環匯 (GPN) 2005 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to Global Payments' third 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. [ operator instructions ] At this time I would like to turn the conference over to your host, Vice President of Investor Relations, Jane Forbes. Please go ahead.

Good morning, and welcome to Global Payments' fiscal 2005 third-quarter conference call. On today's call we will discuss our quarterly financial results and business highlights. Joining me on the call today are Paul Garcia, Chairman, President, and CEO, and Jim Kelly, Senior EVP and CFO. 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 and 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 March 21, 2005, which may be located under the Investor Relations area on our website, www.globalpay -- excuse me, www.globalpaymentsinc.com. Now I'd like to introduce Paul Garcia. Paul?

Thanks, Jane. Good morning, everyone. The agenda for our call today is as follows. I will summarize our third-quarter results and review recent trends and events, then Jim Kelly will discuss the financial results in detail. 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 our third quarter. Compared to last year, our revenue grew 20 percent to $195.5 million and our diluted earnings per share grew 29 percent to $0.54. These results were higher than we anticipated primarily due to solid performance from our MUZO acquisition, our DolEx money transfer services and our domestic direct channel.

We also benefited from merchant repricing initiatives in Canada, in addition to a stronger Canadian currency exchange rate. Further, our operating margin improved by 80 basis points to 19.5 percent compared to last year. Primarily as a result of increased economies of scale and the benefits from our prior year's facility consolidations. Now for our recent trends and events. We continue to achieve momentum within our merchant channels in North America and Europe. For the quarter, our domestic direct transactions grew in the mid-teens and our domestic average ticket and spread remained relatively stable. Our internal sales force continues to sign thousands of mid-market merchants each quarter in a variety of vertical markets.

I am also particularly pleased with our strong ISO growth. During the quarter, we signed one new ISO and renewed and extended two existing ISO relationships. In Canada, we continue to sign prominent national and mid-sized merchants and achieved low double-digit growth in credit transactions for the quarter. Our Canadian average ticket during the quarter declined in the mid-single digits primarily due to our decision to exit from our low margin, high-risk contract with Air Canada for processing MasterCard transactions. We will exit our Visa contract with the airline later this spring. Our Canadian spread increased in the mid-single digits during the quarter, primarily due to merchant repricing initiatives. Total Canadian transactions modestly declined in the quarter due primarily to the loss of a large debit-based retailer in the fourth-quarter fiscal 2004 as previously discussed.

We remain very pleased with our MUZO acquisition and our presence in the Central and Eastern European markets. Our new client signings in the strong merchant mark -- market expansion in the Czech Republic led to more than 20 percent growth in ATM and point-of-sale authorization transactions during the quarter. Further, we continue processing for that large customer that prior to the closing of the MUZO acquisition had given notice of its intent to deconvert a portion of its business with us. We now believe this won't incur until the first half of fiscal 2006. Further, we expect fiscal 2005 MUZO revenue growth to continue in the low double digits.

Moving on to our consumer money transfer channel. We continue to pursue our DolEx branch expansion strategy throughout the United States and have added approximately 20 net new branches during the quarter. Raising our total U.S. branch network to more than 680 branches. We also continue to expand our settlement network, and as such, I am pleased to announce that we have recently added the country of Jamaica to our settlement network. Our DolEx transactions grew more than 20 percent during the quarter, due to our competitive pricing strategy, branch, expansion efforts and strong industry growth. We were also particularly pleased with the additional operating leverage that we are gaining in this channel.

We are very pleased with our recent Europhil acquisition and are excited about the new money transfer markets, this strategic transaction has opened us to such as Spain, Morocco, the Philippines, and India. As previously discussed, the Europhil acquisition will be managed at a senior level by our DolEx team, which is currently focused on integrating this acquisition. To this end, we have made considerable progress on leveraging DolEx's more favorable settlement rates, and have recently reduced Europhil's settlement cost per transaction by more than 40 percent to key markets of Columbia and Ecuador.

Before the end of this summer, we also expect to complete a conversion process to connect DolEx -- DolEx's superior technology platform to our Europhil branches, adding a higher degree of efficiency, flexibility, and operating control. Once this conversion is complete, we expect to begin expanding Europhil's existing branch footprint in Spain. We continue to believe this acquisition will be non-dilutive to earnings initially and accretive in the long run.

To summarize, we are very pleased with our strong financial results and accomplishments during this fast -- past quarter. I will now, now ask Jim Kelly to review the financial results in detail. Jim?

Thank you, Paul, in our press release and posted on our website we included GAAP income statements and a schedule which reconciles GAAP to normalized results for the none months ended February '05. Our prior year GAAP results included $4.7 million restructuring charge relating to a facility consolidation program completed last year. My comments this morning reflect GAAP quarterly results as there were no adjustments in normalized GAAP results for the quarter. During the quarter, revenue grew 20 percent to 195.5 million, which includes 14.5 million in revenue from our MUZO and Europhil acquisitions.

Our domestic direct channel achieved mid-teen revenue growth driven largely by stronger-than-anticipated ISO results. Our Canadian revenue also grew in the mid-teens during the quarter which was a higher-than-expected improvement over the single digit growth recorded last quarter. This strong Canadian growth was primarily due to the impact of merchant pricing initiatives, a continued stronger year-over-year Canadian exchange rate, and a one-time favorable merchant pricing adjustment of approximately $800,000 -- Canadian -- U.S., excuse me. Given this quarter's performance and assuming the Canadian exchange rate remains at current levels, we expect double-digit Canadian revenue growth for our fourth quarter followed by single-digit levels during fiscal '06.

Moving on to our indirect channels, our domestic indirect revenue declined in the high teens compared to last year as expected. Our MUZO acquisition added 12.2 million of revenue for the quarter which exceeded our expectation. As Paul mentioned, we continue to expect fiscal '05 MUZO revenue growth to be in the low double digits. Our money transfer revenue for the quarter was 27.2 million, of which 21.3 million relates to DolEx and 2.3 million relates to Europhil. For the quarter, our DolEx revenue grew more than 20 percent to primarily through branch expansion, industry growth, and a more favorable-than-expected impact of our branch pricing strategy which we initiated shortly after acquiring DolEx last year.

We continue to anticipate fiscal '05 annual deluxe revenue growth in the low to mid-teens, and we remain very pleased with the ongoing margin expansion in this channel. Operating expenses for the quarter were 157.3 million resulting in operating margin of 19.5 percent or an 80 basis-point improvement as compared to last year. The -- the operating margin improvement was due to increased revenue, the money transfer channel results, the impact of our MUZO acquisition, a higher-than-anticipated benefit from last year's facility consolidation plan and ongoing cost containment programs. These improvements were partially offset by the continued investment made in our direct and ISO sales channels, as well as investments to grow our money transfer branch network.

Net interest in other expense and income of 2.2 million for the quarter reflected the cost of additional outstanding debt compared to last year as a result of recent acquisitions. This increase is also due to a $900,000 debt repayment fee incurred during fiscal '05 relating primarily to fixed rate debt assumed in the MUZO acquisition. We used our U.S. line of credit to substantially pay down this debt to take advantage of -- of our significantly lower interest rates in the U.S. For fiscal '05, we are expecting six 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 was 1.7 million reflected growth from our Comerica alliance, offset by the elimination of minority interest relating to our Cash & Win acquisition and the reduction in minority interest relating to our successful MUZO tender offer.

For fiscal '05, we are expecting 7 million to 8 million in total minority interest expense. Net income for the quarter grew 31 percent to 21.6 million and diluted earnings per share grew 29 percent to $0.54. Now turning to the cash flow statement and the balance sheet. We achieved 23.5 million in free cash flow during the quarter. We defined free cash flow as net cash from operating and investing activities excluding business development and changes -- changes in working capital. Capital spending for the quarter was 12.8 million, primarily for software and infrastructure. Our new Atlanta-based data center buildout, Canadian merchant terminals and DolEx branch expansion. Our U.S. infrastructure and data center expenditures relate to the plan consolidation of our two U.S. platforms and the exiting of our shared service agreement with NBC Health.

We continue to expect 30 to 35 million in capital spending for fiscal '05. Our business development line for the quarter reflects our Europhil acquisition which was acquired on December 21, '04 for approximately 20.6 million or $18 million net of cash required. Finally, we paid down 19.4 million on our U.S. line of credit during the quarter.

Paul will now discuss our fiscal '05 guidance and our ongoing strategy. Paul?

Thanks, Jim. Based on our strong quarterly results, we are raising full-year fiscal 2005 annual revenue guidance to a range of $774 million to $781 million or 23 percent to 24 percent growth over $629 million in fiscal 2004. In addition, we anticipate a continued improvement in earnings contribution from our DolEx and MUZO channels, both 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 earnings per share guidance to a range of $2.31 to $2.35 reflecting a 32 percent to 34 percent growth over our $1.75 normalized diluted earnings per share for fiscal 2004.

We are also tightening our fiscal 2005 operating margin guidance to a range of 20.6 percent to 20.8 percent. We are once again delighted with our results and achievements this past quarter, which reflects 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. Operator, we'll now go to questions.

Thank you. Ladies and gentlemen, we will now conduct a question and answer session. [ operator instructions ] . One moment please for the first question. Kartik Mehta from FTN Midwest Research, please go ahead.

Good morning.

Good morning, Kartik.

Good morning, Kartik.

I have a couple of questions on DolEx, now, Paul, that you've owned, you've now that you have owned the entity for about a year, your thoughts on potential number of branches. I think at one point, I think you said that you could do about 1,000 branches -- easily do 1,000 branches and continue to maintain a very respectful growth rate. I was wondering if you could get your thoughts now that you've owned it for a year and have had some chance to look at how it really operates.

Well, Kartik, that's a great question. I, I think it is always a balance, isn't it, which with anything where opportunities like this exist. On, you know, what is the near-term impact of making that type of investment. Assuming that the, that the opportunity exists, which it truly does with DolEx, we could -- DolEx could be a multitudes bigger than it is today. It is 680-plus branches today. It could be a lot bigger than that.

So the question is, how quickly do you open those, what's the infrastructure to manage that, and, you know, we're going to be -- we're going to be updating that with guidance given for fiscal '06, but at present, we feel comfortable with opening about 20 a quarter net, meaning that's net of closings, 'cause we close a number of branches that don't perform as well either.

So in summary, I think DolEx has a terrific opportunity in front of it to open branches aggressively, somewhat tempered by the impact of the investment and stress on management to -- to properly manage a disciplined program of advancement.

You know, Paul, as you look at the money transfer business, maybe go out three to five years, I know you added some corridors with the Europhil acquisition, but as you look at the money transfer business both in Europe and the U.S., three to five years out, you know, how many corridors do you anticipate serving? The current ones you have now? Or do you anticipate that you will add corridors to maintain the current growth?

I think that, Kartik, where we are today is primarily the Latin American corridor. I mean, with Europhil we picked up a couple of interesting opportunities, Morocco and India being two in point, but most of the Europhil business, 80 percent of it goes to Central and Latin America and obviously, 100 percent of the DolEx business goes to Latin America. A tiny bit to the Caribbean but almost 95 percent to Latin America. We have about a 10 percent market share of Mexico which is our biggest piece of that pie. The rest of them are much smaller.

So the opportunities to expands just in those corridors, even three to five years out, I think is enormous. So, although we may be opportunistic, and I don't want to, you know, box us in five years hence, but I feel that we are best -- best to focus on the opportunities in Latin America and to take advantage a little bit of what some of the new areas open us to through Europhil. So I wouldn't look for us to be opening up any new dramatic markets outside of those corridors.

You know just one thing I will add too, there's a study by the Pew group that just noted the amount of undocumented workers in the United States have risen just dramatically. I mean, over the last -- over the last five -- four or five years it has gone up 23 percent. Primarily Mexican, which is, you know, absolutely the sweet spot of our market. So you have two things happening. You have a great market that is expanding dramatically and us with what we think is a relatively small piece and a great model to take advantage of that.

Kind of one last question, Paul, for you. On the U.S. merchant side of the business, I was wondering if you could talk about the number of transactions, the Visa transactions that might be impacted by this new category or enhanced category for the rewards part of the program?

Okay. I think the -- the long -- the short answer is, we think it is going to be modest at first, although I think Visa and Mastercard followed suit with something they called their World Card which is similar to what you are referring as Visa Signature rewards and traditional rewards, where they created a new interchange category to provide incentive for merchants -- excuse me for card issuers to issue cards that have these rewards program, which is an answer to American Express signing MBNA and Citibank and potentially others for a program that provide a higher interchange but those require an enhanced rewards program.

So, Visa and master card have answered with their signature rewards, traditional rewards and world card program that pays interchanges as high as 190 and $0.10, on the Visa scenario, slightly lower for Mastercard. But I think it is going to be, you know, kind of single digit, my guess, that we will see impacted in terms of the business that was historically a traditional card versus this, but, you know, we'll wait and see. Either way, Kartik, it doesn't have a big impact. I mean, these are, these are pass-throughs, and, you know, we'll -- there are over 100 categories of interchange today between both associations. I mean significantly more than a 100. And this -- these are just a couple more.

Jim, quick question for you if I am reading this right. You had a big change in the settlement processing line on the cash flow. Is that more of a timing issue? Or was that something specific that happened this time around?

The settlement line is hard to ever predict. It depends on the day you close and I think we closed a Monday and that happens to be a big funding day from the weekend.

Thank you, guys.

Thanks, Kartik.

Thank you, Greg Gould from Goldman Sachs, you may ask your question.

Great, thanks. Hi, guys.

Hi, Greg.

On DolEx, you mentioned the target for growth for this year should be in the low to mid-teens. But you should be anniversarying the price -- repricing of -- of transactions, correct? So if transaction growth is running in the 20s, should we be thinking of sort of '20ish' percent growth going on -- going into 2006?

I think this -- firstly, let, let me -- what you said is accurate. We, that did anniversary, and the reason that we can -- we can look forward to this low to mid-teens and we feel confident is that it did anniversary, and we are, in fact, enjoying something greater than that rate today, but you balance that with what we got in the early results which is more modest because of the price decrease, although we got a big transaction boost.

Now, so the question is, that has anniversaried, we are enjoying more in that today, does that continue next year? And Greg, I'm just not prepared to give guidance on DolEx for '06 at this point, but I promise you we'll have an answer for that when we, when we provide that guidance.

All right. In an effort to push you a little bit, is there anything that you foresee impacting or causing growth to slow?

You know, quite frankly, we feel bullish on -- I just mentioned something about this study that Pew did.

Right.

We think that if anything, the -- the metrics all look very promising, but you're going to have to wait and see, Greg.

Okay, I tried. And then, Jim, on Canada, you mentioned there was a one-time revenue event of 800,000. What was that for?

We had a customer who -- a large customer in Canada who was -- had a new agreement or a renewed agreement and extended. I don't remember the exact time, but within the last year, and under that agreement, they were supposed to move their business from lease line to IP, and they weren't able to meet the objectives, and as a credit to our team, they went back and showed them the contract, and the con -- and the Company honored the contract and made us whole on some expected lower costs for us that never occurred.

And we recorded it when we received the check in the quarter, and we just wanted to make sure that you understood that perspectively, that was not an event that would reoccur.

Okay. Let me just sneak one last one in On Europhil. Can you quantify the impact of reducing the settlement cost by 40 percent? If you take the annualized revenue at the time you acquired it, how much would that save you going forward?

We wouldn't necessarily break it out. We were just trying to give you an order of magnitude as the last couple of acquisitions we have done, MUZO and DolEx, have not been about cost containment , we're look -- or synergies per say, it just happened because Europhil plays to the same market as DolEx does that we were able to pick up the synergy that we expected during due diligence and we were able to realize it in a very short period time.

Paul also mentions moving to a common system, which will occur by the end of the summer, and that is -- is not necessarily as much as a specific savings, but as we said in the comments, it will give us greater flexibility on pricing and control over the business. Their current systems are excellent, it's just -- if we are going to continue to expand this business, it is ease tow have it on one common system.

Okay, thank you.

Thanks, Greg

Wayne Johnson from SunTrust Robinson Humphreys Capital Markets. Your line is open.

Yes, good morning, everyone.

Hi, Wayne.

Quick follow-up on DolEx. Could you give us a little more color on how New Jersey is doing, how many branches you have in that particular state, what is the status of New York? And I have some follow-ups.

Okay. Wayne, firstly, we are -- we have a modest number of branches. I think -- I think it is 3 in New Jersey, and we're just starting to process some transactions. It is a -- you know the -- the hispanic markets are stratified by which countries people come from, an it's not as heavily Mexican which is kind of our sweet spot, but we are -- we're sticking our toe in that water and so far we are encouraged.

The New York process still continues -- although, I have to tell you with the -- with the regulators, and that is moving along. We are still not approved yet for New York, although part of that, quite frankly, is our fault. We haven't pushed it as aggressively because we think there may be some entry opportunities in New York through a modest acquisition or two that would allow us to then seek approval that way. It's actually a faster process and makes more sense. So, we kind of slow walked that New York formal approval through all those channels, and we're seeing if another opportunity doesn't open.

I'm sure you have seen a lot of information, and it even got play on things like national public radio about banks putting -- virtually putting some of these small money transfer operators, who have booth and store models, basically out of business. And, so there are some opportunities to pick up some business [inaudible].

Okay. Terrific. And, as a follow-up, can you talk a little bit more about expansion in existing states, where do you want to focus? Where do you want to be?

I think with the exception of New York, Wayne, we got -- we pretty much got them all. I mean there's a -- there's a -- I mean, that was the last big state with a huge hispanic population. I, I don't -- I don't have it in front of me, maybe Jim knows, where Raul is talking about expanding other states.

No, I think the focus has been this last year to round out existing markets that were in a roughly 18 or so states, 19 states that we have approved, and while we'll probably are continuing to expand throughout the country over time, as Paul said, we're going to stay within the major markets that we are currently in and try to expand either through opening branches, new branches, booths, or acquiring small money transmitters who are finding it difficult to compete in this market.

And, Wayne, as I said in an earlier question we could literally double the number of locations we have in any of the states we are in today, literally.

Okay. And, also, Jim, on the cash flow statement, how does DolEx/Europhil, MUZO impact, like, the settlement funds on the cash flow statement and also what's the impact of currency on that?

There's no impact in terms of settlement. We settle -- we purchase pesos to settle in the market daily, in the morning, and each of these transactions as we represent to our customers are settled within five minutes. So there is not necessarily an affect that you see relative to a MUZO business or the Canadian business. And there's not a receivable, outstanding -- this is a cash and carry business. They pay us cash at the window and so we settle our receivable at the point of sale. The only -- in some of our instances, somebody may not pick up their transfer, in the settlement location and that would just be shown as a liability in the working capital.

And I apologize if I missed this in the opening remarks, but did you guys give a breakout of just the domestic business by itself. I think you guys said that volumes were up in the mid-teens. Did you give a revenue number or growth rate for that?

Mid-teens was the -- was the -- was the comment that we made in the opening comments.

Right, transaction volume. Was there anything in revenue?

Ten, mid-teens.

Okay. All right, thank you very much.

You're welcome, Wayne.

Paul Bartoli from Credit Suisse First Boston, your line is open.

Good morning.

Good morning, Paul.

First question's on MUZO. It looks like there's a pretty nice step up there sequentially in the revenue, is there anything specific going on there?

You know, Paul, we talked about adding Home Standard Bank and that revenue's starting to kick in, so last call we mentioned Russian Standard Bank -- no it was Home Standard -- Home Standard Bank we mentioned in the last call, so that , that revenue has kicked in. That's part of it. And we are also getting robust growth from our existing client list, and I'm also pleased to say there's a healthy pipeline. So I'm very happy with what's going on with MUZO, and you're right, there is a -- there is a sequential kick-up in revenue and we are expecting that to continue.

Okay, great. Then just on the --

One thing else, Paul. I am sorry, Home Credit Bank.

Home Credit.

We tried every name.

Yeah, every combination.

Then just on the cost of services and SG&A lines. Is there any impact from mix that's impacting that? I mean, cost of services was -- the expenses were a little higher then we expected and SG&A was a little better than we expected. Anything unusual going on there?

Yeah, you're going to find from quarter-over-quarter depending on the timing of when businesses were acquired has an impact, and then just the seasonality, but there's nothing in particular that occurred in each of the -- in the quarter relative to those lines.

Okay, and then, lastly, just on -- in the ISO channel, sounds like you are having a lot of success there. Can you just talk about any trends you're seeing in that market and maybe what you're seeing as far as a competitive environment goes, assigning ISOs?

Paul, it remains competitive. That has been a constant theme. However, I'm very pleased to say the we are continuing to keep all of our business and we're signing additional merchants we -- additional ISO's as we announced assigning this quarter. And the business is growing.

It's still a great model. We are -- we are honored and pleased to be doing business with, what we think, the top ISOs in the country and these guys are going from strength to strength in terms of executing their models. So that is just a great business for us. No significant trends other than that and competition remains keen, but we're holding our own.

Okay, great, thank you.

You're welcome.

Robert Dodd from Morgan Keegan, your line is open.

Thank you. Congratulations. This is actually Ajay, congratulations --

Ajay, how are you? Thank you.

-- Paul and Jim. Couple of questions. One, as we look to April 1, are there opportunities to round up regarding the changes in interchange that'll be implemented by Visa and Mastercard?

Yeah, Ajay, there is. I would caution you, though, it is going to be much more modest. You know the -- the so-called Wal-Mart stuff that happened, there was actually reductions and when something goes down, you have a much more significant opportunity to take advantage of that. When you raise rates, for the national merchants, it's just a pass opinion through. For your smaller merchants you keep a little bit, but we're talking -- you know, we're talking basis points here or fractions of basis points in some cases. So it's -- it's going to be a much more modest impact.

Okay. And then secondly, you -- as you had mentioned, you guys have had tremendous success in the ISO -- in the ISO marketplace, can you tell us, are there any specific characteristics of the new sign -- like either the resignings or the new signings of ISOs in terms of the, the contracts residuals?

It continues, A.J., it continues to be more, y ou know -- it gets thinner, but still we're making wonderful spreads on this business, even recognizing that -- how we recognize that revenue, we still make great spreads on the business, but it's very competitive. There's a lot of people would love to have these relationships. We spend a huge amount of time and energy. We just -- last year I talked just about this time about our payments conference for ISOs.

We just had another one of those where the CEO and owners of these ISOs go to a very senior level conference with senior executives from the payment associations and a very small senior group from -- from Global Payments, and we talk about industry issues that we all have in common and how we can better serve them. And that's the kind of emphasis and time we devote to this channel. They have total access to any of us, at any time of day, literally, 24 by seven. So we, we take that channel very seriously and I think that's part of our success.

And also, on the ISO channel, just because -- it seems like there's a much -- there's a much stronger push for multi-applications or prepaid, just A variety of different applications for the ISO to sell. Do you have any thoughts or comments on that?

Now, see, the ISOs are -- these are very smart business people and they're always looking for opportunities to sell other services to their merchants. I mean, that is their, their value -- they have that relationship with that point-of-sale and that merchant. So, yeah, we -- we continue to see they've always sold in checks and debt, and you're right, prepaid cards and gift cards and store value cards and other things like that continue to get momentum. As merchants are interested the ISOs are the channels that presents it to the small merchant community.

Okay, and then, Paul, one last question. Thanks for the time. Could you give us kind of an update on the DolEx Loyalty Program. Are you getting any kind of data or feedback that you can kind of -- either quantity or just give us qualitative feedback regarding the DolEx loyalty programs?

It is going well. It's still, it's still, you know, in its infancy. We're just rolling it out. We made progress since the last call in getting some more data back. It's all very encouraging in terms of acceptance from our -- from our customer base. But as of now, Ajay, it's, it's ver -- it's really -- it's still actually in the beta. But what we are get something encouraging us, I would fully expect us to be rolling out this -- this program next fiscal year.

Very good. Thank you for time.

You're welcome. Thank you.

Thank you, Tien-Tsin Huang from JP Morgan. Your line is open.

Thanks and good morning.

Hi, Tien-Tsin.

Has the competitive situation changed in Canada? Maybe you can us more detail on the repricing initiative. Sounds like maybe the pricing structure changed out there?

You know, thank you for that opportunity, that's a great point. Because there's been some speculation. Canada -- Canada is a very competitive market. We have Monaris and some other new players, that you guys are all aware, who are there aggressively trying to get business. We're growing that portfolio overall. Pricing still is very competitive but I haven't seen any -- in fact we had a little tick-up in our spread because of repricing initiatives. So it's, nothing really to report there honestly.

The reason that we were a little cautious about next year's growth rate being -- you know probably kind of high single digits is that the Canadian business itself is growing at that or less. So we -- with the market share we have, at the end of the day, you can only grow so much faster than the entire market is growing, and that's -- you know,that's part of the dilemma. I would not read in competition is going up, they are doing anything to us, because that's not accurate.

Okay. Good to know. And then on the -- the domestic indirect side. Should we expect any changes in trends there going forward? Were it's allowed to stabilize

Once again, I don't see any real trends or changes in domestic or direct from competitors or spread bases. We expect pick-up from this April interchange and the growth rates there are obviously very robust. We are feeling very good about that.

Actually I was speak morgue to the indirect.

Oh, the indirect side, I am sorry, Tien-Tsin. On the indirect side it's declining in the kind of high teens. Stabilized at that. That continues. It's not going to fall off a turnip truck, but we don't think we're going to reverse that.

Okay. Lastly, any noticeable change in merchant attrition rates in the quarter?

the merchant attrition rate remains in the ISOs in the 20 percent and our direct business 10 percent range and that's constant. And just one clarification on Canada. I think Jim correctly said we talked about single-digit growth, and I said high. I think the -- the party line is single digits. So let me correct myself on that please for Canada?

Got it. Thank you.

Thank you.

Well-done.

Roger Freeman from Lehman Brothers you're line is open.

Hi, good morning.

Good morning.

I'm, I'm sorry. I'm a little confused on Canada. I just wanted to try to clarify. I think Jim was talking about a customer earlier that -- I guess is -- that -- that impacted the revenue growth rate during -- during the quarter because of some catch-up. Was that related to Canada? Or was that something else?

Roger, it was. It was a one-time payment of about 800,000 U.S. It was Canadian dollars but it's about 800,000 U.S. is what it resulted in. It was a one-time because they had been incorrectly charged based on an assumption. The customer was very honorable about this, by the way, and expected to and was pleased to make a payment. Now, it also does get a little impact going forward because it was a correction and it was a catch-up, but there is a positive impact going forward for this particular customer that we will continue to enjoy.

Okay. So that -- but it sounded like there was some, maybe some impact this coming quarter and then you're -- you're kind of forecasting that that falls off in the first quarter of -- of fiscal '06? How is it that we go from sort of mid-teens back down to single -- or sort of double-digit back to single growth?

Yeah, we had double-digit revenue for the quarter and that was partly -- it was a couple of things. It was some decent growth we've gotten and some new signings and some -- and the base business is doing fine. It was merchant repricings, it was a little bit of Canadian exchange, and -- and then lastly, it was this one-time event. Not strictly one-time because there is some residual value going forward but that 800,000 was unique to Q3.

Okay. Would the growth have been more in the -- in the high single digits excess?

If you took out that one adjustment would you have been down -- I don't know precisely but closer to the single digits. And all we're trying to do is make sure that as you look ahead, that we don't expect the Canadian businesses move to a double-digit business at this time. We still have a significant market share in that market and single digits where we expect the business to be and that's why we wanted to guide you in that direction after you get past the fourth quarter.

Right. Okay, that -- that's helpful. Thanks. And then I wanted to just move over to DolEx for a second. Can you quantify what the -- the same-store transaction growth rate is in the context of the overall 20 percent growth rate?

You know, we haven't been separating same-store growth but, as Paul said in his comments on DolEx, as we've gotten past the repricing step we took last year and we discussed on this call last year, is the business has done -- has responded well.

Okay. Can you maybe review where -- you know, with an average store, kind of where the break-even transaction rate is, what that is, and then maybe given -- given the rate of which you have been adding new stores, maybe what percentage of your stores are below that, so we can get a sense of what the -- you know, the operating leverage is going to be or as they ramp up?

We haven't -- we have talked -- we have spoken in the past directionally about what our costs are when you , on -- on operating a branch, these facilities, whether it's a booth which costs, I think, seven or $8,000 to erect versus a stand-alone store. Once those buildings are up, the variable cost of running a transaction is relatively small. So it does not take all that long to get these businesses to a cash flow or a variable break-even.

If they're not say, within 12 months of opening, 75 percent of our locations are booths, which are a store within a store, and they're simply moved to a -- a new location. There's little or no trailing costs to actually relocating the -- these locations. So since there's very little investment in a -- a new location, and you assume it's positive within 9 to 12 months of opening, I think you can kind of get a directional sense that -- of -- of what a -- a store opening plan would look like if we're continuing to open at rate of about 20 a quarter, coupled with acquisitions we do in this market.

Right. And then I guess, just this lastly, I know you probably don't want to talk about the margin in the business, but you've heard -- can you give us a sense for maybe the delta invasive points year-over-year, how much that money transfer business is up?

We don't currently separate out those two pieces, but as we've said in the com -- in the comments, the contribution from the business was better this year than last year. We have been pleased both on the top line and on the bottom line.

Okay. When you look at sort of other -- the other, you know, the public money transfer companies, where you see operating margins, you know, anywhere from 20 to 30 percent, I mean, are margins in those -- in that range obtainable given your business structure, in your opinion?

Yeah, I think the answer is -- the answer is yes. The business is close. The mature stores are accretive to our overall margin. You know, the new locations that Jim talked about, obviously pull that back. Overall they're, you know -- DolEx is pretty close to where our corporate margin is. And, yeah, we think this has terrific leverage this model, particularly if we're able to take advantage of some of the opportunities like store value cards and others. So, yeah, I think those are -- I think those are -- we're already enjoying margins in some mature locations that are at that level.

When we acquired the business a little over a year ago, this was the business in high teens in terms of their margin, and because the model, just like our core business here in -- in merchant lends itself to leverage, the more transactions that we can push through the system, that margin will continue to improve. Where it actually goes to, I think, has a lot factors that I couldn't guess at this point.

Okay. I really appreciate it. Thanks.

Thanks, Roger.

Thank you. Mark Sproule (sp) from Thomas Weisel, your line is open.

Thanks. Just really quickly on the MUZO side. You guys have spoke on numerous quarters in a row about the, you know, the large customer expected to lose and we are now expected to lose them in the next coming period and you guys have indicated you will lose him in the middle of '06 there. Is there any potential that you actually will be able to maintain them? I mean, obviously, he's been -- he's maintained on the , on the platform for quite a while at this point.

Nope. Mark, I -- we don't think so. He has a contractual agreement that they signed when MUZO was not in a position to provide these services. We are in a position. Obviously, we'd love to do it. I think that the other -- the other processor is not in a position to fully live up to their obligations at this point, but we think it's unlikely that they are not forced to honor this. But we will clearly take all of that into consideration when we give guidance on MUZO, and, you know, I -- I'm feeling very confident that MUZO, with -- with that deal gone will continue to be a good grower.

Gotcha. On the -- on the DolEx side of things, with growing the locations kind of 20 -- 20 a quarter. Are -- is there any, any sort of impetus to, to sort of follow the lead that you're seeing by either some of your other money transfer competitors that are partnering with banks that have indicate interest in the space or, you know, maybe accelerating that growth through different types of branch location methodology?

You know, we -- we've actually had some dialogue with some very interesting players that we think kind of get it on the Latino market in particular. And, yeah, that -- that's a possibility.

Gotcha. On the Europhil. I know that you guys had -- you'd commented on this earlier about sort of corridor openings, but with Europhil specifically, obviously there's been a pretty big growth in the internal EU, western European to eastern Europe transfer market. Is there any increase in focus on maybe, you know, opening up the gates of what Europhil focuses itself on? To take advantage of kind of the cross migration of -- as sort of Eastern European accession continues?

You know, Mark, I think it -- I think for the foreseeable future for next couple of years, we will get this thing integrated into the summer, and it's -- then we're ready to rock and roll with expanding these 27 branches to something that'll be significantly more than that. You know, we are so underpenetrated in where we are now, Spain in particular, Belgium and the UK. We've got one location in the UK. And there is an excellent article out about -- excuse me, two locations in the UK.

There's an excellent article out about Spanish immigration policy, and the fact that even though there is high unemployment, almost 10 percent, that all these construction jobs and all the jobs that -- that are going to drive that economy from a -- from that perspective are -- are of no interest to the Spanish population, and Moroccans to some extent, but a ton of South Americans, are flowing into the country and Spain is very open to that, so we see that dynamic continuing to grow too.

So I guess the windy answer to your question is, we're going to focus on where we are today, for the next couple of years, in that business.

Gotcha, one last question. On your own internal sales force. I guess we've spoken a lot about the ISOs and the indirect channels, but, are you starting to see pretty significant traction of that sales force as the, as the building out of clients that you're signing? I guess you'd mentioned that they signed, you know, a couple hundred thousand or what not.

Yeah, just -- no real changes there, Mark. It's been pretty -- we had a big pickup a couple of years ago where we literally doubled productivity and we've been maintaining that level, I'm delighted with it. I think in terms of productivity per individual we're probably one of the best industrys, at least that's our opinion. And, but no, no real change there, kind of steady state, and no significant change in the number of salespeople. Always ticks up a little bit, but nothing significant.

Great, thanks.

Thank you.

Tony Wible from Smith Barney, your line is open.

Great, thank you. Paul, first want to congratulate you on the acceleration you guys saw on the organic growth and I kind of read into that, that, you know, MUZO is now becoming a little bit more of a driver -- I'm sorry, DolEx becoming a little bit more of a driver there and so I had a question of DolEx-related questions.

One is, if you could just recap both the revenue and transaction growth? And whether or not there's any disparity between those two as there has been in the past or are we find of fully anniversaried to the point where, you know, transactions and revenues are growing at the same pace?

Well, first of all, thanks for the comment about organic, Tony, I appreciate that.

And the question about DolEx is that we did annivers -- anniversaryize -- annivers, if there's such a word. We did get the anniversary of the reduction, and now the transaction growth and the revenue growth are much closer to one another than they were, and, of course, the bigger question, does that continue? And I'm not prepared to -- to give any real guidance on that at this point, but, you are correct, the revenue growth is -- has ticked up significantly.

And even though you thought you misspoke, I think MUZO is having an impact. I mean it was a pretty small deal. It's, it's growing pretty nicely and I think, will help drive some of this organic growth you're seeing.

Is there some delta, though, between transaction and revenues, at this point, on DolEx and also on DolEx; you know, when you had first done the deal, you had mentioned that it had kind of a below corporate average margin and, and that was obviously a year ago when margins were notably lower. Can you provide some color today as to where we are relative to the corporate average? From your comments, it seems like maybe you are getting to the point where it's actually above the average and starts to pull it up?

No. This is a -- Tony, this is Jim. This is a business that -- does very well in the summer months. It's not as strong during the winter months because it's primarily construction and agriculture where the -- the users of the service work. And so we're coming through the winter months, as compared to last year, the business has done better because as you -- we've, we've talked about, we've not needed to do the -- the repricing again that we did a year ago.

So our expectation was we were able to set it once and then let transactions of -- for growth and that has -- has worked through this first year. In terms of where the margin is, you know, it is, as I said when we bought the business, it was in the teens, mid to high teens overall if I remember, and as the business continues to grow, we're going to continue to see that grow as it moves north of the Company average. It is obviously going to be continually helping us move our overall margin line up.

And are we at that point where it's crossed over the Company average?

You couldn't -- not this year because -- or not this quarter because the -- this is --

seasonality.

This is the slowest quarter they've got. So you're never close to the company average, but if you compare it against how they performed the last year, they did better than they did last year, but they're not near the Company average for the third quarter.

Yeah, Tony. I think our expectation is reasonably near term that -- that DolEx will have a margin that is very close to where we are at the Company.

I mean, because as we said before, mature locations and clearly to Jim's point, when you take in a heavy season, they are accretive margins to the Company. So I think this is a -- this will help the margin driver and the transaction and revenue to your first point, there is a little difference, but it's pretty close right now.

And while it is relatively small in overall size, remember, Europhil came in this quarter and Europhil was a drag --

That's a great point.

-- in the quarter because it is -- it doesn't have any -- anywhere near the size that it needs to be the kind of producer that DolEx is, but we bought it early in its life cycle, and over time, we expect it to move toward the DolEx numbers and beyond.

That's a great point. And also me -- let me add that we are doing same thing there that we did with -- with DolEx in that we are taking down pricing somewhat to drive transactions as having the same impact there as well.

Great. One last question. And is it, you know, I guess it was some time ago, but it was a deal with Sears that you guys had talked about in its early phase and basically trying to leverage your network in alternative ways. Is there still initiatives out there to try and figure out alternative ways to leverage your merchant processing infrastructure?

You are not speaking to DolEx, you mean just in general new payment cards, et cetera ?

correct. Where you were going to actually take the Sears private label card and let it be used in other alternative locations?

You know, Tony we spend a significant amount in time. Jeff Baker heads up our strategic planning efforts, he looks at that quite often. And, yeah, we think that is a long-term value proposition that we bring to the party. Over a million relationships in North America with merchants that we are able to deliver other things to them, nothing to discuss at this point. But yeah, we spend a lot of time and energy discussing that very point.

Great. Good quarter, guys.

Thank you very much, Tony

Greg Smith from Merrill Lynch, your line is open.

Good morning. This is actually David Parker for Greg Smith. We're just hoping to get an update on the, the gaming segment and the opportunities you're seeing in that business?

A year ago as we mentioned we purchased the Cash & Win business, and we have now moved the processing from the Comerica relationship on to our bend relationship and have integrated the business into our business.

I think that , you know, nothing specific to report other than the progress both on the check side as well as the gaming and some new products that we've rolled out have been very positive, and I think the -- to the extent you get out to Vegas, you'll see us in the Bellagio and many of the other major establishments. While that is not our major focus, it is knew nice to be in some of the bigger places but, I think we are doing fine.

Can you talk about the type of growth you're seeing in that business and what you expect growing forward?

I think growth is a function of the different lines. So our VIP preferred card which is the check-cashing card, has been a very strong grower -- strong double-digit grower, more traditional in established lines such as our -- the Cash & Win product that we acquired from Comerica is more in line with the overall growth in the credit card business, and then we have a variety of new products that are growing at, you know, over 100 percent just because of their size.

But overall, the business, as I mentioned, is trending where we were expecting.

Great, thanks, guy

Thanks.

Once again, if anyone does have a question, please press star one on your touch tone phone. Dan Perlin from Legg Mason Wood Walker, your line is open.

Thanks. Paul, my question really pertains to your comments about the technology platform for DolEx and Europhil, and I'm assuming that the first opportunity to actually share the branch network and then, let's say, the Europhil settlement network will be once that's converted, or can you do that today?

We are -- what we talked about, Dan, was that -- we got the benefit of our contracts and our contacts with getting better settlement rates, but you're correct, to actually be part of this system, to get the full IS that DolEx has versus the Europhil system, which, by the way is not bad, but it's not the DolEx system, we won't get the full functionality or benefit of that or, and the cost savings of that until we have that, and we have that integrated, and we are looking at kind of summer to end of summertime just to have that happen.

Okay, just so I understand this in it's most basic form, you can't make it -- you can't go to a DolEx branch today and send a transaction that will get settled through a Europhil network until the end of summer?

That is well said and that's correct.

Okay. Another question I had was, this Home Credit Bank, if in fact that is the right contract.

It is.

Oh, okay.

Thank you for pointing that out.

No, no, I just want to make sure.

Looked to be a one of the reasons you mentioned, for MUZO having such a big step function up and I'm wondering, is this the type of contract that we should come to expect out of MUZO? Because even if that was half of the reason for the sequential improvement, that's a major contract.

You know, Dan, I think the answer is, yes. I think without boxing us in too much --

Like 12 million annualized.

Pardon me?

Like 12 million annualized.

Well, I won't -- I'm not going to box myself in that much. But typically these are -- these are long sales cycles, a year-plus, but these are big deals. These aren't signing up merchants these are signing up major financial institutions who make big commitments and are very, you know, are very circumspective about them and it takes a lot of hard work and selling to get them to con -- to convinced, but once you do, it's a , it's a -- it's a big deal like Home Credit.

So, yeah, I think these are -- these are going to be cases in point as our sales staff, which we are expanding aggressively as we speak, all through Central and Eastern Europe, are out signing new business. That's what we hope to expect from MUZO, and quite frankly, Dan, when we bought that deal, that's what I said. It is a nice business but if we end up growing this thing kind of modestly I'll be extremely disappointed because it's a -- it's a window to that massive market.

And do you have a pipeline of deals that let's say you are in already the sales cycle 12 months deep or --

I think we have a pretty good sized pipeline where the sales cycle is probably more like six months deep -- with probably months and months to go. So it's going to -- so it's going to, you know, this is -- this is going to take a build.

Okay.

-- for time.

And earlier in the call -- I just missed it. What was the DolEx contribution into revenue? Did you say 22 million? Jim?

It was $21.3 million.

So that was still a good quarter despite its season me weak time period is.

Yeah, compared to last year third quarter when --

Yeah, or even last quarter.

-- you guys had a lot of questions about our third-quarter and expectations. I think on a comparative basis, DolEx did terrific.

Yeah, okay. Thank you very much. I appreciate it.

Thanks, Dan.

And I am showing no further questions at this time.

Okay. Well, thank you, operator. And thank you all for joining us today. We appreciate your continued support of Global Payments.

Thank you.

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