Fidelity National Information Services Inc (FIS) 2004 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Third Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will be given at that time. If you should require operator assistance during this call, please press star, then 0. As a reminder, this conference is being recorded for replay, and details will be given at the end of the call.

I would now like to turn the conference over to our host, Vice President of Investor Relations, Mary Waggoner. Please go ahead.

Thank you, Robert. Good morning, everyone.

Joining me today to review our third quarter results are Lee Kennedy, Chairman and Chief Executive Officer; Larry Towe, President and Chief Operating Officer; Mike Vollkommer, Chief Financial Officer; and Mike Sax, Treasurer.

In addition to being recorded, this call is being audiocast live over the Internet. A webcast replay will be available on our website, and the operator will provide telephone replay information at the end of the call.

The statements made during this call will include forward-looking comments, and we ask you to refer to the safe harbor legend at the end of our press release.

I will now turn the call over to Lee Kennedy.

Thank you, Mary.

Good morning, and welcome to our third quarter earnings call. I'll begin today's call by summarizing third quarter results and then cover the planned sale of our merchant acquiring business and today's announcement of our MOU to provide card processing services to LaSer, a leading European card issuer. Larry Towe will follow me with an update on key business initiatives, and Mike Vollkommer will conclude today's call with a detailed financial report.

Now, for our third quarter report.

We are pleased to report solid third quarter results. As summarized in this morning's release, consolidated revenue increased 12 -- or 13.2 percent to 262.7m. Operating income grew 12.6 percent to 47.1m, and earnings per share came in at 46 cents, which was a 15-percent increase over prior year. EPS from continuing operations increased 15.8 percent to 44 cents.

These solid operating results were achieved in a weaker-than-expected retail sales environment, which slowed third quarter U.S. card and check transaction growth. This weakness closely parallels sales reports issued by major retailers throughout the U.S. We've been monitoring this trend very closely to determine its potential effect on the holiday shopping season and have concluded that our current EPS guidance range adequately takes into account the possibility of continuing weak retail sales.

During the quarter, we reacted very quickly to the first signs of slowing retail sales and initiated tight expense controls across all businesses, which enabled us to minimize the bottom-line impact of soft consumer spending. We were also able to cover significant unbudgeted costs incurred to activate our contingency processing systems when our Florida operations were threatened by multiple hurricanes.

I'll now cover business unit results, starting with Check.

Despite the weakness in retail sales, Check Services produced strong third quarter operating results. Consolidated revenue grew 23.3 percent. Operating income increased 30.6 percent. And the overall margin increased 80 basis points, driven by continuing improvements in the accuracy of our risk-management models, increased collections, tight cost control, and improved leverage in our cash access business.

As we discussed in our second quarter call, we have made significant progress over the past three years in diversifying our core check risk management business. We have entered new markets which are less sensitive to fluctuations in retail spending and have launched new products and services, which target vertical industries with strong, sustainable growth potential. Today, approximately 45 percent of Check revenues are generated from products and vertical industries outside our traditional North American risk management business.

Our payroll check cashing, gaming, and third party collection product lines generated strong double-digit revenue and operating income growth in the quarter. In particular, we made significant progress in our check cashing business.

At the end of the third quarter, we were providing payroll check cashing services to over 6,500 Wal-Mart, Safeway, and Albertson stores nationwide. As mentioned in our last call we signed a substantial multi-year agreement with Wal-Mart to provide a comprehensive range of third-party collection services. The installation of these services was completed on schedule during the third quarter.

We were also pleased with the progress that we are making in our gaming business, where sales momentum remains very strong; third quarter signing, including a leading riverboat casino and one of the nation's largest cruise lines. The gaming industry is a high-growth opportunity for our Company, and we think we're well positioned to increase share in this vast growing segment.

In summary, we believe our strategy of maintaining the industry's most accurate risk-management systems, the development of new products and services which target high-growth vertical industries, and strategic acquisitions which leverage our risk-management capabilities will position us well for sustainable long-term growth.

I'll now turn to Card Services.

Card Services' revenue increased 6.7 percent, and operating income increased 5.1 percent in the third quarter. These results were driven by 5.2-percent revenue growth in North American card issuing and 26-percent revenue growth in International card. The slight decline in Card's operating margin was largely attributable to strong, high-margin debit card marketing revenue in the prior-year quarter and Crittson integration costs in the current quarter.

New sales institution signings, strong e-banking and card loyalty sales, and revenue from Crittson contributed to the growth in our North America card-issuing business, which was partially offset by lower quarterly marketing revenue.

Domestic card transactions increased by 3.1 percent over the prior year, compared to 5.6 percent in the second quarter, reflecting weaker-than-anticipated back-to-school sales. We expect strong growth in our e-banking, card loyalty, and account activation services to drive high single-digit revenue growth in the fourth quarter.

International card issuing revenue grew by 26 percent. We expect a year-over-year increase to moderate over the next few quarters but remain in the low double-digit range.

In the U.K., we added 400,000 full-service accounts, whose revenue more than offset inactive low-revenue account purges in the quarter. New revenue from these full-service accounts, strong card growth in our South American operations, CariCard, and positive currency trends drove very strong top-line growth for the quarter.

I hope that you've had a chance to read this morning's announcement regarding the execution of an MOU, where Certegy will provide private label, bankcard, chip card, and consumer loan processing services to LaSer, a leading European card issuer with operations in the U.K., Holland, Portugal, Spain, and Belgium. We announced this MOU at this time for two reasons -- both parties are well underway in the development process, and the word is out in the marketplace, and we wanted to make sure that we communicated accurate information on the status of this new deal.

This long -- new long-term agreement will add over 2m new card and loan accounts at conversion, significantly increasing our presence on the European continent and leveraging our existing processing and support infrastructure that exists throughout the U.K.

We're in the process of completing final contract details and expect to reach a definitive agreement in the very near future. We expect revenue to commence in early 2006. Larry will provide additional information on this important new win later on in this call.

Before I turn the call over to Larry, I'd like to discuss our decision to sell our merchant acquiring business. As stated in this morning's release, our Board of Directors just this month approved a plan to [invest][ph] this business. As we have indicated in the past, we view merchant acquiring as a non-strategic business. Over the past few years, we have operated this business conservatively in order to reduce our exposure to merchant risk. While at the same time doing this, it also made our long-term growth potential, and had limited it.

Our merchant revenue has been generated from two separate businesses --

One, merchant acquiring services, where we own merchant contracts and we own the associated risk; and --

Two, institution processing, where we provide authorization, settlement, customer service to community banks that contract directly with merchant customers.

We will continue to operate the institution-processing segment, which we believe is complementary to our card issuing business.

The merchant acquiring business, which includes approximately 12,000 direct merchant relationships, generating $106m in gross revenue and $28m in net revenue annually -- it will contribute approximately 8 cents per share in 2004.

Interest in our merchant acquiring business has been very, very strong, and we are currently in discussions with one large merchant processor who has indicated the willingness to market our check products on an exclusive base, thereby enabling us to further penetrate what we believe is a very, very large regional market. We have no additional details to report at this time but hope to complete the sale of this business prior to year-end.

Mike Vollkommer will provide further details on the accounting treatment and financial impact of discontinuing this operation later on in this call.

I will now turn the discussion over to Larry, who will provide additional information on new customer signings, the planned sale of our merchant acquiring business, and other key business initiatives. Larry?

Thank you, Lee.

Good morning, everyone. I'll begin with a few additional comments regarding the LaSer announcement and the sale of our merchant acquiring business, followed by an update on our card and check businesses.

We're extremely pleased to announce a Memorandum of Understanding with LaSer. LaSer is a subsidiary of Galeries Lafayette Group, one of Europe's premier retailers. LaSer specializes in providing portfolio management, card development, credit, and loyalty programs to retailer around -- retail and specialty stores. We have provided transaction processing, consumer cost center, and back office support services to Creation Financial Services, one of LaSer's subsidiaries, since entering the U.K. market in 1999.

The current agreement covers 4.5m private label cards, bankcards, and loan accounts. As Lee mentioned, the new long-term agreement will extend Creation's existing contract, as well as add 2m cards and loan accounts for a total of 6.5m accounts in 5 countries throughout Europe. The remaining portfolios are processed on several different platforms today. We believe our excellent relationship with Creation, the flexibility of our Base2000 platform, and our ability to support rapid portfolio growth were deciding factors into LaSer's decision to expand their relationship with our Company. We look forward to providing additional details in the near future.

We are working on other -- several other opportunities in Europe, Brazil, Asia-Pacific, and the Caribbean and remain confident about the growth potential for each of these markets.

Next, I'll discuss the sale of our Merchant business.

As Lee stated, being a merchant acquirer is not strategic to our overall operation and places us in direct competition with many of our financial institution customers who provide the same services. Exiting this business will better position Certegy to sell clearing and settlement services to our financial institutions.

Other factors influenced our decision as well --

First, merchant acquiring is extremely competitive and a mature market.

Second, card industry regulations is increasing and becoming more complex, making it more difficult for small acquirers to comply.

Third, achieving desirable growth rates would be accompanied by increased merchant risk for our Company.

And, fourth, our current position relative to the big players in this rapidly consolidating industry is not consistent with our overriding strategy of being a leader in this market -- the markets we serve.

Now, I'll turn to North American Card.

We signed several new contracts in the quarter and are working on additional prospect. We recently announced a new credit card processing agreement with Suncoast Schools Federal Credit Union. Suncoast has $4.3b in total assets and is the eighth largest credit union in the nation. It is the third-largest card-issuing credit union, with $275m in card loan outstandings. We also announced a new card processing agreement with Pulaski Bank and a new card processing and e-banking agreement with Bank of Louisiana. Suncoast and Pulaski were both competitive wins, and the Bank of Louisiana was a new outsourcing contract. Collectively, these new agreements are expected to add over 200,000 new cards and generate 2m in combined new annual revenue.

Enhancement and loyalty products continue to represent strong growth potential, reflecting the increased focus customers place on value-added rewards.

Sales of e-banking services remained strong, driven significant -- driving significant growth in our electronic bill payment. Certegy is well positioned to capitalize on these growth opportunities.

We completed the Crittson integration in August, several months ahead of schedule, and are pleased with the results to date.

Turning to International Card --

The CariCard acquisition, which was finalized in early August, gives Certegy a leading presence in 16 countries throughout the Caribbean. CariCard will enable us to leverage existing technology and operating centers. Integration efforts are underway, and we expect to complete the process within the next 12 months.

Turning to Check --

We're pleased to announce a new expanded agreement with Dillard's department stores. Dillard's, which has been a Certegy customer for 10 years, previously outsourced only their high-risk transactions. Under the new agreement, Certegy will provide full warranty services for all transactions to Dillard's stores nationwide.

In summary, we continue to maintain a strong competitive position and active sales pipelines in each of our businesses.

I'll now turn the call over to Mike.

Thanks, Larry, and good morning.

I'll cover the consolidated third quarter results. Then I'll add to Lee's and Larry's comments on segment performance and conclude with our outlook for the fourth quarter.

As Lee had mentioned, the Board of Directors approved a plan to sell our merchant acquiring business at a meeting held in late September. Therefore, as of the third quarter, we are reporting this business as a discontinued operation. The results of discontinued operations are required to be presented separately as a single after-tax profit line item on the face of the income statement below net income from continuing operations.

Revenue from the discontinued operations is not reported on the income statement. Its balance sheet accounts are collapsed into two line items -- assets held for sale and liabilities related to assets held for sale. All related cash flows are reported on the cash flow statement as a single line item entitled, "Cash provided by discontinued operations." The prior -- you know, the prior comparative periods are restated to conform to this presentation.

So consolidated revenue and operating income, as well as our related comments today, pertain to the continuing operations only. The many attachments to our press release provide a full reconciliation of the financial statement reclassifications and also disclose the revenue generated by the discontinued operation.

Moving on to the P&L, consolidated third quarter revenue of $262.7m increased 13.2 percent over the prior year third quarter. This growth was driven by a 23.3-percent increase in Check Services' revenue and a 6.7-percent increase in Card Services' revenue.

Consolidated operating income of $47.1m increased 12.6 percent. Check Services' operating income grew 30.6 percent. Card Services' grew 5.1 percent. And corporate expense began to level off with a 2.9-percent increase.

Interest expense during the third quarter totaled $3.3m, a $1.2m increase over the prior-year quarter. This increase is primarily driven, once again, by higher interest rates on indebtedness, caused by the issuance of our $200m notes back in September of 2003.

Outstanding borrowings on the revolving credit facility related to our first quarter acquisition and subsequent share repurchases, and the Fin. 46 lease accounting, which became effective at the beginning of '04, also contributed to the higher interest expense.

Net income increased 10.5 percent to $29.1m, comprised of 27.8m from continuing operations and 1.3m from discontinued operations.

Earnings per diluted share increased 15 percent to 46 cents, comprised of 44 cents from continuing ops and 2 cents from discontinued ops.

Average diluted shares outstanding totaled $63.8m for the quarter, a 3-percent reduction from the prior-year quarter. During the third quarter of 2004, we repurchased over 1.2m shares of common stock at a total cost of approximately $47.8m. This drove a $26.5m increase in our revolving credit borrowings during the quarter, bringing the outstanding balance to $61.5m at September 30. Since Certegy's spin-off in July of 2001, we have repurchased approximately 8.4m shares of stock at a total cost of $243.2m.

I'll now move on to the segment results.

Total card revenue of $149.5m, increased 6.7 percent from 140.2m in the prior-year quarter. Our North America card issuing business generated 5.2-percent growth over the prior year. This quarter's revenue growth in North America issuing was tempered by a slowdown in transaction growth, as well as other year-over-year comparisons, including heavy debit card marketing revenue in the prior-year quarter. This marketing revenue, which was related to our debit card loyalty program, drove that quarter's high North American revenue growth, as we mentioned, in last year's third quarter call.

More favorable, year-over-year comparisons in the fourth quarter of this year should result in a strong quarterly growth rate driving full-year North American revenue growth to approach 10 percent.

International card issuing revenue increased 26 percent in the quarter, primarily due to growth from new full-service accounts in the U.K., growth in existing customers in Brazil, card reissuance fees, and the third quarter acquisition of CariCard.

Now, our reported global card and account numbers will show some reductions in the third and fourth quarters. This has a much larger impact upon total reported cards and accounts than revenue. The drivers of these reductions includes a third quarter deconversion in North America of 1.2m limited service postage accounts, which had no associated cards.

Our new card adds will be less evident due to deconversions and inactive purges. In fact, the fourth quarter is expected to show an estimated 2m card and account purge in the international numbers, which currently generate minimal inactive revenue. These purges will free up system capacity on existing hardware and reduce costs of maintaining these cards on file. Now, we're beginning to assess our reported metrics to identify better data that is more relevant to the growth and diversification of our businesses.

The continuing merchant processing revenue increased 4.2 percent in the third quarter. Going forward, this processing revenue will likely be included as a product line with North America card issuing.

Third quarter card operating income was $36.7m, increased 5.1 percent compared to 34.9m in the prior-year quarter. Slower transaction growth, lower comparative marketing revenue, Crittson integration expenses, and hurricane preparedness costs in our Florida operation contributed to lower profit growth in the second quarter.

Card Services' operating margin for the third quarter of 2004 was 24.5 percent, which compared with 24.9 percent in the prior-year quarter.

Check Services' revenue of 113.1m grew 23.3 percent from 100 -- from 91.7m in the prior-year quarter. Revenue growth in Check was also tempered by a slowdown in consumer spending. New customer signings and growth in cash access, including the acquisition of Game Financial, drove this quarter's top-line growth.

Third quarter Check operating income of $15.5m increased 30.6 percent compared to 11.9m in the prior-year quarter. Again, slowing retail sales activity and hurricane-related costs contributed to lower profit growth than the second quarter. However, exceptional performance of our risk-modeling systems increased collections, and the containment of variable costs all contributed to this quarter's margin expansion in Check.

Check Services' operating margin for the third quarter was 13.7 percent, an 80-basis-point expansion over the 12.9-percent margin in the prior-year quarter.

Corporate expense of 5.1m in the third quarter increased by 2.9 percent. The increase in corporate expense, as I mentioned earlier, has moderated from the first half of 2004 due to favorable insurance premium renewals and the containment of discretionary cost items.

I'll now conclude with some brief comments on our fourth quarter guidance.

Our fourth quarter EPS guidance is 53 to 55 cents from continuing operations, with the revenue growth of 14 percent to 16 percent. Discontinued operations could add an additional 2 cents per share if held for the entire quarter. An anticipated gain on the disposal of this business segment is not included in this guidance.

Thank you. And before we take questions, I'd like to turn the call back to Lee.

Thanks, Mike.

I want to thank everyone for their attention and interest this morning. Overall, we're very pleased with third quarter results, and we're particularly pleased with the progress that we're making in our cash access and international card businesses.

Operator, at this time, we'd like to now open the line for questions.

Thank you. [Caller instructions.]

Dris Upitis, Credit Suisse First Boston.

First a question just on the pipeline on check cashing and also on the traditional guaranteed product. Can you give us a little bit of an update there?

Both on check cashing and the traditional pipeline are very, very strong. In fact, they probably are as strong now as they've been at any point in time over the last couple years. We have significant interest on check cashing from other grocers throughout the country as they notice that some grocers have implemented our services.

And on the major retail end with our core business, which has always been a very, very strong pipeline for us, it remains stronger than ever.

The delta, or the change, probably is the pipeline, which, in the regional business on Check, which has increased substantially over the last 12 months, so we're encouraged in every single facet and piece of Check as it exists today.

Okay, and now that you've made some good progress rolling out the check cashing product, can you give us a sense for where margins are in that business versus the traditional one and where they might ultimately go?

Well, they're pretty comparable to the traditional business right now, and I believe, you know, hopefully, that it can be -- you know, it can help us expand that tradition, the overall segment margins, because I do believe that we can ultimately have higher margins in the check cashing. But it's fairly comparable at this point.

Okay, thanks.

Welcome.

Kartik Mehta, Midwest Research.

I wanted to ask a little bit about the fourth quarter in terms of -- as you look at the guidance. What type of retail sales are you anticipating? Similar to what we had in the third quarter? Getting worse or getting a little bit better?

Well, I think similar to what we've experienced in the third quarter. I think in talking to the major retailers, most of them at this point in time are cautious, but they don't believe that they'll deteriorate further than what we've seen in the third quarter, so our guidance is based on maintaining the run rate that we currently see today.

So if we do see better sales, obviously, that will help the --?

Absolutely.

And moving on to the Game Financial business that you bought from MGI, could you talk about what you're experiencing there in terms of potential contract renewals, new products, you know, anything that is -- that you've done since you've acquired the business?

Well, we're in the process of developing a whole series of new cash access products, and they're on schedule and on target, so we feel comfortable that we'll be able to roll those out within the next 6 to 12 months. So we're in good shape there.

As far as contract renewals, there are several that are out there. We think we're in a good position with each and every one of them. I know that there have been some reports issued relative to the MGM contract, and all I can say at this point in time is that we feel pretty encouraged about the renewal of that contract.

However, we factored the possibility of not renewing that contract into the purchase price when we purchased the company because we knew that that contract -- the contract negotiations were ongoing prior to the date of the closing of that business.

Other contracts that we're up against we feel comfortable we're going to renew those. We have not lost any deals to date. And the reception in the marketplace has been exceptionally strong, and we expect to penetrate new accounts and sign new business in the very near future.

Craig Peckham, Jefferies & Company.

Lee, I just wanted to pursue a bit the retail sales situation, and I guess what I wanted to find out more specifically was how you distinguish between, I guess, volatility in retail spending versus a secular decline in check usage.

Okay. You know, we have spent an enormous amount of time on that particular subject with our major customers, and I can tell you that in analyzing their data and working with them, we still believe that the runoff to debit card or migration to debit card is in the 4-percent range. We believe that in this particular quarter that we were hit with a 3- to 4-percent decline in overall retail sales that affected our old base in addition to the conversion to debit. So that 4-percent number, on an old-base analysis, is pretty much what we've come up with, and I think we supported that by taking -- if you go back and take a look at our first quarter results, where our old base was pretty much flat with prior year, maybe down a percent or so, if -- if there was actually a conversion to debit in a magnitude greater than 4 percent, we would've seen it in that quarter, and we did not. So we still are relying on that number and feel pretty good about it.

And, Craig, one thing you might want to remember is last year was a good back-to-school season. This year, it was relatively weak, whereas the Christmas season last year was weak. So from a comparability standpoint, it's better in Q4.

Okay, thanks. I appreciate that.

And my follow-up question is on the, I suppose, anticipated use of proceeds on this divestiture and whether you anticipate getting cash or stock out of that deal.

Yeah, we'll get cash on that deal, and as soon as we get that, we'll slug it against the revolving credit facility, bring that borrowing down. You know, in the long run what we're doing here is redeploying capital in a low-growth business and giving us more capability to spend on strategic acquisitions. But day one, we'll take the revolver down.

Greg Gould, Goldman Sachs.

To follow up on the consumer spending issue, did -- can you quantify or just tell us how the trends occurred during the quarter? Did it stat out much stronger and then weaken as the quarter progressed? And what have you seen in the month of October so far?

Yeah, Greg, absolutely, August was the worst of the months, where a lot of the back-to-school shopping occurs. You also remember there were a lot of the tax rebate checks last year that were not there this year, so that was not overly surprising. And September did come back from where August was, and I would say August was certainly the trough.

Okay. And then, secondly, can you give us some thoughts about how you'd like to deploy the cash obtained from the merchant business when that transaction closes?

Yeah, I -- what we'll do is just pay down the revolving credit facility. We'll put it against the revolver day one. But, again, the strategy with the disposition of that business is the redeployment of invested capital from a low-growth business for us into higher growth opportunities. So paying down that revolver on day one just gives us more capacity to borrow for strategic acquisitions.

Jim Kissane, Bear, Stearns.

Mike, just following up on the merchant questions. Yeah, you're got to pay down some of the credit facilities. Do you expect it to be a non-dilutive sale, you know, based on what you expect to realize on the sale?

You're forgetting the one-time gain. You know, on a run rate, you know, we're taking, you know -- you know, 8 cents out of this year's earnings, and we're not going to make up, you know -- you know, we'll make up 10 percent of that on interest. So it is -- it is dilutive, but, you know, the reason why -- you know, and we don't look at dilution accretion with every deal that we do on a buy or a sell. Strategically, now is the right time to sell that business for all the reasons that Lee and Larry talked about. But, certainly, it's going to, you know, impact us on the EPS side, but, you know, it's a -- you know, we've made that decision for a long-time strategic purpose.

And I think it absolutely is dilutive, but on the other side of the coin, not having that business over the longer term should help our growth rates overall.

Yeah, the continuing growth rates will be high.

That's definitely not a business that we're prepared to effectively compete in.

No, I got you.

And on the LaSer deal, and it sounds like a pretty big deal, is it possible to quantify or to put some size, you know, materiality around it? And does it require you building a new platform, or can you leverage your existing software and infrastructure?

Yeah -- this is Larry. Yeah, we plan on leveraging our U.K. operation, our data center in the U.K., and I think the significance of the deal is that we're going to enter 4 new countries. Did Lee mention those? There's Holland, there's Spain, Portugal, and Belgium. But it will give us a presence in those countries. We have found it very difficult to cross the English Channel to date, and this is a big step for us. Once we have presence in a country, we'll have some business analysts and reps in those countries servicing those accounts and those subsidiaries of LaSer and will give us the opportunity to expose other businesses in those countries, you know, to Certegy. And we will not have to build a new data center. We will be building some functionality, adding language capability and currency capability, but those are a part of our fabric already in our BASE2000 platform. So we'll leverage the data center in the U.K., build some additional utility to our functionality, and be in 4 new countries within, you know, a relatively short period of time.

Tony Wible, Smith Barney.

One question, actually has to do with the gaming business. Can you describe what the organic growth rate would've been this quarter? And then the second half of that is, you know, in the reverse situation where you keep MGM, can you comment about what the Mandalay Bay opportunities would mean?

Yeah, our -- you know, we look at the cash access business to include gaming and check cashing, and they both had exceptional organic growth. But in total, it was in the low- to mid-20s.

And as far as the potential with the incremental properties, I think it's a little bit too early. That's not on the table at this point in time, but we would hope in the future as the deal evolves that that might be made available, so that would be significant, also.

Great. Thank you.

You're welcome.

Roger Freeman, Lehman Brothers.

I'm wondering if you can break out in Card Services the impact of the debit marketing revenues that you didn't have as much of this year?

About -- it was about [multiple speakers] three -- yeah, figure $3m in prior year. So if you netted that out, that was really almost [multiple speakers]

[Multiple speakers] of about $3m.

Almost a one-time event that would've kicked the growth rate up in North America to 8 to 9 percent, which would've been comparable with what we expected.

All right, okay.

And then the second question is when you look out, you know, into next year at this point in your -- in the -- in the check business and the new business wins you have, is your -- do you expect your new business wins to -- are they coming in above or below what you've been doing this year and, say, last year, that $50m kind of range?

And then as a follow-up to that, are those more regional or national types of accounts?

Well, we do expect to achieve on or about the $60m range this year. And as far as next year, it's a little bit too early for us to give you guidance. But I'll tell you the general statement that there's nothing out there that leads us to believe that we can't duplicate that.

Now, that $50m included regional business. Now, with the -- with the increased competition on the regional base, and if we're successful in negotiating this merchant divestiture deal where we had more feet on the street selling our check products, then, obviously, that could be incremental to that, and we'll have to take a look at that as we move forward. We'll report that to you in the first quarter.

And this year's new wins are more heavier -- heavier weighted to the regional than they have in the past, which is why you don't see a lot of press releases because there are a lot of small deals. But that's good because we like the margins on that regional business. But with that said, some of the pipelines got some recognizable names in it.

Yup, some very good names.

[Tim Jin Wong][ph], J.P. Morgan.

Just as a follow-up to that question, how much is a new -- the 50 to 60m in new business is takeaway business versus just in-house conversion?

You know, that's -- that's -- I don't have that number with me, but I will tell you that an awful lot of it this year is actual takeaway business from other service providers. There has -- there had been some signings that were in-house that converted directly into us, but the majority and the bulk of it is takeaway from the competition.

And, particularly, on the regional side.

Especially regional, and even as much, I guess, on the national side, too. But having said that, I think there are some industries out there that have traditionally done all their own check cashing in-house, and I think you will see some of that, you know, in the future, in the near future, and long-term future, where some of those industries will outsource their check services for the first time. And I think you'll see some of that shortly.

We actually have quite a few of that type or category of merchant sitting in our sales pipeline as we speak. So that'll continue on into the future.

Okay. Is there any way to kind of quantify your win rate on the check side? And, also, have newer entrants, like, I guess, GE put additional pricing pressure on the business?

No, they really haven't. GE, as we all know, signed the deal with 7-Eleven, but to date on the retail end of the business, they're not players on the retail end for traditional check warranty and authorization services on the check-cashing side of the business. To our knowledge, they're in one account through ATMs, and we've not bumped up against them elsewhere, so we haven't seen that factor enter the marketplace as of right now. We're not discounting them because they're a good strong competitor, however.

[Charles Murphy][ph], Morgan Stanley.

Hi, it's Charlie Murphy calling in for David Togut. Just wanted to ask very quickly about the Crittson acquisition. How is that tracking relative to your revenue and operating income projections when you bought it?

Yeah, the Crittson acquisition has been, from a revenue standpoint, very much in line with what we expected when we originally did that deal. I think the one good thing that's happened is we've actually converted the accounts back to your system earlier than we originally anticipated in the third quarter. Did cause a little bit of incremental expense in the third quarter, but -- so, actually, we're ahead on that part of it.

Yeah, the revenue's definitely sticking now. If you'll recall, we talked about 20m in annual revenue when we acquired Crittson. You need to be aware that -- I think we made this clear at the time -- that 7m of that 20m was merchant acquiring, so that's going with the disposition of Merchant. So the issuing portion of that Crittson revenue is about 13m on an annual basis.

Is there any heavy seasonality in the fourth quarter there?

No more so than we had [multiple speakers] --

Just [multiple speakers] some transactional bump, but that's about it.

-- yeah, in our card business comparable to our base of North American business.

Okay, great. Thanks a lot.

Welcome.

Robert Dodd, Morgan Keegan.

With the $2m card [indiscernible] you said were going to deconvert in the international markets, can you tell us which -- which markets those are?

They're spread among a couple markets. It started really in Australia. There were purges just to improve the efficiencies of the issuers. These particular accounts are primarily in the U.K. In working with LaSer, there are a considerable number of accounts on file that are eating up space and requiring overhead allocations, so pretty much low revenue but primarily from the U.K.

And the reason why we want to look at our metrics is international card issuers on the bank side send out cards, kind of like what they used to do in the States 15 years ago, and hope that they get activated. So we need to really look at our reported metrics to give more relevant data for modeling purposes.

Hopefully, next quarter, we'll be able to provide a better set of metrics because it's really become a mixture of a number of different types of accounts, and it's very difficult today to read and draw the proper analysis from that data.

For example, in addition to card accounts, we now have a growing number of loan accounts, and we all know, loan accounts have a fixed term to them, so after they go through that term, they sit on the file and don't really generate very much. So we'll come out and we'll give you a better indication of how to look at this, but it's safe to say that very little revenue impact as a result of these accounts being moved off the piles.

Right, and keep in mind, we are in the private label business, and your active and inactive rate on private label accounts is much, much different than on your traditional VISA/MasterCard accounts. So, again, we're going to work on some metrics that will better show what we really are processing in the future.

Okay, so that means that you'll have excess capacity on your European platform for the LaSer conversion?

It doesn't take a -- I mean when you're not running transactions, I mean it has some [bazi][ph], you know, free-up. It's not a lot, but there is a cost in maintaining --

It'll cut some of our run times and give us better windows, and the bottom line is that -- take it one step further. I guess the question that you're headed at is will we have some more capacity for the new business that we're bringing on, and the answer is -- in certain cycles, in certain processes, the answer is yes.

Okay, and then final follow-up, are you going to see any -- with that in mind, are you going to see any increase in expenses ahead of the revenue generation from those card -- those new accounts in '06?

No, they're really very automated. We aren't going to see that, no.

Wayne Johnson, SunTrust.

Should we expect -- in the payroll check cashing, should we expect one large retailer to sign up annually?

I would like to have at least one, but I -- I don't want to get out a limb and commit that because it really revolves around their timing decision and programs they have in place within their operations. But I think as a reasonable goal on that, I would say, yes, we would want to be able to accomplish that.

You know, I think going, you know, into next year and through next year, you're going to -- even with a customer base today, you will see a nice ramp-up in usage as people become familiar with the offering.

Absolutely.

And they get their volumes going.

Absolutely.

And that leads to my next question. Is there any way that you could quantify the penetration of your target consumer at Wal-Mart and Safeway?

It's very difficult to do that without disclosing information that would be proprietary to -- to Wal-Mart, and we wouldn't do that. So I will tell you that they've done an enormous amount of work. They really know what they're doing as it relates to serving their customers, and I -- I can tell you they're very thorough, but I don't want to get into those numbers.

And our customers don't even share --

Yeah.

-- all the relevant information with us because, you know, they're in competition with some of the customers that we're serving, the same service. So they're protective of that.

But they are very, very pleased with the progress that they're making, and they do have a high level of customer awareness. They market that program very, very effectively throughout the store chain. They're very good at what they do.

So we'll see nice growth in game -- in check cashing [and gaming][ph] and --

And excellent repeat usage, which is very important.

Right.

Greg Smith, Merrill Lynch.

This is actually David Parker for Greg Smith. In regards to the gaming business, you mentioned earlier the MGM contract and the -- potentially the Mandalay contract. Do you anticipate a lot of your growth in this business coming from these large casinos? Or is it going to come from any of the smaller establishments? And then building off of that, what also do you see as the opportunities internationally?

I think it's going to come from really both segments. Obviously, with the new capabilities that we have, it's our intent to further penetrate the destination casinos, which are typically larger. But, also, with the new capabilities, we're able to further penetrate the regional base, which still has very, very high potential. So both segments.

In international opportunity, as you know, we're not processing internationally currently. That will be a goal of ours to complete the necessary program to be able to do that. That now resides, and that market really is concentrated with almost just about one service provider, and we see a great opportunity there to move this out of the States, into the Caribbean, and throughout Europe.

And the CariCard acquisition, you know, gives us a presence throughout the Caribbean, and we intend on, you know, using that to leverage relationships into the gaming, you know, business down there.

Yeah, absolutely.

Great. And then, secondly, could you also talk about the -- your online banking and bill payment solutions just at the pipeline in that business?

Very, very strong pipeline. Very, very good, good, strong performance. We've said double-digit performance in that business, and that's exactly what we had in this past quarter. We're making good headway in converting and selling to existing customers that we have on the credit and debit side. As you know, we've communicated the strategy where we would bundle all three products. We've signed 3 or 4 good, strong customers, and there's an awful lot in the pipeline as we move forward.

Bill payment is a part of that business. That growth is accelerating. We had a very strong quarter in bill payment. We have good capabilities, and during the quarter, we brought more and more institutions in-house on that service. So we see that as a high-potential business moving forward.

Matt McCormick, Friedman, Billings, Ramsey & Company.

I have a question regarding the timing of the divestiture as it relates -- hello? I have a question regarding the timing of your divestiture as it relates to your acquisition pipeline. Considering that there's always readily -- ready buyers of merchant portfolios, can we assume that the timing of your sale is due to -- due to some near-term acquisitions? And if not, why wouldn't you wait on that sale?

It's really not. It isn't dependent on that. We want to accomplish that sale, move on, so we can get clean numbers in the next year and also pick up the lift from further penetrating the regional base through the utilization of the acquirer's sales force. So, you know, that's kind of the story. There's nothing out there that's holding it up relative to acquisitions.

Yeah, you know, the buyer of this business will not necessarily be the person who's putting the highest last dollar on the table because we're looking to go with someone who we can partner with our Check and other products, so it really is a much more qualitative, you know, pick on our side as to who's going to buy this business. And so it's not just a matter of putting it out for bid at any point in time.

That's right. The right thing strategically for us, and, you know, whether it's a couple months here or there, we think it's important to move as quickly as we can, get it out the door, and then concentrate on the other core businesses.

Okay, and then on Wal-Mart, what percentage of your revenue has that become? And at what level do you become concerned?

We can't really disclose that number without violating an agreement we have with Wal-Mart, so we can't get into the number or the percentage. I'll say this. Wal-Mart has been a very straightforward, upfront professional organization with our Company. We couldn't ask for more. And we believe that we're going to live and die with Wal-Mart based on our ability to perform and deliver the right level of service. So we're not looking backwards on it. We feel comfortable with what we've done to date. As you know, we started in check cashing. We migrated into collections. We now provide a wide range of collections service to them, which is incremental to the check cashing. And it's our hope that we expand the relationship further. We're working on a number of initiatives, and hopefully, we'll be able to do that. But we feel comfortable with that particular merchant and the professionalism that they've displayed to us.

[Eric Smith][ph], Robert W. Baird and Company.

Given the, I guess, the strong organic growth you guys are seeing in cash access, I was wondering if you could talk a little bit about the competitive environment, and probably more specifically, in the casino area, if you're seeing anyone out there being more aggressive or, you know, someone trying to enter the market, anything that would speak to the competitive environment today?

You know, there's a number of competitors that have been out there for some time if we'd -- I guess the question, have we seen any major change in the competition, and I don't think so. I think, you know, two global companies are out there, and they both do a good job, and we've been competing against them for some time. But I think it's safe to say no major increase or no major change since we've been actively involved in that segment.

I think what you see is that, especially in some of the Indian casinos, some of the riverboat casinos, and those types of outlets, these guys are looking for cash access in total. They want to be able to cash checks. They want to be able to do ATM at the cage, script, utilize their cash. So with our gaming business associated with our check business, we can give one contract and a total solution to that, and I think that's helped us in being able to walk in and offer all the services under one contract. So that gives us a slight advantage, especially against some of the Indian and riverboat.

Yeah, and maybe we'll just flip it to answer your question, too. From a retailer or casino perspective, I think they -- they welcome the new entrants into the market because in the past, that particular segment of the market was pretty heavily concentrated with one service provider. So they're enjoying this, and, you know, the activity level in that regard has picked up, but no major deltas or changes.

Great. Thanks a lot.

Welcome.

Peter Swanson, Piper Jaffray.

I was wondering if you could talk about the consumer spending trends in the U.S., if you're seeing a difference either between your national merchants and the regional merchants?

You know, that's a great question because we have spent an awful lot of time going through the data to see if there was a marked difference, and we've concluded there really isn't. Whether it's a national retailer or a regional retailer, we've seen the same basic trends, which confirm that -- which are consistent, by the way, with what the national retailers have -- have reported in terms of sales, year-over-year sales. So very consistent and not skewed to one segment or another.

Okay, thank you.

Welcome.

Greg Gould, Goldman Sachs.

Just a couple of follow-ups. Can you comment on the increased, I guess, win rate or business in the check area, in the regional area? Sorry, not worded well but --

Greg, we can. You know, as you know, we've reported in the past that we only had about $100m in business or revenue generated from that segment, yet we believe that market with some of our competition was significantly above that. The penetration was above that, in some cases, as much as 2 to $400m in revenue. And what we've done is we've realigned our sales force, we've strengthened our sales force, we've struck some additional third-party alliances, and really went back into that segment through new leadership and better qualified that market from a sales prospect standpoint, and we've been executing to that plan and have been doing a relatively good job.

In the future, if we're successful in selling this merchant acquiring business under the right terms, the name of the game in that business is feet on the street and exposure to regional markets, and we'll pick that up. That's why it's important for us to get this deal done and move forward, but we feel very comfortable and confident in our ability to reach that market and to penetrate that market further.

Okay, just two others. The increased -- you mentioned increased regulation in the merchant market. What types of things are you seeing there?

Well, what you're seeing, Greg, is requirements on sponsorship by the associations, how you can get your transaction into the system, who can put them into the system, regulations on -- on the service providers that you use for your front end on how you're switching transactions, and account information through the pipelines, etcetera. If you've looked recently or in the past 12 or 18 months, you see a movement of financial institutions, banks, back into the acquiring business. You've seen Royal Bank of Scotland enter our market. You've seen, you know, big banks buying NPC and things of that nature. You're seeing a movement of those transactions back into the financial institutions, and, of course, some of the regulations from the associations are going to make it tougher for independents to sit out there and continue in this business. It's just heading that way.

Just based on our size, and we operate a very small portfolio relative to the larger players in the business, I think it's safe to say that it would become -- would've become more difficult or will become more difficult in the future for us to process through the MasterCard and VISA system because of increased capital requirements that they're going to require for entrants, sponsorship of banks, and the difficulty of risk associated with that and the bank's reluctance to sponsor smaller players, and then just increased regulation in general, and who can play in that business and who can't play in that business. So that was one of the factors. It wasn't the driving factor. The driving factor was -- for the divestitures was it just did not fit with our core strategies, and it did not represent enough growth potential for our Company.

Okay, and then just one last question. You mentioned increased cost controls helped offset the lower consumer spending in the quarter. Can you quantify what those cost savings were on an annualized basis and maybe what kind of additional flexibility you have going forward?

You know, some of those things were just, you know, simple things, like, you know, when we go on service calls, you know, and you want to take three people, you can take two people. So it's not something that, you know, where maybe that third person's going to help with that sale. Who can quantify it? So a lot of it was just a quick reaction to, you know, what we were seeing in the quarter.

You know, is that going to continue? I don't want to put a number out and have you think, well, that's a run rate because we are -- we do want to grow this business. We want -- and that takes investment, that takes people on airplanes, and that takes a lot of other things. So it's not something that --

And some of it was really driven, also, by the automation of certain manual, labor-intensive functions, especially in our collection areas and in some of our claims processing areas. So there were a wide range of things, but most of the savings really came through a direct result of better management of the risk control models, better data, better analytics, and the numbers associated with that segment were very, very sizable, and they've been sizable for a number of quarters. So we feel good that that will continue on.

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