First Data Corporation (FDC) Q3 2018 Earnings Conference Call Transcript

First Data Corporation (NYSE: FDC)
Q3 2018 Earnings Conference Call
Oct. 29, 2018, 8:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Hello and welcome to the First Data Third Quarter 2018 Earnings Conference Call. All participants will be in listen-only mode. Should you need assistance, please speak to a conference specialist by pressing *0. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press *1 on your telephone keypad. To withdraw your question, please press *2. Please note this event is being recorded. I now would like to turn the conference over to Peter Poillon. Please go ahead.

Peter Poillon -- Senior Vice President, Investor Relations

Thank you, operator. Good morning and welcome, everyone, to First Data's Third Quarter 2018 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 the 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 and EBITDA growth rates referenced by Frank and Himanshu will be on an organic constant currency basis and exclude the impact from currency and acquisitions and divestitures, and measure growth on a comparable accounting basis. After Frank's and Himanshu's prepared remarks, we'll open the call up to Q&A and our standard ground rules 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.

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 reconcile those measures to GAAP measures in the appendix of the slide presentation and in the supplemental schedules to the earnings release. Now, I'd like to hand the call over to Frank.

Frank Bisignano -- Chairman and Chief Executive Officer

Thank you, Peter. Good morning, everyone. It's a pleasure to be on the call today. We again turned in a solid quarter of performance as we continued to execute against our initiatives to drive growth, particularly in many of the high-growth areas of our business. I'll start with a review of our third quarter performance. Our segment revenue grew 5% on an organic constant-currency basis, led by strong performances in GBS and GFS, both of which grew 6%. It's notable that both segments benefited from solid growth contributions from the North American region.

Segment EBITDA grew 7% on an organic constant-currency basis. Free cash flow was healthy at more than $400 million for the quarter. During the quarter, we received proceeds of $550 million from the sales of two low-growth non-core businesses: Our check remittance processing business and GFS businesses in Greece and Central and Eastern Europe. These strategic portfolio actions allow us to concentrate management time and investment dollars in our fastest-growing and most profitable businesses.

Between the strong cash flow and the proceeds from the divestitures, this was a banner quarter for total cash generated, and that brings me to capital allocation. Our net debt declined more than $850 million in Q3 and more than $1.4 billion year to date. We've reduced our leverage ratio to 5.3x at the end of the quarter and are clearly on target to bring our leverage down to our stated goal of low 4x by the end of next year. Separately, we closed on a significant refinancing transaction last week that will result in an estimated $90 million interest expense reduction next year.

Let me now touch on some key growth initiatives, where we are significantly accelerating our pace of investments because speed to market is critical and we see significant incremental revenue opportunities for First Data. Let's start with Clover, our cutting-edge tablet-based point-of-sale platform. Clover continued its strong growth and performance in the third quarter. We're now processing about $70 billion of annualized volume globally on Clover, up a healthy 45% year over year.

For a little historical perspective, Clover was generating less than $20 billion of annualized volume in early 2016. I think this clearly shows the incredible traction Clover has in the marketplace. The Clover platform remains on a great growth trajectory as is, but we intend to take a leading position in this business to the next level through initiatives aimed at notably expanding Clover's addressable revenue market.

A few highlights on this. First, merchants can now sign up digitally on clover.com. Merchants can go to the website, do their research on all the rich feature and functionality of the Clover platform, and most importantly, open up a Merchant Services account directly online and be up and running almost instantaneously. This is the start of a new and highly strategic distribution channel that we intend to scale.

Second, Clover will shortly launch a tightly integrated full-service restaurant software solution. Clover has always been strong in small, quick-service restaurants, but the FSR segment needs much deeper functionality and is a large addressable software market that enables Clover to increase its revenue per merchant. FSR is just one example, but we have an exciting pipeline of both horizontal- and vertical-specific software solutions at Clover, all intended to increase our revenue per merchant. We'll be sharing more details on this in the coming quarters.

Lastly, after a relatively brief pilot, Clover is now in Canada, and we expect to be live in Argentina before year end. We have a solid road map ahead at Clover and are confident that we can extend our lead with this platform. Following on closely to the advancements we're making in the digital signup on clover.com, we are also investing to advance digital enrollment with our JV partners, all of whom are very enthusiastic about a joint plan to enroll more small merchants digitally.

Let me now provide a brief update on our ISV strategy. Our differentiated solution continued to gain market share as our ISV business once again generated robust revenue growth well in excess of 50%. We signed up more than 250 new ISVs through the first three quarters of the year, an incredible pace of new business wins that strengthens our foothold in the integrated space. Our current pace of signing up new ISVs is more than double the combined rate of CardConnect and BluePay prior to them being acquired by First Data last year. This speaks volumes to the power of combining these two great assets with First Data.

There are a number of notable recent wins that are indicative of our success here, but let me just provide two of the more prominent ones. Recurly, a leading provider of subscription management software, will integrate into our CardPointe Gateway API, and IDEXX, an international leader in pet healthcare innovation that will integrate into our Bolt solution and deploy our Clover hardware. We're also investing to take our market-leading CoPilot CardPointe partner platform to the next level and across other channels.

We are building our international capabilities, providing ISVs the ability to integrate with us to get outside of the U.S. In addition, we also expect to launch instant onboarding capabilities, which will be game-changer for ISVs, as they will then be able to offer a PayFac-like experience for their merchant clients through our highly differentiated CoPilot CardPointe platform.

I'd now like to talk briefly about our international businesses, which turned in another strong performance in the quarter. First Data generated in excess of $525 million of total revenue outside of the U.S. in the quarter. That's up 13% year over year. EMEA grew steady mid-single digits, but the growth was highlighted once again by our LATAM businesses, which grew in excess of 30%, and Asia/Pac, up high teens in the quarter.

Now, let me briefly touch on some of the recently closed enterprise deals. Within GBS, we signed several exciting enterprise mandates and partner arrangements. Just recently, we announced that we've signed a significant piece of new business with Royal Bank of Scotland Group in the U.K. RBS decided to reenter the acquiring market, and after extensive market evaluation, elected to switch to First Data as its exclusive technology partner based on our highly differentiated Clover platform and the strength of our global technical processing capabilities. We signed a deal to provide multiple products, including acquiring security solutions and telecheck, for Aaron's across its thousands of retail locations in North America and its e-commerce platform. Both of those deals were competitive takeaways that further reinforce the strength of the products and solutions that we are bringing to bear in the marketplace.

Building on our long-term core processing relationship with Valero Energy, First Data significantly expanded its services to Valero to provide advanced fraud detection and secure tokenization and encryption to support in-store and at-the-pump transactions. Valero will also launch a mobile app leveraging First Data's uCom mobile services for use at Valero's 6,000 outlets. In our stored value business, we're excited to now include luxury retailer Neiman Marcus in our fantastic portfolio of gift card partners. In the category of key renewals during the quarter, we're extremely pleased to have renewed our important partnership with PayPal on our international OmniPay platform.

In GFS, we closed several notable new mandates around the globe. We recently entered into a significant new processing arrangement with a leading financial institution in Europe for debit and ATM services that represents a meaningful expansion in the region. We also won separate mandates for credit processing for Addiko Bank and broadened our agreement with Ikano Bank to include processing solutions across Europe. Here in the U.S., we recently won a mandate to significantly expand the fraud services we provide for Credit One Bank. We continue to onboard the sizable global backlog in GFS and have great confidence in our ability to sustain good top-line growth in the segment.

I'll wrap up here by saying that we're pleased with our growth, our pace of innovation, and our continued balance sheet progress. We reiterate our organic revenue and EBITDA growth rate guidance for the year. Our full-year EPS guidance is revised primarily to reflect significant and recent adverse FX moves. Let me now turn it over to Himanshu for a deeper discussion about the quarter's financial results.

Himanshu Patel -- Chief Financial Officer and Executive Vice President

Thank you, Frank. Good morning and good afternoon, everyone. I'm going to start on Slide 4, the summary of our Q3 results. As a reminder, the organic constant currency growth rates that I'll be discussing are just the reported growth rates for the impact of currency translation, acquisitions, and divestitures. Additionally, these growth rates compare the current-year amount to the prior-year as if the new reporting standards that we adopted as of January 1st of this year were adopted retrospectively. Please refer to the 8-K that we filed in April for a full disclosure of the changes associated with the new reporting standards, including the impact of those changes on our 2017 revenue and EBITDA as if the changes were adopted retrospectively.

Now, to the quarter. Overall, we had another good quarter, characterized by continued good revenue momentum in GBS, much improved revenue growth in GFS, and continued measurable progress on deleveraging. Segment revenue was $2.16 billion in the quarter, up 5% on an organic constant-currency basis. Reported segment revenue was negatively impacted by $45 million of currency headwinds in the quarter, primarily in Latin America, with the devaluation of the Brazilian real and especially the Argentine peso were severe. Note that for reference, in 2017, First Data generated $170 million and $130 million in Argentina and Brazil respectively, and those currencies were down over 50% and about 20% respectively at the end of the third quarter on a year-over-year basis.

Segment EBITDA of $815 million was up 7% on an organic constant-currency basis, and on that basis, our segment EBITDA margin improved by 60 basis points. Reported segment EBITDA was negatively impacted by $23 million of currency headwinds in the quarter. Q2 adjusted net income per diluted share came in at $0.35, down $0.05 year over year, as our improved operating performance was offset by the application of a normalized tax rate in the current period and a $0.02 headwind from unfavorable currency movements.

We also had another strong cash flow quarter, generating $444 million of free cash flow. As Frank mentioned, during the quarter, we also closed on the divestitures of the businesses in Greece and Central and Eastern Europe and the check remittance processing business in North America. We applied the majority of our free cash flow and the funds received from the divestitures against net debt. As a result, net debt declined by $855 million this quarter. You should be aware that both of the divested businesses were previously included within GFS.

Slides 5 and 6 summarize financial performance for the quarter and year to date respectively, including a breakout of results by segment. You see on Slide 6 that reported constant-currency segment revenue and segment EBITDA have growth 8% and 10% respectively year to date. You should note that we've lapped the anniversary of the acquisition of CardConnect in early July and will lap BluePay in December. And, as you know, we've divested certain non-core businesses in Q3 of 2018, so reported growth rates are lower in the second half of 2018 compared to the first half. Organic growth rates, by definition, are unaffected by this M&A activity.

Let me discuss the segments in more detail, beginning with GBS on Slides 7 and 8. GBS Q3 segment revenue of $1.38 billion was up 6% on an organic constant-currency basis, continuing the good results we saw in the first half of the year. I would note that currency movements negatively impacted total GBS segment revenue by about $36 million in the quarter. GBS segment EBITDA of $503 million grew 10% on an organic constant-currency basis, and on that basis, its margin improved by 110 basis points. Currency movements negatively impacted total GBS segment EBITDA by about $18 million in the quarter.

Now, let's discuss GBS revenue results by region, starting with North America. GBS North American revenue grew 4% on an organic constant-currency basis. This compares to the 5% normalized growth rate we achieved in Q2, with most of the variance in growth rates between the two quarters attributable to lower hardware revenue growth in Q3. Let me provide a little color on the three distribution channels within GBS North America. Partner Solutions continued to be our fastest-growing channel.

Our ISV and agent businesses continued to exhibit the highest levels of growth in our North American merchant acquiring business. As Frank mentioned earlier, we are accelerating our investments in our ISV business to extend our lead, and we are very confident that this can be a multi-hundred-million-dollar revenue channel for First Data in the medium term. Our direct channel continues to grow moderately, benefiting from solid volume growth across our RSA partners and the many initiatives we've invested in the past two years in this channel.

The JV channel was down modestly on a year-over-year basis, roughly comparable with its trend in recent quarters. To date, GBS North America has grown mid-single digits each quarter this year. We believe that this growth rate is firmly sustainable, supported by investments we are making in partner solutions, particularly the ISV channel and the Clover platform, where we see an opportunity to acquire merchants online and grew revenue per merchant through the sale of value-added services and software.

Now, let's discuss our GBS regions outside of North America. Our international merchant acquiring business continues its excellent performance, growing 17% on an organic constant-currency basis in the quarter. GBS EMEA revenue grew 8% on an organic constant-currency basis, driven by good performance in both our direct business and our European JVs. GBS Latin America turned in another very strong quarter, up 37% on an organic constant-currency basis, driven by continued robust growth in Brazil and Argentina. GBS APAC grew 13% on an organic constant-currency basis, driven by strong results throughout the region. So, in summary, GBS was once again very healthy around the globe.

Let's turn to GFS, covered on Slides 9 and 10. GFS Q3 segment revenue of $407 million was up 6% on an organic constant-currency basis. Currency movements negatively impacted total GFS segment revenue by about $9 million in the quarter. Additionally, as I mentioned earlier, you should note that in mid-August, we sold our GFS check remittance processing business, which had previously been generating about $20 million of revenue per quarter. In addition, in our GFS EMEA division, we sold our Greece and Central and Eastern Europe businesses at the end of the third quarter. This transaction did not affect Q3 GFS revenue or EBITDA, but it will affect Q4 reported numbers.

GFS third-quarter segment EBITDA of $161 million was down 2% on an organic constant-currency basis. Currency movements negatively impacted total GFS segment EBITDA by about $5 million in the quarter. The EBITDA decline in GFS this quarter was primarily driven by transitional costs we are incurring to ramp certain new businesses in North America, including the Navient student loan processing deal that I discussed on the last call, compression related to renewals, primarily in North America, and the nonrecurrence of prior-year software license settlements outside of North America.

Let's take a look at GFS by region. GFS North American revenue grew 4% on an organic constant-currency basis in the quarter. This is a notable sequential improvement driven by the ramp-up of new deals. The positive impact from new deals was partly offset by recent large contract renewals. Moving to international regions, which represent roughly half of GFS revenue, they collectively grew 9% on an organic constant-currency basis. GFS EMEA revenue grew 1% on an organic constant-currency basis, driven primarily by new business being onboarded in the U.K. and Germany, largely offset by the nonrecurrence of a sizable Vision Plus license payment in the prior-year quarter.

GFS Latin American revenue grew 23% on an organic constant-currency basis, primarily driven by growth in Argentina and Colombia. GFS APAC revenue grew 30% on an organic constant-currency basis, driven by broad-based growth across the region. So, in summary, GFS top-line growth is back to what we believe is its long-term trend line of mid-single digits, and we expect GFS's industry-leading margins to remain strong over the long term.

Please turn to Slide 11 to cover NSS. NSS third-quarter segment revenue of $367 million was down 2% on an organic constant-currency basis. As disclosed on our Q2 call, we did not renew a large, low-margin plastics deal. I'll discuss the impact of this in a moment. Despite the revenue decline, NSS third-quarter segment EBITDA of $195 million was up 6% on an organic constant-currency basis. On that basis, its margins improved by 410 basis points, driven by improving revenue mix and focused revenue management of fixed costs in this segment.

Let me break out the results by NSS's three main business lines: EFT Network Solutions, which comprises our STAR Network and debit processing business, was up mid-single digits year over year as we are gaining momentum in implementing new STAR deals with several national merchants that we believe will drive improved volumes. We feel great about the new business momentum in STAR and remain confident that our bundled portfolio of products will help us continue to gain market share in the debit market medium-term. Stored value network revenues were down high single digits, driven by weakness in the closed-loop gift solutions business. The non-renewal of the low-margin plastics deal impacted year-over-year revenue growth by about $14 million in the quarter, and we expect a similar year-over-year impact in Q4, but lesser impact starting in 2019.

Excluding the non-renewal of this low-margin deal, the closed-loop gift solutions business grew at a healthy double-digit pace in the quarter. Security and fraud revenue was down low single digits in the quarter, reflecting flat growth in our core security and fraud businesses as we've lapped some sizable new wins from the prior year and the ongoing decline in telecheck revenue associated with the secular decline in check payments. In summary, we view the segment as a mid-single-digit grower over the medium term, powered by products like gift solutions, the STAR Network, and multiple security and fraud offerings.

Moving to free cash flow, shown on Slide 12, this table on Slide 12 walks you from total segment EBITDA to free cash flow, which we think of largely as cash flow from operations less CapEx and distributions to minority interests. Q3 was another good cash flow quarter, with free cash flow coming in at $444 million. This reflects good operating performance and a roughly $50 million favorable conclusion of a prior-period tax-related matter. Year to date, we've generated robust free cash flow of nearly $1.2 billion.

Now, let's discuss our balance sheet. Slide 13 lays out our debt balance at the end of 2017, Q2 2018, and Q3 2018. Our net debt decreased $855 million in Q3, driven by the free cash flow generated in the quarter and the proceeds we received from the two divestitures I mentioned earlier. Net debt has decreased by more than $1.4 billion since the end of last year. Our leverage ratio, defined as net debt to segment EBITDA, was 5.3x as of September 30th, down from 5.6x at the end of Q2 and 6.0x at the end of 2017. We remain highly confident that our net leverage will approach low 4x by the end of 2019, in line with our stated goals for deleveraging our balance sheet.

Please turn to Slide 14, where we discuss our recent refinancing transaction. As you know from our press release on Friday, we've once again been very active in the credit markets, as we seek to optimize our capital structure and reduce interest costs. We raised a new $6 billion credit facility with a rate of LIBOR plus 150 basis points, maturing in 2023. The key benefits of the transaction are that it will result in a substantial reduction in our annualized interest costs to the tune of approximately $90 million starting in 2019. In addition, the transaction pushes out all major debt maturities to 2022 and beyond. The transaction attracted significant commitments from a wide variety of financial institutions, allowing us to further diversify our sources of debt capital. We review that as a reflection of the market's confidence in the strength of our business and deleveraging trajectory.

Finally, let's turn to full-year guidance on Slide 15. We laid this slide out a little differently this quarter because we want to clearly show both the reported constant-currency and the organic constant-currency growth rate ranges for revenue and EBITDA. First, on revenue, three key points to make here: Organic constant-currency revenue growth guidance for the full-year 2018 of 5-6% remains unchanged.

Reported constant-currency revenue growth guidance for the full year 2018 is modified to 6.3-7.3% with the change versus prior guidance on this basis strictly attributable to the impact of the two divestitures completed in Q3. And, one final important point on revenue: We expect actual dollars of reported revenue in Q4 2018 to be adversely impacted versus a year ago by $50 million from the two divestitures completed in Q3 and an additional estimated $60 million from the recent deterioration in certain foreign exchange rates, primarily in Latin America.

Next, on EBITDA, three key points to make here. Organic constant-currency EBITDA growth guidance for full-year 2018 of 6.5-8.5% remains unchanged. Reported constant-currency EBITDA growth guidance for full-year 2018 is modified to 7.6-9.6%, with the change versus prior guidance on this basis strictly attributable to the impact of the two divestitures completed in Q3. And, one final important point on EBITDA: We expect actual dollars of reported EBITDA in Q4 2018 to be adversely impacted versus a year ago by nearly $15 million from the two divestitures completed in Q3 and an estimated $35 million from the recent deterioration in certain foreign exchange rates.

Next, let's now turn to our EPS guidance. We now expect full-year 2018 adjusted EPS in the range of $1.38 to $1.40. The downward revision from our prior guidance primarily reflects two items: Foreign exchange impacts that are considerably worse than anticipated in the second half, and lastly, a modest dilutive impact from the two divestitures closed in Q3, primarily impacting Q4. Lastly, full-year guidance for free cash flow in excess of $1.4 billion remains unchanged. Finally, on the topic of guidance, we remain confident about achieving our medium-term guidance of mid-single-digit segment revenue growth, mid- to high single-digit segment EBITDA growth, low double-digit to mid-teens adjusted EPS growth, and $5 billion plus of cumulative free cash flow from 2019 to 2021. We'll provide full-year 2019 guidance during our Q4 2018 earnings call.

In closing, we continue to feel great about our business and financial outlook. Our GBS business continues to see good, sustainable growth across all geographic regions, and we expect this momentum to continue. Clover is selling online on clover.com for the first time, the start of a new and highly strategic distribution channel that we intend to scale. In addition, Clover is building out value-added services and software solutions like the full-service restaurant solution, all intended to increase the revenue we earn per Clover merchant.

Our Partner Solutions business is rapidly taking share in the ISV and agent channels, and this business is investing to extend its lead in the integrated space. Our digital merchant signup initiatives are progressing well across our JV and other bank partners. International businesses continue to deliver double-digit growth. Lastly, we continue to rapidly delever as we utilize our significant free cash flow to strengthen our balance sheet. Our low 4x leverage ratio target for year-end 2019 is clearly achievable. With that, let me hand the call back to the operator to open it up to Q&A.

Questions and Answers:

Operator

Yes, thank you. We will now begin the question and answer session. To ask a question, you may press *1 on your touchtone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press *2. At this time, we will pause momentarily to assemble the roster. And, the first question comes from George Mihalos with Cowen.

George Mihalos -- Cowen and Company -- Managing Director

Great, good morning, guys. Just wanted to ask on Clover -- in all the progress you're making there, is there a way to think about how the Clover sales break through distribution channels, maybe just what's direct versus partner? And, somewhat related to that, any sort of color you can give as to how the rollout on the bank partner side is going via the digitization, if you will, of Clover.

Himanshu Patel -- Chief Financial Officer and Executive Vice President

George, on Clover, it's very important to recognize that it is available through all First Data distribution channels in North America. It's been a pretty methodical effort by us over the last few years, so it started with some of our largest bank JV partners, and now it's available in all of those partners in our ISO channel, in our agent channel, as well as our RSA bank partner channels.

Frank Bisignano -- Chairman and Chief Executive Officer

George, relative to bank adoption, two of our JVs are in the digital mode already, the third one preparing shortly. We have a series of bank partners and even other partners who are now on digital distribution. It is the early innings, but we've veered very heavily in this and built the machine, and it's been well adopted by partners, and we'll have a rollout plan through all of next year to finish the swing on it. And, we expect it to create, obviously, a meaningful change to the way we acquire. It's a new distribution channel for us. They've embraced it heavily. I think it's important -- when you take large institutions and become part of their real estate, it shows the adoption rate, so we have a number of them up and running, including our two biggest JVs.

George Mihalos -- Cowen and Company -- Managing Director

Okay, thanks for that color. Just quickly on the GFS side, not sure if I missed it, but Himanshu, what was the contribution to revenue from the Navient deal, and how are you guys thinking about the core card process and the core issuing processor business? Is that still steady, or any changes that you're seeing there? Thank you.

Himanshu Patel -- Chief Financial Officer and Executive Vice President

Navient was high single digits of revenue contribution on the quarter on top-line and mid-single digits dilutive to EBITDA on the quarter.

Frank Bisignano -- Chairman and Chief Executive Officer

And, I would say on the core processing business, we feel very good. We're investing in adjacencies to that also to actually create new revenue pulls, and you'll see that through next year, but our core platforms are strong, our clients are renewing, and we have a great business model there.

George Mihalos -- Cowen and Company -- Managing Director

Thank you.

Operator

Thank you. And, the next question comes from Darrin Peller with Wolfe Research.

Darrin Peller -- Wolfe Research -- Managing Director

All right, thanks, guys. Maybe we're diving a bit deeper into the GBS North America growth rate from last quarter's trends. First of all, how much was the actual hardware sales in the two quarters? And then, when you say you have confidence in that growth rate being sustainable in the mid-single digits, can you just break down -- is JV growth going to end up being an easier comp contributor next quarter or '19 in your expectations? And then, maybe further onto Clover and the ISVs, do you expect those growth profiles to be sustainable there as well? Thanks, guys.

Himanshu Patel -- Chief Financial Officer and Executive Vice President

On the first question, Darrin, GBS North American growth rate -- if you remember in Q2, we posted 6%, but we called out a one-time contract amendment. If you adjust for that contract amendment, which we had quantified, it was basically a 5% growth in Q2. If you take the third-quarter number and adjust for what was a greater-than-Q2 decline in the rate of hardware sales, you get to 5% on Q3 as well. So, from our perspective, the rate of GBS North American growth is roughly comparable if you normalize both. They're affected by different items. One was a contract item in Q2, and the third quarter had a greater decline on hardware. And, by the way, you see that in the transaction growth in GBS North America. You can see that, and it's actually fairly healthy, which is indicative of the improving product mix that's more tilted toward profits in the current quarter.

I think your bigger question on JV growth rates -- they're obviously still declining, but the rate of decline is essentially the same. We're not seeing an improvement. We're seeing some moderation in the rate of decline on some of the incoming lead flow data, but as we've said before, it's not material to our analysis at this stage because we think lead flow is going to become a meaningless metric over time. I think it's still fair to assume we expect the JVs to post growth in 2019. I think it's not going to happen in the third quarter or the fourth quarter.

Darrin Peller -- Wolfe Research -- Managing Director

Okay. All right, that's really helpful, guys.

Frank Bisignano -- Chairman and Chief Executive Officer

And then, on ISV and Clover, we have purposely accelerated our technical investments in both because we see a sizable opportunity on market share gains in both areas. So, our view is the things we're doing to build out our ISV technical software and moving it out internationally also will give us the ability to sustain that growth level in our digital acquisition, and our value-added services will create new profit pulls around Clover and cause that to be able to grow at the rate it is today.

Darrin Peller -- Wolfe Research -- Managing Director

All right, that's really helpful. On that note and a quick follow-up, on the Clover side, we've estimated over $600 million of revenue coming from Clover now, growing at a very healthy clip, obviously, not far off from your volume growth rate. But, that's still -- I just want to make sure we're on the right numbers. That's still mostly off of payments revenue, meaning there's a lot more to go on the software side. Is that accurate?

Himanshu Patel -- Chief Financial Officer and Executive Vice President

Yeah. Your numbers and estimates -- I understand the math you're doing on that, Darrin. Your macro point is 100% right. The primary source of revenue that we earn from the Clover platform today that is recurring in nature is acquiring revenue. One of the big pivots that's happening in Clover over the next 18 months is the buildout of value-added services and software, which we think allows us to pretty materially increase the revenue per merchant that is on Clover, and the other big change we're doing is obviously starting to acquire Clover merchants directly online, both through our bank partners as well as now on clover.com.

Darrin Peller -- Wolfe Research -- Managing Director

All right, great. Okay.

Operator

Thank you. And, the next question comes from Ashwin Shirvaikar with Citi.

Ashwin Shirvaikar -- Citi Investment Research -- Managing Director

Hey, Frank, Himanshu. My first question is on GFS. Would it be possible to size the impact of the large renewals you mentioned, and are these new renewals? You had mentioned large renewals having an impact last quarter as well. Are these new renewals, or are these the same renewals rolling through until they come, and is it safe to assume that the new base then grows and its new enterprise wins also ramp, so the GFS constant-currency growth rate should improve from here?

Himanshu Patel -- Chief Financial Officer and Executive Vice President

Ashwin, I would say the impact of the renewals starts anniversarying itself in the early part of next year, not exactly at the end of this year, but really at the tail end of Q1 of next year. Renewals happen every year in this business, but I think it's fair to say that the dollar amount or the percentage of the revenue base in GFS globally that got renewed in this current period is probably roughly twice what happened in the prior year, so that's just showing through on the numbers.

Ashwin Shirvaikar -- Citi Investment Research -- Managing Director

Got it. Thank you for that. Good job here on the cash flow and debt side. I just want to clarify quickly if there is any benefit assumed from the debt refi in 2018 -- obviously, the debt in 2019 improvement.

Himanshu Patel -- Chief Financial Officer and Executive Vice President

Really, not much, if anything. We have to do some additional transactions in the market, which I'd rather not comment on, but those will not really be material to this year. Really, expect the savings from that to be a full-year-2019 event.

Ashwin Shirvaikar -- Citi Investment Research -- Managing Director

Got it. Thank you, guys.

Operator

Thank you. And, the next question comes from Andrew Jeffrey with SunTrust.

Andrew Jeffrey -- SunTrust Robinson Humphrey -- Analyst

Hi, guys. Good morning. Thanks for taking my question. I wonder if we could elaborate a little bit on Clover in particular -- the revenue-per-merchant commentary and value-added software solutions. I think across verticals, but particularly maybe in restaurants, how does end user behavior change such that you start to monetize more software? Your primary competitor in this regard has offered things like direct deposit and really integrated itself in that physical world ecosystem. Are there some delevers you're looking at that give you confidence once you start to monetize outside of acquiring?

Frank Bisignano -- Chairman and Chief Executive Officer

Why don't I take that? Himanshu can obviously add later. We've spent a lot of time building out Clover, as you know, and I think we've been very happy with its growth as a product. We have had software revenue from it, but the pivoting of where we started as an app store and moving to very vertically focused and well understood opportunities is what we're doing. So, if you look at how -- what I talked about our FSR vertical -- it is designed to service the FSR and will, in fact, attract revenue because of their acquiring it for the software specifically for their business model.

We also are building out many of the other things that are fundamental value-added services that our merchants will buy. We know that for a fact. We've had focus groups, we've talked to them, and so, those value-added services that help them improve the profitability of their business or run their business economically better is what you'll see us do, and you should expect that rolling out quarterly through next year. And so, we know the platform has tremendous subscription. Verticalizing our software so, in fact, we're not just letting app developers develop on us, which we love them to do, and many of those apps get used, but also delivering very specific software-as-a-service and other services is what we'll be doing, and that'll be across the whole Clover platform.

Himanshu Patel -- Chief Financial Officer and Executive Vice President

Andrew, I would add a little bit of background context on this. If you look at First Data's journey with Clover over the last four years, I think it's fair to say we really focused on three main areas: Expanding distribution, building a great core operating platform, which is evidenced by the hundreds of third-party developers that code to it, as well as having a very innovative and broad line of form factors.

I think it's fair to say that for the next two years, not that we don't want more distribution, but we have a lot already. It's not that we're not gonna keep working on the operating system and the form factors, but they're already pretty top-notch. I think it's fair to say our focus in terms of how we spend our development dollars at Clover is now going to focus a lot more toward building out value-added services and software, which includes both horizontal items that cut across all verticals as well as making a few bets on select verticals, full-service restaurant being the first one that will roll out shortly.

Andrew Jeffrey -- SunTrust Robinson Humphrey -- Analyst

Okay, that's really helpful. I appreciate it and look forward to seeing your progress.

Operator

Thank you. And, the next question comes from Brad Berning with Craig-Hallum.

Brad Berning -- Craig-Hallum Capital Group -- Analyst

Hey, good morning. One follow-up on the interest expense side: The $90 million in savings you talked about in the $6 billion debt refinancing -- I'm assuming that's exclusive to the actual interest savings on that piece of it. Does that not count the actual debt reduction interest savings that you're having for next year? Just want to clarify that point.

Himanshu Patel -- Chief Financial Officer and Executive Vice President

Yeah. I'm sorry, Brad, the $90 million estimate has nothing to do with interest savings we would earn from paying off absolute amounts of debt. That's a separate bucket. This is just the interest savings we estimate that we'll earn from taking existing indebtedness and replacing it with new debt at LIBOR plus 150.

Brad Berning -- Craig-Hallum Capital Group -- Analyst

And then, one follow-up -- on the GBS North America transaction volumes actually accelerated a little bit this quarter, can you talk about specifically on mix shift or which areas where you saw the acceleration?

Himanshu Patel -- Chief Financial Officer and Executive Vice President

Yeah, the acceleration actually started a couple quarters ago. We saw some strength in our large enterprise book. More recently, the incremental acceleration is being driven by Partner Solutions and our direct business, which has smaller merchants, but now, the rate of growth in both of those is becoming more material that it's helping total transaction growth.

Brad Berning -- Craig-Hallum Capital Group -- Analyst

Thanks a lot.

Operator

Thank you. And, the next question comes from Bryan Keane with Deutsche Bank.

Bryan Keane -- Deutsche Bank -- Managing Director

Hi, good morning. Just wanted to ask on GBS North America on hardware, I guess why did hardware slow? Was it a tough comp? And then, do you expect this to continue into fourth quarter and into next year as a tougher comp?

Himanshu Patel -- Chief Financial Officer and Executive Vice President

No. If you look at the third quarter of last year, Bryan, it would be a little bit hard for you guys to decipher publicly, but if you look closely at some of our disclosures, you'd be able to read it. We end up selling some hardware sales in bulk to ISOs, and so, we had a very large ISO bulk sale in the third quarter of 2017. We simply anniversaried that this quarter, so that creates a year-over-year negative drive.

Bryan Keane -- Deutsche Bank -- Managing Director

Okay, that's helpful. And then, just thinking about NSS going forward, what is the right organic growth rate there? I know there's some moving pieces with the non-renewal in the plastics contract, but can you just talk a little bit about how we should think of that and model that going forward, that segment?

Frank Bisignano -- Chairman and Chief Executive Officer

Yeah, that segment you should think about as a mid-single-digit grower. Obviously, that segment -- that mid-single-digit grower -- is also our telecheck business, which obviously is not a grower, but I think about the total segment as a mid-single-digit grower inclusive of that.

Bryan Keane -- Deutsche Bank -- Managing Director

In the fourth quarter as well?

Himanshu Patel -- Chief Financial Officer and Executive Vice President

You won't see that in Q4 because of the low-margin plastics contract that we referred to that was about $14 million of revenue in Q3. We referenced that last quarter. We walked away from that contract. That's going to work through over the next three more quarters.

Bryan Keane -- Deutsche Bank -- Managing Director

Got it. All right, thanks, guys.

Operator

Thank you. And, the next question comes from Dave Koning with Baird.

David Koning -- R.W. Baird and Company -- Analyst

Yeah, hey, guys. Thank you. And, I guess first of all, my question on GFS -- you had North America, APAC, and LATAM all accelerated pretty nicely in the quarter, I know partly on wins and stuff. Is that growth rate sustainable? I know you have more wins coming on and an easy comp in Q4. Could that growth actually improve further in Q4?

Himanshu Patel -- Chief Financial Officer and Executive Vice President

The question was on GFS international?

David Koning -- R.W. Baird and Company -- Analyst

Well, GSF North America, APAC, LATAM -- I guess the whole segment. Everything is accelerating.

Himanshu Patel -- Chief Financial Officer and Executive Vice President

In its entirety -- I understand. Look, we started the year saying that we expected GFS to accelerate in the second half, both for global and for North America. That's a combination of new wins onboarding as well as the Navient transaction. I think you're just seeing that come through in the third-quarter numbers. You can see GFS globally is now at 6%. We feel pretty comfortable that that's a good rate of growth for that business going forward.

David Koning -- R.W. Baird and Company -- Analyst

Okay. And then, the follow-up is the margins were down quite a bit on the wins -- the investment. When can those return to year-over-year growth again? What quarter might we see that?

Himanshu Patel -- Chief Financial Officer and Executive Vice President

I don't know the exact quarter that I'd want to give out. I want to think a little bit more about that, but I'd say if you think through one of the impacts that's clearly weighing on margins is we did a lift-out of Navient, which onboarded a bunch of revenue, but more expenses on day one. We have to go through a technology conversion to bring Navient into our environment. The act of doing that itself significantly improves the profitability of that transaction as well as further wins that we would obviously get on that. I would think about that as a four-quarter transition, call it one to two quarters into it. You're going to see that impact for the first half of next year as well.

David Koning -- R.W. Baird and Company -- Analyst

Okay, great. Thank you.

Operator

Thank you. And, the next question comes from Jason Kupferberg with Bank of America Merrill Lynch.

Jason Kupferberg -- Bank of America Merrill Lynch -- Analyst

Hey, thanks. Good morning, guys. So, I just wanted to ask about the JVs. I think you guys had previously said that the second half of '18 should be stronger than the first half, so I wanted to see if that's still the expectation, and as you think about 2019 and sustaining mid-single across GBS North America, how much acceleration do we have to see in the JVs? Obviously, the comps are really going to get a bit harder overall, and particularly in areas like Partner Solutions in 2019, so I just wanted to gauge how much acceleration we need to see in the JV channel next year to stay in that mid-single-digit range.

Frank Bisignano -- Chairman and Chief Executive Officer

I actually think there's two points to that. One is that today, we're producing with our current JVs being down. We have an expectation that during the course of '19, they will go up. That is designed along with our current business. We feel that the investments we're making in Partner Solutions and the ISV space specifically will continue to keep this growth rate and, in fact, give us much greater opportunity across that, not just ISV, but also in the agent business. We think the investments we're making in Clover will allow us to get more revenue per merchant and, in fact, gain share in many other categories.

So, our belief is that we will grow the other, being JVs, but our business itself could carry that JV load at the growth rate it is today without an issue because we believe all of the businesses are going to grow better next year because the technical investments -- we made a pivot. We are veered in technology quite heavily when you look at CoPilot, CardPointe, our Bolt solution, and our Clover product, and our digital acquisition capabilities, so we feel very good about the ability to grow that number.

Himanshu Patel -- Chief Financial Officer and Executive Vice President

Jason, I would just reiterate the comment we made in the scripted part of the call. We feel very confident about maintaining a mid-single-digit growth profile for GBS North America despite the JVs being down modestly. We've been doing that for three quarters in a row. Obviously, we expect the JVs to improve at some stage, timing TBD on that, but they're clearly stable in terms of their growth rate performance, and we have many other engines going, whether it's on our Partner Solutions business, whether it's Clover, or continued gradual improvement in our direct business to keep us pretty confident that GBS North America is firmly a mid-single-digit grower now.

Jason Kupferberg -- Bank of America Merrill Lynch -- Analyst

Okay. Himanshu, just a follow-up for you -- obviously, there's a fair amount of FX sensitivity here, so if you were to just snap the line on where rates are right now and project forward, any sense you could give us for 2019 of the kind of headwinds on top- and bottom-line that we would experience?

Himanshu Patel -- Chief Financial Officer and Executive Vice President

Let us come back to you on that offline. Obviously, some of these Latin American currencies are moving so much month to month that it's probably better for us to just see how the quarter progresses before we opine on that for '19.

Jason Kupferberg -- Bank of America Merrill Lynch -- Analyst

Okay, makes sense. Thanks, guys.

Operator

Thank you. And, the next question comes from David Togut with Evercore ISI.

David Togut -- Evercore ISI -- Managing Director

Thanks. Good morning. Tremendous focus right now on the restaurant space within merchant acquiring. Clearly, both your San Francisco and Atlanta competitors have either announced major expansion organically or through acquisition. Can you talk about what you're going to do differently with Clover to get a lot of traction in restaurants versus some of the competitive offerings?

Himanshu Patel -- Chief Financial Officer and Executive Vice President

David, I'd give you two data points there. 1). We never had a full-service restaurant solution before, so we were never fundamentally going after that market aggressively with software. We were always going after it with, obviously, payments and an app store. 2). If you look at the vertical concentration where Clover has generally done well over the last three years -- there's pretty good data now -- you can see restaurants is Clover's biggest single vertical. And so, we think it's very natural for us to peel deeper into that vertical and build out software functionality for full-service restaurants, who are obviously very different than quick-service restaurants.

The third thing I would say is the time to do this is very much now for us. It would have probably been a little bit of a different story three years ago, precisely because three or four years into the launch of Clover, we now have a back book. So, we obviously have a lot of existing restaurant clients that would love to buy more richer-functionality full-service software from us. It's very easy for us to deliver to them through the Clover platform since it's cloud-enabled, and obviously, for the front book, it's going to be helpful as well. When you understand the composition of the book at Clover, building out a full-service restaurant solution is entirely right in our strike zone, both for the existing client base as well as the future.

David Togut -- Evercore ISI -- Managing Director

That's helpful. Just a quick follow-up on capital allocation: Does your low 4x net debt to EBITDA target for year-end '19 assume all free cash flow goes toward debt paydown between now and then?

Himanshu Patel -- Chief Financial Officer and Executive Vice President

We generally assume in those assumptions the vast majority -- assume 80% or so.

David Togut -- Evercore ISI -- Managing Director

And, the other 20% -- is that for possible tuck-in acquisitions?

Himanshu Patel -- Chief Financial Officer and Executive Vice President

No, it's just there tends to -- you can always have some gap between free cash flow and net debt. For example, you could have new capital lease formations that increase to your debt balance. You could have other items. We may do a couple of small little venture investments here or there, but most of it is intended to go toward net debt reduction, but you can't always call it perfectly, so that's why we just leave a little bit of a gap there when we do our modeling on that.

David Togut -- Evercore ISI -- Managing Director

Understood. Thank you very much.

Operator

Thank you. And, the next question comes from Jamie Friedman with Susquehanna.

Himanshu Patel -- Chief Financial Officer and Executive Vice President

Jamie? You're on mute.

Operator

Okay, as we are getting no response from that, probably the next question comes from Lee Cooperman with Omega Advisors.

Leon Cooperman -- Omega Advisors -- Chairman and Chief Financial Officer

Thank you very much. A couple questions. With your strong free cash flow, and what appears to be a very optimistic feeling about your outlook, and the fact that 2018 is just about over and everyone is focusing on 2019, we've basically seen that we're selling around the current price of about $20.00 on the pre-market, about 12.5 times earnings. When you look at the after-tax cost of debt versus the after-tax cost of equity, would you consider slowing down your debt repayment program in favor of buying stock if the market becomes disillusioned with our story and the stock trades at prices that you think are inappropriate? That would be question No. 1. Question No. 2 is any further insight into the dual-class situation and possible inclusion in the S&P 500? Thank you very much.

Frank Bisignano -- Chairman and Chief Executive Officer

Why don't I start with Question 2? We had made a very firm declaration that we would do everything in our power to be prepared for that, and we view that as a project to do everything inside the house to get ready for that. We see that as something over the next 18 months that will surely occur, and that's how I'd think about the dual-class stock. That's a commitment that we made that we're very focused on getting done. And, capital allocation sits at the top of the list for us. I would like to remind people also around that -- that the first piece of capital allocation we do is how we make decisions about what to spend in the company, and we've been investing very heavily in technology.

You heard us talk about accelerating it because we have a deep belief that we can get an even better lead with our products in the ISV space, and that Clover has proved itself out as an industry-leading payment platform and software platform, and we're going to do a bunch more there. So, that's not going to change anything that we're thinking, but it's important that you recognize that's our first course of capital allocation. And then, we've always paid attention to where the stock trades and what to do. We've always said deleveraging is first and foremost for us, but in a company that's generating $1.4 billion plus of free cash flow, doing over $3 billion EBITDA, we have a lot to think about.

Himanshu Patel -- Chief Financial Officer and Executive Vice President

Leon, I think if you look at our public commentary about this topic, we've been very clear that we do think paying down debt is important, but we've said we want to get to 4x by the end of '19, which is only a little bit over a year from now, and we've also indicated that on the other side of that, we don't want to be dogmatic. We're going to be very strategic in terms of how we deploy our capital, and at that point, paying off debt may not make sense, and we'd consider obviously either share repurchase or acquisitions at that stage. But, I think it's fair to say that's sort of the game plan for now until the end of 2019. Obviously, if circumstances change materially from here, we'd revisit that, but that's where we are today.

Leon Cooperman -- Omega Advisors -- Chairman and Chief Financial Officer

Thank you.

Operator

Thank you. And, that was the last question. I'd like to return the floor to Frank Bisignano for any closing comments.

Frank Bisignano -- Chairman and Chief Executive Officer

Thank you, everyone, for being on the call this morning. We're tremendously grateful for your time and attention during the call. We are happy to spend this time with you always, and we all look forward to discussions at the next conversations in the various venues over the next few weeks. Thank you very much.

Operator

Thank you. The conference is now concluded. Thank you for attending today's presentation. You may now disconnect your lines.

Duration: 62 minutes

Call participants:

Peter Poillon -- Senior Vice President, Investor Relations

Frank Bisignano -- Chairman and Chief Executive Officer

Himanshu Patel -- Chief Financial Officer and Executive Vice President

George Mihalos -- Cowen and Company -- Managing Director

Darrin Peller -- Wolfe Research -- Managing Director

Ashwin Shirvaikar -- Citi Investment Research -- Managing Director

Andrew Jeffrey -- SunTrust Robinson Humphrey -- Analyst

Brad Berning -- Craig-Hallum Capital Group -- Analyst

Bryan Keane -- Deutsche Bank -- Managing Director

David Koning -- R.W. Baird and Company -- Analyst

Jason Kupferberg -- Bank of America Merrill Lynch -- Analyst

David Togut -- Evercore ISI -- Managing Director

Leon Cooperman -- Omega Advisors -- Chairman and Chief Financial Officer

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