環匯 (GPN) 2006 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. And welcome to the Global Payments first-quarter 2006 earnings conference call. At this time, all participants are in a listen-only mode. Later, we'll 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 our host, Vice President of Investor Relations, Jane Forbes. Please go ahead, ma'am.

Good morning. And welcome to Global Payments fiscal 2006 first-quarter conference call. On today's call, we will discuss our quarterly financial results and business highlights in addition to our strategic Asia-Pacific joint venture with HSBC. 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.

Before we begin, 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 Safe Harbor for forward-looking statements, meaning 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, which are discussed in our public releases, including our most recent 10-K.

In addition, some of the comments made on this call may refer to normalized results, which exclude restructuring charges 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 September 22, 2005, which may be located under the Investor Relations area on our website, www.GlobalPaymentsInc.com.

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

Thank you, Jane. Good morning, everyone. The agenda for our call today is as follows -- I will summarize our financial results and review recent trends and events. Then, Jim will discuss the quarterly financial results in detail. This is Jim's final quarter as CFO before he transfers these duties to Joe Hyde after our first quarter 10-Q is filed. Upon which, Jim will assume the COO position as previously discussed.

Then, Joe will discuss our newly announced and very exciting joint venture with HSBC. Next, I will discuss our fiscal 2006 outlook. And lastly, we will have a question-and-answer period.

Now for our financial results. We are very pleased to announce another quarter of strong financial growth. For the first quarter, our revenue grew 17% to $224.5 million. Our normalized diluted earnings per share grew 24% to $0.77. And our operating margin improved by 130 basis points, 22.9%.

Excluding the impact of favorable Canadian and Czech currency exchange rates in the impact of our Europhil acquisition, revenue growth for the quarter would have been approximately 13%. This solid revenue growth reflects strong performance in our North American merchant channel, primarily due to re-pricing initiatives in Canada and ISO growth in the U.S. Additionally, our consumer money transfer channel in our Central and Eastern European operations continue to provide solid growth due to further market penetration and strong industry expansion.

Now for our recent trends and events. Starting in the U.S., our domestic direct transactions grew in the low teens for the quarter. And our domestic average ticket and spread remained relatively stable. In total, our domestic direct revenue achieved low double-digit growth, which continues to be primarily driven by our ISO channel. In fact, I'm pleased to report that we signed two new ISOs and renewed and extended an existing ISO relationship with HealthCard Systems during the quarter.

Our fiscal 2006 revenue expectation for the domestic direct channel remains unchanged at high single digit to low teen revenue growth due to continued expected success in this channel. This will be partially offset by the potential impact of Hurricane Katrina, particularly on our check gaming area. While it is difficult to estimate the full financial effect of this disaster, we believe there may be a $2 million to $4 million revenue impact and a $0.02 to $0.04 diluted EPS impact for fiscal '06. Importantly, these potential impacts have already been reflected in our recently raised guidance. Lastly, in the U.S., our domestic indirect revenue declined in the mid-teens during the quarter as anticipated.

In Canada, we continue to sign prominent national and midsized merchants and achieved low single digit growth in total transactions for the quarter. Our Canadian average ticket during the quarter declined in the mid single digits as expected, primarily due to our decision to exit from a low margin, high risk contract with Air Canada. However, our Canadian spread increased more than 20% for the quarter, primarily due to merchant re-pricing initiatives and a benefit from no longer processing under the negatively priced Air Canada contract.

In June 2005, we instituted a pricing strategy consistent with both our U.S. pricing strategy and the Canadian marketplace. The favorable revenue impact of these initiatives was quite frankly stronger than planned. And the continued strength of the year-over-year Canadian exchange rate drove our Canadian revenue growth for the first quarter to more than 30%.

As a prelude to updating our Canadian revenue guidance, you may recall in our last year third quarter, we had a favorable one-time merchant revenue adjustment of approximately 800,000 in Canadian dollars. In addition, certain other Canadian pricing changes will annualize in the third quarter, including the MasterCard assessment increase.

We're also anticipating the year-over-year impact of the exchange rate to lessen for the remainder of the year. As a net result, we are raising our fiscal 2006 Canadian revenue growth expectations to the low double digit, mid-teen range.

Our Central and Eastern European merchant operations continue to benefit from strong organic growth, driven by industry trends. During the first quarter, we achieved robust revenue growth in this channel of more than 30%. However, excluding one-time equipment sales of approximately $1 million, a strong year-over-year Czech exchange rate and other non-recurring items, our European revenue for the quarter grew in the high teens. This growth was driven by an increase in card personalization revenue in addition to more than 20% growth in the point-of-sale and ATM authorization transactions.

We continue to anticipate de-converting the large customers that prior to the closing of the MUZO acquisition had given notice to move a portion of its business. This de-conversion is expected to start towards the end of our second quarter and to be completed during the first half of our fiscal 2007. Also during the quarter, we finalized a plan to transition from the MUZO trade name to a new name, Global Payments Europe. This decision is consistent with our strategy to expand beyond the Czech Republic in Central and Eastern Europe, where the MUZO name is not as well recognized. It also helps to further establish the brand recognition of Global Payments. As a result of our strong European growth this quarter, we are raising our revenue growth expectation in this channel to the high single digit to the low teen range for fiscal '06.

Our money transfer revenue for the quarter was $29.6 million. During the quarter, our DolEx transactions grew more than 20%, and our DolEx revenue grew in the low teens. Consistent with our proactive competitive pricing strategy, last year's quarter reflected a higher average price. And although we expect this year-over-year pricing gap to narrow during the rest of the year, we continue to expand our U.S. branch footprint and are pleased to announce that we added approximately 20 new net branches during the quarter, raising our total U.S. DolEx branch network to more than 715 locations.

We also continue to be pleased with our Europhil acquisition. We have completed the technology and back office integration with our DolEx platform and are pursuing our branch expansion strategy in Spain. As a result of our continued money transfer success, we are raising our DolEx revenue growth expectations in fiscal 2006 to the mid to high teen range.

Moving on to recent events. I am very pleased to announce that we have hired a new Executive Vice President and Chief Sales and Marketing Officer, Kevin Schultz. Kevin has had an extensive industry background in payments, most recently as Executive Vice President Client Support for Visa USA, where he served in various executive positions for 13 years. Kevin will report to me and will lead our domestic direct and indirect sales key customer support in worldwide marketing activities. Kevin will also be joining us at our investors' conference in New York on October 11th -- understanding that Kevin's first day is October 10th.

To summarize, we're delighted with our strong financial results and achievements during this past quarter. I will now ask Jim to review the financial results in detail. Jim.

Thanks, Paul. In our press release and as posted on our website, we included a GAAP income statement and a schedule which reconciles GAAP to normalized results for the current period ending August 31st. The current quarter GAAP results include a $900,000 restructuring charge, primarily related to employee termination benefits. Anticipate incurring approximately $2 million in additional restructuring charges during fiscal '06, primarily to complete the consolidation of our Dallas call center into other existing locations. These restructuring charges have been excluded from our fiscal '06 guidance. My comments this morning exclude these charges and reflect our normalized results.

During the quarter, revenue grew 17% to 224.5 million, and normalized operating expenses were 173.1 million, resulting in operating margin improvement of 130 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 European merchant channels, lower telecommunication costs and other vendor rate reductions, and our ongoing cost containment and consolidation strategy.

These improvements were partially offset by the continued investments made in our direct and ISO sales channels, as well as our investments to grow our money transfer branch network. Net interest and other expense of $600,000 for the quarter reflects a reduction from the prior year, as we have used our strong cash flow ability to pay down the remaining balance on our U.S. credit facility. During fiscal '06, we expect 2 to 3 million in net interest and other expense. Minority interest net of tax for the quarter of 2.2 million reflects an increase from the prior year due primarily to the growth in North America alliance.

Our tax rate, which we now define as income tax provision as a percentage of our pretax income before minority interest, was 34.1% during the quarter as expected compared to 35.3% in the prior year quarter. Please refer to our most recently filed 10-K for further information regarding the tax rate, calculation changes we have made during the fourth quarter of fiscal '05.

The decline in our year-over-year tax rate is due to tax claim initiatives and the impact of international growth, primarily in European markets, where the statutory rates are lower than U.S. rates. We achieved 38.1 million in free cash flow during the quarter for growth of 28%. We define free cash flow as net cash from operating and investing activities, excluding business, acquisitions and changes in working capital.

Capital spending for the quarter was 5.2 million, primarily for software and infrastructure, our new Atlanta-based datacenter build-out and DolEx branch expansion. Our US infrastructure and datacenter expenditures relate to the planned consolidation of our two U.S. platforms and the exiting of our shared service agreement with NDC. I am pleased to report that as of today, we are substantially off the NDC Health network and should be completely separated from NDC by the end of Q2 '06.

Paul will now briefly discuss our impending Asian-Pacific joint venture with HSBC. Paul?

Thanks, Jim. Before Joe goes into some detail on this announcement, I just wanted to preface his comments by saying how excited I am personally about this new joint venture. I believe this has the potential to become one of the best transactions we have ever completed. And it is clearly one of the most exciting deals of my career. This Asia-Pacific joint venture literally touches almost 40% of the world's population, which presents an amazing growth opportunity for us. Although we have a long road ahead to capitalize in this opportunity, I am -- to be very clear -- very thrilled to have announced this very important partnership with HSBC.

To that end, I am pleased to announce that Carl Williams, our EVP of Worldwide Payment Processing, has relocated to Hong Kong with his family and will be managing this JV on a day-to-day basis in addition to overseeing our European operations. Joe will now discuss our joint venture in more detail. Joe.

Thanks, Paul. My comments this morning will be made in connection with the presentation currently located on our website. This presentation will remain available for review after the call. I'll start by discussing the joint venture itself followed by a description of HSBC's Asia-Pacific merchant acquiring channel and will conclude with industry data.

Starting with slide number 3, we have agreed to form a payment processing joint venture with the Hongkong and Shanghai Banking Corporation, or HSBC, in the Asia-Pacific region. HSBC is one of the largest and most respected financial services institution in the world with assets of almost $1.5 trillion. Global will pay 67.2 million in cash to acquire a 56% interest in the joint venture. And HSBC will contribute its Asian-Pacific merchant acquiring channel to control a 44% interest.

We also agreed to form a marketing alliance, whereby HSBC will refer new merchant customers to the joint venture for at least a 10-year period. We expect this acquisition will be non-dilutive to earnings per share and should be completed within 12 months.

Turning to slide 4, these contributions from HSBC to the joint venture include existing merchant contracts and new merchant referrals; sponsorship into the Visa and MasterCard Associations; and experienced, local management team; and HSBC's strong brand recognition. After the completion of a multi-year technology conversion effort to be led by Global, we intend to provide the joint venture with leading-edge payment processing technology, back office automation, and economies of scale benefit. Our executive team will also focus on improving the sales effort of the joint venture by focusing on small to medium-sized merchants, improved sales force training and incentive programs and using a more proactive sales approach.

Turning to slide 5, next, I'll discuss HSBC's existing merchant acquiring channel. As shown on this slide, this channel has a very wide Asia-Pacific coverage, which includes 10 attractive countries or territories. These are Brunei, Hong Kong, India, Macau, Mainland China, Malaysia, Maldives, Singapore, Sri Lanka and Taiwan.

Turning to slide 6, HSBC's merchant acquiring channel is headquartered in Hong Kong and provides credit and debit card payment processing services to more than 40,000 merchant locations. We estimate that this channel has a market share of 10% to 25% in its key markets. During calendar 2004, this channel achieved annual revenue in the range of $50 million.

Turning to slide 7, HSBC's Asia-Pacific merchant portfolio is diversified both by region and by vertical market. While Hong Kong and Taiwan comprise almost 70% of revenue, Malaysia, Mainland China and India together reflect more than 20% of revenue. The portfolio also includes a variety of vertical markets, including retail, restaurant, travel and entertainment, insurance, utilities and business services.

Turning to slide 8, next, I will review industry information. The 10 countries and territories expected to be included in the joint venture, which we call the JV Regions, comprise almost 40% of the world's population for which Global previously had no direct access. As shown, the vast majority of this 2.5 billion people are living in Mainland China and India, which are the two markets with the highest likelihood for future payment processing growth.

Turning to slide 9, the 10 JV Regions consist of fast-growing economies, which is generally a strong indication of future payment processing growth. As illustrated, the gross domestic product of the JV Regions as a whole grew 10% per year on average between 1999 and 2003. This fast pace compares favorably to developed countries, which typically grow in the low single digit range.

Turning to slide 10, not surprisingly, the 10 JV Regions have also achieved above-average payment processing growth. From 2002 to 2004, the JV Regions as a whole experienced more than 20% average annual growth in Visa and MasterCard purchase volume, which totaled approximately $92 billion during 2004.

Turning to slide 11, as shown on this slide, the two fastest growing payments markets among the JV Regions are Mainland China and India. Both of which experienced more than 50% growth in Visa and MasterCard purchase volume during 2004. Taiwan and Hong Kong stand out as the two largest and most developed payments market of the JV Regions.

Turning to slide 12, the 10 JV Regions as a whole comprise only 20% of the total Asia-Pacific Visa and MasterCard purchase volume and are surpassed in total size by the individual countries of Japan, South Korea and Australia. In considering that the JV Regions comprise 70% of the total Asia-Pacific population but only 20% of total Asia-Pacific Visa and MasterCard purchase volume, it is clear that the JV Regions have significant long-term growth opportunities for payment processes.

Turning to slide 13, the growth opportunities of the JV Regions are further illustrated on this slide. The JV Regions as a whole have a payment card-per-person ratio of only 0.2, which is significantly less than the US at 2.6 or Western Europe at 1.2. As shown, Mainland China and India are the primary drivers for the low payment card-per-person ratio of the JV Regions, as their ratios of 0.2 and 0.1 respectively almost entirely offset the impact of the more developed markets of Taiwan and Hong Kong, which carry ratios of 3.1 and 1.8 respectively.

Turning to slide 14, in conclusion, we believe our joint venture with HSBC will provide Global Payments access to vast Asia-Pacific populations and fast-growing economies. HSBC's existing presence will provide us with a strong share of the high growth Asia-Pacific payments market in addition to immediate access to Mainland China and India. We also believe this joint venture will provide long-term revenue growth and earnings-per-share accretion potential. And virtually always, this joint venture fits with our stated international growth strategy, and we look forward to partnering with a world-class financial institution that has extraordinary local market expertise of the Asia-Pacific region.

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

Thanks, Joe. Nice job. Based on our strong first-quarter results, we are raising our full year fiscal 2006 revenue guidance to $855 million to $883 million or 9% to 13% growth over $784 million in fiscal 2005.

In addition, we are raising our full year fiscal 2006 diluted earnings-per-share guidance to $2.74 to $2.86, reflecting 15% to 20% growth over our fiscal 2005 normalized diluted earnings per share of $2.39. We are also raising our fiscal 2006 operating margin guidance to 21.5% to 21.9%. This guidance does not reflect the impact of our impending joint venture with HSBC or any other significant acquisitions, all restructuring charges and the stock split.

We are once again delighted with our results and achievements this past quarter, which continues to reflect the ongoing execution of our strategy. We will continue to focus on integrating and expanding our acquisitions as well as pursuing other domestic and international opportunities to position Global Payments as a solid, long-term revenue and earnings grower.

Operator, we will now go to questions.

(OPERATOR INSTRUCTIONS). Paul Bartolai, Credit Suisse First Boston.

Great job on the quarter, guys. First, just on the HSBC deal, it sounds like a great deal. Just curious in the near-term what kind of a -- what the strategy is going to be and then what things you're going to be concentrating on first.

Well, Paul, the first thing we're going to do -- and not to sound like a smart Alec -- is get this closed. This is 10 countries and territories. The bank has to be involved. And each country has its own peculiar rules and regulations concerning the close process. So that's going to take a little while. So we are very focused on that. We are having conference calls every week. We have got full -- I basically got a deal team that is focused on getting closed.

But as I mentioned, Carl Williams has moved to Hong Kong. We are moving a Canadian also there to help Carl. And we have designated senior executives within HSBC that will be coming with us. And this team is all focused on plans to aggressively grow market share.

I will just add one other thing too. We had the fortune to absolute just good fortune of meeting with all the country managers when we were there signing the transaction and announcing in a couple weeks ago in Hong Kong. They were there for other reasons, but we got a chance to me with them and told each one of them -- look, we are going to expand this business in your market. Talk to us about opportunities, potentially perhaps even competitors you may be interested in. Anything at all that you can tell us that would give us your knowledge and your cooperation in aggressively growing this business will be in your interest, will be in our interest. So that is the plan.

And then on the domestic direct channel, sounds like ISOs continues to be the key driver of the growth there. Just curious, you mentioned on 4Q that the channel -- the business outside of the ISO was a little bit weaker than expected. I am just curious if you're seeing any progress there.

I have been running that personally until Kevin Schultz gets onboard. He is joining us October 10th. And I think we are making progress. There is still some work to be done. I am not pleased with the growth in that channel. I am delighted with the ISO growth, and I think Kevin has his work cut out for him. So stay tuned.

Okay and then last, did you give the revenue contribution from Europhil?

We didn't.

No, we did not break it out. It's small, so I think for purposes of acquisitions of that size, we probably won't separate that out.

Thanks. Good job on the quarter.

Roger Freeman, Lehman Brothers.

You mentioned you have obviously some regulatory hoops to jump through in these countries. Do you think that -- I think you mentioned 12 months' timeframe on the closing -- do you think that -- is that a conservative estimate? Do you think you can do than in considerably less or--?

We hope to do it more quickly. We are prepared to say that it is our expectation to get done within 12. So I would say that is the outline, kind of the line in the sand. Can we get it done more quickly? I will personally be very disappointed if it takes that long.

Other thing Roger, we can close countries too and still have some work to do with the smaller ones. It could hold up the whole transaction. So we've got a lot of work to do here. But I am very hopeful. We got a A team focused on it that will get it done more quickly. But I'm not prepared to give you a flier on that.

Okay, so you partially answered my second question, which was that -- you cannot go ahead in individual countries as you get those cleared?

That is not the strategy currently. The strategy is to work with the bank. The bank, as Paul just mentioned, is having to coordinate amongst all their existing operations, and there's tax implications. So the idea is to do this all at once.

The other way to look at that, Roger, is -- we had that same thought. But quite frankly, it puts a little more emphasis and pressure on everybody if there's a country that has a little more difficultly. It puts a little more pressure on them to get everything done because they are holding up the whole transaction.

Can you talk at all about the profitability of this business? Just back of the envelope looking at the neutral contribution in the first year, I guess that business is running less than half of your current margins. Is there any reason that couldn't get up to Company margins fairly quickly?

I think that the expectation is that this is really a growth story. I mean the $50 million, in all fairness, if this were just a $50 million acquisition with kind of a normal low-teen, double-digit growth rate, we think that's pretty good. But this is a whole another story. This is such a small amount of revenue from 40% of the world's population that you are really going to be focused on expanding. So it's possible the investments may have a negative impact near-term on the earnings of this. But I think everyone will applaud that. So the focus isn't necessarily maximizing the profitability on this 50. It's to make the investment to really grow this thing and expand it.

Okay then just last question -- having looked at their technology platform so far, what's your assessment? Are you going to have to make a significant investment to overhaul it? Or is it just a matter of adding capacity as you grow? What is the plan?

Well, think about a credit card transaction from every aspect. We are going to try to leverage everything we have where it makes sense. But clearly, when you are that far away, 12 times zones from Eastern -- number one. Number two, labor markets there are pretty desirable. So there are opportunities to do some things. And parenthetically, they do a pretty good job on a number of things they do today. So it is going to be a combination -- but we think systemically, you can leverage an existing infrastructure, and we do have the capacity. We are rolling out a new system, so we are in pretty good shape there.

Kartik Mehta, FTN Midwest Research Securities.

A question on the HSBC, do you have the ability to buy a greater stake than your 56%? Or is the way the joint venture will be going forward?

It is not structured to -- that wasn't the intent going in to increase the stake or change the stake. There are provisions in the agreement whereby we can buy down a bigger piece. But they're timeframes and requirements that parties would have to meet. But our expectation for the region and one of the reasons that we're so excited about this opportunity is that we are partnering with such a great financial institution, having them in each of these markets partnered with us. I don't think we could ask for anything better.

One of the things you talked about, Jim, is a potential acquisition of portfolio. If you do acquire portfolios in that region, would it be bought into the joint venture? Would the investments just be from Global Payments? Or would HSBC also invest in the business?

The expectation would be the latter; that we would go in ratably. But that's something that we would work through at the time. As Paul mentioned, as we met with the country managers, opportunities to grow now that this is a mono-line business within HSBC where it's focused on acquiring, I think there's great opportunities in each of those markets. And there's potentially opportunities for acquisitions to roll in.

This is HSBC's business in Asia, and obviously HSBC has the similar types of businesses in Europe. Is this a shift, in your opinion, by HSBC to want to maybe invest less in the business and look for partners in other parts of the world? Or is this more specifically just in this part of the world?

Kartik, let me take a swing at that. Personally, I think it's fair to say this is HSBC. So it is, depending how you measure it, clearly one of the top two or three financial institutions in the world. I think it is unparalleled in that part of the world, Asia-Pacific. I mean it is called the Hong Kong Shanghai Banking Corporation. They have an unbelievable pedigree in that part of the world, and I think are better established than anyone. They don't need us for this transaction. We convinced them that one plus one are going to equal three here. So it's not that they are deemphasizing; it is not that they are not willing to make parapasue (ph) investments with us, which they will. It's a matter of focus.

They are growing that institution in a lot of ways. We convinced them -- this is what we do. This is what we focus on. We will get a team in here, and we will grow this thing aggressively. You will participate all the way down the line, but we will be the ones responsible. And because of that laser focus that we bring, we believe that we can grow this more quickly. They believe that as well, and that is why we're entering into this JV. I do not think it portends any other opportunities; although, that would be fabulous. And it certainly doesn't mean that they are less interested. That helpful at all?

Very helpful. Paul, a question for you and last question, a bigger picture industry question. MasterCard talking about becoming a public company. I wanted to get your thoughts. What you think this'll do in terms of impact of the industry and then more specifically impact to Global Payments?

Okay, I don't have a ton of information. I haven't even gone through their S-1 in a lot of detail. But this deal is -- I don't think unexpected. MasterCard has positioned itself with public filings for some time. I was a little surprised at a 5 billion market cap quite frankly. I thought it would be a little higher. But when you really dive in the numbers, it looks pretty straightforward.

It is a greater risk avoidance for their members so that makes an awful lot of sense. And I think also from a governance perspective, understanding the world we live in today, it makes an awful lot of sense. So I applaud what they are doing.

What kind of impact it has for us? I think it is good news. I think it creates an environment where you have an organization that I think is a pretty well-run organization but now with another set of public eyes looking at their operations and their plans. And I think that will drive I think even -- behavior that could potentially even be better for us.

Mark Marostica, Piper Jaffray.

Congratulations on the quarter. Question relates to DolEx. I am wondering if you can give us a sense for the average operating margin profile of a DolEx branch once it is fully performing, how long it takes to get there and how many of your units are at that level today?

I think we can take a couple of those. What we have talked about historically, a brand-new branch -- and 75% of our branches are generally booths, which are locations within existing retail or supermarket store locations generally in a Hispanic neighborhood -- it would generally take about 9 months to get the branch to a breakeven, where it would be able to cover the direct costs of the facility.

In terms of contribution beyond 500 transactions or so, it's roughly I would say depending on the size or the location, somewhere between 3 to 500 transactions a month are about where we would like to be above. And then as it moves above -- because this is a fixed-cost model -- as it moves higher to 1,000 or 2,000 or more transactions a month per branch, the business becomes incrementally more profitable in terms of contribution from that branch location.

Breakout, we have very few branches that are not performing at or above the expectations. And where we have challenges, sometimes it's something that we can work through. There was a fire in a facility next door, and therefore the strip mall that we are in is under construction and the traffic is not what it used to be. And therefore, that branch will have a tough time for 6 months or so. But because these branches are very easily moved -- 75% of them, you can just dissemble them and move them to another location -- moving from one place to the next is not all that traumatic.

I appreciate the color. And then there is a follow-up. I know that your revenue growth guidance for DolEx in '06 is definitely above what you delivered in '05. And I'm wondering, how much pricing has an impact on that revised guidance? Thanks.

I'm not sure that -- I am going to try to follow the pricing strategy that we've put in place hasn't really changed in the last almost going on our second year. And our feeling is that the market is reacting well. We recognize that price is a part of the equation. And we are consistently sensitive to where the price needs to be, but we haven't needed to make any movements one way or the other. I think the business is trending where we are expecting it to be as well as Europhil, which is in its first year, is doing nicely as well.

Mark, we are unabashedly proud of being a price leader. Our model gives us that luxury. When you see transactions growing at a higher rate than revenues, that's a clue that we are reducing our pricing. We will continue to look at those opportunities. And I think absolutely, our pricing strategy does have some impact. The revenue growth could be a lot higher if we raised the pricing. But we are looking for a long-term strategy, not for quarter-to-quarter solutions.

Gregory Gould, Goldman Sachs.

A couple of questions. First, on depreciation and amortization, it looks like it was down and it is about 1.5 million sequentially. And I had expected it to rise with the acquisitions. Can you give us a sense for what the D&A should be for the year, Jim?

I don't know that we gave a number -- guidance for depreciation for the year. But in terms of looking like it was flowing, I do not think there's anything in particular, just assets running off in the ordinary course. But we do not have a lot of long-lifed assets. It is not a business -- the facilities that we are in are owned by others where we are leasing them. Most of the heavy investments around computer equipment -- and I'm not sure what your expectations were -- but there is nothing remarkable in that quarter.

Second question -- was Europhil -- I know you didn't disclose this, the revenue -- but was it roughly flat or down sequentially from--?

Similar to what you all saw with DolEx in the first year. When these businesses are for sale, the sellers tend to raise the price to drive earnings to try to get a better price. And after we have closed on a number of them, we have had to adjust the prices down. So the Europhil business is modest growth in terms of transaction growth, but it is nowhere close to where DolEx is at this point.

And the 29.6 million was all of money transfer, right, so Europhil and DolEx combined?

Yes again.

And then on the domestic direct and direct in ISO channels, can you just give us a sense of the relative momentum? Is ISO growing in the 20%-plus range and domestic, the non-ISO business flattish?

We haven't been trying to parse that into pieces I think in the past. ISOs have, as we have said a number of time, they've got a lot more feet on the street. They send a lot more deals in than our direct sales force, which has been relatively constant in terms of the number of people in that group. We do use independents to support that channel because that channel is predominantly a fixed number of people that have been here. Or at least that quantity has been here for several years. They tend to focus on more mid-market merchants as opposed to ISOs, who are focusing on the smaller merchants. But clearly, the ISO growth has been stronger, as we have highlighted in the press release and the speeches, than our direct group.

Just one last question -- I know Kevin hasn't started yet. But Paul, what would you like him to -- what kind of strategies would you like him to work on to reaccelerate growth on the non-ISO business?

One of the things, Greg, that he has done already a little bit because he spent a little of his free time here prior to starting was to kind of do an evaluation of what was good about our product offerings and service offerings, what is lacking. He's putting together a list. We've already had a couple meetings on it. And he has pointed out a couple things based on his intimate knowledge of the industry of areas that he thinks that we are doing very well and areas that he thinks we can do better.

So he's going to focus on emphasizing our strengths, shoring up our weaknesses and setting some new objectives, looking at emerging growth opportunities. I mean this guy brings so much institutional knowledge; it's fabulous. You are really going to enjoy meeting him when you see at the analysts' show.

Don McArthur, Stifel Nicholas.

Nice job on the quarter. Can you talk about the margins were -- you did a nice job of improving them -- how much of that was kind of seasonal impact from DolEx? Or maybe how do you see margins moving sequentially over the next two quarters that are kind of weaker in that seasonal process?

I would say in terms of this quarter, as I mentioned in the comments initially, it's a variety of things. We have more revenues in the quarter. We took advantage of opportunities to improve on pricing. We highlighted telecommunications. I guess we've talked about now for several years, we are pulling out of the NDC Health facility. They previously held all the telecom contracts. It gave us an opportunity over the last 9 months to go through an extensive RFP process with a number of telecom carriers. And then there has been a lot of movement in the telecom industry, as you all know, recently, and that has worked to our favor. And that's a constant focus of the Company as a fixed-cost model in all our businesses, trying to drive the costs out of the Company. We talked about also the improvements in the Canadian market. So it's a combination of all those factors that help raise the operating margin for this quarter.

In terms of going forward, these quarters tend to follow each other. We have no real new acquisitions that are going to have much of an impact against last year in any significant way other than Europhil, which has not yet annualized and will in December. It's a relatively small acquisition. So I think what you have seen in the past in terms of seasonal impacts of the business quarter by quarter shouldn't change all that much.

And then on the joint venture in the Asia-Pacific, can you talk about I guess China Union Pay, how that has finally developed and how you will interact with that? And how that can help drive growth there?

I think China Union Pay, as you all know, is a consortium of financial institutions that was encouraged by the Chinese authorities to link up all the ATMs and point-of-sale debit. They have -- according to China Union Pay -- 835 million -- that's their number -- 835 million China Union Pay-plugged debit cards that they have issued. China Union Pay is a network, but they are also interested in having a merchant acceptance beyond their borders. We are having conversations with them that would help them in their strategy outside of their borders. They are currently a strategic partner with HSBC in these 10 regions and countries. So China Union Pay is and will continue to be an important customer/partner with us going forward.

And then finally for Jim, is there any change to your overall tax rate outlook or minority interest for fiscal '06?

No, I think if you looked at the K, we have made some changes as of the end of last year in terms of how we report it, those numbers. But the piece of tax as a net of tax and minority interest is relatively. I don't expect to see much changes there.

Adam Frisch, UBS.

Congrats on the quarter. I just wanted to -- you guys haven't mentioned HSBC at all, so I figured I would ask you a couple questions on that.

First of all, in Asia, are you going to look for more acquisitions there? Are you going to wait? It just seems like you've bitten off a lot here. Are you going to wait to kind of chew this a little bit and digest it a little bit before looking elsewhere in Asia?

Well actually, Adam, what we would be looking at with HSBC -- and quite frankly, we have exclusive arrangements with them in a couple of significant territories. So what we're saying to them is -- what makes us different than some of our competitors is, we are not trying to have a dating arrangement here; we are interest in a marriage. And consequently, we will betroth ourselves to just you. And we want you to do the same with us. So consequently, the acquisitions that we are looking at -- and we are looking at some now with them -- will be in these territories to help bring these -- so it's -- we are not going to wait. We are busily looking at lots of opportunities with these guys right now.

So this deal doesn't -- it is not only with Asia but also in Europe and the U.S. This does not constrain you at all. Certainly, I would assume not by capital means but maybe by a resource constraint? Or are you guys still okay to move forward with other things?

This is why -- there was a question earlier about the percentage of ownership. It was very important to us that HSBC have a significant piece of this JV. We need them. We not only need their branches and we need their name and we need their franchise. But they have some wonderful management. They have salespeople in cross countries, out there successfully signing merchants all day long. That all comes part of this. So we are inheriting some great people. And I'm very confident in Carl Williams' abilities and a gentleman that will be joining Carl shortly that came from our Canadian operations, who is a star as well. So I am feeling pretty comfortable.

Maybe I should have been a little bit more clear. Can you guys still do other acquisitions or strategic deals in the US? Are you constrained at all from a resource perspective within Global Payments to do other things?

We were not from a financial perspective. We are only constrained by our own imagination, our own ability. So we are feeling pretty good, and we are going to pursue every opportunity that makes sense. We are always able to bring in more talent, and Kevin Schultz is the case in point.

I would agree with that. On the HSBC alliance, could that be used to help DolEx enter the Asian money transfer market?

It could. But I would not, Adam, that is one area I would say I would not look for us to do anything immediate there. And that is an area where I think we have so much growth opportunity, and we've only got 10% of Mexico today. Why not have 20% of Mexico? That's just there for you to take advantage of. We do have limited resources that are focusing on that business. I'd like to let them grow that business aggressively. And when we reach certain growth projections there, then I'll start casting the net. But HSBC does provide that opportunity. Now they do have some money transfer services as well themselves.

And I think they just introduced that recently in North America.

And I believe it was free.

Yes, it was. In speaking of which, it is a good segue to my final question. Do you have any plans to diversify the money transfer model at all in the next several years? You've written about pre-paid cards and re-loadable debit cards for money transfers and all that kind of stuff. Do you see the model changing if at all over the next few years?

I guess we see it changing dramatically, not over the next couple years, but I mean over the next decade I think and beyond that I think it's going to change. I think it's going to be in the two areas you just mentioned. We are actively pursuing those tests. They are finally getting a little traction. Hopefully, we will have a little more to talk to you about next time. But we are doing both pre-paid and debit that we are issuing from our DolEx locations. And we also have money transfer abilities on those two. So it's not only cash or check, take in some money, put it on this card, but you can give one to your -- the person you have a relationship with in Latin America, Mexico, Central America -- and you can load that up as well. So we are looking at both above of those.

Tony Wible, Citigroup.

Great quarter. I think you've answered most of the questions on HSBC. But I had a couple of clarifying questions. Do you anticipate most of the costs in HSBC alliance being based overseas? You gave some partial answer I know earlier, but I want to just kind of get a sensey sense -- 50/50, 75/25?

I think we're early to give you that viewpoint. We have some plans that we have worked out internally. But I think we want to get further along before we share what direction we're going to go. As Paul mentioned though, one of the things that we are able to do because technology is easily affordable is make available many of the tools that we have available here in the U.S. We have done the same thing for both the NDC and CIBC acquisitions in Canada. And I think we're going to try to take advantage of all the nice things that we bring to the table. And where we come up short, we will make up in country.

The second question has to do with the question on China Union Pay. More broadly speaking, do you guys currently support any local networks beyond just Visa and MasterCard?

Well, we interface with JCB, and we accept, in fact a fair number of their cards in all the gateway cities that Japanese tourists visit. Is that what you mean, Tony?

Yes, exactly. In other words, China Union Pay being potential local network that it sounds like you're trying to tap into and then each country.

Yes, we are. Now you know, they just announced a deal with the Discover network, a deal with Citi. They got their own plans for expanding the bug. But they're also interested in people knocking on doors and signing up merchants for their card as well.

But building interfaces to our systems, that would be work that we would have to do. It's not all that difficult to do.

And then each -- outside of China and the other regions and territories that they generally have their own local networks, so do you have connections now that you know of? Or would you anticipate building more of those connections, some of those local networks?

I think as we go with MUZO, Tony, as we expand beyond, as we get successful in some of the countries where we have sales presence. It takes a while to sign these banks by the way; they are not merchants. But as we do that, absolutely, positively we will.

So right now, we should think about is primarily JCB, Visa and MasterCard?

Correct.

And then shifting gears, on your guidance that you've given, what are your economic assumptions in the US? Are you taking a more bearish stance on the economy or status quo with where we are at right now?

That is a great question. We are in fact taking a little more of a bearish stance. We baked in some impact with Katrina. You know, you've got another monster out there swirling in the Gulf as we speak. There's lots of things on the horizon that you cannot see, but we have taken -- we have assumed we will get less of a benefit from currency. And that the -- we have a little bit more of a bearish look. But quite frankly, Tony, one of the beauties of our industry -- not just for us, it is pretty much across the board -- is we are not as hit as much in slower times just because of the diversified portfolio and people using their cards for lots of other reasons. If you just had a portfolio of luxury merchants, that's one thing. But if doctors and dentists and professionals and taxes and education, etc., etc., utilities -- it's pretty well spread.

Last question has to do with Canada and the re-pricing. Are any of your other competitors in Canada re-pricing? And then, is it across the board you are trying to re-price? Or is it certain selective verticals?

You go back to last year, there were some (technical difficulty) MasterCard pricing adjustments -- one on commercial card, one on adjustment themselves. So some of the price adjustments that we have made really were to take into account a pass-through of what they've increased to us.

Aside from that, what we have tried to do is react to the market, and the market has got today more U.S. competitors with -- Paymentech is there. Anova is there. First Data is there. And they have brought some of the U.S. pricing models to Canada, and we are really just reacting to the marketplace.

And so when would you expect these -- I know you mentioned earlier -- when would you expect the pricing to anniversary?

There is going to be varying points in time. It starts October/January and then June, so you're not going to see it in one stair step effect. I don't think any particular (multiple speakers) --

But by clearly this time next year.

Right.

Unless they're already at the end of it.

Unless there are other changes during the market.

Right.

Thanks again. Great deal too.

Robert Dodd, Morgan, Keegan.

Just a couple questions on surprise, surprise HSBC. At the moment in the infrastructure for the HSBC business, is it data centers per market? Or do they have a centralized technology infrastructure and would actually -- if it is per market -- would a centralized system be practical either for the regulatory or technology reasons?

That's a great question. Right now, the two biggest markets for these guys, as Joe pointed out in his presentation, they do have separate data facilities that support these. And that's one of the things that attracted HSBC to this JV. They were looking for a way to seamlessly take all these regions and potentially even others in the area and put them together in a neat package to support them.

Now there are regional differences clearly. In fact, there are some things you have to be very careful about, particularly with Taiwan, in particular with handling transactions and in China with handling transactions. And when the two meet each other, you have to be very careful with those transactions. So we do have some regional peculiarities we're looking at. But we believe we can support this in a single data utility.

On the south side, I assume for the most part right now that the merchant customers in the region as some of the larger guys were direct sales were -- but if you are targeting the smaller merchants, how are you planning on building out? What kind of sales infrastructure? There's no ISO channels in those markets so to speak, but can you give us any color there?

What we are doing today is, they do -- you are correct -- have an awful lot of the big merchants. But they also have a fair amount of mid market. They call them SMEs -- yes, I'm sorry -- SMEs and they are very interested in expanding their SME presence. And that that's one of the reasons they did this too. But their branch network drives in a fair number of these. We will be adding sales firepower and parenthetically, there aren't any ISOs there. But who knows? It might be a ripe market that could very well work.

Thanks a lot. One final actually, '02 to '04, you took like 20% -- 22% dollar volume growth compounded. We actually look at the numbers in the last several years both as the region as a whole and then India and China separately, the growth rate has actually accelerated each year. Do you think that is sustainable that we can see that growth rate accelerate from the 22% level going upwards?

I personally do because it is so de minimus. 39% of the population was less than 3% of the world's payments. We have less than 5% of the population in the United States. We have 45% of the world's payments. I'm not suggesting they follow lock step like that, but I think therein lies the answer to the question.

You have such a small penetration. The Chinese consumer -- by the way they're probably approaching 1 billion bank accounts in China with very, very few credit cards. So the upside in India obviously, the same story -- the upside is enormous.

David Togut, Morgan Stanley.

Could you talk about the pricing trends in the domestic merchant processing business? It seems like a lot of companies are going to the mid market as the larger national merchants continue to cut price. Have you seen price hold in in the quarter, and how would you expect this to evolve?

The spreads were -- our spreads -- once again, David, because we are in the midsize market -- our spreads were pretty constant. We agree though that the national business -- and I keep wondering how much lower can it go? You're now at a point where they are all bids. It is all cents per transaction. You cannot even make basis points anymore. And it is all over interchanging assessments, so there's no opportunity to do anything there. That business, as far as I'm concerned, is marginalized, and that just continues.

But the mid market business -- thank goodness -- although highly competitive, our spreads are holding up very nicely.

And then any update on the New York regulatory approval for money transfer?

Go ahead, Jim.

We just got the application in in the last week or so. And we are at the same time working on a small money transfer acquisition that touches New York State. And so I think (multiple speakers) those two, New Jersey and Florida -- but the fact that it touches New York state, I think it may play a part in trying to accelerate the approval of that application. But it was a very long process. It has to go through fingerprinting and all the like of the Board and management involved in the business. But we have it on file. And hopefully in the not-too-distant future, we will be processing the state.

Have you considered by the way adding biometric identification to some of the DolEx cards?

It is not on a current list of near-term rollouts. But I think it is clearly something that is being considered.

Tien-tsin Huang, JP Morgan.

I was wondering, how much of the impact of Katrina that you've quantified is tied to the merchant direct bankcard business versus the check and gaming business?

Great question, Tien-tsin. Most of it is on the check and gaming. In fact, if you look at the some of the horrible pictures from Biloxi, you can actually see some devices that have our name on it in the rubble, some devices that gave cash advances, our teller cages that were crushed where our logo was. We were directly impacted. We had almost all those casinos. They put out some pretty good volume. We have a very much smaller impact from general merchants in those areas quite frankly. So I would say the great majority of it came from the check business (multiple speakers), specifically, Tien-tsin, those casinos.

So no major change in volumes or average ticket, etc., towards the latter part of the quarter or the early days in September?

(multiple speakers) We knew you guys would ask that. And we actually had a concerted effort to look, and I'm happy to report we've seen very little change at all.

If I could just ask 1 HSBC question.

Sure -- love HSBC questions.

That is a great deal. I'm just curious to know, if it was a competitive or a negotiated win? And what ultimately drove you guys to win the deal? Was exclusivity a major factor?

I think exclusivity had something to do with it. But I do not think we are the only guy that was willing at the end of the day to offer that. We have been talking to these guys for well over 2 years. We had serious dialogues for the last couple years. And this was a very competitive process. They talked to a lot of people. I can't tell you precisely -- it sounds a little self-serving if I did -- why I think they chose us. I think they felt comfortable with what we promised we would do. They felt comfortable with our relationships with CIBC in particular, and they did some due diligence on that. And I think they are also very selfishly made the right decision in choosing us. Because we will in fact advance this more quickly than anyone else could.

We also -- we don't advertise this all that heavily -- but we also have a pretty much exclusive relationship with them in the U.S. in terms of sponsorship relationships. We have been sending them almost all our new business over the last 5 years -- ISO business as well as our direct business. So financially, they have a good relationship with us in the United States as well.

But I would say one last comment on that. We really have been going over there a lot, and sometimes things just click. And this was a scenario where management clicked. And I think that's a lot of that. It is hard to quantify those, but I think that meant a lot.

Congratulations. Well done.

Carla Cooper, Robert W. Baird.

Amazing, there'd still be more questions.

Thanks, Karla. We like questions.

Now I am going to forget my question. My question was about just in the margin that you produced in the quarter. Clearly, clearly added a revenue beyond what you might have been expecting impacted that. But to what extent did cost surprise you on the downside?

I do not think it was much as a surprise. Some of the initiatives that we put forth at the start of this quarter, it's hard to quantify the impact to the business, changes that we made in Canada -- hard to quantify. At the beginning of the quarter, we had some estimates, and maybe they were a little bit better than we had originally expected. But I think on the cost side, I think we have a pretty good visibility into it costs to run the business. It is progressing according to expectations.

Great. And then just finally one more on the Asia region, to what extent did your thought process on this joint venture focus on sustaining what HSBC already has going in its major regions versus more fully exploiting some of the regions like Mainland China and India that are fairly small today as contributors to that? I mean --

I think it is all the above. I think they had a leadership position or have a leadership position in all the markets that they are in. They are a great financial institution. And I don't this is a question that they have not been executing well. I think, as Paul mentioned, this is even greater focused opportunities in China -- are just getting started for them in Mainland. And opportunities to acquire in, being part of a joint venture, I think it is easier for those type of relationships to develop than if they were simply within the financial institution. So I think there's nothing but good news coming from this opportunity.

Mark Sproule, Thomas Weisel Partners.

Most of the questions have obviously been answered on the HSBC side. But to look at the MUZO platform a little bit, did you get out -- I might have missed it -- but did you guys give out the contribution on the revenue side that MUZO had for this quarter?

We talked about -- we said that the revenue grew 30%.

On that side of the business, are you seeing increased penetration within the banking communities in Europe? Are you starting to get more traction? Obviously, we have not heard any major new client wins on a comparable basis, stuff that you kind of announced right out the gates with the Russian opportunities. Are you seeing that kind of traction? Is it taking a little longer than you would've hoped for? Or what would you look out for in the future?

The reality is, your selling to financial institution is a long, long selling cycle. I'm not disappointed at all with MUZO. In fact, I'm delighted with this kind of growth. And even with the exit of that customer as we are still anticipating, these guys are still going to do great. And then once that annualizes, they are back to these kinds of level. We do have a strong pipeline. I am not disappointed at all. But this is not a deal where we are going to be announcing lots of customers every quarter.

Do you have to acquire more MUZO-type operations throughout Europe to really drive the growth? Is that going to be the bigger method of entering some of the bigger contracts over there?

Yes. The answer is yes. If you are going to really grow this thing in leaps and bounds, that has to be a strategy.

And then I guess given some of your competitors recent focus on doing similar type of movement into Eastern Europe and European operations, has that pushed up potential costs associated with acquiring some of these platforms versus what it would have been would have been 6, 8 months, 12 months ago?

Yes. The answer is yes. It's becoming more competitive. We are not the only guys that see the potential in Eastern and Central Europe. And the answer is yes. There are lots of people chasing these. God forbid, if it ever comes to book and you have a bakeoff, typically, we back out. Because we're not going to -- we are still very disciplined about how we are going to do things. We are not going to do wildly dilutive deals just for the nature of empty calories.

On the Europhil side -- and you might have mentioned this, and I apologize if I missed this again -- I understand that the pricing disparity and how that might affect the revenues in this current quarter. But have you seen transaction volumes? Have those still been fairly strong? How have those trended over the last quarters?

That is a great question. And Jim didn't have a chance to add that on Europhil. The Europhil transaction growth is great because we're doing the same thing we did in DolEx. We are taking the price down. It was increased beyond where it should have been. We are taking it down. That is helping to drive transaction growth.

And on the DolEx front, how many Latino Amigo cards do you have now? And are those the focal point of your kind of build-out towards the pre-paid debit card market through that brand franchise?

Actually, the neo -- the Latino card is really just an identification and activation of the system. So if it is lost or stolen, it doesn't have necessarily a value, and we cannot store on it. We could use that name Amigo Latino; it was not something that we can brand. So we have, the name we use is Super Express. And as Paul mentioned, this is in the pilot program. Amigo Latino, I don't have a count for you. It is somewhere north of 800,000 cards that are active. The other program is just getting started. It is in a pilot stage at this point in time.

I guess one question on the HSBC front. Obviously, we have seen the infantile stage sort of on a credit card number -- credit cards or debit cards that are in those marketplaces versus kind of the US, Taiwan Hong Kong, Western Europe. But is there a difference -- or would you say that China and India have a lot more similarities on the trend towards the electronic payments to the US market or towards or Central and Eastern Europe, which have been a little bit slower to adopt or quickly move that way?

I think probably more towards the Central and Eastern Europe. I think it would be unrealistic for us to expect that China and India are going to adopt payments the way we did in this country. But, there still are, between those two countries, 2.2 billion people. I think even a much slower adoption rate -- and by the way, the growth rates in Central and Eastern Europe are pretty darn good -- so even a much lower adoption rate still produces significant opportunity.

The other question is, is it going to be straight credit? I think you are going to see other applications obviously debit with 800-plus million China Union Pay cards out there. Virtually everyone who has a job in China has a bank account. You really do not have a choice in the matter. They just put your pay in your bank account.

At this time, I show no further questions, sir.

Well, thank you very much, ladies and gentlemen. And thanks for joining us on today's call. And as always, we appreciate your continued support of Global Payments.

Ladies and gentlemen, this conference will be available for replay starting today at 5:30 PM and ending at midnight on Octobers 7th. If you wish to listen to the replay, please dial 866-365-2452, or international participants can dial 203-369-0220. This concludes our conference for today. Thank you for your participation. You may disconnect now.