環匯 (GPN) 2005 Q2 法說會逐字稿

Welcome, ladies and gentlemen. Thank you for standing by, and welcome to Global Payments second quarter earnings conference call. At this time all participants are in a listen-only mode. Later we will open up the lines for questions and answers. If you should require assistance during this call, please press star then zero. As a reminder, today's conference call is being recorded. At this time I would like to turn the conference over to your host, the Vice President of Investor Relations, Jane Forbes. Please go ahead.

Good morning. Happy holidays and welcome to Global Payments fiscal 2005 second quarter conference call.

On today's call we will discuss our quarterly financial results and business highlights in addition to our acquisition of Europhil, a money transfer company based in Spain. Joining me on the call today are Paul Garcia, Chairman, President, and CEO, and Jim Kelly, Senior EVP and CFO, and Joe Hyde, Senior VP of Finance.

I'd like to remind you that 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 including our most recent 10-K and 10-Q.

In addition, some of the comments made on this call may refer to normalized results which exclude restructuring charges and other items and are not in accordance with GAAP. Management believes that normalized results more 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 December 22, 2004, which may be located under the Investor Relations area in our Web site, www.globalpaymentsinc.com.

Now, I'd like to introduce Paul Garcia. Paul?

Thanks, Jane. Good morning everyone. Let me also offer my best wishes for a happy holiday season for all of you.

The agenda for our call today is as follows: I will summarize our second quarter and review recent trends and events including an update on our recent acquisitions and then Jim will discuss the financial results in detail. Next, Joe Hyde will speak to our Europhil acquisition. I will then provide an update to our fiscal 2005 outlook, and lastly we will have a question-and-answer period.

We reported strong financial results for the second quarter ended November 30, 2004. Our revenue grew 27% to $188.5 million, primarily driven by our recent acquisitions and continued momentum in our domestic direct channel.

During the quarter we achieved a 190 basis point operating margin improvement to 21.6%, primarily as a result of increased economies of scale and the benefits from our prior year's facility consolidations. Our revenue growth and margin improvements resulted in a 40% net income increase to $23.6 million, and a 37% diluted EPS increase to 59 cents, compared to our normalized results of last year.

Now for recent trends. For the quarter our domestic direct transactions grew in the mid teens, and our domestic average ticket remained relatively stable.

We also experienced a modest increase in our domestic spread during the quarter, although the amount of this increase was considerably less than in recent quarters. As will you recall this was due to the expected annualization of last year's pricing initiatives.

Our Canadian credit transactions for the quarter grew in the low double-digits. Our Canadian average ticket during the quarter experienced a modest decline and our Canadian spread has remained relatively stable.

Despite the positive credit card transaction growth, total Canadian transactions grew only modestly in the quarter compared to last year. This was primarily due to the loss of a large debit-based retailer as previously discussed.

Now for an update on our MUZO acquisition.

We continue to be very pleased with the MUZO channel. Our new client signings and strong industry expansion in the Czech Republic have led to the consistent transaction growth in excess of 20%.

Further, we continue processing for the large customer that, prior to the closing of the MUZO acquisition, had given notice of its intent to deconvert a portion of its business. We now believe this won't occur until the first half of fiscal 2006.

As a result of these positive trends we expect our fiscal 2005 MUZO revenue growth will be in the low double-digits, which is an improvement from our initial expectation.

Now for an update on our DolEx acquisition.

We continue to pursue our branch expansion strategy and have added 20 net new branches during the quarter, raising our total branch network for DolEx to approximately 660. We also continue to expand our settlement network, and as such I am pleased to announce that DolEx recently added the country of Bolivia to the settlement network.

As previously discussed, our competitive pricing strategy, branch expansion efforts, and the overall strong growth in the industry continues to drive transaction growth in excess of 20%. We are also particularly pleased with the additional leverage that we are gaining as we build our transaction counts and our operating margins.

We reiterate our fiscal 2005 expectation for DolEx of low to mid teen revenue growth. Now that we've had one full year with DolEx we thought it appropriate to reiterate our strategy for this channel.

Number one, expand our branch presence in the U.S. by either opening new booth or stand-alone locations or by completing branch acquisitions. Number two, leverage our existing client base by selling new products and new services.

Number three, expand our settlement network throughout Latin America and other attractive money transfer destinations. And lastly, enter into new money transfer corridors that have high fund flow into Latin America either through organic branch and settlement location expansion or through a strategic acquisition, such as our Europhil transaction announced yesterday.

Speaking of Europhil, I'm pleased to welcome Europhil to our consumer-to-consumer money transfer service offerings. Joe Hyde will discuss this strategic acquisition in further detail in just a couple of minutes.

Moving on to our North American merchant channel.

In Canada, we continue to focus on signing national to mid-size merchants. We also remain diversified in our domestic merchant channel, and as such we continue to sign a large number of mid-market merchant accounts reaching into many different vertical markets such as retail, professional services, education, government, and healthcare.

One of the more recognizable signings for the quarter is the renewal of the Texas A & M University, a testament to our continued achievement of high service standards and customer renewal rates.

Additionally, I'm very pleased with the growth achieved by our ISO channel. During the quarter we signed three new ISOs and renewed two existing ISO relationships.

To summarize, we are very pleased with our strong financial results and accomplishments during this past quarter.

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

Thanks, Paul.

In our press release and as posted on our Web site, we included GAAP income statements and schedules which reconcile GAAP to normalized results for the prior year quarter and six months ended November 30, 2003. Our prior year second quarter GAAP results include a 3.1 million restructuring charge relating to a facility consolidation program that was completed last year.

My comments this morning exclude this charge and reflect our normalized quarterly results. There were no adjustments to normalized GAAP results for the current quarter.

For the quarter revenue grew 27% to 188.5 million, primarily due to 31.2 million in revenue from our recent acquisitions and strong growth in our domestic direct sales channel which achieved mid-teen transaction growth.

As discussed during our first quarter fiscal '05 earnings call, the favorable revenue impact from last year's pricing initiatives effectively annualized at the end of our first quarter. As such, our domestic direct revenue grew in the mid teens as expected for the quarter, compared to more than 20% in our first quarter.

We achieved low double-digit growth in our Canadian credit card transactions during the quarter, but our total Canadian transactions grew only modestly, primarily due to the loss of a large debit-based retailer as previously discussed. We also continue to experience a positive impact from the stronger year-over-year Canadian exchange rate.

These trends resulted in Canadian revenue growth in the mid single digits during the quarter.

Our domestic indirect channel declined by more than 20% during the quarter and has declined in the high teens for the first half of our fiscal year, which reflects a return to expected levels of future decline.

Our MUZO acquisition added 8.9 million of revenue for the quarter.

As Paul mentioned, we expect fiscal '05 revenue growth to be in the high single to low double-digits. This range is an improvement from our initial estimate primarily due to the delay in the previously disclosed deconversion of a significant customer which now is expected to occur during the first half of fiscal '06.

Our revenue growth expectations for MUZO should be in the mid to high single digit level for the 12 months following this delayed deconversion.

Our money transfer revenue for the quarter was 26 million, of which 22.3 million relates to our DolEx acquisition. We recorded 3.8 million in revenue in the prior year quarter from this acquisition which annualized on November 12th.

We continue to anticipate annual DolEx revenue growth in the low to mid teens, and we remain very pleased with the ongoing contribution from this channel.

Operating expenses for the quarter were 148 million resulting in an operating margin of 21.6%, or a 190 basis point improvement as compared to last year. The operating margin increase was due to increased revenue, our DolEx and MUZO acquisitions, a higher than anticipated benefit from last year's facility consolidation plan, and continued cost containment programs.

These improvements were partially offset by the ongoing investments made in our direct and ISO sales channels, as well as investments to grow our money transfer branch network.

Interest and other expense of 1.8 million for the quarter reflected the cost of additional outstanding debt compared to last year as a result of recent acquisitions. For fiscal '05 we are expecting 5.5 to 7 million in total expense for the interest and other income, and the interest and other expense line items netted together.

Minority interest for the quarter of 1.9 million reflected growth from our Comerica Alliance offset by the elimination of a minority interest relating to our Cash & Win acquisition. For fiscal '05 we're expecting 7 million to 8.5 million in total minority interest expense.

Net income for the quarter grew 40% to 23.6 million and diluted earnings per share grew 37% to 59 cents. Our effective tax rate remains at 37% from the prior year's rate of 37.4% due to continued tax planning initiatives.

In addition, our diluted shares increased due to a combination of additional restricted shares issued to employees as part of a retention program, and additional options exercised during the period. For fiscal '05 we are expecting 39.4 million to 40.4 million in diluted shares outstanding on average for the year.

Now turning to the cash flow statement and balance sheet.

We achieved 31.1 million in free cash flow during the quarter, or a 50% increase over last year's quarter. This cash flow growth is primarily due to the strong earnings growth in addition to lower capital expenditures and restructuring expense compared to last year.

We define free cash flow as net cash from operating and investing activities excluding business development and changes in working capital.

Capital spending for the quarter was $6 million, primarily for software and infrastructure, our new Atlanta-based data center buildout, and DolEx branch expansion. We continue to expect 25 million to 35 million in capital spending for fiscal '05.

Our business development line for the quarter reflected 4.5 million, which was primarily due to a tax-related purchase adjustment in connection with our DolEx acquisition.

We paid down $5 million on our U.S. line of credit during the quarter. Additionally, we paid down approximately 2.5 million on a note payable assumed through the MUZO acquisition to take advantage of the lower interest rates from our U.S. credit facility.

Now I'll turn to Joe to discuss the Europhil acquisition in further detail. Joe?

Thank you, Jim.

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

Starting with slide number three. Global Payments has acquired a group of European money transfer firms based in Spain that operate collectively as Europhil.

As Paul mentioned, this acquisition is consistent with our strategy to grow our DolEx channel into attractive regions with high money transfer flows into Latin America. And as such, Europhil will be managed at a senior level by our DolEx team.

We used existing cash to fund the acquisition which we expect will be non-dilutive to EPS initially and accretive to EPS in the long-term.

Turning to slide four.

This slide illustrates the primary money transfer corridors of a combined DolEx and Europhil. As evident, this acquisition not only compliments our core position in the Latin American market, but also provides access to new regions in Europe, Africa, and Asia.

Turning to slide five.

The worldwide money transfer industry is growing rapidly due to increased population migration and continued immigrant usage of money transfer firms. Spain in particular has recently seen explosive immigrant population growth of more than 20% per year, compared to low or negative growth among its native population.

Due to its aging population, this influx of immigrants has been necessary to help fuel Spain's strong GDP growth of 7% per year since 1999. At the end of 2003, there were approximately 1.6 million documented immigrants living in Spain, with an additionally estimated 1.5 million that are undocumented, for a potential total of 3.1 million.

Turning to slide six.

Since 1999 the Spanish money transfer market has seen rapid growth of 26% per year. Further, Spain is the eighth largest send country in the world with approximately 4 billion in outgoing money transfers in 2003.

Approximately half of this volume is sent equally to Colombia and Ecuador, and most of the remaining transfers are sent to African destinations such as Morocco, in addition to many Latin-American countries. Latin America is one of the largest destination regions for money transfers with more than 38 billion in 2003 and has grown approximately 18% per year since 2000.

Turning to slide seven.

Europhil's primary service is electronic consumer-to-consumer money transfers. In typical Europhil transfers, senders bring euros, British pounds, or U.S. dollars to Europhil branches, and beneficiaries receive these funds in their local currency by o Europhil settlement network.

Similar to the DolEx's Amigo Latino card, over 70% of Europhil's transactions are made using a Club Europhil card, which offers a convenient and accurate transaction in addition to promoting a loyal customer base. Europhil anticipates $12 million in revenue for calendar 2004.

Turning to slide eight.

Europhil has 26 branches consisting of 20 in Spain, four in Belgium, and two in the U.K. These are large, stand-alone branches with five to seven windows, located in areas of high immigrant concentration in cities such as Madrid, Barcelona, Brussels, and London.

Similar to DolEx, Europhil uses employee cashiers at its branches instead of agents. We believe this model provides more control over the customer experience, such as the opportunity to transact in a familiar environment with cashiers who speak the customer's language.

We believe this model also creates more financial leverage since commissions are not paid to employees or agents.

Turning to slide nine.

More than 80% of Europhil's money transfers are sent to Latin America countries including Ecuador, Colombia, Bolivia, Brazil, the Dominican Republic and Peru. Most of its remaining transfers are sent to African and Asian countries, including Morocco, the Philippines, and India. Europhil has approximately 1000 settlement locations primarily consisting of bank branches, currency exchange houses, and money transfer firms.

Turning to slide 10.

We believe this acquisition provides many advantages. Not only does Europhil participate in a large and growing industry, but money transfers are critically important to beneficiaries adding further stability and protection to the industry.

Europhil also provides access to new geographic markets and has a very similar business model to DolEx, which has performed very well for us since our acquisition last year. As one of first money transfer firms to operate in Spain, Europhil has an established 15-year history and a very effective compliance program that has consistently yielded positive feedback from government regulators.

Turning to slide 11.

We believe this acquisition provides many long-term growth opportunities. We intend to leverage the experience and leadership of our DolEx management team in addition to pursuing expense synergies from DolEx's typically lower negotiated settlement rates. We will also focus initially on expanding the existing branch footprint of Europhil in Spain.

As longer term objectives we may pursue branch expansion in other attractive European countries, expand our settlement reach, enter new high-growth money transfer corridors, and sell new product to our existing base of customers.

Turning to slide 12.

To summarize, this acquisition provides Global Payments with an expanded presence in the attractive worldwide money transfer industry. Europhil compliments our core presence in the Latin American market and provides access to new regions worldwide. We believe this acquisition will provide long-term revenue growth and EPS accretion as we expand Europhil's branch and settlement presence.

Finally, this acquisition is complimentary to our DolEx channel and is consistent with our long-term growth strategy.

Paul will now discuss our ongoing strategy and give you an update to our fiscal 2005 guidance. Paul?

Thanks, Joe. Good job.

Now on to guidance. Based on our strong quarterly results and our Europhil acquisition, we are raising full-year fiscal 2005 annual revenue guidance to a range of $758 million to $768 million, or 21% to 22% growth over $629 million in fiscal 2004.

In addition, we anticipate a continued improvement in earnings contribution from our DolEx and MUZO channels and a higher than anticipated benefit from recent facility consolidations and cost reduction initiatives. All of which are expected to have a positive margin growth impact compared to last year.

As a result, we are raising our full year fiscal 2005 diluted EPS guidance to a range of $2.24 to $2.30, reflecting 28% to 31% growth over $1.75 normalized diluted EPS for fiscal 2004. We are also raising our fiscal 2005 operating margin guidance to a range of 20.5% to 20.8%.

On a quarterly basis, we are expecting diluted EPS of 48 cents to 51 cents in our third quarter and 55 cents to 58 cents in our fourth quarter. We anticipate stronger diluted EPS growth in our fourth quarter compared to our third quarter primarily driven by expected robust DolEx margin expansion. This guidance does not reflect the impact of any potential new acquisitions.

We are delighted with our results and achievements this past quarter which continues to reflect the ongoing execution of our strategy. We will continue to focus on integrating and expanding 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 will now go to questions.

Thank you. Ladies and gentlemen, we will now conduct a question-and-answer session. If you would wish to ask a question, please press star then one on your touch-tone phone. You may remove yourself from the queue at any time by pressing star and then two. Once again, if you do have a question please press star one at this time. Joe, we do have our first question coming from Kartik Mehta from Midwest Research.

Good morning.

Hi, Kartik.

I had a couple questions on Europhil. From a pricing structure do they price similar to DolEx where there's a price for obviously the money transfer service and then an additional price based on whatever the settlement network would charge? Does it work in a similar manner?

The pricing does work in a similar manner. They earn money on commissions for sending the money and they also earn an FX revenue for converting the foreign exchange. The settlement piece of it is a little bit different, but on the whole it's very similar to DolEx.

I think in terms of DolEx just the business is more mature in terms of size and they have in many instances a larger number of locations to settle through and, therefore, there's variability within pricing at the settlement location.

The overall branch growth, obviously they only have 26 branches as to DolEx's 600 some. How many branches a quarter do you think you can expand Europhil?

Kartik, we're not prepared to give guidance directly on that but I will say this that we're picking up some great management that heretofore had been constrained because they didn't have the balance sheet obviously that we have. We also are integrating this with DolEx and Raul lamon and his team can bring another level of expertise. So everybody is very excited about the potential.

Plus, just the markets they're in, just Spain, could sustain some significant expansion. That doesn't speak to the U.K. or Belgium or potentially in very much in the future some surrounding other European countries. So we do have high expectations that this deal is going to grow pretty nicely.

I think for now Kartik we'd stay with the same guidance we've been giving on DolEx in total, which is 15 to 20 a quarter net.

And two last questions. I apologize. Can you utilize DolEx's settlement network with using Europhil?

Yes, Kartik, we absolutely can do that and we expect to get some synergies because DolEx has typically lower negotiated settlement rates than Europhil has because of their higher number of transactions.

That would be an immediate synergy for us as we put the two businesses together.

And a last question just on the merchant business. There's been a lot of talk about Amex gaining a little bit market share as MBNA is starting to rollout Amex cards and Citibank is starting to rollout Amex cards, and I realize it's early, but based on the transactions you look at, are you seeing any type of market share shift away from MasterCard and Visa to Amex?

Kartik, at this point we aren't seeing anything. My expectation is these will be programs that are geared to a kind of laser focus within MBNA and Citi and any other banks that potentially may sign. I will also say it's interesting to note that these are primarily MasterCard issuers. Visa, in our opinion, responded with a, I think very well thought through response.

One of the reasons the financial institutions are interested in this of course, is they'll earn higher interchange fees. Visa has responded with a new interchange structure that provides a higher interchange for robust rewards programs, which is what American Express cards used as a primary inducement for consumers. And so I think that was a good response. We have not yet heard from MasterCard, so I think there's a lot yet to be seen here.

Lastly we haven't heard from the merchant communities. They're going to probably have something to say about this, too.

Thank you very much.

Pleasure.

Thank you. And, sir, we have our next question coming from Peter Swanson from Piper Jaffray.

Hi, congratulations on the good quarter.

Thanks, Pete.

Question about the margin expansion coming in ahead of what we were looking for and certainly sounds like your internal expectations. Does that change your long-term outlook of what the targeted operating margin might be?

Pete, that's tough one. We're not prepared to give long-term right now. I will tell you that we have told you guys that we're not going to take it too much higher. I think there's always a desire to reinvest in your business, but, you know, we feel comfortable with our guidance and the enhanced guidance on the margins for the remainder of the year and we'll see about next year.

Okay. When we question the shifting over to DolEx, did you say it was in the greater than 20% transaction growth in the quarter?

Yes.

Did I catch that correctly? And are you seeing any changes from a competitive pricing front from people who [went] out agent locations near where your branches are?

No, I would say, Peter, as we mentioned, last year when we purchased the business, and I think it was during the third quarter, it our first quarter on it of a full quarter, we instituted a pricing strategy to adjust some of the behavior that the seller had. Since that's annualized, I think we've seen a pretty consistent market price and I think that, you know, we're pleased by what we're seeing in the marketplace. I don't see undue pressure currently.

Okay. And one final question. Curious about if you could update us on progress of the development of the next generation processing platform?

As we've mentioned on a couple of these calls this is a multi-year program. We don't anticipate completion until late calendar '06, but to date everything is going smoothly. We have the data center here in Atlanta complete, and we are also, we actually have some communication links into the building, and at least the communication layer is up and running. The rest of the project is going according to plan.

Okay. Thank you very much. Happy holidays.

Thanks, Pete. You, too.

Thank you, sir. We do have our next question coming from Tony Wible with Smith Barney.

Thanks. Great quarter, guys.

Thanks, Tony.

Couple quick questions on DolEx. I was wondering if you can comment on the pipeline for these new services? We've heard about them I guess a little bit in the past. I just want to get an update on kind of what's the highest priority and where we stand and how fast we can kind of see something come out.

And a second related question on DolEx, it just has to do with just kind of pricing. I know you guys had some promotional pricing originally. Has anything changed there? You had indicated that later on in the call that you expected the DolEx margins to ramp a little bit. Does any of that to have do with pricing?

Tony, we'll do it in reverse order. I'll do the pricing one and Jim's going to handle the one and give you a brief update on where we are with new product introductions within DolEx.

On the pricing side we intentionally are a bit of a price leader. We feel that our high fixed cost, low variable cost model puts us in that position and we're taking advantage of it. Because of that, as you know, we told you guys we were going to drive transaction growth. This business is even more elastic than we thought it was, so we've driven transaction growth pretty healthy.

Now as those pricing concessions annualize, in theory transaction growth should be pretty close to revenue growth, and we're just now annualizing that so we will have to wait and see, but we're not anticipating any further pricing increase, our revenue growth is terrific. To an earlier question, the competitive pressures remain constant, and so our expectation for guidance that we're giving in the future does take into consideration higher margins from DolEx as a byproduct of these events annualizing.

And as far as new services like check cashing or stored value, is that still in the pipeline?

They're going pretty good and Jim will update you on one in particular, our debit card.

I think as we've mentioned, going back probably six months or so after we acquired the business one of the projects that they had on their plate but had not yet been funded was the stored value card which would effectively work as a debit card. We've completed the design and development. It's actually in a beta currently. We've got some cards, Paul's got a card, I've got a card.

There are a couple more than that out there.

I think when we're ready to announce it hopefully in the not too distant future we'll put something out and we'll discuss it on a future call. But I think in terms of new products it's clearly one of the initiatives that Raul and his team has beyond simply opening new branch locations, new markets in the U.S., new settlement locations in Latin America, and now moving into the European arena, new products, we look to leverage that fixed infrastructure that Paul was talking about to really take advantage of the margins.

Great. You had mentioned real quickly at the beginning of the call that you saw a little bit of an improvement I guess in the domestic spreads. Can you go into kind of what that is? Is that you guys capitalizing on more interchange or is that a conscious spread increase?

Tony, it wasn't. It's just, it's a little bit left over from previous activities, and we said modest, we mean modest. So when spreads are up very small amounts, it did increase, however, but that does not, that is not a precursor of any future activity that you would come to expect, nor did we take any activity that drove that.

We would expect that spreads would kind of normalize. And by normalize we mean they kind of stay constant, go down a little bit, maybe one quarter up a little bit. We won't see the kind of activity that we saw in previous until we have other opportunity perhaps through Visa and MasterCard activity yet to come.

Great. Good quarter again.

Thanks, Tony.

Thank you, sir. We do have our next question coming from Roger Freeman from Lehman Brothers.

Hi, good morning.

Hi, Roger.

Just want to come back to a couple issues that have been raised here. One on DolEx. When I hear you talking about sort of mid teens, you know, revenue growth and transaction growth at 20% plus, I mean, should we, you know, assume here with pricing stable that that should get even closer, that perhaps the revenue growth could actually approach the transaction growth even, and kind of going further and looking at the new products that you'd layer on there?

This is still a very competitive corridor and I think we're comfortable with mid teens as we talked about for revenue growth. Transaction growth for this last year as we've reported consistently has been north of 20, and as Paul mentioned, we've just annualized the pricing adjustment that was made right after we bought the business and I think we'll see in the future, but right now we're comfortable with the guidance that we've given.

Okay. So I mean the guidance would imply that some incremental price pressure, I'm assuming, right?

Yes. And, Roger, it also implies some benefit from what I discussed but it is absolutely the level that Jim just shared with you. I was speaking, I think the question was more speaking to what's your future expectations but also keep in mind, as we open locations, those are very dilute. I mean a location loses money for some time and has an overall dilutive impact on earnings although it does help drive transactions.

On that note, have you opened any New Jersey locations and what's the status of the New York application?

The New York application ended up having to be restarted late summer so I don't have anything, new news in terms of New York. In terms of New Jersey, we have identified locations, I think there are four, five, that are taking transactions now.

Okay. Then kind of on the margin front, normally the second quarter is a sequential, I guess a seasonal sequential decline versus the first quarter. I'm just curious when you kind of look at the sequential comparison, also the 200 basis point year-over-year increase in the operating margin, is it more a function of the facility closures or more just general operating leverage? How would you characterize the comparisons?

I think anytime we have acquisitions that are, have not annualized it's very hard to draw year-over-year comparisons. The trend would be in absent the phenomenon of buying businesses and not having them annualized. The trend in the business would continue to be strong first quarter followed by second quarter. But this quarter two businesses, DolEx as well as MUZO coming in as well facility consolidation programs.

There were over 250 jobs affected by those consolidations. We didn't eliminate 250 jobs but that was the total number of jobs that were there before the consolidation and the business continues to grow and this is a terrific business for leverage. As we get bigger we get more margin.

Let me just add something, Roger, if I could. I'd really encourage you guys to take us at face value on Q3 in particular. Historically it has been one of our lowest quarter in terms of revenue and earnings, and by adding DolEx that actually exacerbates it a little bit because that's a very weak time for DolEx.

Christmas is a little robust but once you get into kind of the doldrums of January and February it's a pretty weak time for them, too. So you take a historically soft time for retail and for our transaction business, put on top of that our funds transfer business, having a weak time, that just further reinforces the expectation for Q3.

Okay. Understood. But as you look at the increase in guidance for the rest of the year, would you characterize that as mostly because of improved DolEx expectations or other parts of the business?

I think a little bit of both. DolEx is going to be a big driver of Q4 as we pointed out earlier because that's a very robust time for them but that's also, strangely enough, a big time for our merchant business as well.

We're a big processor of floral, for example, and Mother's Day is right there, and that's a huge time for the floral business, and we have one of our highest transactional days not the Saturday before Christmas but right around then, strangely enough. So those two factors of very robust merchant business and robust DolEx with better operating margins, which we think continue, drive that.

As well as MUZO is, as we've mentioned during the initial comments, has exceeded expectations this year. The team there has done exceptionally well, added some additional customers that we've talked about in the past, plus we had the delayed de-conversion which will help us during this year.

Okay. Great. Thanks very much.

You're welcome, Roger. Thanks.

Thank you. We have our next question coming from Dris Upitis from Credit Suisse First Boston.

Hi, congratulations on a great quarter.

Thanks, Dris.

First on the domestic channel you had another strong quarter there. Can you just give us a sense of contribution from ISOs versus the direct sales force? Whether, I know you typically don't quantify that but whether the relative contribution of each has shifted at all?

You know, Dris, we don't break it out. I will say that relatively it didn't change dramatically, ISOs grew, we added three new ones, and that ISO channel is still doing extremely well, but we also had a pretty good quarter for our domestic direct business as well. So I would say in relative comparison they're pretty similar from previous quarter.

Okay. So no real change that you've seen in the competitive landscape for attracting new ISOs, really?

No I haven't And remember, the key to understand if ISOs become a much bigger part is, remember the margin on the business because of how it is accounted is much lower, and consequently when you see a margin improvement that's kind of, you know, further support of my previous statement.

Now, to answer your other question about did we see any big changes, it's still very competitive. ISOs are great models. Everybody smart wants ISOs. And anybody smart wants ISOs.

Our ISOs are constantly under attack. We are renewing them. We're fortunate enough to retain them. We are adding new ones, but you earn their business every day.

Okay. And then can you give us a sense of how much the contribution was from the Canadian dollar in the quarter, how much that contributed to revenues?

I think you guys could probably back into it. Just take a look at what the exchange rate was. Our Canadian revenue is about 20%, roughly, of our overall, so you could get, you could back into it, Dris, by looking at the exchange rate from quarter-to-quarter, and it's not a mystery, it's pretty close. We just haven't given guidance in particular but, you know, you'll, in 10 seconds you can figure it out.

Okay. And are you just assuming a flat exchange rate going forward then, in your guidance?

Jim?

I wouldn't comment. I don't think we're going to comment on the specifics of the exchange rate. I think it has surprised us this year it's gone up as much as it has, and I don't know that we have any better insights where it's going to go through the May time period. But all that's been factored into our revenue guidance for this year.

Okay. And then if you can just give us a sense for about three weeks into the holiday season what you've seen so far on spending at your merchants?

It's pretty robust. I mean, we think it's going to be a good holiday season but we have two big caveats here. Number one, our experience, all transaction processors experience with holiday volume doesn't necessarily translate to good news for the retailers, because we don't know if they're doing this at deeply discounted prices, if these are profitable transactions, all we know is we're seeing them, we're seeing quite a few of them.

Also, I'd have to add that we are not a big holiday-driven portfolio because of our doctors and universities, utilities, government. We have kind of floral, as I mentioned a minute ago, we have kind of non-traditional, and it's not as big a period for us. But with that said and done, we're seeing some pretty good volumes this far into December.

Okay. Thanks. Nice job in the quarter.

Thanks, Dris.

Thank you. We have our next question coming from Craig Peckham with Jefferies Company.

Good morning. I had a question, more of a clarification. The press release indicates that there was 31.2 million in revenue from DolEx and MUZO. Is that total from DolEx and MUZO, or is that incremental to the 3.8 million that was present in the prior year?

It's total.

Okay. And so that's about flat sequentially with the first quarter, I think which was 31.1 million. Are there any seasonal factors in there that would explain kind of flat quarter-to-quarter growth there?

Well, you're coming off our strongest quarter for DolEx, which is the summer months, and you would not get, we wouldn't expect sequential growth in the business. If you remember, the users of the service are primarily construction and agriculture, and sun belt states, so they would slow as the weather changes, and you'll see the third quarter even slower, and then the fourth quarter picks up with Mother's Day, which is a very big day, and then the summer is very healthy.

Okay. Thanks for clarifying that seasonality. Just also wanted to see if you could give us a little bit more clarity in terms of how the relative pricing on Europhil compares to other competitors in the region and see how it might compare to DolEx.

Europhil pricing is similar to DolEx. It's around the same range. They are, though, under Western Union and MoneyGram and those markets, so it's a very competitive price, just very similar to DolEx.

Okay. Thanks, and good quarter.

Thanks, Craig.

Thank you. We do have our next question coming from Greg Smith with Merrill Lynch.

Hey, good morning, guys. First question, just on the indirect domestic business, are there any opportunities to sort of stem the outflow there or should we just continue to expect it to decline? I do realize it's become a much smaller part of the business at this point.

Greg, we aren't see seeing anything that would change that kind of high teen decline that we've experienced.

Okay. And then on the gaming business, just wonder if you can comment on any new opportunities you're seeing there, and do you feel that you have a real competitive advantage? I know you've got some bigger competitors on that side of the business. Just give us an update overall on the gaming.

As we mentioned, over the summer we acquired the remaining interest in a business that we had owned 51% of called Cash & Win. We just completed a conversion prior to the freeze during November, late October, from the Comerica System on to our systems. We've rebranded some of the product offering, and thus far and these are a limited number of customers in this marketplace, and the sales cycles are longer than smaller merchants that we would traditionally go after in our domestic or in our ISO business.

But so far all signs are positive. We've had a number of positive signings in both the Cash & Win side as well as our traditional check business. So, so far I think the news is good.

Okay. And then lastly, just back to the ISO issue, Paul, are you guys trying to emphasize though one area more than the other? I mean, do you hope for the coming year you have a significantly greater growth on the direct side? What's kind of the strategic plan there?

You know, we obviously, direct side is very important to us but the ISOs just because of the sheer number and our success in that Greg, the reality is the ISO business does grow more quickly than our direct business. It's a bigger book of business and it's continuing to grow.

I mean we have 300 sales people on the direct side. There are thousands and thousands and thousands of ISO sales people, independent contractors, who are selling our services, and that's fine. I mean, even though it is a lower margin business, we are still very pleased with that business, and we are big fans of the ISO business.

Okay. Thanks a lot, you guys.

Thank you, Greg.

Thank you. We do have our next question coming from Don McArthur with Stifel Nicolaus.

Good morning, guys. Congratulations on a great quarter. Can you give us an update on possible processor acquisitions in Eastern Europe with a move to that EMV standard?

I hesitate to, we don't have anything to announce and there's nothing I can really comment other than activities like that do create changes in opportunities. Not all the processors are EMV compliant, so I'm sure there will be some activity.

And then the loss of the Canadian debit retailer was that in the full, when did that happen, I guess? Was it in the full quarter?

That would have occurred, as a comparison, against last year's numbers. It's in most of this year on a comparative basis, and it was just a situation of pricing and, you know, we felt as though the competitor offered a price that was not worth retaining the business.

Okay. Then final question is on margins. With the first and second quarter operating margins at 21.6%, if you look at your full-year guidance, it looks like you're expecting them lower with stable domestic spreads with MUZO in theory increasing. What's causing that sequential decline? Is that just seasonality with MUZO or something else?

If you go back and you look at '03 or '04, and I think there was a question on this earlier, first quarter has always been a very strong quarter for us, back-to-school, summer months, and if you average, though, the second, which is slower, and the third, even independent of these acquisitions, it moves down during the year, and that's why for the full year guidance while we moved it up in terms of the previous guidance, it's still lower than the first quarter.

Okay. Thank you.

Thank you. We have our next question coming from Wayne Johnson from SunTrust Robinson Humphrey.

Good morning. My question is regarding Europhil, and if you could talk a little bit about the types of services that Europhil is offering and what's the opportunity there to expand those services? Can you also talk about the time line of integration with DolEx? Thank you.

Wayne, in terms of the services, 95% plus is the typical electronic consumer-to-consumer money transfer. Europhil does have some ancillary business, primarily phone cards, but it's less than 5% of the revenue. And I'll let Jim talk about new products.

The new products as we and they work independent as Joe mentioned in his comments, they have a product, the Euro Club card, very similar to the Amigo Latino card.

Club Europhil it has some loyalty-based things that the Amigo Latino card does not have. We think that's interesting in and of itself, but it's awfully early Wayne.

I think as we make strides in the U.S. with new products we will look to leverage them into that market.

Your second question concerning integration, there's not a lot of integration to be done here. I think, as you know, in terms of DolEx we've done a number of acquisitions before and I think the team is very adept at it.

As Paul mentioned, Raul has a team that's going to work in concert with the outstanding management team that we've acquired as part of this acquisition. I think there will be some system work that will combine the two organizations which is not more than a six-month exercise and very little cost.

Probably the best synergy in the near-term, though, is going to be around settlement locations, and that will just simply be settling [inaudible] through our network as opposed to their network and there is no cost associated with switching.

Okay. Terrific. And did you guys talk about the purchase price or what you expected, when you expected Europhil to be accretive?

This is, as Joe mentioned in his comments this is a pretty small transaction so when you get to our size a transaction of this size really doesn't have a lot of impact either plus or minus in the early stages.

It's basically non-dilutive. This is all about, not unlike MUZO, Wayne, this is all about having a strategic relationship and then expanding that. So I think for this thing to really fulfill its potential you're going to be looking at us doing all the things that we had questions on, expanding product, expanding locations.

While this is a 15-year-old business and it is profitable, it is still relatively early stage when you compare it against the size of a DolEx, and so as it grows, and as Raul expands the business with the team there, our expectation is that there will be strong contributor to the Company but we're talking in terms of years, not in terms of quarters.

Terrific. Thank you very much.

Thanks, Wayne.

Thank you. We do have our next question coming from Tien-tsin Huang from J.P. Morgan.

Hi. I was curious, what's driving the delay of the large MUZO customer de-conversion?

Say again, Tien-tsin?

I'm sorry. I was just curious, what's drive the delay of the large MUZO customer de-conversion? Any chance that you might keep more of that business than you originally thought?

It's a couple of functions. Number one, let me just back up. You recall these guys, we knew these guys were leaving before we bought them and it was a function of MUZO not being in a position to offer services beyond the Czech borders.

Now clearly we're focused on offering services beyond the Czech borders, we're taking the shackles off MUZO and they are constantly pitching this guy. But the processors they were to go to is having some issues too, and they're also very happy with MUZO business. But they have signed a contract so it is our expectation that we'll lose a piece of this business, but we're hopeful that we are going to retain a whole bunch more, though. I mean they're not taking all of it. We're obviously focused on replacing that with other good quality business and the bank we signed in Russia is a case in point.

Right. So generally how does the pipeline look today for MUZO?

It looks robust. I'm pleased with the pipeline in MUZO but remember, this is not signing merchants, these are signing financial institutions. And the pipeline is robust but it is a long sales cycle measured in quarters.

It takes months and months and months and months from initial call, possibly years, to get somebody to actually sign up, because it's a big deal to switch processing, and it's a big deal to commit to a new processor but I'm very, very pleased with the pipeline.

Understood. That's helpful. And Paul, I would love to hear your thoughts on I guess Walgreens decision to drop Amex at the point of sale. Is this kind of the beginning of merchants being more proactive at the point of sale and what does this mean for the processors?

I thought that was an interesting shot across the bow, for everybody, for the bank card associations, too, although I said that Visa I think had a very intelligent response in terms of creating an interchange structure that it gave incentive to merchants to issue cards. You know, you don't want to kill the goose that laid the golden egg and when you see somebody like Walgreens dropping American Express cards, it is concerting. However, that's not a trend in all fairness.

I mean, Walgreens has a very low average ticket, it is a pharmacy primarily and you know, selling other assorted goods, and it's not typically the prime target for an American Express card holder. So I keep all of in that mind when I look at what they did. So I'm not expecting to see a wave of merchants dropping Amex.

That's helpful.

But you know, a little healthy tension is good for everybody. It's a three-legged stool. It's card issuers, some merchant acquirers, and it's the processors, and that's a nice juxtaposition.

I would agree that's helpful. And lastly Jim, maybe If you can talk about trends you're seeing in the retail check warranty business?

In terms of what we see internally that business has continued to do well. Its transaction growths have been in the low double-digits and for us this is a relatively small business but to see it at that level, I think consistently at that level has been a positive, but I think the overall trend still moves away from check at the point of sale in the long-term.

Well done. Happy holidays.

Thank you. You, too.

Thank you. We do have our next question coming from Greg Gould with Goldman Sachs.

Thanks. I wanted to, Jim, get a little bit more clarity on the margin upside in the November quarter. Since it was cost-based, or this was expense-based, were there any particular one-time items that helped? Because I would think on the cost side you have a lot of visibility in giving guidance.

I don't have much to add from what we've already discussed. The facility consolidation program you have visibility toward, that was a project that started a year ago, and we're seeing it this year for the first time.

MUZO and DolEx in the quarter which they weren't, DolEx was barely in the quarter last year, and then just the overall health of the business and, you know, a variety of initiatives, small individually, but when you add them together it's a constant effort here since we joined and we split from NBC to gain leverage, whether that's renegotiation with vendors as we've gotten larger, it's a host of items, but beyond the ones I've already identified, nothing in particular.

Okay. And then, Paul, on transaction momentum, you had mentioned earlier in the quarter that, or in early December that you saw a pickup in transaction volume. Has that continued so far this month?

Our transactions are looking pretty good. I'd say probably more steady state. We're growing in the teens, and I'm still seeing that, obviously comparable period. So teen growth over this December over last December is pretty good, but I haven't seen any variance beyond that, Greg.

One last question, and that's on American Express and Citibank. Based on your view, do you have a sense for how much of the card base could get converted over to Amex cards?

My sense, Greg, is that it's not going to be a big chunk of that, it's going to be more focused on a certain customer set. Obviously those that don't keep balances, because that would not make sense for an issuer.

And so I think it's going to be less of an overall volume impact. Not that it's not a big deal. And not that it's not a big deal for American Express, but we're not anticipating a lot of volume impact.

Okay. We can apply that across the board as other issuers may follow suit?

I'm going to say we'll keep you informed on this. You're right. I mean this is, I suspect next quarter we'll discuss it again and it will have a little more data to share with you.

I will say that we do have good relationship with American Express. Once again, we issued all their terminals. Every time a new merchant is signed, American Express utilizes our services to send out terminals and sales drafts et cetera, actually comes from one of our locations although it appears that it comes from American Express, we participate in their ESIP program, a big participant in that, we sign merchants directly.

They find it beneficial to use people like to us to get at smaller merchants. We sign merchants for them. And lastly, we provide our processing services outside the ESIP program directly to merchants and make bips on each transaction. So all that combined, it's a pretty good piece of revenue from them.

Thank you.

Thank you, Greg.

Thank you. We have our next question coming from Carla Cooper with Robert W. Baird.

Good morning. When you talk about 20% transaction growth for DolEx, is that an organic number? Remind me of how that includes new store openings.

Carla, it's everything. We haven't broken out organic from otherwise.

Okay. And then you've talked about making small acquisitions to compliment the DolEx business on a occasional or regular basis. Were there any of those in the quarter?

Yes, there was one transaction in the quarter that closed. It was in Southwest U.S.

Okay. And is that included in the 31.2 million in revenue that you talked about coming from MUZO and DolEx?

Relatively small but all the revenue is included in that.

Okay. Thank you.

You're welcome.

Thank you. We have our next question coming from Roger Freeman with Lehman Brothers.

Hi. I just had one quick follow-up. I believe that Visa is lowering their signature interchange, I guess in April, and raising debit, the pin debit. Do you anticipate that as an opportunity for you to grab a slice of that, and is in that your guidance?

Very small, Roger.

Okay.

We think it's more of a pass-through and very small opportunity.

Thanks a lot.

You're welcome.

Thank you. We have our next question coming from Tony Wible with Smith Barney.

Another very quick follow-up question which is on the acquisition that you just did. You mentioned 5% of the acquired companies' revenue come from kind of ancillary products. You mentioned phone cards. Is there any E-top-up products that they currently support and do you anticipate dedicating more resources towards that initiative?

Tony, they don't currently support in that any meaningful way today, I don't think at all, but I think that going forward we'll sit down with DolEx and the Europhil management team and develop a strategy. Because this acquisition was signed and closed at the same time we just need more time to develop a long-term strategy for the business.

Great. Thank you.

Tony, I will say just parenthetically MUZO actually has a big piece of that business with T-Mobile in Europe.

Any other mobile operators outside of T-Mobile?

At this point it's just T-Mobile.

Great, thank you.

You're welcome.

Thank you. We do have our next question coming from Mark Sproule with Thomas Weisel Partners.

Thanks. Just a quick question on the Europhil stuff. With the growth opportunities there, is that mainly going to be within Spain and U.K. and Belgium or is there kind of a nearer term look to expand beyond that?

And then on top of that with the settlements, obviously within Europe the immigration patterns are a lot more of Eastern Europeans moving West and then North Africans moving into kind of France, Spain, et cetera. Is the settlement growth on the locations of settlement basis is that going to be more focused in those areas or is it going to be continued Latin America focus?

Mark, for the time being I think that the initial focus will be primarily on expanding a Spain-France presence. I think that there's an awful lot of room to grow in those markets I think it would be a mistake for us to divert our attention away from growing that branch presence there.

I think we'll look to other attractive Western European countries to open branches potentially, adding on to Belgium and U.K., potentially entering new regions, but for the time being, at least for next probably six to 12 months, Spain will be the focus.

In terms of settlement, I think that the initial focus will be on taking advantage of the Latin-American settlement destinations that we have and getting synergies between DolEx and MUZO, but certainly North Africa is an attractive settlement destination and certainly with the ten countries that just extended into the European Union from Eastern Europe, there's certainly a migration of workers westward and that may develop into an attractive money transfer corridor in the future, but I don't see us entering that in the short-term.

Gotcha. And then on the new products that you guys are rolling out, kind of stored value card check cashing stuff within DolEx, is that, are you going to look at kind of focusing on sort of the employment payment card avenue along that line as well? And then does that at all sort of shift your kind of basic consumer base within DolEx away from sort of a core Latin American money transfer to kind of a broadened subprime financial services offering for a wider consumer base?

The answer to your first question is, yes, actually, one of the betas for the card will be to use these cards for our employees. We have a very large employee base in DolEx, and in terms of payment, we're going to try to use the card as a payroll card for them, so that will be, that is one of the ideas for the card as it gets rolled into the market.

I think in terms of your second question, I don't think we're there yet to really comment on whether we want to turn into a broad financial services offering. What we're trying to simply do is provide limited financial services around the core corridor of providing value to a customer base that is serviced today by DolEx.

Gotcha. One last question just on the merchant side. With the growth of kind of your ISO channel and then your own direct sales force is there any sort of, have you seen any sort of, I guess, competition among Global Payments sales professionals both trying to sell the same product to the same merchant? Has that sort of impacted you in any way, I guess either positively or negatively?

Great question. I will tell you I am pleased to tell you it happens so infrequently and here's why, there really is a bright line. The ISOs are typically after merchants that do $80,000 or less in annual bankcard volume. Our direct sales force, because these are commissioned guys, our direct sales force that makes a salary plus a commission but a big salary, benefits, et cetera, are after much larger merchants so it's very, very unusual for them to collide. And when that happens, we resolve it amicably.

Gotcha. Thanks a lot.

Thank you.

Thank you. At this time I'd like to turn the call back over to our speakers for closing remarks.

Thank you. Thank you all for joining us on today's call during this holiday season, during this busy holiday season, and on behalf of Global Payments and our entire staff we wish all of you a safe, healthy, and happy new year.

Thank you. Ladies and gentlemen, this conference will be available for replay starting today at 5:30 p.m. and ending at midnight on January 6th. If you wish to listen to the replay, please dial 866-359-6498. For international parties, dial 203-369-0155. This does conclude our conference for today. Thank you for your participation. You may now disconnect.