環匯 (GPN) 2004 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the National Data Corporation third quarter earnings release. 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. If you need any assistance for today's call, press star then zero and an operator will assist you offline. As a reminder, today's call is being recorded. I would now like to turn the conference over to Ms. Jane Forbes, Vice President of Investor Relations. Please go ahead.

Good morning and welcome. This is Global Payments, not NDC, conference call for our 2004 fiscal third quarter. Our our Global Payments call today, we will discuss our third quarter financial results and business highlights. Joining me on the call are Paul Garcia, Chairman, President and CEO; Jim Kelly, EVP and CFO; and Joe Hyde, SVP Finance. I'd like to remind that you some of the comments made by management during the conference call 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 included in our most recent report on form S3. In addition, some of the comments on this call may refer to normalized results, which are not in accordance with GAAP.

Management believes that normalized results most clearly reflect 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 March 17, 2004; which can be located under the Investor Relations area on our website, www.globalpaymentsinc.com. Now I'd like to introduce Paul Garcia. Paul?

Thank you, Jane. Good morning, everyone. The agenda for our call is as follows: I will summarize our third quarter results and review recent trends and events, including an update on our recent acquisitions. Then Jim will discuss the financial results in detail. I will then discuss our fiscal 2004 outlook and, lastly, we will have a question and answer period.

We reported strong financial results for the third quarter ended February 29, 2004. Our revenue grew 30% to $162.6 million. Primarily due to the impact of recent acquisitions and our high teen growth in our domestic direct channel. Excluding the impact from our DolEx and MUZO acquisitions, third quarter revenue would have grown 16%. We also achieved 120 basis-point operating margin improvement to 18.7%, as a result of gaining greater economies of scale and continued cost containment programs. Our revenue growth and margin improvements resulted in 36% net income increased to $16.5 million and a 31% diluted EPS increase to 42 cents. Now for our recent trends.

Our domestic direct transactions grew in the high teens for the quarter driven by our direct and ISO sales channels. In addition our domestic average ticket remains stable for the quarter and we continue to experience an increase in our domestic spread. Our Canadian transactions for the quarter grew in the low single digits. This reflects the continued impact of the recent removal of certain lower margin, higher risk merchants, such as airlines, from our portfolio as we discussed during last quarter's call. Moving on to recent events.

We are delighted to have closed on our MUZO acquisition. Pursuant to Czech law, we will announce a public tender within the next 30 days for the remaining shares of MUZO at approximately the same value per share as paid for our current ownership stake of 52.6%. I'm also pleased to announce that we have already established our first sales office in the Slovakian market and we are actively soliciting new customers in central and eastern Europe. Concurrent with our international expansion strategy, I'm delighted to announce that Carl Williams has joined the company as Executive Vice President to manage our merchant service channels outside of the U.S. and Canada. I have known Carl professionally for more than 20 years, and I believe he is an excellent addition to Global Payments. Our quarterly results include a full quarter of DolEx operations, and we are very pleased with its performance. As such, we are expanding our branch network, primarily in our underpenetrated existing regions. As a result, we now have more than 600 branches, up from the previously reported 575.

In addition, we have received our money transfer licenses in New Jersey and are in the final stages of the application process for a license in New York state. In addition, we continue to expand our settlement reach throughout the Latin American market, offering a wide selection of convenient choices for our customers. Turning now to an update on our CIBC acquisition.

As you know, we purchased CIBC's merchant acquiring portfolio in March 2001 in exchange for approximately 26% of our equity. This acquisition vaulted Global Payments into a prominent market position in Canada and yielded a ten-year exclusive CIBC branch merchant referral relationship, of which seven years remain. From CIBC's perspective, its equity investment has almost tripled in value; making this truly a win for both parties. The terms of the acquisition have allowed CIBC to sell Global shares over the past year pursuant to the restrictions of Rule 144. As such, CIBC's current ownership in Global is approximately 22% or $8.3 million shares. Also per of the acquisition terms, CIBC this month is allowed to exercise a demand registration right; which would provide the bank more flexibility in managing its investment in Global. Accordingly Global has filed an S 3 with the SEC. Although CIBC has indicated they haven't made any decision regarding timing or method of sale, in light of their large stake in the company, it would obviously be in their best interest to structure any sales to cause as little market disruption as possible; and CIBC has indicated to us that this is one of their key considerations. The details of any particular sale by CIBC would be described in a perspectus supplement. Global's relationship with CIBC continues to be excellent and we look forward to benefitting from our continued partnership for many, many years to come.

Moving on to our domestic merchant channel. We continue to focus on growing our ISO channel and, as such, held our second annual payments conference attended by our ISO customers and Card Association representatives. We also continue to concentrate on new product offerings and enhancements to existing products and tools to assist our customers in growing their business. To that end we signed three new ISOs that will bring in approximately 500 new accounts per month. We also continue to expand our domestic direct sales channel by signing thousands of mid-market merchants in a variety of verticals. As part of our diversification strategy for our Canadian portfolio, we signed thousands of new mid-market merchants during the quarter in Canada, as well. In addition, we continue to sign larger Canadian merchants; a few of which are the 7-11 chain and Olympia Tile. We also continue to expand our Check Guarantee Gaming Channel through the additions of New York, New York in Las Vegas, and several other smaller casinos throughout the midwest.

To summarize, we are very pleased with our continued strong financial results and accomplishments during the quarter. I'll now ask Jim to review the financial results in detail and provide a progress report on our consolidation of operations. Jim?

Thank you, Paul. In our press release ,and as posted on our website, we included a GAAP income statement and a schedule that reconciles the year to date current period GAAP to normalized results. Our GAAP results include restructuring charges related to our previously discussed facility consolidation program. There were no restructuring charges during the quarter relating to this program. My comments this morning reflect our quarterly GAAP results. For the quarter revenue grew 30% to $162.6 million, primarily due to the $18.3 million in revenue from our recent acquisitions and high teen transaction growth in our domestic direct sales channels. Our Canadian revenue continues to be negatively impacted by our decision to remove certain travel related merchants, such as airlines, due to the higher risk of loss associated with these vertical markets. The decision to exit these higher risk markets has not negatively impacted earnings, as these merchants were generally low margin accounts. For the quarter, the Canadian business was favorably impacted by stronger year-over-year Canadian currency exchange rates.

Our direct sales growth was particularly -- was partially offset by low teen declines in our domestic indirect sales channel, as expected. In addition, MUZO added $1 million in revenue for the quarter. Our money transfer revenue for the quarter was $20.9 million, of which $17.3 million relates to our DolEx acquisition. Operating expenses for the quarter were $132.1 million resulting in an operating margin of 18.7%, or an improvement of 120 basis points as compared to last year. The operating margin increase was primarily due to economies of scale benefits as a result of our revenue growth, in addition to facility consolidation initiatives. These cost reductions were partially offset by the ongoing investments made in our direct and ISO sales channels, as well as increases in commission payments to our ISOs. Net income grew 36% to $16.5 million and our diluted earnings per share grew 31% to 42 cents. Our effective tax rate is 37.4% and our diluted shares increased primarily due to the effect of In The Money stock options. Now turning to the cashflow statement.

We reported $73.4 million in free cashflow for the nine months ended February 29, as compared to $63.4 million last year; or a 16% growth rate. We define free cashflow 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 $5.4 million primarily for software and infrastructure development and, to a lesser extent, Canadian merchant terminal purchases. We borrowed $161 million on our line of credit during the quarter primarily to pay off the offsetting notes payable relating to our DolEx acquisition, and to fund the purchase of the outstanding MUZO shares; although, we have only acquired 52.6% of the outstanding shares to date. The balance of the funds relate to the upcoming MUZO tender offer and is reflected on our balance sheet in cash, as a prerequisite under Czech law in order for the tender process to commence. Also, our net line of credit related to Canadian merchant funding decreased primarily due to timing.

Turning to the balance sheet, we have reflected a line item on our balance sheet entitled line of credit with related party. This represents the Canadian line of credit for merchant funding. Our credit facility remains with CIBC and has previously been reported net of settlement processing receivables. Our prior year balance sheet also reflects this change. Finally, we have assumed an existing $12 million note payable in connection with our MUZO acquisition; consisting of bank debt that MUZO historically used to purchase its Prague headquarters and to finance working capital.

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 continue to make progress on each of these moves and expect to complete them by the fourth quarter of fiscal '04. We would also like to announce that we have relocated our corporate headquarters location in Atlanta. This move occurred solely to comply with an IRS requirement to completely separate ourselves from NDC Health, which was our former landlord and the successor to National Data Corporation, our former parent company. The move helps to solidify the tax-free nature of the spin from National Data in early 2001. We will maintain a modest technology presence at our former headquarters location and to purchase technology services from NDC Health until calendar 2006. Fortunately, by delaying this move for three years, we have been able to capitalize on a soft commercial real estate market in Atlanta by securing very attractive lease terms on an excellent property. Paul will now discuss our fiscal '04 guidance. Paul?

Thanks, Jim. Now on to guidance. Based on our strong third quarter results and the addition of MUZO, we are raising our full year guidance to $610 million to $620 million; or 18 to 20% growth over $516 million in fiscal 2003. In addition, we are raising our annual full year diluted EPS guidance to $1.71 to $1.74 reflecting 20% to 22% growth over $1.43 normalized diluted EPS for fiscal 2003. This guidance does not reflect the impact of previously announced restructuring plans or new acquisitions. We are very pleased with our third quarter performance and the continued execution of our strategy. We will continue to focusing on integrating our acquisitions, as well as pursuing other domestic and international opportunities to position Global Payments as a solid, long-term, revenue and earnings grower. We'll now go to questions. Operator?

[Caller Instructions] First we'll go to the line of Tony Wible with Smith Barney. Please go ahead.

Thanks, great quarter. I was wondering if you could comment on some of the sales that we've seen in the gaming space more recently with Viad and First Data; and what you're take of that is with your--pertaining to your gaming business. And also I was hoping you could comment a little bit more on some of the trends that you're seeing in maybe your small merchant community. You had gone over some of the numbers. I was just hoping you could maybe go a little bit more color. If you're seeing any incremental changes relative to last quarter on how traffic is bearing there as far as like same-store sales numbers? Thanks.

Thanks, Tony. This is Paul Garcia. I'll handle the small merchant question and then Jim will talk about gaming. On the small merchant, I can't add a ton of color other than we did see a lift in the third quarter. Our merchant portfolio performed extremely well, actually exceeded our expectations in terms of volume and transaction growth. I think we benefited a little bit from just what you read about overall Visa and Mastercard growth. And Jim, you want to talk about gaming?

Sure. Tony, I think it was we've talked the last years, in particular, in the gaming business relative to our check organization and our gaming business currently fits within check. That business has had a tremendous run the last couple of years. As we mentioned on the call, I think Paul mentioned in his comments, that we signed up New York, New York. We're in the Bellagio and we've made it from kind of the the river boat, reservation based properties; more into main stream, because of the product that we have brought to the market. I think with respect to the competition, clearly Certigy is a big player out there. Global Cash Access is the biggest. We have successfully competed against them, so I'm not necessarily concerned about the movements for us as to the whys. I was a bit surprised to see First Data exit that, but I couldn't comment beyond that.

Great. And I have one last follow-up which is that Check 21 is going into effect, I think, October 28th and I've heard the Fed is potentially looking at having some kind of private arrangements allowed between banks and merchants with what regards to kind of what Visa POS is doing? Are you seeing any potential for having new product cross sold to your merchant base. You had mentioned new products in your comments, but is that, in particular, one opportunity for you?

With respect to POS?

Yes, with regards to potentially selling, you know, imaging and check deposit services.

Tony, this is Paul. We have an ACH product today which is meeting with an awful lot of acceptance. It's a very low cost alternative for merchants. There's a little consumer resistance to registering and giving out their ACH access to retailers, but from a retailer perspective and a technological perspective, it's a very straight-forward product and it has presented itself--I mean we have presented it to merchants successfully. In terms of imaging, we do have a check conversion product that, as you know how that works, it simply converts the check at the point of sale to an electronic format and we have a solution for our merchants and we have a number of establishments that are successfully using check conversion. There is cost at the point of sale for the hardware. It's actually a little more difficult than a straight-forward ACH and, consequently, that product hasn't taken off with gang busters. I don't have a ready answer for our response to anything coming from the government that would allow easier access for checks between merchants, but I would think that would give that whole product set a bit of a lift.

Thank you very much.

Now to the line of Craig Peckham with Jefferies & Co. Please go ahead.

Good morning. I had two questions. One, when did the comparisons in Canada start to normalize? Obviously you're getting kind of a drag right now because of the adjustments to the portfolio up there. But I was wondering when we might see the rough anniversary of that?

The process began actually right after September 11th and has been working steadily based on contract terminations over the last 14-16 months. I would say within the next six months or so, we're probably through the bulk of it. Now, we still have the Air Canada situation that is--we're still processing both the Visa and Mastercard transactions; and we will likely be required to continue while they're in bankruptcy, but our expectation is shortly after bankruptcy we'll exit the Mastercard relationship, and then by next year at this time, exit the Visa relationship.

Okay. So it sounds like then it's probably still a few more quarters before it bottoms out from some of these airline relationships, then.

Well, it's airlines and some less steady travel agent businesses.

Okay. Also in Canada, can you quantify the currency benefit on revenue in the third quarter?

We haven't broken that out separately. I think as you can follow the movement in the currencies, it has a positive impact to us. That will effectively-- depending on where it moves from here, it's pretty much run its course through this quarter.

Can you tell us how much revenue was in Canada during the quarter?

As I said, we haven't separately segregated those pieces.

Okay. How did the full quarter contribution from DolEx contribute to operating margin during the quarter?

Again, we view it as we have separated out the revenue contribution. This was the slowest portion of the year for them in terms of seasonality of the business but we wouldn't separately segregate out their contribution.

Craig, we have said, though, in a previous call that DolEx is slightly dilutive to our overall corporate margins. You know, we saw that activity during the quarter. Because of the model, the high fixed cost, low variable cost nature of the DolEx model; however, as we expand that, add more traffic through existing locations in particular, fully leverage the network. We intend to drive those margins up.

Plus we're coming in to the busy season all the way through May, Mother's Day, so we expect--and the business is doing very nicely; we expect to see continued growth in both the earnings and the revenue.

Okay, so that real solid operating margin here in the quarter, was actually probably negatively impacted by DolEx then.

That's correct. Our base business continues to do quite well.

I'll let somebody else ask more questions. Thanks.

Next from the line of Dris Upitis with Credit Suisse First Boston.

Hi guys. Nice job in the quarter. First just on the SG&A line, you mentioned the continued investment on both the ISO and the direct side. Can you give us a sense for how that investment has been split, if that has been skewed mostly toward the ISO side and where you think that that might go as a percent of revenues in the next year?

Dris, I think we've, again, mentioned on other calls, we are focused on the overall operating margin as opposed to the geography between SG&A and cost of sales; and we have a lot activity coming through this quarter as we have two new businesses being added in. MUZO to a much lesser extent, but DolEx for the quarter. The ISO business continues to do well, the group that's running it is having a good year. And as Paul mentioned in his comments, has added new accounts to that business, so it will be difficult for us to give you a precise view on how that's going to tick up because it's going to be impacted by the way we add business to the channel.

Okay. And then on the DolEx side, can you just give us an update on what you're seeing on the competitive front there, especially on pricing. And also you said this is the seasonally weakest period, but can you give us a sense of what growth looked like year-over-year in that business?

Taking the second question first, I think year-over-year, we didn't own the business last year, so it's--

If you looked at DolEx, sorry.

Excuse me?

If you looked at the DolEx results.

I think the DolEx business is tracking along the lines that we talked about prior to buying it. We have seen continued improvement both in the transaction growth and, as well as in revenue, so we're pleased with where it is in terms of both of those metrics.

Dris, I'll give a little more color on pricing. As you know, the Latin American corridor is the most competitive corridor for pricing; however, we're delighted with the margins we are getting from that business. Although, they are slightly dilutive, it's still a wonderful business. We have, in fact, from time to time, in certain locations, responded aggressively if we want to drive in new business; we found a fair amount of elasticity when you tinker with pricing a little bit. But we have had no surprises in the pricing. We haven't seen any dramatic activity from any competitors, and we are gaining transactional counts at a fairly robust level so we are very happy.

And then last question, on offline debit interchange, are you still seeing some benefit from friction there and is that a contributing factor to the increased spread that you mentioned you saw on the quarter?

It clearly is. We did get a lift from the very first action and we're continuing to get lifts from subsequent action. There's also another increase coming in April. We get a little bit of action from that as well. So this has contributed overall to our spread increase.

Okay. Thanks.

You're welcome, Dris.

And next from the line of Greg Gould with Goldman Sachs. Please go ahead.

On Canada first. Jim, I know you don't disclose the specific revenue but how much should revenue be down. Can we just talk growth rates for fiscal '04 in Canada?

I would say the growth rates are relatively flat and the Visa portfolio has been impacted more so than the Mastercard portfolio. Mastercard portfolio is at a better growth rate than the Visa, but because the Visa is larger, it has a larger impact.

Okay, so, Canadian revenue should be flattish this fiscal year?

I would say that flattish is probably a good feeling.

Okay and what do you think, sort of, organically can that business grow at once the comps get a little bit easier?

Our view is that this has been a mid-single market. Shortly after the NDC acquisition, it moved up closer to double digits as we were cross-selling the portfolio; but the variety of factors dating back to SARS, etc., it has been a mid-single area is probably where we are comfortable to talk about.

Okay. And on DolEx, Paul, what's, how many agents would you like to exit this fiscal year at and what kind of growth rate in agents are you targeting in fiscal 05? Just sort of round numbers.

Greg, I think on a previous call we announced approximately 15 a quarter, that we're going to add in terms of new locations. I'd be disappointed if we're not going at a little faster clip than that. There are some opportunities to make some small acquisitions, opportunities to add new locations. Now, we're also shuttering some, too. The beauty of DolEx is the IS system that came along with this deal is just terrific and we know daily, we know hourly if we want, how many locations do how much by all types of metrics; and occasionally we realize we opened a location and the metrics have changed and we close them. Net adds, I would be disappointed if it's only 15 in a quarter. I think we can do better than that.

Okay, and in terms of the give and take between opening new agents and discounting with teaser rates at the beginning, has there been any changes in assumptions about overall revenue growth from DolEx?

I think we clearly feel this is a strong double digit organic grower. Initially we are playing a little bit with taking some prices down and that would have an impact. If we were to raise prices, it would change it the other way. So we're trying to come to the right formula. But, Greg, I would say we're delighted with this deal. Our assumptions always are subject to change, but the overriding assumption that this is a terrific business that we're going to continue to invest in, we're delighted with the management and delighted with the model. That remains very solid.

Okay, and one last question. Since you've made some pretty big acquisitions recently, what's your thought on additional acquisitions?

We're very bullish on opportunities outside of our border. We think there's a fair amount of opportunity to expand domestically, primarily with DolEx, and I would expect that we'll be talking about other deals in the quarters to come; so we are very focused on that as we speak. And by the way, just a correction on DolEx, it was branches, not agents.

That's right. Sorry. Great job on the quarter.

Thanks so much, Greg.

Next we'll go to the line of Robert Dodd with Morgan Keegan. Please go ahead.

Hi, a couple questions. It seems that DolEx was down sequentially, I mean that's the seasonality, would you say the seasonality impact-- it should be up sequentially for the next three quarters and then maybe down again? Is that the pattern through the year?

This is a new business to us. We are, as Paul indicated, we're opening branches, we also look to acquire branches; so we would anticipate consistent growth. But we just came out of the slowest quarter.

Okay, you said the spreads had widened on the domestic dialect, are we talking about one basis point or is it three or four on the spreads?

I don't think that would be something we would comment on directly. I think the question revolves around the impact to us on Visa Mastercard increases; and, overall, you've got competitive pressures in the marketplace that help move that spread, move it down as we adjust it in the other direction.

You know, Robert, I think you should also consider that spreads historically, with our whole industry, go down a little bit every year. The fact that our spreads are actually going the other direction is that--even if it only went a basis point or two, that in and of itself is material.

Okay. And last question, you also said the commissions you're paying to the ISOs went up. Is that just because the business grew or were they going up faster than the growth in the business?

It's because business grew. The ISOs are growing very aggressively and it's just a function of volume from the ISO channel.

Okay, thanks.

Alright, Robert, thank you.

Next to the line of Tien-tsin Huang with JP Morgan.

Thanks. How are you doing?

Good.

Regarding Interchange, it looks like again, Credit Interchange has gone up particularly for your target merchants. I guess in your conversation with merchants, what's the consensus merchant feedback on these price hikes, and what can Global do to help these merchants minimize, or I guess soften the impact of rising Interchange fees and perhaps gain some share by doing that?

There's a superb question. We do have something here called a merchant advocacy focus so all of our sales and support people recognize their bread is buttered on the merchant side. We're not a card issuer. The reason we got rid of our small card issuing business is so we could be a pure player focused just on the merchant community. Because of that, we are offering things like Tony Wible referred to, ACH products. We offer aggressive debit products. Both of those are less expensive than credit. However, credit still remains a pretty good deal. The merchants are not, of course, happy with interchange increases. And although we benefit a little bit, we're talking very small increments and anybody of any size, typically it's a direct pass through. So, we do lobby with Visa and Mastercard. We are not pleased with continued increases. And we certainly empathize with the merchants and do our best to try to influence future decisions.

Directionally, do you think Interchange could creep up to where AMEX is today?

You know, there's two schools of thought on that. The first one is for MBNA to leave and go to American Express, they did that primarily because they could earn a greater Interchange. That's not lost on Visa and Mastercard, they react accordingly to pay a higher Interchange to the card issuer. So that action would lead you to the conclusion interchanges could increase. I think the government continues to be focused on this, and I think that there are pressures being considered that could have some impact on just how high it goes.

All right. I appreciate that.

Okay.

Quickly on MUZO, what's the status of the significant customer that you mentioned might be moving to a rival processor?

It was something we took into consideration when we did this deal. What happened was there's a customer who put out a proposal that wanted a Pan-European proposal and MUZO was precluded from responding outside of the Czech borders. Consequently, this customer, although delighted with MUZO had no choice but to consider other proposals from other processors. Now, of course, we're in there, we're a little late, I think it's probably unlikely we can save that deal, it's possible. But we took that into consideration when we gave guidance on MUZO, and we still expect this to be an accretive growing acquisition even with the impact of that potential customer loss.

Got it. Thanks. Nice job on the quarter.

Next question from the line of Wayne Johnson with SunTrust Robinson.

Yes, for Jim Kelly, on the gross profit margins, fantastic job there, where do you think that can go for the next year or so?

I think in terms of the balance of the year, we are comfortable with the overall operating margin of the 19.5 to 20% range. In terms of the years to come, I wouldn't suggest that we be talking about that at this point. I think there's a business that continues to leverage nicely as we grow. I don't think at this point we would talk about next year until we get there. Just as a point of clarification, our range is 19 to 19.5% for this year.

Right, right. Where do you stand on data center consolidation?

The work that was done in--or was underway in Canada; that, as we've talked about in the past, is complete. So we've gone from two platforms to one. Then as I mentioned in the comments here, we've moved out of the NDC facility into a new facility in Glenlake. We're still sharing the data center with NDC for certain services, but over the next 18 months to two years, as we talked about in our conference; this summer or this fall, Barry Lawson mentioned how we'll be moving to a next generation platform and that work is underway.

And on the DolEx, have you guys rolled out an advertising program for them?

Wayne, we are testing a number of things in a number of markets, but we have not rolled out a program at this point.

And what about new services?

We are testing, also, and hopefully in the near future we'll have an announcement about some new services in DolEx.

Okay. Lastly, what about rollup opportunities for the small mom and pop shops in the money services business who cannot afford to comply with the U.S. Patriot Act. Do you still see an opportunity there?

Clearly. We have a formula that's--we have some guys that are focused on that and we see opportunities to acquire some of those and we're working on them.

Terrific quarter. Thank you.

Next to the the line of Greg Smith with Merrill Lynch. Please go ahead.

Good morning, this is actually David Parker for Greg Smith. First, can you comment further on the tender offer for the remaining MUZO shares and how that result could impact the guidance in any way?

I'm going to throw the ball to Joe Hyde on that.

It should have a modest positive impact but it's not going to be a big swing if we are able to acquire 100% of the shares. But, in any event, we probably wouldn't know until mid to late summer for that process to be completed.

Okay. Great. Then also you mentioned that you established a sales office in Europe, in conjunction with MUZO. Can you talk about the timeframe for expanding that further in Europe?

Okay, David, we--as you know, Czechoslovakia split into the Czech Republic and Slovakia. We put a sales office in Slovakia because there's a real kinship between the old MUZO operation and what's in Slovakia today. So we immediately established a sales office and we are soliciting financial institutions in that market right now. I would think about what borders the Czech Republic from Austria, Germany and Slovakia. We are going to be focused on all of those pretty quickly. And then we hope to expand further east and with Carl Williams' addition to our executive management team; in fact, he's out of the country right now, and we are working on that program as we speak.

Great. And then finally, earlier you stated that DolEx had revenues about $70 million in calendar year '02. Can you provide us with the calendar '03 revenues.

David, we haven't given guidance on that at this point.

Okay, great. Thanks.

Thank you.

Next question from the line of Dan Perlin from Legg Mason. Please go ahead.

Thanks. Hey, I just wanted to touch base again on DolEx. I know, Jim, you don't want to give year-over-year growth numbers and understanding that you guys are just getting your hands around the business. Your long-term growth trajectory for this business is a double digit, organic growth business and I'm wondering how far off we are from that at this point.

Clearly on a transaction basis, the business is growing in a double digit range, and we expect the organic revenue to follow.

Okay.

Last year, and Paul mentioned in his comments, last year we didn't own the business and pricing adjustments were not within our control. So I think year-over-year comparisons can be difficult until we own the business for a year.

Sure. And you said that the third quarter is the seasonally slowest quarter for DolEx. What is its peak quarter?

Well, if you look at the target market that we focus on, it's first and second generation latinos, it tends to be more of the summer months, spring, summer and early fall where there's a lot of work outdoors.

And did I hear you earlier in the call say you're not going to break out the operating profit for this business segment, for money transfer?

That's correct. It's one segment. We broke out the revenue for money transfer and then the merchant services business.

And the indirect business looks like it actually held up in the quarter, is that fair to say? Looks like there was about $3.6 million in revenue, which looks like an actually an improvement? I'm wondering if that contributed to just helping this internal growth number. Because when I look at your internal growth, it looks like it was about 11 to 12%, excluding Canada.

I think you're relating to the comment on the old funds transfer business. That business hasn't really changed in terms of its trajectory. It's going to continue to be a declining business. We don't spend a lot of effort in trying to remarket what is today a very old legacy system that it runs on. But there will be quarters where it looks relatively flat and other quarters will probably be down 10% or so.

Do you think that the internal growth that you guys just put up this quarter is a sustainable number for the remainder of the year?

I think the internal growth rates are continuing to do well and I don't foresee a change in the balance of the year.

Okay. Is there a point at which the ISO structure changes, its commission structure? In that as they become a bigger component of, let's say, one or two ISOs become a bigger component of overall revenue, will their payout increase? In other words, is there a sliding scale over time?

You know, actually, I think as a percentage of our total revenue, they are getting smaller as we are getting bigger; both through acquisitions and our own organic growth. Each of them are priced on a service base, and those services are likely not to change because they're the services necessary for them to be able to provide business to the market. I think what changes over time is they get larger, some of them, or a lot of them; and it's a competitive marketplace and we remain competitive. I don't think we're a leader in that area as we hear that, but I don't see that there's going to be a day where they're that significant.

Now, most of these relationships are also exclusive, right?

Well, Dan --

Or is that changing?

They give us the majority of their business, but nothing's really truly exclusive. There will be some products and services you don't have, et cetera, but most of these, we're getting well over 80% of their volume. And let me clarify that last question too. The ISOs charge the merchant and that's a function of what we reflect in the SG&A. That's really kind of out of our hands.

Okay. And then just quickly on these last three large shareholders of MUZO. What's their appetite to participate in the tender?

Joe?

We've had discussions with all of them and we've told them what our strategies are and our interests. I think they all will consider tendering their shares, but none of them have given us any definitive indication of what they're going to do. I think that indicates that the Czech government is probably the most likely that they will divest their shares. Either way any of the numbers that we've given or any of our viewpoints have always been based on the fact we're just going to own 52%. If we can get more, that's fine and if we don't, that's fine as well.

Is there a risk associated with CKA, this government-owned piece? If they decide to sell, is there some sort of relationships, either with the financial institutions or regulatory issues that would be at risk since they no longer become an owner?

No, Dan.

And the same would go for the bank, like the Belgian bank, I think?

Well, that's a different question. In terms of the Czech government, that was an organization set up exclusively to do things like this; to encourage entrepreneurship within the newly formed Czech country, and to make strategic investments. In fact, quite frankly, this is a real homerun for these guys. Most of them haven't done a well as that. I'm with Joe, they will tender their shares. I think they feel very good about this business, they're delighted that we still have Czechs in significant senior management roles and that we have a commitment to expand the platform. So they couldn't be happier with us. They're not a source of revenue but we do have a friendly relationship.

In terms of the other owners, they are customers. You could argue it both ways. Part of us feel good about the fact that they are shareholders, we kind of wish they wouldn't tender. It would be cleaner if they did. We are kind of torn on that. Either way, you could draw up a list of positives from that event but it's not going to affect their business posture with us.

Thank you. I appreciate it.

And next to the line of Don McArthur with Stifel Nicolaus & Company. Please go ahead.

Good morning, guys. What percent of your growth in Europe is going to come from acquisitions and what percent from just expanding MUZO? And then can you talk about the size of potential acquisitions you are looking at over there?

MUZO is approximately $30 million. I would say that the real growth is going to be from making some other strategic acquisitions in Europe. MUZO was a platform. They have a 50% share in the Czech market. We are certainly going to gain some market share as we solicit customers outside of the Czech borders; but to really make some quantum leaps, we're going to have to do a couple strategic deals.

When you expand MUZO to like Slovakia, do you get some of it's in country or do you put Czech people in Slovakia or if you were moved into Hungary or other places?

Yeah, in country. Remember now, in the Czech scenario, it actually was one country, it was Czechoslovakia. We have Slovaks in our--resident in Slovakia as part of that sales operation.

Okay, great. And then would you increase the price that you're willing to pay for the MUZO tender to try to get more out of it?

No, we would not do that. I think it would not be looked upon favorably by KB bank, who we bought it from, plus it's not required, plus it's just not necessary.

Okay. And then, finally, you made a comment about CIBC and selling their stake; and you know they sold some through 144 and kind of has hurt the stock price. What are your conversations that led you to believe that they are wanting to do a more organized sale and that they'll actually do it that way this time?

Let me talk mechanics for a sec. The way it works is, we put in an S-3 with the SEC. We are awaiting a letter from them saying that they're either going to take no action; therefore, the S-3 is effective. Or there's a review. How that goes, I don't know. Then when CIBC decides what they're going to do, they'll have to file a perspectus supplement that will state--we will actually file on their behalf, a perspectus supplement that will state exactly what their intent is and how they're going to do it. The conversations we have had relative to this matter are, these guys are giving us assurance that look we are your largest shareholder, we are very focused on maximizing our price, we'e delighted with the company, we're delighted with our partnership, and we clearly aren't going to do anything that will disrupt the equity value. Other than that, there's nothing else I can really say, Don.

Thank you.

Okay, Don.

And next to the line of Gary Prestopino with Barrington Research.

Good morning. Jim, did you give a total sales figure for the money transfer?

Yes, let me just make sure I have the right number.

I have it right here. Right here.

It's $17.3 million.

I'm sorry, $17.3?

That's for DolEx. Money transfer was $20.9.

Okay. Thank you.

That's it, Gary? Thank you, Gary. We'll go to Jason O'Donnell with Ryan Beck & Co. Please go ahead.

Good morning, gentleman. Nice quarter. I had a quick question relating to trends in merchant signups. I know you've touched on this. Specifically, do you know the number of the gross new merchants that were added and also the attrition rate during the third quarter?

Our attrition rate, we haven't really ever, Jason, given exact numbers. We talk in thousands on our direct side, we have assigned thousands of mid-market merchants and we did so in Canada, too, through some initiatives to sign mid-market merchants in Canada. We do announce, by name, any significant guys; which is primarily Canadian driven, because that's the only place we really have a true national sales force focusing on that business. In terms of attrition, we are, we think, one of the lower; if probably not the lowest with our portfolio, and its-- we are delighted with our attrition. We haven't given any real guidance on that, but it's kind of barely double digits.

Okay. Thank you.

You're welcome.

And we have a follow-up from Dan Perlin with Legg Mason.

Thanks. I have two quick questions. Paul, you mentioned that you're expanding your DolEx branches obviously faster than the 15 per quarter. I think you did 25 this quarter, and I think you did a similar amount last. Is that mix all new kind of start-ups or are there acquisitions in that?

It's a mix. It was mostly all start-ups. We did do a couple little small, where you got less than ten locations in one scenario; so it's a mix right now, Dan.

Okay. And the other quick question I had, with all this kind of changing in interchange rates, is there a cost ultimately that you guys might bear as a result of your bank sponsorships or banks that sponsor you into the Visa network?

Well, we do have a cost. We have several sponsors. We have an alliance with Comerica and we have another major bank sponsor; and there is a cost. It's economically in their best interest to continue to sponsor us and we have those relationships locked up long-term agreements, et cetera. But in terms of the interchange fluctuation, it doesn't reflect that relationship. There is a cost--

I'm just think more like an indirect if rates go down or up and over time if there's a trend that it actually goes down and someone is losing revenue, are they pushing some of that cost back on to you via the sponsorship?

No, that's clever, but no that's not happening.

Thank you.

You're welcome.

And that will conclude the Q&A session. I'll turn it back over to Mr. Garcia.

I'd like to thank everybody for participating on today's call. We sincerely appreciate your continued support of Global Payments and look forward to producing results similar to these. Thanks so much.

Ladies and gentlemen, that does conclude your conference for today. Thank you for your participation and you may now disconnect.