環匯 (GPN) 2002 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Global Payments teleconference call.

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As a reminder, today's conference call is being recorded. I would now like to turn the conference call over to your host, President and Chief Executive Officer of Global Payments Mr. .

Thank you. Thank you, Allen. Good morning everybody and welcome to Global Payments conference call for the third quarter of fiscal '02. Joining me as usual are , our CFO, and , Investor Relations.

We welcome all of you to the call this morning. You know, this quarter marks our successful one-year anniversary as an independent publicly traded company. And as always, we thank you and I thank you personally for your continued interest in investments in Global Payments.

Let's talk for a minute about the agenda. I'm going to give an overview of our third quarter results, review the trends we observe during the quarter and discuss recent events. Then will discuss the financial results in detail and review the integration status of our recent acquisitions.

I will then comment on the outlook for fiscal '02 and we will then go to a question-and-answer period. I want to remind you, of course, that comments made on this call contain forward-looking statements. And while these statements reflect our best current judgment, they are subject to risks and uncertainties that could cause actual results to vary. These risks and uncertainties are discussed in detail in our latest 10K.

Now for our results. We reported strong results in the third quarter. We grew revenue by 43 percent to $115.3 million resulting in net income of $10.3 million, a 76 percent increase over prior year.

Diluted earnings per share grew by 23 percent to 27 cents. This growth was primarily due to the inclusion of a full quarter of results from our , Imperial Bank and National Bank of Canada portfolio acquisitions as well as continued strength in our direct card merchant requiring business.

We also reported an 80 bases point operating margin improvement as a result of our acquisition integration initiatives. will speak more to that in just a second.

We had EBITDA of $26 million for the quarter, up from 17 million last year and we continue to be a very strong generator of cash.

Regarding Q3 trends, our domestic direct transactions grew in the high teens this quarter as compared to prior year's quarter. This growth coupled with a fairly constant average ticket attests to a well-diversified portfolio.

In addition, our transaction mix is well represented as I've stressed in the past by health care, universities, utilities, and governments. All sectors, which are less sensitive to retail spending, travels and entertainment.

Our Canadian average ticket has a declined slightly over the prior period, primarily due to a shift towards faster growing verticals with lower average tickets such as grocery, utility, and small government payments.

However, overall, our Canadian transactions for the quarter grew in the low teens and as planned. Our check business, I'm delighted to say, also improved during the quarter relative to the first half of the fiscal year, primarily due to strong sales growth in the gaming area, improved collection efforts and lower merchant losses.

I'll continue by summarizing other recent events. During the quarter, we successfully converted Imperial's back end processing including settlement and charge back functions. This process involved converting approximately 20,000 merchant locations onto Global's operating platforms providing us with continued leverage within our business.

In addition, we continue to integrate and leverage our Canadian acquisitions as demonstrated by our recent announcement of the industry's first combined Visa, MasterCard, and debit merchant statement that is now available to our Canadian merchants.

In addition, we will continue to focus on enhancing other services as we expand in the Canadian market.

Also during the quarter, of note, we renewed five client contracts in our indirect business, as well as created both the communication and reporting program for our customers, which compliments our existing service offerings. These initiates demonstrate our commitment to our indirect business.

Our check group continues to add new customers including some notable merchants such as and Reed Jewelers. The check business continues to build us presence in the gaming industry, where we currently service over 400 gaming institutions with our proprietary products.

In addition, our cash and win gaming product, which came to us through the Imperial Bank acquisition of their portfolio, continues to grow through a significant client additions and new product enhancements. To that end, we recently rolled out an enhanced ATM product, which offers consumers a cash advance option limited only by the users credit limit.

We continue to make significant advances in the development of our ISO sales channel. We signed five ISO agreements with the potential to generate an access of 100 -- excuse me -- 1000 new merchant contracts per month.

Our direct sales force continues to be focused on signing 1000 of mid-market merchants in the U.S. These signings include Southwest Texas State University, Motion Industries, which is a division of Genuine Parts; the San Francisco Academy of Art, a very prestigious merchant; Parking Management, Inc., with garages all over the country, and the American Physical Therapy Association.

Our Canadian sales force is focused on larger accounts in addition to merchants. We signed Carlton Cards, which is a large retailer in Canada; the , which is duty free stores at all Canadian airports, and Furniture, which is a major Canadian chain with 46 locations throughout the country.

In summary, we had a very successful quarter on many fronts. I'll now ask to review the financial results in detail -- .

Thanks, .

I will be covering the following. A review of the third quarter income statement, comments on the balance sheet, and cash flow statements, and an update on the integration of recent acquisitions.

With our press release, we included a year-to-date income statement on both a normalized and for fiscal '02 and a third quarter fiscal '01, cap and normalized results are the same.

Total revenue for the quarter grew by 43 percent to 115.3 million. This growth is primarily due to the , Imperial Bank, and National Bank for acquisitions, as well as continued strength in our direct card business.

Our ISO channel also continues to be a strong contributor, while indirect and funds transfer continue to decline as forecasted.

As seen in the third quarter, our revenue mix will continue to shift with merchant services expected to represent 97 percent of total revenue in funds transfer representing three percent.

Within merchant services, after we include the full impact of acquisitions on an annualized basis, we expect the direct channel to represent nearly 80 percent of revenue with indirect representing 20 percent.

In the third quarter, operating expenses were 97.3 million, resulting in an operating margin of 15.6 percent as compared to 14.8 percent in the prior year quarter.

The third quarter operating margin improvements were primarily due to a strong quarter in operating performance in our Canadian and check operations, the implementation of cost reduction and acquisition integration initiative and to continued investments made in our direct and ISO sales channel.

For the quarter, net income grew 76 percent to 10.3 million and diluted earnings per share grew 23 percent from 22 cents to 27 cents.

Our effective tax rate remained at 38.2 percent as compared to prior year of 38.5 percent. Our share accounting peaked year-over-year due to issue in the fourth quarter of '01 and additional employee option in the money.

For the quarter, basic shares were 36.5 million and diluted shares were 38 million.

To comment on a few significant items on the cash flow statement and balance sheet, Global reported 127 million in net cash provided by operating activities for the nine-month ended February 28, '02, as compared to 54.9 million for the same period last year.

This strong cash flow is due to the growth in our based domestic direct card business, recent acquisitions, and a reduction in merchant processing receivables required to support our Canadian Visa merchants. This reduction in funding relates to back-end conversions, which took place on October 26th.

Accounts receivable, as of February 28th '02, were 1.8 million, down from the May 31 '01 year-end of 76.8 million, primarily due to the back-end conversion of last quarter and the timing of merchants funding. During the quarter, we paid down 41 million under our line of credit.

Capital spending for the quarter was 3.2 million. We continue to estimate approximately 20 to 25 million in total capital spending in fiscal '02.

Now turning to our acquisition integration plan. As stated earlier, we are realizing from our acquisitions as we consolidate operations and leverage our scale.

As indicated earlier, we successfully completed the conversion of Imperial's back-end processing to our U.S. platforms on schedule. We are now turning our attention to the National Bank back-end conversion, which we plan to complete within the next nine months.

In addition, we plan to migrate National Bank's front-end to a third party processor, combining it with front-end processing within the next fifteen months. This will take us down to a single front-end platform for our Canadian business.

In addition, we plan to migrate Imperial's front-end to our U.S. platform over the next 12 months. These have been factored into our fiscal '02 guidance. will now address our strategy and outlook -- .

Thanks, .

In light of our one-year anniversary, we thought it appropriate to review our ongoing strategy.

As demonstrated by our third quarter results, which we're very pleased with, we are consistently achieving our objectives of providing best-in-class service, which allows us to grow market share both domestically and in Canada to create, invest and implement new products and services, to grow the direct side of our merchant services, to continue to integrate our acquisitions, gaining margin improvements.

And lastly, to consolidate operations, implement cost reduction initiatives gaining further margin improvement.

Now for our 2002 outlook. We are reiterating our full year guidance for fiscal 2002 with revenue up 455 million to 462 million reflecting growth in the range of 30 to 32 percent over fiscal 2001, normalized revenue up $350 million.

On a diluted basis, we continue to expect full year earnings per share up 1.19 to 1.24. We are pleased with our progress over this past year and anticipate continued success in the remaining fiscal year. , we will now go to questions.

Thank you. Ladies and gentlemen, if you do have any questions, please press the one on your touch-tone phone. You will hear a tone indicating you've been placed in queue.

You may remove yourself from queue by pressing the pound key. If you're using a speakerphone, we ask that you please pick up your handset before pressing the numbers.

Once again, if you have a question at this time, please press the one on your touch-tone phone. For our first question, we will go to the line of with Goldman Sachs. Go ahead, please.

Hi, it's for .

, could you please maybe quantify the savings that you've achieved so far and, or maybe that's directed at , and what's left to achieve or what sort of targets do you have?

Well, , if I may, and I'll throw the ball to in a second, but if I may, let me start the kind of the macro outlook on that.

Overall we have a stated objective of a -- of a margin of approximately 20 percent, and we stated previously that's our target. We are making real progress towards that , and the synergies we have achieved, which we haven't broken out separately, but generally they are acquisition-related, we've converted 150,000 customers to date to a common operating platform. We get tremendous synergies from both manpower, infrastructure, communications, et cetera, from all of those.

We have -- we have certain vendor contracts, whether they be telecommunications or otherwise. That is we continue to grow and offer additional opportunities. We are quick to ask for concessions and to that end, we've gotten a number of those that are fairly significant, as well. Lastly, I think overall, , the reason we're comfortable in putting out an objective of 20 percent as a margin target is that this business, as you well know, offers tremendous leverage capabilities. And as we grow, so long as you keep your costs in line, it'll literally cost you less the process of transaction today than it will tomorrow and to a reasonably conclusion. , you want to add anything?

, anything I'd add to that would be that as I made mention in the comments, we are looking to integrate the NBC and front-end platforms that will provide additional synergies, and we're all -- this is on the front end. We're also looking to convert the portfolio to our front end. To date we have not converted any of the front ends to a -- to a common platform. Those will drive additional synergies, but I think it's been our view that trying to break out synergies per acquisition is a -- is a slippery slope, so we tend to just include it in the overall guidance for the year.

OK, that's great. Thank you. and , just a quick follow-up. On the indirect business, it sounds like things may be firming there. Can you maybe provide a little bit more color on your tactics and strategies for that business? Thanks.

I'll try. , the issue with the indirect business is that overall we have a portfolio business that in most cases isn't growing. Its business that's been acquired and although it's not leading in droves, it is slowly , and because it's not being replaced in that -- in a particular portfolio, then it puts pressure on the rest of the business that is growing to grow at even a greater rate. The rest of the businesses haven't been growing at a high enough rate to make up for the overall nature of that indirect business, so the business has been declining.

Now, what we did announce and you picked up on was that we had a number of successes. We renewed five fairly important customers. We've actually gained a little business here and there, and you know, we're very focused on doing everything we can to exploit those opportunities. And we still think it is a -- it's a reasonable business model. We're not deluding ourselves to think we can turn that thing around and start growing it as aggressively as we're growing our direct business. But, we are focused on doing everything we can to add new customers when possible. But the net impact is for our forecast and for this year we're still seeing decline.

OK, thank you.

My pleasure. Thank you.

And next we'll go to the line of with Salomon Smith Barney. Your line is open.

Hi. Good morning. tell us what the internal growth rate was for the company -- have two other questions. , with your continued huge free cash flow, are there any more potential Canadian acquisitions or acquisitions that you can, at least, comment on in terms of the big picture. Thanks.

Well thanks. , I think that -- let me start with the -- with the last question first. In terms of Canadian opportunities, there are not a whole bunch left in Canada in terms of acquisitions, in all fairness. Between and Global, we collectively have in excess 60 percent of that market. has a little piece and there are some other pieces. There may be opportunities potentially to do something at a much smaller rate, but I would not look for any major movement in terms of market share shift up there.

We are, however, growing very nice internally, and adding lots of new business and growing out products, and we have every reason -- we're growing much faster than the market is growing in Canada, and we have every reason to expect that will continue. If I may, let me expand on that question a little bit, though. That cash flow, those offer opportunities to make acquisitions beyond Canada, and we are -- we are vigorously looking at opportunities and although we don't comment on acquisitions in progress, we are very interested in pursuing and are looking for opportunities every single day with a -- with a fairly significant team. So hopefully, we will continue to have success in that arena.

Now in terms of our internal growth rate, it's tough to get a blended rate due to the nature of the acquisitions. However, our direct business is growing in the kind of high single to low-double digit range, and -- on revenue, which is your question. Canada is growing in the kind of mid-single digit range on revenue. And the whole thing is offset, somewhat, by declines in the indirect business, which I just referred to, and a little bit off on transfer, although it's a very small business for us. So, the end result is we're looking at kind of high-single digits, maybe mid to high-single digits overall.

OK, thank you, but it seems like the returns on those revenue dollars are basically are free cash and then some.

I think it's a good -- that's a great observation, , absolutely.

Thank you , great quarter.

Thank you so much .

And for our next question we'll go to the line of with . Go ahead please.

Yeah, Paul, I think you've somewhat answered my question, but I have a couple of questions here. Attrition in the portfolio, both U.S. and Canada, has it been increasing or would you say it somewhat stabilized as we've come out of the last year?

OK, we're not seeing -- we're not seeing a lot of attrition in any of our portfolios. In fact, I mean our portfolios, now all the numbers we give you obviously are net over attrition. But our attrition is we clearly -- we haven't announced specifically what attrition rates are, but we happen to think they are -- they are probably pretty close to industry low, number one. Number two, we haven't seen any decrease in attrition nor have we seen any increase. It's been pretty constant.

Canada is particularly stable. In fact I would say that the attrition rate in Canada is even more stable than the U.S. attrition. So all those factors combined, we're very pleased with our attrition rates.

And in terms of the average ticket item for the U.S., I know you said the average ticket item in Canada was a little bit lower. What about the U.S.?

The average ticket actually in Canada is higher.

Oh, OK.

It is higher another way because it's Canadian dollars, but even on the adjusted basis it is, because we have larger merchants and have some merchants that, you know, present larger ticket opportunities. The comment I made was that the average ticket actually declined a little bit in Canada because we got involved with some businesses that have lower average tickets like grocery.

OK.

In the U.S., our portfolio, we've pretty much grown along the lines of our portfolio mix, so our average ticket has remained pretty constant from year to year in the domestic U.S. business. And Canada, just kind of earmark it's probably 30 percent higher than the U.S.

Well thank you very much.

My pleasure.

And next also from Salomon Smith Barney, we go to the line of . Go ahead please.

Good morning, congratulations on the quarter.

Thanks .

I have three kind of questions for you. The first is Official Payments announced now that it's going to be accepting Visa, and I guess we're approaching tax season. Could you provide any comments on the growth vertical, one, and then two, do you think this announcement will be a positive for you? There'll still be the charges, obviously, on the transactions, but do you expect any incremental growth from that?

Well , because of the acquisition of the business, we do process a whole chunk of the business, and the fact that they were able to convince Visa, as well as Master Card that it makes sense to be able to use those cards, we will benefit to the degree that we process business for them, and we have a big -- we have a big chunk of it. I happen to think it's a vibrant vertical. The issue, of course, is that there are fees for the consumer, which makes the model a little more difficult. If it were not for that, that thing would be, you know, just unbelievable -- I mean just massive. But yeah, that's very good news for and it's good news for Global Payments.

Great, and could you define a little color, too, on the debit roll-out, where we stand and maybe when we might start targeting the other verticals such as say and ?

OK, that's a great question. I'm going to speak to Global Payments, not so much the industry, but we announced an product not too long ago and was about two years in the making, but we feel a very robust product and our sales force is in the process of selling that to convenient stores and the like as we speak. In terms of debit roll-out, we are not in as many debit verticals as we would like, quite frankly. And our debit growth, although it is excellent -- I mean it's significantly higher than our -- than our bank card growth, in excess of 30 percent.

It is not -- we -- it is not in terms of transactions as aggressive as we would like. Now we do have some opportunities to get involved in some more typical debit verticals, but we also have an opportunity with all of the merchants that we do business with, who, as of this point, do not accept debit, to get them to do so. And economic is such that you can offer a very attractive package, discounted , in some scenarios you can even throw the stuff in for free, so you can literally say to a merchant, you're going to have a discount rate that's a lot lower than bank cards. It's going to cost you nothing. What's the downside Put one of those babies next to your cash register and sit back and see what happens.

So if telemarketing group that is focused on that and we have been signing -- you know, in terms of marketing statistics, the amount of business that we've signed with these is unbelievable. So we're embolden to think that that could eventually move the needle. So we are focused on that as we speak.

Great, one last question. This is actually a question, the past cash question is, I know you can't provide specifics on the acquisitions, but to what extent will you use the cash to pay down debt or what other uses for the cash would you have besides acquisitions?

Well I think you put it -- you put it . , the first thing we're going to do with our cash is pay down debt. And as you saw last quarter, that's precisely what we did. We'll continue to pay down that debt with our cash, and then the next, of course, application is acquisitions, as well as product development, internal growth, cap ex. I mean there's no real mysteries in all of those, but I'd pretty much put them in that order.

Thank you.

My pleasure. Thank you.

And next we'll go to the line of from J.P. Morgan. Go ahead please.

Hi, it's . Congratulations on another good quarter. You've gotten a lot of good economic news lately, and I just wanted to see where there was coming in versus your expectations, and looking out a little farther, you know, what's built into your forecast? What personally are you guys expecting in the...

Yeah.

...next nine months or so?

Well , we -- we've seen, and we -- this is really probably last quarter's news. The bad news is in terms of transaction industry and processing was pretty much behind us. I think you're seeing everybody across the board in our industry reporting pretty robust transaction counts. And we're -- you know we -- what were they calling it, a ? I mean this ...

As far as we're concerned, it's old news. I mean it's -- people are out there buying. People are out there buying our services. People are out there buying services through our merchants and transaction counts are back to pre September 11th levels and have been for you know three, four months.

OK.

We're feeling pretty bullish.

Great. On the Visa, Master Card opportunity and just cross selling overall, when do you, you know, what kind of a time frame should we be expecting, you know, possibly some positive announcements in that respect?

Well, I'm assuming you're referring to Canada and our ability to cross sell Visa and Master Card.

Exactly, and then also the cross selling opportunity of products that you offer to Canadian merchants that now you can offer to U.S. and vice versa.

Well, we got -- we have two to that. Number one, we did sign close to $1 billion with new that either did business with us through Visa, i.e. CIBC or through Master Card with National Bank of Canada. In other words, these were existing merchants just doing one card or the other. We've sent our sales force in and convinced $1 billion worth of new annualized Canadian bank card business to sign up with Global Payments. So that we announced, I think, actually maybe...

Last quarter.

...yeah, last quarter I think we mentioned on the call. And we've signed up -- we're continuing to do very well there. And I think I announced three or four merchants in this last call -- there were a bunch of others that we signed. Now, in terms -- what was the second question?

Products.

The product. What we're doing on the product side is probably most importantly with the combined merchant statement. The reason we were able to provide a Visa and Master Card and debit statement to our Canadian merchants is that we migrated that business onto our back-end platform. Consequently, that produces, because that's all you do in the United States, that produces a combined bank card statement for these merchants. And it was a byproduct of those cross border synergies that produced that. They also have some other stuff that we are importing. They have some very robust products and a couple of industries that we are looking at very closely. So, we're trying to take full advantage of those opportunities.

OK, thanks a lot.

All right, , thank you.

And we have a question in queue from the line of from Credit Suisse First Boston. Go ahead please.

Hi, this is . You touched briefly on the check business earlier, and it sounds like that business may have, you know, started to stabilize there. Can you just kind of give any more color on the outlook for that business going forward?

Yeah, happy to . There's a couple of factors. The check business is different than anything we do because you can literally have a merchant who's profitable one day, become unprofitable the next, because their hit was up, a check writing ring or just general or problems with collections have cropped up. So that is a business that is a very tightly managed, day-in and day-out, slug it out from a collections and management end point. Now we brought in some new management. About five months ago we announced a fellow that we brought in to be president of that group. His name is .

He's done a great job of turning that business around. Getting the operations very focused, our collections are way up. Our policies are tighter. We are increasing pricing as appropriate and now we're starting to add customers. We announced a couple during this call, and we also have some boutique products that appeal to casinos and other gaming establishments, and in the last year and a half we've signed up 400 of them. So we have some very nice data points on our check business. Operationally collections are up. Operationally we're tidying up the management and pricing appropriately, which could mean weekly with some of these customers. And lastly, we're adding lots of business and rolling out new products. So, we're feeling pretty good about that business as well.

Great. Thank you.

Thanks .

And we have a questioning queue from the line of from Legg Mason. Your line is open.

Thank you. A couple of quick questions. One is, Paul, you had mentioned that you know a percentage of the merchant base that you have today doesn't accept debit cards. Can you qualify that? Is that 50 percent of your merchant base, 60 percent?

It's...

Large or small?

...you know, it's actually -- , I'm not trying to be coy. I don't know the exact number, but it's way over 50 percent.

OK.

Way over 50 percent of our merchants do not accept debit. Now this is mid market merchants who just aren't typical debit accepters.

OK.

Still a lot of there.

OK, so big opportunity there...

Absolutely.

... market. Now with Statement Advantage, has come out with a single statement yet and where are they, at least as far as you can tell with rolling out that product? The other question on that same type of product, is that something that you actually charge for or is that something you use as a competitive advantage to kind of switch or lure people away from as an example?

Well is -- has announced a product. I don't believe they've rolled it out yet.

OK.

And we're not charging.

OK.

I don't believe they will be either. It is -- it's an enhancement to keep the existing customers we have happy and to lure others, and we have some more enhancements where that came from.

OK. And then, is it -- is it safe to say that your initial, kind of look at NBC's consolidation plans to the back-end should offer up the same type of savings as CIBC has?

It's -- , so long as you understand that you adjust that per the size of the portfolios.

Yes.

NBC's significantly smaller, but I would think as a percentage basis, if you adjust on that, I think that's fair to say.

OK, and your network today, you said you signed five. Does that put you around 50?

Approximately.

OK. And your -- just a couple of more real quick questions. The front end that you're going to put onto a third party and then pull back off the third party, that should all get done in 18 months? Was I -- did I understand that correctly?

No, this is . In Canada, the CIBC portfolio was processed through a joint venture between and somebody called .

Right.

It actually was owned by CIBC, 50 percent. We have elected to stay on that front-end processing platform and we're going to move the National Bank portfolio, which is currently on a IBM platform to the CIBC platform or the platform over the next 15 months. And that combined Canadian portfolio will stay on a combined portfolio for several years, at which time we'll consider bringing it in house to the U.S.

OK, and where are you in relation to being -- having all your systems kind of not shared between NBC and yourselves?

There's a -- an agreement that's in place between the parties as we went through the spin, which was a multi-year agreement and at this juncture we haven't elected to exit the relationship with NBC. It's a relationship that's working nicely today.

When would that agreement come up for renewal?

I believe it -- there is a decision point in about a year, but it's a three-year agreement from the time of .

Yeah, we have to give notice within a year, and then after that point and time, if -- our notice is to leave, it would take us a year to exit, or we would , and one of the advantages of staying on that system is it together combines in U.S. alone about five billion transactions between ours and theirs.

OK.

Which gives us incredible synergies relative to telecommunication purchases.

So your goal really isn't to get off that system? It's to continue to share and consolidate so you can continue to leverage...

Yeah, I think the goal is continue to evaluate. Right now it works great. I think it's good for NBC, as well, so as long as that continues, we don't have an immediate need to do that.

And , just elements, please don't confuse that for your time frame with the 10-year marketing agreement that we have.

Right. OK, sure.

And secondly, because of the French-speaking nature of a lot of those customers, there are some unique requirements that would probably tie us a little closer to the bank.

OK. Understood. Thanks, I appreciate it.

And next we'll go to the line of and he is . Go ahead please.

Yes, good morning Paul, great quarter.

Thanks .

Well done. I was wondering if I could get you to back up and take a look at the whole payments process in terms of growth opportunities. I mean it seems that obviously you can pay three ways. You can pay with cash. You can do credit or debit or you can do check. And as you look at the whole payment situation, one area that is really unexploited by your industry and your company is cash. And I guess one of the reasons you haven't exploited cash is there are many cash transactions for which time is essential, number one. Number two, they're relatively small transactions, $10, let's say 15, $20. And speed is another factor, and of course, what I have in mind here is principally the whole fast food industry from McDonald's right on down.

As you know, there's some exciting wireless technology that's come out. And I'd like you to comment globally, no punt intended, on the cash opportunity that you and your colleagues face over the next three, four, five years with this exciting new wireless technology.

Well , I think the cash opportunity, quite frankly, is the opportunity through wireless, which is absolutely adding new opportunities for what we call micro payments, the ability to buy a soda or any other vending product. The ability, as you talked about, in quick service restaurants, QSRs to provide even at the point on the drive-up window to accept credit cards. But cash is kind of the enemy. Cash is the -- cash is the thing that we are eating into.

Cash is the payment that, according to the Nielsen report, is going to be 38 percent of consumer payments as opposed to 65 percent today. In the next eight years, they're -- they are forecasting from 65 to 38. So we per say don't have any plans nor products that helps a merchant accept cash. In fact we use that as the bad example and this is why you need to accept those other payments.

That's right. How soon do you see somebody like McDonald's accepting a wireless credit card situation?

They're actually, , McDonald's and the others are doing some bank card acceptance today in debit in various pileups, either corporately and in some cases with some of the big franchises. We've had -- we've had -- what's that ?

-- we've had as a customer for a long time. It's kind of a -- kind of a boutique burger place and accepting bank cards . Producing a lot of business for a long time, and we also have some smaller franchises doing it. So , it's there. It's happening as we speak. for example accept bank cards, many times through Global Payments.

Right.

Wireless.

Yeah, wirelessly. So there's lots of those opportunities.

Do you see wireless being at the point where it's robust enough from a security point of view? It's fast enough and it's inexpensive enough to compete with the traditional Veriphone, telephone base system?

Yeah, I think, the answer is yes, yes, and yes. And in many countries they are skipping a whole generation of hard wire telephony and going directly to wireless. It's working just fine.

OK, thank you very much.

My pleasure.

And for our next question we'll go to the line of -- pardon me, just a moment please. We'll go to the line of with . Please go ahead.

I'm here. How are you doing guys?

Good , how are you?

Good, hey a couple of quick questions for you. One is on the funds transfer was, what percent of revenue was it last quarter?

Approximately three percent.

OK.

And that's domestic and international combined.

OK. The other thing is now maybe my model is a little bit aggressive comparatively speaking, but I had my SG&A being a little bit higher than I'd expected and consequently your EBITDA being a little bit lower. Any reasoning or besides being aggressive?

You know I don't -- I'm not sure if I can comment specifically on your model.

let me rephrase that then. Going forward, would the 33 million in SG&A be an approximate level? Do you expect that to increase or decrease?

You know it changes as you have been able to see over the last three quarters and looking back against last year, what we've put in the Form-10. As you bring these acquisitions on, it's going to, on an annualized basis, you'll probably see some modest increase once the annualization of those acquisitions are in place because they are coming with their own sales forces. As you would anticipate, both in Canada and for the acquisition. I wouldn't anticipate any significant growth.

OK, thank you guys. Have a great day.

Thank you.

And we have a question in queue from the line of from U.S. Bancorp Piper Jaffray. Go ahead please.

Hi guys. Real quick on the -- on the competitive environment, and you may addressed this earlier, but if you could talk a little bit about that and then another question as far as it relates to the dollar amounts on the transactions that you're seeing both domestically -- you've already commented in Canada, as you saw -- as you moved in the grocery stores that it had declined a little bit. What about domestically here?

OK, , firstly in terms of competition, I think our whole segment's doing pretty well. I mean the whole industry is doing very well, and I think that's a function of kind of the bigger players emerging and the opportunities for continued growth in bank card to offer robust opportunities for all and obviously debit growth, even growing at a higher rate and then new market opportunities, acquisitions, et cetera. So I would say that the whole industry seems to be doing very well, number one.

In terms of bumping into each other, we all do. It depends on the markets. We bump into different people in different market segments. And you know, we all, I think, aggressively compete against one another. Sometimes we're successful. Sometimes they are. I think the market share is coming from two different places. As I said earlier, from just general growth of the business and from some of the smaller players that you wouldn't immediately recognize as competitors.

In terms of average ticket, the U.S. average ticket remain constant. I think the point there was there were some -- there were some question as to are you guys really seeing -- are you getting hurt because of the economy? What's going on in various segments? Are you -- you have a lot of travel in entertainment? We know that's getting slugged, although that's back pretty well too. But, you know, and an average ticket would be a good way of understanding that because if you had lots of travel and entertainment, which are typically higher average tickets.

If your average tickets decline, that would be an indicator that you're probably seeing some softness in the sector and our average ticket is pretty constant and has been. We haven't seen a lot of movement at all in the U.S. So, that's your average ticket story.

OK and then it also sounded like your merchant growth still remained very strong. You're seeing still some good merchant , right?

We are. We're delighted with our merchant . I mean the list is -- there's lots of customers I didn't mention because you guys wouldn't -- some of them, for example, . Whoever heard of ? But they have 450 locations. We signed those for a check service. That wasn't on the list. And lots of others in Canada and the U.S. as well.

OK, great. Thank you very much.

My pleasure.

We have a question from the line of from . Go ahead please.

Good morning guys.

Hi .

Could you comment on, you know, what's the level of new merchant locations you're signing up every month in this quarter -- recent quarter?

, we've never -- it's a great question, but I'm not prepared to answer it. I don't think we've ever given that kind of information.

OK, that's fine. That's fine. information. One thing I'd like to know is in Canada, you said that doesn't have this combined statement. So you must have a tremendous pipeline of potential new business in Canada, given that hasn't, you know, integrated statement rendering at this point. Is that true?

Well I think it's fair to say that , that is a -- is a very able competitor, and they are going to have a statement. I wouldn't want you guys to go away with the thought that, you know, we have this lead on . They actually have a slightly larger market share than we. We're probably 29, 30, they're probably 31, 31 percent of that market. They are going to have a statement shortly, and they are visually telling merchants, you know, please don't leave us. We're going to have a great statement.

But we have it first. It's out there and the merchants love it, so that is a competitive advantage, and we are signing up business, but not unlike the question about the domestic business. We're getting some business from them, but I think some of it's coming from small to less sophisticated competitors in that market that don't have a hope of having any of this stuff.

OK and the last question is versus where you thought transaction volumes would be at this point last fall, are you ahead or even or below what your plan was?

, this is . I would say that we are on plan for where we started the year. So we started and released guidance back in the beginning in July. Where we are today is unplanned. Maybe it's ahead of our expectations, which were reset in September, because since September we fell backwards along with everyone else as a result of those events. But as Paul said in his comments, we're feeling good about the quarter and the continued growth in the business is looking very strong.

I think, , in all fairness and this is why I hesitated and did a great job in answering it. I don't think you'll find a CEO that would ever not expect more. It wouldn't set the bar higher for internal projections and objectives than they would guidance. So that's why I hesitated for a sec. We just don't release what our internal objectives are, but you know we're never satisfied. We're always expecting more growth, but I will tell you, absolutely 100 percent correct. It's -- we've been pleased with what we have and it's pretty close to our -- to our internal targets.

OK, thank you.

And ladies and gentlemen, as a reminder, if you do have any questions, please take this opportunity to press the one on our touch-tone phone. We have a follow-up question from the line of with Goldman Sachs. Go ahead please.

Thanks, good quarter guys. Can you talk a little bit about sales force performance in terms of qualitatively how are they performing relative to your expectations and sort of how you're trying to evolve the sales force from where they were when you took over the business to today.

That's a -- that's a great question . You know we hired a new guy, . We announced him, I think last quarter, maybe even previously, and is of sales and marketing. He's put in a number of pretty basic blocking and tackling that we didn't have. We didn't have an automated way of understanding how our 300 sales people, how many calls they make every day, how many perspective calls, what the pipeline is, what's the -- what's the chances of closing that deal. How many maintenance calls do they make?

And he's automated a -- it's not rocket , but he's automated a message to bring all that information on line, so I can -- I can literally check any of that -- any of that data. And he's in process of rolling that out, still got a little more work to do on it, but that already is going to pay some significant dividends. Go ahead .

Oh no, go ahead, sorry.

And I think it's -- what we're going to measure in terms of what are the metrics we're looking for, you look for how many merchants did they sign? I mean get, you know, one a day, two a day, one a week. How big are they, i.e. what's their annual ? What's the profitability because they're incentivized to do that. And what kind of other products did they cross sell -- our products, our debit product, our check product.

Discover processing, American Express processing, those are in some cases , if they're in a market frequented by Japanese tourists, and they get a little for that. There are some equipment sales that we don't really emphasize that because that's kind of empty calories. And we don't gouge for equipment and do that. That's not our model, because we don't really pay our guys a lot for doing that.

And all of those factors are measured with objectives, and these guys are compensated. Now we do have some people who are independent contractors, who are measured somewhat differently. They're after the very small merchants as opposed to the mid market. They're not salary, and that's a little different model smaller group of men.

Is the sales force where you wanted it to be in terms of performance now versus a year ago?

I think we're making -- I think we're making great strides. It's never going to probably be where I want it to be, because I have high expectations. But no, I think we have more -- I think we have -- we have more work to do. And you know the sales guys will tell you that, you know, we have to do some things operationally with product, et cetera. That's why we rolled out our merchant enrollment advantage, because they said it takes too long to get a merchant on. Now we can put them on, on line. They can actually enter all the data. They can ship the device the next day. We've got the guy up and running in a day or two as opposed to weeks before. So, we still have -- we're still -- yeah, that's a day-in and day-out focus and a day-in and day-out slog to get that, you know, as absolutely efficient as we can.

One last question, Paul, on the associations. Can you give us an update on, have you added any new ones and what's the progress been in rekindling the relationships that you already had?

You mean -- , associations...

associations.

Oh, you mean like referral agents.

.

Yeah, we have a -- we have a number of wonderful New York restate -- New York Retail , for example, is a great association. , is another wonderful association. Texas Retail Association is another wonderful association. We've been very fortunate with associations. There are -- there are people that'll tell you associations aren't good relationships because the very big guys do the deals directly. Therefore, you get the very little guys who on average are getting the rate that all the portfolio got because you took in consideration the big guys who you're never going to get anyway. That hasn't been our experience. We've had great relationships. We have signed other associations. I don't believe , we -- did we do any press release this time ?

No.

No.

But we've done probably half a dozen new associations. and you wouldn't recognize. They're very focused on various industries, but we have a great formula. We offer some money back when that's appropriate for the association and typically is. We customize a deal and we provide them, in some cases, telemarketing support to solicit their members. So we're delighted with that channel.

Great. Thank you.

Thank you.

And for our next question we'll go to the line of from T. Rowe Price. Please go ahead.

Good morning.

you were hurting our feelings. We didn't hear from you.

I'm here.

OK.

I'm just listening.

OK.

, I'm just wondering on the cash flow, which is enormous for the nine-month period. I know in the second quarter you benefited, I think, by the tune of 30 million on the back-end integration with CIBC. I was just curious if you had a similar experience in the third quarter with the National Bank integration.

, actually we have not integrated the back-end yet for National Bank. That's sometime...

I'm sorry, I meant . I don't know why I said that.

No, the 30 million opportunity was something that we don't anticipate with either -- well, we didn't have with . We don't anticipate with National Bank. The deals were structured differently. Again, the reason the 30 million pickup occurred is in Canada. CIBC funded its merchants in advance of receiving payments from Interchange. We were able to accelerate the time it took for the transaction to get to Visa and then be -- in turn paid to us from two days to a single day, and that took the 70 million, 80 million down to 30 million.

Right and was there anything noteworthy with respect to just the timing of settlement, which I know can change these numbers from quarter to quarter. You know if I look at the 127 million of cash from operations in the nine-month period and let's say, I even want to, you know, penalize you the 30 and take it down to something just south of 100.

Yeah, I would say it is lower than usual. The month ended on a Thursday and our big funding days are Tuesday. So it is a function you'll see this from time to time depending on when the month ends. The amounts will swing, but overall there is a decline, and as you can tell, there was a pay down of 40 million, 41 million on the line of credit this quarter. A big piece of that was the 30 million of cash that was on our balance sheet at the end of last quarter ...

Right.

Went to pay down lines that were outstanding at the end of last quarter.

Got you. My other question as it relates to the integration with CIBC and done effectively on the back-end and with National Bank of Canada kind of light at the end of the tunnel on that back-end, can you just update us on the plans or progress on integrating customer service functions?

Well actually, as you integrate the back-end, the mechanics of the processing, you are integrating customer service, at the same time, the people that see the system today are in the United States, and so in terms of customer service, both on the terminal help desk, which is managed through St. Louis, as well as the operations that we have in Baltimore, those have been integrated. I think as it relates to NBC and their conversion, because it is -- because of the location, the portfolio being in Quebec and the French speaking predominance of that province, we will likely have a -- an operations center in Toronto, which was not our original plan, but we're going to be challenged to try to find enough French speaking people in Maryland to answer the phone or in St. Louis to answer the phone. So we'll likely put a facility in Toronto to handle a fair amount of the -- of the NBC customer service. But CIBC's customer service and customer service is today being handled by our operators in St. Louis and in Baltimore and the deployment for is being done out of our facility.

Great. Thanks a lot.

Thanks .

And we have a follow-up question from the line of with . Go ahead please.

Yes Paul, I wonder if you could comment on the trend of the pricing that you've experienced over the last quarter or two, both for your direct and your indirect business. And then secondarily, if you could also comment on mix in your business. I know that you tend to serve mid market and tend not to serve large corporations like First Data does, but maybe you could comment on those two areas.

Those are great questions . Firstly, in terms of our pricing, which is our spread, which is comprised of a couple of different factors. It's what we make after interchange and assessment fees are paid and includes miscellaneous fees for processing customers, and our spreads are fairly constant. We have -- we have not released precisely what they are, and I don't intend to, but they are fairly constant. We have seen virtually no erosion in those spreads. I'm delighted to say that.

And that would be both in your direct and indirect business?

It is -- I'm speaking to our direct business right now.

OK.

Now our indirect business, we haven't seen a lot of pricing erosion per say, but understanding the portfolio is getting smaller, but the pricing that we charge is fairly constant.

.

Now in terms of the mix of our business, we are primarily a mid market provider, which is a wonderful place to be. You don't have as many boutique names, but we have a number. But, you know, we don't have the huge -- the huge national merchants except in Canada, which we have a portfolio across the board. Our domestic portfolio is primarily mid market, some small guys, but I think the average merchant size is probably $300,000 a year in bank card business, which is a wonderful place to be. And I'd say that's on average the entire portfolio, maybe a little bigger when you take in some recent big guys. So we are primarily a mid market merchant provider.

Right and then related to my earlier question, how will pricing compare with wireless, let's say fast food or other type customers to your conventional business? Will the spreads be as good or is that a lower margin business?

Well, it's -- depending how you look at it. The spreads are probably going to look even better because the average ticket is so low.

Right.

But the actual profitability, you know, if someone has -- it's going to be tough to charge somebody 50 cents if they have a $3-average ticket.

Exactly.

So, I would say that we do a whole bunch of wireless business and I would say the lower the average transaction value in general, the lower the fee you're going to earn. That's just pretty much and it's because a lot of wireless stuff is smaller average ticket per say, you are going to earn less aggregate fees. But let's take a ridiculous example, you have a guy with a $1,000-average ticket, you earn 10 basis points or 20 basis points in that business. You're not going to in aggregate get a whole lot of money because his average ticket is so big, and if he's the same size kind of mid market merchant, that's another dynamic on the other side.

I will tell you on balance we are very happy with the wireless business. We are aggressively investing in that, and have sales forces focusing on a lot of that, as well as our who buy service from us. In fact, those taxicabs actually came through . So, we're happy with that business, and our spreads are very good. Now, all of that's taken into consideration, , when I answered your question about are we seeing spread erosion and we aren't.

No, that's great. Now, in time won't the wireless business displace the telephone base Veriphone system business?

Well...

Because it's quicker. It's cheaper. And most important is the speed.

Well I'd -- I would say that a lot of the equipment manufacturers, Veriphone included, are participating in wireless technology. So they don't necessarily see that as a -- I mean the more technologies, the better for those guys...

Right.

...opportunity to sell equipment. You know, it's a -- is it a -- is it a telecom thing? Perhaps, you could say that over time there may be more sale at the expense of some hard wire. But I think the industry will show you that both of those are pretty robust. So, I'm probably not qualified to answer that one for you .

OK. Thank you very much.

You're welcome.

And for our next question we go to the line of with Legg Mason. Go ahead, follow-up question.

Thanks. As you mentioned, this operation center in Toronto, which was not originally planned, what are the costs estimated to be to roll this thing out? Obviously you're not going to build it from scratch like you did with the one in Baltimore, but what do you estimate the cost to be?

Well, in terms of what we did in Baltimore, we simply leased a property that was coming out of the ground and you may not be aware of the fact that we actually have an operation center today in Toronto and we are looking at just simply expanding that facility. It's in a multi-story office building, and we would just simply take additional space in the building or we would move to a larger building, and given the fact that the market is slow in Canada as it is here in the United States for real estate, I think we'll take advantage of pretty good pricing. The rest of the stuff that would go in there, which is simply desks and chairs, it's not a lot of money.

OK.

It's not nearly the investment we made in Baltimore where we built out a 80,000-foot facility or 100,000-foot facility ...

Hey , what we're talking about, too, is it's, you know, a very focused facility to handle specific needs like French speaking customer service.

Let me just clarify one other point. Today the group of employees that were formally CIBC that are today Global Payment employees, the sales group, as well as operations and account management are still resident within the CIBC office building in Toronto ...

OK.

And we had a two-year period to move them out, so it was always in our plans to have a bigger facility to house these employees in Toronto, but we had not originally contemplated was to the need to have help desk services and customer services in Toronto because the language barrier was just something we missed initially. But I don't think it's going to impact -- it will not impact the economics of the transaction, still a very good transaction.

OK, and is this a one, two or like three-quarter type of time frame?

To get this out of the ground?

Yeah.

I would say that we'll have it completed by October, November of next year.

OK.

I mean, excuse me, of this year.

Our next fiscal year.

Right, your next fiscal -- right, I got you. OK, and then one other real just quick -- on the merchant processing receivables, I understand that, you know, it jumps around a lot and also that the Canadian market is different where you're funding kind of the interchange for the merchants. But if we're trying to forecast this going forward, what kind of guidance can you give us going into even the end of the year? Is this, I would anticipate, picking back up fairly significant. Is that -- am I correct?

If what you're looking to do is try to estimate cash flow from operations.

Yeah.

You know, in the past we've tried to say if you look at EBITDA, obviously before taxes and CAPEX...

Right.

That's probably a good proxy. Because that number will move up and down relative to merchant processing. It's just a unique year where we were able to pick up an additional $30 million of cash -- real cash flow that's in the bank paying down debt. It will not -- that $30 million will not reoccur next year, but we've targeted the company on EBITDA basis to be in a $100-million range.

OK.

As these acquisitions annualize.

OK.

That's probably your best proxy.

OK, great. Thank you very much.

Yeah.

And sir, at this there are no other questions in queue. Please continue.

Well, I'd like to thank you all for your excellent questions and for joining us today and most importantly, I thank you all for your investment and interest in Global Payments.

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