環匯 (GPN) 2006 Q3 法說會逐字稿

Good morning ladies and gentlemen and thank you for standing by, and welcome to the Global Payments third quarter 2006 earnings conference call. At this time, all participants are in a listen-only mode. Later, we will open up the lines for a question-and-answer session. (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. You may begin ma'am.

Thanks. Good morning and welcome to Global Payments' fiscal 2006 third quarter conference call. On today's call, we will discuss our quarterly financial results and business highlights. Joining me on the call today are Paul Garcia, Chairman, President and CEO; Jim Kelly, Senior EVP and COO; and Joe Hyde, EVP and CFO.

Before we begin, I would 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 which are discussed in our public releases including our most recent 10-K. We undertake no obligation to revise any of these statements to reflect future circumstances or the occurrence of unanticipated events.

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 our Form 8-K dated March 31, 2006 which may be located under the investor relations area on our website, www.GlobalPaymentsInc.com.

Finally, our prior period earnings per share results and share amounts give retroactive effect to our two-for-one stock split which was completed through a stock dividend that was distributed on October 20, 2005. Now, I would 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, Joe will further discuss our financial results. Next, I will provide an update to our fiscal 2006 outlook. And lastly, Jim, Joe, and I will of course be available for question-and-answer period.

Now, for our financial results. We're very pleased to announce another quarter of solid financial results. For the third quarter, our revenue grew 15% to more than $225 million. Our diluted earnings per share grew 33% to $0.36 and our operating margin improved by 190 basis points to 21.4%. This solid revenue growth reflects strong performance in our North American merchant channel primarily due to ISO growth in the U.S., continued benefit from pricing benefits initiatives in Canada, and a favorable Canadian currency exchange rate.

In addition, our DolEx branded consumer money transfer channel experienced strong growth this quarter, driven primarily by our continued branch expansion strategy and industry growth trends.

Before I cover our recent trends and events, I will briefly discuss our pending joint venture with HSBC in the Asia-Pacific region. To summarize the deal, we have agreed to pay HSBC $67.2 million in cash to acquire a 56% ownership interest in the joint venture. HSBC will control the remaining 44% and will contribute its existing merchant acquiring channel and 10 Asia-Pacific countries and territories.

The deal is subject to a lengthy regulatory approval process in all 10 of these regions, but we continue to expect this transaction will be completed within 12 months from our September 2005 announcement date. We're obviously delighted to partner with a world-class financial institution that has extensive local market knowledge and a rapidly growing payments region.

Now, on to recent trends and events. In the U.S., we achieved strong growth in our domestic direct channel compared to prior year quarter. Our transaction growth for this channel exceeded 20% and our average ticket and spread grew in the low single digits.

In total, our domestic direct revenue grew approximately 20% in the quarter. This growth was higher than our expectations largely due to our ISO channel. I'm happy to report that we signed three new ISOs and renewed two ISO relationships during the quarter.

We are raising our annual fiscal 2006 revenue expectation for the domestic direct channel to a range of mid-teen to high teen growth. Our domestic indirect revenue declined in the mid-teens during the quarter as expected. Due to price reductions granted on contract renewals, revenue for this channel may decline more than 20% during the fourth quarter. Nevertheless, we reiterate our full fiscal year revenue expectations for this channel of the mid to high teen declines.

In Canada, for the quarter, we achieved low single digit in total credit and debit card transactions, and our credit card average ticket declined in the low single digits. Our Canadian credit card spread, however, increased in the low double-digits for the quarter, primarily due to the continued benefit from or last calendar year's pricing initiatives and a benefit from no longer processing under the negatively priced Air Canada contract.

For the quarter, our total Canadian revenue growth was in the low teens, driven primarily by these pricing initiatives and to the continued strength of the year-over-year Canadian exchange rate, both of which delivered a more favorable impact than expected. Nevertheless, our Canadian revenue and spread growth slowed this quarter as expected, largely due to a partial annualization of certain pricing initiatives. We continue to expect that our fourth quarter Canadian revenue growth may slow to high single digit level as this annualization effect continues.

Lastly, our full fiscal year Canadian revenue growth expectation remains unchanged at mid to high teen level.

Our Central and Eastern European merchant revenue declined in the low single digits for the quarter as previously anticipated and as discussed in last quarter's call. Several factors contributed to this expected decline, including the timing of nonrecurring revenue in last year's quarter; an unfavorable year-over-year Czech currency exchange rate; the impact of custom attrition; and price reductions granted on contract renewals.

Our revenue for this channel may decline at a faster rate during our fourth quarter as a result of these factors, in addition to the increasing impact of the de-conversion for the previously discussed large customer which prior to the closing of the MUZO acquisition had given notice to move a portion of its business.

Despite these trends however, our revenue growth expectation in this channel remains unchanged at the high single digit to low teen arranged for fiscal '06.

Although we're entering a challenging near-term revenue growth period for this channel that may extend into our next fiscal year, we remain pleased with the growth prospects in Central and Eastern Europe and continue to believe strongly in the long-term attractiveness of this market.

Our total money transfer revenue for the third quarter was $30.5 million which includes our DolEx and Europhil revenue in addition to our legacy funds transfer channel. During the quarter, our DolEx transactions grew more than 30% and our DolEx revenue grew more than 20%, both of which reflect accelerated growth compared to the first half of our fiscal year. This expansion was driven primarily by improved same-store sales growth and an increasing U.S. branch footprint. As such, we're pleased to announce that we opened more than 30 new branches during the quarter, raising our total U.S. DolEx branch network to more than 790 locations.

We are also pleased to report the subject to certain administrative requirements, we received approval for a money transfer license in New York and are working towards expanding our branch network into this state, either organically or via branch acquisition. Lastly, we expect DolEx revenue growth in the high teen range for fiscal '06. In summary, we're delighted with our overall strong financial results for the quarter.

I will now ask Joe to further discuss our financial results in detail. Joe?

Thank you, Paul. In our press release and as posted on our website, we included GAAP income statements and a year-to-date schedule which reconciles GAAP to normalized results for the nine months ended February 28, 2006. Although we did not incur any restructuring charges this quarter, our fiscal year-to-date GAAP results include $1.9 million in such charges primarily for employee termination benefits and facility-related costs associated with the completion of a previously discussed facility consolidation. These restructuring charges have been excluded from our fiscal 2006 guidance.

During the quarter, revenue grew 15% to more than $225 million on operating expenses of $177 million, resulting in operating margin improvement of 190 basis points compared to last year's quarter. This margin expansion was primarily due to increased revenue and improved leverage from our North American merchant channel.

Aside from the revenue increases that Paul discussed and the related economies of scale benefits on earnings, other factors contributing to this improved leverage include lower telecommunication costs and other vendor rate reductions, savings from the exiting of our shared service agreement with NDCHealth, a favorable year-over-year foreign currency impact and a decline in year-over-year operating costs in our U.S. customer service centers including our recently closed Dallas facility.

These favorable factors were partially offset by investments in our direct sales channel, including significant growth in our ISO commissions expense in addition to investments in new U.S. money transfer branches and in our smaller European branch network.

Interest and other income of $2.2 million for the quarter reflects an increase from the prior year primarily due to higher cash balances and higher investment rates. Interest and other expense of $1.7 million declined compared to the prior year primarily due to the paydown of our U.S. line of credit, partially offset by an increase in interest and other expense related to our relationship with National Bank of Canada as previously discussed. If you recall, we also incurred a nonrecurring debt repayment fee during last year's quarter relating primarily to fixed-rate debt assumed in our MUZO acquisition.

During fiscal 2006, we expect that our interest and other income will largely offset our interest and other expense for an approximate net zero balance. Minority interest net of tax for the quarter of $1.9 million reflects an increase from the prior year due primarily to growth from our joint venture with Comerica Bank. Our tax rate remained at 34.1% during the quarter compared to 35.3% in the prior year quarter. We define our tax rate as our provision for income taxes as a percentage of our pre-tax income before minority interest.

The decline in our year-over-year tax rate is due to tax planning initiatives and the favorable impact of international growth, primarily in European markets where statutory rates are lower than U.S. rates.

As previously discussed, our current share count reflects the impact of our recent stock split. We expect a range of 82 million to 82.5 million in diluted shares outstanding on average for fiscal 2006. We achieved $47.9 million in free cash flow during the quarter or growth of 25% compared to the prior year quarter. We define free cash flow as net cash from operating and investing activities, excluding business acquisitions and changes in working capital.

We also realized $83.6 million in cash relating to our settlement activities during the first nine months of this fiscal year as reflected on our cash flow statement. This increase is partially due to timing inherent in our settlement process, in addition to the migration of a large portion of our Canadian Visa portfolio away from same-day value, as well as a change in practice relating to our National Bank of Canada relationship, all of which we discussed on our second quarter call.

This settlement-related cash flow increase is also due to a significant increase during the quarter in cash reserves relating to a particular merchant for whom we no longer provide processing services. For more information, please refer to the voluntary 8-K that we filed this morning that describes the situation related to this merchant.

Also on the cash flow statement, capital spending for the quarter was $5.3 million primarily for software and infrastructure, including our new Atlanta-based Next Generation processing platform in the U.S. We anticipate 23 million to $28 million in total capital spending for the fiscal year. Lastly, on the cash flow statement, our business acquisitions line increased $1.8 million in the quarter as expected, primarily reflecting the remaining payments due on the money transfer branch acquisitions discussed on our second quarter call.

Moving to the balance sheet, our reported cash increased significantly during the quarter primarily as a result of strong cash flow growth, in addition to a significant increase in cash reserves related to a particular merchant as previously mentioned. Lastly, the increase in settlement and processing obligations during the quarter primarily reflects the corresponding obligation created by our increased cash reserves related to merchants. Paul will now discuss our fiscal 2006 guidance and our ongoing strategy. Paul?

Thanks, Joe. Based on our solid third-quarter results, we are raising our full-year fiscal 2006 revenue guidance to $896 million to $903 million or 14 to 15% growth over 784 million in fiscal 2005. In addition, we are raising our full-year fiscal 2006 diluted earnings per share guidance to a range of $1.48 to $1.51 reflecting growth of 24 to 27% over our fiscal 2005 normalized diluted earnings per share of $1.19 on a post split basis.

We're also raising our fiscal 2006 operating margin guidance to a range of 22 to 22.3%. This guidance does not reflect the impact of restructuring charges or pending joint venture with HSBC, or any other significant acquisitions. We are delighted with our continued strong performance and achievements this past quarter which reflect the ongoing execution of our strategy. We will continue to focus on pursuing domestic and international opportunities to position Global Payments as a solid long-term revenue and earnings grower. We are now pleased to go to questions.

(OPERATOR INSTRUCTIONS). Tien-Tsin Huang, J.P. Morgan.

Good morning. A quick -- I guess Paul, maybe you could give a little bit more detail on the merchant risk that was disclosed in 8-K. It sounds like the likelihood of taking a material charge is pretty low, but I was hoping you can just comment on this based on your prior experiences.

Yes, I will give a little color on that. This was partially driven -- I'd say in a large way driven because we have this big increase in cash on the balance sheet, and so we felt an obligation to explain that to you guys, number one. Number two, the 8-K was really our call. This is something that we thought was worthy of a Q, but we wanted to have a chance to discuss it, which we're going to jump into right now.

The language in there -- I can say too much other than we do not think a loss is probable. We have adequate reserves. I am going have Jim take you through a little more on this in a second, but at the end of the day we feel pretty comfortable. We're in the risk business. That's what we do. We think we do pretty good job of this. It's unusual something of this size crops up, but we deal with merchant issues literally every single day. And we think we do fine job of that. Jim, you want to take a little more detail on that?

Okay. I'll just walk you through briefly what's in the 8-K, but I would refer you back to that document which has a lot of detail. We signed this merchant in October of '05 as an auction site. It is an on-line payment service provider which allows customers to transfer money from their credit card accounts with the on-line payment merchant. And then at the customer's discretion the merchant can transfer the money from the customer's account to a third party to complete the payment of the bid or service.

As I said, we started this relationship in October of '05. We saw very little activity in October, and November and December the activity started to spike up which we would expect because of the month of December. We had a number of the transactions verified which means you pick up the phone, you call the cardholder to confirm that this was a transaction that they initiated and they all came back favorably.

Then, when we moved into January we saw the volume continue to grow. And that point, because we were looking for additional information, we decided to put the merchant on reserve and start capturing funds, which is a standard procedure here and probably with any payments company to protect itself against the potential of chargebacks.

By end of the month of January, we learned that they had -- this on-line payment service a company which was our merchant had also a relationship with a multilevel marketing company that we were not aware of. And when we became aware of it, we elected to cease the relationship by the end of January.

Around the end of February, the marketing company's operations -- this is the Company that is not our merchant, but the multilevel marketing company underneath our merchant, their operations were seized pursuant to a federal court order. And the court order also appointed a receiver to assume control of the operations of the multilevel marketing company.

In addition, the court that appointed the receiver ruled favorably that the chargeback process, the normal Visa/MasterCard chargeback process would continue in the ordinary fashion. And as a result, subject only to request for reconsideration or appeal the judge's order.

Global will continue to apply the reserves that we had established. They're outlined in the 8-K, which were at its peak $47 million. At the end of the quarter I think it was $39 million or so that we will continue to apply the chargebacks as they come in. And not all of those chargebacks are valid, and we have successfully reversed chargebacks where we have underlying documentation to show that the consumer who participated with this marketing company was in fact, from the documentation we have, was paid.

While there are still factors that are clearly out of our control as described in the Form 8-K this morning, and assuming a normal runoff of the chargebacks, we believe that the reserves that we have for our merchants will not be depleted when this comes to a landing. We cannot be sure that this will ultimately be the case and as Paul said, we think our loss is not probable. But it still is possible.

We have seen in the last two weeks, if you look at the week ended 3/29 versus the week ended 3/15, these chargebacks have declined at a rate of over 40%, and this is quite normal and we've seen it. This isn't the first merchant to go out of business and is not the first merchant we've seen fraud with, but it is normal that these chargebacks spike and move up, which we saw in February. And then they start to drop. And we are seeing a very sharp decline in the chargebacks and expect it to continue that way and runoff in the next month or so.

I will just add one final comment. The bottom line is we also have guarantees from the merchant and from the ISO that brought these. We're hopeful that won't even come into play and appreciate the question.

That is helpful. I guess a question on the gross margin, getting back to the numbers. That came in well ahead of our expectations, and we calculated sort of -- I guess a 95% incremental gross margin there, which was well ahead of your peers. Curious on what is driving the outperformance there and maybe if you can talk about how sustainable that gross margin is and that trend is -- are there more levers to pull etc. going forward?

Well, as Paul said, we had some significant revenue growth in the quarter. This is largely a fixed cost business and you can see our cost of service this year and even in the prior year really hasn't grown all that much. We've done a lot of work around customer service center facility consolidation, other telecommunication cost reductions that we have kept the costs in line. And as the revenue grows, that is favorably impacting that gross profit margin, so nothing in particular in the quarter. I think it's a continuation of the trends that we've seen year-to-date.

And going forward, we always have a number of potential cost reduction initiatives that we're looking at that we've discussed, and we would expect that to be favorable in the future as long as the revenue growth is there for us.

Mark Marostica, Piper Jaffray.

Thank you. Congratulations on the quarter. First question relates to the SG&A expense line. It looks like for the last couple of quarters, the growth in that line item has eclipsed revenue growth. I'm just wondering -- I think you mentioned a few items that drove the SG&A this quarter. Maybe elaborate on that and perhaps talk about over the next few quarters if you expect that to normalize in line with revenue growth or how should we think about that line item?

That line item -- the growth in that line item is largely driven by ISO commission. The ISO channel growth has been actually accelerating as of late. It's doing extremely well, is the largest contributor to our performance in our domestic direct channel. And you're going to see that SG&A line continue to grow as long as that ISO channel is growing at these rates.

Great. And then as we look to the coming quarters, understanding that you have a number of cost reduction initiatives ongoing. Maybe if you could talk about some of the initiatives that would occur in '07 that you guys will be focusing on to continue the cost reduction efforts.

We're not intending to talk a lot about '07 at this time. We're currently going through our budgeting process. We're at the early stage of that and I think it would be a disruption to that process if we came out and talked a whole lot about the '07 numbers.

Needless to say, we are working on a number of initiatives, both technology and operating related. We're containing with our next generation technology platform in the U.S. Whether that will be an impact in '07, I think it's still a question. But we do have those initiatives under way and we are just not in a position to talk a lot about financial effect and disclose (multiple speakers) at this time.

I would add one more, I think that as you're well aware, one of the great benefits of being in this business, and this is not peculiar to Global Payments, is the leverage that you get from bringing in more business. And as our ISOs grow, as our direct business grows, as DolEx grows, as our other businesses grow, these are all very leverageable businesses. So you continue to get -- you get that margin pickup as well.

And one last question and I will turn it over, on DolEx, I'm wondering if you could comment on the margin profile of DolEx relative to the average margins for the business. Thanks.

We don't separately segregate out the margins, but as Joe mentioned in his comment, the growth in DolEx was very strong for the quarter. And as Paul just mentioned, these are both leverages -- these businesses are very leverageable and that is continuing to benefit the Company.

Tony Wible, Citigroup.

Good morning. I was hoping we could start off by recapping what percentage of the merchant volume today is from ISOs, and I guess that that channel is accelerating. I just heard it's kind of accounting for a growing proportion.

We haven't broken that out yet. I will tell you it is a significant part of our direct channel. And it is growing at a faster rate than our direct channel, just by the virtue of the leverage of all these ISOs. And we added three; hopefully -- we have a robust pipeline, we can keep that up. We are renewing or haven't lost an ISO and that business is significant. So perhaps we can give some more color down the road on that, but it is significant. It's not a small part of our direct business.

And looking at this contract that you guys held the reserves on, is that indicative of a large merchant for you? Because it does look like they are on, like maybe 340 million of volume. Is that considered kind of an anomaly or has your average merchant size changed at all over the last couple of years with this new ISO business?

We have merchants of varying sizes. I don't think 300 million is the top end. We have merchants that exceed $5 and $6 billion in just total volume. This was large for an on-line company such as this, and I don't think you can take those numbers and extrapolate into a size because it was not our intention to have a merchant of this size in this kind of business.

Okay. And it looks like you guys reserved like half the volume that they were putting through. Is that normal practice for you guys or did you guys early on get a sense that there was some suspicious activity?

I wouldn't say it was early on. I think for the first couple of months, we were not aware of their underlying merchant relationships. And once we became aware, largely due to increase in the volume, we started capturing 100% of all their transactions in the month of January. And that's what accumulated this huge reserve to protect ourselves against the potential of chargebacks which we're now seeing.

Okay. Last question is, is it safe to assume then that if there was any other suspicious activity that you had seen in the portfolios, you would have disclosed such, right?

That's correct. We see merchant issues from time to time. As Paul said, that is the business that we are in. This one just happened to be larger than most and it ended up with a large reserve, but we have seen these back two and three years ago after 9/11 with travel agencies. We had a number of large travel agencies that we closed and we did the exact same thing. We set up large reserves to avoid chargeback risks and those relationships ended smoothly.

You know, I would make one more comment on this. This is kind of in today's world, and also I think it's our corporate values that an abundance of communication is a good thing, so that's what drove these discussions number 1. Number two, our systems worked fine. We actually -- we picked of all of these spikes in volume. We verified transactions, called consumers and they said no, we really charged that. That was legitimate. But in a multilevel marketing program like this, when we realized what it was, that's when we seized all these funds, so -- I feel comfortable with everything we said.

So guess to be clear on this particular relationship, it looked like it came through an ISO, but you guys were doing screening for the ISO. It wasn't that the ISO was doing any screening.

The initial screening is -- this is a full liability ISO.

Meaning they have 100% of the liability.

When they did the initial screening, we do a shadow screening of it. They have the primary responsibility. We have secondary responsibility as it relates to our responsibility with the ISO. And for the first couple of months, as this was moving along according to expectations in their merchant agreement, if things looked fine once it accelerated rapidly, that's when we take a more primary role. And clearly once we move to shut the account down, and to the extent there's any legal issues, Global takes 100% of control.

Adam Frisch, UBS.

Nice job on the quarter. Can you give us some color on what type of growth you expect out of Canada in the next year, and how the improvement of your U.S. operations and some of the things that Kevin is doing in the sales force could reinvigorate growth there and complement or mitigate what's going on in Canada?

I am going to do Kevin first and then will talk about Canada. Kevin has done a couple of things that I would like to highlight. First of all, he has brought in some new talent. He has a -- we split the country into half and he has an internal guy that has been promoted to run half of the country and brought in a payment executive of some note to run the other half of the country.

He's also addressably developing our referral and VAR channels and we're getting subtraction there, which I'm pleased to see. He also hired two senior relationship managers from Visa which was his old position, and they are enhancing our existing clients' relationship structure. So I'm starting to see a lot of traction on all of these things and feeling very good about what Kevin is doing.

Now, as you know, Adam, we're talking about grand total of 300 salespeople roughly. And although it's Kevin's intent to add cells resources, you don't get the kind of movement on the needle from that amount of salespeople. You will see some progress and we'll be delighted to address that, but it's not as material as our ISOs. Now I am going to say something on Canada and I'll throw the ball to Joe.

Our Canadian business, we're a little surprised on the upside for the quarter. We are giving you guys guidance that it's going to be where we said it would be. Kind of [ongoing-ly], we're going to annualize a couple events that we discussed before and all that you understand -- the pricing increase for one. And so we're expecting the Canadian business to kind of get back to the high single digits, Joe. Is that our guidance?

Yes, that's actually the guidance for the fourth quarter. We saw the revenue growth in the high teens in the second quarter, and now it's down to the low teens and looking at high single digits for the fourth quarter. And that's not a deterioration in the business performance but simply an annualization of some pricing initiatives that we put forth.

For fiscal '07, we are reluctant to talk a lot about what our expectations are, but clearly we're not expecting Canada to be a double-digit type of a revenue grower. It's likely to be a single digit. It's a more mature market. We do have a wonderful market share, but we have had a wonderful year this year, but it was largely a result of either FX or the pricing initiatives that we tried to be as clear as possible on.

Now, it doesn't mean that we don't have more tricks up our sleeve. It doesn't mean that our ISO growth isn't going to be robust, but you're going to have to let us go through our budgeting process and we will share with you guys our guidance for '07. And we will very carefully consider all of those factors. Got a couple months yet.

Okay. Two questions on ISOs. First of all, I agree with Tien-Tsin that the 8-K does not seem too material in the sense of a financial risk for you guys, but is it an indication of a larger issue regarding the quality of business being generated by your ISO channel and whether you're planning on adjusting your risk standards here?

That's an excellent question actually, because at the end of the day, that's really the underlying question here. And the answer is we're delighted with our ISO channel. We have a robust credit monitoring group and they are working hand-in-hand with our ISO group. This is a very unusual situation. I can never say, Adam, this will never happen, but this is a first for us.

Now we do manage risk all day long. We take write-offs all day long. We seize money all day long, but something of this size is unusual. But the systems work. We seized the money. Hopefully this has a very happy ending which I -- we feel comfortable saying. But there's nothing -- I do not read into this that this is a trend with the ISOs or there's lots more of this coming, although I have to flavor that by saying there's no guarantee. This is the business we are in. We take merchants. We're ultimately responsible to the card associations. And never say never, but this is the first one of this size for us.

(multiple speakers) We added a couple of small changes that will allow us to maybe see things even sooner than we did in the situation. They are minor. I don't think they will be felt by our customer base, but it will give us greater comfort that we might be able to react a little sooner. But the reality is merchants like this get signed as Paul said, and once they are in and processing with you, you can't just simply turn them off. And every new merchant that we sign does not necessarily have a reserve.

So there's a process that you go through getting a merchant and there's a process you go through in exiting a merchant, and I think we're very capable in that arena and we have not seen any significant losses in the six years we have been in the ISO business.

Okay. And one follow up on the ISOs. It seems like some of the growth is coming from the new relationships you guys are signing, three this quarter, seven last quarter. Can you talk about the organic growth of the ISOs and how much is coming from -- what is the mature rate of growth for the ones you've had for a long time and what do the new ones add to that growth?

Yes, I don't think we would comment on specifically the organic piece of that business, but I can say that it's not just by adding new relationships. We love to add new relationships and they are terrific. They are smaller generally and we have seen the ones that added five years ago have not matured in the sense that they're not going to continue to grow very strongly.

Some of the ones that we added five years ago are some of our stronger growing ISOs today. And I think the Company has done a good job in marketing this service and I think we are a strong destination point for people that are considering this business.

I would say if we never signed another ISO, you're still going to have very robust growth from this channel. That's the great thing. This is a fabulous channel.

Understood. If I could just sneak one last question on HSBC. The expectations for growth and margins are really all over the place from the accounts we speak to. Can you just maybe establish some broad-based parameters around -- is growth closer to 10% or 50%? Are margins closer to kind of mid single digits at first that will grow over time? Or -- I have heard some people think that margins right off the bat are going to be 30, 40%. So given the variability in what people are thinking, can you just kind of give a little bit of a tighter range on some of those things?

We probably haven't helped tremendously because we have not given a ton of guidance, but that's an excellent question, so let's at least color in some of it. Firstly, part of the enthusiasm from us and everyone else is that you're talking about China and India, this part of the world that has massive growth and huge opportunity, so everyone gets very euphoric about that. The reality is there is massive opportunity, but it's not going to come day one.

The majority of the volume from the HSBC business is two fairly mature markets. Hong Kong and Taiwan make up well in excess of 50% of that business, and those business -- those markets are not growing the way China is, the way India is, the way Malaysia is, the way all these other countries that we have with HSBC are growing, because they are mature markets. In fact, Taiwan on a credit card per capita is way up there. It has more credit cards than just about any country.

So at the end of the day, we're initially going to get this business, it's going to be kind of slower growth until we get into this. It certainly isn't going to grow immediately the way China and India is because most of this revenue is coming from slower growth. Over time, our expectation is that we will do better than market, but initially, it's going to be a more reasonable growth expectation. And we will give - the minute we get this thing closed, it is our intent to then go out with some pretty robust guidance on this that tells you guys as much as we can about it. Joe, you want to comment on margin for a second?

Sure. Let me add a couple of points on your revenue comments. When we announced this deal, in our description of the acquisition we had disclosed that 70% of the revenue came from either Hong Kong, Taiwan and only 20% came from either Malaysia, China, or India, and that again is based on a calendar 2004 revenue of $50 million.

We would like to provide more financial information on this, but at this point it's really not our information to provide. We don't own the business. We don't have an interest in it at this time. Is still in HSBC's data, so as Paul said, when we close this deal we will try to provide as clear as possible the financial effect of this acquisition.

Moving to the margin side, we disclosed that HSBC didn't focus on this business in a lot of ways, including from an efficiency standpoint. They're processing on a number of different platforms which really hurts the efficiency and that is something that we feel that we bring to the party to make them more efficient, to raise the margin, but that being said, that will take a several year process to complete. So I don't have any other kind of financial color I could give but --

I will add one more. We I think mentioned in a previous call, Adam, maybe even the question you asked, we said that we are also going to invest here. If we're not in investment mode, we're not buying this to maximize profitability. There is some low hanging fruit, there is probably some stuff we can do to make this more profitable. And they're making money now, but that's not what this is about. This is about adding lots of sales resources, investing in product, investing in infrastructure, so I'm not looking to maximize the near-term profitability on this. It's a long-term play. I hope that's helpful.

It is very. Thank you very much. I appreciate it.

Greg Gould, Goldman Sachs.

It's Liz Grausam sitting in for Greg. I would like to drill down on your U.S. business. I think you said, Paul, that transaction growth was 20% plus in the quarter. How much of that is coming purely from market share gains in your view? And how much maybe is coming from mix shift towards debit and/or just an overall [listing] card usage that you're seeing in your merchants?

Wow Liz, I would say we're doing a little bit of everything. Let me try to put in rank order. Our debit overall [and base] debit is not huge. It's about 5%. Our signature base is like 40%, and that's a big part, so I'm assuming that when we're talking about debit, you really are probably focused more on pin, but signature is a big part of our -- signature debit is a big part of our growth.

I would say the majority of it is coming from share growth. There are some new markets we're in. Kevin is focusing on some emerging markets which are pretty exciting for us too, and these are -- Visa and MasterCard are actually making some great inroads with a lot of things. Contactless, we are watching some other initiatives too. We're hopeful Visa in particular will be softening its rules on the signature required, which will open up without kind of gimmicks like contactless, will open up a whole bunch of new merchants opportunities for us to acquire. But I would say most of that growth is coming from the market share.

And then on the average ticket and spread in the U.S., I think you said both were up in the low single digits. What is driving the spread?

The spread is largely driven by the growth in our ISO channel, who are focused on more small and medium-sized type merchants which typically have higher spreads.

Do you think that's a sustainable trend, Joe?

I think that we've seen our spread remain fairly stable over the past several quarters, even in the past couple of fiscal years. We also tend to get a bit of a benefit from Visa/MasterCard interchange adjustments, so that will continue to be our strategy. And we love the ISO channel and we don't see it slowing, so I would think that trend will likely continue.

Liz, another important point here is of course Visa and MasterCard had a pricing change effective tomorrow, April 1. And we do expect a little pickup from that. Not -- modest, we're not saying anything of any significance, but you round. You round a little bit here, a little bit there, you do get a little bit of a pickup.

Great. And then just lastly on the cash balance, even excluding the reserves and potentially the payout you are going to have to HSBC for the joint venture, you still are accumulating cash at a nice rate. What does the M&A pipeline look like? And if not M&A, what are the other uses of cash that you might pursue?

[M&A is] that we are accumulating cash. You are exactly correct and we are delighted to be doing so. It's good to be generating lots of cash and we are very proud of that. M&A is absolutely top. We have a $67 million expenditure coming up with HSBC as soon as we get that closed. The M&A pipeline is fairly robust, but robust doesn't necessarily translate to deals. We have a lot of -- we have a pretty rigorous process including needing accretion in the near-term, and that's a tough fence to hurdle. And -- but we're seeing lots of deals. We're primarily focusing in Europe and Asia and we're looking at lots of things.

Dave Koning, Robert W. Baird.

Congrats on a great quarter. Just a few follow-ups from a previous question. First of all, Joe, you mentioned you expect SG&A to continue to grow. Is that is dollar terms or do you expect it also to keep growing as a percentage of (indiscernible)?

Yes, it wasn't specific to either. It has grown as a percentage of revenue and has grown in dollar terms, so beyond fiscal '06, we really haven't talked about what the '07 number -- and I am not in a position to say whether it's dollar or percent. It's likely that the trend will continue on both.

Okay. Great. Secondly, the 35 million of collateral at the end of Q2 or at the end of Q3 from this merchant, is that apples to apples with the hundred million of collateral that you had at the end of fiscal '05? Meaning are those two I guess the same terms -- the same type of collateral?

Yes, it is the same bucket. Same type of collateral.

Okay great. Lastly, [on] DolEx pricing, I'm just wondering the trends there. You mentioned revs were up 20% plus, transactions up 30% plus. Is this something where you have seen I guess mild pricing declines? It kind of looks like mid to high single digits. And would you expect that to continue?

Before Joe answers or Jim, let me focus on the last question you asked. It is apples to apples, but it's not in a big chunk. These are lots of little deposits for lots of merchants as opposed to a big deposit for the merchant that we discussed. Okay?

Right. Thanks.

I'm sorry, could you repeat that question on the DolEx?

Sir, that person is no longer in the queue. Greg Smith, Merrill Lynch.

First, just a quick one -- were there any small money transfer branch acquisitions in the quarter?

No, we had a couple of payments that were still due on the acquisitions that we made in the second quarter.

Okay, so no new acquisitions. And then this was addressed previously, but I just wanted to ask the question again. So what's typically the lag time between signing an ISO and actually seeing significant volume? And the reason I ask is because we keep getting surprised just how strong the ISO channel is for you guys, but don't you have very good visibility on that quarter to quarter?

Not as much as one would think. We do. We know the ISOs we have, we know the signing and we have a pretty good sense when we signed an ISO, to answer that question in particular, it takes awhile to build up. Typically, unless it's a startup ISO, they're typically processing somewhere else. It takes awhile for them to convert that business. Sometimes they don't choose to convert it at all. They leave it with their old processor and give us the new business and that takes awhile to accumulate, so with ISO -- [there] are exceptions however, but typically with ISO, it's a slower build.

Now, in terms of visibility with the existing, these ISOs are constantly growing themselves. In some cases, they are buying other ISOs and swinging that over to us. They're adding more sales resources. They're getting into new verticals. And although we have a sense for all the business they bring in, it's not a precise science to forecast that growth, so we are pleasantly surprised on the upside. Joe, you want to add anything to that?

No, I concur with what you're saying.

Okay. And then just wondered what have been your loss rates maybe over the last 12 months? Loss rates as far as a percentage of dollar volume? And how much do you reserve for that on each transaction? Please remind us of that.

Great question.

We haven't specifically given a loss rate as a percentage of volume, but the loss on our card business year-to-date has actually shrunk by almost $2 million. In the quarter, it was fairly even with the last quarter, but given strong volume growth, obviously a percentage of the volume, it has declined significantly.

And that has been fairly consistent for the last two years.

And I think that's a function of the processes that Jim has put in place over time and the robust underwriting and the risk profiles and intuitive systems that pull out transactions that exceed a number of parameters, so this stuff is really working.

Yes, and you guys don't give out the actual volume, so we can't calculate any of this, but we're talking loss rates in the handful of basis point range?

It will be more of half the basis points instead of basis points. And in an ISO relationship, you would expect for the full liability ISOs that we talked about earlier, they'll see losses from maybe 2 or 3 basis points up to 5, 6, 7 basis points. Our base business, Canada and U.S. either individually or combined, is less than a basis point.

The important take away there is that 100% liable ISOs, meaning those are their losses, so when we take a loss it's our own portfolio.

When an ISO takes a loss of 5 basis points, we never see that. It never is reflected on our financials. It is netted out of the commission we pay them.

Yes, but if an ISO were to go bankrupt or something, you could still the on the hook for 100% liability?

That is correct.

We don't -- we are in a [walk] from the liability. We still have an indemnity to the bank that sponsors it. But if the ISO goes out of business, it doesn't necessarily translate bad news for us because the processing, the front end processing, the back end processing, the managing of the funds, all of the rest of that stuff continues uninterrupted, even the customer service. They can call our customer service instead of the ISOs. What we would see is the ISO business would not grow if there wasn't somebody sending the business in. It would start to attrit, but it wouldn't result in a financial loss to us.

That is a very important point. You have seen some of these transactions where ISO portfolios sell for massive amounts of money. Ultimately, we have the ability to take that business. And it's worth a lot of money and it throws off terrific profitability, so that's always a fallback position. So we really feel quite protected.

Great. Very helpful. Thank you.

Paul Bartolai, Credit Suisse First Boston.

Joe, on your comment on the margins, you mentioned you saw an increase in the ISO commission expense. Was that is due to the growth in the ISO business overall or are you seeing higher payments kind of on an apples to apples basis to the ISOs?

It's largely driven by a growth in the overall revenue from the ISO channel.

So are you seeing any -- can you talk about any change you are seen in the payments to the ISOs? Or has that been pretty steady?

Paul, there are -- we negotiate deals all the time. It's modest. The ISO gets maturity of it anyway, the way it works. So it is modest. It's mostly a growth in their business.

Okay. And switching to DolEx, saw pretty nice acceleration there in transaction and revenue growth. Can you talk a little bit about what drove that? Also, maybe if you could give some color on the gap between revenue and transaction growth, it looks like that may have widened a bit from past quarters.

I think a lot of the movement in that business, and we have seen it since we owned it, has to do with the pricing in the marketplace. And our pricing has held pretty strong in this quarter. We were somewhat aggressive going into the start of this calendar year. As you know, we mentioned before Mother's Day is a really big day for DolEx. We are coming into the busy part of our season starting with May. And we just happened to see as early as January and February that the transaction growth that we started to work that calendar year carried into this year. And the pricing strategies that we put into place market by market held. And we've not added -- needed to add a lot of fixed costs to support it.

And then just comment on the general acceleration you have seen. Is that just expanding the footprint?

I think it's a combination of both expanding the footprint and the -- the stores that have been here for over a year, those are seeing strong growth as well.

Okay, then just last question, looking at Canada, is there any way to quantify how much of the re-pricing benefit has anniversaried and how much is still going to be rolling off in the coming two quarters here?

It's difficult to quantify that even for us, but clearly the revenue as I said before declined -- I'm sorry, it grew in the high teens in the second quarter. It went down to the low teens in this quarter. We're giving kind of guidance of high single digits in the fourth quarter, so we're hoping that will help you arrive at your financial number. But some of the initiatives that we put forth were staged in the middle of Q3, so not all of those annualized yet. So we're expecting the annualization to continue into the fourth quarter. And by the first quarter of next year, everything will be apples to apples as it relates to the re-pricing unless we do something additional.

Great, and then just one last if I could. For your high single digits Canadian expectation for 4Q, what is the currency assumption there?

We tend to assume constant currency relative to where the dollar is trading today versus the Canadian. So last year it was about $0.81, so we're expecting it to be an increase year-over-year, probably consistent with what we saw in this quarter, which is around I think 5 or 6%.

Wayne Johnson, Raymond James.

Just as a refresher and a reminder, the Atlanta platform that's being built out, the Next Generation as you guys called it, what kind of capabilities will that introduce to the market? And what do you think is going to be the main benefit to Global Payments?

I am not sure it's a new offering to the market as much as we have two platforms here in the U.S., one in Canada and as Joe mentioned, we'll be inheriting a few as it relates to HSBC. And the objective was to take platforms that have been around for 20 years, COBOL based systems and move them into the 21st century. And I think benefit to the market and to Kevin's group in particular is speed to market in terms of launching new products. And also from a compliance standpoint, it'll be easier to make the changes as they come through from the associations.

So we see it as efficiency gain, cost reduction opportunity. We also see this as an opportunity to not only use this platform for the U.S., but also for our Canadian platform which is currently outsourced to a third party.

Okay that's helpful. And then, how many facilities in the U.S. remain to be consolidated?

That wouldn't do something that we would discuss. We constantly look for opportunities to improve efficiencies as Joe said in his comments, but at this stage, we're comfortable with all the facilities that we have.

And the biggest financial impact on the P&L would be to the gross profit margin on this?

In terms of --

Reducing costs for the new platform.

Thank you very much, good quarter.

Mark Sproule, Thomas Weisel Partners.

Talking a little bit about the on-line risk here, do you think that maybe or is -- do you look at sort of risk mitigation in the on-line arena differently than you look at it in the regional channel? In the sense that when you're looking at merchants, obviously the ramp up in growth for a standard retail based merchant versus an on-line channel may be distinctly different. And as they ramp up, things tend to shift out. And beyond that, those that bode into how you look at maybe can your full liability ISOs, as these merchants expand rapidly, are they able to take on potential losses?

And then I guess beyond that, have you looked at other platforms of guys that focus exclusively in on-line processing and how they deal with risk as potential either add-on targets or types of software platforms you want to develop yourself?

That was a long question.

Sorry, I tried to throw it all out at once.

I think you answered the first one. Yes, we do look at the ability to pay in the value of the ISO's business and the personal guarantee behind it. And that is -- that weighs into the amount of credit that would be extended to them. We don't do a lot of on-line business. We typically like on-line business tied to a bricks and mortar business. But in some instances, there is good quality on-line business that we will take.

And the company that we talked about this morning had been in business for several years, actually still is in business -- the on-line payment merchant is still processing today with a nationally recognized processor. It just happened to be that the on-line business invites companies that do not have the same objectives sometimes, and it's hard to see them remotely. So not think we're planning to make any big changes either into the market or out of the market.

In terms of tools, I think we feel comfortable we made an investment a year or so ago a product called RiskNet, which is a system that attracts all transactions and enables us to flag a variety of factors. And I think that we're comfortable with what that system provides. It identified this as a problem account and we act accordingly.

Got you. And then with the -- what you discussed earlier with the full liability on the ISO side, as these merchants expand rapidly, does that sometimes -- do they expand to the point where your ISOs wouldn't be able to necessarily -- (multiple speakers)

Mark, it depends on the size of the ISO. I would say that for our big ISOs, it's unimaginable quite frankly, because these guys are worth so much money. For a -- sometimes these ISO's kind of [carve] -- like an iceberg kind of -- cuts off a piece finance. When you get one of those, they're typically -- they're savvy and have been successful, but they go off on their own. We're fortunate enough to get that business.

If the timing is such that there's an on-line merchant, the scenario you said could happen. The risk associated with that or even a bricks and mortar merchant, the risk associated with that could exceed the value of that personal guarantee. We look at those very carefully and make sure when those are signed that we ultimately have the ability to approve or disapprove. Even if they have liability, we can say we are not going to let you sign that.

And if we see an account that -- as we did in this case where they get out of the ability to pay area, we'll close the account, especially if it's not an account we are comfortable with.

To transition away from this and go to more like the MUZO side of things, how have you looked at the European expansion opportunities? Has it gotten more competitive fighting for new acquisition opportunities? Or -- what do you see the pipeline of maybe new either deals or signings of customers? It has obviously been a little while since your big announcements of last year with the Russian banks etc., so where's the pipeline developed on Eastern European front?

Okay. And Global Payments Europe, which is what we are calling MUZO now, we have sales offices in Prague as you well know, but also in Bratislava, in Warsaw and in Moscow. And they are indeed -- have a pretty robust pipeline of financial institutions. But it takes awhile to build these things. You are signing banks that are either issuing with someone else, driving ATMs with someone else, acquiring merchants with someone else. And it's a big decision to get them to pull all that over to you.

Or in the case of some Russian institutions, this is a new venture. Those are actually easier to sign. It could take a while to build that business. It's about 5% of our revenue roughly. If this thing becomes 4.5% or 5.5%, that isn't really the story. The story is that we believe we can make this meaningful over time. We love Central and Eastern Europe. Tremendous growth characteristics in that business and we think we're very well positioned, but it's going to take time.

Initially when we did this deal, we put out some guidance that we probably regrettably just blew through because we got some easy wins and we cut out a lot of costs and we did some stuff, but it's going to be a little longer slog here to really build up this business, but we love it. In fact, I'm heading over there next week and some opportunities in Russia and in Central and Eastern Europe I'm personally going to be calling on, and we're really excited about the business. So it's going to take awhile though, Mark.

Great. And one last question if I may. On the DolEx front, we talked in the past about new product opportunities and expanding beyond just money transfer to be kind of a financial products player for low income or Hispanic communities. How has that expansion gone and have you started the pilot new products and selling new opportunities through those communities? And how much of the revenue is -- obviously it's in an early stage, but where is that going down the road? Thanks.

As I mentioned in the last quarter, we had this question a couple of times. The primary objective is to get a store value card out and we have it out in beta. It's really just being tested by employees at this time. There's a variety of other Sarbanes documentation that has to be completed. And we hope to get this launch sometime this summer. And it remains to be seen how effective it will be, but we're hopeful that this will be a mover for us as this business moves to plastic from traditional face-to-face.

In terms of the numbers to Joe and Paul took you through to date, we do have non direct money transfer services that we sell through the branches, but they're still a very small part of the overall business.

Robert Dodd, Morgan Keegan.

A couple of questions. First of all, could you give us an idea what proportion of your ISOs are 100% risk? I think it's the majority, but are we talking about 60%, 90%? Can you give us a rough idea there?

We described before that we have three categories -- no liability, 50/50 and 100%. We have very few in the no liability. Maybe a handful, one or two. A number in the 50/50, but it's not active program? The majority of the business we're seeing is in the full liability program. And I think that's what the marketplace has come to know us as a good provider in that service.

Okay. Can you also give us an update on the underplay and perhaps on the casino side of your business? We don't hear much commentary from you on that. You have been gaining some share there. Could you tell us how? And what your expectation of the current status is there?

Yes, we signed -- gosh, I think we announce 9 or 8 casinos recently that we signed, Robert. And it's kind of -- it sounds like a pat answer, but it's a robust product. We're winning these because we have we think the best product for the casino gaming market. And I think all of the signings are a testimony to that.

And lastly, not beating around the bush, First Data says they are going to go after the small merchant segment. Are you seeing anything from them there yet? Clearly you're signing ISO customers and winning new ones, so it would not appear so, but can you give us any idea what is going on there?

Well, we haven't seen any new activity. But First Data was and remains an active competitor in both small and midsize merchants through their alliances and through their direct efforts. And they're very anxious to be successful in the ISO community as well, and they have had some success in the past. They will have some success in the future, but I haven't seen, Robert, anything in particular that would say they're more of a threat than they have ever been.

Cannon Carr, CIBC Global Partners.

We haven't really mentioned immigration reform and I just figured I would just touch on it since it's in the headlines so much. Is there any -- is that progressing kind of like you would expect it to be? And what might be those worst-case downsides as you see things right now?

Well, that's a great question and we're -- I was waiting for the one. There is so much going on and I don't want to pontificate, but we have a strong opinion that there's got to be a better way to resolve this than putting up 800-hundred mile walls and criminalizing people who are here trying to work. If there were a significant decrease in immigration or Hispanics in particular in this country, it would have an impact on everybody who is transferring money to Latin America, end of story.

So we have an economic reason not to want that to happen. And personally, we are all immigrants unless you're Native American, and you either came here willingly or unwillingly, and this whole thing kind of mystifies me. But we also are working with some lobbyists and doing some things. There was something recently in Georgia about was going to charge a 5% surcharge to everyone who could not prove they're here legally for anyone transferring money. That was thrown out. We had an active piece in making our voice heard on that, and we're watching this stuff in each state pretty closely.

And incrementally, it seems like what is coming out the (indiscernible) judiciary committee seems to be gaining a little traction, but you're right. It varies a lot state by state. Is there a way to handicap things right now about how it evolves or that just --

I will tell you what makes me feel good. When Ted Kennedy and George Bush are agreeing on something, either apocalypse is here or we might be encouraged they're really going to come up with something that's more enlightened than some type of program that recognizes reality. That we have people here, the great majority of whom are just trying to work and send money home and provide for their families and they're doing great service in our country and building our economy. And there has to be a way to incorporate them into our society, and I am hopeful that's what happens. I'm a glass half full guy, but that's what I'm hopeful for.

Gary Prestopino, Barrington Research.

Total branches on the money transfer side; you mentioned 790 for DolEx, but how many worldwide do you have now?

Europe has another 33, 34, 35, something that way -- I think it's around 35.

Yes.

With this New York State license, how many branches do you anticipate opening over the next twelve months? And what do you see would be the total capacity there for the entire state for you?

It is going to take a -- I am not going to give you figure on that, but we -- there's a couple ways, as we mentioned, there are some opportunities perhaps to make some acquisitions -- not huge, but to get some immediate traction. There is also a chance just to flat just open some. And hopefully, we'll have some data no later than the next call on this.

But it's -- New York is a little different. Remember, our really -- I think our competitive advantage and our focus is, a lot of it has been in Mexico and there's not as many Mexicans in New York. There are Hispanics from other parts of Latin America and those are not areas that we have focused on as much. So although New York is a great market, it is not as robust as Texas or California or even probably in Georgia for that matter. Jim you wanted to add something?

Just to add on, the other countries that are serviced through New York would be more Peru, Colombia, Dominican Republic are about 80% of the base there. So as Paul said, New York is now going to be a big focus, but we are -- it will not be the same as -- it will be different than some of the other states we have moved into in a big way -- Texas, Arizona, California, Florida.

Dan Perlin, Stifel Nicolaus.

Thanks. There's that and the name massacre continues.

It's better than weasel.

It is so far. That's right. A couple of questions that we'll end on I guess. One is you talked about in the past, in order to remain competitive in the ISO channel, being creative into how you retain those customers or those relationships, and one of the things you had mentioned to me was possibly funding some of their expansion or even quasi-acquisitions for some of those large ISOs. Have we seen that begin yet? And if so, to what extent?

Dan, I will tell you our ISOs are becoming increasingly more sophisticated and they don't really need us to do that. They are getting significant money center bank financing for their needs. And they are -- people are recognizing the value of these ISOs. There are even people talking to them about taking some of these guys public. They are significant, profitable, well-run enterprises. Now, it is doesn't say that we from time to time won't be helpful where needed. And we will do that, but I wouldn't want to announce any type of program.

Just on that note, this just kind of occurred to me -- taking some of these ISO public, do have any equity interest in any of these relationships?

No, we do not.

Okay. The commission fees, are you seeing that as a percentage, in other words the payout that you are paying to the existing ISO increasing over time?

Well, there's two pieces to that. The way it works is they charge the merchant something and those are -- they're kind of moving around a little bit. Probably the fee they a charge the merchant actually as a percentage of the transaction is actually going down a little bit, but they have additional fees for other monthly activity. Those go up a little bit. Probably in general, they are pretty constant -- maybe up slightly.

In terms of what they pay us, like all things, it trends down as you renegotiate these guys. They're going to get a little more and a little more and a little more, which is the way of the world. And the thing that I think we all focus on, we talk about SG&A increasing which we think it will continue as these ISOs continue to drive a lot of growth, but when we can throw up operating margin increases, I think that shows a balance that this leverage model really does work.

Absolutely. And the commission payout to a full service or full liability versus a non-liability or 50/50 -- I suspect it's higher. Is that correct?

Meaning what we charge them -- yes, typically that's accurate. But you know it really is a great majority of these guys are full and that's why they get more money for that. And it's really more legacy customers that are smaller. And because we focus on larger ISOs, those guys by nature want to be fully liable for the reason you said.

I had one other point on the ISO program. One of the areas that I think has helped us be successful is where an ISO, a smaller one is looking for a liquidity event. Some of our larger ISOs have been able to step up and acquire them, and it's an easy benefit because there is no conversion involved. They're just simply moving the portfolio from one region to another region, but it's seamless, so there's no impact to the merchant. The ISO that is selling gets a liquidity event. Sometimes they sell and stay involved, sometimes they sell and they leave. And we have helped facilitate a number of these transactions over the years which has enabled some of our stronger ISOs to get even bigger.

That is an excellent point. And Dan, I have to tell you that's not something that we probably were smart enough to foresee. But as our success, as we expanded our ISO portfolio, that in fact is providing liquidity events for these guys. The bigger ones are buying the smaller ones, as Jim said it is on our -- it's almost an unfair advantage we have to continue our growth of that ISO business.

And I think we have also assisted the money center banks to understand this business and educate them so they feel comfortable that they can make loans, which are collateralized by the merchant contracts. And they feel confident if there's a bump in the road, we're there to help on the processing side, not on a guarantee side.

And what percentage really of the ISO channel would be -- whether it's dollar, volume, or transaction, whatever you care to comment on, are really card not present versus card present transactions?

I would -- this is just a guess, but it's very small. The ISOs tend to be restaurants retail, small locations, $5000, $7000 a month in volume. Every once in a while, you'll see them bump into an Internet relationship. And we have some that have been here that are fairly large and been very successful, and if we gave the name over the phone you would recognize it as an Internet merchant signed by one of our ISOs. But that's not the norm. The norm is small retail.

That's a great closing point.

Well I have one other question. And this will even be a better closing point. The question is really for you, Paul. If we look back at the business a year and two years ago when we followed the Company versus today, would you say that you are -- the business is riskier as a profile today that was then? And then I will hang up.

That is a great closing one. No, I would say that if anything, our systems are more robust and we get smarter every day. It is an iterative process. Every day we learn. So no, I would say our risk profile is either A, unchanged, or B, we're actually getting better. Operator is that truly it?

Yes sir.

Okay, well then all of you thank you so much for joining us on today's call. We as always appreciate your continued support of Global Payments.

Thank you. Ladies and gentlemen, this conference will be available for replay starting today at approximately 1130 AM and ending at midnight on April 14th, 2006. If you wish to listen to the replay, please dial 1-800-925-0850 or international participants can dial 402-998-1599. This concludes our conference for today. Thank you all for your participation. You may disconnect at this time. Thank you.