Oct 30, 2017
Executives
Peter Poillon - SVP, IR Frank Bisignano - Chairman and CEO Himanshu Patel - EVP and CFO
Analysts
Darrin Peller - Barclays Ashwin Shirvaikar - Citibank David Togut - Evercore ISI Bryan Keane - Deutsche Bank Lisa Ellis - Bernstein Sanjay Sakhrani - KBW George Mihalos - Cowen James Friedman - Susquehanna James Schneider - Goldman Sachs
Operator
Good morning, and welcome to First Data Third Quarter 2017 Earnings Call. All participants will be in listen-only mode.
[Operator Instructions]. After today's presentation, there will be an opportunity to ask questions.
[Operator Instructions]. Please note this event is being recorded.
I would now like to turn the conference over to Peter Poillon, Senior Vice President, Investor Relations. Please go ahead.
Peter Poillon
Thank you. Welcome everyone to First Data's third quarter 2017 earnings conference call.
Our call today is being hosted by Frank Bisignano, Chairman and Chief Executive Officer of First Data. Joining Frank on the call is Himanshu Patel, Chief Financial Officer.
Frank and Himanshu will be referencing a slide presentation during their prepared remarks. A copy of the slide presentation as well as our earnings press release and supplemental schedules are available on our website at investor.firstdata.com.
Throughout this call, segment revenue, expense and EBITDA growth rates referenced by Frank and Himanshu will be on an organic constant currency basis and exclude the impacts from currency, and acquisitions and divestitures. After Frank's and Himanshu's prepared remarks, we'll open the call up to Q&A, and our standard ground rules will apply.
We request that you limit your questions to one question and one follow-up in order to be fair to as many participants as possible. If we have time at the end, you can come back into the queue for another question.
Now, I'd like to remind you that any forward-looking statements made during today's call are subject to risks and uncertainty. Factors that could materially change our current forward-looking assumptions or actual results are described in today's presentation, and in our SEC filings.
We'll also discuss items that do not conform to Generally Accepted Accounting Principles. We've reconciled those measures to GAAP measures in the appendix of the slide presentation and in the supplemental schedules to the earnings release.
With that, I'll hand the call over to Frank.
Frank Bisignano
Thank you, Peter. Good morning, everyone.
It's a pleasure to be on the call today. As we have in the past, I'll open with a brief recap of the third quarter's financial results.
And then, I'll update you on some of our important initiatives. Our adjusted EPS improved by 18% to $0.40 per diluted share.
On an organic constant currency basis, which adjust for currency and the impact of acquisitions and divestitures, segment revenue grew 3% and segment EBITDA grew 5% this quarter. Our segment EBITDA margin expanded 70 basis points in the quarter and our free cash flow in the quarter was once again healthy at $370 million.
For to first three quarters of the year, we’ve generated over $1 billion of free cash flow. Now, I would like to update you on a few initiatives.
Let me start with an update on our enterprise business, where our backlog remains strong. Similar to prior quarters, let me discuss a few of the more interesting recent client wins.
In what I knew is a great example of an enterprise win for First Data, we went global acquiring Pinless Debit, TeleCheck and other services for Fareportal, the world’s third largest online travel agency, which goes to market under several notable consumer brands, and this was the competitive take away. We also want acquiring services Produce Plus, the branded line of nutritional products sold online.
We're now enabling call authorization for Amadeus one of the world's top global distribution systems that connect airlines and travel agencies, helping them to achieve better inter-change rates. The state and local government team had taken advantage of the addition of Acculynk to the First Data portfolio by closing several deals for business, licensing fee collection.
Solutions requiring managed collection of convenience fees are growing trends for government entities and we have several more opportunities in the pipeline. In the sports and entertainment vertical, we’ve expanded our REIT with Clover from having zero to now 15 major sports stadiums and arenas in about 18 months.
And as I’ve emphasized every quarter, an important driver of enterprise revenue growth is holding on to our clients. This past quarter, we successfully renewed some very important customer relationships, including Wal-Mart merchant acquiring.
In GFS on past calls, we’ve discussed our focus on driving revenue growth from adjacent markets such loans. I’m happy to say that we’re now supporting an end process of implementing a number of consumer lending programs for clients, spanning a variety of verticals including retail, consumer electronics and the home improvement and GFS continues to see strong momentum outside of North America.
Following the merger of First Gulf Bank and National Bank of Abu Dhabi, FirstData was chosen as the issuer processing partner for the new combined entity First Abu Dhabi Bank, now the largest bank in the UAE. We also expanded VisionPLUS into a new geography signing a 10-year processing agreement with MONETA Money Bank, one of the largest banks in the Czech Republic.
These wins build upon the great growth we’ve seen across the international regions. Second, I’d like to discuss our GBS North American JV business.
These businesses have remained softer than we had anticipated at this time a year ago. And it proved to be a headwind in our Q3 year-over-year growth [business] even as our other businesses performed well.
We are engaged in deep dialogues with senior leaders at each of our bank partners and aimed at renovating these businesses and these thoughts have taken a greater sense of urgency within the banks. Amongst other initiatives, we are working with each bank to accelerate their digital lead acquisition effort, vastly simplify the online signup experience for new merger and accounts, advance FirstData's full suite of products, services and capabilities and sharpen the focus on expense management.
Each of our JV partners have fabulous franchises and together we are firmly committed to renovating these partnerships and as we have said before, we fully expect they will recover. Third, let me discuss developments in the integrated space.
You recall that it was just about a year ago that we announced that we would be entering the integrated channel and I am pleased to say that we are firmly executing on this. The acquisition of CardConnect in July of this year gave us a significant jump start by bringing ourselves the most easy to use and advanced offerings in the ISV space, particularly for card present transactions.
I’ll make two key points on CardConnect. First, we have made significant progress in the integration efforts.
In the initial few months since closing, our former ISV organization has emerged into a single ISV organization under CardConnect and we have already merged our ninth Asian business into CardConnect. And because CardConnect already processed FirstData platforms, we don’t have to undergo a process or conversion.
Second, CardConnect's ISV pipeline has strengthened in recent months with the backing of FirstData. Software partners [fluency] to differentiated card connect offering and the backend of FirstData has only further helped CardConnect on the client front.
We will further accelerate our presence in the ISV space with the planned acquisition of BluePay, another tech oriented ISO that largely processes through FirstData today. The acquisition is highly complementary to FirstData and CardConnect on several fronts primarily because BluePay is highly focused on the card not present ISV space.
We believe BluePay is best-in-class integrated card not present solutions combined with CardConnect's, cutting edge ISV product suite, clearly set FirstData apart from the competition in the high growth integrated payments space and we’re very excited about our ability to take share in the growing ISV channel in the coming years. Finally, I’d like to discuss FirstData’s ongoing focus on innovation which we believe is one of the key reasons we are winning new business.
A few examples worth noting, the launch of Clover Station 2.0 and the upcoming availability of Clover Go and Apple Retail stores and online. In our e-commerce business, we've recently launched Logo Payments to allow ecommerce clients to accept alternative methods of payments cross-border through a single interface.
Our new disbursed debit capabilities which targets the growing card-based disbursements market. Our fraud detect product that uses artificial intelligence to help merchants detect fraudulent activity across multiple channels, such as in-store, online, at the pump or through a mobile device.
And further expanding the choice of payment acceptance types available to our merchants to include, UnionPay, Amazon Pay and Alipay. In summary, we are working on the right initiatives and we're seeing the fruits of our labor in many aspects of our business.
We reiterate our 2017 and medium-term guidance. Our confidence is supported by a highly differentiated set of offerings in a fast-growing ISV channel through the acquisitions of CardConnect, and BluePay, rapid growth in our Clover platform and an international business that is expanding across all regions in the enterprise business that we believe is taking share among merchants both on and offline as well as issuers.
For enterprise merchants, the rich product suite that FirstData offers between NFS and GBS, which collectively help these clients lower their total cost of acceptance while helping them grow their business are clearly resonating in the marketplace. For issuers knowing to match FirstData's unique ability to provide banks' global relationship that spans processing for all of its card types, a merchant acquiring partnership and increasingly loan processing capabilities.
Now I'd like to turn it over to Himanshu for a deeper dive into the quarter's financial results.
Himanshu Patel
Thank you, Frank. Good morning and good afternoon everyone.
I'm going to start on slide 4, the summary of our third quarter results, I'll focus on the non-GAAP and segment financial metrics, which more closely reflect how we manage our business. Segment revenue which modifies consolidated revenue primarily to exclude certain pass through cost and to proportionally consolidate the revenue of our major joint ventures was $1.9 billion in the quarter.
This was up 5% on a reported basis or up 3% on an organic constant currency basis, which adjusts reported growth rates for the impacts of currency translation, acquisitions and divestitures. The addition of CardConnect in both periods benefited our organic constant currency revenue growth rate by about 25 basis points this quarter.
Third quarter adjusted net income per diluted share came in at $0.40, up 18% versus the prior year quarter. The improvement was driven primarily by improved operating results and lower interest expense.
Third quarter total segment EBITDA of $787 million was up 6% on a reported basis or up 5% on an organic constant currency basis. Of reported Q3, 2017 segment EBITDA margin improved by 70 basis points to 41.3% in the quarter.
During the quarter, we generated $370 million of free cash flow, we've generated over $1 billion of free cash flow year-to-date. I'll discuss cash flow in greater detail on the later slides.
Slide 5 is an informational slide that summarizes financial performance for Q3 and year-to-date including a breakout of results by segment. Let me discuss the segments in more detail beginning with GBS on slides 6 and 7.
GBS third quarter segment revenue of $1.1 billion was up 5% on a reported basis or up 2% on an organic constant currency basis. GBS segment EBITDA grew 2% on a reported basis or was flat on an organic constant currency basis and its reported margin declined 100 basis points to 42.5%.
I would like to discuss GBS' revenue results by region, starting with North America. GBS North America saw 2% reported growth in the third quarter.
On an organic constant currency basis, GBS North American revenue declined by 3% in the quarter. On a normalized basis, GBS North American organic constant currency revenue was down 1% year-over-year in the third quarter.
This calculation removes hardware revenue in both periods which by definition also eliminates the revenue benefit in 2017 from the Clover accounting change and if adjusted a year ago period with the previously disclosed $25 million of unusual revenue items that inflated third quarter 2016’s revenue. Now I would like to provide some color on GBS North America organic results by distribution channel.
Once again there was a measurable difference in the growth rate performance this quarter between our JV channels and what we collectively call our non-JV channel which largely comprises our SMB direct business, our enterprise business and our partner solutions business. Our JV channel saw a mid-single-digit normalized decline in its revenue growth rate in the third quarter.
As we’ve discussed over the past three quarters, the weakness in lead flow that emerged in the fourth quarter of 2016 persists and is negatively impacting our revenue growth. While the rate of lead flow decline has somewhat moderated, the absolute level of lead flow remains well below year ago levels and JV revenue remains challenged as a result.
As Frank mentioned earlier, we are actively engaged with our partners here to accelerate digital lead acquisition to vastly simplify the sign-up experience and to manage expenses. The remaining portions of our GBS North American business or our non-JV business, collectively was up slightly an organic basis and normalized for the items previously discussed.
While the JV business has not recovered at the pace we had anticipated at the start of this year, we are confident that GBS North America will gradually improve over the coming quarters supported by good growth in enterprise, growth from the integrated channel, continued progress in our SMB business, and the eventual recovery of our JV business. I would like to provide a brief update on CardConnect before moving to GBS results outside of North America.
CardConnect’s revenue improved mid-teens in the quarter and we are accelerating its investment pace to even more rapidly build out its ISV business. During the quarter it closed 30 ISV deals and while it’s pipeline is growing very nicely today, we believe that First Data’s ISV offering will be taken to an even higher level through the eventual integration of Clover, CardConnect and BluePay.
Moving to results outside of North America, GBS EMEA revenue grew 6% on an organic constant currency basis, driven by good growth in the UK and Germany. GBS Latin America continues its strong performance, its organic constant currency revenue grew 61% in the quarter, Latin America's revenues are up 58% on an organic constant currency basis year-to-date.
The growth in the quarter was once again driven by the ongoing momentum in our Brazilian acquiring business, where revenues more than doubled in the quarter as we continue to grow market share. We also saw solid growth in Argentina, driven by inflation and good transaction growth.
We are very pleased with the performance of this region, and as we look ahead, we remain bullish as the ramp up with a second financial institution partner in Brazil. GBS APAC grew 18% on an organic constant currency basis with the revenue growth driven primarily by deep monetization in India.
Let’s turn to GFS covered on Slide 8 and 9. GFS third quarter segment revenue was $416 million, representing growth of 5% on both a reported and organic constant currency basis.
GFS segment EBITDA was $180 million, up 14% on both a reported and organic constant currency basis as expenses held flat to prior year. GFS’s reported margin improved 350 basis points to 43.3%.
Let’s take a look at GFS by region. GFS North American revenue increased 1% in the quarter as U.S.
card processing revenue growth was offset by the anticipated decline in our card personalization business, primarily attributable to a difficult EMV related volume comparison in the year ago period. We expect that EMV related comparison to become less significant on a go forward basis.
GFS EMEA revenue grew 7% on an organic constant currency basis in Q3, driven by new business, internal growth and the license fees settlement. GFS Latin America revenue grew 24% on an organic constant currency basis in Q3, driven by good growth in Argentina.
GFS APAC grew 13% on a constant – on an organic constant currency basis in the quarter, driven by new business and internal growth, primarily in Australia. Please turn to slide 10 to cover NSS.
NSS Q3 segment revenue was $395 million, up 5% from the prior year. NSS Q3 segment EBITDA was $184 million, up a 11% and its margins improved 270 basis points to 46.6%.
Let me breakout the results by NSS’ three major business lines. EFT Network Solutions revenues were down 3% year-over-year as transaction growth was offset by lower blended yield.
Security and Fraud Solutions were up 5% in the quarter, reflecting mid-teens growth in our core security and fraud products, partially offset by a continued decline in TeleCheck revenues. Stored Value Network revenue was up 16% driven by strong growth in our Closed/Looped Gift Solutions business along with moderate growth in our Money Networks payroll card business.
Moving to free cash flow shown on Slide 11. We think of free cash flow largely of cash flow from operations, less CapEx and distributions to minority interest.
We provide the reconciliation of cash flow from operations to free cash flow in the appendix of the slide deck. This table on Slide 11 walks you from total segment EBITDA to free cash flow.
We had another good cash flow quarter in the third quarter with free cash flow coming in at $370 million. The year-over-year decline reflects the non-recurrence of a roughly $40 million derivative settlement in the prior year period that was previously disclosed and timing impacts on settlement flows from day and week differences at respective periods at quarter-end.
Year-to-date free cash flow is $1.1 billion, that’s up over $130 million year-over-year. The improvement in free cash flow this year has been primarily driven by improved operating results and lower cash interest payments.
Now let’s discuss our balance sheet. Slide 12 lays out our debt balance for the last quarter and the end of last year and the year ago quarter.
Our net debt increased by $336 million as the $763 million in net consideration that we paid for CardConnect was partly offset by free cash flow generated during Q3 and proceeds from the sale of the Baltics business. This quarter, we increased the capacity and the borrowed balance of our AR securitization which is currently our cheapest form of debt.
Our leverage ratio is defined as net debt to EBITDA declined sequentially to 6.0 times at September 30th versus 6.1 times at June 30th. This is down from 6.3 times at the end of 2016.
Our coverage ratio using our previously provided 2017 cash interest guidance of $900 million is 3.4 times. That is up from about 3.2 times at the end of 2016.
As an additional note, we expect to close on the acquisition of BluePay before year-end and anticipate using a combination of cash on hand and debt. As I mentioned on the BluePay announcement call, we expect the acquisition to have a 0.2 x impact on our leverage.
Turning to slide 13, we provide some color on our debt profile. Our overall cost of debt today is approximately 4.7% and approximately 70% of our debt is fixed or hedged within a fixed range.
You can see here that we have no material debt maturities until 2020. Before we move to Q&A I’d like to cover several housekeeping items.
First, I would like to discuss our definition of organic constant currency growth which is clearly disclosed as a footnote on the first page of the press release. You’ll notice in this definition that for acquisitions, specifically CardConnect in Q3 we are including CardConnect results in both the current period and the prior period as opposed to excluding it from both periods which some may consider as the more conventional way of defining organic growth in an acquisition context.
We specifically took the approach we did because as discussed on the Q2 earnings call, we have merged the CardConnect business with First Data’s existing agent business known as Ignite payments. From an operational perspective, it will shortly become essentially impossible for us to accurately distinguish the Ignite P&L from the CardConnect P&L.
As a result, the only way to maintain apples-to-apples comparability in both periods is to add the CardConnect business to both periods in our organic growth rate definition. Second, I’d like to discuss a few items that may impact your models into the future.
There were two events that occurred that may impact our results ahead starting in the fourth quarter. We recently announced the divestiture of the Baltics business and the completion of the joint venture with Live Oak Bank.
In Q4, our results were reflected divestiture of the Baltic's business and the contribution of our online banking business to our 50% owned JV with Live Oak Bank. Our organic constant currency growth rates will adjust the prior year period for both of these items starting in Q4.
For reference, the GFS Baltic's business generated approximately $25 million of annual segment revenue and approximately $11 million of annual segment EBITDA. Our online banking business generates nearly $60 million of annualized revenue and nearly $20 million of the EBITDA.
While we contributed our entire online banking business into an entity in which we own 50%, the terms of the agreements state that we will in effect retain nearly 100% of the entities' EBITDA through 2018. Next, I'd like to remind you some items that specifically impact our GFS fourth quarter segment results.
Recall that in Q4, 2016 we highlighted a $7 million termination fee that positively impacted our GFS North American results in that quarter. That obviously will occur in the fourth quarter of 2017 therefore, it represents a headwind to year-over-year comparability in Q4, 2017.
And as mentioned on our last call, GFS EMEA will face more difficult comparisons in the second half of 2017 particularly in Q4 due to some non-recurring revenue in the year ago period. Lastly, I'd like to talk to you about two tax related items.
The first point has to do with the third quarter reported GAAP taxes. They included an approximately $130 million tax benefit associated with the release of a portion of our valuation allowance against our net deferred tax assets as a result of the deferred tax liabilities recorded in connection with the accounting for the purchase of CardConnect.
This was a onetime non-cash benefit that was excluded from our adjusted EPS. Second, I'd like to talk to you about how you should think about our booked taxes in 2018 and beyond.
We believe that it is reasonably likely that we will reverse the valuation allowance against our deferred tax assets associated with our U.S. federal NOL as early as the fourth quarter of 2017.
Should that reversal happen, we estimate that it would result in us recording a onetime non-cash tax benefit of approximately $900 million in the quarter. Of course, that $900 million benefit would be a discrete tax item that would be excluded from adjusted EPS in the quarter and full year.
The reversal of the valuation allowance means that First Data would begin recording a normalized booked tax rate starting as early as Q1, 2018. We will come back to you with our expected book tax rate for 2018 on our Q4 call when we expect to provide more detail 2018 guidance for the company.
I want to emphasize that the reversal of the valuation allowance has no impact on the value of our U.S. federal NOL carry forward and as I said previously we expect to continue to be sure from paying U.S.
federal cash taxes through the end of this decade. Finally, with regards to 2017 guidance.
We continue to reiterate all of our previously guidance, 3% to 5% segment revenue growth, 5% to 7% segment EBITDA growth, approximately 15% adjusted EPS growth and in excess of $1 billion of free cash flow generation. In closing, we feel very good about our business and financial outlook.
We set ourselves up to be a major player in the ISV channel in the medium term with the acquisition of CardConnect and BluePay. Our enterprise business continues to drive momentum across all three segments.
Our international regions are achieving healthy growth rates. We continued to see healthy margin expansion.
And overall our business is growing within our expectations despite the weakness in our North American GBS JV business. With that, let me hand it back to the operator to open it up for Q&A.
Operator
[Operator Instructions]. The first question comes from Darrin Peller of Barclays.
Please go ahead.
Darrin Peller
Thanks guys. May be just quickly start-off talking about the progress expected in the JV channel.
I know you mentioned some initiatives just started in the early ‘17 or late ‘16. So, has the rate of referrals changed or stayed roughly similar and would some of the initiatives, can we expect this to at least anniversary in the first quarter of ‘18?
Frank Bisignano
Yes, maybe I will touch on the initiatives again because they are dramatic to how the business is being handled before. I’ll go first to the digital channel.
These are fabulous, fabulous franchises that have a lot of traffic and what’s under renovation. One is that that traffic can come right through the JV.
We have built the technology to automatically on-board and credit approve. So, it’s really [gives us] the channel where we did not have that before.
And I would look at that being in full ramp and occurring in the first half of ‘18. In some of the JVs we were sure merchant acquiring JVs and that means as we talked about the bundled solution of products, everything from [SiteX] it to some of our payroll and gift products, none of those were sold within a couple of those.
And you saw the benefit within our enterprise business of bringing that to it. So, I look at the digital, I look at on-boarding instantaneously, any ability to bring the other array of products and indeed to make it by these fabulous franchises.
So, for that we’ll look at having it implemented in the first half of next year and getting the benefit next year. While the naturally flow has already stabilized and is anniversaryed.
So, and that’s why we talk about full recovery.
Darrin Peller
Alright, that’s helpful guys. And maybe just for my follow-up.
When you think about the pro forma growth of the GBS North America segment given a combination of BluePay and CardConnect now, and CardConnect in the numbers, but then you add on to that, the mix around digital you are seeing and I guess even the Clover [battery] coming out, can you just give us a sense what kind of pro forma benefit that your acquisition should have going forward on the overall numbers?
Himanshu Patel
Yes, so Darrin, CardConnect in the current quarter we talked about helping total company revenue growth rate by 25 basis points, that's including CardConnect in both periods. So, it's a very apples-to-apples comparison.
So, just take that as a data point. That's where our First Data Global, obviously the impact on GBS would be approximately 2X that, GBS North America, given that GBS North America is roughly 40% of our total business.
And BluePay is the business that from a revenue perspective, is a little bit smaller than CardConnect, but should we feel very comfortable of thinking about that business and as about a 10% grow, so you can extrapolate from there as well.
Operator
The next question comes from Ashwin Shirvaikar of Citibank. Please go ahead.
Ashwin Shirvaikar
Thanks. My question also is on GBS, and when I think of GBS’ non-North America businesses, pretty good growth there, and most of its organic.
As you look at your portfolio outside North America, other M&A opportunities that you would consider to drive this growth and on an organic basis can you talk about the sustainability of the non-North America GBS growth going into next year?
Frank Bisignano
Yeah. I would start off with that, we have a deep belief that our international franchise has a lot of runway relative to where it is, and you will continue to see us organically grow that out.
When you talk about acquisitions, we have been very consistent about our first and foremost use of cash is to pay down our debt, and delever. Obviously, we had an objective to be a player in the ISV space, which we set out, up till now, we built out our own capability.
And then when there were two great properties, we thought it completely fulfil what we happily get done in North America. We also believe in North America that those ISV capabilities will help our JVs, we didn’t have that capability in our JV side there – and that’s instrumental to our arsenal.
So, when I talk about the full product set, coming to the JVs, it’s inclusive that. So, we are very optimistic about the things we can get done, the early guns on CardConnect has been fabulous, obviously we’ve merged our ignite channel in there already.
So that’s really a fully integrated business and the combination of BluePay and CardConnect will pose on a completely different game coming into next year on ISV capabilities.
Ashwin Shirvaikar
Okay. And then one follow-up, the Clover installed base growth if you could provide that please or basically with volume growth I think you provided us volume growth number last quarter?
Himanshu Patel
Yeah. Ashwin, excluding Clover Go, which is a dongle, which is a dongle base unit is over 400,000 units, including Clover Go at 700,000 units, and think about payment volume is approaching $50 billion annualized by the end of this year.
Operator
The next question comes from David Togut of Evercore ISI. Please go ahead.
David Togut
Thank you, good morning. Can you talk about the new business pipeline for GFS?
Last week [indiscernible] has highlighted the expansion of their Capital One relationship including the co-brand business and also a strong pipeline. So, what do you see as you look out over the next 12 to 24 months?
Frank Bisignano
So, as you remember, we had talked about our thermalide backlog previously and our objective was to give you an annual look at that number, you know we’ll talk to you about that number at investor day as it comes up in the beginning of next year. But you know we felt very, very strong about our general pipeline in GFS about our extension into the loan business and the winning of mandates that we already have not implemented but have won.
So, I think I would reiterate we feel strong about it, we see it growing and you know we will implement business that’s in that pipeline over the next two years.
David Togut
As a follow-up, what is your renewal rate this year on an existing business within GFS?
Himanshu Patel
David, we have a significant amount of renewals in GFS North America about 18 months ago. Its considerably lower at this stage.
So, I don’t want to give out specific numbers but directionally we’re not in a period where we’re doing a substantial renewal of the whole existing program now.
Operator
The next question comes from the Bryan Keane of Deutsche Bank. Please go ahead.
Bryan Keane
Hi good morning. I want to ask about GBs North America.
I know it was a tough comp in 3Q ’17 given that the JV business hadn’t really dropped off tremendously as we saw in the fourth quarter of last year. And then you also had the 25 million onetime benefit in the quarter last year so it was a tough comp.
So, I’m just trying to figure out if hasn’t GBS North America improve organically as we anniversaryed those tougher comps as we get into next quarter?
Frank Bisignano
Yeah, obviously you get North America is a big business multiple moving parts in there Bryan. You know directionally why we don’t chunk up the conversation by each of the big businesses instead of talking about it in aggregate.
So, I think they’ll give you more texture. On the JV business, let's start there.
I think we disclosed in my prepared comments that the normalized decline in our business was mid-single-digit decline in Q3. You know that business we think from a lead flow perspective, you know year-over-year decline in lead flow is still substantial although less bad than what it was two quarters ago versus fourth quarter ’16.
Lead flow will just from an arithmetic perspective will start facing easier comparisons by the time you get into the fourth quarter of this year and the first quarter of next year. And if you hold all other variables constant, meaning pricing, mix and all of that stuff think of change in lead flow as maybe being a leading indicator of revenue change on a six to nine months lag.
Fixed meaning, lead flows from six to nine months leading indicator of what’s going to be happening to revenue. That gives you some sense of the pace at which we expect the JV business to recover.
Obviously, there are 50 other things going on in the revenue line of the JVs not just lead flow but it’s the item that is the more pronounced different from where the business was a year ago. If you go to our enterprise business within GBS North America, that business under normalized basis has had very solid growth every quarter of this year including the third quarter, we expect that to continue prospectively.
And the SMB Direct business that we've talked about for a lot more about a year ago is sort of on a steady gradual path for recovery. Attrition rates in that business continue to improve year-over-year, we'd expect that trend to keep margin steadily forward.
And so, when we put all of GBS together, I think it's hard for us to give a comment about the totality without acknowledging what's happening with the JV just given the size of the JVs as a percentage of total. I think until the JV see more substantial improvement we probably are not going to see a huge rebalance and basically, we've been bouncing around breakeven on a normalized basis for a few quarters.
I think it's hard to argue that our other businesses are going to make up for the JV weakness without the JVs turning around.
Bryan Keane
But there is no tough comp or like this quarter we had to jump over the $25 million hurdle. There is none of that, so that there should be a natural improvement from the minus 3 organic that we saw in this quarter.
Frank Bisignano
There should be, the 25 was a very discrete item we had in the third quarter. Correct.
Operator
The next question comes from Lisa Ellis of Bernstein. Please go ahead.
Lisa Ellis
Hi good morning guys. Could you give us a sense in GBS North America particular pro forma for the two acquisitions?
How you're positioned now online versus in store? So, with your enterprise clients for example, are you sort of equal weight in exposure to their high-growth online channels as well as they're in store?
And so, a similar question across the other channels.
Frank Bisignano
We'll talk about what functionality we had, what we've built out and what we've acquired. We felt very strong about our worldwide global e-com capability, you've heard us kick off some wins there coming into the second half of this year.
In terms of in store, we think about e-commerce and the app itself, and the ability to handle the brick and mortar and handle the order outside and, each one is still alive in the QSR and other spaces there. When you look at BluePay and saw that as an opportunity to acquire an ISD at great e-com capabilities to complement the ISD capabilities of the card present space for CardConnect.
And so, for us, we see ourselves now having all the aspects of where we can compete large merchant e-com globally, large merchant full array of products to lower cost of acceptance [indiscernible] as a real asset for debit routing both in the cards not present space. And then LI has the capabilities both brick and mortar and e-com to deliver that to lot of arsenal we didn’t start the year with that we believe we have.
And I think we see e-commerce is a great grower. It's been a good double-digit grower for ourselves for now.
And we think we're well positioned for the future.
Lisa Ellis
Terrific thanks, Frank. And Himanshu, my quick follow up is for you.
I know the RPT number in North America GBS is impacted by the consolidation of the JVs. Can you give us a sense on an apples-to-apples basis, how it’s trending in the direct businesses?
Himanshu Patel
Yes, let us look at that up a little bit while we’re chatting but definitely think about RPT normalized was down sort of mid-single-digit in the quarter. The JVs actually had a bigger decline than the non-JV business and that is primarily because one of the JVs does have a decent amount of enterprise business within it.
And so, if you think what happens when lead flow goes down, your -- those are small merchants that generally don’t attract that much transaction but they just have a much richer yield. And so, your denominator on RPT doesn’t necessarily change that much but your numerator changes faster.
So, we will get you some details offline on that Lisa. But I think if you use mid-single-digit as a normalized blended decline in RPT for all of GBS North America, it’s fair to say that the direct channel was better than that, the JV channel was worse than that.
Operator
The next question comes from Sanjay Sakhrani of KBW. Please go ahead.
Sanjay Sakhrani
Thank you. Good morning.
I was wondering just back on the North American GBS business and JV channel. When we look at the weakness, is it fairly concentrated among one or few partner or is it more broad-based?
Frank Bisignano
We have three JVs in North America with three of those fabulous institutions, BMA, Wells and P&C. And they all have declines in them.
Himanshu Patel
Sanjay, the point around JV is definitely broad-based. I think we all know how the issue unfolded in kind of late December of 2016 but I think the macro issues all the things related to selling inside of the retail bank branches I think all large banks has probably just become a lot more conservative.
And so, I don’t think it’s necessarily our three partners I think a lot of big banks are probably going through something similar.
Frank Bisignano
Yes, I would just make a point, back to when I called the renovation plan, these banks have fabulous websites, fabulous mobile business and a great opportunity to digitally acquire. We have built the functionality and for the most part we have plans to embed the digital acquisition of clients.
Sanjay Sakhrani
Okay, great. And then Himanshu, just on the tax point that you made towards the end of the call.
I guess when you look at our ['18] number, is there a specific tax rate that you use for now as we look at our estimates or either we should play for more guidance from tax point? Thanks.
Himanshu Patel
So, Sanjay I would like to hold off on giving you guys a specific number and until the fourth quarter. Part of it is we’re just into sharpen our pencil a little bit.
But I assume there is a lot going on in DC as well very actively around the topic of tax reform and how that impacts First Data or any of the companies, it’s hard for us to know right now if at all. So, I think it’s fair for us to hold off until we get a better view on that and hopefully we’ll get to better clarity within the next quarter on that.
But the macro point on the removal of the valuation allowance is that we will -- if we remove our valuation allowance in the fourth quarter that would mean on the other side of that we would start booking -- accruing full taxes. The rate would be comparable to what you would expect, any large company now, but obviously our rate, right now is actually very depressed because of that valuation allowance.
The specific number we will get into later, but obviously that number is going to be a lot higher than where it is right now.
Operator
The next question comes from George Mihalos of Cowen. Please go ahead.
George Mihalos
Great. Good morning, guys.
I appreciate the color on the JV side. But just looking at your actual referral partnership with banks.
How has that performed relative to your expectations, and then I think Himanshu you talked about the non-JV part of the business growing modestly or sort of below single-digit. Is that the growth rate we should be thinking of those referral partners are growing at?
Frank Bisignano
Yeah. I’ll start off by saying our referral partners have performed well.
They did not have the type of change you’ve seen in the JVs. I would say we have also add in partners and they’re onboarding.
And I would look at this piece of the business as a single-digit performer as you think about it going forward.
George Mihalos
Okay. I appreciate that color.
And then just as a quick follow-up. As we think about the North American GBS business going into 2018 or throughout 2018, should we be thinking that that sort of mid-single-digit organic growth that you guys have been targeting, call it kind of 6sh percent to that – so that sort of back end loaded now, that's achievable more back half 2018 versus first half?
Himanshu Patel
Yea. Why don't we save that for the next call when we kind of talk a little bit more about 2018 guidance, but I think it is fair to say, we don't expect the JVs to recover tomorrow.
So that's going to be a little bit of a journey on that, but I do think some more quarterly [tax] of 2018, we’ll probably say about for – or keep for Q4 call.
George Mihalos
Okay, great. Thanks, guys.
Operator
The next question comes from James Friedman of Susquehanna. Please go ahead.
James Friedman
Hey, Frank, I think you said in your prepared remarks that you renewed Wal-Mart, that sounds important. Is there – were there any - I'm just wondering, were there any changes in the terms, contract duration, anything you'd share about that important customer would be helpful?
Frank Bisignano
I'll talk more broadly because we highlighted that, but every quarter we have a number of renewals, I think that one [indiscernible] is so important for you, I didn’t know. We generally will get all on this as the opportunity to grow with the client.
So that's how I think about our renewals. We feel strong about our relationships there.
We’ve been good partners and continue to grow their relationships. So, I look at that as a growth relationship for us.
James Friedman
Okay. And then from my follow up, Himanshu, I want to ask you about this Slide 10, you don’t have to look at it, but the storage value comment of 16% on the gift side.
So, can you update us to where you are in the journey, I think that correct me, if I’m wrong my recollection is that that was put in to control JV? Is that 16%?
Himanshu Patel
Yeah, James, there’s two businesses in there. One is close-loop gift business and the other is open-loop payroll card business, that we call it money network.
The And close-loop gift business was planned, but – to end up being in a joint-venture with Fleetcor, however that never happened because of regulatory concerns. So, none of them are in a JV right now both are 100% owned and they will continue to be going forward.
Operator
The next question comes from James Schneider of Goldman Sachs. Please go ahead.
James Schneider
Good morning. Thanks for taking my question.
Just want to follow up on the JV channel, I think you’ve talked first of all about the fact that you know the lead flow was down the most in Q4 and then you’ve talked about sequential declines thereafter, so maybe just help us understand are the absolute levels of lead at this point now above where they were in Q4 of last year and then maybe help us understand I think last quarter you talked about JV channels being down low single digits or modestly and its time down mid-single digits. So, any kind of kind of comparability issues or ways to think about the performance in Q3 was it worth it or would be helpful.
Thanks.
Himanshu Patel
Yeah, so on the first quarter to be clear lead flow sequentially is stable. I mean there is some seasonality there but maybe even slightly improving as price of the better characterization.
The references to lead flow declines is strictly a year-over-year comment. The low point on lead flow from an absolute perspective from the JVs was full quarter ['16].
We mentioned on the Q1 call that the sequential rise from into Q1 was healthy and probably above and beyond normal seasonality. I'd say that trend has sort of continued but you know there is still just the absolute levels are still notably below a year ago.
We will start anniversarying some easier comps on that, that’s not a reason for us to get excited because the absolute levels of lead flow is still weak but just on from a percentage basis you won’t hear as much of a decline going forward assuming it sort of sequentially goes sideways from here. The comment on JV revenue, you’re correctly talked about that being down low single digit, we talked about it being mid-single digits decline this quarter.
There is always comparability noise I think to go with those numbers as a good judge, there is you know cats and dogs in every period but you know those numbers are normalized from the [BIM] so we think about which is Clover accounting as well as the portion of our JV revenues that was impacted by the $25 million of non-recurring items that inflated revenue in the year ago period.
James Schneider
Thank you for the color. And then maybe just as a quick follow-up, maybe Frank on the enterprise pipeline of the $200 million you’ve talked before about that kind of feathering in over the next 24 months.
Can you give us any kind of color in terms of how much of that was in the next 12 versus the following year?
Frank Bisignano
I would just think about our previous comment on that Jim which is think about it as a ratably over the course of two years.
Operator
And the final question for today will come from David [indiscernible]. Please go ahead.
Unidentified Analyst
Oh yeah, hey thanks guys. Just a couple of things.
The first thing I know you called out the 25 million non-recurring and I just went back to last year’s 10-Q and there was a 13 million price increase and a 12 million non-recurring item. Is that the 25 million and does that mean the pricing increase got reversed at some point?
Himanshu Patel
Yeah, the 25 is the sum of those two numbers and just one correction, the 13 was not a price increase. The 13 was due to a one-time benefit you get from the timing of network assessment fee increases and just the way the math works as you get -- you essentially get to recognize the benefit of that fee increase because you’re passing it on to your clients in that quarter but you don’t end up paying the networks until one quarter in a reverse.
So, at the moment that the network fee increase happens, there is a 90-day period where you end up having a list of network fees actually went down due to the opposite impact. That is not a price increase that's just a one quarter timing issue related to that.
If you remember there was an assessment fee increase that happened in that period.
Unidentified Analyst
Yeah, got it. Okay, and the only other thing certainly understand the tax rate, it's difficult to know that the number.
So how are you going to present that? Is your adjusted presentation going to still be at the more cash rate or is the adjusted presentation going to move to these like say 30% or whatever that number is going to end up being?
Himanshu Patel
No, I would say our adjusted presentation will reflect a normalized booked tax rate. And like I said we will come back to you guys with normalized booked tax rate guidance.
But we will be accruing full taxes and our adjusted EPS will reflect that full tax even though our cash tax rate will remain substantially below that first couple of years.
Unidentified Analyst
Okay. So, your cash flow has actually been really good relative to earnings which is great.
Operator
This concludes our Question-and-Answer Session. I would like to turn the conference back over to Frank Bisignano, Chief Executive Officer for any closing remarks.
Frank Bisignano
Thank you very much for joining our call this morning. As always, we greatly appreciate the opportunities that you deeper dive into our results.
And we look forward speaking with all of you over the coming days and weeks. Thanks a lot, and have a great day.
Operator
The conference has now concluded. Thank you for attending today's presentation.
You may now disconnect.