環匯 (GPN) 2002 Q4 法說會逐字稿

Ladies and gentlemen, thank you very much for standing by. And welcome to the Global Payments’ teleconference. At this time all lines are in a listen-only mode. Later there will be a question-and-answer session with instructions given at that time. (Caller Instructions.)

And as a reminder, today’s conference call is being recorded.

I’d like to now turn the conference call over to our host, President and Chief Executive Officer of Global Payments Inc., Mr. Paul Garcia. Please go ahead.

Thank you. Good morning, everybody. And welcome to Global Payments’ conference call for the fiscal fourth quarter and fiscal yearend of 2002.

Joining me are Jim Kelly, CFO, and Jane Forbes, Investor Relations.

I will begin by thanking my Global Payments’ colleagues, and in particular, my Executive Team for making this a wonderful first full year as an independent public company. I would also like to thank our Board for their diligence and guidance, and our shareholders for their continued interest and investment.

It is important that I take a moment to assure our investors that Global Payments holds itself to the highest ethical standards. To that end we are honored to serve on the New York Stock Exchange listed Company Advisory Committee helping to develop and implement standards for improved corporate governance.

Now for the agenda. The agenda for our call is as follows. I will give an overview of our fourth quarter and full-year results, review the trends we observed during the quarter, and discuss recent events. Then Jim will discuss the financial results in detail and review the integration status of our recent acquisitions. I will give guidance for fiscal 2003, and discuss our strategy. And we will then have a question-and-answer period.

I want to remind you, of course, that some of the comments made on this call may contain certain forward-looking statements pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. 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 10-K.

Now for our normalized Q4 results. We reported strong financial results for the fourth quarter ended May 31, 2002. Our revenue grew by 18 percent to $121 million, resulting in net income of $11.8 million for a 36 percent increase over prior year.

Diluted earnings per share grew by 24 percent to 31 cents. This growth was primarily due to the inclusion of the full quarter of results from our Imperial Bank and National Bank of Canada portfolio acquisitions, as well as continued strength in our direct card business.

In addition, fourth quarter results include our CIBC portfolio acquisition which annualized in March of this year. We also reported 130 basis point operating margin improvement as a result of our continued acquisition integration initiatives.

We had EBITDA of $28.7 million for the quarter, up from 23.4 million last year. And we continue to be a very strong generator of cash. Jim will speak in more detail on that subject in a moment.

Now for our normalized full-year results. We reported 32 percent revenue growth to $462.8 million, resulting in net income of $46.6 million or a 51 percent growth over prior year. Now, this revenue growth was due to acquisitions and strong performance in our direct card businesses.

Diluted earnings per share were $1.23 versus $1.06 in the prior year for a 16 percent growth. Our margin improved 50 basis points over prior year, primarily due to gaining leverage from planned facility closures and acquisition integrations.

Now for Q4 trends. Domestic direct transaction growth was above 20 percent this quarter, as compared to prior year’s quarter. This organic transaction growth reflects a significant improvement as we had previously indicated growth in the high teens for this channel. We are very encouraged by these results and believe they demonstrate that we are gaining market share in both our domestic direct and ISO channels.

Our Canadian transactions for the quarter continue to grow in the low teens as is consistent with the Canadian market, and our recent performance levels.

Our check business continued to improve during the fourth quarter relative to the first half of our fiscal year primarily due to strong sales growth in the gaming area.

And lastly, our alliance with [CoAmerica] has seen strong year-over-year new business growth in the Western and Southwestern markets.

Moving on to recent events. We are very proud to announce a significant new relationship with Sears National Bank, a wholly owned subsidiary of Sears Roebuck and Company. Sears has recently selected Global Payments to be its payment processing engine for a new strategic partnership program that Sears is developing to provide for the acceptance of Sears private label credit cards at unaffiliated merchant locations.

Currently Sears cardholders can use the Sears card for purchases made in Sears stores, and authorized or licensers’ retail outlets. However, Sears plans to extend acceptance of its private label card to a targeted group of merchants with whom you will enter into strategic partnerships. The merchants include hotels, restaurants, gas stations, supermarkets, and entertainment companies that do not compete directly with Sears.

Under the terms of the agreement with Sears National Bank, Global Payments will provide Sears card merchants an end-to-end solution for transaction processing and merchant support services that include credit card authorization, capture and settlement, clearing, funding, monthly statement servicing, customer service, and reporting.

As the payment gateway for the Sears strategic partnership program Global will be paid a fee for every transaction process under the program irrespective of whether Global is the processor for other credit card transactions originated by the merchant. While the program is in its early stages we are excited about our new business relationship with Sears, and the opportunity to expand our processing base to an increasing number of new accounts.

We continue to make significant advances in the development of our ISO sale channel. To that end we signed six new ISO agreements with potential to generate over 1,000 merchant contracts per quarter. Our U.S. direct sales force continues to sign thousands of mid-market merchants per quarter, as well.

Our Canadian sales force continues to aggressively cross-sell MasterCard and Visa services between the CIBC and National Bank of Canada merchant portfolios and generate additional signings with the most recent focus on the mid and small business sectors.

We also renewed six client contracts in our indirect channel. Which demonstrates our commitment and willingness to leverage this business.

In summary, we had a very successful quarter.

I’ll now ask Jim to review the financial results in detail. Jim.

Thank you, Paul.

I will cover the following. A review of the fourth quarter and full-year income statement. Comments on the cash flow statement and balance sheet, and an update on the integration of recent acquisitions.

With our press release we included a fourth quarter and full-year income statement on both a normalized and GAAP basis. We believe our normalized financials more clearly reflect comparative operating performance because current and prior year GAAP results include certain one-time items. After first discussing our normalized results I will describe the adjustments we have made to reconcile these financials to GAAP reported results.

Fourth quarter fiscal ’02 revenue grew by 18 percent to 121 million. This growth is primarily due to the Imperial Bank and National Bank portfolio acquisitions, as well as continued strength in our direct card business. The CIBC portfolio acquisition continues to grow as expected, and annualized in March of fiscal ’02. Our ISO channel also continues to be a strong contributor, while indirect and funds transfer continue to decline as forecasted.

In fiscal, in the fourth quarter of fiscal ’02, operating expenses were 100 million, resulting in an operating margin of 17.3 percent as compared to 16 percent in the prior year quarter. The fourth quarter operating margin improvement was due primarily to the strong operating performance in our Canadian and check operations, the implementation of cost reduction and acquisition integration initiatives, and the investments made in our direct and ISO sales channels.

Also in the fourth quarter, net income grew 36 percent to 11.8 million. And diluted earnings per share grew 24 percent from 25 cents to 31 cents. Our effective tax rate remained at 38.2 percent, as compared to the prior year rate of 38.5 percent. It is expected, however, that our effective tax rate will be 37.4 percent for fiscal ’03 due to the impact of our recent acquisitions and tax planning initiatives.

Our share count increased year-over-year due to the issuance of stock to CIBC in the fourth quarter of fiscal ’01, and additional employee options in the money. For the quarter basic shares were 37, excuse me, 36.7 million. And diluted shares were 38.2 million.

Total revenue for fiscal ’02 was 463 million, as compared to 350 million in the prior year, representing a 32 percent increase.

Net income grew 51 percent to 47 million, and diluted earnings per share grew 16 percent to $1.23.

Now turning to our GAAP reported results. As reflected in our earnings release there are two adjustments required to reconcile fiscal ’02 GAAP to normalized results. These adjustments include a change in accounting principle related to a 24.6 million non-cash trademark impairment charge, or 16 million after-tax. This change was required due to the adoption of FAS 142, goodwill and other intangible assets and as a result of Global’s purchase of MasterCard’s remaining partnership interest in Global Payment Systems, LLC in fiscal ’02. Subsequent to the buyout Global determined it would no longer be marketing under the [MAP] brand. The change was reported as of June 1, ’01, the date we adopted FAS 142. We have filed an 8-K which describes this charge in more detail.

The second reconciling adjustment of GAAP to normalized results for the fourth quarter and full-year relates to a restructuring and other charge for the consolidation of redundant activities and acquisition integration totaling 11 million, of which 4.2 million is non-cash. The charge includes 8.2 million for severance and facility closure, and 2.8 million for the write-off of non-cash assets. The severance and related costs arose from our actions to reduce personnel in areas of redundant operations and activities. The charges relating to facilities represent locations that are either closed or have plans to be closed within the next nine months. More specifically, we’re in the process of completing facility consolidations with respect to our check operations, Canadian and U.K. locations. These actions reflect our intentions to maximize long-term efficiency and profitability.

Now turning to the cash flow and balance sheet. To comment on a few significant items on the cash flow statement and balance sheet. Global reported 160 million in net cash provided by operating activities for the 12 months ended May 31st of ’02 as compared to 79 million for last year. This strong cash flow is due to the growth in our direct card business, recent acquisitions, and acceleration in the collection of Canadian visa, net merchant processing receivables. This reduction in funding requirements primarily relates to the CIBC back end conversion which took place on October 26th ’01. The merchant processing receivable of 77 million last year represented a net receivable from Visa Canada which CIBC managed during the pre-conversion transition period. And as a result Global did not receive any cash flow benefit.

Since the October ’01 conversion Global has been able to reduce this amount by 30 million as reported in Q2 with the balance of the change related to timing differences. During the quarter we paid-down 26 million under our line of credit for a resulting debt balance of 22 million. Since May 31st we have paid-down the remaining balance of our line of credit leaving us with a full 150 million of credit facility availability.

Our current strategy with regard to cash flow is three-fold. First, to pay-off debt arising from the timing of working capital needs. Second, to pursue accretive acquisitions. And finally, to continue to make capital investments in our business. During fiscal ’03 we anticipate net interest expense to approximate our current quarter level, primarily due to significant growth expected from our Canadian business and related impact on merchant prefunding on our Canadian credit facility borrowings. Further, we expect minority interest to grow at rates consistent with our fiscal ’03 earnings growth.

Capital spending for the quarter was six million, and for the year it was 22 million. We anticipate approximately 15 to 25 million in capital spending for fiscal ’03. The increase in our accounts payable and accrued liabilities was primarily due to a 6.8 million restructuring accrual. Lastly, our long-term accrued liabilities decreased primarily due to a 5.4 million true-up of a deferred tax liability as a result of FAS 142.

Now turning to our acquisition integration update. As stated earlier we are realizing synergies from our acquisitions as we consolidate operations and leverage our scale. We have been focusing our attention on a national bank back end conversion which we plan to complete in the next few months. In addition, we plan to migrate national bank’s front end to a third-party processor, combining it with CIBC’s front end processing within the next 12 months. This will take us down to a single end platform for the Canadian business. These integration synergies have been factored into our fiscal ’03 guidance.

Paul will now address our strategy and give fiscal ’03 guidance. Paul.

I will now discuss our fiscal 2003 guidance. We are providing full-year revenue guidance of between $495 million to $514 million, or seven to 11 percent growth over fiscal 2002. With normalized diluted EPS of between $1.35 to $1.41, or 10 percent to 15 percent growth over our $1.23 EPS for fiscal ’02.

We also expect to achieve operating margin of 18 percent to 18.5 percent which reflects up to a 70 basis point improvement over fiscal 2002. Excluding the impact of FAS 142 and acquisitions this guidance reflects a significant improvement over Global’s historic revenue and earning growth rates including those achieved during fiscal 2002.

As I mentioned previously, we are very encouraged by the trends we have seen recently in our business, and we believe that we are gaining momentum towards accomplishing our long-term financial and operating performance goals.

This guidance assumes successful execution of our internal strategy, but it does not factor in the impact of any potential acquisitions.

Now I will discuss our strategy on how we’re going to deliver these results. Specifically, we will continue to focus on growing our domestic and Canadian market share by concentrating in the mid-market segment. This strategy has continued to serve us well by protecting our revenue stream from significant market and economic fluctuations due to our well-diversified portfolio.

We will continue to build our ISO Group by becoming the responsible ISO processor of choice. Today we have just over 50 ISOs as compared to five a year ago, which attests to our strengths in this area.

We are dedicated to our existing customers with a goal of providing full customer satisfaction which will translate into achieving a lower than industry attrition rate. We are dedicated to providing best-in-class service which allows us to have a strong sales pitch in the domestic and Canadian market. And we are dedicated to providing the latest secured, enhanced products and services by blending technology with our customer needs.

We will continue to focus on potential domestic and international acquisitions, both strategic and tactical in nature. And lastly, we will continue to integrate our acquisitions, consolidate operations, and implement cost reduction initiatives gaining further margin improvement.

We are very pleased with our progress over the past year, and anticipate continued success in this new fiscal year.

We will now go to questions. Operator.

Thank you. (Caller Instructions.)

Our first question will come from the line of Tony [Wibel], Salomon Smith Barney. Please go ahead.

Good morning.

Hi, Tony.

Hi. A couple of quick questions, and then one more strategic question. Is your a guidance assumption on the top line including acquisitions that you could happen in fiscal ’03?

No, it is not Tony.

Okay.

The 495 to 514, or seven to 11 percent growth excludes any acquisition.

Okay. And would you happen to have the funds transfer revenue for the quarter?

Tony, we haven’t broken that – we do, but we haven’t broken that out.

It would be in the K, Tony.

It’s for this speech – but Jim, do you have it handy?

I think we’ll just release it in the K.

Okay. All right, Tony?

Okay. And a last question is could you comment a little bit on the pin initiatives? And then two, the indirect, I guess, sales channel? You had mentioned, I thought you said that you had six new contracts in the quarter. Are you seeing any kind of recovery in that side of the business? And if you could maybe just touch on what the growth rate is in trends that you are seeing in the direct versus the indirect?

Well, let me start with the last part kind of first, if I may Tony. The direct channel, as we mentioned, we had wonderful experience in the last quarter with 20 percent plus transactional growth, which is above the high teens we’ve been experiencing. So we’re feeling very, very good about our direct and ISO channels.

The indirect business we are forecasting will continue to decline in the kind of levels it is. Kind of the, you know, mid single-digit range. However, we did, we were successful in re-upping a number of customers. We didn’t release precisely who they were, but six new customers, or excuse me, six existing customers did re-up meaning they are agreeing to continue to purchase a host of services from authorization, processing charge-back, voice-off, et cetera, statementing from us. And we continue to dedicate resources to that business.

And although our internal projections and although our guidance takes into consideration reductions in those areas we are dedicated to finding new sources. For example, Sears is actually part of the indirect channel. And Sears, although we haven’t given any guidance on what kind of revenues Sears will produce, we’re optimistic that it could build over time to be something of some significance.

I think the trick to that business is to continue to be creative, to look for opportunities. We have this wonderful engine that we can leverage, and provide very cost effective services. And we just have to find new users. And Sears is a great example.

Right. And the pin initiatives?

The pin?

Pin based debit?

Well, I’ll tell you, as you know, pin at the point of sale is growing in the high 30’s. Our pin based growth is actually higher than that. And so we were doing, we’re actually growing faster than market. So we’re growing at something greater than the high 30’s for our own pin use.

So our initiatives are paying-off. And those initiatives are to solicit our existing customer base through a number of means. Direct sales force, leveraging our telesales group, working with our ISO customers, and offering incentives for these customers to accept pin based. And quite frankly, our margins on those transactions, although the merchant pays significantly less our margins are equal to or exceed what we earn on a credit card transaction. So all that is good news for us.

Great.

Those initiatives continue, Tony.

Great. Thank you.

Thank you.

Thank you. Our next question will come from the line of [Dreese Ubitous] at CSFB. Please go ahead.

Hi, it’s Dreese. Can you talk a little bit about the internal revenue growth rate that you experienced in the quarter?

Yeah, Dreese. You know, we read your report, and I will tell you that we are not in complete agreement with your conclusions. I don’t know if we’re prepared to break-out a lot of detail at this point. But Jim, do you want to – can we add something here?

I think in terms of quarterly organic growth, Dreese, that’s not something we have historically, or would be providing. I think we’ve talked in terms of the components of the business, the direct business here domestically continues to grow in the low teens from a revenue perspective. And as we said on the call it’s growing from a transaction volume basis either in the high teens or 20 percent as we said.

In Canada the business continues to grow in the mid to upper single-digits. And then you have funds transfer and indirect which have been declining. When you roll it altogether our business has been growing and continues to grow organically within those levels, depending upon the variety of businesses that we have.

In terms of guidance for this coming year there is only one acquisition that has not fully annualized, and that would be the National Bank which annualizes in October after our first quarter.

Right.

So in terms of the guidance of seven to 11 percent that is primarily organic growth coming through our direct channel and our Canadian channel.

Okay, thanks. Can you talk just a little bit about pricing in the market right now? And then lastly if you have a free cash flow target or range for fiscal ’03? Thanks.

Okay, let me take – I’ll take the pricing, Dreese, and I’ll have Jim talk about free cash flow.

We have, you know, we measure the spreads we earn. We’re primarily referring to our direct business at this point. But this goes for all of our business segments. But we measure the spreads we earn. And they are holding pretty constant.

Now I know that kind of flies in the face of some things we’ve read. And the realities of some of our competitors. But how we are different is that we are primarily focused in the mid-market. And the pricing pressures that one endures processing national customers does not spill-over to anywhere near the degree to the mid-market. I mean just think of the reality of having to solicit all of those customers. So consequently, our spreads are holding-up very, very nicely.

We are involved and do solicit from time to time national deals on a very kind of focused basis, and those spreads continue to get more challenging. But it’s not a big part of what we do. So consequently, overall including the national business that we have I can tell you absolutely, positively our spreads are strong and remaining constant. So that’s, that’s great news.

Jim, anything on free cash flow?

In terms of free cash flow or I think a better indicator for us would be EBITDA because of the funding requirements inherent in our business, in particular in Canada where we have some swings. And depending upon the day that we end the quarter, or the year, it can swing quite significantly.

This year our EBITDA was roughly 112 million for the year ended May. And I would suggest something in the neighborhood of 125 to maybe 28 would be a range for next year. One of the things we’ve benefited from this year, as we’ve talked about since the second quarter was the acceleration of cash collections for our Visa receivables in Canada where we picked-up 30 million in the second quarter. And we continue to do better than expected in terms of positive cash flow coming out of that portfolio.

Okay. Maybe another way to look at it, excluding the Canada affect then is just a change in working capital? Is that going to be more or less flat? Excluding the Canadian piece.

I think it will always grow at some rate because our merchants are growing, and we’re adding thousands of new merchants every quarter. So as a result they require some need, some level of funding whether it’s fees, interchange assessments, and again, depending upon the day of the week that we end a fiscal month it could swing $40 million, $50 million in a day. And that’s why I think EBITDA is a better indicator of cash flow.

Okay. Thank you.

Okay, Dreese. Thank you.

Thank you. Our next question will come from the line of Ken [Korndeibel] with Columbia Management. Please go ahead, sir. Mr. Korndeibel, your line is open. You have your mute button on, sir?

All right, we’ll move-on. The next line we’ll open is the line of Jeff Baker at U.S. Bancorp Piper Jaffrey. Please go ahead.

Great. Thanks, guys. Can you give me, talking about the pin based transaction business, can you give us an idea of the penetration within your using customer base? And break it out between domestic and Canada, realizing that Canada is a lot more heavily penetrated?

Well, Jeff, that’s a great question. We, we haven’t broken it out. I will tell you we have a long way to go. We are growing at a pretty significant rate, as I said, domestically. And that’s partly because we have a lot more penetration to accomplish. You know, the U.S., unlike Canada, and pretty much unlike the rest of the world, generates more credit at the point of sale than it does credit. Than it does debit.

Canada recently joined pretty much the rest of the world with generating more debit at the point of sale than it does credit. The U.S. potentially could follow that model, and that’s going to require a penetration into not just national customers, who most of them accept, but the millions of mid-market merchants who do not.

So, while our penetration is kind of low double-digits at this point into that mid-market, we think there’s huge opportunity. And virtually all of them are targets to accept debit. I mean the exceptions are perhaps restaurants. That’s not a perfect application, but a traditional merchant selling merchandise that would normally accept a credit card can easily accept a debit card.

Sure.

Now, Canada it’s virtually everybody accepts debit at the point of sale. It’s, it is a one debit network owned by the financial institutions. We actually process as many transactions as anybody does up there. There’s two major players, and we’re one of them. And that business is also growing, but nowhere near the degree that it’s growing in the U.S. just because of penetration.

Right, right. And then on the indirect business? You guys mentioned six renewals? What was that net – I would assume there was a net loss there for the quarter, and what was that?

You know, that’s another great question. We haven’t announced net losses. Now what I will say, though, is because that’s a great way of looking at it. We don’t necessarily lose customers. What happens is, and this is the challenge with our business. What happens is these merchants, excuse me, these banks that I’m referring to, although there are other indirect users, but the financial institutions sold their portfolio and are no longer involved.

We have the existing business, and it is slowly attriting. It’s not growing. They haven’t cancelled us per se, because it’s incredibly painful to convert business. But they’re not adding new business. So the net impact of that plus the renewal. And the guys that are growing are growing and renewing. And we’re you know holding our own there very nicely. It’s the reality of there are less financial institutions that are actively engaged in pursuing this business today than there were 10 years ago, and that’s the story there.

Sure, sure. Okay. And then the last question, a little bit of compression on the gross margin relative to what my expectations were. Is there anything going on there in terms of, well, is there anything going on there?

This is Jim. No, what you’ll see as we move through these acquisitions and they annualize, plus we are making changes to consolidate. From quarter to quarter we may see some improvements or compression relative to maybe what you had anticipated, so I couldn’t speak to anything specific. We’re in the range where we anticipated being.

And you expect those to remain in this range going forward?

I would say that that’s a fair assessment.

Okay, great. Thanks Jim. Thanks Paul.

All right, Jeff. Thank you.

Thank you. The next line we’ll open is the line of Matt [Bosnaud] at JP Morgan. Please go ahead.

Hi, it’s Glenn [Foder]. I was wondering if you could just provide some color on how volumes are trending so far in July, compared to that 20 plus percent for the quarter?

Glenn, we haven’t, we haven’t announced anything on that.

As we had described for the fourth quarter – excuse me, Paul – of the 20 percent growth for the domestic business, which is one we tend to reference most significantly on these calls. We have seen continued levels of growth for the month of June. Beyond that I really can’t comment. We look at it really, we look at interim month, but it’s at the end of the month that we would be more specific.

No, Glenn, obviously we’ll give another report next quarter.

Sure.

But you know, I will take a second to comment on some of the reports you’ve read about the economy, and it’s weakening, et cetera. It isn’t translating to transaction declines with us, for whatever reason. And I think that it isn’t so much that we have this golden set of merchants that are growing counter to everyone else, although we are pleased. And we’ve said it a lot, but we’re pleased that we have, you know, healthcare and government, and education. You know, kind of verticals that are not as prone to economic kind of pressures. But the growth isn’t necessarily coming from these guys, just growing through any type of economic situation. It’s coming from adding new business. And both from the ISO and on the direct side. So we’re continuing to add, and so we’re continuing to expect that trend to go on.

And do you sense, do you guys sense that other large retailers, you know, for example like a Target, might be pursuing something like Sears is doing? You know, making their store card be able to be used at other merchants as well?

You know, I don’t know, Glenn. I will say that Sears is pretty unique. They have the largest retail credit card base in the world. And they’ve done a couple of interesting things with it. This is one of them. They are, you know, uniquely positioned. You know that credit obviously is a very important generator of income for Sears Roebuck and Company. They have some of the smartest credit guys in the world. And this could work for Target. I don’t have any knowledge about anything they’re doing, but I tell you, it sure makes a lot of sense for Sears. And you know, we’re pretty excited about being chosen, because they considered a lot of other players.

All right, great. Thank you very much.

Thank you.

Thank you. Our next question will come from the line of Greg Gould at Goldman Sachs. Please go ahead.

Thanks. Paul, I know you talked a little bit about the merchant, the sales force doing well in Canada. How is the overhaul in the U.S. sales force in terms of metrics? How are they performing relative to your expectations? Say six months or a year ago?

Greg, I would say it’s – I’m never satisfied with what I think our sales force can do. I will tell you that we have objective measures that go down to daily measurements. How many calls were made, and we put all this stuff online which is incredibly helpful. So how many calls were made, prospective calls, existing kind of maintenance calls. What is the pipeline of pending to be approved deals? And then we have weekly reports from those, monthly reports, quarterly reports.

And I will tell you overall the sales force achieved their objective. So I think they can do more. They have a higher objective this year. And from time-to-time we move people out who don’t perform, and we reward those who consistently do.

And I know I’m not being precisely answering your question. But they have a higher objective this year. They achieved their objective last year, and we think, in part, because of this online measurement. And really management is kind of laser focused on it. And quite frankly, providing our salespeople with some new tools. For example, merchant enrollment advantage. So it allows us to get a merchant up in a day, where before it would take weeks. All of that is coming together in a way that leads us to believe we can have a higher expectation for ’03 from the sales force.

And productivity wise can you give us some numbers on merchant signings per salesperson? Or annualized volume per salesperson?

You know, Greg, those are very important questions, and I think they’re very valid questions. We consider that proprietary because we’d like to think we’re best in class. And so we haven’t. We will consider that for next quarter, but I’m not prepared to do that right now. I’m sorry.

Okay. One last question. The relationships with industry trade groups. How are those evolving?

They’re going great. You know, there’s a couple of ways to look at that. You have to be cautious because sometimes you can get trade groups who aren’t really behind the program. You’re not really supporting them. And, or there’s not really a compelling reason for their customers to use you. We have people that focus exclusively on servicing the trade groups, both from a sales and a support. We have 200 associations that do business with us, and they’re growing very nicely. I personally spend a lot of time on it.

On Monday I’m speaking at a New York State Trade Show Association in [Kuperstown], and they have trade associations from all over the country, in fact, attending. And we were given a keynote opportunity to talk about our services, and the industry in general. And though it’s a pain to get up to Kuperstown that’s how seriously we take that channel. And we’re very pleased with the progress we’ve made there.

And how much approximately of your volume percentage-wise come from trade associations, at least?

Wow!

I think, Greg, it’s a very robust opportunity for referrals into the direct channel. And it’s meaningful, but we’ve not tried in the past to provide that level of detail.

Okay, thanks.

All right, Greg. Sorry we didn’t answer everything.

Thank you. Our next question will come from the line of Gary [Presptino] at Barrington Research. Please go ahead.

Hi, Gary.

Good morning. How are you doing?

Good.

Hey, Jim, did you say the tax rate for this year is going to be 37.4 percent?

That’s correct.

Okay. And Paul, could you give us some idea of how many of these Sears credit cards are out there? And how many are active?

Yeah, there’s about 60 million. About 17 million active, Gary.

Okay, 17 million active?

Yeah.

Okay. And this is really based on how quickly Sears can get these agreements with the merchants, right?

Yeah. No, they have some in the works right now. We hope to have some activity by calendar year. But however, you know, we are the engine, so Sears pays us actually, not the merchant. Sears has the relationship. And we appear to the merchant to be Sears. So if the merchant wants to do business with their processor, and then who links with Sears? We’re Sears. But if the merchant wants to do business directly with Sears, we’re Sears. And we get paid, we get paid in any of those scenarios, including an arrangement because we’re providing services effective immediately, we’re earning some revenues right now. So to really make this thing sweet, they obviously need to sign customers, and they’re hard on that right now.

Okay, great. And then, I just want to clear something up. You said that fourth quarter trends, domestic transactions were up 20 percent which you saw an acceleration, correct?

20 plus, yeah.

Okay. Now that comes from internal as well as new customer signings? Or is that an internal number?

It’s the existing base of business, that’s also doing pretty good, but it’s really an awful lot of new business that we’re generating.

Gary, it’s not our existing merchants all growing at 20 percent.

Yeah, that’s what I figured. But it’s still good. I mean vis-à-vis what your existing internal, existing merchants were doing, is your internal growth still is it growing? Is it down, or is it, you know, is it flat?

You know, as Paul had mentioned, we’re in a lot of different verticals. And those that are left susceptible to the economic downturns are doing better. The ones that are more retail oriented would be a bit lower.

Okay, thanks.

Yup.

Thank you. Our next question will come from the line of Wayne Johnson at SunTrust Robinson Humphries. Please go ahead.

Yes, good morning. Could, Jim, could you break-out a little bit on the capex side what your initiatives are there?

For what? For the coming year? Or for the year prior?

No, for the FY ’03?

We, as we’ve indicated we have a number of, still some work to do on acquisition integration. We are building or we’ve leased a facility in Toronto to move employees who were part of CIBC and National Bank who were still resident in their former offices into a global office. Part of their restructuring charges were closing a small satellite office that we had for the last 10 years in Toronto, moving into an additional facility. And you’re going to see some of that last year, as well as this year, costs related to moves.

Beyond that, the focus or spending will be in products such as GAA, global asset advantage, which is effectively taking our statements and putting them online. MES, or MEA, which is the web portal to board merchants. So when you look at 20 – we said a range of 15 to 25 million there’s going to be a piece of that which will be integration related. I think there’s a bigger piece which is investment in products, and in technology to allow us to provide services to our customers quicker, faster, better.

Okay. And also, on the salespeople side could, Paul, could I get a sense of a number on how many salespeople, direct salespeople you have today versus what it was a year ago?

Wayne, it’s actually down slightly because we have gotten rid of some people who weren’t producing per our requirements. But overall, the quotas have actually increased. And so we are expecting more productivity from less people. And with proper management tools, and measurement tools, and implementation tools, and product sets, I think that’s a realistic expectation. So although our sales force is down approximately 10 percent our productivity is actually, our expectation is much higher.

Okay. And also can you give us a sense on the Canadian market, on how cross-selling services is going there?

It’s going terrifically. As you know, the National Bank of Canada gave us the MasterCard entrée, and we already were the largest Visa provider. And we are continuing to sign lots of, lots of, lots of new business, both national and recently for the quarter we’ve been focusing on the smaller customers, kind of the mid-market. And it’s going extremely well. We’re very pleased. You know, although that business overall is growing in kind of the low teens that’s significantly ahead of what the market is growing. I mean Canada, Canada’s growth overall, we are far exceeding that, and we will continue to.

And last question here. On the indirect side, you guys renewed six contracts. Good news there, is this – are you guys committed to investing long-term in this business? This is a service that you’re going to want to be providing to your customers over the next two to three years?

Yeah, the answer is absolutely. This is a very important business for us. And you know, the investment in products will obviously help that. The Sears deal is not to be underestimated. That is – just because it’s Sears National Bank, that is somebody who are buying those core services from us. Those same services we’re selling at financial institutions for Visa and MasterCard just happens to be the Sears card. And it’s a similar type of revenue stream. So we’re looking for other opportunities like that. We are absolutely committed to this business. We have a first class management team. And it’s an important channel for us.

And what percent of revenues does indirect represent in the fourth quarter?

It’s around 20 percent roughly. You know, it’s declining a little bit as the business grows around it, and that business goes down a little bit. But it’s roughly 20 percent.

All right, thank you very much.

It’s my pleasure. Thank you, Wayne.

Thank you. Our next question will come from the line of [Partek Vita] at Midwest Research. Please go ahead.

Good morning.

Good morning.

I wanted to know where the mix of new merchants are coming from now that the ISO channel is growing?

Meaning big, small, or type?

No, meaning, you know, if you looked at a year ago I’m sure you were getting more merchants from your direct channel versus the ISO channel now that you have so many more ISOs how would the percentage break-out in terms of how you get the merchants?

That’s a good question. The ISO channel is becoming – you know, before it was diminumous. Now it’s becoming much more significant. Our direct business still is bringing in more business than the ISO channel is. However, they are knocking on the door. I mean they’re bringing in lots of business. Now the business they bring in, it kind of differs. All the ISOs, the successful ISOs have kind of a stick. I mean they appeal to a market niche, they have a unique product, they, you know, offer something that kind of makes-up for the fact that they have to purchase all their services from somebody else.

So those merchants, however, typically are on the small side. $100,000 a year in bank card, or less. Whereas our direct guys are calling in $250,000 or greater. And so we’re getting in numbers, you know, a whole bunch of new customers from these guys. But still our direct is, you know, producing more in revenue. On a customer count, you know, they’re getting closer.

And from a revenue standpoint you said seven to 10 percent revenue growth. Would you be able to break that down to what you anticipate from Canada in direct and direct? Just expectations for ’03?

Well, it’s seven to 11.

I apologize, seven to 11. Could you break that down?

Don’t leave out that other percent, that’s important. And when we break it down between Canada and the U.S.

Right.

We’re not at this point.

Okay. Well, thank you very much.

My pleasure, thank you.

Thank you. Our next question will come from the line of Joe Milano at T. Rowe Price. Please go ahead.

Hi, guys.

Hi Joe.

Hi Joe.

Could you just give a little bit more color on your operating margin guidance for next year? Just curious. I guess the guidance is for somewhere between 20 and 70 [BPS] of improvement. But with the synergies you’ve achieved, and will achieve on some of the integrations, and with the normal operating leverage I just wondered if there were other things that you’re contemplating in terms of expenses that would keep the margin from, you know, improving further?

Hi, Joe. Good morning. As you’ve heard on the call, and we’ve been referencing over the last year, our ISOs continue to be a bigger part of our business. The way we compensate an independent sales organization relationship versus an employee sales rep, and employee sales reps are paid commissions for the first 12 months that a new merchant comes on. And then after the 12 months have ended, until the, for as long as the merchant is with us it is, there’s no sales expense against the merchant. It’s just simply our processing costs, the majority of which are fixed. Anyway, it would be charged against that merchant from a profitability standpoint.

In terms of an ISO relationship there is a commission paid which is on a rate basis much smaller than what we pay our direct sales force for the first year. So we paid in perpetuity. And so there’s a margin impact in year one, two, three, four, and so on as long as we have the relationship with that ISO and that merchant.

And what you’ll see in ’03 versus maybe what we saw in ’02 is a bit lowering of the margin in terms of how it had been growing given the size of the ISO channel and our expectation that it will continue to grow, and will continue to add ISOs in the coming year. So we'll get it in terms of aggregate bottom line and top line growth. But in terms of percentage it will have a downward impact offset by the integration activities and cost reductions that we focus on all the time.

Okay, do you guys anticipate having to invest any money up front in the Sears relationship?

I think there’s some investment required, but most of it is internal resources, and so it’s an allocation of people to one project versus others. It’s not having to go out of pocket by having to purchase products or equipment.

And our, the agreement, Joe, with Sears calls for some reimbursement, too, of any unanticipated out of pocket costs, and reimbursement of some anticipated out of pocket costs. And so the net result is precisely what Jim said.

Okay. And then I guess finally, Paul, as you look at the market could you maybe characterize the M&A pipeline and what you’re seeing out there either in terms of portfolios or processors, or whatever you’re, you know, whatever you’re level of interest is given your balance sheet entering the new year?

You know, we’re very interested. And we continue to beat the bushes. I think that we’ll see more opportunities outside of our borders than we will in. And that’s going to require a little more digging.

You know, where we do well isn’t in a bake-off necessarily, although you know, I guess if we have to we can win those. But where we do well is where we identify something unique, we bring something unique, we work a little harder. And you know, we’ve pulled-off some of those last year. And we hope to pull-off some of those this year.

And where we get, you know, really focused we’ve been pretty successful. And so we are very focused on looking for those opportunities internationally as well as domestically. And we’re looking to do something different, come up with a different angle. Because these things aren’t cheap. When everyone finds out about them, and it’s a bake-off, you know, it’s normally not the story we’re looking for.

Okay, thanks.

All righty.

Thank you. Our next question will come from the line of Tony Wibel at Salomon Smith Barney. Please go ahead.

Hi. One quick follow-up question. Would you happen to have the dollar volume of growth rather than transactions during the quarter?

It’s a – Tony, this is Paul. It’s pretty darn close. Because the transactions haven’t’ declined. And therefore, haven’t increased. So the dollar volume, it’s still in the, you know, 20 percent range.

Okay, so that would go with the same way that you were saying earlier, that the pricing pressure is not really happening here?

No, we’re not really seeing it.

And large, sorry, smaller ticket sizes either?

No, we’re not seeing any real change in ticket sizes.

The average ticket is health as well as spread.

Great. Thank you.

All right, Tony. Thank you.

And Mr. Garcia, please continue with your presentation.

Well, thank you all very much for joining us on our call today. I thank you for your investment, and we thank you very much for your continued interest in Global Payments.

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