環匯 (GPN) 2004 Q2 法說會逐字稿

Welcome to the Global Payments second-quarter earnings release and discussion of the announced MUZO transaction. At this time all the participant lines are in a listen-only mode. Later there will be an opportunity for questions; instructions will be given at that time. (OPERATOR INSTRUCTIONS). As a reminder, today's call is being recorded. I would now like to turn the call over to Mr. Paul Garcia, Chairman, President and Chief Executive Officer of Global Payments. Please go ahead sir.

Thank you. Good morning everyone. Seasons greetings and welcome to Global Payments' conference call for the second quarter of our 2004 fiscal year. On today's call, we will discuss our second-quarter financial results and business highlights. In addition, we will discuss our announcement this morning that we have agreed to acquire a majority interest in MUZO, a leading payment processing company in the Czech Republic. Joining me on today's call are Jim Kelly, EVP CFO; Joe Hyde, Senior VP Finance -- and Joe will be taking you through MUZO; and Jane Forbes, VP Investor Relations.

I'd like to remind you that some of the comments made by management during the conference call and certain information contained in our MUZO slide presentation contain forward-looking statements that involve a number of risks and uncertainties. For these statements, we claim the protection of the safe harbor for forward-looking statements contained in 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 our public releases, including our recent 10 K and our MUZO press release announcement. In addition, some of the comments made on this call will refer to normalized results, which are not in accordance with GAAP. Management believes that normalized results more clearly reflect the comparative operating performance. For a full reconciliation of normalized to GAAP results in accordance with Regulation G, please see our press release filed as an exhibit to our form 8-K dated December 18, 2003, which can be located under the investor relations area on our Web site, globalpaymentsinc.com.

Now for the agenda for today's call. I will summarize our second-quarter results and review recent trends and events, including an update on our DolEx acquisition, and then Jim Kelly will discuss the financial results in detail and provide a progress report on our operational consolidation efforts. Next, Joe Hyde will speak to our MUZO announcement; I will then provide an update on our fiscal 2004 outlook; and lastly, we will have a question-and-answer period.

Before I begin my Q2 overview, I would like to note that my comments exclude the impact of a previously discussed restructuring charge for facility consolidations. The net charge for the current quarter is $3.1 million, which Jim will explain in further detail.

We reported solid financial results for the second quarter ended November 30, 2003. Our revenue grew 15 percent to $148.4 million, primarily due to high teen growth in our domestic direct and ISO channels and the impact of our DolEx acquisition. We also achieved 140 basis point operating margin improvement to 19.7 percent as a result of our acquisition integration efforts and continued cost containment programs. Our revenue growth and margin improvements resulted in a 24 percent net income increase to $16.8 million and a 19 percent diluted EPS increase to 43 cents.

Now for recent trends. Our domestic direct transactions grew in the mid-teens for the quarter, driven by our direct and ISO sales channels. In addition, our domestic average ticket remained stable for the quarter and we experienced a modest increase in our domestic spread. Our Canadian transactions for the quarter grew in the mid single digits, which is generally consistent with industry growth in this market. Our Canadian transactions have also been impacted by the recent removal from our portfolio of certain profit-neutral merchants in the travel industry, primarily airlines, due to the relatively higher loss risk attributed to these businesses. Our Canadian average ticket declined, primarily due to the recent mix of merchant signings, such as the addition of significant petroleum and grocery retailers, and our Canadian spread remained unchanged.

Moving on to recent events. We continued to renew our existing ISO relationships and are pleased to announce multiyear renewals with two of our midsize ISOs. In addition we signed 2 new ISO's that will bring in approximately 400 new accounts per month. We also continued to expand our domestic direct sales channels by signing thousands of midmarket merchants in a variety of verticals. Notably, we expanded our government vertical by signing the State of Illinois, and we continued to grow our New York State relationship, most recently with the addition of the New York State Department of Motor Vehicles and the New York City criminal courts. As part of our diversification strategy for our Canadian portfolio, we signed thousands of new midmarket merchants during the quarter in Canada, as well. In addition we continue to sign larger Canadian merchants, a few of which are -- (indiscernible), which is a retail dollar store chain; Petrol (indiscernible), which is a petroleum retailer; and the North Hampton Group, a Canadian hotel chain.

We also continued to expand our check guarantee gaming channel through the addition of the MGM Grand, Treasure Island, Norwegian Cruise Lines and Prim Valley resorts. Finally, we are pleased to announce the launch of a new Czech gaming product called VIP Lightspeed, which provides casinos a faster and more convenient option to process transactions. Lastly, we're very pleased that we closed our DolEx acquisition and are excited about our new money transfer growth opportunities. As we have previously discussed, there are no significant integration activities required with DolEx, which allows us to focus full-time on our growth strategy. To that end, we intend to open approximately 15 to 20 new branches per quarter, primarily in our underpenetrated existing regions, which would reflect low-teen annual location growth from our existing base of more than 575 branches. We are also currently applying for money transfer licenses in New York and New Jersey, and intend to expand into those states as soon as possible.

To complement these internal initiatives, we are pursuing a number of potential branch acquisition opportunities. We are primarily focused on acquiring branches in strategic locations that also have meaningful customer bases. We are also working to expand our settlement reach throughout the Latin American market, which will provide our customers with an expanded set of settlement choices. To summarize, we continued to be very pleased with our financial results and accomplishments during this quarter. I will now ask Jim to review the financial results in detail and provide a progress report on the consolidation of operations. Jim?

Thank you Paul. In our press release -- and it is posted on our Web site -- we included a GAAP income statement and a schedule (indiscernible) which reconciles current period GAAP to normalized results. Our GAAP results include restructuring charges related to our previously discussed facility consolidation program. My comments this morning reflect our normalized results, which we believe more clearly reflect comparative operating performance for the period presented.

For the quarter revenue grew 15 percent to 148.4 million, primarily driven by high teen growth in our domestic direct and ISO sales channels. Our Canadian revenue was adversely impacted by our removal of certain travel-related merchants such as airlines, due to the higher risk of loss associated with this vertical market. This program is not expected to negatively impact earnings, and with respect to revenue, was offset by a stronger year-over-year Canadian currency exchange rate.

Our direct sales growth was partially offset by mid-teen declines in our indirect sales channel, as expected. As previously discussed, we have renamed our funds transfer channel to money transfer. The money transfer revenue for the quarter was 6.8 million, of which 3.8 million relates to our DolEx acquisition. Operating expenses for the quarter were 119.2 million, resulting in operating margin of 19.7 percent for an improvement of 140 basis points compared to last year. The operating margin increase was primarily due to the integration of our past acquisitions and the implementation of other cost reduction initiatives.

These cost reductions were partially offset by the ongoing investments made in our direct and ISO sales channels, as well as the increase in commission payments to our ISO's. Net income for the quarter grew 24 percent to 16.8 million and diluted earnings per share grew 19 percent to 43 cents. Our effective tax rate remains at 37.4 percent and our diluted shares increased, primarily due to (indiscernible) stock options.

Now turning to the cash flow statement. We reported 48.4 million in free cash flow for the second quarter, as compared to 42.4 million for last year. We define free cash flow as net cash from operating and investing activities, excluding business development, changes in working capital and the cash impact of restructuring activities. Capital spending for the quarter was 6.5 million, primarily for software and infrastructure development. Our net line of credit borrowings restricted for merchant funding in Canada increased relative to our first quarter, primarily due to the holiday season.

Turning to the balance sheet. The merchant process receivable and payable line items have been renamed settlement processing, to reflect the addition of our DolEx money transfer business. These items carried a net payable balance at the end of the second quarter, primarily due to the timing of funds received from Visa MasterCard and the settlement of such funds with our merchants.

During November, we announced a new $350 million credit facility with a syndicate of U.S. Bank. This new agreement has increased flexibility and will primarily be used to fund working capital needs and finance acquisitions. Global also has the option to expand the facility size to 500 million through either existing or new bank relationships.

On November 12, we completed our DolEx acquisition at a purchase price of 195 million, which included certain closing adjustments such as an adjustment relating to DolEx's closing cash on hand. On this date, we effectively paid a net 61 million in cash to the sellers in this transaction, which is equal to $195 million purchase price (indiscernible) the $125 million seller note, and less other items such as DolEx's closing cash assumed by Global, and other certain deal-related costs. As of November 30, we had 114 million outstanding (indiscernible) note payable relating to this transaction, which was equal to the original $125 million note payable, less certain adjustments. These adjustments relate to DolEx's cash on hand at closing and the issuance of restricted shares in partial consideration of the note. On December 1, we paid the balance on the note using our new credit facility.

Now for an update on our facility consolidation efforts. During the fourth quarter of fiscal '03, we announced the closure and consolidation of three operating facilities and their related functions into existing operating centers. I'm pleased to report that we have made significant progress on each of these moves, and expect to complete them by the fourth quarter of fiscal '04. To date, these consolidation efforts have been primarily transparent to our customers while providing Global with a more efficient operating infrastructure. Our second quarter results include a net restructuring charge of 3.1 million relating to the consolidation plan. And finally, turning to new business development activity, Joe Hyde will now review the details of our recently announced MUZO transaction. Joe?

Thanks Jim. My comments will be made in connection with the presentation currently located on our Web site. This presentation will remain available for review after the call.

Starting with slide number 3. During this presentation, I will review our acquisition strategy, summarize this transaction, provide an overview of the European payment market and the MUZO business model, discuss relevant financial and operating data, and make some concluding comments.

Turning to find slide 4, as we have discussed previously, our acquisition strategy is to focus on high-growth, profitable sectors of the payment space, both domestically and in expanding markets abroad. We target companies with clear, competitive advantages, in addition to strong revenue growth and earnings accretion opportunity. When assessing acquisitions, we look to leverage our core strengths, including our management team and financial resources. As this presentation will illustrate, we believe this transaction provides an excellent fit with our strategy.

Turning to slide 5. We have agreed to acquire 52.6 percent of the outstanding shares of MUZO from the Komercni banka, a major Czech bank and a customer of MUZO that is also known as KB. KB Is 60 percent owned by Societe Generale, a leading French bank. We are pleased to announce that in connection with this transaction, KB has agreed to extend its customer contracts with MUZO for an additional three years. The purchase price for these shares is approximately $34.7 million in cash, which we intend to finance using our $350 million revolving credit facility. Lastly, we expect this transaction will close during the first calendar quarter of 2004.

Turning to slide 6. MUZO was privatized in 1990 following the collapse of communism in the Czech Republic and began payment processing in 1992. MUZO has since grown to become the largest indirect payment processor in the country, with an estimated 50 percent market share. Serving primarily financial institutions, MUZO has a superior technology platform that is EMV chipcard compliant; a competitive advantage that I will further discuss later in this presentation. In calendar 2003, MUZO expects revenue of approximately 27 million U.S. dollars.

Turning to slide 7. I will now discuss the compelling fundamentals of the European payment sector. This market is large and rapidly expanding, with billions of annual ATM and POS transactions each year growing at a mid-teen annual percentage rate. While the UK, France and other Western European countries control 95 percent of this market, the Central and Eastern European region, otherwise known as the CEE region, is growing significantly faster than Western Europe and represents a very attractive payment market.

Turning to slide 8. Despite having only 5 percent of the European payment market, the CEE region's 285 million people reflects 38 percent of Europe's population, or roughly the population size of the United States. Russia represents half of this population, followed by Ukraine, Poland, Romania, Czech Republic, Hungary and Slovakia. This disparity between this region's share of Europe's payment market versus its share of Europe's population, signals a tremendous growth opportunity, as further illustrated by slide 9.

Slide 9 provides card and annual transactions per person data. The CEE region carries a ratio of 0.18 payment cards per person. Western Europe is more than six times this amount at a ratio of 1.09 cards per person, and the U.S. is almost 14 times this amount at 2.43 cards per person. As evidence, the CEE region is a relatively undeveloped and untapped payment market which should rapidly expand as it progresses toward Western European and U.S. levels for merchant card acceptance and consumer card usage.

Turning to slide 10, this chart illustrates the impressive transaction growth rates in some of the major Central and Eastern European countries, including Poland, Czech Republic, Russia, Hungary and Slovakia. This region as a whole had transaction growth in excess of 30 percent during 2002, which reflects one of the fastest-growing regional payment markets in the world.

Turning to slide 11. Industry data suggests that as early as 1991, there were fewer than 200,000 internationally branded payment cards in the entire CEE region, compared to more than 50 million cards as of 2002. The primary catalysts for this growth include post-communist political and economic changes, the entrance of Western European banks into this market through acquisition, increased card usage by consumers, and increased card acceptance by merchants. Further, the impending entrance of the Czech Republic and other CEE countries into the European Union should also continue to drive industry growth, as these countries progress toward Western European electronic payment standards and practices.

Turning to slide 12. I will now provide an overview of MUZO and a few of the advantages to Global Payments of this strategic transaction. MUZO is an indirect payment processor, which means the company primarily provides credit and debit card processing services to financial institutions. These institutions then resell these services to merchants. In addition, MUZO installs, services and resells ATM and point-of-sale devices. Finally, MUZO offers select card issuing services such as database management and card personalization. Database management primarily includes providing authorizations for payment transaction from an issuing perspective. Card personalization primarily includes card embossing, magnetic strip encoding and chip card programming.

Turning now to slide 13. MUZO's strategic location in the Czech Republic, which is one of the most stable and prosperous of the post-communist states, provides an ideal location for Global's entrance into the Central and Eastern European market. The Czech Republic has encouraged foreign direct investment and is moving toward political and financial integration in world markets.

Turning to slide 14. This transaction offers a significant number of growth opportunities, which primarily include an expanding CEE payments market and the potential to sign additional customers, both in and outside the Czech Republic. Other growth opportunities include acquisitions of other European processors and the potential expansion of service offerings.

Turning to slide 15. Consistent with our acquisition strategy, we believe that MUZO has several strong competitive advantages. The Company has an experienced management team dedicated to the long-term growth and success of the Company. MUZO also has a strong market reputation for providing high-quality services, primarily due to a superior and proprietary technology platform that is among the first in the European market to be compliant with the international EMV standards for chip-based (technical difficulty), also known as smart cards.

Turning now to slide 16. Since some of you may not be familiar with the term EMV, it might be helpful to provide a brief summary. To reduce fraud levels, EuroPay, MasterCard and Visa -- known EMV -- jointly developed security standards for chip cards, which are designed to function only after the input of a four digit PIN code by the consumer. These standards require card issuers, processors and merchant acquirers to purchase and develop new software and increase their system capacity, which is often an expensive and lengthy process. Merchants must also have chip-capable terminals to accommodate these cards. A chip compliant technology platform is important because, in January 2005, the liability for a fraudulent payment card transaction in Europe will shift to any non-compliant party involved in that transaction, whether it's the issuer, acquirer or the merchant.

Turning to slide 17. From a financial perspective, MUZO has historically achieved transaction growth consistent with market levels. The Company processed 62 million ATM and 33 million POS transactions during 2002, and expects 27 million in revenue during 2003. MUZO's revenue growth, however, has been constrained in recent years by the nature of its share ownership. Although a public company, MUZO has historically been controlled at a supervisory board level by a number of shareholder customers operating in the Czech Republic. A primary objective of these shareholder customers was understandably to provide themselves with the highest possible level of service and leading-edge product offerings, rather than to grow MUZO outside of the Czech market. Further, certain of MUZO's contractual prices may have historically been at above-market levels, which nevertheless benefited certain of its shareholder customers in terms of higher MUZO profitability and related dividend payments. Over time, however, and especially during 2003, MUZO's average pricing has decreased significantly to more appropriate market levels, which has also adversely impacted its revenue growth. On a going forward basis, we would expect some residual adverse impact of these pricing changes in addition to an unfavorable impact from a significant customer who has verbally provided notice of its intent to move a portion of its business to an alternative supplier outside the Czech market. This decision was made as a part of this customer's pan-European strategy for processing, which again, MUZO was not allowed to effectively address, given its historic objective. As such, from the closing date of this transaction, we anticipate first-year revenue growth in the mid to high single digits. For the long-term, however, we anticipate revenue growth in the low to mid teens, as we pursue new customers and new regions throughout Europe. We further expect that this transaction will be non-dilutive to Global's earnings per share after the transaction closes.

Turning now to slide 18. In terms of next steps, this transaction is subject to Czech antitrust clearance, which Global expects to receive since it does not currently engage in any business activities in the Czech Republic. After the transaction closes, Global will be required, pursuant to Czech law, to announce a public tender offer for the remaining shares of MUZO at effectively the same price per share paid to KB.

Turning to slide 19. In conclusion, this transaction provides Global Payments with an entrance into a new and expanding payments region with sound fundamentals. MUZO is a market leader in the Czech Republic and has clear competitive advantages. The business offers significant revenue growth opportunities coupled with strong earnings accretion potential. Finally, the MUZO acquisition is a perfect fit for Global Payments' strategy.

This concludes the presentation on our MUZO transaction. Paul?

Thanks Joe. I will now conclude by discussing our fiscal 2004 outlook. We are reaffirming our full year revenue guidance of between $588 million to $608 million, or 14 to 18 percent growth, over $516 million in fiscal 2003. Full year diluted EPS guidance of $1.65 to $1.72, reflecting 15 to 20 percent growth, over $1.43 normalized diluted EPS for fiscal 2003. This guidance does not reflect the impact of restructuring charges or our MUZO transaction.

We're very pleased with our second quarter performance, our DolEx acquisition, and our planned expansion into the European marketplace. We believe we are taking the appropriate steps to position our company for long-term revenue and earnings growth, and we look forward to continued success during the second half of our fiscal year. We will now go to questions. Operator?

(OPERATOR INSTRUCTIONS). Roger Freeman, Lehman Brothers.

I just want to understand how this tender is going to work after the majority stake you buy. Will you effectively end up buying the entire company?

The requirement in the Czech market is for us to, within 60 days after the closing of this transaction with KB, for us to announce a tender offer for the remaining shares of the Company at a price effectively equal for what we paid KB. That tender offer needs to stay open for at least 4 weeks; it cannot stay open for more than 10 weeks. And the shareholders may or may not choose to tender their shares. Any shares that are tendered we, obviously, will purchase.

Do you expect that they will tender? Is your offer -- was your offer price relative to where the --?

I think the expectation is that they will, but it's not a requirement. It wouldn't necessarily affect the transaction adversely. We would just simply have some minority shareholders. We have a majority of the Board positions. And quite frankly, a couple of them are customers. So you could even argue the other side. But I think the expectation is that they will tender, and we're going to be meeting with them in Prague very shortly. We had telephone conversations with them this morning. Obviously, precluded from having discussions prior to that. And the process is just beginning, so we promise to keep you guys informed.

I was just going at it from the standpoint of your guidance that it's going to be neutral to earnings. Does that assume that you tender for -- you end up paying in full, buying the entire company? Or is that just based on the 52 percent hat you're buying now?

It's just based -- we're just assuming the 52 percent.

How did this business come to you? Was it for sale? Did you find it? Was it based on the technology, that you sought this out?

We have been looking at this market for some time now, at least a couple of years. And we are familiar with many of the processors in the region. MUZO was one that we have been very interested in for some time. We had contacted some of the shareholders, primarily KB, earlier this year. KB had decided to divest themselves of their interest and had contacted a number of players in the market. And it was not a public sale; it was very private, just a limited number. KB decided that we were the best strategic partner for MUZO and for KB. And we made this announcement yesterday.

Okay, great. I'll just ask one question on the quarter. The margin expectations going forward, I mean this quarter was a lot stronger than I had anticipated. Is the annualization of the, I guess the Canadian processing platform consolidation -- does that kind of hit here in the third quarter, such that the margins are not going to be -- the margin comparisons are not going to be nearly as strong?

We have given guidance for this year and updated it on the DolEx transaction. In terms of margin, I don't think the Canadian platform consolidation in itself is what drives margin improvement. We have it in and among a variety of consolidation efforts. The one that it's underway this year particular will continue to strengthen margins for the future.

And just lastly, how much was the Canadian dollar impact to revenues in the quarter?

We have not separated that in the past, in terms of its impact in any particular quarter.

Craig Peckham, Jefferies & Co.

Just a couple of questions about MUZO here. How much revenue does KB account for?

We're not going to disclose the percentage of revenue by customer at this time.

But they are the largest customer I would assume, right?

They are a significant customer.

Looking at the guidance after the first year for revenue growth out of MUZO, just kind of curious -- the revenue growth rate looks roughly comparable to what we have seen in North America, but we got the impression by looking at all the market data here that the longer-term growth is a lot more robust. Why would it seem like relatively conservative guidance out of this operation?

I think the straightforward answer is that we're just getting our arms around this business. There is -- Joe alluded during the prepared comments and the slide presentation that there is a significant customer who is probably going to move some business. That's going to have an impact. There was some repricing. At the end of the day, this MUZO transaction is really about a bigger play in Eastern Europe, potentially even Western. Although we are in love with Eastern Europe. We think it's not unlike the 37, 38 million Latinos in the United States. It's just a terrifically untapped and very attractive marketplace. The bottom line is that we are focused on expanding this business beyond the Czech borders. We have a 50 percent market share today within the Czech Republic. This transaction will be okay if we maintain that market position and continue to be a leader in the Czech business -- the Czech market. It will be outstanding if we can execute our strategy to take this business beyond the Czech borders, and that's going to take a little time. That's not a next quarter or quarter after that or even a quarter after; this is a longer-term play. Once again, its $27 million in revenue in and of itself. That is okay, but that is not the objective here.

Dris Upitis, Credit Suisse First Boston.

Congratulations on the acquisition and a solid quarter. First on MUZO, can you just give a sense for how fragmented that other 50 percent of the Czech market is? And also, what level of price compression you would expect, both in that market and in Eastern Europe? Any reason that that would differ from what you have seen in the U.S.?

The big player -- the other big player is the Czech Savings Bank in the Czech Republic. In terms of price compression, we have had -- a good bit of that happened in this year. MUZO did make some pretty significant pricing considerations to their existing partners, and like all markets, there's probably ongoing price pressure. But I think the big piece of that is behind us. We're still feeling the impact of it, but we're not anticipating any others. The major customers have multi-year left on their contracts. For example, KB being amongst them. The question was earlier how big are they. They are significant, and they do have a multiyear agreement with us, which is important. And obviously we did have conversations with them, because we bought their shares. So you can be assured that we feel very comfortable and they with us, or the transaction wouldn't have happened.

On the Czech savings bank, is that most of the other 50 percent?

Yes it is.

Great. And then on the ISO side. Can you just give an update for what sort of growth you're seeing out of that channel, and what percentage of your revenues are coming from that channel at this point?

The ISOs continued to still be a solid grower; they're growing at a faster rate than our direct business, because of just the leveraged nature of them. Plus, as we note, we signed a couple of new guys -- NPNG and USVS. These are 2 separate ISO organizations that collectively are going to bring in a fair amount of new business per month. We signed up -- re-upped a bunch of existing ISOs. And that ISO channel, they continues to -- they continue to add sales distribution to their own corporation. So this business is growing very robustly. We haven't broken out to date, and we're not prepared to at this moment, just what percentage of the business the ISO comprises. But it is growing, and when we get to a point where we'll have those conversations, we will.

Last question. You mentioned that the average spread in the U.S. increased modestly. Do you think that's interchange friction? Is that probably the biggest driver there?

We do think we got a little lift from interchange on that. That pricing had some impact, so that certainly helped. It was modest but it was favorable.

Pete Swanson, Piper Jaffray.

Paul, I was wondering if you could comment on -- I know the market over in Central and Eastern Europe is more of an indirect merchant acquiring market. Do you see plans or have ideas to go more directly to merchants, maybe building up a sales force? Is that part of your outlook in the future?

That is a great question. We do think there is an opportunity to have a direct merchant acquisition effort. However, in the Czech Republic, because we have a 50 percent market share and a couple of significant customers who bring us that business, I would not look for us to be doing any direct acquisition in the Czech marketplace. That's not our intent. We don't think that would be a very smart move. We would be competing with our customers. However, beyond the Czech market that is clearly an opportunity. It takes some time to formulate that. We have owned this for a grand total of about five hours. But that would clearly be our intent, to look at indirect customers as well as a direct acquisition strategy outside of the Czech borders.

Will you look also beyond the Czech Republic, other indirect relationships with financial institutions? What would be more of the focus going forward?

I think initially it's going to be indirect financial institutions beyond the Czech borders. The management of MUZO actually have a list. They are raring to go to make some calls. They have been constrained in the past; that's why they're so excited about this transaction and we are so supportive. By the way, the entire management team is intact. These guys are very excited about this transaction, and are literally in a position to start making those calls today. And think about just the surrounding geography around the Czech Republic, it will give you an idea of where they're going to be headed next.

One other question. As you expand beyond the Czech Republic, are there any type of capital payment issues to partner with another bank, or are there any changes to CapEx requirements going forward to grow this business?

We haven't given guidance including this transaction, and if we think there's any significant CapEx impact, we'll give you guys some thoughts. At present, we don't see -- other than potential acquisition opportunities, we don't see a lot of -- a significant amount of CapEx. One of the things we liked about this so much is they have this robust EMV compliant platform that is just very scalable and, we think, state-of-the-art. So this is a Ferrari just waiting to be let go here. So that's what we are looking for.

Tony Wible, Smith Barney Citigroup.

Great quarter. I have several questions for you. The first one is, since the quarter ended, can comment on what trends you might have seen in the merchant processing space to date?

We had a pretty robust period to date, and we're very pleased with -- everything you're reading is consistent with that. Merchants are doing great, retailers are selling stuff, and we are certainly the beneficiary of that. I can't add a ton more color other than that, Tony, but it's been pretty robust.

Moving over to MUZO, can you comment a little bit about how this acquisition might interact with Euronet (ph), which is another processor in that region?

Unknown at this time. We certainly know those guys and they know us. I really can't comment other than that.

Any thoughts on offering prepaid as a plug-in to MUZO (technical difficulty) cellular?

Great question. That clearly is a product option, and we have actually had some conversations about that.

Tony, MUZO has relationships with all the GSM operators in the market today, and actually has a product. It's not a significant part of the revenue, but they do have some potential growth (indiscernible).

(indiscernible) explain GSM?

It's just the mobile phone operator, telecom operators.

Those are direct relationships?

Yes. All the major ones.

Is the MUZO transaction fixed price on the U.S. dollar, or is it based on the local currency?

Fixed on the U.S. dollar.

Last question is just, if I kind of looked at DolEx versus the European investment, where do you suppose that you will allocate more of your investment dollars? Which side of those two initiatives?

Wow, that's a tough one. I think at DolEx we are actively focused on two types of expansion, adding organic growth through new branches and acquisition opportunities, (indiscernible) of which exist. So I would say there's probably going to be more immediate activity along those lines. But this is a massive (indiscernible) 38 million Latinos doesn't compare to almost 300 million Central and Eastern Europeans. It's massive opportunities there. There are a number of acquisition opportunities we are going to be looking at there. And I would just be guessing. I would think we are equally focused on both. The good news is we have the available lines of credit, and I think we're well-positioned to take advantage of both opportunities, Tony.

Greg Gould, Goldman Sachs.

Good morning. This is Andrew (indiscernible) for Greg Gould. How fast do you guys expect organic growth to be in the second half of '04?

We have not previously tried to forecast organic growth. We have historically been in the mid to upper single digits, and that has been a range that I think for the foreseeable future. Some of the businesses that we're adding, DolEx in particular and MUZO as Joe said, in years out will continue to help accelerate that organic growth, as the strategy here has been to deemphasize our indirect business. Over the last few years, I think we have successfully taken the impact of that out of our numbers and ISOs, direct business, DolEx, MUZO, Canada, among others, continue to move the number toward double digits.

The last question. How do you see pricing? Is pricing still an issue or has it slowed down?

No, it's going to always be a mature competitive market (indiscernible) U.S. on the merchant side. In Canada I think you see something quite similar. So pricing will always be a challenge. We try to focus on services that we can offer to our merchants and the quality of that service, so that our sales group is not just out simply selling on price, but they have other offerings to help balance it.

Dan Perlin, Legg Mason.

Just a quick question on the actual processing of MUZO. Paul, can you just remind me -- you can actually capture the transactions in the Czech Republic but actually process them in Atlanta. Is that right?

Yes, you could.

Is that your plan?

I would say it's a little premature to say that, Dan. I think that they have a very robust platform. I think that, clearly, the authorizations are going to happen in country, and I think it's highly likely the settlement will happen in country as well.

So that really is going to be your kind of European platform?

Yes. That is the thought, absolutely.

Since they're not -- they're currently in the indirect business. The services that we offer here, some of the supporting systems are leveragable. But as Paul said, the focus here is to continue to expand this indirect business. The platforms -- everything is in place. It's been around for a number of years and they've been successful, and we expect they'll continue to be successful.

One question on the quarter. The SG&A was higher than what I was expecting. And I thought -- I had certainly taken into consideration the ISO channel rollout. Is DolEx -- does DolEx come with a lot of SG&A, given the fact you've got to pay those people?

DolEx was in for a very short period of time, so I'm not sure (multiple speakers) you were expecting.

Just mostly ISO related?

The ISO is growing faster than the direct, and it's having more of an impact. So that's primarily the issue.

This may be kind of a foolish question, but given all the kind of antitrust issues that are surrounding this industry today -- if you have -- this is a market that has, or this is a company that has 50 percent market share in the Czech Republic, and it sounds like you're going to end up acquiring 100 percent of that. Is there any reason for you to think that that would be problematic?

I don't think anything on antitrust is foolish. The Czech government takes that stuff very seriously, too. We clearly are not going to be able to acquire a Czech savings bank; they're not for sale anyway. But we're not going to have 100 percent market share in the Czech Republic. That's why I said earlier, Dan, the MUZO transaction is really about expanding beyond the Czech borders. We want to take very good care of our existing Czech customers. They -- the market itself is expanding. We could keep our 50 percent market share and still grow that business pretty nicely, because the Czech market itself is growing. But clearly, we're not looking at acquisitions in the Czech -- within the Czech border. So you are correct.

Where are you in relation to actually getting New York and New Jersey -- the license for that for DolEx, money transfer?

It's only a few months away. It's just down to the last little stroke.

John Mahelovic (ph), Thomas Weisel Partners.

Thanks. Just a couple of questions, following up real quick on the SG&A question. Is the level of SG&A that you reported in November, is that a good number to look at going forward? I think it was around 35 percent of revenue.

I think it would be hard to pin a specific percentage, as we have discussed for a number of calls that that's a combination of our corporate overhead plus our residual payments to our ISO's and commissions to our direct sales force. And as the business improves, whether that relationship stays exactly the same, it's dependent upon the contracts that we either renew with existing ISOs or the new ones that we bring in.

Just a couple of things on the MUZO acquisition. By the way, nice move into Eastern Europe. As you can imagine, I like that market a lot. If you guys do end up acquiring 100 percent, my calculation shows that coming out to about $66 million. Would that be about right?

That's about right, yes.

It seems like MUZO has a small card issuing services business. I think that is probably your first foray into that sort of business. Is that something you're interested in growing going forward, as well, maybe through additional M&A in Europe? Or is that a line of business that you would just sort of let continue but not put a lot of focus behind?

Just as a point of reference, NDC 4 years ago had a small card issuing business here in the U.S. And because we were such a really insignificant player, we actually divested that just prior to spinning into becoming a separate public company. I think with respect to the business in MUZO -- so it's not a new business to us, at least here in the U.S. It's clearly not a new business to them at MUZO, and I think we'll continue to look at that as an opportunity to expand again in that market and outside those markets. It's relatively a small percentage of the Company's business.

And then, the management team that is in place there seems like a solid team. Do you look at them as maybe your consolidation team for Eastern Europe, that you would leverage their expertise as you bring additional scale on board?

That is clearly our hope and it is clearly their hope, but all of us justify what we do every single day based on results. I'm clearly expecting that we can leverage these guys. I think they have the skill set and the desire and the platform, and now they have the ability, to execute. So that is our expectation.

And I assume they will have some sort of equity stake or equity-based incentives, as well?

They are, especially the senior team, would be compensated. Part of the competition, of course, would be performance-based and then equity-based.

Great. Final question, just on the guidance for '04. Do you expect to update that after you close this first 53 percent or after the tender offer?

We would update it upon closing as we have in the past. Once the transaction closes, we will update the impact for the balance of '04.

The transaction meaning the acquisition of the KB stake?

(indiscernible) should be in the next quarter or so.

Don McArthur, Stifel Nicolaus.

With the limited number of banks in the Czech Republic, is there any customer concentration, since one of the largest (indiscernible) does it in-house.

Absolutely. They're done. We did not tell you precisely, but KB is a customer and one of the biggest banks in the Czech Republic, and one of the significant customers of MUZO. There's only a handful of financial institutions, and all of them, quite frankly, are owned by either -- primarily owned by French institutions, Stockgen (ph), as you know, owns a big part of KB. A Belgian bank owns another one of our big customers, a majority. And I don't think there is a Czech bank that is owned exclusively by Czech shareholders.

And then I guess (indiscernible) -- I guess it's pretty safe to assume that some of those the larger customers are the banks that own it. And then, what kind of impact do you see with retaining those customers with a tender offer, if they don't have an ownership stake anymore?

That's a great question. The good news is we've got a couple of more years on those contracts. I think that -- we just started our conversations. They are primarily focused on do you have a commitment to continue to support us in an acceptable manner. And the obvious answer is of course we do, that's why we did this transaction. I've already had those dialogues, and I think so far so good. But I would be less than honest if I said that we have to justify ourselves to those guys and remain attractive and provide a compelling set of services. There are competitors that would love to swoop in and take that business. So this is a very important time for us to stay close to this business, and that's what you tend to do.

Can you discuss -- it looks like significant pricing changes this year in anticipation of joining the European Union. Can you discuss the competitive landscape of how that changes both within the Czech Republic, and probably (indiscernible) Western players coming in, and then with the other countries in the Eastern European joining the Europe; how that helps you or helps other helps or hinders other processors from the West moving in?

I think that you're of course right, with the Czech Republic joining the EU, in addition to (indiscernible) 8 other countries in Eastern Europe joined (indiscernible). Nine other countries joining the EU. 10 in total from Eastern Europe. It allows our businesses in Czech Republic to expand beyond the Czech borders pretty effortlessly, but vice versa, it allows you members to enter the Czech business. So we clearly are focused and understood that risk and opportunity. What was the second piece of the question? Oh yeah, wide the pricing. I think the pricing was -- I think you're over -- you're being overgenerous in crediting that decision based on potential entrance into the EU, or future entrance into the EU. That was really more of a discussion with shareholders and customers, and getting this pricing where it needs to be. I don't think the EU really entered into that decision.

Final question on DolEx. Can you discuss like maybe a timing of accelerated investment into either buying new branches, an existing location, existing money transfer businesses, or rolling out more branches and then maybe the impact of some type of acceleration of investment?

Don, I would say we're trying to accelerate that as we speak. We're looking at opportunities to acquire. We did announce 15 to 20 -- we committed to 15 to 20 branches per quarter in organic openings in DolEx. As you recall, it was like 550 when we did the thing. We just said it was 575 based on this call, so there's no mosque growing under our feet. So we are trying to aggressively expand this business as we speak.

Wayne Johnson, SunTrust Robinson Humphrey.

I was curious on the MUZO, and I don't know if I heard this correctly or not. Is there any hardware component to those sales, or is this all purely (indiscernible) transaction services?

No, Wayne. They do have equipment sales.

So what percentage of the MUZO sales are hardware?

Roughly 20 percent.

Are those point-of-sale devices, or what are those?

Point-of-sale devices, ATM devices, and then our card.

Great. And also, as far as the Canadian operation goes, what were the currency effects on the fiscal second-quarter '04 results?

We have not broken that out Wayne. We continue -- the dollar continues to dip against a lot of currencies, and the Canadian dollar included And so we've got a little pop on that but we haven't broken it out.

And you mentioned that the direct business is, on a transaction basis, growing in the high teens which is fantastic. Can you talk about what the indirect percentage decline was in the quarter?

You know, I look forward to one day not having to talk about the domestic indirect at all. When we first started these calls when it was fun indirect, indirect was like 35 percent. Now it's less than 15. I mean, very shortly it's going to be less than 10. But that business is declining, high teens, as we speak. Which is pretty consistent with last quarter.

Can you talk about -- are there any leveragable relationships --

Wayne, let me correct that. It was mid gains, a decline which was consistent with last quarter.

Also, are there any leverage -- potentially leveragable relationships between DolEx and MUZO?

There are. There is a unique immigrant population in the Czech Republic that transfers money, but that is a little ahead of us. We're going to focus on the Latino market, at least for the foreseeable future for DolEx.

Greg Smith, Merrill Lynch.

The contract with KB that was extended for three years -- is that three years from today or three years from some multi-year period, ahead of going forward?

Effectively three years from today.

Why isn't that longer? I would just -- just (indiscernible) that given the nature of this deal, you would get a longer contract with KB.

We were happy with three years; that's a pretty significant contract. We are very confident that the pricing and the level of services, the complexity of the relationship, the ties that exist between the organizations, and the difficult nature of disentangling all that, encourages us that we will have a long relationship to come.

On the hardware sales, is there any leasing or any kind of specialty finance activity that MUZO does?

There's nothing significant.

But do they lease equipment as well sell it outright, I assume?

It's primarily equipment sales. The banks own the equipment and the banks will have relationships with the merchant, but in some circumstances (indiscernible) will get involved in that and we'll be involved in the selling. But it's mainly sales.

And then you talked a little bit about moving out of the airline business. I just want to be clear --was that just in Canada, and has this been something that has been in the works (indiscernible) contracts just came up to the end of their lives? Or did you terminate some early? Can we get some more color on that please?

This was localized to the Canadian portfolios, both with CIBC and National Bank. They came with maybe 15 or 20 airline relationships, relatively small. But other than Air Canada, over the last -- since September 11 actually -- we have been moving out of those industries, in particular, to the extent the contract permitted, we left early. To the extent they did not, we waited until the end of the contract, but we were effectively out of that business. And some of the travel, other travel industry related (indiscernible) business in the Canadian market. In the U.S., we have stayed away from the airline business historically, because there was no push to require.

But we won't see any big steps on (indiscernible) of revenue declines or anything like that?

No, you're not going to notice this. The only place you'll notice it is when Air Canada ultimately leaves us -- you'll see, at least on a reported volume basis -- because they're a large volume player -- not a large revenue player (indiscernible) we'll see our volume in the country decline, but it's not going to have a financial impact on the Company.

Lastly, can you just talk about overall in the U.S. what you're seeing as far as check trends, the number of people writing checks.

Checks are declining. However, there is a more compelling -- a more compelling reason for accepting check verification and check guarantee, because the nature of the check writers have gotten to a point where most merchants are concerned about the quality of the check writer. So that's kind of a paradoxical scenario. And because of that, our check guarantee volume is going quite nicely. We are in a double-digit kind of a low teen growth rate in that business, and it's actually upticking.

When does that stop? When does that paradox shift?

I don't see that happening anytime soon. I think, Greg, we still see checks declining at the point-of-sale. And we see those who are writing checks being less attractive to the merchant. The name of this game is to make sure that you as the guarantee, not so much -- not as important on the verification, because you're not buying the risk from the guarantee, you are making a more significant decision because you are based with a less credit worthy population that are producing these items. But we love this business, especially the gaming parts. That's been -- that's where our real growth is coming from is on the gaming side. That business is just going terrifically.

Robert Dodd, Morgan Keegan.

I've got several questions. First of all, on your ISO business. Is there any pressure to put up residual payments to ISOs? Everybody wants to build a relationship with various ISOs. Is their pressure to put those rates up at the moment?

Meaning, Robert, to --

-- pay the ISO salespeople a greater residual of the revenue?

I see. That's -- Robert, that is a decision of our ISOs. But yes, they're faced with that every day. They are all chasing their sales agents and all trying to one up each other with something more creative. I think the ISOs that have been successful on our platform are those that pay fairly, pay timely, and offer some true benefits and products that make it easier for their sales guys to sell. But you have seen ISOs introduce things like benefits, which is very controversial. Signing bonuses, thousands of dollars to just agree to come on as a sales agent. That continues. And I haven't seen any significant change there. It just continues.

Is there any pressure on you to increase the amount that you're paying to the ISOs, other than them to the salespeople?

The way it works in our ISO model is that they pay their salespeople. They buy services from us. Either every service, the entire gamut, or some cases by the drink. They'll buy just authorization and settlement; they'll do their own customer support and chargeback. Some will buy every aspect of it, including sponsorship. Those are contractual arrangements that we are in any onetime in discussions with lots of them. We have announced that we have renewed virtually the whole portfolio is renewed. So no, we don't have any pressure there.

On the DolEx side, can you give us any update on your advertising or marketing would perhaps be a better word. Has that been a factor, obviously, very early in your SG&A? Or we're going to see an increasing marketing spend from DolEx?

We're just starting those discussions. They have done an excellent job of growing with a very modest marketing budget. We also are very cautious to try to step in in a heavy-handed way and make decisions that I mean the minute you start doing that, you're going to affect the entrepreneurial nature of this incredibly effective management team. So we are very cautious to come in chock-full of ideas and demands about anything, marketing and advertising included. But clearly, we think there's opportunities to do some marketing. We think that is a better term than advertising, and a lot of direct marketing in Hispanic neighborhoods through lots of different vehicles, and we're having conversations with DolEx management about rolling some of those out. I wouldn't be looking for any massive increases in advertising costs, however.

Then some questions about MUZO. '02 to '03, revenue is down 17 percent with transactions up 25 in the overall market. And then earnings down somewhere near 50 percent for MUZO. How are you going to reverse those? Some of it is obviously pricing pressure, but those look like some pretty steep -- especially on the earnings side -- declines? How are you going to invest that?

Almost all of that is the pricing pressure, because the business is not declining in terms of profitability absent the pricing changes that MUZO has made in the past few years, especially 2003.

Could you characterize -- are you in line with, or -- is MUZO in line with market prices now, or is it still a bit above?

We believe and MUZO believes that their prices are competitive as of today.

If they weren't, Robert, we wouldn't have someone like KB signing up to a three-year contract.

Right. Another question -- looking at the management, how long have they been with MUZO? What's they're experience? It looks like there is a lot of academic background -- Charles University all that kind of stuff. What is their experience in terms of being able to grow the business into the rest of Europe?

Peter Sidell (ph), the CEO, has been there for several years. I think at least 5. He is a top talent, and they all have excellent academic credentials. That's another unusual scenario in the check environment. And when I was asked earlier is it our expectation and their expectation they have the ability we believe and the encouragement and the tools to take that business forward. We think they will.

You mentioned something earlier about mobile (indiscernible) for the MUZO. Looking at their annual report, it's all done over ATMs or direct from the cell phone. Is there any actual -- do they have any product that works in the point-of-sale, since that seems to be the largest star? Ranch -- if I (indiscernible) it something.

Robert, I think you're correct in that most of the volume is either ATMs or just through a mobile phone. But point-of-sale is a potential for the future.

One last question. On the balance sheet, if I'm getting the dates right, the previous balance sheet closed on a weekend; this balance sheet closed on a weekend. So why the switch from receivables to payables? Has there been a change in policy in terms of when you pay your merchants?

Actually, we closed on a Friday. It was a weekend, but when the weekend ends -- no, the quarter ends on a weekend; it closes off -- the system closes off on a Friday. So the money that was due to the merchants, (indiscernible) in Canada. That money wasn't paid until after we cut off. That's why its long and it will continue to move up and down, that balance sheet from receivables to payables, for as long as we are in the back dating advancing business in Canada.

Larry Berlin, First analysis.

Is it safe to assume that the bulk of the business that MUZO is doing is debit card rather than credit card?

Most of their credit and debit processing is debit card, yes.

Is the debit card rates in the Czech Republic like signature rates here, or PIN rates here or something else? The interchange rates and the fees that you can charge for processing and so forth?

There's really no signature in this market, it's really just the PIN-based debit.

So then, their rates -- would they be comparable to the PIN-based rates that are charged to American merchants?

Larry, we have 30 different interchanges in the U.S., it's not as complicated in Europe. But I will tell you -- remember, we are charging them a transaction cost to process their transactions. They in turn then charged the merchant a discount, which includes an interchange and an assessment fee. And in terms of comparing the 2 interchanges, I don't have that in front of me. I don't want to guess.

Gary Prestopino, Barrington Research.

Most of the questions are answered. But is compliance with chip-based payment cards -- is there a high capital threshold to do that? Are the banks, particularly in the CEE, are they in the process of trying to do that or are they just going to say it's just too much of a capital threshold to do, and we're not going to do it?

There is a lot of capital resources necessary, a lot of time and technical expertise. There are very few banks or processors who are EMV chip card compliant. I think that there's actually been some talk of maybe extending the date for the liability shift, because the general consensus is that most players in Europe will not make it. But MUZO is fortunately compliant, and is one of the few that is today. And it reflects a significant competitive advantage for them.

It's fascinating what's going on. The entire world -- literally the entire world with the exception of the United States is impressing EMV standards. Canada -- they have mandatory time frames for acceptance and then there's a liability shift to the merchant, if you can't recognize that card and there is a chargeback. We are it, we are the country that is kind of standing on our own, but this is a wonderful platform these guys have. Everyone is going to have to use something, and it is (indiscernible) for all, but that's why we're so excited about this transaction.

Roger Freeman.

Paul, strategically speaking and putting (indiscernible) aside. Is (indiscernible) an asset that you would have any interest in?

I read the same American Banker article you did that talked about all the potential suitors for Nice (ph). I will tell you that we do like the debit business, and we like nice; however, it has to fit our requirements for accretion? And if that company is growing at a level that we think is acceptable, and that we can do a transaction that is accretive, then we are interested. If either of those the answer is no, than we're not. We haven't -- there's no book out there (indiscernible) we're going to take a look at it when we can, and we're certainly interested. But we're pretty disciplined buyers.

Lastly, given that the new Visa interchange rates that are coming into affect at the end of January, is your bottom half the same as back in August (indiscernible) that's a net benefit for you?

That's a wonderful question. Visa -- the answer is yes, we think it is. And it's a little more complicated than even what happened in August. On January 31, Visa has announced a number of debit card fee structures. By number I mean lots of them. And in some cases, they are actually lower than what is in place today. If you are a large enough merchant, something they call threshold one, you're actually paying a debit rate -- a debit signature based rate significantly lower than your paying today for interchange. If you are a kind of run-of-the-mill middle size merchant, depending on your average ticket, it is either maybe 10, 15 basis points higher. In some cases, it is actually the same or even a little bit lower. The bottom line is we have still some work to do, this just came out. MasterCard also announced their increases on April 1 that are taking place. And depending on the average ticket assumption, this one could almost be a wash, depending where your average ticket is. But the end result is, we think there's a little net benefit to us on any of this activity.

Greg Gould.

Paul, I had to jump on late. I just had a question that you may have answered this already, but on the direct sales channel, I know what -- two years ago, the sales force had been repositioned. Do you think that this improvement is sustainable, and we can be looking forward to double-digit rates continuing?

Our direct transaction growth is high teens, so we're delighted with that. We're seeing a lot of productivity from that, of course. We had a huge pickup last year, Greg. You're never going to see that again. That productivity just leaped, and that is not sustainable. But steady growth that we are enjoying now, that is sustainable.

And so collective -- between ISOs and the direct channel, the 12 percent organic growth, or something like that, is sustainable?

I think that is our expectation.

That is on the direct business. We still -- although we prefer not to discuss it over time, because it will be so small -- the indirect business is going to, in the foreseeable future in the U.S., continue to have the same impact. Which brings us into kind of that mid single upper single range for the foreseeable future.

One last clarification on the color. Is it the -- reinvigorating the industry trade groups that is helping growth, or is it pushing up into larger merchants, or other bank alliances?

I think it's primarily getting the salespeople more productivity tools. We have rolled out a number of new products; that is all helping. (indiscernible) retreat to our commission structure, that was helpful. We have reinvigorated a lot of sales channels, which include trade associations. And that has helped quite a bit as well.

A follow-up from (indiscernible)

Just a couple of more questions. On the card management portion of the business, the card management system at MUZO -- it looks like you only get about (indiscernible) a dollar a card per year. That looks low compared to what -- the likes of First (indiscernible) and (indiscernible) here, where it's a general-purpose card, it might be five to seven or even more. Can you give us a -- some color on why that is so low?

Robert, at this time we're really just describing the services that the Company provides; we're not an owner of the stock yet; the transaction has not closed. That's a level of detail that we're probably just not prepared or comfortable going into at this time.

That concludes the Q&A session. I will turn it back over to Mr. Paul Garcia for any closing comments

Thank you so much for joining us today on our extended call. Our very best for a healthy and happy, prosperous and safe holiday season and new year. And we appreciate your continued support of Global Payments. Thank you.

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