環匯 (GPN) 2007 Q2 法說會逐字稿

Thank you for standing by and welcome to Global Payments second quarter fiscal 2007 earnings conference call. [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. Please go ahead.

Thank you. Good morning and welcome to Global Payments fiscal 2007 second quarter conference call. Joining me on the call today are Paul Garcia, Chairman, President, and CEO; Jim Kelly, Senior EVP and COO; and Jim 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 are not in accordance with GAAP. Management believes that normalized results more clearly reflect comparative operating performance. For a full reconciliation of normalized to GAAP results in accordance with Regulation G, please see our press release filed as an exhibit to our Form 8-K, dated January 5, 2007. Which may be located under the Investor Relations area on our website at www.globalpaymentsinc.com. Now I would like to introduce Paul Garcia. Paul?

Thanks, Jane, and good morning, everyone. Before I begin, I know that many of you have heard about the untimely passing of a long-term member of our Board of Directors, Gary Betty. Gary was a excellent Director in every sense of the word, as he brought strong technological expertise, entrepreneurship, and business acumen. He was a shareholder advocate, and a sounding board for management. He will be greatly missed by all.

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

Although we had a solid quarter, we realize that not overachieving expectations is a disappointment for some. Therefore, we will make every effort to take you through an analysis of the quarter, our expectations for the rest of our fiscal year, and some thoughts on future trends impacting our businesses. For the second quarter, our revenue grew 19% to $260.7 million, and our normalized diluted earnings per share grew 16% to $0.44. These results reflect expansion in our Merchant Services segment, driven by continued strong growth in our U.S. ISO channel. In addition to a full quarter's results from our new Asia Pacific joint venture with HSBC. Additionally, we benefited from a favorable Canadian currency exchange rate.

In our consumer Money Transfer segment, we reported strong revenue growth in the quarter. Although our Money Transfer earnings growth continues to be impacted by an increasingly competitive pricing environment and other factors, which I will discuss in more detail shortly. Lastly, we reported a normalized operating margin of 21.3%, which represents a decline over prior years' quarter, but as anticipated. While our underlying businesses continued to benefit from the leverage we've built over the past several years from a variety of consolidations and efficiency improvements, our operating margin this quarter was unfavorably impacted by several previously-discussed factors, which Joe will review during his comments. Overall, our results met our expectations and we continued to anticipate benefiting from new cost efficiencies in future years.

Moving on to recent trends, we achieved outstanding growth in our domestic direct channel, which was driven by growth from our ISOs. Our credit and debit card transactions grew 26% for the quarter, with revenue growth of 16%. This reflects superior performance by our existing ISOs, and speaks to their ability to expand their market shares. For fiscal '07, 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 4% for the quarter, while our revenue grew 6%. Our Canadian revenue growth was primarily driven by a favorable Canadian currency exchange rate in addition to a moderate impact from pricing initiatives that were rolled out on June 1, of this fiscal year. Based on the recent Canadian exchange rate movements, however, we do not expect to receive a similar benefit for the second half of our fiscal year. Based on these movements, we've lowered our Canadian revenue growth expectations to the mid- to high single digit range for fiscal '07. In addition, this revenue guidance includes an expected benefit during our third quarter from card associations incentives relating to various programs.

We are delighted, absolutely delighted, with our HSBC joint venture and the progress we've made in the past five months on building momentum in the Asia Pacific region. As of today, we have approximately 170 salespeople and have instituted new sales incentive plan and an ongoing sales training program. As such, we are gaining momentum in signing new merchants. We've also recently rolled out new products in select markets, such as the MP card acceptance. We are diligently working on a systems integration process and expect to initiate back end conversions during calendar year '07.

After a thorough evaluation process, we've decided to convert the HSBC back end platforms into our existing infrastructure. For the second quarter, the joint venture contributed $14.8 million in revenue and we continue to expect the joint venture to contribute between 47 to $51 million in revenue from July 24, '06, through the end of our fiscal 2007. This reflects 55 million to $60 million on an annual basis.

Our central and eastern European merchant channel had revenue growth of 16% in the second quarter, largely due to a favorable year-over-year check currency exchange rate, and growth in credit and debit card transactions of 16%. Additionally, we have yet to experience a meaningful financial impact from the deconversion process of the previously-discussed large customer. Although we are expecting this to occur during fiscal '07. Due to the continued delay of this deconversion process and a stronger than expected check currency exchange rate, and a modest impact from our Diginet acquisition, we are raising our annual fiscal '07 revenue expectation for this channel to a range of high single digit to low double digit increase.

Our domestic indirect and other revenue declined 14% during the quarter with a 7% decline in credit and debit card transactions. Based on our first-half results, we are raising our expectation for this channel and now expect a low to mid-teen revenue decline for fiscal '07.

During the quarter, our Money Transfer segment achieved solid revenue growth of 17%. In the U.S., our transactions grew 22% with revenue growth of 13. During the quarter, our U.S. branch count was 855 locations, which includes ten newly acquired branches that are located primarily in Florida and New Jersey. This branch count reflects a 13% increase over the prior-year quarter. On a sequential basis, however, this amount was relatively stable with our first quarter of fiscal '07, primarily due to additional branch closings relating to that landlord issue that we described on our first quarter call.

As you may recall, a former landlord of ours entered the Money Transfer industry and began competing with us. Further, due to additional closings during December related to this landlord situation, we are expecting our third quarter branch count will also remain close to this level. As we've indicated on our first quarter call, we are expecting to conclude this process by the end -- we expected to conclude this process by the end of calendar year 2006, pleased to say that we met this expectation. Further, we believe that this situation is not likely to occur again. In addition, only 2% of our current domestic branch presence is with a single landlord.

In Europe, we opened six new branches during the quarter and had a total of 53 locations at our quarter end. As a result of our European branch expansion, we achieved 85% transaction growth and 63% revenue growth in this channel for the quarter.

As I mentioned previously, the U.S. to Mexico corridor is becoming increasingly more price competitive. This has impacted our money transfer financial results. Although we started our second quarter with a strong, high-teen domestic revenue growth for DolEx, this growth gradually fell to the mid-single digit level by the end of the quarter. We attribute this to not only a competitive pricing environment, but also the challenging comps from the prior year. As you may recall during our second, our third, and our fourth fiscal quarters of last year, we experienced a significant increase in same-store sales that drove our domestic revenue growth to the high-teen to low 20% range. As a result of our recent trends, we are lowering our fiscal '07 total Money Transfer revenue growth expectation to the low double digit to mid-teen range. In addition, we are lowering our fiscal '07 total Money Transfer operating margin expectation, which Joe will cover in more detail shortly.

We believe that DolEx is being impacted by a number of market conditions. Firstly, the federal government and particularly the states are putting more focus on immigration issues. And although it's hard to quantify, we've got to believe that 32 states passing 87 separate pieces of legislation focused on immigration issues is having an impact. In addition, as the Mexican economy improves, there are an increasing number of viable domestic Mexican employment options. Lastly, the second tier Money Transfer competitors have strong incentives to sell their businesses as a result of their lack of scale and ability to manage increased compliance requirements and scrutiny. We believe that many of these second tier competitors are dropping price in order to grow transaction counts, which is a commonly used metric in valuing these businesses. As an avowed price leader, DolEx is matching these price reductions. Importantly, we believe that other first-tier players are now following this strategy.

So what does this mean for the future? Although we are hopeful that our government introduces programs which will help ensure availability of the immigrant labor force our country needs while allowing for a legal and taxable worker, we're not convinced this will happen quickly. Secondly, we believe the Mexican economy fosters additional employment opportunities within their borders. And lastly, the pricing environment will likely remain highly competitive in the near term.

So where's the good news? Well, new product revenues, although not significant, are starting to grow meaningfully. We're hopeful that this will be a future area of growth for us. We also expect to pursue additional branch acquisitions at reasonable purchase price levels. In addition to organically expanding our domestic branch count on a selected basis. As a result, we expect continued long-term expansion of our domestic footprint, although the expansion may not follow the steady pattern we've experienced on a quarterly basis. While the United States may not have a workable solution currently to accommodate immigrant workers, many European countries do.

Please note that our Europe-filled channel had revenue growth of 63% during the quarter. Consequently, we plan on continued expansion throughout our European markets. And lastly, and very importantly, I want to emphasize that we remained absolutely delighted with our branch-based employee model. Our model provides a competitive advantage in the ability to offer new products. It offers a competitive advantage in the ability to sustain aggressive price competition and in our ability to comply with increasingly complex state and federal regulations. Although our near-term results may be challenging, I am convinced that DolEx will continue to be a meaningful contributor to our company's growth over the longer term. I'll now ask Joe to further discuss our financial results. Joe?

Thank you, Paul. In our press release, we included GAAP income statements and schedules which reconcile GAAP to normalized results. Although we did not incur any restructuring charges during our current reported periods, our prior periods include such charges. Further, on June 1, 2006, we adopted FAS 123R. This adoption, which requires the recognition of stock option expenses, lowered our diluted earnings per share by $0.02 during the quarter. Our prior-period restructuring charges and current-period stock option expenses have been excluded from our normalized results. Our normalized operating margin declined by 190 basis points compared to last year's quarter. In addition to the impact of our Money Transfer results, this decline was the result of several factors as previously discussed.

First, 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. Further, while our average ISO pricing remained relatively flat in fiscal 2006 compared to the prior year, we have experienced a low single digit decline in this average pricing during the first half of fiscal '07 due to recent contract renewals. As a reminder, no further major ISO renewals are due until 2010. We also granted a significant price reduction to one of our few national merchants in the U.S. in connection with a multi-year contract renewal as previously discussed. This reduction began to impact our results during the second quarter. We also experienced a continued impact from the decline in our highly profitable domestic indirect revenue channel. These types of factors were not evident over the past several years due to the timing of major cost reduction programs, favorable repricing initiatives in the U.S. and Canada, and earnings accretion from new acquisitions.

As previously discussed, we are not expecting to achieve a significant expense savings during the year from vendor rate reductions, technology consolidations or facility closures, at least not to the extent we experienced during fiscal '06. Our HSBC joint venture, which has a lower margin than our company average has also impacted our operating margin this year, and we continue to expect up to a 30 basis point unfavorable impact for fiscal '07 on a consolidated basis. We don't expect a similar impact once this acquisition annualizes and we continue to believe that there are opportunities to increase this margin over the long-term due to expected revenue growth and efficiency improvements.

Lastly, we experienced an increase in our merchant card operating loss expenses during the quarter, compared to the prior-year quarter, which primarily related to a possible fraud situation at one of our domestic merchants. We fully reserved for this situation during the second quarter, and we no longer process for this merchant, although we are still pursuing collection of these funds.

Moving to our segment data, our Merchant Services segment operating margin decreased 250 basis points to 27% for the quarter as compared to 29.5% in last year's quarter, as largely anticipated. This decline was a result of the factors that I've previously described. Based on these results, we are reaffirming our fiscal year '07 guidance for our merchant services operating margin to the 27.3% to 27.7% range.

Our Money Transfer segment operating margin declined 260 basis points to 12% in the current quarter as compared to 14% -- 14.6% in last year's quarter. This change was primarily due to the factors that Paul discussed relating to the landlord situation and the competitive pricing environment. Similar to our first quarter, we incurred significant duplicate expenses during the quarter as we opened new branch locations in nearby areas, in order to encourage its existing DolEx customers to utilize these new locations. In addition, we also responded to aggressive price competition from this landlord in pursuing this customer base. Based on our first half results and second half expectations we are lowering our fiscal '07 Money Transfer operating margin to the low double digit to low-teen range.

Moving to our corporate area, our expectation for fiscal '07 corporate expenses has slightly declined to a range of approximately $54 million to $56 million. This range includes an estimated $13 million in stock option expenses. As a result of our lower expectations in our Money Transfer segment, we have slightly lowered our fiscal '07 total company operating margin guidance to 21.5% to 21.9%, excluding stock option expenses. Including stock option expenses, we are expecting fiscal '07 total company operating margin of 20.3% to 20.7%.

Moving to our nonoperating line items, we expect 7 million to $8 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 better than expected reductions in the merchant prefunding interest expense in Canada. For minority interests, net of tax, we expect 10 million to $11 million for fiscal '07. Our tax rate for the quarter was 32.6% and we are anticipating a range of between 32.7% and 33.1% for the full-year fiscal '07. Lastly, we expect a range of 81.5 million to 82.5 million in average diluted shares outstanding for fiscal '07.

On the cash flow statement, capital spending for the quarter was $8.3 million, primarily for software and infrastructure, including our new Atlanta-based next generation processing platform in the U.S. In addition, our business acquisitions line was $12.3 million in the quarter, due primarily to the DolEx branch acquisitions that we discussed during our first and second quarter calls in addition to our Diginet acquisition.

Moving to the balance sheet, our reported cash increased primarily due to strong cash flow generated during the quarter. This increase was also due to a favorable impact from our settlement and working capital line items, primarily due to timing. Paul will now discuss our fiscal '07 guidance and our ongoing strategy. Paul?

Thanks, Joe. For fiscal '07, we are modifying our annual fiscal 2007 revenue guidance to a range of 1.057 billion to $1.069 billion or 16 to 18% growth over $908 million we achieved in fiscal 2006. In addition, we are reaffirming our full year fiscal 2007 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 fiscal 2006 normalized diluted EPS of $1.54. Including fiscal 2007 stock option expense, our fiscal '07 diluted earnings per share guidance is $1.69 to $1.75.

I would like to remind you that our fiscal third quarter has typically been the lowest earning quarter of our fiscal year due primarily to seasonality. This guidance reflects the impact of our joint venture with HSBC, but does not include any other significant acquisitions or potential restructuring charges. We intend to continue to focus on integrating our recent acquisitions and pursuing domestic and international opportunities to position Global Payments as a solid long-term revenue and earnings grower. I'm now delighted to go to questions. Operator?

Thank you. [OPERATOR INSTRUCTIONS] Our first question today comes from Adam Frisch with UBS Securities L.L.C. Go ahead.

Thanks. Good morning, everyone.

Hi, Adam.

Paul, I just wanted to hit on a theme on -- which I think is important just in terms of the psyche on the stock here, on whether 2Q is an indication of a near-term blip with some operating challenges that will ultimately be mitigated in the next quarter or so, or a more significant change in your operating outlook, which I think is much more important. I think given the stability of your model, your execution history, and the trends in the industry, I'm more inclined to go with the blip thesis, but you did raise some points and I think your commentary was certainly not as positive as it has been in the past, so if you could just address that point.

Adam, I think that's an important question and I'll attempt to address it and I'll ask Joe and Jim to jump in as they think appropriate. A couple things that are recent trends and recent developments is DolEx, importantly. This -- all the factors I mentioned, individually, these are fairly important. You have pricing, you have immigration, you have a scenario where there are more jobs being created in Mexico, but collectively, they're really significant. And I think that we saw that happen. And that's why we gave you guys some unusual view into the revenue trend for DolEx for Q2. Started in the teens, ended in the mid-single. And so what we are saying is we don't think that jumps up to the teens again in the third quarter. I think it's going to take a while -- this is just DolEx. Obviously Europe will have a positive impact. So we will keep you as closely apprised of that as we can.

Now everything else is pretty much steady state. The ISOs are becoming increasingly larger part. They're growing at an exponentially larger amount than our base business, by definition. And consequently, primarily because of the accounting for the ISOs, we are experiencing some margin pressure from those guys, but that's been a steady story, Adam, and that really shouldn't surprise anyone.

Right.

I think we're a little victim of our own success here. We've just kind of blown away everything quarter after quarter after quarter after quarter, and that's why we're going to take some pains to really go through this. And I would encourage you guys to believe us too, when we tell you something. I would want you to get too far ahead of us.

Yes, just in terms of the upside I don't think anyone was expecting the same kind of outperformance that you showed in the first quarter, but Global Payments coming in in-line is obviously a difference of expectation.

I understand that, we do truly understand that.

Just on the merchants -- thanks for all the color that you gave on the influences there on the margin, but could you also expand the discussion to include an update on how sales has impacted that number in the quarter and on the second half, and in the past you've touched on things like commissions and salaries and turnover and things like that related to your sales force?

Sure, I would be happy to. There's been a paradigm shift, and we talked about this in a previous quarter or even before that. When we first spun, probably one of the few levers we had to pull in order to get topline growth was our own sales force. 300 people, it's remained fairly consistent, but that is so -- those guys have paled in comparison. Not that they're not going a good job, they are doing a good job. We have a new fellow running that, Ed Meyers, and he's doing a terrific job with he and his staff. But the amount of business they can turn in, Adam, vis-a-vis what the ISOs can, with thousands, tens of thousands of independent people out there selling, by some measures, that's probably a little on the high side but there are thousands, clearly, of producing salespeople out there for the ISOs. And they are just going to produce a lot more. And because of how we account for that, it's going to pale by comparison. I would say steady state with the existing sales force, not a lot more color I can add there domestically.

However, Asia Pacific, we talked a about a couple hundred salespeople out there, we're already at 170. It is my thought we go higher. I'm pretty comfortable with what I've seen in terms of our ability to measure results, the metrics, the compensation, the products, the management structure in these ten countries and territories. I'm very bullish -- in fact I I'm heading over there in a week. Very bullish on what we're doing, and I would look for us to increase that sales force beyond that 170, and probably beyond the 200 we talked to you guys about during our investor day at the New York Stock Exchange. And I think that does have a dramatic impact in that region, because we report it separately. You have to watch that, and I think we'll have a lot more color on that.

Okay. Last question. Obviously you're doing a lot internally with operations, whether it be restructuring and managing costs and all the things that you discussed, but does any of that impact either the timing or the size of your M&A program in the near term, or is that all kind of separate?

It's all separate. I think, Adam, the opportunities for us to continue to leverage this business absolutely exist. It's just the nature of the beast, if you add revenue and you don't add cost, we're just going to leverage the business. But we do think there are some other future opportunities that we refer to, G2 being the biggest one, our internal system. And there's serious millions there. We've talked about that, and that's some time out. That's fiscal year periods beyond us now. But they are separate and distinct from -- most of those investments have already been made, quite frankly. We have some more to make, but it doesn't have any impact on what we acquire. We're sitting on $250 million of cash and have an opportunity to get our hands on a lot more, and we would like to make deals, but we are going to remain disciplined. There are some deals banging around Europe that we would like to make, but if they result in a book, chances are you're not going to see Global Payments doing it because they are bid up to levels that we think are not sustainable for our appetite.

Okay. Thanks, guys.

You're welcome.

Our next question comes from Paul Bartolai with Credit Suisse First Boston, Inc. You may ask your question.

Good morning, guys.

Paul.

First question, just on the merchant margins. First, can you quantify how much that reserve was? And then just more broadly speaking, I understand the things you guys highlighted that impacted margins, but still not quite understanding the magnitude of the sequential decline in margins. Any more color you could give me on that would be helpful?

Sure. We provide a little bit more detail in the Q in terms of our merchant loss reserves, but it will be around a $1 million increase this quarter compared to last quarter. So that did have an impact on the quarter, not a huge one, but it did impact it. In terms of the sequential decline, it's probably most helpful to look at the various revenue channels, three in particular. If you look at domestic direct, Canada, and domestic indirect, if you take the total revenue in the second quarter from those three channels and compare it to the revenue from those channels in the first quarter, you have about a $10 million shortfall. That $10 million equates to around $0.08 of earnings per share. That and then that gets into the loss, the merchant loss explains 90% of the variance between our earnings per share in the first quarter and the second quarter.

And that's potential loss.

Potential loss.

Right.

We're still pursuing those funds. But that -- our total company revenue stayed constant quarter to quarter, because of a $9 million pickup we got from the HSBC joint venture, which is not dilutive, but it's not accretive either. So if you look at those three revenue channels, Canada is strictly a seasonality issue. You've got June, July, and August, again, the major months in Canada compared to the second quarter, that is strictly seasonality. The drop-off in domestic direct is largely a result of that national merchant that we talked about, where we gave a pricing concession in order to get a multiyear contract renewal. We didn't have that impact in the first quarter. That really started in the second quarter. And then thirdly, the domestic indirect is just going to continue with the decline we've seen over the years, and as I said in my comments, that's a highly profitable revenue stream. All of those three factors I just talked about are all almost near 100% margin, very close to that, at least 90% margin. So that is the biggest, I think the best way to try to understand the sequential impact on margin and on the earnings per share.

So it doesn't seem like this current level of margins, obviously given your guidance, is more what we should expect for the rest of the year?

I think it's certainly closer to what you should be expecting. We reaffirmed our Merchant Services margin. I didn't really see any surprises in the quarter, other than that merchant loss reserve. As we said, the third quarter could be lower because of the seasonality issue, but it's probably closer to this range. I think the first quarter will stand out as them by far the largest margin for Merchant Services.

And then in merchant, outside of the price concessions you highlighted specifically, any change in the pricing environment there, or does it sound like it's still pretty steady with what you expected?

In the U.S., our average spread has remained pretty constant year-over-year.

And that includes what we charge the ISOs as well. That's an important element.

Then just last question, and I'll jump off. You talked a little bit about profitability in HSBC, has that been in-line with your expectations, and anything you'd highlight there?

It has been in-line. As I said when we acquired it, or on our fourth quarter call, I said that I thought the margin would come in around the mid- to high teen level and it's been pretty consistent in that range.

Paul, this is clearly an opportunity to invest. This is exactly what we're going to do. We will much -- I will gladly take reduced margins in that business for the future growth opportunity. And I can't overemphasize how excited I am with what I've seen just in a very short period of time in terms of wrap-up of talent and seeing a merchant pipeline coming in. I'm really delighted.

Okay, thank you.

You're welcome.

Our next question comes from Kartik Mehta with FTN Midwest Research Securities Inc.

Good morning. A question on the Money Transfer business. Was the pricing pressure geographic, by nature, or did you see it all across the DolEx brand system?

I would say we saw a tickup in the last couple of months, probably in the California market, Arizona, Texas, would be the leaders, which are not coincidentally the largest segments for us and most of our competitors.

Does what's happened in the money transfer business and the state of it now change your thoughts at all about strategy, in terms how fast you want to grow the business, or how you grow the business, or maybe what products you offer?

That's a great question. I think it causes us to reflect on this business in a big way. It makes us very bullish on Europhil and in Europe. I think that they have figured out the immigration issue, first of all. There's a steady stream of clientele eager to send money home, and although Spain, which is the biggest market for us, but there are others we are opening in and are currently in not as large as the U.S., they are still pretty good-sized markets. That's exciting for us and we think we can sustain some pretty good growth rate there. New products, it reemphasizes that we've just really got to get rolling on new products. We are getting some traction finally in some new product revenue, but Jim is all over that, as is Raul and his team. We just need to get some real traction with new products.

In terms, Kartik, of opening up more locations it makes you circumspective. We are -- we're going to be opportunistic. We think some of these smaller players, which quite frankly, are part of the reason these rates are where they are. They are dressing the gallop for the dance, as we say in the South. There are some of these guys we are going to be able to get hopefully at some reasonable amounts. I'm still bullish on DolEx, in particular. I love the model, I love the management. They think this could be a blip. We're telling you guys it probably isn't a blip. Hopefully we are favorably surprised. We just don't want to set an expectation and be disappointed. We're telling you guys, let's say this is a continuing trend. In fact, if you look at our guidance of low double digit to mid-teen for revenue in DolEx, you just dial in what we've done versus what our expectation is, you can see we're looking at a steady state run rate from what we experienced in November, which is pretty low growth. Hopefully we're surprised. Jim, do you want to add anything?

As Paul mentioned, we've seen a more price competitive market November, December, so at this time, we don't have any greater color on whether it will improve or when it will improve, so we're going to go with what we see currently.

So Paul, it sounds as though if some of these companies do -- some of these money transfer companies do get sold that might provide relief from pricing pressure assuming the buyers don't maintain the same type of agressive pricing. Would that be a fair statement?

There are some people within DolEx that are actually making that same statement. I think it's a fair statement, but, Kartik, I'm a very much wait and see guy here. We haven't seen that, so let's see. Let's hope we do. We are -- we are part of the problem here. We are absolutely driving prices. Someone lowers a price, man we're right there. We're going to be lower. So we probably need to look at everything, but, yes, I think that's a fair statement and let's hope that turns out to be accurate.

Great. Thank you very much.

You're welcome.

Next question, Tony Wible with Citigroup. Please go ahead.

Good morning.

Hi, Tony.

I was hoping we can get some information about the working capital benefits you saw this quarter. How sustainable are they, and is part of that related to the prefunding in Canada?

The working capital specifically I would not call it sustainable. It's largely timing. It relates to either payroll or benefits or additional days accrued at the quarter end or the HSBC acquisition. Really nothing there either the working capital or the settlement lines that are, that I would think are going to be a sustainable amount, it is really kind of a one-time pop in the quarter. On a year-to-date basis, if you take the working capital and settlement lines, they actually negate each other and we really had no benefit from those areas for the first six months of the year.

And what's your current usage of cash? Are you guys looking to pay down debt, or are you still looking to do more acquisitions.

We really have almost no debt today, so our first and highest use for cash is additional acquisition.

Any thoughts, Paul, on CEPA? I guess it starts to go into affect in January of '08 and the European Payments Council seems to be really pushing it. Any thoughts on what that could mean this year for the central and eastern European business?

I think it has very little impact on central and eastern Europe. They're not laboring under the same problems, because they're newer markets, and their debit cards work pretty much easily between markets. I think CEPA -- I don't have enough time to really give you my CEPA view, but I think it's dangerous ground to run in and buy a bunch of CEPA players because most of them are for sale. Could be a risky move. We think that central and eastern Europe is the place to be and that's where we're going to focus . I don't think CEPA this year has any real impact there at all. I think it will be a long time before we see anybody doing anything outside of their borders in a meaningful way, truly.

Okay. Thanks.

You're welcome.

Our next question comes from [Drew Tropul] with Morgan Stanley.

Morning, gentleman. Had a quick question on sort of this pricing. Do you think the Money Transfer pricing to Mexico, is that now sort of a long-term secular trend? I know it's been one of the most competitive areas, but is this just, with all this immigration concern, or what extent would you expect this to ease going forward?

Drew, I think that's the question, isn't it? And what we're telling you is for the next couple of quarters, we're not looking for any easing. We'll provide more data as we get it. There was a question earlier, as some of the players that are helping drive this drop out, clearly all the big guys want to get the pricing back to a better level. Will that happen? We are hopeful it will. We think that some new product revenues will make a difference, plus there's opportunities to grow organically, and let's not forget, of course, the Europhil impact for us. Drew, I have to say, we have to wait and see. I'll tell you what it's not, it's not -- because we get questions on this every quarter -- it's not a bank or credit bureau offering these services for free or at low rates, that's not really having any impact. It is just traditional providers in a price war. And we're right at the head of the pack of that, so let's see.

Okay, great. And then a quick question. How long do you expect to be incurring these duplicate costs as you add on some of these new locations?

As we said, we thought we'd finish it by the December period, and we have finished that. So there'll be a little bit of an impact in the third quarter, but we have finished that as of the end of December.

One note that this chain also got into the Money Transfer business, so they are aggressively competing with us on price, so while this was a very strong grower historically and a profitable business, it's still going to be a good grower, but profit is going to take some time to come back.

Okay, great. Then just last question. Given that there's been a lot of consolidation, particularly amongst the large ISOs, have you seen any indication of an uptick in processing volume that are coming on to your platforms?

We have, actually. We have some of our ISOs are buying others and adding revenue, so we're getting -- we're -- as the largest -- we believe, we're the largest ISO processor, our ISOs are -- you're either prey or predator in the ISO business, and most of our ISOs are predators, so we are gaining. Sometimes it's in-system, it's one of our ISOs buying one of our ISOs, so there's no real net gain. But sometimes they buy others that are outside of our system, and we have had a little pickup on that.

Okay, great. Thank you.

You're welcome.

Our next question comes from Robert Dodd from Morgan Keegan.

A couple of questions on the HSBC area. On the minority interest, can you reconcile for me, Q1 to Q2, not a lot of change in the minority interest line despite the fact that we've now got a full quarter from HSBC. That would tend to imply to me that the JV wasn't making a lot of money. Can you reconcile that with your comments about mid- to high teens operating margins?

Well, you do have other costs that are associated with the HSBC joint venture, interest, merchant prefunding costs that would serve to lower the overall profitability which would cause the minority interest to be a little bit less. You also have our Comerica joint venture, which is included on that line, and that's had relatively flat growth, so you're not seeing some growth there. It's a little bit hard to dissect that number, but sequentially we did have more earnings from HSBC in the quarter than we had in the first quarter. And that HSBC number is also shown net of tax, which makes it an even smaller impact as well.

Okay. And then, also, on the sales force over there, can you give me an idea -- you're talking about 170 salespeople, growing that, is the compensation structure in the Asia Pacific market the same as -- get to the point, is it 100% commission, or are you having to pay salaries, benefits, anything else in those markets? That's a great question, and let me clarify that.

We have not created a ISO model, or a contractor model at this time. These are -- in many cases, these were bank employees making a salary and getting a commission on top for their successful signing of merchant locations. We've continued that, we've changed the structure, we think favorably, and as do the salespeople, and added some other metrics of measurability and a more disciplined approach to it. But these are salary with benefits and offices and management and all the tools and these are employees. And we are going to enter expenses. It takes a while to get one of these guys to produce. Now, the prices over there -- even in the most expensive market, which would be Hong Kong, it is -- you are paying significantly less than you pay in the United States for a similar salesperson.

Okay, thank you.

You're welcome.

Next question, Greg Smith from Merrill Lynch. Please go ahead.

Hi, guys. You mentioned, I think it was Paul, you mentioned some incentive payments up in Canada. I thought maybe it was from the card associations. Can you just explain that a little bit more?

Well, I can't give you a ton more color on it, because it hasn't happened yet. But the card associations ask you to do certain things that will help their card holders use their cards more easily at merchant locations, and it requires investments in infrastructure for us and they provide incentive payments to processors to do this. My guess is, I don't have personal knowledge of this, but my guess is it's not just for global payments, they offer it to other processors in that region too. And we expect to be the beneficiary of one of those payments, and we will give some more color on that in the third quarter, but that's what I'm talking about.

I would add, too, that this is not a quarter-specific event, these occur regularly and have for years here in the U.S. as both associations, and also now in Canada, you have the two associations plus interact all of which are available to provide incentives for the reasons Paul just stated. And they won't just be quarter-specific, it just happens to be that in the next quarter, we're anticipating a somewhat larger than usual.

In terms of materiality, from the overall company it probably technically isn't, but because it is over $1 million, and it is in Canada, we thought we should probably tell you guys about it, and we are.

Yes. Okay, thanks. And then just as you look at the acquisition environment, surely there's lots of competition for properties out there, but are you seeing private equity firms more often as sort of competing with you for companies?

Yes, we've seen -- I don't know competing with us in particular, but we've been fortunate on some of the deals we've done, albeit small ones like Diginet, we like to find a deal that was unique to us and we woo management and woo the ownership and then make a deal, but on some of the larger deals that are banging around Europe, absolutely. Greg, as you know, there's a trillion something dollars out there in private equity and they're chasing some of these deals. Absolutely that's a new dynamic that we are seeing, that we're seeing on almost every deal.

And then just lastly, given your balance sheet situation and your discipline on acquisitions, are buybacks something we should start to think about a little bit more here?

We've had those conversations with the Board from time to time. I think that we will continue to consider that. I'm hopeful that we can use, and I think absolutely the best use of this money is to make some deals. We're hopeful we can get some of those done, but if we keep getting our feelings hurt because we're not prepared to overpay for things in our opinion, then that's always a viable option, so stay tuned.

All right, thank you.

You're welcome.

Next question, Elizabeth Grausam with Goldman Sachs.

Hi, Liz.

Hi, how you?

Good.

On the Money Transfer business, I see we've talked a lot about the pricing environment, but can we talk a little bit more about the volume, and how you saw that track, maybe in terms of growth through the quarter. Because Western Union's problems have been more specifically related to their volume and less sort of pricing, so I'm interested in the balance there?

I'm not sure how that occurs, because both of them are related. We try to keep the transaction growths as high as we can, and as they started to come back during the quarter, that's where you're forced to react with the piece, the lever that is most powerful, which is price. You have two components, which is commission and FX, and we tend to focus more on the FX than the commission. So I can't comment as to Western Union's experience but the two, both revenue and transaction volume, or transaction accounts, they tend to move together over a period of time.

And the significant change you saw in pricing, I think you noted in November and December, was that mostly due to the tier 1 providers coming -- bringing their pricing down to market levels of the second and third tier players?

No, historically they have been so much higher than the rest of us, we don't even track them. We just know they're there and they kind of set the high-end standard. That's exactly what occurred in our view. In certain markets, they moved into our territory aggressively, which forced us into a new territory. The alternative is just leave the price where it is and that would see transaction growth slow dramatically over time, and then we would be forced to take a bigger reduction later on, similar to when we bought the business in '03, the seller had raised the price and we were forced after we bought the business to lower it, and we saw tough comps for the first six to nine months, and then improved after that, we didn't want to go through that period again, so we opted to adjust in the November and December time frames.

And Liz, I think the spirit of your question about transactions, there were the more dramatic hit on the revenue side than the transaction side in the months going forward, because we've lowered it more. The light at the end of the tunnel is, if we're able to stabilize those things, then the transactions hold, I think it's a happier story.

And the full spirit of it, is the low double digit to low teens range for revenue growth and money transfer, what is your implied transaction volume growth that you would associate with that? Is it still in the low 20% range?

Yes. We're not necessarily forecasting transaction growths. I think as I mentioned, they generally run together, except this year as we've now lowered the price, we will see lower revenue growth clearly, and our expectation is that the transaction growths continue to expand and we would like to see it move back up into the high teens, but I don't think we're forecasting a number at this time.

Okay, thank you.

Next question from Mark Sproule with Thomas Weisel Partners. Please go ahead.

Thanks. I guess a follow-up on the Money Transfer theme. Can you -- I guess, maybe I'll quantify it, but were the stores that were closed because of the issue with the landlords, would you -- would you sort of imply that those are the more mature stores on your sort of growth trajectory and replacing them may be a little bit more costly, and what was the impact there?

I think that's fair to say. They were mature stores, it was costly. What we did, Mark, was we actually -- while we still had that store, we opened another one next door. We had that double cost we talked about, and we indicated that we got out of that at the end of December, which was our expectation. But it takes a while to build that back up. That was a bit of a hit for us. We never saw that coming. So that was a disappointment. And we hope -- that's one of the reasons, and one of the reasons we cited why we had some disappointing results for DolEx in this quarter.

Got you. When you look at -- you're saying that some of the new products have finally started to get a little bit of traction, is that helping to get any kind of retention benefit? Or from the sounds of it, it appears because of the price competitiveness of some of these other mom and pop transfer players, that price is being the single driving factor of most of your customer base, whether they come to your location or go somewhere else.

Mark, that's the mother load here. If we can get some products, it does in fact -- what we've seen is it does make people more sticky. Because they're dealing with our employees in our great environment, all in Spanish, and they're buying things from us and we want to be a place that you go not just for Money Transfers, but you go for other financial services. We are getting some traction. I think, yes. I don't have quantitative studies to point to, but we all believe it does make for more sticky customers. That's all very good and I think very important for our future.

And then with the fixed cost model obviously had some great benefits if you have the volume and the pricing as the stores mature, but are you being negatively impacted with it right now, just because you have lost some of the mature stores, you're taking a significant pricing hit, and you're also getting maybe a volume--?

You're exactly right. We probably should put that in the speech, you said it so well. That's exactly right. This business levers extremely well, and high fixed costs, low variable costs delever very poorly. When you have this phenomena, it's an additional burden, but I did quickly follow-up on my comments by saying, I love this model, I am absolutely committed to this model. We hope we don't -- we already are, but we hope we don't see ridiculous things. Georgia was leading the parade and rolling out ridiculous requirements for money transfers. We were to assess a 5% higher fee if someone couldn't prove they were a citizen. While that was eventually discarded we're going to see things like that. The bottom line is in a model where you have your employees, although that's unfair, we don't support it, at least we can institute it and comply. I would hate to have an agent model and live in that world. So I really think in an increasingly complex world that this will be an additional benefit to us.

If I can slide another quick question in. On the merchant side domestically, the transaction growth of 26% is obviously very nice. Is that -- how much of that would you quantify is benefits from the ISOs, just bringing on new volume or acquiring new volume and bringing it on to your platform, and then really is that sustainable as it goes forward?

First of all, the great majority of it is organic. The ISOs made some acquisitions, but these weren't big. These weren't -- they didn't -- I'm glad I had a chance to clarify that comment. I would't to give everyone the impression that some ISOs bought a lot of business and it added to this. This is, I would say, hugely organic. It's over 90% plus organic. This is not any acquisitions that these guys did. We think it's sustainable because that's what they've been doing, quarter after quarter, month after month, year after year, and I don't see anything on the horizon that will impact that.

Thanks.

Your welcome.

Next question comes from Wayne Johnson with Raymond James. Please go ahead.

Good morning.

Wayne.

On the pricing decline in November, December, for domestic Money Transfer, could you give us a sense in percentage terms on how much that is down in those two months compared to, let's say, one year ago?

Oh, significant.

We've talked in the past of maybe the mid-single digits as kind of a normal trend for this business competitive. We saw that improve or increase in the November/December time period from mid-single to probably high single, maybe a little bit higher. But it's not across the board, it's market by market. So I don't think I can give you a sweeping number, but it is higher than what we've historically seen.

And that would be predominantly in Arizona and California.

California, the Sun Belt states, or the western Sun Belt states would be where we're seeing most of the pain.

We also had some really strong comps from last year that has exacerbated the situation a little bit. But look at what we shared with you in the beginning of the quarter and what we shared with you towards the end of the quarter. That will kind of give you a sense. The beginning of the quarter was probably more in-line with what we had last year, and the end of the quarter is what we're now experiencing.

That's helpful. Can you talk also a little bit about the Money Transfer expansion plans in Europe? What are the costs associated with that and what are the long-term plans for branch increases and any plans to expand it to other countries, which you are not currently operating?

Well, we're currently operating in the three countries, substantially all the business, though, is in Spain, and as we said, we are -- I don't remember the exact branch count, but we were looking to double the branches over this fiscal year, and we're on track to do that. I think we had 53 coming out of the quarter.

And we started with 26.

So we're going to exceed that. Spain continues as the numbers indicate to do quite well, and we are looking to surrounding markets, but I don't think we're ready to comment on which market at this time.

Okay, great. Thank you.

You're welcome, Wayne. Thank you.

Next question comes from Tom McCrohan with Janney Montgomery Scott. Please go ahead.

Hi, good morning.

Tom.

I had a question on offsetting some of the pricing pressures you are seeing on the merchant side as your business actually becomes more ISO related. How much of that pricing pressure do you guys think you can offset over time by pretty much consolidating the platforms that you're doing here in the U.S.? Are you going to more than offset some of the pressure you're seeing there, or is it kind of a dollar for dollar offset?

I think those two things work independent. Their priced in the marketplace for servicing customers, whether they're direct customers or customers refer to us as ISOs are based upon competitive market factors. Separate from that, we look to be as efficient as possible, both in our fixed asset, our bricks and mortar buildings, as well as operating platforms in any systems or personnel that support it, and we go at them separate. I don't think we try to look for a cost reduction to offset a price compression on the revenue side.

Yes, I know -- I realize and appreciate, Jim, there's no causality between the two things, but let's say you're experiencing $0.02 pressure on the ISO side from contract renewals and renegotiating, can you quantify for us or give us a range, after you consolidate your platforms domestically, what the per transactional savings could be, and do you expect that to offset some of the pricing pressure you're seeing on the ISO side?

Yes, I don't think I would be able to provide that kind of guidance. As we've said, this is a long-term project. We've been at it now for well over a year or two years, and until it's complete, and then we'll factor it into the guidance at that point in time. I don't think I could give you any other additional insight.

Fair enough. Was there any acceleration this quarter in internal investment spending on these conversions, and are these costs capitalized, or do they flow through the P&L?

Any conversions as it relates to an ISO, moving a portfolio over, as Paul indicated, and they were very small aside from one which was an internal move, one of our ISOs sold to another ISO, so there was really no cost associated, the ISO would bear any cost of a conversion. The only time we would bear a cost of conversion, which we are now, is the HSBC effort to convert off the back end and the front end, those are our costs and they would be capitalized and charged to the joint venture over a period of time.

Lastly, Joe. Can you just clarify, you had talked earlier about an $0.08 EPS potential that you could have gained. I really wasn't following that analysis. I apologize if I'm not clear on that.

That's right. I was asked a question on the sequential difference between the first quarter of fiscal '07 and the second quarter of fiscal '07. I believe the question was pointed to the Merchant Services margin, but for simplicity, I tied it to the earnings per share level, the $0.54 that we achieved in the first quarter compared to $0.44 in the second quarter. And based on the data that you have, I think the most simplistic way to try to understand that variance is by looking at three revenue channels in particular, domestic direct, Canada, and domestic indirect. If you take the total revenue from those three channels in the first quarter and compare it to the second quarter, the second quarter total is roughly $8 million less than -- I'm sorry, $10 million less than the first quarter and I'm saying that most of that difference -- most of that $10 million is highly profitable revenue. The domestic indirect is almost all profit, the Canada revenue is almost all profit, and then the domestic direct difference is largely that pricing adjustment that we gave to that national merchant, which is 100% profit. That $10 million highly profitable, that equates to roughly $0.08 in earnings per share, which is 80% of the variance between our first quarter EPS and our second quarter EPS. Most of the rest of that difference was the higher merchant loss issue that I talked about.

Got you.

That clear?

Yes, that's clear. Thank you.

Next question Tien-tsin Huang with JP Morgan. Go ahead, please.

Hi, can you hear me okay?

Yes, Tien-tsin, how you doing?

I'm well, I'm well. A couple of questions. First on HSBC, how should we think about the margins in the coming quarters? Are some of these investments going to come and potentially have an impact on the margins there, or are we pretty close to a floor?

On the HSBC margins?

Correct.

That's your question -- it's more than likely a false set -- we are ramping up sales efforts pretty quickly. We're actually forecasting a bit of a decline in the second half margin compared to what we've seen for the first four months since we've had this business. We are working on some of the back end conversions, but I think it's more likely the sales impact will come first followed by some of the back office savings.

Okay, got you. And then on DolEx, obviously a lot of questions about pricing, but I'm more curious to hear, given that your pricing there is pretty low, especially relative to the other tier one global players how much lower can pricing go structurally here domestically?

That's a question we're hopeful the answer is not any lower. But we're prepared to do whatever we have to do.

We would be happy if everybody would stop, but I'm not sure we can cause that to occur. Our model is as Paul described, and we'll continue to price where we feel is necessary, market by market.

My sense is it's going to be tough though, as we said for some of these smaller players. And the tier 1s, believe me, are not anxious to have this continue.

It feels that way, especially given the gap in pricing between the tier 1 and the tier 2, tier 3 players.

Absolutely.

The gap is narrowing substantially from what you've seen historically.

Hopefully we're closer to a point of stabilization. And then in Canada, any -- not a lot of questions about Canada, any changes there in the creative landscape between Maneris and Payment Tech. It sounds like if I heard correctly, that the revenue reduction in the outlook was purely due to the FX. Did I hear that correctly?

It's pretty much steady state up there. We're pretty close to where we thought we'd be, and the FX has a little bit of an impact, and that's why we made that adjustment. So yes, your read is exactly right. No really news there for us to share with you. Steady state, and we continue to be very pleased.

Good to hear. Last question related to guidance, so the Canadian incentives, those are not baked into the guidance? And also domestically, if I recall, there's also a discover portfolio thatyou're going to be bringing in, is that in your current guidance?

The discover portfolio is not, because it's really a next fiscal year impact, so we will come back to you guys when we give you that, and in terms of the MasterCard or whatever that incentive is, there is going to be a impact of that that we are counting on for our third quarter, and that's another reason we mentioned it to you.

Great, thanks.

Your welcome.

Your next question, Dave Koning with Robert W. Baird.

Yes, good morning. Within the domestic direct business, with the transactions growing 26% and revenues 16%, that's the biggest delta between the two we've seen because of the repricing. Is that the maximum delta now going forward? Is that 10% delta about what we should think going forward?

Well, it is partly because of that repricing, but there's also another phenomenon there. We have one particular ISO who's growing incredibly fast, and they have a lower average ticket that the rest of our ISOs. So our average tick this year has been down kind of a mid-single digit level. For the volume, it's been growing at that 26% level. So it's not all pricing. That's kind of a new phenomenon that we've noticed this year. We also had a higher level of car association rebates in the last second quarter of last year than we did in this quarter, so a little bit different on the nontransactional-based revenue quarter to quarter, but I wouldn't expect that 10% variance to get much worse than that, at least for the next couple of quarters.

Okay, great. Then just one follow-up. Over the last few quarters, we've seen domestic direct revenue growth decelerate a bit. Are we at sort of a base now in the 16% range and second half, should we expect somewhere in the same ballpark?

Yes, I would continue to expect mid- to high teen growth in that channel. It's been fairly steady. In the third quarter, we have a little bit of a tough comp in that we had a lot of revenue from that merchant contingency situation that we talked about, I believe it was last year around this time, or in the third quarter of last year, but it should be pretty consistent at that mid- to high teen level.

Great, thank you.

All right, David.

Your next question comes from Andrew Jeffrey with Robinson Humphrey. Please go ahead.

Hi, good morning.

Andrew.

A question, Paul, just conceptually on the merchant business. This is -- you talked about a potential fraud situation. You've done a great job of managing your exposure as these types of issues and risks have arisen. Qualitatively, do you view any greater risk of fraud when you're generating a greater proportion of your merchants through the ISO channel as opposed to a direct sales force. Is that why we've seen a couple of these events arise, do you think, or is it just coincidental?

Well, before -- I just wanted to, Paul, take that one and just clarify the situation we saw last year was related to an ISO. An ISO signed an account that was an Internet account and those are notoriously more risky than traditional businesses. The one that Joe's mentioned earlier, this was what we refer to as a direct account. This account had been with us for a couple of years. Was in a large account category, and it was a business that just one day stopped processing and it turned out that some of the transactions that they processed were, we believe, to be fraudulent. And we're dealing with it accordingly. But I don't think there's any tie between one and the other, and I think we do a very good job working with our ISOs, and I think our ISO, in particular the ones that are 100% liable, they're on the hook. This is their business, their livelihoods and they watch this stuff very, very closely. It isn't a perfect world, sometimes stuff does get through, but in every instance where we've had a challenge, we've been able to work through it without either any loss or any substantial loss.

And let me emphasize that last part. The ISOs, and this was a direct guy, and hopefully we are going to work this through, we have a pretty good team that focuses on this. But in terms of the larger question, the ISOs, the great majority of them are 100% liable. These guys have real businesses, real balance sheets, personal guarantees, real assets. And even if something were to go wrong, it's highly likely that they would be able to absorb that.

Okay. And overall, you're comfortable with your underwriting and reserving policies at this point. You wouldn't anticipate anything structural changing on either of those fronts?

No, absolutely. That's a great question, thank you. We absolutely feel very comfortable. If anything, we get stronger, quite frankly. We handle billions of transactions. We have millions of merchant locations, and it's a complicated business. But if you look at ours, which we look at very closely, you look at what we actually write-off vis-a-vis our competitors, we believe we are best in class. I feel very comfortable and we have a first rate team with first-rate tools that focus on this, with no changes.

Thank you.

Your welcome.

Our last question comes from Dan Perlin with Wachovia. Please go ahead.

Dan, you have the distinction of having the last question, I hope it's a good one.

I have a bunch.

No.

Just quickly on the second half of the fiscal year for merchant margins, it really implies that margins have to come down some 150 basis points to hit your target goal, and I understand that February certainly would be a sequentially down margin quarter for you guys, but I'm wondering if as we look at the second half, if that's more of a run rate that we should be thinking about as we go into the next year?

You're asking, will the second half margin will be a run rate into next year? I don't necessarily--.

Let me stop you there. Second half margins look like they have to be around 25.5 in merchant on average to hit your 27.5 target. True or false?

It's in that range, that's not the exact number I'd come up with, but it's in that range. They certainly have to decline from where they are in the second quarter.

Okay, the second question I have on that. Is that more indicative, fully loaded with all the costs and anniversarying of the Canadian currency and other things that you've talked about as we think about a base number or maybe even a trough number. Maybe said a different way?

Well, I think that the FX could have an impact. That has moved south pretty quickly. It's -- we are actually forecasting decline year-over-year in FX in the fourth quarter of this year, if the rate stays where it is today, and that could have an impact. But if you look at the last three quarters of last fiscal year, the second half margin was actually less than the second quarter margin. So probably not -- probably as much to do with seasonality, as it is FX and other kind of investments that we're making, either in HSBC or in other areas.

Right, okay. Are you contemplating any other repricing initiatives in Canada? Are there other opportunities that you kind of see at this point, but haven't maybe fully articulated or initiated?

I don't think we would -- at this time, we don't have anything to outline, but I think as we get into our planning cycle for next year and we look at what other changes are coming in the marketplace, hen we can update.

One of the other things I thought was interesting, is it sounds like from a capitol allocation standpoint internally, most of the budgeting will go to Asia Pacific, which I would expect is a pretty obvious place for it to go, but one of the things you're talking about is the tier 2 players in the Latin America corridor, really ultimately going to end up struggling. And if that's a business that you really want to be in, I would think you would want to take a shot at acquiring those. What are your thoughts on that, Paul?

Great, Dan, absolutely. In fact, I did allude to that in my comments that--.

I'm slow.

Not at all. We're opportunistic, and if we think some of these, specially if the pricing comes down, because these guys are maybe looking for a dance partner and it could get more complicated.

But just as a clarification, many of these tier or non-tier 1 money transmitters are not in the branch model business, and therefore if their agent to date that's not been a business that we've actively pursued to acquire.

Excellent point.

So they may struggle, which we believe some of them are financially. I'm not sure in those cases -- there's a storm here in Atlanta. I'm not sure in those cases it would be an opportunity for buying, but hopefully it would at least alleviate or lessen the pressure on price.

Okay. And then Paul what kind of comments does Raul make to you as it pertains to a significant improving economic environment in Mexico, and where does he think that is relative to where it can go?

That's such a viscous kind of deal. Raul thinks that there are jobs being created, as do I. I just got back from Mexico, and anecdotally it looks -- I can just see it, it's like palpable. But there are some statistics just released by the Mexican authorities that suggest that the last couple of months, they've actually seen a decline in job creation. And there's been a lowest levels of new job creation since the previous year. We're trying to get our arms around it. Raul thinks that is a factor.

Do you think it's more politicking than it is reality?

Possibly. And plus the other thing is jobs are so underreported. There's 100 million people, the amount of jobs that are tracked through our equivalent of Social Security is a very small percentage. It would suggest that 20% of the population is employed, which is ridiculous. There's all of that, too, and the government only reports on official data. My sense is the Mexican economy is improving somewhat, there are some jobs being created. Couple that with a lot of fear of that coming over to this country, and I think that you -- I hesitate because I can't point at hard statistics, but my gut tells me we're starting to see the impact of that.

Right. And then lastly, you mentioned Europe understands or has a much more inviting environment for immigrants to come into that country, but you're not really alluding to the fact that immigrants in other markets that you're currently in in a big way are going to Europe, it's more really as it pertains to Europhil?

It is as pertains to Europhil, you're right. Although, we are having some people that would come to this country are now considering going there. So there is clearly some of that happening too.

Okay. Good. Thank you very much for your time.

I'm showing no further questions. I'll turn it back to Mr. Garcia. You may make your closing remarks.

Thank you, operator, and thank you all for joining us on today's call and for your continued support of Global Payments.

Ladies and gentlemen, this conference will be available for replay starting today at 1:00 p.m. and ending at midnight on January 19, 2007. If you wish to listen to the replay, please dial 1-888-568-0723 or international participants can dial 1-203-369-3193. This conclude our conference for today. Thank you for your participation. You may now disconnect.