環匯 (GPN) 2005 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to Global Payments' Fourth Quarter Earnings Release and Fiscal 2005 Year-end 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]. As a reminder, today's conference will be recorded. At this time, I would like to turn the conference over to your host, Vice President of Investor Relations, Jane Forbes. Please go ahead.

Thank you. Good morning, and welcome to Global Payments' fiscal 2005 fourth quarter and year-end conference call. On today's call, we will discuss our quarterly and year-end financial results and business highlights. Joining me on the call today are Paul Garcia, Chairman, President, and CEO; Jim Kelly, Senior EVP and CFO; and Joe Hyde, Senior Vice President 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 July 20, 2005, which may be located under the Investor Relations area on our website at 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 financial results and review recent trends and events, then Jim Kelly will discuss the financial results in detail. I will then discuss our fiscal '06 outlook, and lastly, we will have a question and answer period.

Now, for our financial results. We are very proud of our fiscal '05 accomplishments, and I am delighted to announce another successful year of strong financial growth. For the fourth quarter, our revenue grew 14% to $207.7 million. Our normalized diluted earnings per share grew 39 percent to $0.64, and our operating margin improved by 200 basis points, 2% to 20.8%. For the year, our revenue grew 25% to $784.3 million, our normalized diluted earnings per share expanded 37% to $2.39, and our operating margin improved 140 basis points to end the year at 20.9%. These robust results primarily reflect strong growth from our consumer money transfer channel and our central and eastern European operations. Our North American merchant channel also showed strong results, primarily due to repricing initiatives, ISO growth, and a favorable Canadian currency exchange rate.

Now, for our recent trends and events. Starting in the US, our domestic direct transactions grew in the mid-teens for the quarter. Our domestic average ticket remained relatively stable and our domestic spread declined in the mid single digit. In total, our domestic direct revenue achieved low double-digit growth, which continues to be driven primarily by our ISO channel. In fact, I am pleased to report that we signed two new ISOs and renewed and extended several existing ISO relationships during the quarter. We are expecting high single digit to low teen digit revenue growth for our domestic direct channel during fiscal '06. Our domestic indirect revenue declined in the mid-teens during the quarter and we expect further declines in this channel in the mid-to-high teen range for the next year.

In Canada, we continue to sign prominent national and mid-size merchants and achieved high single-digit growth in credit transactions for the quarter. Our Canadian average ticket during the quarter declined in the mid-single digits due to our decision to exit from our low margin, high-risk contract with Air Canada for processing transactions. We exited the Air Canada MasterCard contract during our third quarter and the Visa contract during our fourth. Our Canadian spread increased in the mid-single digits during the quarter largely due to merchant repricing initiatives. Total Canadian transactions were flat for the quarter due primarily to the loss of large debit-based retailer in the fourth quarter of fiscal '04 and as previously disclosed. Our Canadian revenue grew in the double digits during the quarter as anticipated due primarily to merchant pricing initiatives and a continued stronger year-over-year Canadian Exchange rate.

As discussed last quarter we anticipate mid-to-high single digit Canadian revenue growth during fiscal '06. We continue to be delighted with the performance of our Central and Eastern European merchant operations and remain focused on expanding this channel. To that end, I am pleased to share that we now have sales presence in several new countries, including Poland, Bulgaria, and Romania. In addition, we have existing offices in Russia, Slovakia and the Czech Republic. Our European revenue for the quarter grew in the high teens driven by more than 20% growth in ATM and point of sale authorization transactions. In addition, there is a significantly stronger year-over-year check currency exchange rate we benefited from.

Additionally, we continue processing for the large customer that prior to the closing of the MUZO acquisition had given notice of it's intent to deconvert a portion of it's business. We now believe this will occur during the first half of fiscal '06. As such we expect to achieve revenue growth in this channel in the mid single digit to low double-digit range for fiscal '06. Our money transfer revenue for the quarter was $32 million of which 25.3 million relates to DolEx and $2.7 million relates to Europhil.

During the quarter our DolEx transactions grew more than 20% and our DolEx revenue grew in the high teens, primarily due to our competitive pricing strategy, branch expansion efforts and strong industry growth. We added approximately 15 net new branches during the quarter raising our total US DolEx branch network to more than 695. For fiscal '06, we continue to anticipate adding 15 to 20 net new US branches per quarter, and to achieve DolEx revenue growth in the low to mid teens. With respect to Europhil we made considerable progress in leveraging our DolEx infrastructure and as such we have completed the majority of the conversion process to connect DolEx superior technology platform to our Europhil branches.

The remaining conversion of certain back office operations should be completed in early fiscal '06. We remain committed to expanding Europhil's branch footprint in Spain and I am delighted to announce that we have opened two new branches in this very attractive market. Further, these new branches were designed with the less expensive branch layout, which saves 15 to 20% on the initial setup cost.

Moving on to recent events. I am very pleased to announce some executive management changes effective August 31, 2005. Jim Kelly, will be promoted to the new role of Chief Operating Officer reporting to me. In this role Jim will oversee North American systems and operations, including DolEx and our Canadian units, in addition to our strategic acquisition activities. Jim's rigorous approach and diversified skill set is ideal for maintaining a controlled and efficient technology and operating infrastructure. We will all be well served having Jim's full attention and talents focused on these areas.

I am also pleased to announce that Joe Hyde will be promoted to Chief Financial Officer also reporting to me. In Joe's current role as Senior VP Finance, he has responsibilities for Investor Relations, planning and analysis, treasury and corporate development. Joe has been an integral leader of our finance area and has made significant contributions towards the successful execution of our strategy. His background and proven abilities make him the ideal choice for this crucial role.

Lastly, Jeff McWey our former Chief Marketing Officer left Global Payments at the end of fiscal '05 and we are currently undertaking a national search for Senior Executive to oversee our domestic sales efforts as we speak. I am also pleased to announce that our board has authorized a two per one stock split for each year of common stock held at record on October 14, 2005. We expect these shares will be distributed on October 28, '05. Further, any future dividends -- although any future dividends will be declared at our board's discretion. The Company expects that any such dividends during fiscal '06 will remain at $0.04 per common share on a pre-split basis or $0.02 per common on a post-split basis. We are seeing significant share appreciations since our spin in '01, and we are optimistic about our future revenue and earnings growth prospects.

To summarize, we are very pleased with our strong financial results and achievements during this past quarter and I'll now ask Jim to review the financial results in detail. Jim?

In our press release, and as posted on our website, we included GAAP income statements and schedules which reconcile GAAP to normalized results for the three and 12 months ending May '05. The current quarter and full year GAAP results include a $3.7 million restructuring charge primarily related to employee termination benefits, of which 2.7 million was non-cash. Additionally, the prior year quarter and full year include restructuring and other charges of 4.9 million and 9.6 million respectively relating to last year's facility integration program.

Finally we anticipate incurring approximately $3 million in restructuring and other charges during fiscal '06 to consolidate our Dallas call center into other existing locations. These restructuring and other charges have been excluded from our fiscal '06 guidance. Also, in the prior year quarter, interest and other income included a one-time gain on the sale of stock in an unrelated public company of $583,000. My comments this morning exclude these items and reflect normalized results.

During the quarter, revenue grew 14% to 207.7 million and operating expenses were 164.4 million, resulting in an operating margin improvement of 200 basis points as compared to last year's quarter. This margin expansion was due to increased revenue, improved leverage from our consumer money transfer and our European Merchant channels, and our ongoing consolidation and cost containment strategy. These improvements were partially offset by the continued investments made in our direct and ISO sales channels, anticipated declines in our US indirect business as well as, investments to expand our money transfer branch network. Net interest and other expense of 1.2 million for the quarter reflect a reduction from the prior year as we have used our cash flow to significantly reduce our outstanding US debt levels.

During fiscal '06, we expect 2.5 to 3.5 million in net interest and other expense. During the quarter, we have reclassified and reflected minority interest, net of tax below our provision for income taxes on our income statement as we feel this is a more generally accepted presentation. Minority interest net of tax for the quarter of 1.5 million reflected a decline from the prior year primarily due to 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 '06, we are expecting 5 to 6 million in minority interest net of tax.

Our effective tax rate for fiscal '05 was 36.5%, which was less than our initially anticipated rate of 37% for the year due to tax funding initiative and strong international growth. This favorably impacted our diluted earnings per share for the quarter by $0.02. We are expecting an effective tax rate of 35.8% for fiscal '06. In addition we are expecting 40.3 to 41 million in diluted shares outstanding on average for the year without giving consideration to the stock split announcement. We achieved 50.2 million in free cash flow during the quarter and 134.7 million for the fiscal year, which reflects an annual growth rate of 42%. We define free cash flow at net cash from operating investing activities excluding business acquisitions and changes in working capital.

Capital spending for the quarter was 6.7 million primarily for software and infrastructure. Our new Atlanta-based data center build out and our DolEx branch expansions. We anticipate capital spending in the range of 25 to 35 million for fiscal '06. Finally, we paid down 35.6 million during the quarter on a US line of credit.

Paul will now discuss our fiscal '06 guidance and our ongoing strategy. Paul?

Thanks, Jim. Based on our solid annual results we are providing fiscal 2006 annual revenue guidance of $839 million to $870 million, which represents a 7 to 11% growth over $784 million in fiscal 2005. In addition, we are providing fiscal 2006 annual diluted earnings per share guidance of $2.67 to $2.79 reflecting 12 to 17% growth over the fiscal 2005 normalized diluted earnings per share. We are also providing fiscal 2006 operating margin guidance of 21.3% to 21.8%. This guidance does not reflect the impact of any potential new acquisitions, restructuring and other charges as well as the announced stock split. We are proud of our accomplishments and financial results during the past quarter, which reflects the ongoing execution of our strategy and the dedication of our Board and our management team. We will continue to focus on integrating and expanding our acquisitions as well as pursuing other domestic and international opportunities positioning Global Payments as a solid long-term revenue and earnings grower.

We will now go to questions. Operator?

Thank you, ladies and gentlemen. We will now conduct the question and answer session. [OPERATOR INSTRUCTIONS]. Paul Bartolai, CS First Boston.

Just a couple of quick questions on the guidance. It sounds like the domestic direct revenue growth is going to be a little bit lower than we saw in '05. Can you just talk on anything going on there and what's behind that?

Primarily, it is coming off of the year prior when we had a very significant price adjustment as a result of the Wal-Mart settlement with the associations, while those pricing events occur generally once a year, the one that we saw, I guess it was a year ago. August was much more significant, and there was actually two in the year, August and January. There was one adjustment price in April and that will benefit the Company as well, but it will not to the same extent that we saw prior. In terms of transaction growth, the business continues to be very healthy. I think it is just a timing event as you compare the two different years.

Okay, that make sense. And, then on the money transfer business, can you just talk about the competitive landscape and any trend you are seeing there and maybe any impact you expect from FDC's acquisition of Vigo?

Paul, (indiscernible). We are continued to be delighted with DolEx and that in no way takes away from any of our competitors who aggressively are pursuing this wonderful Latino corridor that we are focused on. However, we are growing market share, so the numbers we'd suggest that we are doing very well and in fact since we are growing faster than market we are doing better than our competitors. We are not seeing any real impact from any competitive ventures that anyone is undertaking and we continue to see Vigo, and First Data of course, in the marketplace and MoneyGram also and lots of other smaller competitors. But, we are doing great and we are sticking with our strategy.

Tony Wible, Citigroup.

I was hoping, I know it's not customary that you guys give quarterly guidance, but the first quarter of last year you obviously had a lot of strength there, and that comps up to incorporate here, how should we be thinking about the first quarter, and how should we be building now that you have some businesses that have a different seasonal trend than what you have had in the past?

Tony, it's true that we had a very strong first quarter as we talked about during that time period last year. It even surprised us, the effect of the pricing. As I mentioned earlier, we are now on the other side of that event. So, in terms of incremental growth, I don't think you are going to see that the way you saw previously, but we are not currently planning to provide quarterly guidance, it's annual guidance.

So, your biggest headwind from last year would be in the first quarter, correct?

Clearly, we saw a benefit from, and I don't know if it was specific to just the first quarter. I think other quarters benefited as well, but clearly the first quarter did stand out.

The second question I had is on the platform consolidations, then the second round of it, how soon could we start to see some of the benefits from that, and then how long of a tail would you anticipate from that consolidation having, in other words, are there more facilities beyond just the initial things that you can integrate into the existing new facility you have now at Atlanta?

The consolidation comment I made relative to the DolEx facility, there is three primary facilities outside of the US, primarily outside the Atlanta data center, and there is three customer service facilities both in our St. Louis and Dallas, and Dallas is now really at a size, and we have already completed the Winston-Salem and Cleveland consolidations last year that this was just the next one to go. They don't really have anything to do with the data center consolidation, and that's a combination of moving out of the NDC facility and then also consolidating two legacy platforms. We really haven't given a horizon on when that will be complete. Once we complete the development of the system, it will still then take quiet some time to migrate the customers from the, our old legacy systems on to the new one. So, we don't see it as an '06 event, but the team is working diligently and making good progress.

Adam Frisch, UBS.

First of all, Jim, congrats on the new role, (indiscernible) hasn't really paid off.

Currently, Sarbanes has kept me so busy I haven't been able to take in. So, I think my explanations (indiscernible) right now.

Fair enough. I just wanted to ask you if you can quantify the cost savings you expect from the restructuring plans going forward, and I guess how much more in excess cost can you continue to trim the business, I know you always are looking to trim it, but how much more is there left?

We could get that question consistently. I don't know that I could tell you that we would know when it's enough. I think our view here is, we are only looking for opportunities to find improvements, and we do it in a way that the company can absorb those consolidation efforts. So, trying to do Dallas, Winston-Salem and Cleveland all last year would have been a mistake. In terms of facility consolidations, we are getting less and less as we have less facilities to consolidate in the US. In terms of other opportunities coming, likely the data center consolidation, because there will be an opportunity to also consolidate the Canadian data center into the US after we complete the US piece, I think represents a great opportunity to the Company. We haven't historically tried to break out those specific amounts. We generally just put it in the guidance, and you see the benefits overall, because it's not just one effort. It's a lot of things that we are doing every year.

And in your new role, as you focus on M&A in '06, can you just provide us a little insight as to what your focused on, and where you are spending more time? Is it on the money transfer side or the build out of merchant services service in an emerging market?

I think the strategies we have talked about for the last couple of years in our history (ph) is going to be more outside of the US than inside of the US. It doesn't foreclose out US opportunities, but the US opportunities tend to be far in queue between since the consolidation here is already taken hold. I think Europe and the Asia-Pacific markets to us are right now the most attractive on the card side. And the money transfer business, we are going to continue to focus on acquiring, as well as opening branches in the US. It's a great quarter for us. We are going to continue to expand it now with Europhil in Spain, and we have just opened a couple of branches there and are actively, now that we have moved from the Europhil system on to our DolEx system, we are going to actively look to acquire in those regions. The challenge is you see more aided models than branch models, so I'm not sure we'll see as many acquisitions as we roll just organic store openings.

If I could stress one more and switch gears here. Can you just talk about the competitive environment a little bit in the smaller merchant market? Are you seeing more competition, were your relationships with ISO partners getting anymore challenging in terms of pricing or other deal terms as vendor start to increase their presence in this particular market?

Adam, we haven't seen any trends worth to note, this market has always been incredibly competitive on the mid to small merchant side and continues to be highly competitive. In terms of people who are after ISOs, their ISOs were not considered as an attractive opportunity. I think there are a number of financial institutions and financial institution service providers who are after that business more aggressively, but we have been successful in renewing a bunch of deal signed to new (indiscernible) that we announced on this call just a couple of minutes ago. So, we feel very good about our ISO growth. And it's helping fuel on the top end, a teen of revenue growth in our direct channel.

You just ran real fast on the contractual terms with your ISOs in terms of by duration and exclusivity and ability for either sides to terminate them?

They are generally no less than three years probably not more than five years. They all have some level of exclusivity. I think the reality is we provide a good service. We generally get a 100% for the exclusivity levels or north of 75, 80, 90%. And usually what they are doing is carving out a small piece because there maybe a front-end product that we don't offer and we are not certified to that one of their agents want to sell and want the ability to meet their agent fees.

Tien-tsin Huang, JP Morgan.

Can you just talk a little about the implications of CardSystems security breach and VISA's decision, I guess to shut them out. Curious to know if that will have any impact on the ISO market and simply if you think it could (indiscernible) increase your budget on (indiscernible) payments?

That was a pretty drastic move by VISA and you know we started out in the press as 40 million cards that were compromised. I guess they are talking about 200,000 (indiscernible) about 5% reality. I will be curious to see if there is any losses generated from that, but card associations are on top position. This is now political pardon (ph). The CEO of that company is going to be testifying in the Congressional subcommittee I think today and were coming up very soon, so it's a tough deal, I mean, if the card associations feel obligated to show they are being tough. Of course the card issuers are concerned as well. There are significant finds, but here is I think a couple of take-aways. Number one, VISA years ago implemented something called CISP which is a type of certification that the (indiscernible) acquirers and issuers and those that process and handle bank card transactions are complying with the highest standards. Now to this date, best of my knowledge, there has not been a card compromised or a dollar lost on any (indiscernible) processor that has been CISP certified. The company in question was not CISP certified. And I believe if they were this wouldn't have happened because this is a front-end center what CISP does. It requires that no naked data be available, only encrypted, or not at all. I mean there is no reason to really hold on to this stuff and we are very focused on it. Now in terms of what kind of implications that has for us, in Jim's new role, he will be overseeing our systems area. But though we are very confident and feel very good and have really the benefit of creating a new system, which gives us a leg up on some people who are laboring under legacy systems. You take a great deal of confidence that all the processes and the discipline that Jim brings with all his financial acumen would be -- that whole discipline will be focused ensuring that we have the best, most secure systems anywhere though it's costing a little more money, but that's the world we live in.

Okay, that's helpful. Typically, I remember there was a -- you were expecting to lose a (indiscernible) business starting fiscal '06. Does that have any impact on the revenue guidance in the coming year? I remember that that's going to be positive for earnings.

Actually, that was Air Canada, we have been exiting that relationship. We are trying to exit for a very long time. We finally did exit it. The total this year at the end of the year -- this was a relationship that we acquired as part of close to CIBC and National Bank portfolios and on the VISA side actually the revenue to us, because of the way the bank had priced it, the revenue to us was negative. We were below interchanged. This will have a positive impact, very small but a positive impact on revenue and on earnings.

Very good. Thank you.

I just wanted to also point out, I'm not sure Paul mentioned it, we are system certified at global. So, I don't want anybody to be concerned there. We haven't been working hard at this for a very long time frame and we feel very confident with the system infrastructure that we have in place and the security around that.

We have been and anyone that -- anybody that we touch, we insist this as well. So, we're on a pretty good shape.

Greg Gould, Goldman Sachs.

Thanks. Paul, I wanted to get a sense, you guys have mentioned several times ISOs have been doing, the ISO channel has been doing very well for you guys. What does that imply about the non-ISO part of the business? Did new sales this year meet target?

I was disappointed with new sales this year, Greg, and quite frankly, we are implementing a new organization in the sales area as well, in part to reflect some of the disappointment in that area. So, that's a good catch. ISO growth has been great; I am delighted with that business and the people who run it. A little disappointed in what happened domestically and we have some plans and programs in place, and are proceeding. And as I mentioned, we are undertaking a national search for a new executive and I'm confident we will get that back on track.

What are the things that you think could be easily enhanced in that when a new head comes?

I don't think anything is easy, Greg. If it were easy, I wouldn't need somebody. You know it's -- we have a great product set and we execute I think pretty well, but there are opportunities that we have not taken full advantage of with endorsements from associations, and financial institutions have referred business to us exclusively, and we have not put, in my opinion, enough resources against those opportunities. In addition, I don't think we are as efficient although we got huge productivity increases in the last couple of years, it kind of flattened out, and I think that we can do better. So, we have a whole list of things, but it would start with getting some more talent focused in some areas where we have opportunity and not taking advantage of it.

Okay. And then Europhil, what is your revenue expectation for that business in fiscal '06? I heard the DolEx number but not Europhil.

Europhil, again this is Europhil's first year, it is a relatively small business compared to the total company, so I wouldn't expect that you are going to see much of an impact in the initial year. I think as we expand the branch network, which is only today, 26 or 28 branches, I think it will have a bigger impact. I think the other thing I will point out similar to the DolEx story, sellers of money transfer businesses like to raise the price before you buy the business to try to drive up earnings and make things look better. And, so the first year though is a challenge relative to making sure that the pricing is competitive in the marketplace, and we are experiencing -- we experienced that in DolEx we talked you through that last year, and we have got the same story going.

Okay, so but we -- as a base case we could serve with 2.7 million a quarter and annualize that?

I don't have a specific, it's -- if the summer is going to be stronger than the winter, but yes that's probably close enough for now.

Okay, and Paul, you mentioned that you haven't seen in DolEx any impact from competitive moves, and I just wanted to drill that a little bit more on the BofA, the free money transfers between Chicago and Mexico, specifically there what have you seen in that market?

Yes Greg, we have been watching that very carefully, and we have a number of branches that are somewhat proximity to where the BofA branches are providing those services. And, we have -- initially we were a little defensive and actually lowered prices in those branches that drove transactions up pretty significantly. So, we are seeing transactional growth in those same branches that are close to where BofA is offering allegedly free. Now, it really isn't, it's, I would say, and normally we don't say something negative about a competitor, but it's really -- I don't think they're doing anyone a service by calling it free. They are requiring a DDA, there are minimum balances, there are costs for the recipient if that person gets it out of an ATM, it's not really free. And, the Latino consumers are probably more sophisticated than they are given credit for, but the windy answer is we are actually seeing a revenue increase in those branches that are close to those markets.

Greg Smith, Merrill Lynch.

Paul, are you seeing PIN pads getting rolled out with any of your smaller merchants, any particular trends there you are seeing?

Greg, it's kind of a steady on. We still are under-penetrated with the smaller guys, and we have all types of promotions anything from a free of PIN pad, and we charge more to do other types of promotions.

A couple of years ago there was a push to try to us sell the PIN pad separately and have it connect to terminals. I think today it is just given, anybody is launching a terminal is going to have a PIN pad embedded in the system, and I think you are seeing a little bit of more activation, but as Paul said it's really -- it's steady and still a pretty small piece of our US business.

You know, the phenomena with small merchants Greg, as you probably know, is they have a much higher average tickets specifically mid-sized merchants or national merchants and because of that it doesn't lend itself depending on what type of merchant, but generally, for general retail and of course restaurants obviously, doesn't lend itself to as much PIN pads. So, you don't see as much PIN debits, you don't see as much penetration for PIN in that kind of small market.

And then in your, I guess US merchant processing business, can you give us an indication of the relative revenue size between ISO and direct sell business at this point?

We have not tried to separate the two but the ISO business has steadily grown over the years, so it's becoming much more significant, it's probably close to -- approaching 50% of it.

And then just lastly, as we look at MUZO and First Data's acquisition of EuroProcessing, is there any overlap there? Is this the sign of increasing competition or do you just view it more as confirmation of the opportunity you are looking at?

I think the later and I really mean that. It's a very fertile market, we think there are enough slices of that pie for everybody. First Data is very smart, they recognize that Central and Eastern Europe is terrific. Our sales office -- our new sales offices that we announced earlier, and the opportunities we are pursuing in Russia are going to keep us very busy just from organic opportunities in those markets. So, I am still very bullish, have high expectations, and for us to be able to grow at the top end of that guidance even with the pending loss of a customer, really kind of shows you the growth opportunity in that business, so I am very bullish.

AJ, Morgan Keegan.

Just in terms of my transcript, if you can go back and just talk a little more about pricing in core doors (ph), when you look at your DolEx doors and you look at year-over-year, what type of -- what kind of a pricing environment are we in? Is there a steady decline in prices held, can you just review that with us?

Sure. I mean we don't have a standard price across all the markets, we actually break it down to 26 different districts across the country, and between and among those different districts, New Jersey is a very low price as we are entering a new market and trying to gain share, and we generally do that through pricing initially as supposed to advertising. For our customers it's more of word-of-mouth. But on a macro basis for the year, I think you are going to expect or we expect that there is always going to be some price compression and we see it. But it's after the first year that the business annualized February it has been relatively small, and as a result we are seeing transaction growth and the revenue growth move together at a pretty good clip.

AJ, with that said and done, we are pricelier, that is we think this business is somewhat of a commodity although we have some terrific differentiators in terms of service product, but price does drive a lot of this business, and we are committed to be a price driver, we are probably the most competitive offering anywhere, and that's strategy is working great for us. And this is all about driving in more business and leveraging our unique model. As opposed to variable costs, we have a high-fixed cost base and it's working great for us. So, as that works in the matured locations even with lower prices the margins when we drive in there, those transactions are terrific.

Would it be fair to say that there would be an annual 3 to 5% price decline, on an annual basis in this business. I am sure, I know DolEx is only -- you got a fairly -- it's kind of a short amount of time, but you studied the market and you have seen it, is that a fair assumption on pricing?

That is tough to say. I think it's fair to say there will be some strategy to continue to lower price, but I would not want to do give any indication that is going to be treated about.

Now, also when you look at -- when you look money transfer, how about your branding efforts, where have you seen some successes, and what you're going to increase -- whether you're going to increase your efforts you spend on in branding to get the DolEx name out?

Well, we have a couple of things we're doing. We are putting out a television monitor in our store locations and are looking at models that would actually do it for the booth, and having a Latino (indiscernible) with personalities that are big in that Latino market that endorse our product can talk about all the places you could transform the money in -- it's a kind of a new form of show. It has something that all the cultures of the various countries with music and overlays, and we've tried this out, and people in line are staring at this thing. So, we're putting some money into that. We're also doing some local radio and television and/or some direct mail and door hangers, etc. We've also branded, the Europhil was slowly moving that over to the DolEx brands. So, Europhil is going away and DolEx Europe will be the brand, and we have introduced what is an Amigo Latino card for our Europe card, a Europe Amigo, Amigo Europe.

Moving towards MUZO and looking at some of the European markets, you talked to us about card and transaction growth, and maybe some specific countries you can possibly highlight where are seeing some successes, and are you seeing some strong growth?

For DolEx and transaction -- well, let me go back, it's Euro Amigo.

I'm sorry Paul, -- precedence for MUZO.

Well, I am sorry. Okay. So, the question was what were the countries where we're seeing strong growth?

Yes, correct. Because some of the countries that you've focused on, and what -- just tell us a little about that marketplace, how it's developing? I know it's still very early days?

We're just getting outside of the Czech Republic. This business was historically precluded from doing business outside of the borders. That's one of the reasons the owners realized they had to sell. We have 50% share of the Czech market, and that's strong and that business is growing organically very nicely double digits. But we're just getting some business from outside of those borders, Russia being one of the first, but we have commitments also from Poland, Bulgaria, and Romania that's why we have sales offices there. And they're small at first. It just takes a while to build. So, percentages are obviously massive because you are starting from no base.

And then very lastly -- just lastly on the ISO channel, just what's happening in the ISO channel? You've had very strong growth, you've had very good success. How much of it's moving new business, how much of this is just taking market share from your peers through that channel?

Well, the ISO business is a little different, in that our direct sales force, every merchant they sign is an acceptor of bankcards, and by definition, they are taking it from someone else. The ISO business, because the focus is somewhat smaller, as their sales people sign business, on many times, they are new bankcard acceptors. But, they got that at the expense of someone else. The business itself is growing. We're adding new customers, start putting down what is organic, what's share from someone else, but I know our ISO business is growing faster than anyone else's.

Don MacArthur, Stifel Nicolaus.

Congratulations on a great quarter guys. Can you talk about what -- I guess DolEx and Europhil, is there an opportunity to use, I guess, DolEx send locations and Europhil receive locations which are primarily South American to pick up some new corridors?

Yes. The advantage of having the Europhil acquisition was -- many of their locations today where they settled are the same locations that DolEx is settling, but conversely they are sending to locations that DolEx is not currently marketing to, and I think it does present an opportunity. It's not something that we've tried to capitalize at this point. DolEx is still focused on a strategy, which is US to Latin America, but it would provide an opportunity for us to have settlement locations in Asia and outside of our normal corridors.

And then regarding New York and New Jersey for money transfer licenses, can you give us an update on that and is acquisition still probably the most viable way to enter those markets?

Don, we are in New Jersey and building some locations as we speak and getting -- we've three locations currently and we think there is opportunity to have more. New York, we can't really comment on acquisitions other than I would tell you that that's a little more complicated than we hoped. There are a couple of great targets but there is some issues surrounding them. So, consequently we've swallowed hard and we are going through the kind of laborious procedure with the New York State Regulators or the body that allows for money transfer. We just had our board fingerprinted and all that just happened. So, we are going to submit that way. We were hopeful that this acquisition opportunity would happen and it's modest, but it will be a great way to jump into the market. It still may -- we were hoping to actually say something on this call, but it wasn't to be. So, we are still focused there. I would suspect we'll have some activity this fiscal year in New York.

Good to see a disciplined approach on it. Moving onto MUZO and getting some sales people on the feet in another countries I guess, what's the sales cycle methodology and I guess, how long they have been there? So, when do you may be expect to see some deals?

It is a financial institution sale. So, you are talking about a long lead cycle. There are a couple of mitigating circumstances. For example, in Russia, because it is developing and there are not converting something off of somebody on to you. We are giving you new opportunities with an existing portfolio somewhere else. But in the Russian scenarios, these are brand new efforts. They were card issuers, they had proprietary cards and now issuing VISA and Master Cards, they were looking for partners. So, that's a terrific opportunity. There is a little bit of that in some of the other countries, particularly the more developing countries in Eastern and Central Europe. But with those opportunities aside and you can get that revenue a little more quickly, in the more established countries, in the bigger countries, Poland with 60 million people, where we have a sales office. It's going to take a little longer. It's usually at least a year kind of sales cycle and then they have to go through the process of bringing that business on to you and converting off of others. So, this is a -- you are not going to get any quick hits here, unless we get lucky with some more Russian banks. In our guidance for MUZO, I think it's pretty spot on.

Mark Sproule,Thomas Weisel Partners.

Just, I guess I'd jump on that the MUZO questions a little bit more. When you guys look at building growth out there and obviously ramping up some of your sales offices in other countries, do you guys think that a lot of this growth will be sort of organic built out of the former MUZO platform or you are going to have to look at making either some other acquisitions in Eastern Europe or partnering with existing banks, etc.?

Mark, when we give our guidance about MUZO growth we are obviously talking just about organic. We think this is a solid, solid double-digit grower. Once we get this conversion from that customer that we talked about earlier behind us, this is a solid double digit organic grower with existing systems and infrastructure and kind of modestly expanding our sales force to go after some countries that are just -- starting with those that are (indiscernible) Czech Republic. Now, acquisitions, there is a bunch of them there. I mean there are bunch of MUZOs in all these countries. And we are focused on those. In fact, in Jim's new role, he will be spending an awful lot of time trying to figure some of those out and those exist. We are not the only guys that see those and there are other chasing them. And, it was said earlier that we are disciplined, which I -- appreciated that comment terrifically. We will remain disciplined too. We are not going to do things that are not reasonably near term, accretive, and don't make sense, we are not going to overpay. But with all that said and done, my guess is we will still get some of these done.

We are trying to sign up new banks outside of, you know, the Russia and etc. Is there a difficulty in sort of breaking through, with kind of the former kind of bank organization partnerships that were driving card or slow card growth over there? Or is the benefit of being we'll come in and offer, kind of (indiscernible) EMV compliance format. Is that helping you to kind of get your foot in the door and into the process as we go out?

Yes, two things are helping us. Absolutely our platform, which you know, the first thing we do -- we get anybody seriously interested, as we drag them to the product, we make them go through this, and it's a very impressive platform, and they talk to our list of references. So, that is a big opportunity. I think it's -- other opportunities are going to be simply because card issuing is taking on aggressive proportions in all of these countries, and there is a need to not only begin to be compliant but it's getting more focused, and financial institutions are realizing that in many cases the existing service provider is not adequate. And so that is creating some market momentum too. So, I think we are at the right time in the right place, with the right platform, and I'm once again very optimistic about results.

On the merchant side, I mean, I know you don't, you haven't given us, is there any sort of year-over-year growth or just a numerical number, of the number of additional merchants that you brought on to your system this year?

We have really just commented in terms of general directional in toto between the ISOs and our direct business, we talked about 1000s, 5000 plus, it's not a thousand or two.

It was, you know, for the year, it was well over 100,000 merchants that we have added to our clients.

Gotcha. And then with that adding a 100 -- a 100,000 with attrition of merchant losses, was it sort of similar to, in line with what you would historically expect or below or --?

Our merchant attrition actually was improved, as did our merchant losses, you know, the amount you write off from merchant (indiscernible) we actually had significant improvement to that area, which is a real, real kudos to our operating group primarily in Baltimore did a fabulous job with that. So, all those numbers look pretty decent.

Okay. And then on that side as well, I mean is there a break down that you see as kind of debit growth in the portfolio on transaction side, is it predominantly becoming -- is that driving the business as far as revenue expansion?

Not really. I was talking about PIN. Signature continues to grow, so that's looking pretty good. But on a PIN base, it's kind of a steady state.

Gotcha. And then I guess finally just to go to the DolEx side a little and hit that as well. You indicated kind of 15 stores a quarter through '06, where predominantly you are going to be expanding, obviously you have got the New Jersey expansions but is the remaining portion of that going to be really focused on kind of the more of southwest and border-type locations of that?

Yes, the stage that we are in, the strategy is just to build out. You have the regional infrastructure and to the extent we can find occasions that are attractive and are going to promote strong growth that we are going to open them, and remember 75% of our business are booths, so there are stores within a store, they are very easy to move around, opening them is somewhat of a misnomer because you can just simply move them if it turns out not to be a good location and even the places that are stand-alone branches, the cost of bringing one up is relatively small.

Great. And then two quick ones real quick. How many Latino Amigo cards are there out there already? And then finally, with some of the new kind of add-on products that you guys can offer through the DolEx either prepaid type cards et cetera, is that sort of coming on board and is that going to help you either drive increased revenue growth but also offset any fears of what some of the bank community may look at, things like the Bank of Americas etc.?

We are approaching a million active Amigo Latino cards and it doesn't count what we are doing with the real Amigo and so that thing is going great. In terms of new products, we have modest expectations in terms of revenues. I hope that we are pleasantly surprised because we have some great products, we talked about a number of them earlier, but that is the key. It's not that we are transferring money for the Latinos, it's that we have a relationship with potentially 14 million Latino customers in United States and tens of millions more in Europe and that is the core fundamental of that business. So, you need to expand upon that and offer other services to this primarily unbanked population. To that end, we are rolling out successfully our store value cards and offering a number of other services through our locations that are thus far doing pretty good. So, not a huge impact this year with that, but we think that's a long-term great strategy.

Carla Cooper, Robert W. Baird

I wondered if you could talk a little bit about your operating margin guidance. I guess keeping in mind that you ended up doing better than I think your original guidance in fiscal '05. What was it that drove it in fiscal '05 and obviously and I am trying to get a sense of what might do the same in '06?

When we started this fiscal year we've taken into account, excuse me this is '05, we were coming through an acquisition, excuse me a consolidation as well as some acquisitions that we were annualizing during the year. Those factors together, I mean its hard as you start the year to know precisely the impact of those businesses once they are fully integrated or when you close and consolidate facilities, and we were pleasantly surprised to do better than we had anticipated. The margin is a key focus on everything we do here. In terms of looking for efficiencies, in terms of pricing for merchants, our expectations for the coming year is that there is still expansion opportunities on that line and I think we are going to continue to work at them. We have a Dallas consolidation that's going to go on during the year. There is a 100 positions currently In Dallas that represents an opportunity, there are infrastructure in Dallas that will represent cost saving opportunity that will not only benefit, a small portion in this year but will carry us into the coming years.

And Dallas is really the one that you have contemplated when you gave the restructuring number and also when you were thinking about the savings at this point?

Well there is a lots of initiatives that go on. Dallas is just one that stands out because it is the facility that's closing and as required by GAAP we identified as discontinued -- or a restructuring charge and identified as such, but its not the only initiative we have. During the year we work with our vendors, as the Company gets larger we have had it global together with US, with Canada, and now with DolEx in US, and DolEx in particular on the telecom side represents opportunity for savings there. We spared no vendor in terms of looking for upside to the Company.

Got it. And then on the DolEx side the 15 branches I think was within your guidance but looked to me to be a little lower than I think a 20 you had put up the last couple quarters. Was there something special this quarter that may be kept you closer to the 15 than the 20?

Sorry could you repeat that.

I am just thinking about the number of new branches that you added to DolEx this quarter? And may be why it was 15 and not 20?

There is not -- we give a range of 15 to 20, has just more to do with opportunities that they find in the marketplace.

Well Carla, it also net, so you know if we get a little more aggressive because we've run out of patience for some under performing stores and close them that can have an impact too, and we had a little bit of a cleanup too at the end of the fiscal year and Lorie Almon and his team are pretty disciplined about saying okay we have this type of expectations and this branch did not produce that, guess what we are moving.

And my final is just on -- you touched a little bit on the idea of your platform in Europe being EMV compliant? And I wondered if you've seen -- what you expected in terms of that being a particularly important factor going forward? Thanks.

It's a crucial factor going forward, but if you also imply in that question are lot of people doing things with the EMV? The answer is not a ton at this point. We are the only Country basically that are not adopting EMV compliance standards. Canada is adopting them, and everyone has been slow in issuing, merchants are slow in adopting, but it doesn't change the need for the platform to be compliant.

Kartik Mehta, Midwest Research.

Good morning. Question on DolEx. As you look at the money transfer business and look to potentially go outside of just the US, the Mexico quarter, does it makes sense at all that if you are not able to find a branch model that goes from the US to another quarter to start that on your own, or is this a model where you believe that you do need some need to find a player that's been in the business that have some historical track record?

Kartik, first of all, we think that there is a -- we have a little more than 10% of the Mexican -- US to Mexico market. We believe we absolutely have the best platform, the best products, and we could double our volume to 20% and I still think that there would be huge upside. So, we are not necessarily anxious to go outside of those markets when there is such low hanging fruit here. Well, with that said and done, if an opportunity presents itself even if it's an agent model, which I think was implied in your question, agent models aren't evil. Western Union does extremely well and makes enviable margins and has wonderful growth and hundreds of thousands of agents. I mean it's a great model, it works if you want to have a worldwide footprint. For what we want, our model works great. It doesn't of course preclude us from pursuing other opportunities as they develop. Lastly, we are going to stick our toe in the water. With Europhil, we picked up some interesting markets like India, and there is a strong money transfer from the US to India. In fact, Europhil stands for Europe to the Philippines, that's another market we picked up. So, we are going to do a little bit to see if we can expand that kind of organically within our own model.

Great. And a last question on the indirect business in the US. Is there anyway you reduce attrition or is this a business that you just have to accept the fact that attrition is in kind of the double digit?

Look, Kartik, we think there is. We had a pretty good year in terms of merchant attrition last year. We had -- Kartik, will you repeat that question again to make sure I got it?

Sure, sure. I was talking about the indirect business here in the US.

I was wondering why he was making faces out here. No, the indirect -- I think I will stop, the indirect model is declining, you know, Kartik, it's about 7% of our volume now, when we first spun it was --

35--.

Yes, it was significantly larger than that, and we are down to 6-7% of our revenue is our indirect business, but it continues to decline, kind of actually backed off a little bit, but we are projecting that to continue declining to kind of mid to high teens for the remainder of the year, I believe that was the guidance we gave. And you are right, there is not a whole bunch we can do, you know, occasionally we get successful and sign some small institutions, but that model, that is changed. There aren't financial institutions who are actively in that business that has consolidated significantly, First Data is a major customer, they are clearly not going to put new business on it although they are not migrating anything of. So, that is what it is.

Do you anticipate any more interchanges from Visa or MasterCard in 2005?

I would say there is wild stuff going on there, isn't there? I mean with now more Class Action Suits challenging the whole very nature of how interchange was established. I absolutely think we will see some, I am not smart enough to predict if we will see any this year, but I will be surprised if we didn't see something this year quite frankly and probably down with pressure, which is the best scenario for us and the whole space, I mean that tide will lift everyone's ship. So, if you get downward pressure on interchange, it's very good for the acquirer. So, if that happens that's a great thing.

And one final question Paul, there aren't a lot of banks out there that are of significant size that don't already have an alliance. Are there any opportunities that you see that you could form alliance with the bank that would have a positive impact on Global from a merchant-acquiring standpoint?

Yes, I think there are -- there are a couple of guys still looking for (indiscernible) partners, although they are huge multinational financial institutions realized that they are not specialists in the merchant acquiring business and this is basically a huge part of what we do, come to work everyday and focus on this and money transfer. Although these financial institutions may be a lot more talented than we in a lot of other ways, if this is all you do you can do a pretty good job of it. So we have been successful convincing some in the past, we're hopeful we will be successful convincing some people in the future that we make an excellent partner and have our fingers crossed.

Roger Freeman, Lehman Brothers.

I joined late, so tell me to read the transcript if you have answered my questions already. Last quarter, you gave us a sense for a DolEx margins and I guess they were approaching the Company average. Can you give us some color on how they did this quarter particularly being a strong seasonal quarter, were they actually above?

As we've described in the past, it's not something we'll do is break out separate margins for the businesses as a (indiscernible) segment. But the results for DolEx both on the revenue line and on the contribution piece were very strong. I'm getting them above the Company average. Probably in the future, I don't think it's here today.

The interchange rate changes this quarter, does it help you out at all, can you just talk about that?

As mentioned, in April there was an increase that went through -- it was April or May. It's nothing like what we've seen in the past because the adjustments previous were unusually given the litigation settlement. These, I think the benefit will be seen over time because they are going to require members of issue to make some adjustments and those adjustments couldn't be effective on the day that the interchange adjustments went in place, so it may improve during the year, but we have factored that into our guidance.

And do you have any thoughts around these recent merchant losses, obviously they are focused on interchange. Is there any risk that they spill over into processing costs, more broadly?

Our margins is that in relation over the entire discount rate is so small, I can't imagine that it could ever be challenged. I mean national merchants literally pay basis points. So they are paying 150,160,175 basis points and (indiscernible) basis points to the processor. Thus the processors are not unified in pricing, we all set our own prices independently whereas the associations and members are setting it one interchange for all those that participates. So, I don't see how the two relate to each other.

I can't imagine it is a free market working more efficiently within the pursuit of national merchants quite frankly, so we don't any fear there. I think if anything for potentially opportunity although -- you know this is lawsuit, I have seen articles suggest four years before this would be adjudicated if it went through the entire legal process. So (Multiple Speakers) immediate impact on this.

Okay and then I guess with respect to MUZO -- can you compare MUZO's capabilities to the Euro processing business that First Strategists bought -- I guess they are focused on Central and Eastern Europe and I guess, I'm curious if you look at that I doubt anything it's done over there without you knowing about it at a time.

I can speak to MUZO, we know just about without speaking particularly to that issue, we know pretty much that all of our competitors or opportunities, and I would say that MUZO can go toe-to-toe with anybody. It has a state-of-the-art system, it has been E&B (ph)compliant before just about anyone. So no one is going to out sell us from a product and future benefit.

And just lastly, does your guidance include FAS 123 impact and if so what is in there?

No, that's not -- it is not applicable to us in this fiscal year, that would be -- unless something changes that would be applicable next year.

That doesn't apply since your fiscal year starts after or ends after -- I guess not, because it starts after December 1.

Correct. Fiscal '07.

Wayne Johnson, Raymond James.

Just a quick question on DolEx. At the time of that acquisition, there was some discussion about the possibility of rolling up some smaller money transfer companies. Can you talk a little bit about on how you view that, number one, and number two, does First Data's purchase of Vigo change the landscape in the mid to smaller money transfer market and all?

I don't -- taking your second question first, I don't know that that would have an impact. Vigo is an agent model, and so, I think Western Union is going to have to find a way to blend it into their existing agent infrastructure. I don't see that -- when we have been competing against Vigo, prior to this we actually used to settle for them as well. In terms of acquisitions, we are active all the time, and the opportunity to acquire small money transmitter, which could be five branches up to maybe 20 or 30, is more attractive to us than just simply opening a location because the traffic is already established, and our system, once plugged in, can take the next transaction and process it immediately. We'll continue to peruse that strategy. There are finite number of opportunities and they are all privately held and every time you deal with an acquisition of such, you've got a lot of family and other complications that you have to work through on a sale.

Greg Smith, Merrill Lynch.

I was just going to ask you about the stock option expensing issue, can you just give us a little color on how you are thinking a bout that for FY07?

I think at this stage, we don't really have a comment. We will see what happens with the literature, but it's not applicable to us in this fiscal year.

FAS 123, Greg, it's been little confusing at best, I mean it's on again, it's off again, it's on again, it's off again, you know we are -- I think we are very fortunate with our fiscal period that we a) we weren't an earlier adopter, and b) we get to look, but you know we are forecasting having the impact of that in '07.

Thank you, I am seeing no further questions at this time.

Ladies and gentlemen, thank you so much for joining us, for your continued interest in Global Payments, and we appreciate your support.

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