環匯 (GPN) 2007 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to Global Payment's first quarter fiscal 2007 earnings conference call.

At this time all participants are in a listen-only mode. Later we will open the lines for questions and answers. [OPERATOR INSTRUCTIONS] As a reminder today's conference will be recorded.

At this time I would like to turn the conference over to your host, Vice President of Investor Relations, Jane Elliott. Thank you, ma'am, you may begin.

Thank you. Good morning and welcome to Global Payments fiscal 2007 first quarter conference call.

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'd like to remind you that some of the comments made by management during the conference call contain forward-looking statements that involve a number of risks and uncertainties. For these statements we claim the protection of the Safe Harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995.

While these statements reflect our best current judgment they are subject to risks and uncertainties that could cause actual results to vary, 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 are not in accordance with GAAP. Management believes that normalized results marked 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 29, 2006 which may be located under the Investor Relations on our area on our Web site at www.globalpaymentsinc.com.

Finally, our prior period and 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 28, 2005.

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

Thanks, Jane. Good morning, everyone.

The agenda for our call today is as follows: I will summarize our financial results and review recent trends and events, then Joe will further discuss our financial results. Next, I will review our fiscal '07 outlook and lastly, Jim, Joe, and I will be available for a question-and-answer period.

Now, for the financial results. We're very pleased with our first quarter results.

For the first quarter our revenue grew 16% to $260.3 million. Our normalized diluted earnings per share grew 38% to $0.54, and our normalized operating margin improved by 300 basis points to 25.9%.

These results reflect continued strong performance in our Merchant Services segment primarily due to strong expansion in our U.S. ISO channel, a favorable Canadian currency exchange rate, and the continued benefit from our previously discussed fiscal '06 cost reduction initiatives. In addition, we remain very pleased with our consumer Money Transfer business which achieved solid revenue growth in both our U.S. and European channels driven primarily by our continued branch expansion strategy.

Now on to recent events. We're very pleased with the recent announcement of our Discover Merchant Acquiring and Portfolio acquisition agreement and look forward to strengthening our relationship.

The deal was truly a win-win scenario for both parties as it allows Global the opportunity to directly offer and price Discover Card acceptance and therefore, participate in the full revenue stream on Discover Card transactions. Likewise, this provides Discover Card with the opportunity to grow its acceptance at small and mid-size merchants.

In addition, our ability to acquire the existing Discover Merchant portfolio adds another dimension to our partnership. We expect to begin offering integrated Discover Card acceptance during the first quarter of calendar '07.

We're also very pleased with our announcement to acquire Diginet, which is an indirect payment processor of both point-of-sale and ATM transactions in Bosnia and Herzegovina. This is a strategic acquisition for us and we are excited to enter the fast growing Balkans market and to expand our central and eastern European presence.

I'd also like to announce a management change that recently occurred. Kevin Schultz, our EVP of U.S. Sales and Marketing for our Merchant Services segment, has resigned his position to return to the Midwest with his family.

Kevin helped us make significant strides in strengthening our U.S. direct sales team and we wish him well in his future endeavors. I'm pleased to announce that Kevin's team will report directly to our COO, Jim Kelly, and we expect continued strong growth in this area.

Moving on to recent trends. In the U.S. we achieved outstanding growth in our domestic direct channel, largely driven by our ISO customers.

During the quarter, credit and debit card transactions grew 22% with revenue growth of 18%. In addition, we signed four new ISO relationships. For fiscal 2007 our revenue expectation remains unchanged at the mid to high teen growth range for this channel.

In Canada, our credit and debit card transactions grew 3% for the quarter while our revenue grew 12%. Our Canadian revenue growth was primarily driven by the continued benefit of a favorable Canadian currency exchange rate in addition to an impact from new pricing initiatives that were rolled out on June 1st of this year. For fiscal '07 our Canadian revenue growth expectation remains unchanged at the high single to low double-digit range.

We continue to be pleased with our central and eastern European growth prospects and are pursuing our strategy of signing new clients and acquiring complimentary businesses throughout the region such as Diginet. Our merchant revenue for this channel grew 4% in the first quarter largely due to a favorable year-over-year check currency exchange rate and importantly, growth in credit and debit card transactions grew 17%.

Excluding the currency exchange benefit, our revenue declined slightly for this channel and continues to be unfavorably impacted by the loss of an ATM driving customer as well as price reductions granted on recent contract renewals, both of which we have previously mentioned.

Additionally, we've yet to experience a meaningful financial impact from the deconversion of the previously discussed large customer, although we are expecting this to occur during fiscal '07. Due to the continued delay and stronger than expected check currency exchange rate, we are raising our annual fiscal '07 revenue expectation for this channel to a range of low single-digit decline to mid single-digit increase.

As previously discussed, we closed our HSBC joint venture on July 24, 2006 and are pleased with the progress we've made on building momentum in the Asia-Pacific region. We believe that HSBC is a world-class partner with its 160 plus years of experience in the rapidly growing Asian-Pacific market.

We continue to expect the joint venture to contribute $47 million to $51 million in revenue from July 24th '06 through the end of our fiscal '07 which reflects $55 million to $60 million on an annual basis. This revenue expectation is equivalent to single-digit growth over the same prior year period.

We believe, however, that with the combination of strong leadership, execution, and the right investments, the HSBC joint venture will be poised to benefit from the rapidly growing Asia-Pacific payments markets and thus achieve organic revenue growth in the double-digits over the long-term.

Our domestic indirect revenue declined 14% during the quarter with an 8% decline in credit and debit card transactions. For fiscal '07 we continue to expect a mid to high teen revenue decline for this channel.

During the quarter, our Money Transfer segment achieved solid revenue growth of 18%. In the U.S. our transactions grew 23% with revenue growth of 14%. The U.S. revenue growth reflects the impact of our stated strategy of price leadership to continue to win market share.

We increased our U.S. branch count by 22 during the quarter which resulted in a total of 857 branches at our quarter end. During the quarter, we entered into three separate agreements to acquire more than 40 branches that are located primarily in New York, New Jersey, and Florida of which 38 were operational as of quarter end.

Our growth in acquired branches during the quarter was offset, however, by branch closing. Many of these closings were due to a large former landlord of ours who recently purchased a money transfer business and has since entered into competition with us. Although this type of situation is not a common occurrence, we're pleased to report that we have since opened many branches in nearby areas and we believe we have recaptured the vast majority of these transactions.

In Europe, we opened seven new branches during the quarter and had a total of 47 locations at our quarter end. As a result of our branch expansion efforts, we achieved 83% transaction growth and 59% revenue growth in our European Money Transfer channel for the quarter.

Based on our first quarter results, we are reaffirming our fiscal '07 Money Transfer revenue growth expectation of the mid teen to low 20% range. In summary, we are very delighted with our overall solid financial results and accomplishments during this past quarter.

I'll now ask Joe to further discuss our financial results. Joe?

Thank you, Paul.

In our press release and as posted on our Web site, we included GAAP income statements and schedules which reconcile GAAP to normalized results for the quarter. Although we did not incur any restructuring charges this quarter, our prior fiscal quarter GAAP results included approximately $900,000 in such charges relating to employee termination benefits. These restructuring charges have been excluded from the following discussion.

Lastly, on June 1, 2006, we adopted the Statement of Financial Accounting Standard 123R using the modified perspective method. This adoption, which requires the recognition of stock option expenses, lowered our diluted earnings per share by $0.03 during the quarter. These stock option expenses have been excluded from our normalized results.

As Paul mentioned, our normalized operating margin improved by 300 basis points compared to last year's quarter. This improvement is due primarily to the revenue increases that Paul discussed and the related economies of scale benefits on earnings.

Other factors contributing to this improved leverage include: Savings from exiting our shared service agreement with NDT Health, lower telecommunication costs, a favorable year-over-year Canadian foreign currency impact, the impact of the MUZO trademark write-off in last year's quarter, and a decline in year-over-year operating costs from our U.S. and Canadian customer service and back office centers, including our recently closed Dallas facility.

With this the quarter, the vast majority of these positive factors have now annualized. A possible exception is the Canadian foreign currency benefit although we are expecting a lessening of this favorable impact over each of the next three quarters.

In addition, two of these factors were specific to the first quarter of last year and did not impact the last nine months of fiscal '06. Namely, we incurred the MUZO trademark write-off as discussed in our 10-Qs last year and in our most recent 10-K.

We also incurred a higher level of back office operating expenses than last year's first quarter compared to the quarterly levels that we have experienced since that time due to greater efficiencies. The favorable factors in the quarter were partially offset by significant growth in our ISO commission expense in addition to investments in new Money Transfer branches.

Our Merchant Services segment operating margin increased to 32.1% for the quarter as compared to 28.6% in last year's quarter as a result the factors that Paul and I previously described. As a result of lower than anticipated operating expenses, we are raising our fiscal year 2007 guidance for our Merchant Services operating margin to the 27.3% to 27.7% range.

As discussed during our last quarter call, there are several factors driving this expected slight decline compared to fiscal '06. Among these factors, our ISO channel continues to become a larger part of our total company which serves to lower our overall operating margin despite contributing to our earnings growth.

In addition, we are not expecting to achieve a significant expense savings during the remainder of this fiscal year from vendor rate reductions, technology consolidations, or facility closures at least not to the extent we experienced during the last three quarters of fiscal '06 and the first quarter of fiscal '07. We also continue to expect our HSBC joint venture to have a dilutive effect on our Merchant Services margin during fiscal '07 although we expect this acquisition will be non-dilutive to earnings per share.

On a consolidated basis we are anticipating the joint venture to lower our operating margin by up to 30 basis points for fiscal '07. The joint venture did not have a significant effect on our operating margin during the quarter as we did not complete this transaction until June 24th of this year.

Our Money Transfer segment operating margin declined during the quarter from 16.3% in fiscal '06 to 14.2% in the current quarter. This change was primarily due to our pricing strategy that Paul discussed. Also, the higher than average branch expansion we achieved during the fourth quarter of fiscal '06, in addition to the landlord situation that Paul described, both contributed to higher fixed costs during the quarter.

Due to the landlord situation, it was necessary for us to simultaneously operate both the existing branches that we ultimately closed as well as the new branches that we opened. We incurred these duplicate costs in order to encourage existing DolEx customers to utilize our new branch locations. Based on our first quarter results we are anticipating fiscal '07 total Money Transfer operating margin in the mid to high teen range.

Moving on to our corporate area, our expectation for fiscal '07 corporate expenses is approximately $56 million to $59 million, which includes an estimated $13 million in stock option expenses.

As a result of our expectations by segment, our fiscal '07 total company operating margin expectation is 21.8% to 22.2%, excluding stock option expenses. Including stock option expenses, we are expecting fiscal '07 total company operating margin of 20.6% to 21.0%.

Moving now to our non-operating line items, we are expecting approximately $3 million to $5 million in income from the net of our interest and other income and interest and other expense during fiscal '07. This improved guidance is largely due to higher than expected cash balances and investment rates in addition to expected further reductions in the merchant pre-funding interest expense in Canada.

For minority interest net of tax, we are expecting $11 million to $12 million for fiscal '07. These amounts would reflect an increase over the prior year due primarily to the impact of the HSBC acquisition and the related 44% minority interest expense net of tax. These amounts are less than previously expected primarily due to lower than expected minority interest from our joint venture with Comerica Bank.

Our tax rate of 32.2% was lower than expected during the quarter primarily due to a greater than anticipated impact from tax planning initiatives and international growth. Although our tax rate may fluctuate modestly on a quarterly basis in the future, we expect a tax rate of between 32.5% and 32.7% for the full-year fiscal '07. We define our tax rate as a provision for income taxes as a percentage of our pretax income before minority interest.

Lastly, on the income statement our diluted share count of 81.6 million shares for the quarter was lower than expected and was lower than any of the previous three quarters. This occurred primarily as a result of a lower average stock price and more out of the money stock options which are not counted as diluted shares. We are expecting a range of 82 million to 83 million in diluted shares outstanding on average for fiscal '07.

On a cash flow statement capital spending for the quarter was $6.9 million primarily for software and infrastructure including our new Atlanta-based next generation processing platform in the U.S. We continue to anticipate $35 million to $45 million in total capital spending for the fiscal year. Lastly, on the cash flow statement, our business acquisitions line was $67.2 million in the quarter due to the HSBC joint venture.

Moving to the balance sheet, our reported cash decreased primarily as a result of the cash purchase price payment relating to the HSBC joint venture partially offset by strong cash flow generated during the quarter. As of August 31st, we held $10.5 million in cash reserves relating to the merchant contingency situation that we previously discussed although we have not experienced any operating losses relating to this merchant and we do not expect to incur such a loss in the future.

Paul will now discuss our fiscal '07 guidance and our ongoing strategy. Paul?

Thanks, Joe.

For fiscal 2007, we are updating our annual revenue guidance to a range of $1.57 billion to $1.84 billion, or 16% to 19% growth over $908 million in fiscal '06. In addition, we are raising our full-year fiscal '07 diluted earnings per share guidance to a range of $1.79 to $1.85 excluding the impact of stock option expense which would reflect growth of 16 to 20% over our fiscal '06 normalized diluted earnings per share of $1.54.

Including fiscal '07 stock option expense, our fiscal '07 diluted earnings per share guidance is $1.69 to $1.75. This guidance reflects the impact of our joint venture with HSBC but does not include any other significant acquisitions or potential restructuring charges.

We're very excited about our financial results and recent accomplishments during this past quarter and we intend to focus on integrating our recent acquisitions and to pursue domestic and international opportunities to position Global Payments as a solid, long-term revenue and earnings grower.

We'll now go to questions.

Thank you. [OPERATOR INSTRUCTIONS] Our first question comes from Elizabeth Grausam with Goldman Sachs. Please go ahead.

Good morning.

Just wanted to talk ability your Money Transfer business. Certainly in light of everything that's going on with the Western Union brand it looks like your transaction growth held up very strong but your pricing initiatives seemed to maybe gained a little more momentum.

Could you kind of talk about the market, what you're seeing from a transaction standpoint and what you're seeing from a pricing standpoint market-wise and how your strategy is playing into that?

Sure.

Well firstly, you did pick up exactly what we said. We did see some strong transactional growth. We are the avowed price leader.

We think this is a commodity business and as such, it's important to have the infrastructure, the stomach, and the, I think the focus to execute on that strategy, so we are, in fact, taking down prices whenever we detect any competitive pressure and it's becoming competitive so we're responding and that drives transaction growth. We're seeing a little more stabilization as of late, so I wouldn't say that is a precursor for lots of future activity but we'll keep you apprised.

And then your European practice seemed to have grown a little bit well beyond our expectations. Can you kind of tell us what's going on with your Europhil business and how rapidly you think you can expand that?

Liz, we're delighted with that deal. There's a phenomenon. You do net some people that would be coming to North America and now going into Europe.

I mean the Europeans have a much ore enlightened approach to immigration, quite frankly, than I think we do and because of that, you know, there's an article recently talking about if it wasn't for immigrant growth in virtually every country, with the exception of maybe Ireland, there wouldn't be any GDP growth. But the immigrants are driving consumer growth, housing growth, et cetera. And because of that we're picking up on those wonderful tailwinds and there's a lot of money being transferred.

Also, of course, as you know, is new EU entrants come in, they can very freely flow between countries and we're getting some of that activity as well. So I would look for us to be continuing to open branches and take advantage of those opportunities.

We've got a great management team over there, we think we've got the formula right, all our systems are up and going and we're bullish on that market.

Great.

And then just lastly, quickly on the timing on the timing on the deconversion out at MUZO, is there any update as to when that may hit in the [inaudible]? I think we all expected, we keep expecting it to hit in the current quarter and it doesn't.

We expected it last quarter and then we expected it the quarter before that. I mean we've been expecting, you know, there's kind of good news and bad news. The good news is it's not easy to deconvert and we're providing great services.

I think if these guys had their druthers, they wouldn't do it. This was an agreement that was signed before we bought them and they're going to ultimately have to live up to it. We think it's going to happen over the next three quarters. We think we get through fiscal '07 and it's behind us.

Great. Thank you so much.

You're welcome. Thanks.

Thank you. Our next question comes from Kartik Mehta with FTN Midwest. Please go ahead.

Paul, I wanted to ask a little bit more on the Money Transfer business. You said there was some, little bit more competitive pricing. Was that pricing in just certain states or did you see that throughout the DolEx network?

I'm going to throw that ball to Jim. Jim?

I think we saw it clearly in the major states being Texas, Arizona, and California. I don't know that I could say it was across-the-board but, clearly, from U.S. to Mexico corridors where the border states are most heavily concentrated, I think we did see some reaction in the marketplace relative to pricing and as Paul indicated, we try to remain competitive in the spread between ours and the other money transmitters, large money transmitters and if their prices move we generally follow the market.

And you indicated that some of the issue on the margin was because of this landlord issue. Is there any way to say was pricing more or was the landlord issue more, any type of directional comments?

Well, the landlord is, was large relative to other situations where we'd have stores within stores, but I would say the competitive pressures in the marketplace probably had a bigger impact than having to run to dual labor and have to start up businesses next to the locations where we were exiting.

I would agree with Jim on that. The pricing competition is harder to quantify but the duplicate costs are easier to determine. We probably had several hundred thousand dollars of duplicate costs in the quarter, so instead of kind of the modest earnings growth that we saw for the Money Transfer area, you would have grown in kind of the high single, low double-digit range.

And in addition to having duplicate costs to attract the traffic from what was previously a store within a store to a new location, we generally run introductory pricing and introductory pricing has an impact on the margin. So the positive news, as Paul said in his comments, is that we've picked up what we believe is substantially all the traffic that was previously in the other location, but it came at a price and that will annualize and it should be good news after that.

Okay. Thank you very much.

All right, Kartik. Thanks.

Thank you. Our next question comes from Dhruv Chopra with Morgan Stanley. Please go ahead.

Good morning.

Just on this question about the landlord, how long do you expect to run these duplicate [inaudible] or is that basically just a one quarter event?

It's not one quarter. It's been going on now for some period to ramp it up. I would say we should be beyond it by the end of this calendar year.

Okay.

And then one of your large ISOs just added on or made a pretty sizeable acquisition. Is that sort of new volume that would be coming to you from a competitor?

Well, I know what you're referring to and it's, we are having dialogue with that ISO as we speak and that would be our hope but there's no guarantees and until things are done so we'll keep you in the loop.

Okay. Great.

And just lastly on the HSBC joint venture, can you sort of give us a little bit more color on sort of what progress you've made there? Have you finished with all the pruning of the unprofitable accounts and is it sort of now the base from where you're going to grow or is there still more to come off?

The former I think was well said. We have, in fact, finished with the pruning of the unprofitable accounts. A lot of that was done actually even prior to close on this. HSBC was very helpful and cooperative in that.

We are adding executive leadership under Carl Williams and in [Courtnage] we just added a senior executive residing in Singapore to run our non-China, everything but that, for India, example. His name is Monish Sharma and he just joined us, was an executive with American Express bringing lots of years of knowledge and expertise and we are hard at putting together the finishing touches for the plan that will be the most cost effective and aggressive way of delivering our services in all of those fast countries, and so we'll keep you informed.

Great. Thanks.

You're welcome.

Thank you. Our next question comes from Tien-tsin Huang with JPMorgan. Please go ahead.

Thanks. Good morning. First --

Tien-tsin, how about starting with nice quarter? Someone's got to say that.

Great results, Paul!

Thank you. You're hurting our feelings here. We haven't heard it from anybody yet.

Terrific results and the incremental margins are definitely still playing through.

First I guess the four new ISOs signed in the quarter, on average how do these ISOs compare to the typical ISO [that] process on Global in terms of, I guess, size and growth?

That's a great question. They're pretty much what we're focusing on. I mean it's a sweet spot or a little bit larger, but that does not translate to we're going to get tons of business immediately because that necessitates conversion. So these are ISOs that are capable of bringing on some reasonable amount of new business, but it's going to build over time.

But we're not, to answer the question, we're not dipping into the other tiers that, quite frankly, we haven't been focused on. We're looking at ISOs that will have sophistication to assume full liability for all of their credit decisions, that have a network that's up and running and that have some depth and scope to their operations.

Understood. And then can you give us a sense of how meaningful the Discover Portfolio acquisition agreement could be?

We are not going to close that yet for a little bit.

Sure.

But it's -- it is typically, Discover is typically anywhere from 5 to 7% roughly, maybe as much as 8% of bank card volume. It depends on the vertical, 5% is probably a safer number kind of across-the-board, especially with our verticals, so it's an opportunity to pick up 5%, bank card, excuse me, 5% of the accounts and revenue for Discover merchants.

Now, we have a different approach here. When these accounts are part of our ISO program we're going to offer them to our ISO customers and that's a unique thing that we're going to offer, it's something that our ISOs are very excited about and we think it's exactly the right move for them and for us.

When it's our own base business, then we'll be making those acquisitions ourselves. But we get a little closer to getting this deal done, we'll give you guys a little more color.

Okay.

If I could just sneak in one more question on DolEx given all of the moving parts, can you give us a sense of the same store growth in domestic Money Transfer volume this quarter and maybe how it compared to the prior quarter?

At present, we haven't been giving out same store. We're kind of thinking through what we're going to do and what we're not. Just at present we're not doing that. I'm sorry, Tien-tsin.

No problem. Great results.

Thanks so much. Thank you. Our next question comes from Tony Wible with Citigroup. Please go ahead.

Good morning, guys. I guess a great quarter also. I'll follow-up on that one.

Thank you, Tony.

Real quick to start off with DolEx, I know that you guys had talked a little bit about your strategy there, but are you guys trying to be proactive or more reactive in pricing?

And I guess would it be fair if we did our math and if we look at the 23% transaction growth and the 14% revs, would that imply that pricing, I guess, is getting cut in half on average or is that evenly across or is that skewed just because of the magnitude of the price decreases and just the new locations with the promotion?

I think that it's all of the above. I don't think it's, you can point to any one piece.

Clearly, the competitive marketplace had some impact but as we said when we purchased this business three years ago, there was a trend on pricing and it's generally moved to one direction, which is down, and I wouldn't say it's abnormally low relative to any previous quarter other than the first year that we purchased the business, but we did modify pricing in the July-August timeframe.

You know, Tony, I think it's important and this is kind of a level setter. It's important to note that we have reaffirmed our revenue guidance, high teens, low 20s for the whole business. Now that does include Europhil too, of course, but, so we're still feeling comfortable with the strategy.

As you do drive in transactions, once you get past a critical mass, it's terrifically profitable, even at lower prices because of the fixed cost nature of the business. And clearly, because we've been opening so many new locations, especially with the dollar but even beyond that, until we really build up critical mass in all of those things they're losers and that's definitely going to suck it down.

Would you say that there's any kind of skewing in that average, you know, on average I guess with your revs per transaction being down, like in half, is there a lot of skewing because of promotions or would you say it's just a minimal driver?

I don't know that I could comment that it's having that much of effect as opposed to just the overall market.

Okay.

Moving on to Canada, I guess is it possible to at least qualitatively break out how much of the improvement in Canada between the transaction revenue growth is from the foreign exchange versus repricing? And I presume I already know the answer to this but I just wanted to double check that you do your FX calculations based on the average rate during the quarter. Correct?

Yes, we do, and the average rate in the quarter grew about kind of a high single-digit number, I think it was 9%. So of that 12% revenue growth, 9% was FX with the balance just being normal organic transaction growth and a much more modest repricing benefit than in prior years.

Okay.

Last question, Paul, is more of a strategic question with Bank of America's move to exit the ISO channel. What are your thoughts on that as far as your relationships with the ISOs and I guess the fears of increased demand for ISOs?

You know, it's not a shocking move for Bank of America, I mean, banks haven't been truly embracing the ISO model. So, that didn't shock us.

We are -- we remain fully committed to the ISO model and are delighted with the results and feel that we have the absolute sweet spot of that business. So we see that as basically nothing more than a reaffirmation that financial institutions just don't really like that business. It's not a comment on the viability or the desirability of the ISOs.

Great. Thanks a lot, Paul.

All right, Tony.

Thank you. Our next question comes from Mark Marostica with Piper Jaffray. Please go ahead.

Thank you. Congratulations, Paul, Jim, and Joe.

Thanks, Mark.

Actually this is A.J. for Mark.

Oh, hi, A.J.

Just on the margin expansion. I know you guys didn't change your pro forma operating margin expectations. Can you just talk to us as to why after such a strong first quarter?

We did have a good quarter. The results were modestly higher than our expectations on the margin side although not as much as what you may think. We had, most of the upside in the quarter for us, in terms of our internal expectations, came on the non-operating line items that I talked about in my interest related comments, tax rate, shares, et cetera.

We've historically seen kind of a big lift from Q4 to Q1 in terms of EPS results, a little misleading in looking at last year's numbers in that we had the MUZO trademark write-off which was at least $2 million impact. We also had some other kind of non-recurring expense or higher level of settlements, or back office expenses in that quarter, so it's a little bit difficult to kind of gauge in terms of seasonality, but our first quarter is a very strong seasonality quarter, largely, higher level of recurring revenue business especially in Canada.

June, July, and August are very solid months. It's really the best month of the year, I'm sorry, the best quarter of the year, relative to Canada, so again, we didn't give quarterly guidance, so we did have some upside but not as much as the upside that you may think when you compare our results to the quarterly consensus that was published.

Okay. Understood. I appreciate it.

Now just moving on to the landlord issue on the Money Transfer side just to make sure that I'm clear, how much of a risk is that, Paul, in terms of the operating model, in terms of what happened with this specific landlord and you feel there's anymore risk at any other locations?

That's a fair question, A.J. We think this is unusual. We haven't seen this since we've had it. There are -- there's always potential for some of these in the future.

I'm not going to say it will never happen again, but it's a pretty unusual scenario where a regional merchant decided to actually make a small purchase of a money transfer company and incorporate it. I mean he's an entrepreneur and it might have been a smart move for him, but we don't see that.

There's know not a lot of those companies available, number one and number two, we just don't see that happening any time soon with any other of our customers so I think probably this was an unusual scenario.

Okay.

And I know that you haven't really been disclosing this on a year-over-year basis but can you just talk to us, Paul, about, this is my last question, about the leverage over at DolEx right now, where you are today versus where you were last year and I mean, if trends continue on transactions, where it could go?

Jim, why don't you take that one?

Well, we wouldn't project long-term operating margin growth but the model is a solid one and we've seen it continue to expand. The cost of an incremental transaction on a variable basis is relatively small, so as we continue to move more transactions both into DolEx and we've now leveraged the Europhil, a lot of the back office Europhil infrastructure into DolEx, at both models I think will continue to experience margin expansion over time.

You know, I'll add a couple other thoughts to that.

Just on the DolEx model in general, and I'd like to say we were smart enough to have had figured this out but we always like the model with owning our locations with our own employees. We knew it gave us better systems. We knew it created a unique environment for our customers, but we never really figured that it would have the kind of impact it does particularly in the environment we have today with some of the immigration pressures and some of the things going on with states Attorney Generals being very focused on making sure all proper procedures were followed.

Because these are our employees we have a unique opportunity to fingerprint, to absolutely 100% verify identifications and we have a know your employee program that we think, you know, allows me to sleep very well at night.

Secondly, because it's our location, even if it's our booth inside of a store, it's our people, it's our location, it's our environment and it happens to be a very friendly environment and, you know, in a culture where somebody might be looking over their shoulder, we think this is an environment that actually lends itself to people feeling comfortable having relationship with the clerk and effortlessly transferring money and we find our customers are very, very sticky. Those are all, you know, great trends for us. So we remain very bullish on this business and particularly our model.

Thanks again. Congratulations.

Okay, A.J.

Thank you. Our next question comes from Franco Turrinelli with William Blair & Company. Please go ahead.

Hey, Franco.

Nice quarter.

Thank you.

Per instructions, right?

Thank you, Franco.

No, I mean it.

Hey, just before I ask my question, if I may, I think that the suggestion was right, the one of the previous comments that you had halved your pricing on Money Transfer and that's certainly not what I think you've been doing and I kind of would like you to clarify that out.

Just to clarify, I'm not sure what was meant by halving. I think it was Tony's question but we have not halved our price.

We modify commissions, which is the fixed rate that we charge, and we modify the FX piece and we have different strategies, market by market but there hasn't been a dramatic change in anything close to a half. I mean, if anything, our pricing generally is in the single-digit modification.

Great. Thanks for that clarification.

Could you just, I'm sorry, we were frantically trying to write here, and I'm not sure that I understood. So Europe and 22 new branches, was that net of the landlord situation or was that 22 and [inaudible] last time because of a landlord situation?

That's a net number for the whole quarter, net of the closings, net of the landlord, net of the acquisition that we made.

You know, and, Franco, just to level set, every quarter when we tell you guys how many branches we opened it will always be net. We'll tell you, okay, we started out with this many, we ended with this many. There is going to be closers there's going to be openings but I think you guys are interested, where did you end up net.

Right.

But everything we do, everything we add versus, you know, minus everything we close ends up with a net number.

So, Paul, on that acquisition, as well, I want to make sure that I understand this. I think that you mentioned New York is one of the states in which these new branches are. Does that mean that you no longer need to independently obtain a New York license?

Actually, it was really in connection with this transaction that we acquired, you don't actually acquire the licenses, you have to reapply but the fact that we were acquiring existing business, the assets of an existing business that had a license in New York, it made it much easier to get over that two year delay of getting into New York, but we are well past that in New York and New Jersey and we have branch locations that are doing quite well in both locations.

Yeah, it just occurred to me we've never really said that because remember there was lots of questions about where we are with all those approvals. I'm not convinced we actually said it was done, so that was another great correction. Thank you.

I'm trying to be a good straight man for you.

Thank you. Very good.

So now I have my real question. It's a tough one for Joe.

I hear what you're saying about the first quarter being seasonally strong and also about the operating margin performance not exceeding your expectations by as wide of a margin as our models maybe suggested, but I'm kind of looking back at the results of the last two to three years and I don't really see a significant deterioration in margins during the year because of seasonality or of effect.

It's partly, of course, because you've been doing work to improve your operating margin, so I have to tell, I'm a little, you know, I'm struggling to get down to the numbers that you're talking about. Obviously, it's a class problem to have but I'm wondering why I should be expecting margins to drop as much in the remainder of the year as you're suggesting?

Well, again, I think maybe the street didn't think that the, or maybe they thought that the cost reductions had already annualized and most of that list that I read, we had incurred or we were feeling the benefit of in the past three quarters in fiscal '06 and they just had not annualized yet so really the vast majority of those have now annualized and we don't expect to really get any big cost savings in the rest of the fiscal '07 year.

If you go back multi-year period, it's very difficult to try to look at the quarterly results and try to deduce some kind of relationship because of all of the moving pieces in our business and the level of acquisitions that we made, the level of conversions, it's somewhat difficult.

As I said at the start, we have always had kind of a big lift between our Q4 EPS and our Q1 EPS. If you kind of readjust the Q1 EPS last year for the MUZO trademark write-off and some of these other higher level of costs, you get a lot closer in line to where, to make more sense out of the numbers that were given.

Okay. Maybe I'll follow-up with you off line. Thanks, Joe. Appreciate it. Good quarter.

Thank you. Our next question comes from Wayne Johnson with Raymond James. Please go ahead.

Hi. Yes, good morning.

My question relates to the HSBC joint venture, and Joe, I was wondering, could you tell us what the tax rate is for that joint venture?

I don't have a consolidated tax rate number, but in most of the jurisdictions they interest lower than the U.S. rates. Hong Kong has a very favorable tax rate. Some of the rates are in the teen level, some of them are in the 20s, but they're consistently lower than what we have in the U.S.

So somewhere like 15 to 25 would be a reasonable range?

You know, I'm not going to give a range. I mean, you can look at the industry data that's out there but we really only had one, or really five weeks of HSBC results in the quarter, but it is part of our international growth strategy and it will help our overall tax rates to lower in the future.

Okay. Terrific.

And going forward, how should we think about the investments in terms of dollar value for that joint venture in terms of time and magnitude?

That's a great question, Wayne.

I would guide you to think about us making significant investments there and I think that's partly why we're guiding you guys down a little bit on some of the margin expectations going forward. This is a scenario where we have to invest aggressively in this business if we're going to reap the future benefits these markets offer. So these are going to be real investments in some capital but a lot of non-capital items, sales people, et cetera, infrastructure, to take advantage.

Okay.

And so could you like over a three-year period, would you say that the first 12 months is going to bear the brunt of that? Would it be kind of equal? How is that going to play out?

I'm not going to tell you exactly because, quite frankly, we're still in the process of finishing that up, but I would think the first 12 months would be more of the ramp-up and then probably more of a steady state although we hope to build as we add Asian countries, too, and as we're successful. So, but I would think probably initially it will be a little heavier [inaudible]. We'll give some more visibility on that as we go forward.

Okay. Great. Thank you very much.

You're welcome.

Thank you. Our next question comes from Mark Sproule with Thomas Weisel Partners. Please go ahead.

Thanks. I guess just two quick questions.

First on the Europhil side. I guess is it safe to assume that we're past all of the pricing initiatives they did after the acquisition and now the transaction growth will start to excel at the revenue that we saw this quarter?

We were clearly past that initial first year anniversary event, but as we're expanding the branches on the basis that we are right now, it's not going to be a large contributor to earnings, opening a branch even there while they are ramping very quickly and getting to profitability quicker than we've historically seen even in the U.S. in some markets, I'm not sure it's going to be a huge earnings driver for some time but it is moving in the right direction.

Okay.

And then within the Money Transfer business, I know you haven't given this out in the past and probably gives me a pretty quick answer at this question but, you know, is there a same store type number for your DolEx business? I mean, how the sort of legacy stores been performing versus just the new expansion?

Mark, we do have those numbers, obviously. It's one of the things we track. We haven't provided visibility into that at this point, but we'll keep you informed.

Okay. And then lastly if I can, I guess to sort of follow-up on the last couple questions regarding the Merchant margin.

If you net out the foreign exchange benefit that you've gotten from Canada this quarter and that's a couple percentage points of the benefit here, to get down to sort of 27, high 27% range, netting out, again, I guess the HSBC 30 basis points, is it all the investment that you're putting into HSBC? I know you referenced sort of cost onsetting but that's not going to cause declines as we go forward, so how do we get down to that sort of 27,7 range as we go forward? Thanks.

Again, the seasonality of the business dictates that the first quarter is likely to be the highest margin improvement year-over-year, the highest earnings per share growth year-over-year, largely from the cost reduction initiatives.

You didn't see it as much in prior fiscal years because of the number of moving parts in our businesses and some of the larger non-recurring items that we took in the first quarter, higher level of expenses in the first quarter of last year, and the margin came in largely as I had expected.

We did have a little bit lower operating expenses than I thought in the quarter but by and large, very consistent, most of the upside coming from the non-operating line items and, again, the Canada revenue, which is highly profitable, June, July, and August, has a much bigger impact on the earnings than it does on the revenue.

We also had one of the best quarters on our domestic indirect business, which I did not mention it. It only declined 14%. That's probably the best that we've seen in the past year or more. That may or may not be a trend in the future but that also contributed to a higher level of earnings relative to the revenue contribution. That's a higher margin revenue stream and we reiterated our guidance on that channel of the mid to high teen level assuming that the trends were going to kind of return to where they had been.

So there are a number of assumptions, it's only one quarter into the year and we're lining up these numbers the best that we can and I feel that the ranges that we provided are reasonable and consistent although I do understand how, when you look at the prior year, how some of the numbers can seem to be out of sorts but there's just a lot of moving pieces.

Thanks.

Thank you. Our next question comes from Adam Frisch with UBS. Please go ahead.

Thanks, guys, good morning.

Hi, Adam.

I'd say nice quarter but I really think with the stock up 12% it wouldn't really matter.

That's good news. We were following that.

I'm sure! Surprised no one asked about the margins on this call but maybe to get to it another way.

Open it for you, Adam.

Maybe to get at it another way, are you guys looking at '07 as kind of a time where after several years of expansion you're going to take a step back, reinvest in the business to make sure that the growth is there longer term or is what we saw in the first quarter, obviously, part of the impact is what you do and part of the impact is timing of anniversaries and all of that and future quarters will be some good expansion also but maybe not as much?

Because your reputation is one that you always deliver upside most of the time, so just trying to manage expectations here and maybe getting a feel for how you're looking at '07 would help us do that.

Adam, I would again refer to some of the comments I made earlier. We are certainly making investments in our business as we have in the past. Our sales expenses were a little bit lower in the quarter.

We're actually getting more revenue from about, or actually probably less people because we're being more selective in some of the hiring but we're really getting the same amount of revenue. We're expecting to continue to ramp-up our sales related efforts in the U.S. and in the Asia-Pacific region.

I still think that the seasonality in some of the anniversary-type activities are driving more of the impact, I guess, for the next few quarters relative to this quarter, but I don't want you to leave without thinking that we're not making investments in our business because we certainly are. The next generation processing platform in the U.S, Asia-Pacific, our U.S. sales channel Money Transfer branches, all of those certainly take expenses to support future revenue growth.

Adam, I understand the dilemma. I mean, we had a blowout quarter with terrific margin growth and, you know, is that going to continue and we're guiding you guys not to for a couple reasons.

I mean it's a one-times as Joe talked about. I mean, you know, the trademark write-off was in the Q. It was a couple million dollars, a little more than that I think, Joe, $2 million?

$2 million.

Yeah, $2 million. And that, obviously, was a one-time we banged up against.

And then what I was saying to the earlier question about investment in Asia, we haven't seen any of that really yet. I mean that's going to be coming forward, and so I think that you just kind of have to take us at face value here.

Okay.

And then the next couple quarters we'll see, I guess, we'll see how that will play out. I was going to say something else but I decided to hold back.

Whatever that was we're deeply appreciative.

Paul, you and I have talked about the future viability of the cash base model for remittances and the potential for other forms to come into the marketplace. You're just very blunt comment of it being remittances being a commodity business kind of struck a question in my head: Are you guys using, is your strategy to use pricing as a weapon to get market share and ultimately get it to a level where the transition to other cheaper forms of remittances, whenever they come about whether they be card-based or whatever, is a smoother process where you won't have to manage cannibalization and attrition issues?

I'd like to say we're that smart. That is, you know, that would be a wonderful scenario and we do have a stated desire to provide more and more services and we all believe that eventually people are not going to be sending money to where they do today. You and I have had those conversations a lot.

Yes.

I mean that's years away but that's going to happen and [when] these customers are very, very sticky. As long as they stay in our country we keep these guys.

So once you do get them, once they try us, as Raul says who runs that business, once they taste it, they like it, so that is part of the objective. And once you get them you can even raise a little bit once you get them, so that's all part of the strategy.

And I would, from quarter-to-quarter you might see a little of that. You might see a little bit of an uptick where we can take advantage of it.

Okay. Last thing on acquisitions.

I know you're doing with the, the one you just did in Europe and so far acquisitions has been part of your growth engine. What's out there now? What are you looking at or evaluations? Are they still appealing in some areas or is it kind of on hold?

No, we clearly are looking. We love eastern and central Europe. We love Asia. There's some stuff available.

Once again, as we said before, if it's anything of any real size and it results in a book, because we are really looking for value and we're pretty focused and we don't feel like we have to do deals, I wouldn't hold a high expectation for us to get any major things unless it's something that we work out ourselves. We're looking for more deals that we can, just little deals that we can tuck in, like Diginet and I would look for us to do more of those and we have a whole list of stuff we're working on, Adam.

Okay. Is the merchant area the place where you would most likely add or would you also do stuff in the remittance?

Sure. I mean we did those 40 branches. I mean it's not huge but that's kind of the flavor of the stuff we're going to do for DolEx.

There's not a ton of those left, but I would look for some more of those opportunities and the same with Europhil. If we see some opportunities over there, we're going to do it, but merchant is probably the lion's share of the list we have.

Got it. Okay. Thanks, guys. Good job.

You're welcome. Thank you.

Thank you. Our next question comes from Thomas McCrohan with Janney Montgomery Scott. Please go ahead.

Hi, thanks. Janney Montgomery Scott. Good quarter. Just had a question on the direct business and Kevin Schultz' absence.

Can you just give us a little color on where you're taking the direct business, kind of the progress today and then some of his initiatives and where you guys are today in that channel? Thanks.

Sure.

There's two, they're really unchanged is the fast answer to the strategy that we've announced but there's really two segments to that business. There is the direct sale with our proprietary salesforce. Some of that was under Kevin, that's our domestic, some of it is in Canada that's already reports to Jim, did previously, we have about 300 sales people between telesales and feet on the street in North America, that remains pretty well constant. They produce a fair number of new relationships through referrals and through just pounding on doors.

The bigger segment is the ISOs because there's just so many more of those sales people and they're bringing in thousands and thousands and thousands of new accounts every month, and that business continues to do extremely well, too.

No real change, while it's not our intent to replace Kevin, I think the way we have this rationalized now with the businesses assigned to executives that have the authority over the operations and the revenue stream, I think it's a great way of doing it and we're pretty excited.

Can you remind me at least how many current ISO relationships you have and if any of the four new ones you added this quarter, did any of those four come from B of A?

We have somewhere in the neighborhood of 80 or so total relationships that the Company has, and I don't know that I'd comment on exactly where the relationships were previously, but we are visible in the marketplace and I think people are attracted to us for our service and our focus on this market.

And I guess when it comes to converting the ISO, I heard the kind of rule of thumb out there is that there is some, I guess, attrition in the portfolio when they do the front-end conversion. Can you, I heard that being like 20%, Jim.

Can you comment on that and what your experience has been when you do go through a conversion from an ISO, what kind of attrition you see?

I would just clarify, I'm not sure where, I think the statistics that you received are accurate. I think if you try a front-end conversion there is a lot of room for the merchant to make a decision to leave and so it's not being converted but typically, our conversions are back-end conversions and then the new business that the ISO signs would be added to the front-end.

There are instances where we do front-end conversions, either we'll handle it or the ISO will handle it themselves. We see lesser of, very few of those, it's typically just a back-end conversion. The old business stays on whatever foreign front-ends it was on and then we see generally the lion's share, if not all of the new business putting on our front-end.

Fair enough.

So the ISO wouldn't see any loss of business.

Great. Thank you.

Thank you. Our next question comes from David Koning with Robert W. Baird. Please go ahead.

Yeah, thanks. Just a quick question on cash flow.

Historically, your free cash flow has been in line or often quite a bit better than earnings. In this quarter it looked like it stepped back a little bit and looks like just a little bit of an anomaly and wondering if you could explain that a little bit?

We did have a few anomalies in the quarter. We had a low double-digit, probably about 10 to $13 million tax payment in the quarter that we did not have in the prior year quarter. We also made an advanced payment on the branch acquisitions that Paul mentioned. That was a several million dollar, I think, it was $4 million impact.

We also had a new receivable of about $3 million relating to HSBC. They are collecting our merchant funds for us and that's kind of a one-time working capital draw that you typically experience when you make an acquisition. So, all told there's probably a $20 million of kind of a more of a unusual nature, at least relative to the prior year quarter.

Great. Thank you.

Thank you. Our next question comes from David Parker with Merrill Lynch. Please go ahead.

Good morning, guys. Good quarter.

Hi, David.

Now, while the immigration reform issues might not be impacting you directly, it's obviously having an impact on some of your competitors who it's impacting their pricing and forcing you to change some of your pricing initiatives. Can you just share your thoughts on this issue of immigration in the U.S?

And should we assume that since you affirmed your revenue guidance for Money Transfer that you think it's a temporary issue or is it more longer term in nature?

You know, it would be very difficult for me to answer that, but I will tell you my, this is just my opinion that it is not a short-term thing. I think we are seeing less immigrants. I think that our sense is that there's less people out there.

We are getting more than our fair share. We are delighted to say that. We are reaffirming our guidance, but we have a very weary eye on what's going on, we're delighted to see that the Senate handed President Bush a victory today. That was good to see and I think that's going to help matters.

Until we really adopt, I think, a more reasonable immigration attitude, there's going to be some uncertainty and there are people that are not coming here or people going home and not coming back and that's not good for anybody in the money transmission business period. We're not supernatural. If there's less customers we're all going to be impacted a little bit.

So far we've been able to make it up. Our expectation is that we do so far the rest of the year, but we don't take this subject matter lightly.

Okay. Thanks, Paul.

And then just on a different topic, we continue to see in the news and read about concerns over consumer spending but just looking at your results and transaction growth of greater than 20%, I mean, you seem to disprove that actually there's going to be a slowdown in consumer spending. Can you just talk about your expectations for consumer spending for the rest of the year?

You know, we continue to be bullish on what we're seeing, but we could just ask this question fairly often and it's a little different. We're not the complete measure of consumer confidence, consumer spending.

It doesn't necessarily follow that consumer spending has a hit and credit card sales fall off dramatically. You see a shift into different categories but because credit cards are accepted in so many places where people need to do things, you actually get an uptick in some areas when there's a lack of consumer confidence that people will potentially use their card at a dentist or at a doctor or at paying a tax, et cetera, et cetera, education, things they may not have done in the past.

So Visa MasterCard have announced volume gains in every year, even in years with pretty significant recession. So you got to put that in the back of your mind as well. So with all of that said and done our expectation is the consumer keeps spending and we keep enjoying that benefit.

Thank you. Thanks, guys.

You're welcome.

Thank you. Our next question comes from Dan Perlin with Wachovia Securities. Please go ahead.

Hi, Dan.

How are you doing?

Good.

There's been a lot of discussion on pricing in the Money Transfer business but I'm wondering what, if any, pricing strategies you're implementing and let's maybe leave Canada out of this for a moment on the merchant side of the business and maybe in particular in ISO?

I don't think there's a new strategy that we've put into place recently where they were contemplating the arrangements with their ISOs or they price the merchants directly and we have an agreement where we have a fee that we charge them for the services for processing and other services that they buy from us.

Is that trending up or down or is it --

I think as they get larger, just like any industry, as it matures as they get larger the pricing pressure continues and that's why as a company, as Joe mentioned in his comments, we are constantly looking to rationalize expenses and look for greater efficiencies so that we can remain competitive in the Money Transfer business as well as in the payments business for credit card.

Now in Canada, I mean, Canada had a huge sequential uptick and I understand the volume [for] implications for the timing of the quarter but if you just look at the numbers like for the whole previous year, they were pretty much one or $2 million kind of within line with one another and I also appreciate the comments about [CAT] appreciating but we had that going on also all of last year.

So I'm just wondering how big an initiative did you set fourth in June [reprice] and then in the past you've done that specifically on card types, commercial cards in particular. Wondering where the pricing initiative was targeted there.

It's actually it's hard to hear all of the entire question, but I don't think there's any specific anomaly in the quarter beyond what Joe talked about. It has historically been a, the summer is always a good time for us relative to the pricing structure for foreign currents in the country. That phenomenon hasn't changed.

As Paul mentioned, we have a direct salesforce up there, it's a model that we adopted two years ago. It's similar to the U.S. model in that business and those in the business have been doing well and in addition, we have entered the ISO business in Canada as of the last two years and we're continuing to get transaction growth and customer growth there as well.

Are there any other large ISO contracts that are coming up for renewal this year? I know you repriced one last year but, or the tail end of last year?

We actually repriced a bunch last year and even the previous. It's pretty much behind us. I mean, there's some, because with 80 deals you're always going to have some rolling but anything of any really significant impact is behind us.

Okay. Excellent. Thanks so much. Appreciate it. Good quarter.

Thank you.

Thank you. Our next question comes from Julian Bu with Lehman Brothers. Please go ahead.

Hello, Julian.

Thanks. Very strong quarter, guys.

Thank you.

First of all, not to beat a dead horse, regarding margins this is the strongest margin expansion in the past few years on a quarterly basis. I'm just curious because you guys just two months ago gave the most cautious margin guidance. Joe said that it's kind of in line with what you expected but it's clearly much higher, the margin, than the street was expecting.

Even if you take out MUZO, you mentioned the $2 million trademark impact. That's less than 100 basis points. We are still talking about, even if you exclude that, we are still talking about over 200 basis points margin expansion year-over-year.

You have the impact of the other cost reduction initiatives that I talked about, the telecommunication savings, the NDC Health platform savings, the Dallas facility consolidation, other customer service related savings, those did not annualize in the fourth quarter of last year. They annualized in the first quarter of this year.

I can stand by the operating margin guidance that we gave for the full-year. Again, we did not give quarterly consensus that didn't really speak to the numbers on a quarterly basis. I was expecting a substantial margin upside in the first quarter with some margin contraction in the remaining three quarters as a result of the factors that I previously described.

Joe, is it possible for you to take out for the one-time items you mentioned some of those are going to anniversary this quarter, take out MUZO. What's the [inaudible] impact of the one-time gain in your margins?

Well the MUZO impact is easier as you said, it's probably about 100 basis points so it comes to 300 basis point impact, you'd have maybe 200 basis points of an improvement without that. Without the rest of those cost reduction initiatives and those other items you'd be kind of at a flattish to down margin year-over-year which is what we're expecting for the rest of the last three quarters largely as a result of the ISO channel, which is a lower margin business, becoming a much higher part of the overall company.

Just making sure I understand. So you are saying if you take out the one-time items, the margin would be flat to down this quarter?

If you're referring to the one-time items as all of the MUZO trademark and all of the cost reduction initiatives? Yes, sir.

Which you said it will not repeat.

We're not expecting to get any more savings from those items for the rest of this year in addition to any of the other items that we have talked about in terms of the next generation processing platform. We're not expecting to get savings from those for the rest of this year.

That's helpful.

And also, regarding the, Paul, regarding the four ISO wins, you mentioned those are competitor wins. Could you talk a little bit about from whom you got those ISOs?

You know, Julian, we're not releasing that. I don't think that's very nice, you know, our competition does that occasionally and I prefer not to.

But I will tell you that these are good ISOs and, quite frankly, we've had some other wins in the past, too. That business continues to be very robust, we're signing new business, we're keeping what we have, we're investing heavily.

This Discover announcement is significant, too. Of the more sophisticated ISOs we have we'll jump on that program and buy their Discover Merchants and add to their business thereby adding to the value of their businesses, so that's just all green lights there.

Okay. Is there any way for you to just quantify the size of the ISOs and also the Discover portfolio?

We're going to get a little closer to the Discover deal before we give you any guidance on that, but on the ISO business, we've kind of baked in our wins in our pipeline when we gave the ISO guidance which is baked into the merchant stuff overall. So it's pretty well in there, Julian. I mean, if we get something so significant then we would update but right now, we're sticking with that guidance.

Okay. Perfect. Thanks, guys.

You're welcome. Thank you.

Thank you. I am showing no further questions. I will now turn the call back over to Mr. Paul Garcia for closing comments.

Thank you, everybody, for joining us on today's call. We appreciate your continued support of Global Payments and I look forward to seeing each of you at our investor conference November 2nd at the New York Stock Exchange. Thanks so much.

Ladies and gentlemen, this conference will be available for replay starting today at 1:00 p.m. and ending at midnight on October 13, 2006. If you wish to listen to the replay please dial 1-800-294- 0360 or for international participants you may dial 402-220-9750.

This concludes our conference for today. Thank you for your participation. You may now disconnect.