環匯 (GPN) 2003 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Global Payments Conference Call. At this time participants are in a listen only mode. Later we will conduct a question and answer session. Instructions will be given at that time. If you should require assistance during the call, please press 0 then *. As a reminder this conference is being recorded. I would like to turn the conference over to our host, Chairman, President and CEO, Mr. Paul Garcia. Please go ahead.

Thank you. Good morning everyone and seasons greetings. Welcome to Global Payments Conference Call for the second quarter of 2003. Joining me are Jim Kelly, CFO and Jane Forbes, Investor Relations. I want to remind you that some of the comments made in 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 10-K. Now for the agenda. The agenda for our call is as follows. I will give an overview of our second quarter 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 the National Bank of Canada merchant portfolio acquisition. I will then talk about our 2003 outlook, and lastly we will have a question and answer period.

Now for our 2Q results. We reported strong financial results for the second quarter ended November 30th.

Our revenue grew by 12% to $129.5m. Resulting in net income of $13.6m for a 17% increase over prior year. Diluted earnings per share grew by 16% to $0.36. This growth was partially due to the inclusion of one-month of results from our National Bank of Canada portfolio acquisition. Excluding the impact of the National Bank acquisition, organic revenue growth for the quarter was approximately 9%.

In addition, our organic revenue reflects low teen growth in the direct channel, offset by expected declines in the indirect and funds transfer channels. Additionally, and as you would expect we experienced a positive year over year impact relating to the events of September 11th. Now for our 2Q trends. Our domestic direct transactions during the quarter grew in the high teens. This organic transaction growth compares favorably to market trends which demonstrates, we believe, that we continue to gain market share in both our domestic direct and ISO channels.

In addition, our domestic average ticket and spread have remained stable for the quarter, which we believe is a result of our diversified mid-market segmentation.

Our Canadian transactions continue to grow in the low teens. In addition, our average ticket and spread have held constant as we continue to further penetrate the Canadian market. Moving onto recent events. We've been working diligently to exceed our ISO service expectations by broadening our product and service offerings and to help our ISOs grow their business. To that end, the number of new ISO merchants added year over year has grown significantly. Our U.S. direct sales force continues to be very active and has successfully signed thousands of mid-market merchants this quarter. A few of the more notable signings were: Ford Motor end of lease pay off program; Interstate Batteries, which is a large multi-location chain of auto supply stores; Atlas and Polar Air, which is the largest air cargo outsourcer in the air freight industry; Old Dominion University; and Direct Maytag, a mid-market appliance store chain.

We successfully completed the back-end conversion of the National Bank of Canada at the end of October, and have rolled out our secure web based reporting tool, Global Access Advantage to all of our Canadian merchants. Our Canadian sales force continues to aggressively cross-sell Mastercard and Visa services, and we have signed thousands of mid-market Canadian merchants this past quarter. In addition, we continue to sign larger Canadian merchants, a few of which are: Capital Iron, a mid-market chain of hardware stores in Canada; Empire Theater; Look Communication, an internet service provider; Co-op Atlantic, which is a mid-tier Canadian grocery chain; and Axa Insurance, a large insurance provider.

We continue to add new check merchants for both our guaranty and gaming products. The following merchants represent a cross section of our recent signings in this business segment: Olympia Sports; Morgan Jewelers. And for our gaming products, we signed Riviera and the Cannery Hotel Casinos.

We are also happy to announce that we are currently processing transactions through our Sears agreement. Sears has currently reached agreement with a number of national merchants and is currently in negotiations with several others with one merchant up and live.

In summary we had a 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 second quarter and year-to-date income statement; comments on the cash flow statement and balance sheet; and an update on the integration of the National Bank of Canada portfolio acquisition. For the quarter, revenue grew by 12% to $129.5m. As Paul mentioned, approximately 9% of this represents organic growth, and is driven by low teen revenue growth in our direct business and the favorable year over year impact relating to last year's September 11th events. This growth was partially offset by forecast decline and indirect funds transfer businesses. We are defining organic growth as GAAP revenue, excluding acquisitions that have not yet annualized. We have calculated this growth by excluding an estimated $3m in revenue that we recorded in the current quarter as a result of the October '01 National Bank portfolio acquisition.

Our Indirect business continues to decline in the high single digits as forecasted. Our funds transfer business declined 15% to $3m, primarily due to the scale back and facility consolidation of our UK operations announced during our fiscal '02 fourth quarter. This UK business was not profitable during fiscal '02. Excluding this impact, funds transfer would have declined in the high single digits. In the second quarter of fiscal '03 operating expenses were $105.7m, resulting in an operating margin of 18.3% as compared to 18% in the prior year quarter. The second quarter margin increase was due to the October '02 back-end integration of our National Bank of Canada merchant portfolio and the ongoing implementation of cost reduction initiatives. These cost reduction initiatives were partially offset by the ongoing investment made in our direct and ISO channels, as well as the increase in commissions paid to our ISO's. Also in the second quarter net income grew 17% to $13.6m and diluted earnings per share grew 16% from $0.31 to $0.36. Our effective tax rate is 37.4% as compared to the prior year tax rate of 38.2%. As a result of the impact of our acquisitions and tax planning initiatives. Our share count decreased slightly from prior year due to the impact of options out of the money. On a year-to-date basis, our revenue grew 14% with organic growth of 8%. Net income and diluted earnings per share grew 15% to $28.2m and $0.75, respectively, excluding the prior year trademark impairment charge described more fully in our latest form 10-K.

Now turning to our cash flow and balance sheet. Global reported $42.3m in free cash flow for the six months ended November 30th '02 as compared to $29.9m for last year, which resulted in a 41% growth rate. This strong cash flow growth is due to increases in our direct card business and the National Bank portfolio acquisition. As we're defining cash flow as net cash from operating and investing activities, excluding business development and changes in working capital. We currently have our full U.S. credit facility available of $150m. However, from time to time we may draw down amounts from our credit line for working capital needs, primarily to fund interchange for our U.S. merchants. As we have previously discussed we fund interchange for the majority of our U.S. merchants during the month. In addition, we renewed and increased our credit facility with CIBC to $175m from $140m. This is a 364 day credit facility which is annually renewable and expires on December 9th, 2003. The interest rate for this facility is variable based on market rates. The facility was amended to provide our Visa merchants same day in value, which is typical in the Canadian business practice for merchant inquiring. This means that our Canadian merchants daily Visa deposits are dated to match the sales transaction date to give the merchants the same day in value. As a result, we will be drawing down the credit facility to fund our merchants in advance of the date we receive funds from Visa while we are managing the pre-funding for our Visa transactions in Canada, the National Bank of Canada manages the funding for our Mastercard transactions. While this practice will increase our interest expense, we have factored this into our existing guidance and expect interest and other expense in total to approximate the fiscal '02 amount. This will be more fully described in our second quarter 10-Q.

Now for our cash flow strategy. Our cash flow strategy remains unchanged and is three-fold. First, to pay off debt arising from the timing of working capital needs. Second to pursue accretive acquisitions. Finally, to continue to make investments in our business. Capital spending for the quarter was $4.6m primarily for software and infrastructure development. We continue to anticipate spending in the range of $15-25m for fiscal '03. The decrease in our trade accounts receivable was primarily due to improved DSO within our indirect business. The increase in accounts payable and other accrued liabilities was primarily due to the timing of income tax payable versus prior year.

Now turning to our acquisition integration update. As demonstrated by our improving margins, we continue to realize synergies from our acquisitions as we consolidate operations and leverage our scale. We have successfully converted the National Bank of Canada portfolio to our back-end processing platform. In addition, we plan to migrate National Bank's front-end to our Canadian based third party processor, combining it with our Visa portfolio by the end of our fiscal year. This will take us down to a single front-end platform for our Canadian business. Paul will now give an updated guidance for fiscal '03. Paul?

Thanks Jim. I will now discuss our fiscal 2003 guidance. Based on our results and our current outlook, we are reaffirming our full year revenue guidance of between $495m to $514m which is a 7-11% growth over our fiscal 2002. With normalized diluted earnings per share of between $1.35 to $1.41 which results in 10-15% growth over our $1.23 EPS for fiscal 2002. 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. As a reminder, this guidance does not factor in the impact of any potential acquisitions.

We are very pleased with our progress over the past quarter and anticipate continued success in this fiscal year. Operator we will now go to questions.

Thank you ladies and gentlemen if you wish to ask a question please press one on your touch tone phone, you will hear a tone indicating that you've been placed into queue and you may remove yourself from queue at any time by pressing #. If you are using a speakerphone, please pick up the handset before pressing a number. If you have a question at this time, please press one. First question comes from the line of Tony Wibel from Salomon Smith Barney. Go ahead.

Good morning and great quarter.

Thanks Tony.

I was hoping we could start off by talking a little bit about the U.S. operations. You look like you continue to gain share and I was hoping you could provide a little bit more color as to what verticals or what areas you're gaining share, and how you are going about doing that. Apparently it's not pricing, I was hoping you might add a little color. Then I have one other follow-up.

Okay, Tony, the answer to your question about gaining share in the U.S. market, we believe that is the case because we are growing faster than market statistics, so by definition we have to be gaining share. I can state a couple definitives that I think are part of the answer. Our sales force is more productive today than ever before. That is a by-product of a couple factors. Number one, we have reporting tools that we've never had before, and it gives the sales management and sales people, quite frankly a better barometer to measure their results against their peers and to track their commissions, and for sales management to track their results. Number two, we have a merchant boarding product we talked about in significant detail that allows merchants to be brought up in hours, heretofore, it was literally weeks, in some cases months. And because we pay our people a salary plus commission, their commissions don't kick in until such time they are actually processing volume from the merchant they sign. That's a good thing for all and particularly a good thing for Global. We also brought in a new senior manager in, Jeff McWey, Executive Vice President of Sales and Marketing. He's been on board a little less than a year. He's really getting comfortable and doing a great job with that whole channel. Lastly our Comerica alliance is also performing very well at higher levels than they have heretofore. All those factors have added up to these very successful results.

Is there any particular vertical or is this across-the-board?

Tony, I don't think anyone stands out. We still have pretty significant vertical penetration in general retail and restaurants but we have a great health care, government, education, utilities, those are all strong portfolios for us. We add merchants every month to those. Just think about the ones I highlighted in this, it's kind of a broad spectrum of things.

Great. And the last question deals with the expense expectations going forward. It looks like SG&A has come up a little bit, but that the cost of operations have come down, do you expect that trend to persist the remainder of the fiscal year? I would presume, just double checking, that the cost of operations are coming down because of the consolidation and that SG&A is going up because of the ISO.

That's precisely right. We think that trend is going to continue as we add ISO's. As you know, we report the fees that we pay to the ISO in the SG&A lines. So, as we successfully add ISOs that increases SG&A. Cost of operations are coming down precisely as you said because of consolidation, the benefits of consolidation activities.

Great, thank you very much, and great quarter.

Thanks Tony.

Next comes from the line of Jeff Baker from Piper Jaffray.

Hey guys. I also echo the good quarter. Can you, Paul, specify how much organic revenue growth was related to favorable 9/11 comps there?

You know, Jeff, we think it's a couple percent. Between 1 and 2%. Maybe organic was 8, you could argue it was as low as 7. We don't have a real specificity on that. Our guess is we picked up a percent, maybe as much as two because of the comparable comps of 9/11.

Alright. Very helpful, thanks. Can you give us trends -- let's talk about linearity throughout the quarter and then what you are seeing as far as spending trends here through December 20th.

That's a great question. Let me start with the first part of kind of our quarterly trends. It's important for everyone, and of course, you all know this, but December, while it's an important month to us, it's but not the be all end all as it is with some merchant processors because of the diversification I just discussed with healthcare and government and education, restaurants, utilities, et cetera. Because of our lower mid-market merchants, not the big box guys who really depend very heavily on the Christmas season.

In fact, third quarter is one of our lowest, and third quarter includes December. Historically, our 3Q has been one of our lowest revenue quarters and, once again, includes December. While December is important, it's clearly not the be all end all. It's probably not even our most significant month in terms of revenue. It's important but it's not a real driver. In terms of holiday trends that we've seen, nothing really dramatic to report. The volumes starting with the Friday after Thanksgiving, which is the beginning of the holiday season, look fine and they've been holding pretty constant along the lines that we've been reporting organic transaction growth in the high teens. So we're not seeing anything dramatic to report.

Great, thanks. What about the second quarter, the linearity there?

Through our third quarter, you mean 3Q?

2Q, the previous quarter we just finished. So September, October, November, how were the spending trends there?

Jeff, I don't have any real insight on that. I would say, we saw transactional growth in the high teens and didn't necessarily see -- pretty steady growth for all three months.

Okay. Great. I'll get back in the queue, thanks.

Thank you and our next question will come from the line of Craig Peckham from Jefferies & Company.

Good morning Jim and Paul. I have a question about the mix of your business right now. In rough terms how much of your volumes are coming from your ISO relationships versus direct, if you could maybe compare that with a year ago?

Craig, we haven't broken that out, we may choose to do so. ISOs were not significant a year ago. They have gained some significance. We may give more insight into that. We have not. What we have told you, however, is that our indirect business was approximately 20%. That continues to decline as we grow our direct business around it, so that's closer to around 18 maybe a little less than that as a percentage of our total portfolio.

Is it possible to get a count of the number of merchants you are processing for now?

I don't have that information readily available. We constantly quote a million points of service which is not necessarily merchant locations and does include our indirect business. So if a merchant had two or three terminals that would count as two or three. If a merchant had one, that would be one. If a merchant had 10, that would be 10. It's about a million points of service in North America, which includes a pretty good slug of business from our indirect. I'll give some thought to that and see if we can't give some insight to that in our next call too.

Thank you.

Our next question will come from Jeris Upetus from Credit Suisse First Boston. Please go ahead.

Good morning, nice job in the quarter, guys.

Thanks Jerise.

Just to follow-up on that last ISO question, can you give us a sense for in the direct channel how much of the growth is being contributed by the internal sales force vs. the ISO channel, in broad terms?

I'll try. The ISOs are producing more actual contracts per month. They are significantly smaller because the ISOs are focusing on much smaller business. I mean, probably something significantly less than $100,000 in annualized bank card volume.

Our direct sales force is $250,000 or higher on the average for probably closer to $300,000 for direct volume they are producing. So ISO's are producing more contracts at a lower level, and the direct sales force producing less. That's a recent phenomena, but much more significant. So, the ISO's are becoming a significant revenue generator for us. That's why in an earlier question we may give more insight to that in future calls.

Would that net out to approximately half of the total volume growth from each? Is that the right ballpark?

I didn't say that. I would think that would be a little aggressive.

Okay. And then just a question on the cash flow side. You mentioned the improvement in working capital. Do you have a target for the DSO's and payable days for the year. It sounded like there was some benefit from timing but you certainly improved that quite a bit.

There's not a specific target. Most of the business is a debit to the merchants account at the end of the month for all our direct business. It's simply the indirect business, which is either ACH or we send a bill. We, just in the ordinary course, try to improve the collections there, but I don't see it's going to change all that materially from where it is today.

The payable days, do you think you can keep the days as high as they are now or is that going to swing back with that tax timing?

It's due just simply to a timing payment. I wouldn't anticipate any additional change to payables.

Great. Thanks.

Thanks Jerise.

Our next question comes from Cartis Mika from Midwest research. Go ahead.

Good morning. A couple of questions. First, a question on the ISO channel. Can you say how many ISOs you have and would the 80/20 rule apply to the ISOs you have?

Yes, it's about 50, approximately. I think the 80/20 rule does apply. We have 20% of those producing 80% of the volume. That's about right.

What's the possibility, the risk of losing an ISO that's producing, the top-tier ISO? Is it because they use your front-end, so you are not that worried about losing the ISO or is it that the relationship is so deep you don't have to worry about it?

No. I think we worry about losing ISOs everyday. They are an important channel for us and it would be unlikely you would lose the existing business because that's problematic to convert that off of one platform to another. But the ISOs could choose to use someone else if they felt that our services didn't compel them to continue to do business with us. That's why we spend so much time and energy investing in that business. I would be -- in summary I would say the ISO business is very stable. We are winning lots of business and it's growing dramatically, but we have to prove ourselves everyday to our ISO partners.

A last question on acquisitions. As you look at acquisitions today, what's the biggest hurdle right now? Is it price or more of a cultural product fit?

I'll give you our philosophy on acquisitions. We think the company is doing very well. We have been. We think we are well positioned for reasonable organic growth, but we're still very interested in the right acquisition, but we're not driven to just do anything at any cost. We are very disciplined in looking at accretive opportunities. We're very disciplined in looking at acquisitions that's fit our criteria. That includes products that we're looking for a market that is attractive to us.

Perhaps other functionalities that make more sense to buy than to build. And lastly, we have to go through all those hurdles and we have to say we reasonably think we can then improve upon whatever the story is. We can make this a better company. We can make this product that we're bringing a better product. We can offer greater functionality. If it passes all those hurdles we going to pursue it.

Alright. Thank you very much.

My pleasure. Thank you Cartis.

Our next question will come from Greg Smith from Merrill Lynch.

Good morning. Back on the ISO issue, I was just wondering if you are seeing any increased competition from other processors maybe moving down market ones that haven't targeted the ISO channel quite as much? Are you seeing any of that at this point? Clearly, you're getting your fair share, but any reason to worry going forward?

This has always been an incredibly competitive arena. We are not the only guys that see the wisdom of providing services to ISOs because it's the most efficient way to get down market merchants. So all the usual suspects are out there aggressively pursuing that business. We haven't seen increase in ISO solicitations per se, and we haven't lost any ISOs. But, I will tell you that everyday we work very hard in keeping them.

Okay. Great. On the online debit front, are you seeing particular success deploying PIN pads or are just starting to get any real kicker from online debit at this point?

Our bank card transaction growth is in the high teens, our debit transaction growth, online debit PIN based is magnitudes higher. It's over 50%. Our online debit growth is significant. However, we still are very under penetrated. Our solicitation efforts continue through telemarketing, through sales channels, through special incentives and we are making headway. Therefore, you have that kind of growth. But it's not moving the needle at this point.

Lastly on the check business can you talk about any trends there? You're signing merchants, but are you seeing any decline at checks used at the point of sale or any rising defaults that are of concern?

Firstly, there are less checks being presented and for the first time checks have actually declined. However, your biggest competitor for a check guaranty product is self insurance. So paradoxically in a tough environment with less consumers, one could argue less credit worthy consumers writing checks, the argument to use a check guaranty company actually increases. Our sales people find a more willing participant, a more willing market when we talk about guaranty because you're talking to a merchant that perhaps has had some losses. We're getting our fair share of new check business. The verification business is a little soft. Certainly for us it is. I'm not sure of our competition. We are definitely seeing some softening there. We are bullish on our gaming products. We think we lead the market. We have more casinos using our products than anyone else's, so that continues to be a strong grower for us.

Great. Thank you, nice quarter.

Thank you appreciate it.

Our next question comes from the line of Apreeva Pereet from SunTrust Robinson Humphrey. Please go ahead.

Good quarter, I have one question. It seems like your revenue growth was more than your EPS growth, is that going to be a trend in the future? What should we think about it going forward? When can we expect the level of revenue growth coming down to EPS?

I think you mean operating income.

Right.

It's so close. I think it's a question of diluted shares. I wouldn't look for any trends there. I think we are about a percent apart. There's nothing of any significance there.

It's just simply rounding. Your question, was around net income or regarding revenue, the earnings are growing faster than the revenue.

Net income.

The difference is a percentage point, which is simply rounding.

Second question, SG&A , what should we think about it going forward?

We answered that just a second ago. I would look for continued growth as we are successful in the ISOs because we report the ISO revenue on the top line, and then we subtract what we pay them in the SG&A line. As that continues to be a grower for us, the SG&A lines will increase.

Okay. Thanks.

Our next question will come from Greg Gould with Goldman Sachs. Please go ahead.

Good morning, it's John Mathis. Paul or Jim, can you talk a little bit about Canada and how that business is trending?

Sure. The Canadian is not growing as quickly as the domestic, but we are growing faster than market out there. A couple important developments in Canada. We continue to penetrate the cross sale either Visa into Mastercard merchants or Mastercard into Visa merchants. That's proceeding very nicely. We are going down market a little bit, and have signed literally thousands of merchants during the quarter. These are merchants that before we wouldn't have focused on. We are taking a page out of our domestic book there. We've also introduced a couple important products to quite a bit of fan fare. We certainly beat the market, and we may be the only one that actually has a combined Visa/Mastercard debit statement out there in the market. Canada is almost 30% of our revenues. It continues to be an important contributor. We are very pleased with our progress

The acquisition pipeline, around your appetite for acquisitions, what would fit -- I know you talked generally about product and you looked for merchant portfolios similar to what you done so far, maybe a little bit smaller. Are these U.S., Canadian or elsewhere? Can you fill us in a little bit there?

I think all of the above. There are more opportunities outside of North America then inside. There's not a lot in Canada. There's still potential. There's some opportunities in the United States. There are significant opportunities outside the U.S. I would look for us to be active in all those areas and hopefully we will be successful in having one or two of these meet our criteria and we are pursuing it.

Last one, please. On the Visa/Mastercard front is there anything in the card associations that could have an impact on your business next calendar year, either in terms of interchange or rules around merchant payments or anything there we should be aware of?

John, that's a great question. We stay very close to the card associations. They are very important to us. We'd like to flatter ourselves to think we are important to them. It seems that Global Payments has less of an adversarial relationship than some of our competitors do with card associations. We do our best to take advantage of that. We don't see anything on the horizon. There was an interchange increase recently. That was well handled. Canada is going to have an interchange increase in a couple months. We'll be rolling that out. We are always keeping our eye on the legal front with a couple of significant items of litigation pending. But nothing that I could look at right now that I would tell you that we see any definitive impact.

Okay, thanks very much, good quarter.

Thanks John.

Our next question will come from the line of Gary Prespitino from Barrington Research.

Good morning Paul and Jim.

Hi Gary.

I want to get back to Canada. Where is Monaris vs. you in getting this integrated platform out with dual processing? Second question, how does the acquisition by Paymentech of Scotia Bank's visa portfolio impact you in a positive or negative way?

Personally, Monaris - please don't misinterpret saying that we beat the market, and we're first and they may not be there. If they're not there today, they're not far behind. Monaris is still a little ahead of us in terms of market share. Royal and Bank of Montreal, and their management team are doing a good job. They're tough competitors and we go head to head with them all day long. They're not asleep and they continue to be a robust competitor.

The Scotia acquisition, merchant acquisition by Paymentech of Scotia's business gives Scotia a foothold up there -- excuse me, gives Paymentech a foothold up there. It's not a dual relationship. They will need to buy the Mastercard services from someone. Also quite frankly, Scotia because it was a smaller player, was a tough competitor in terms of pricing. I think that they perhaps lead with pricing a little more than anyone else. We think that Paymentech will bring a little more discipline. So we are looking at that as actually a favorable development, Gary.

Paymentech is partially part of First Data, right?

Yes. The majority of it's owned by Bank One. I think it's around 48.5 vs. 51.5, around those numbers.

Is First Data doing Mastercard processing in Canada?

First Data is through a kind of back-end acquisition of Canada Trust. That is an avenue potentially for Paymentech to gain MasterCard authorization and settlement.

Thanks.

Alrighty.

Our next question will come from line of David Sanders from Legg Mason. Go ahead.

I was wondering if you can give additional color on Sears alliance. I think you said you had one national chain you had signed up. Can you give details on that or what you have in the pipeline there?

Sure, the Sears relationship, we are processing transactions live for Sears. For a national chain of pest -- pest control. National pest control chain. Sears hasn't done a press release so I'm a little hesitant to announce the name. They also signed with a very well known drug chain and once again Sears hasn't chosen to do a press release. But we will soon be enjoying those transactions as well. There are several other very large, very recognizable names that they are working on. I think transportation in kind of a grocery front.

So they are aggressively pursuing that. We were, quite frankly, a little concerned when they had a change of management, but Sears seems very committed to this. It's not significant at this point, although we are paid minimums through our Sears contract. We're hoping this thing could develop into something meaningful next year.

Thank you.

Once again, ladies and gentlemen, if you do have a question, press one at this time. We have a follow-up from Jeff Baker from Piper Jaffray - please go ahead.

Jim, can you quantify any kind of margin expansion we can expect from going from single front end solution by the end of the year?

As we talked about, that's going to be toward the tail end of this year, I don't think there will be a big impact this year and then for next year when we come out with our guidance for the next fiscal year, it won't specifically be the impact, but it will be the combination of initiatives and strategies for the coming fiscal year.

Okay. And Paul, can you give us any transaction growth metrics between PIN, signature and credit card? I don't know if you've already done that?

I talked a little bit, Jeff, about PIN, it's up over 50 percent. The grower clearly in Visa and Mastercard in a big way too is the offline signature base. That's a huge percentage of the growth for Visa and Mastercard. And we just kind of continue to track pretty much with what Neilson is reporting in those growths. So it's the majority of the transactions.

Okay. Great. Thanks.

Thanks Jeff.

We also have a follow-up from the line of Tony Wibel from Salomon Smith Barney, go ahead.

Hi Paul. On the same line of thought, I was hoping you could actually break out offline debit as a percentage of your transactions, just roughly?

You know, Tony, we haven't done that yet. It's not yet material.

In the U.S.

In the U.S. It is material in Canada, thank you Jim. But it is growing as I said over 50 percent. Perhaps we'll give you further information in another call.

And that's for offline debit, right?

No, Tony, sorry, that's pin base growing at over 50. Our online -- I don't have those statistics in front of me. If you look at kind of where Neilson report is on this, they do report what the percentage of Visa and Mastercard growth is coming from offline because a lot of the banks are issuing offline check cards as opposed to regular credit vehicles. Consequently, a large percentage of transaction derive from those, but we don't necessarily track them differently. They act the same, we earn the same fees. They basically--from a processor perspective, they settle the same, they authorize the same, so there's no real difference.

Would you say that your merchants are more credit oriented though versus the offline debit?

Clearly. They're absolutely more credit oriented, and therein lies an opportunity. Continues to be an opportunity for us. Because there's an argument for the merchant that says, yes it's a missed opportunity not to take a debit card. Because it does end up costing the merchant less, and the way we price it for our mid-market merchant, it actually--we enjoy virtually the same spread on those transactions, so we are ambivalent.

I think the industry, about 20 percent is what offline debit represents to the card base, would you say that would be a slightly smaller number for you?

We are smaller than that.

Okay. Switching gears, I was also hoping you could provide a little bit of qualitative insight into the direct merchant channel. You indicated last quarter you were in the high teens in transaction growth and same for this quarter. What I'm wondering is, was this quarter's transaction growth higher than last-I presume that it was?

It was.

Okay. And the last question is your margin guidance was 18--I think 18.5% I just want to make sure you are reaffirming that.

We are indeed, Tony.

Thank you very much.

Thank you, happy holidays.

Your next question will come from the line of Dan Perlman from Legg Mason. Please go ahead.

Thanks, if I just can drill down a second on your check business, am I right in assuming it's a little less than 10 percent of your overall business?

Yes.

I mentioned, I think you said your verification business you were seeing some softness there?

We are.

And you are attributing that to what? Just to reduction in actual checks to point of sale or competition from other players in the industry?

I think kind of attractiveness of the product, quite frankly. I think the guaranty product is just that, a verification offers a fairly robust database, in which a merchant can get more information, but there's no guaranty on the check per se. I think merchants find the guaranty product more attractive. Perhaps that's just a commentary on today's economy, but we have certainly been selling a lot more of that. We haven't seen -- just the opposite, I think the competitive pressure for the verification is not terribly robust. We're just not seeing a lot of that product being sold.

Okay. So it sounds like you are telling me the merchants are gravitating more towards the guaranty product versus just paying up for verification. Is that an area you are investing in more so? It sounds like gaming or check cashing is where you want to invest your time and money in.

Gaming is a big part as well as conversion, i.e., converting that check to electronic impulse for ACH debit. It's better for all concerned, and a little more sexy of a transaction at the point of sale. We have some--a number of products and we are pursuing some strategies in that area.

You touched on this earlier, but I didn't maybe fully understand it. Your trends in December for really primarily retail channel were what exactly? Holding steady to post holiday Thanksgiving sales? Is that what I was correct in hearing?

Yes. That's the only comment I made. No really exciting news one way or the other, it's just a retail trend.

When we look at more macro trends for just the retail part of your business, do you find that that more closely relates to these comp store sales or just overall gross retail sales ?

We don't really do comp per se, we are only interested in how much business we get from a merchant. Whether they add a location or whether it's growth from the credit card products, we're not really tracking that per se. So I can't accurately answer that.

Okay. And then one last question, you said you have a million point of sale services in North America. What percentage accepts debit?

You know, Tony Wibel tried-- you are trying to sneak up on me.

I know. I'm just trying a different way.

It's less than 20 percent in the United States. In Canada, they are the largest debit transactions per capita in the world.

Through Interac.

Through Interac, correct. And there's one network. You can't go to Canada, it's almost virtually impossible to find a non-restaurant in Canada that doesn't accept Interac debit.

And that PIN based debit market is similar to that of the United States in that you have bank relationships with Interac or are the merchant acquirers members of Interac?

We have bank relations with Interac.

Thank you.

And our next question comes from the line of Ram Casergods with Morgan Keegan. Please go ahead.

I have two questions for you. The first one is, what are you seeing in terms of trends in merchant bankruptcies and charge offs especially in the ISO channel and is that impacting your bottom line and secondly with respect to micropayments, does Global Payments have any technology initiatives to make them more economical for merchants?

Ram, on the first point about merchant bankruptcies, I don't have any statistics per se.

From a risk perspective, we are on budget for merchant write-offs. And I can't report any significant activity that I'm aware of. In terms of the ISO channel, we would be less familiar with that because that's really more between the ISO and their merchant, although we are seeing significant growth in the ISO channel. So if they are experiencing merchant shut-downs and bankruptcies, it's not apparent in the numbers. I understand your point that it seems reasonable that this economy is causing some of that to happen. I don't have real statistics to share with you. And there's nothing meaningful that we're seeing.

In terms of micropayments, we think that's a terrific opportunity. And the card associations we're delighted to say also think it's a significant opportunity. We have a couple of initiatives with a couple new users of micropayments. Think vending, think some other applications I'm really not at liberty to discuss. There's going to have to be a different philosophy for the acceptance of micropayments.

Perhaps a batch authorization. Perhaps a different assumption of liability. Certainly different interchange structure. More percentage than cents based -- I think if the card associations are willing to-by the way, it's got to make sense for the issuers, it's got to make sense for the merchant and it's got to make sense for the acquirer. If we can get that 3-legged stool working, I think this is a big market for everyone. So we are working diligently on it.

Thanks and congratulations.

Thanks so much, Ram.

At this time we have no further questions in queue, please continue.

Well, thanks so much. A very Happy holiday, a joyous, prosperous and healthy, 2003. Thank you so much for joining us on our call today and for your investment interest in Global Payments.

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