, complex financial institution partners outside the United States, Andrew, what they want to talk about is vertical markets software. So I do think what you'll see at Global Payments and 19 and beyond is a lot of progress on things like our restaurant and food service strategy. So one of the things we said in our prepared remarks is that the combined, you know, SICON business is already in 60-plus business. countries with restaurants, so it's already been nativized. Restaurants are going to sell in all those markets. We have a lot of restaurants in Europe and a lot of restaurants in Asia and a lot of restaurants in Canada and also in Tunicum in Mexico. So that is something we're certainly going to march ahead on in 2019. By the way, as an aside, we've already been selling before 2019 our Xenial products for data analytics and customer engagement to those restaurants outside the United States already. And I'd also say we've been very successful with our education, particularly our university business outside the United States with announced wins in Canada, Europe, and Asia over the last 12 months. So what I was referring to in response to David's question is we're getting incremental traction, additional traction from our large FI partners outside the U.S. in wanting to talk about or vertical market software in those countries. So yes, we'll see continued progress in those markets, but I think you have to step back and say, at the end of the day, that's really in the first or second inning for those countries, and we're further along here in the United States. Hey, Andrew, it's Cameron.

Let me just add one point to that, if I could. If you recall, part of the thesis around owning our own software from an integrated payment standpoint is controlling our own destiny with respect to internationalizing those solutions. So when we own the software, we don't have to rely on a partner, obviously, in terms of what we want to bring to markets outside the U.S., how we want to bring them, and when we want to bring them. So I think as it relates to the vertical markets, again, where we own our own software outright today, you know, we are really driving kind of the growth and expansion of integrated payments in these markets by bringing our own solutions and obviously utilizing the distribution capabilities we have in those markets, obviously, to drive incremental growth. and to drive, again, an incremental and differentiated solution set relative to competitors in those local foreign markets.

That's helpful.

Thanks, Cameron.

Thank you. And our next question comes from the line of Bob Napoli with William Blair. Your line is open.

Thank you, and good morning. Jeff, Cameron, maybe for both of you, the biggest concern that I get from investors as it relates to global markets with your software strategy is how you're able to, and I know you've heard this before, but I'd like to hear a little bit more color on how you're building the organization to manage the various software businesses, protecting yourself from loss of key management and also making sure that you're developing the software in line, because it's a lot of different businesses involved. So I'd just like a little bit of color because that's the – I mean, the numbers speak for themselves and over time, and I appreciate, Jeff, the color you gave on each of the businesses up front. But if you could give a little more color on that, I think it would be helpful.

Sure, Bob. It's Jeff, and I'll start. So as we said in our prepared remarks, we manage all of our businesses, but in particular our software technology businesses, along a core and an edge strategy, which means Those things that are customer phasing that are specific to the markets. So, for example, in the case of healthcare and advanced MD, those elements of the software that are specific to the healthcare market are really managed at the edge or locally by the folks over at advanced MD. What do we apply to their management? We apply our own views on security, compliance, regulatory. We apply our own views on architecture management. of those distribution chains and we rely on our oversight coupled with local management who we've retained and grown over time to run those businesses effectively for us. The best indicator of how we're doing along those lines is the track record that you referenced that we've been able to produce certainly going back with this management team to 2012 with APT. So the people running APT today are the people who are running APT and PayPros in 2012 and 2014. AdvancedMD is more recent. The people running AdvancedMD today are the people who are running it in August and September of 18 when we did the deal in the first place. We also then apply our own view of core functionality which is to say in the case of AdvanceMD, for example, their integration with the payments infrastructure and architecture that they already have. We set the time of the deal. That's about 20% penetrated, and we'd like to increase that to a much higher percentage. I gave you statistics in my prepared comments about where that sits today. So expanding and monetizing that payment space is a core functionality that we bring. And then, of course, we also lay our own sales capabilities. So I also referenced this in my prepared remarks. But our ability to generate more sales, more physician sales through Heartland, for example, our ability to generate more payroll referrals, which I also referenced, and our ability, of course, to sell more payments via OpenEdge, in the case of AdvancedMD, are things that we're all focused on. And to be honest, when you put it together and you look at our guidance for 2019, building on that success for 18, but for these purposes, 19, one of the ways that we get to double-digit organic sales revenue growth guidance in the United States in our direct businesses is because of those effective cross-sells that I just described. So those are some of the ways we think about managing and extending and expanding those businesses.

And, Bob, it's Cameron. I'll just add one point to that, which is I wouldn't underestimate the importance of our approach to M&A as it relates to the success we've had with the transactions we've consummated over the course of time. We spend a tremendous amount of time obviously vetting these businesses up front strategically, culturally, and in particular certainly as it relates to the returns we expect to be able to generate from them. But as it relates to the cultural point, that's one of the key elements that we address going into a transaction, how that management team is going to be able to adapt to global payments. Are they going to be effective in the environment in which we operate? Are they going to be able to obviously keep up with the cadence of the business that we run today? And are they well-positioned to obviously understand what we're trying to achieve as a company as it relates to both our strategy and the expectations we've set with the investment community? And I think we've had tremendous success with that to date with really every one of the acquisitions that we've executed over the course of the last several years.

Thank you. And just to follow up, are you seeing a continued significant amount of opportunities to acquire in new verticals as you try to avoid competing with your partnership business?

Yeah, Bob, it's Jeff. I would say the answer is absolutely yes to what you said. So our pipeline remains full. That's not just a vertical markets commentary. That's a commentary about new geographies and other businesses as well, more broadly for our FI and other related businesses. So the answer is yes, the pipeline is full. Some of our markets, like restaurants, are changing very rapidly, and of course we've made significant investments in the form of SCICOM in 2018 to accelerate our rates of growth in those businesses. So we're not applying these skill sets against the static pool, rather these markets are are changing all the time. But, no, there's no limit on the pipeline potential that we're seeing. Now, having said that, though, we've just done a number of acquisitions in the back half of 2018. We just closed our joint venture with HSBC in Mexico a couple weeks ago. So, obviously, we're very focused on executing and integrating those businesses to deliver on the commitments that we're making.

Thank you. Appreciate it. Thanks, Bob.

Thank you. Our next question comes from the line of tension, Wong with J.P. Morgan. Your line is open.

Hey, thanks. Good morning. What really stood out to me was the AMD bookings up 50%, I think you said. So I'm curious, is this the result of maybe low-hanging fruit being picked early, or it seems like you haven't really put in full effort yet on the sales side, just trying to understand how sustainable this booking level is.

Well, since it's Jeff, I put in full effort. I can't speak for Cameron. But in the scheme of things, listen, I think at the end of the day, and of course I'm joking on that because Cameron's sitting opposite me, but at the end of the day, listen, I think it goes back to what Cameron said. When we're looking at partnerships and AdvancedMD is a very good example of them, we're really focused on does it fit our strategy, what's the culture of the business that we're partnering with, and what are the financial outcomes associated that we're trying to solve. So it's been great growth at AdvanceMD. Is that growth in excess of what we hoped would happen? Of course not. At the end of the day, we have an opinion as to what we think we can do with that business, and this stuff's not an accident. We spend a lot of time cross-selling, monetizing, and managing those relationships, which we think is critically important to what we do. So no, I think we're very pleased with where we are, but those things are really by design. Now, Can that accelerate further? Well, we certainly hope with the cross-selling and the globalization opportunities we have, restaurants in particular, some of the vertical markets that we're in, that we can continue to accelerate growth. But I think it's important for us to give you increasing evidence of how we're doing to show you how pleased we are with the investments that we've made on behalf of our shareholders.

Yeah. No, it's a good sign. I mean, I asked that. I know you're kidding, but I know it takes time to – to get the sales on board with such a new vertical. So that's why I was curious about the sustainability. So my follow-up just on SciComm and Xenio going well, you mentioned a large signing there. I'm curious in the aggregate, the pricing on these deals, both on the product side as well as on the payment side or spread, any surprise there as you go to market, especially moving maybe up the market a little bit?

No tensions, Jeff. We haven't had any surprises there. We're really pleased, as I said in my prepared remarks, about SciComm. Restaurants is one of our biggest vertical markets, and, of course, we've also added food service management, which is a large market that we weren't in directly at Global before as part of the partnership. If you step back for a second, what we really like about the SciComm partnership is that the old Global, really through Heartland and Xenial, had 25,000 QSRs before the deal, and we've doubled that with 50,000. But if you step back for a second, the bread and butter at Xenial was really the enterprise-level QSR attention, and that's exactly what Sitecom does. So it was a very nice product overlap in that Legacy Global and Heartland really had front-of-the-house solutions. Sitecom brought with it not just front-of-the-house, which is where some of the overlaps are, but middle-of-the-house and back-of-house for enterprise customers, as well as the globalization of those businesses. So, no, we're not surprised by any of the trends. We were already in that business. I think it gives us additional scale in one of the most attractive vertical markets that we're in globally. It's what our bank partners outside the United States want to talk about. And the restaurant market, as I said before, is very rapidly changing today. And it's very nice that we're at the forefront of that with leading technologies to do that globally. So we gave an indication in my prepared remarks about a recent win. I would say more to come. That business has a lot of momentum. And this is a business, to go back to one of the prior questions, where software is the leading strategy. So if we go back to global payments for a second, many of our competitors in that business are also leading with technology and leading with software. And I think that really is, as I said in response to David's first question, a validation, honestly, of the approach that we're taking in our technology enablement.

And the only thing I would add to that, Tenzin, is I think what we've seen in SciComm thus far, consistent with what we've seen in Xenio historically, more proves the thesis around leading with software and obviously utilizing software as a means by which to drive incremental value from customers and drag payments has proven to be a very effective economically opportunity for us. So I think thus far, the ability to bring solutions that SICOM brings to bear, front of house, middle house, back of house, again, the middle house and back house being very distinctive relative to anyone else in the space, the ability to use that software platform, again, to drag the payment volume as well, again, has proven to be a very valuable strategy and a very effective strategy from an economic standpoint.

Thank you for the responses. Thank you.

Thank you. And our next question comes from the line of Jim Schneider with Goldman Sachs. Your line is open.

Good morning. Thanks for taking my question. I was wondering if you could maybe kind of address the outlook you see for kind of extending the financial partnerships, especially internationally. It's been a little while since you did IRSA at this point. So maybe kind of looking forward, you know, what does the landscape look like? How rich is the target environment? And how do you feel about valuations in that space?

Hey, Jim, it's Jeff. So I'll go ahead and start. So I would say our pipeline's pretty full inside but also outside the United States about FI partnerships. So if you think about what we're looking for, we certainly see more opportunities in Asia in that area, more opportunities in Latin America in that area sitting here today. I think what's as interesting as anything else is the tone of those conversations. So The tone of those conversations today has moved from compliance, which is what it was a number of years ago, meaning EMV and that type of thing, and investments in those types of security assets, into how do you help me grow my business by way of vertical market? So if you think about one of the assets that we bring that we haven't talked much about on the call today, it's really our unified commerce platform in our e-commerce and omni-channel businesses. That is selling e-commerce and cross-border selling really well. For example, in Spain, With Kaisha Bank, it's selling well in continental Europe with Ursa Bank, and of course, it's selling well across Asia, as Cameron described in his remarks. With the release of our next generation platform, which is Imminent and Unified Commerce, that is a conversation that the most sophisticated financial institutions globally are very interested in having, particularly in the area of omni-channel acceptance. which very few people have. So I think differentiated technology products that we're selling today, we've seen significant increase in demand from financial institutions globally to have those conversations, and the conversation has shifted from pure compliance into how do you help me grow my revenue both by vertical market via software as well as cross-border via e-commerce.

And Jim, it's Cameron. Just to add another point to that quickly, I think Jeff mentioned obviously in his prepared remarks, we just closed our joint venture with HSBC in Mexico, so we're busy working to expand into that market as well. In addition to what Jeff said, the other interesting thing I think in the pipeline for us is obviously a fair number of new FI opportunities, partnership opportunities around the globe, but also more and more conversations with existing partners about expanding into new markets. and particularly with IRSA in Central Europe, looking at opportunities to expand further with them, given the success we've been able to have already in markets in working in collaboration with them. So I think we're really delighted to see that the strength of our partnerships and the success of our partnerships over time is allowing us to have further dialogue about extensions of those and expansions of those into different markets where we think we can replicate the same success.

Great, that's helpful. And then maybe as a follow-up, can you maybe just address your relationship with the VISTA and the VISTA software portfolio companies going forward, given they've disposed of their equity stake in the company? Can you talk about any changes you're seeing there? Is there any change at all to the relationship? And maybe can you talk a little bit about how it's gone so far?

Yeah, so... Jim, I'll start and then ask Jeff to add any comments that he would like. So I would say our relationship with VISTA remains very strong, and we've had great success already mining opportunities in their existing portfolio of companies that have now become payment partners of ours over the course of the last, call it, 18 months since we really established this relationship with VISTA. So I think it's clear to say from our standpoint we couldn't be more pleased with how things have gone thus far. We still see a lot of opportunity to continue to mine the relationship for further payment partnerships given their portfolio of assets. Some of their more recent transactions as well I think fit nicely as it relates to our ability to work with them to drive incremental value for both us and them. And we continue to have very strong dialogue with them around those types of opportunities and are continuing to work through a pipeline of opportunities to partner with existing portfolio companies in that business. As it relates to them selling, you know, their stake in global payments that they acquired by virtue of the active acquisition, I would start by saying they're a financial buyer and a financial enterprise. And ultimately, I think they looked at being able to realize a very good return on that investment as it relates to the global payment stock and as they're out in the market fundraising and looking to clean up prior funds, it's a very logical thing for them to do. It doesn't in any way change, I think, the nature of our relationship or the partnership that we have with the various portfolio companies that they operate today.

Yeah, Jeff, I would just add that we have a lot of respect for Vista. I think they've done a fantastic job, but that is just one of a number of private equity and financial firms with whom we have a relationship and an ongoing dialogue. So I think the most interesting thing is, We have a differentiated sales proposition going into that line of business. We approach private equity firms as a whole rather than each one of their individual companies, and we see kind of warm leads as we do with VISTA with those companies. I think in that we're distinctive. I know we are distinctive relative to our peers. So, you know, more to come there over time, but I would view this as the initial step toward a broader-based PE-related distribution strategy, particularly here in the United States.

Thank you.

Thank you. Thanks, Jim.

Thank you. And our next question comes from the line of Chris Brendler with Buckingham. Your line is open.

Hey, thanks. Good morning, guys, and great results. Thanks, Chris. Thanks, Chris. I'd like to focus on the U.S. business for a little bit, if you could, give us a little more detail. Lots of conversations about the software ownership and something we can see the results of these acquisitions really starting to fit well with the existing organization. I'd like to talk about the other side of that business for a second, just the partnership channel on the ISV side and how that's going and how competition potentially may be increasing that space and what you're seeing sort of at the front lines as you're trying to sign new ISVs. And then I have a follow-up. Thanks.

Yeah, Chris, it's Jeff, and I'll start. So if you step back for a second, we said this in the press release, and I said this in our prepared commentary, really what we're focused on is a balanced approach across the technology enablement spectrum. So that means not just partner in software, but own software, partner in software, e-com and on the assets, and faster growth markets. So sometimes we get lost in this office, and we talk a lot about kind of own software, particularly in restaurants and vertical markets like restaurants, where it's kind of a hot topic. But we shouldn't lose sight of the fact that we had fantastic performance last quarter and last year, and our expectations are also high in 2019 for our partner business, particularly in the context of OpenEdge. I gave a fair amount of detail in my prepared comments with our wins, but really, Chris, three marquee wins. Those were all competitive in nature, and we won all three of them. So our point of view there is the proof's in the pudding and the results are what they are. To sign up the largest chain of chiropractors, one of the largest municipal and state government billing facilities, one of the largest not-for-profit ISV providers, I think tells you all you need to know about our competitive positioning because we won those and others did not. Putting that aside for a second, that business has always been competitive. So if you go back to when we got into it, in 2012 in our business more generally, but for these purposes in OpenEdge, it's always the case that as renewals come up and new customers are competitive, that we need to continue to evolve that business. We're offering more and more value, and we're providing more and more scale in what we do. But to answer your question, there's not been a sea change in the way we go to market in that business competitively or by way of pricing over the last year or so. Our business has always been competitive, since we got into it in 2012. It's not like Mercury wasn't a good competitor back in 2012. It's not like the assets that First Data bought over the last year or two or thesis. It's not like they weren't good competitors in their own rights. I think what is different about us, as we said in our prepared comments, is our ability to offer a single technology solution and provide more value add for our partners, which is part of the wins that we had in the three that I mentioned. The other thing that's distinctive is the ability to globalize. and take these into multinational geographies, which I think were either unique or one of two, really doing today. So there really hasn't been a sea change, Chris, in the way the economics work in those businesses. I think we talked about the great performance we had in the fourth quarter at OpenEdge, and I think the recent wins that we highlighted by name, I think, prove that.

Yeah, just to put a little finer point on that, Chris, from my perspective, if you look at the backdrop of obviously a lot of discussion and more competition in the integrated space, OpenEdge had its best year in terms of new partner signings in 2018. Ended the year again with mid-teens growth for the fourth quarter. which obviously positions it well heading into 2019. The last thing I would say is if you look at our guide for the U.S. direct business in 2019, again, we're guiding to double-digit organic growth in our U.S. direct business. We wouldn't do that or couldn't do that to the extent our partnership business was not performing at the level that it is performing today and not helping to drive the overall rate of revenue growth for that U.S. direct business. So that should signal, I think, to a large degree, the amount of confidence we have with the durability of the partnership model. And obviously, I think one of the strengths that we have, and again, where we're differentiated, is the optionality we have to own or partner, depending on the vertical and depending on the Fed. So I think that, again, positions us extraordinarily well kind of heading into 2019 and for years to come as we continue to execute on that strategy.

That's really helpful. That's great, Connor. And I think I'm more thinking about how you are doing so well and what appears to be a lot of your competitors trying to follow, but I think they're still following at this point. My follow-up question was on Europe. Just amazing results as you put up another quarter of constant currency, low double digits. Your guidance for high single-digit next year, is that any macro potential slowdown? Because we do get a lot of concerns from investors about Europe.

Yeah, it's Christmas, Cameron, so I'll touch on that one. I would say, you know, we've had fantastic performance in Europe above our own cycle guidance, frankly, for that region. And that's really been driven by strength in our – Spanish business, strengthen our Central European business, and strengthen our e-com omni-channel business across kind of continental Europe. So I think we're delighted with what we've been able to achieve. Now, if you think back to 2018, we had good growth in our U.K. domestic business for the better part of the year, and obviously that was something that was helpful to the overall European results for the year. As we look to 2019, and as I mentioned in my prepared remarks, we're guiding the U.K. to kind of mid-single-digit rate of growth, and consequently overall Europe to a high single-digit rate of growth for the year. We think that's a prudent approach to take heading into the year, particularly with Brexit on the forefront of everyone's mind. I would say our guide assumes effectively a muddle-through, for lack of a better term, outcome as it relates to Brexit. So we're not assuming that the economy in the UK is going to fall off the cliff. I'd say we're effectively assuming something like what you saw in Q4, which was very, very low GDP growth, if any. I think it was 0.2% for Q4. That's kind of the outlook that we're expecting in the UK for the rest of 2019. Obviously, it remains to be seen how Brexit will play out and will adapt accordingly, but that's what our assumptions reflect today as it relates to the UK. I think the rest of Europe, we continue to assume a macro environment fairly similar to what we saw in 2018. There's a little bit of softness in a few spots in Europe, but the markets that we're in, in particular, Spain, Czech Republic, Slovakia, Romania, and again, the strength driven by our economy business in that market, I think gives us a lot of confidence we're still going to be able to grow Europe, notwithstanding the UK, at that high single-digit rate for 2019. Awesome.

Thanks so much, and congratulations again.

Thank you. And our last question will come from the line of Brian Keene with Deutsche Bank. Your line is open.

Hey, guys. Thanks for fitting me in. I wanted to ask, you know, a lot of payment players saw a slowdown in volume in fourth quarter and in particular saw weakness in cross-border. It doesn't feel like you guys saw some of that same weakness. Maybe the model is a little bit different with mix. Can you just give us a little bit of help when thinking about that?

Yeah, Brian and Cameron, I'll jump in and ask Jeff to add any comment that he may like as well. I would just say as your opening comment, I would say across the board, we generally saw volumes pretty consistent in Q4 with what we saw in Q3. Obviously, the UK was a little slower than we saw in Q3, and that's a function of the GDP environment. And I think that's pretty obvious to anyone who's paying attention to kind of what's happening in the UK and obviously the GDP results coming out of the UK. Putting that aside, I would say in the rest of the markets around the globe, I would say volumes held up very well, and I think, again, that's to your own point, somewhat a function of our own strategy, how we go to market, the diversity of distribution that we have today, and obviously our ability to lead with technology in most of those distribution channels. As it relates to cross-border volume in particular, we really didn't see the slowdown, obviously, that was reported by the networks and then some other players in the market as well on a cross-border basis. If you look at our European e-com and Omni business, which is really at the heart of where we see the majority of our cross-border volumes, we continue to see mid-teens growth in that business in the fourth quarter and volume trends that were relatively consistent, I would say, with what we saw throughout the course of 2018. No real meaningful slowdown in our portfolio of businesses, Brian, but it's obviously something we continue to monitor closely heading into 2019. But I think we have a lot of confidence as evidenced, again, by the guide that we've provided for 2019 as to how those businesses are going to hold up.

Yeah, Brian, Jeff, I think Cameron's right. I also think it speaks to the distinctiveness of our model, you know, focused on S&Bs domestically, including in Europe and those markets, and selectively focused on First of all, M&Ts where we think we can add value-added solutions and differences and not just based on price. And B, in those markets, those faster growth markets where we think it's most attractive to offer e-com and Omni. So unlike the car networks, we're not the entirety of the market in every market that we're in. And like some of our other competitors, we have deliberately targeted some of the markets that Cameron and I described because we think they are more attractive and we think they are more resilient. So obviously time will tell, but I think you can see the results in our fourth quarter and what our guidance reflects.

Okay, great. And just a quick follow-up. Cameron, can you help us with the impact of the HSBC JV in Mexico, and how fast do you guys think it will take for you guys to start gaining share in that market? Thanks so much, and congrats on the results.

Yeah, Brian, it's Cameron. So if you recall in my prepared remarks, I gave an estimate for sort of net interest expense. That's obviously net of other income as well, where you'll see the impact of the HSBC Mexico joint venture for 2018. So as we said when we announced that joint venture, we think it's certainly in the near term far more important strategically than it perhaps is financially. Now, over the course of time, as we scale that business, we expect it to be a nice contributor to obviously, of income to the company through our 50% ownership in the joint venture, I would not expect that to be a material amount in 2019, given the fact that we're just getting the joint venture off the ground, and obviously it's going to take a little bit of time to scale. As it relates to our ability to gain share, part of what we like about that market, and obviously working with our partner HSBC, is they have a far greater percentage of the commercial banking market today in Mexico than they do the merchant acquiring market. So there's a lot of room, I think, in that portfolio to capture share just with the existing book of business that HSBC Mexico is supporting today from a commercial banking standpoint before you even get into taking share from other competitors who may not be HSBC commercial banking customers today. So I think we have a lot of confidence in the ability to grow that business. I would say our forecast for growth in that business is robust. Obviously, it will take a little bit of time to just get it off the ground and to start to scale the business effectively. So more to come on that, particularly as we head into 2020 and 21. But for 2019, it's not going to be a material impact to our overall financial results. Great. Thanks, guys.

Thanks, Brian. Well, on behalf of Global Payments, thank you for joining us this morning, and thank you for your interest in our company.

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.