環匯 (GPN) 2007 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to Global Payments third-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 third-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 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 March 30, 2007, which may be located under the "Investor Relations" area on our website at www.globalpaymentsinc.com. Now I'd like to introduce Paul Garcia. Paul.

Thanks, Jane. Good morning, everyone. The agenda for our call today is as follows. I will summarize our financial results and review recent trends and events and 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. Third-quarter revenue grew 16% to $260.4 million and our normalized diluted earnings per share grew 22% to $0.44. It was driven by a solid performance in our Merchant Services segment, while our Money Transfer segment met our near-term expectations.

Starting with our Merchant segment, our ISOs continued to drive growth in our domestic direct channel. Our credit and debit card transactions grew 23% for the [quarter] with revenue growth of 12%. Our average ticket for the quarter declined in the mid single digits, primarily due to strong growth of our ISOs, which generally add smaller merchants with lower average tickets. Our spread for the quarter declined in the low single digits due to price compression in our U.S. merchant portfolio. Our revenue growth through this channel was strong in the quarter but it was lower than recent levels, primarily due to a maturing of our ISO portfolio and our internal sales areas. Nevertheless, we're very pleased with our ISO program and we continue to have success in retaining and customers and in signing new ones, including three new ISOs signed this past quarter. Based on our results, we expect revenue growth in the mid teen percentage range for our domestic direct channel during fiscal '07.

In Canada, our credit and debit card transactions grew 5% for the quarter while our revenue grew 8%. We experienced mid single digits declines in our Canadian credit card spread. Our Canadian revenue growth was primarily driven by card association incentives received during the quarter relating to various programs, and as previously discussed. We believe that these incentives are a testament to our large market share in Canada and our strong partnership with these associations.

Also as anticipated, we experienced a modest negative impact from the Canadian currency exchange rate during the quarter. We expect this unfavorable currency impact will modestly increase during our fourth quarter. Based on our results, we expect revenue growth in the mid single digit range for our Canadian channel during fiscal '07.

We continue to be delighted with our HSBC joint venture and the progress we have made in the past eight months on building momentum in the Asia-Pacific region. As of today we have more than doubled our sales staff in the region to approximately 200. Further, we experienced solid productivity gains in signing new merchants as a result of our recently launched initiatives. As discussed last quarter we are currently working to convert HSBC's multiple back-end platforms onto our existing infrastructure and anticipate completing the first of these conversions during the '07 calendar year.

For the third quarter the joint venture contributed $14.7 million in revenue. We expect the joint venture to contribute $48 million to $51 million in revenue from July 24, '06 through the end of our fiscal '07, which reflects $56 million to $60 million on an annual basis.

Our Central and Eastern European merchant channel had revenue growth of 1% in the third quarter. largely due to a favorable year-over-year check currency exchange rate and growth in credit and debit card transactions of 16%. This transaction growth was offset by the continued impact of price reductions granted on contract renewals in addition to a higher level of equipment sales, and other nontransaction-based revenue during last year's quarter. Additionally our results were unfavorably impacted by the deconversion process of the previously discussed large customer, which we expect will be substantially completed by the end of our fiscal '07. Based on our results and the timing of this deconversion process, we expect revenue growth in the high single digit percentage range for this channel during fiscal '07. However, and importantly, we continue to be encouraged by our organic transaction growth and the overall attractiveness of the Central and Eastern European market.

Our domestic, indirect and other revenue declined 7% in the quarter with a 1% decline in credit and debit card transactions. The improvement in these results reflect the impact of the anniversary of certain price reductions granted last year on multiple contract renewals in addition to growth from a limited number of customers. Based on our results we expect revenue declines in the low double-digit percentage range for this channel during fiscal '07.

As anticipated, our Money Transfer segment was impacted by a competitive domestic pricing environment and the impact of strong results in prior-year quarter. During the quarter, our total Money Transfer segment achieved revenue growth of 8%. In the U.S. our transactions grew 15% with revenue growth of 2. As previously expected our U.S. branch count increased modestly during the quarter to 860 branches, which includes the acquisition of three large branches in New Jersey. As previously discussed our branch count was impacted by the final branch count closings in December related to the previously described landlord situation. In New York, we opened four new branches during the quarter and had a total of 57 locations at our quarter end. As a result of our European branch expansion, we achieved 77% transaction growth and 75% revenue growth in this channel for the quarter. Based on our results we expect revenue growth in the low double-digit percentage range for our total Money Transfer channel during fiscal '07.

Looking ahead our domestic money transfer expansion strategy is to focus on branch acquisitions, which are becoming more reasonably priced. In the short term we intend to organically add domestic branches on a more limited basis than in the past. In addition, we will continue to competitively price our money transfer services while pursuing new revenue from other financial products. We will also continue to build on our success in Europe and aggressively expand our presence in that market.

Lastly, I would like to give you an update on higher Discover merchant acquiring agreement and portfolio acquisition that we announced during our first quarter 2007. We continue to be very excited about this deal as it will allow the opportunity to directly offer and price Discover card acceptance, and therefore participate in the full revenue stream on Discover card transactions. This opportunity will be available not only for us but also for our ISO and financial institution partners. Based on system programming requirements in order to accommodate Discover card acceptance for all parties, we now expect to complete this acquisition and begin offering integrated Discover card acceptance to our own sales force, to our ISOs and to our financial institution partners during the summer of 2007. On that note (technical difficulty) 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 period, our prior year-to-date period includes such charges. Further, on June 1, 2006, we adopted FAS 123R. This adoption, which requires the recognition of stock option expenses and (technical difficulty) 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. Earlier this month we decided to consolidate our merchant technical support center located in Missouri into our existing operations center in Maryland. We believe this consolidation will improve our customer service by allowing us to provide our domestic merchants with a single point of contact in one physical location. We also intend to consolidate a check-related operations facility in Colorado into our existing operations facility in Illinois, which we believe will improve the efficiency of our check-related offering. In connection with these plans, we anticipate recording restructuring and other charges of approximately $5 million, primarily consisting of employee termination benefits and other costs related to the closure of these two facilities. We expect to incur these charges during the fourth quarter of fiscal 2007 and during the first half of fiscal 2008. We believe the streamlining of these facilities will allow us to better serve our customers and will increase our operating efficiency.

Moving on to our quarterly financial results, our normalized operating margin declined by 60 basis points compared to last year's quarter. This was due to operating margin declines from both our Merchant Services and Money Transfer segments.

Our Merchant Services segment operating margin decreased 100 basis points to 27.1% for the quarter, as largely anticipated. This decline was the net result of several factors. First, our ISOs continue to become a larger part of our total Company, which serves to lower our overall operating margin despite contributing to our earnings growth. Many of you have asked for additional detail regarding the margin impact of the ISOs in our domestic direct channel. In response to these requests, we estimate that the growth of these ISOs will unfavorably impact our merchant services operating margin by approximately 250 basis points during fiscal 2007 compared to fiscal 2006. We also expect that our Asia-Pacific joint venture will unfavorably impact our Merchant Services operating margin this fiscal year by approximately 80 basis points due to the existing operating margin of this business at the time of acquisition in addition to the investments we have made in our sales efforts and other startup costs.

These unfavorable impacts were partially offset during the quarter by card association incentives received in our Canadian channel. In addition, we experienced favorable collection rates in the check and gaming areas of our domestic direct channel compared to the prior-year quarter. These collection rates were primarily driven by improved internal risk management efforts. Based on our results we expect a fiscal 2007 Merchant Services operating margin in the 27.7% to 27.9% range.

Our Money Transfer segment operating margin declined 430 basis points to 7.2% in the current quarter. This change was primarily due to the competitive domestic pricing environment that Paul discussed. Based on these results we expect a fiscal 2007 Money Transfer operating margin in the low double-digit to low teen percentage range.

For our corporate area, we expect fiscal 2007 expenses in the range of $53 million to $54 million. This range includes an estimated $13 million in stock option expenses. Based on our segment results we expect a fiscal 2007 total Company operating margin in the 21.9% to 22.1% range, excluding stock option expenses. Including stock option expenses we are expecting fiscal '07 total Company operating margin of 20.7% to 20.9%, excluding the impact of the anticipated restructuring and other charges relating to our recent consolidation plans.

Moving to our non-operating line item, we expect $7.5 million to $8.5 million in income from the net of our interest and other income and interest and other expense during fiscal 2007. From an early interest net of tax we expect $9 million to $10 million for fiscal 2007. We also anticipate a tax rate of between 32.5% and 32.9% for the fiscal year. Lastly, we continue to expect a range of $81.5 million to $82.5 million in average diluted shares outstanding for the year.

On the cash flow statement, capital spending for the quarter was $8 million. Our capital expenditures this year had primarily related to technology spending, including our new Atlanta-based Next Generation processing platform in the U.S. in addition to Canadian merchant terminals and facility costs. Our business acquisitions line this year primarily related to our Asia-Pacific joint venture in addition to DolEx branch acquisitions and our Diginet acquisition.

Moving to the balance sheet, our reported cash increased primarily due to strong cash flow generated during the quarter. As previously discussed our cash balances include amounts that we hold related to merchant reserve funds which totaled $108 million as of February 28, 2007. Our overall cash strategy continues to focus on seeking new acquisitions, which we believe represents the highest potential return for our shareholders. Paul will now discuss our fiscal 2007 guidance and our ongoing strategy. Paul?

Thanks, Joe. Based on all the factors that we just discussed, our revised fiscal '07 revenue guidance is a range of $1,050,000,000 to $1,057,000,000 or approximately 16% growth over $908 million in fiscal 2006. In addition our fiscal '07 diluted earnings per share guidance is now a range of $1.85 to $1.87, excluding the impact of stock option expense, which would reflect growth of 20% to 21% over our fiscal '06 normalized diluted earnings per share of $1.54. Including stock option expense our fiscal '07 diluted earnings per share guidance is $1.74 to $1.76. This guidance reflects the impact of our joint venture with HSBC but does not include any other significant acquisitions or potential restructuring or any other charges, including the facility consolidation plans that Joe just discussed.

With regard to next fiscal year, although we have not completed our annual planning process and we are not prepared to provide detailed guidance, on a preliminary basis only we expect our consolidated revenue may grow in the high single to low double-digit range. Given the factors that Joe and I described and including continued investment in Asia (technical difficulty)-- grow at a lower rate than our revenues.

When I consider the long-term growth prospects of Global Payments, particularly the emerging Asian and Central and Eastern European markets, I'm very enthusiastic about our long-term future. Operator, we will now go to questions.

(OPERATOR INSTRUCTIONS). Adam Frisch, UBS.

A couple quick questions. First on the Merchant business, what kind of trends do you expect to see? Paul, I know you spoke about your preliminary look at '08 revenues in the high single, low double digits. But I'm assuming a lot of that weakness is coming from the Money Transfer business as well. So give us a view on Merchant Services in two angles. One, growth into next year and two, on the margin front, because I know as ISOs become a bigger part of your business a larger part of your cost is pass-through, which lowers the margins. So can you look at it on a net revenue basis from a margin perspective as well?

Well, Adam, first of all, you are correct. A lot of the growth in the Merchant business is being driven by ISOs. Although we have not finished our DolEx planning, we are not encouraged by the results we have seen from the Money Transfer, so we think that could have a negative impact on our overall growth.

But the Merchant segment continues to be robust, primarily through the ISOs. But we have a mature portfolio that we've build up over 30 years as a direct business that has a wonderful margin. But it is difficult to add to that meaningfully in excess of just normal attrition based on our sales efforts. That has always been a reality of that business. And then you add Canada on top of that and Canada is doing fine. This also has good margins but the growth has been and we've discussed that in lots and lots of quarters, the growth in that business continues to be at a lower rate than our domestic business. Joe, do you want to try to add anything there?

I would only just add that domestic direct revenue we saw 12% growth in the quarter. That was a new trend for us. As Paul said a lot of it is just the maturing of this base of business that we have with ISOs and our other internal sales channel.

So in thinking about next year we have a lot of good opportunities but we thought it was appropriate to talk a little bit about preliminary indications on next year and what we're going through the budget process now and we will give you some more data obviously during the fourth-quarter call.

Okay. On the ISO channel, though, can you just talk about on a net revenue basis if margins are going up or down or are flat?

I think what we have said, which we can comment on, Adam, and this was kind of a first look under the covers here a little bit, is that the ISO portfolio caused about a 250 basis point deterioration on the Merchant Services operating margin. And that kind of gives you a sense for this. These margins are because of all the reasons we all know, because of the gross nature of how we report it, and so although the margin is quite good on the net business, on the gross, it is a much lower margin. As these grow, it does continue to have an impact. And we do continue to see that growth at pretty rapid rate. And therein is some of the discussion we had about our earnings for next year. Other than that I don't think I can give a lot more color.

Okay. Two last questions. One, on platform consolidation, you guys have been working on this now for well over a year. Are you still in the investment mode there or are you actually starting to see some benefits from it?

We're working diligently. We have not seen any benefits at this point. This is a multi-year task. We're going to give a lot more of a look on that at our fourth-quarter call. But I would tell you that we do expect to get some benefit in '08. We are not exactly sure exactly what that is. That is part of the whole planning process. We think, however, Adam, that the lion's share of the benefit will be in future years. So that '08, we will get some benefit but we think that most of it comes in in other fiscal periods. We will give more detail on that in our July call.

Okay. And then my final question is, obviously, there's a lot of speculation in the sector right now going on between some companies going private and acquisitions and all that kind of stuff. Can you just give us, Paul, an update on your thinking about your strategic alternatives at this point? And do these results in your projections for '08 make you rethink or change that at all?

First of all, I will comment on the other companies. I think they should go private. I wish them good luck.

I think in terms of our own thinking we see a steady course. We at a board level consider everything at every time but I really cannot give you any color on that at all Adam, at this point. Good question, though.

I give it a shot, right? Why not.

Paul Bartolai, Credit Suisse.

First question just on Canada, any chance you could quantify maybe what the impact was from those incentive payments? Do those continue or is that a onetime thing that will hit 3Q and not reoccur?

First of all, Paul, we said I think last quarter, which is the guidance we had given, it was in excess of $1 million. And we said approximately, I think is what we said. And secondly, we think these are periodic payments from time to time but we are not forecasting any additional ones at this moment.

Okay. And then switching to the domestic business, I mean the growth has slowed there a couple of quarters in a row. It seems like that may have come in a bit below what you were expecting. Are you seeing any changes in trends in the ISO market? I know some of the other players in the industry and some of the terminal providers have talked about some weakness in the -- especially on the small end of the merchant market. I was just curious on your comments, on maybe just a broader look on the market.

I would say that the ISO business continues to be strong. It is growing at a significantly accretive rate to the competition. But the U.S. market probably is getting close to a zero sum game. If you look at the published statistics from sources like the Nielsen report that report on Visa and MasterCard volume, which is 9% to 11%, roughly. But if you look at what merchant spread, particularly for larger merchants, which make up a huge amount of that volume, those spreads typically decline. Consequently you may be looking at a U.S. environment, ditto for Canada, where you have some modest growth to -- I mean very modest, kind of single digit revenue growth. Consequently when the ISOs grow at a significantly greater rate than that they are taking that business, they are taking that share, from someone else. So that is a phenomena. I think this tide needs to lift all the ships, perhaps is slowing a little bit from a revenue prospective. I mean we're getting close to pretty significant penetration in the U.S. market.

I think the second factor is you have a little bit a law of large numbers here. These ISOs are becoming quite large and it is getting more difficult to grow these things at kind of this aggressive rate, although we're adding new ISOs and new ones we have added are producing more business. But that just gets a little more difficult too. So I think it is both of those factors. Joe, do you care to add anything?

No, I would only just say that on the Canadian card incentive I would [say] it's approximately $1 million; it was actually quite a bit larger than that and it would probably be a onetime item in the quarter. Most of that Canadian growth in the quarter is attributable to those incentives.

Great, that is helpful. And then just last question, I just want to make sure I understand your comments on the outlook for '08. Clearly you expect the margins to be down. Can you just clarify what you said that was going to be driven by? Is that more just investments in I think you mentioned Europe and some of the Asian markets?

It is a couple of things. It is that, it is investment in Asia. We're going to -- as part of the planning process, we're team to take that 200 sales force up higher because of the very encouraging early returns we have on those investments. And other investments we're making in Asia and ditto far Eastern and Central Europe.

We also, though, have the continued impact of the ISO business and that does have a continued impact on the margin.

Liz Grausam, Goldman Sachs.

Moving to the Money Transfer business, how did the quarter shape up relative to what you were thinking going into it from both a pricing and a volume standpoint? And where are you seeing the pricing pressure come from? Is it still smaller brands or does Western Union really come in with a pricing initiative in the quarter?

I think as Joe or Paul mentioned in our comments I think it was about where we expected. I think the transaction growth rate, February in particular, was slower than we had anticipated given that we enforce to be much more aggressive on pricing this year than we anticipated at the start of the year. March, we have seen an improvement and so we're encouraged that this well -- I don't know if we could say return to normal but at least get stacked up into a team transaction growth, which is what we are expecting.

In times of where is the competition, I think it is still everywhere. I think it's the large players as well as the smaller ones, although I think the smaller players are going to have a much more difficult time sticking in this market because there's a fair amount of margin that just went out of the business. And I don't think, given their scale, that they will have the ability to rise to that, which will present, to the extent they are a branch model, will provide a great buying opportunity for us.

And the subtle shift in your branch strategy from more of an organic growth strategy to one of acquisitions, what is really driving that? Do you see better productivity just coming out of M&A?

It is. It has always been our interest. The challenge has been the last few years, the price has become -- it has been too expensive to go in and acquire. And it was, we thought, better to do it organically. But an acquisition is always best for the market. If you can acquire a branch that has 500 to 1000 or more transactions coming in a month, that is -- that can take upwards to 12 months to achieve in an organic structure. And it has a lot of introductory pricing that we would not have to necessarily do. So we're encouraged that we will find more opportunities in the market given the recent shift in pricing.

I also think, Liz, if I could add to that, I think that you have the increasingly more complex regulatory environment and a lot of the small operators are -- that is not a good environment for them to operate. So they are encouraged and are quite frankly worried the prices are coming down, so.

Great, and in terms of your commitment to growing in international markets, certainly in light of your comments around a maturing U.S. market, do you still see a lot of opportunities in Europe and Asia for acquisitions on the merchant front?

We do. We typically have to dig a little harder. When something results in a process, typically we're not going to be the high bidder. It is just not our culture. And there are some occasions when that would happen but it is unlikely. So we have to dig a little harder, but there are a lot of -- and some of them smaller -- but there are a lot of opportunities in Eastern and Central Europe and in Asia. And we have a fuller -- we have a fuller M&A pipeline than I have seen in a long time. So we're working it very hard.

Greg Smith, Merrill Lynch.

I just wanted to make sure the Canadian incentive payments, that flows through as revenue? Is that correct?

It does. And Greg, I'm glad Joe clarified that. There has been some banding about. We did not give a lot of guidance. I think we said it was more than $1 million. It was more than $1 million and it was a lion's share of that increase and it does flow through as revenue. Correct.

But just as a clarification these go on from time to time. This is -- it may be an event in the quarter that Joe highlighted, but we see it in the United States although less frequently than we have in the past. And we will continue to see them in Canada as Canada is going through some changes in its market. And as Paul mentioned we are a large provider in the market and therefore we have opportunities to participate. So it would not necessarily be the last that we will see in that market.

Okay and then just staying on Canada, as they move to EMV, migrate to smartcards, is there going to be any extra benefit for you, maybe on a little bit of margin on terminal sales or anything else we may not be thinking about?

There is at least on one of the associations there is an incentive for early adopters that we are already participating in. We are not alone, but there are others. As long as the transaction is at in EMV terminal and your systems are EMV compliant, even if it is not in EMV card, there are incentives that are made available to the processors and to the merchants.

You are correct that we're going to end up turning the base. Joe mentioned this at the start of this fiscal year, that we're going to continue to upgrade the terminals that are in the field today; that is a multi-year project and you will continue to see spending in that regard. In Canada, the predominance of the business is to own the terminal and to rent it to the customer. So it does represent a continued revenue opportunity that you would not see in the U.S., which is not going through a similar phenomena.

Okay, great. I think you guys may have commented on it, but let me just ask this again. You mentioned, Paul, having a full acquisition pipeline at this point. But you know, given for example the acquisition this morning First Data's acquisition of PolCard, it looks like pricing is just doing nothing but going up. How does that impact your decision and how do buybacks maybe play in here, especially with the stock down today?

Well firstly, prices -- you're right, prices are not going down and there is a lot of private equity chasing deals too, which adds to that. But what we're talking about are like the little deal we did in Bosnia. Now albeit, it was a little deal but it was a great deal for us and it is a building block. We're looking at more of those. But there are some larger opportunities where we have a distinct advantage over others. And none of these really -- I don't think we have a deal on the list that is a process. And that is good. So we have people on the ground in Asia and people on the ground in Eastern and Central Europe looking for deals -- that is what they do -- and it is producing some traction.

We still believe that the cash we have is the best and most productive use is to employ it in these acquisitions. But we do continue to probably more recently than in the past, we have considered a program to buy back some stock. And we are continuing to discuss that with our Board. We have nothing to announce at this moment, but I will tell you, it is for the first time, it's on our radar. Let me add one other thing too. I would not expect a huge program because although something like that may not be a bad idea we still believe that the most fundamental and the best use for that cash is to make acquisitions and we're still encouraged.

Kartik Mehta, FTN Midwest.

A question on the ISOs. I think you said the ISOs would have about 250 basis points of negative margin impact in '07. As you look out further I'm assuming that gets lower just because the ISOs are becoming a bigger part of the mix. And the contracts that you have already done. Would that be a correct statement, that that negative margin impact gets lower as we move into '08 and '09?

I think what we're saying is we don't necessarily see that happening in '08. We think that the ISOs continue to be a pretty big grower, as Asia and Central in Europe gets some real traction and we start growing those businesses. Organically or if we get lucky enough to have some acquisition opportunities there too to add to that. I think we're going to feel more benefit from that statement probably in fiscal '09. So that is part of the reason that we had that discussion about '08, is that we think the ISOs kind of [big from our own] success here. The ISOs continue to be a very aggressive grower for us and it is going to continue to have an impact in '08. I think less so in future years, clearly.

If you look at the Money Transfer business, Paul, does what is happening in the industry change your mind at all about the model you have? Would you go to maybe an agent-based model or is the branch model the right thing and some of these things that are happening are more temporary and they will resolve themselves?

And that is an excellent question. I think that if you are in an environment where actually transactions are declining, if there are less customers sending money, it is much better to have an agent model because you have a variable cost model; you don't have a transaction, you don't have a cost. In a fixed cost model, our model, in that environment, it is very difficult to keep margin up. And therein lies some of the issue.

However, there are two factors that are incredibly important. One that we can control and one we cannot. The one we cannot control, and quite frankly the bigger of the two, is what happens with the emigrant population. Do we have some type of guesswork or program? Do we have an environment that allows more and more people to come in and do the things we need them to do and to send money home? Secondly, and we don't have an idea. I mean we have hopes and desires but we have nothing to indicate that any anything is on the horizon on that immediately.

What we can control, though, is getting some real contraction with adding new products and services through our branches. And when you have an environment when you have your own people, that is perfect to add additional services. We have not made enough progress there, quite frankly. We're doubling focused on that, and we hope to have some more to share with you in future calls on our progress there.

Just one final question, I tried to understand your '08 guidance. Obviously some of the impact of the margins will be the ISO channel is getting bigger and that's having a negative impact. And it sounds like some of it is that you're just wanting to invest in the business because you think that that investment will pay a lot more dividends as we go out further. Is it possible for you to just look at the business and maybe try to bifurcate that to say, gosh, if we were not going to be in Central Europe or we were not going to be in Asia, this is what would happen. So I'm trying to get a sense of how much of this is investment in the business and how much of this is just margin pressure because of the mix you have.

That is an excellent question. I think that unfortunately we're going to have to ask you to wait until July when we give that but I promise you we will. I will tell you that is exactly the heart of it. And we will be providing some more color on that very question because I think that gets to the heart of it. In other words is some of this an investment for growth? I think that is a very different discussion than it is just something that is systemic to the business. There is a little bit of both, quite frankly, but we will give more color on that.

Also it is very important to say, it is our job as management to grow our revenues and to grow our earnings and it's our stated objective to grow our earnings at a faster rate than our revenues. We have not looked at the impact of our expense initiatives. We have announced a major facility consolidation. We have not looked at the impact of our G2 platform but we are going to -- we will balance that against the magnitude of the investments we're making and the ISO impact. And we are still in the process of doing all of that. But we think it also behooves us to give you guys as much data as quickly as possible even if we don't have a complete story. And that is a difficult thing to do some time but we made a hard decision to do that and that is what that is. So I have to beg off on giving you a lot more color. It is not because we don't want to give it to you it's that we are still developing it.

Dave Koning, Robert W. Baird.

First of all I was just wondering the rep growth in Asia Pacific is pretty solid but it looked like reps were down a bit sequentially. I'm just wondering if there is some seasonality in that business?

On the Asia Pacific revenue?

Yes.

There is but the revenue was pretty well consistent; it was $14.8 million in Q2 and $14.7 million in Q3, and I would not call that a lot of seasonality. But we're expecting kind of steady on.

I think what you're getting, too, you remember we got rid of some unprofitable business. We got rid of some credit risks. There is still a little bit of that impact too. We're going to go into '08 with a much cleaner portfolio that will be almost a year or old at that point, and I think it's just the comps become a lot easier. But there is a little of that going on too. But there is some seasonality in a merchant portfolio in any market, particularly Chinese New Year. When that falls, it has a big impact on a quarter because that could fall in one quarter or another.

And then just secondly, transaction growth in the U.S. direct market continued to be quite a bit above revenue growth. Is this about -- I think it was about 11% between the two. Is that about the maximum gap that we will have between the two?

Well, that gap was 10% in the second quarter and I think I said at that time I did not expect it to get any wider. It got 1% wider. I would attribute that to the pricing. We said for the first time that our spread had compressed here in the low single digit range and that is a bit of a new trend. So I don't know if I can call it but that's going to be a maximum number. The higher you get between those two percentages are mid single digit decline in average ticket, which is mainly from growth in the ISO channel. And they had just lower -- those merchants had lower average ticket. A little bit of a decline on the spread. And then the rest is that we have a fair amount of revenue that is not based on credit card or debit card transactions that are not growing as fast as those transactions like our check-related services and other equipment or fee revenue.

I want to add one other point too that goes to my earlier comment too. One of the things that we have not fully factored in because we're still in the process of looking at it is that the associations have announced interchange rate changes in April and in June. You know the way it works, you do get some benefit from that. And so that is all part of that -- the answer to Joe's question too.

Tien-tsin Huang, JPMorgan.

I just wanted to better understand your position again on share repurchases, lots of cash on the balance sheet, producing free cash flow. The stock is down at 15%. And what point would you consider a share buyback program?

I think we are having some dialogue about that now. But I would say if we do something it would be more modest because we still absolutely, positively think that we're going to have these uses for this cash in acquisitions, and it makes a lot more sense. But we're one of the few companies that do not have a share buyback. That is not lost on us. And so we -- that is all I can say at this point.

Fair enough. I guess a question on merchant domestic direct. Can you walk us through -- for fiscal '07 it sounds like there was a revision in revenue guidance from the mid to high-teens to the mid teens, if I heard correctly. Can you walk us through what is driving that?

Well, again, the mid to high-teens range was based on the first half trends, and there was about 18% growth in the first quarter and 16% in the second, and I think I said on the last call that I'd expected that to continue in the mid to high-teen range. And in the third quarter that did not happen. We had 12% growth and we are expecting a little bit of an acceleration in the fourth quarter due to timing of ISO signings and conversions, but we have seen a maturing of our ISO and internal sales channels in the U.S., as Paul said in his comments. And the full-year guidance is always just based on recent trends.

So what is the status of some of the non-ISO business at this point?

Well a lot of them continue to move along but they are not growing at anywhere near the rates of the ISO channels, and those channels could consist of our check-related businesses or our internal sales force or the revenue we get from our various -- our joint venture with Comerica. And just given the size of those and the amount of people that we have pursuing that revenue, it's still around 300 people in North America. That revenue is just not growing enough to keep that overall percentage growth at where they have been.

Okay so at what point can we expect somewhat of a turnaround or what are some of the strategies to get that growth rate back up again on the non-ISO side?

I think there is a couple of things here. One is the benefit from any association (multiple speakers). In the past -- and you have followed us for a long time -- in the past we've had some pretty significant benefits. And when you have a portfolio, a base business of portfolio as large as ours, when you start to get basis points and basis points and basis points worth of benefit, it just all falls to the bottom line. And we've had that happen, that has kind of cycled through, and we're hopeful that will happen again. Not necessarily planning for it, but hopeful.

And then there is good, old, hard selling and getting the sales force focused. I'm actually pleased with our direct sales force efforts. But it is just hard to have a dramatic impact on the base number that big by your direct sales efforts, although I'm pleased with those efforts. It is just, that is the nature of it. Especially in the past when you have got the lift from some association changes. But we're still focused on it. I still very much like that business. So just stay tuned.

If I could just get one more quick question on the [MISO] deconversion, when exactly did that start? I know it has been sort of cycling through but it sounds like it is going to hit us next quarter. How should we think about a revenue impact and I guess more importantly the EBIT impact of that client moving away?

I think finally, we've talked about this customer leaving forever and I think that we're going to enter '09 with a pretty clean deal.

I think there has been some impact on profitability because you lose a customer, a profitable customer, that is going to impact you. But the bigger story there, and this is pretty straightforward, is that we did some pretty significant renegotiations with major customers. And I would like you to look at our transaction growth. And once that annualizes, and we're not too far away from that happening, if all things remain equal and we get benefit of some new business and we're not faced with any major new renegotiations, which we are not, then you should have growth that is not -- revenue growth not too far away from your transaction growth. And I think that is the environment we hope for in Central and Eastern Europe. So that is why I'm encouraged.

Okay, that is encouraging in the sense that -- okay. So it sounds like the pricing has had a greater impact than the actual [news of] deconversion?

It did, but it does not underestimate the fact that we lost this customer too, finally. But actually they both did. But the repricing -- we had some big customers to lock them in for a multi years, I mean three, four or five years. So that was a big deal.

Andrew Jeffrey, Robinson Humphrey.

Paul, when you look at Global on a multi-year basis now, given what you're saying about the maturation of the domestic business, which is still meaningful to your overall financial performance, is Global Payments still a growth company?

That is an excellent question, isn't it, Andrew? I think the resounding answer is yes. But I think that not all growth is -- I guess in some cases -- but sometimes it's a little lumpy. And I think that what we're saying is when we spun this company years ago we actually had negative growth on the top line. We worked it into a good, growing company, made some great acquisitions. That helped fuel a lot of growth.

But I always said I thought that if we could get this to a double-digit organically growing company that would be a terrific feat. I think we're approaching that, and I feel good about that. We still have acquisition opportunities, but most importantly, and especially when we look towards '09 and beyond, the opportunities in Asia and Eastern Europe and Central Europe are going to be terrific. Augment that with if we're fortunate enough to get some acquisitions done, but just the organic growth of that business, next year and the year following starts to be a material. And I think that continues to drive our Company. So yes, we are in markets that grow at 30%, I would say we are a growth story. Maybe with a couple of lumpy periods.

Okay, and Joe, maybe you could help me a little bit. I'm struggling -- I appreciate the increased disclosure around the merchant profitability. I guess what gets a little bit challenging to figure out is given the strength of the segment margin in the first quarter, most of which appears to be non-recurring, and your guidance for the full year, the implication is that the segment margins in '08 could be down a lot, maybe as low as 25% or below that. Is that the right way directionally to think about the magnitude of this mix shift impact on the segment margins next year?

We have not given specific guidance on the '08 number. We certainly have, with the revenue growth, it is supported by the ISO channel and that is going to cause a margin impact next year. We have kind of given you a flavor for what the impact is this year. And if the ISOs continue to grow at that same rate and if the pricing does not change there will probably be a similar impact next year, maybe a little bit less because of the convergence of just kind of the ISOs becoming a bigger part of the Company.

But I guess the question is, what else can we do to help offset that impact? So what are the other investments that we're making and will they pay off, growth in other channels? And that is really a question that we have not been able to answer. But that is a pretty high barrier, that 250 basis point margin impact, and I guess it is implied by Paul's comments that it may be difficult to overcome that. We did not overcome it this year. We're expecting a margin decline and next year maybe a similar result.

Asked another way, I guess, is it reasonable to view a normalized full-year operating margin in merchant, normalized for that first quarter, somewhere in the neighborhood of 26.5% or so and then start to look out at '08 from that starting point? As opposed to your guidance, which incorporates the positive impact of that big first-quarter segment margin?

The first-quarter margin grew significantly over the prior year because of all of the cost reduction initiatives and just lower cost infrastructure quarter. But if you look at it on a sequential basis, during fiscal '07, that margin was higher in that quarter, primarily as a result of seasonality. And Canada just has a much higher revenue stream in that quarter. So I'm not sure I would adjust it down that far that first quarter. There was not any onetime big credits in the first quarter that abnormally benefited that result. But we just cannot give you anymore color on the specifics of the '08 margin because we're still working through it. But we do have some headwind as it relates to the ISO channel and the other investments we're making.

Okay, so there is some seasonality, although -- albeit maybe a little more modest that could recur in the first quarter of '08?

Yes.

Mark Sproule, Thomas Weisel Partners.

If we look at the ISO channel and you guys have signed a number of --

Can you get a little closer? I cannot hear that.

Can you hear me?

A little better. Speak up.

Sorry, hopefully you can hear me better. When you look at the ISO channel and think about the new guys that you're signing, is there a worry that as you've built that out that you're starting to see ISOs sort of cannibalize themselves a little bit, so that as they grow themselves (technical difficulty)-- or how do you look at that?

I said earlier, I think we're getting close to a zero sum game in a mature market. But all of our ISOs are going pretty well. I think there is some share shift but we don't have 100% of the ISOs so it is not necessarily coming from us. I can tell you just pragmatically that our ISOs are growing very nicely. I cannot speak to what the other ISOs are doing that we don't have but they cannot all be growing the way mine are. So my assumption is we probably are getting -- our ISOs are benefiting from getting some business from some other ISOs. Our ISOs also, because they are large and well-capitalized and well-run, we get the best fit from them buying some other ISOs. And we get that business converted to us as well.

I would add that if there was a large cannibalization between and among our ISOs that we would hear about it because the ISOs, the [principals] would make us aware of it and I think it is diverse enough that we won't see that as a problem.

Got you. And on the international front in the European with the ex (indiscernible) business, I don't know if you mentioned any -- you said the organic growth was starting to -- did you mention a transaction number? I think if you did, I missed it.

We did. We said that Europe was growing around 16% in the transactions for the --

Okay, so that should normalize towards -- I guess for the former question, that will normalize towards revenue growth and go towards the end of '07 or start to?

Our hope is that normalizes towards revenue growth in '08, as we annualize some of these pricing concessions. I mean that is our hopes for this business. I'm not prepared to give hard guidance on this, but that is why we remain optimistic on this business.

Okay. As you look to expanding -- or you're talking a zero sum game in the U.S. domestic market, you have got a very difficult operating environment with the U.S. to Mexico Money Transfer business. So a lot of the acceleration on growth is driving your European Asian platform. But can it be driven by organic growth or you largely have to start, especially in the European sense, being more aggressive on the acquisition front to build the portfolio, especially in light of some of your competitors that seem to be willing to pay a lot more than you for similar type of platforms?

That is a very fair question. We believe that you can drive, particularly in Asia -- not so much in Europe -- it is very difficult. The reason that customer took so long to leave, it is very difficult to extricate yourself from a processing relationship and it is very difficult for us to then sign new business from other processors from bringing into the GPE platform in Europe, although we are adding new markets like Russia and the Ukraine. And we will get some nice growth from those. And that is all organic with the potential of some acquisitions coming in, but more modest ones. Asia, I think you can grow organically. We have almost tripled productivity in our sales force there and only doubled the number of people. So we're getting a lot of very nice things happening in Asia. We're encouraged to add some more people. And I think that in a couple years that becomes a real critical mass.

Now acquisitions do exist. Smaller portfolios, banks that are located in the Asian markets, and so I think that adds to it.

In regard to our ability, we could go buy someone like a PolCard, who are willing -- they absolutely sell to the highest bidder, especially when you have a financial owner. It is not something we choose to do. I think that that is the way we are. I'm not casting dispersions on others who may. But I still think there are opportunities, Mark, absolutely even with that deal in [mott].

Okay. And then if I can throw in a last one, I guess it is somewhat repetitive given some of your comments that you had earlier on the cash side, but when you look at your cash that you have got on the balance sheet of $290 million, your average acquisitions over the last couple of years have been in that sort of $60 million, $70 million range. So is there any reason that you need to have that much cash or would not decide to -- I know you are saying you're thinking about a small buyback activity. But at what point do you say look, we have got -- in a situation where there are not a lot of acquisitions where we find the price attractive and yet we're sitting on all of this cash. How do you guys look at that?

That is exactly what we look at. And I think that where we are, and we say this very clearly, is that we think we do have enough deals that would encourage us to keep our cash handy for those deals. And we have a robust pipeline that would result in a significant amount of expenditure for these deals. Now we obviously don't think they are all going to come to pass, but there is a couple individually that would be a significant opportunity and purchase price. So we have to balance that against your question. And that is why I think we come out with perhaps a discussion around something more modest but still putting a program in place kind of hedging the bet.

Robert Dodd, Morgan Keegan.

On the DolEx side, now that you have -- can you quantify or at least give us an idea what kind of impact in the quarter you had from closing the stores where you had duplicate locations related to the landlord issue? Were there still significant expenses related to those duplicate stores in that quarter or did you get rid of most of those and the predominate impact being the pricing, or was there a combination of the two?

I think the process, as we talked about before, was -- it was a large relationship we migrated over a period of time. There were no specific expenses in the quarter that were worth note. Overall it definitely drove up our costs because we had to run duplicate branches as we migrated the traffic outside of the stores. But I think the results for the quarter on DolEx in particular aside from Europhil, which did terrific, is just a function of the marketplace and pricing.

And then secondly with regard to DolEx again, you have remained committed to the product line, but can you give us any argument why there are synergies between that business and your other businesses or just a reason why fundamentally you need to be in the Money Transfer business?

I will take that. Robert, I don't think there are a tremendous number of synergies between the two businesses. I don't think fundamentally it is as important for us to remain in that business. That does not mean we're going to sell that business. I'm not saying that at all. We continue to be confident in the management. We do have plans and actions and additional revenue sources and we still feel good about our model, particularly in an environment where you have increasingly more complex regulatory requirements and our closed loop program that I think gives us a lot of comfort in that regard. But it is not fundamental to our business and we look at everything. There is nothing sacred here, quite frankly.

Dhruv Chopra, Morgan Stanley.

A question on the Money Transfer side, particularly with DolEx. Given that you're looking to now acquire branches are you thinking about, are you evaluating the possibility of looking at branches that would potentially expand your footprint outside Mexico corridors?

I think initially, we're looking at Latin American opportunities. We are in fact, through the Europhil business doing some things outside of the Latin America corridor, and maybe Jim can just comment briefly on that.

The customer base in Europe is primarily Latino; Spain is the largest piece of our business. We're in the UK and Belgium as well. And so it is Latino population so you see the majority going in that direction. We see some Africa, some to the Philippines, some to China, but those are very small numbers.

As it relates to the U.S. business though, we're not Mexico centric. We have expanded to effectively all other major countries within Central and South America. And as a result I think we have changed the mix away from being -- moving it away from Mexico centric. That is still the lion's share of our business.

Right, but are you looking at potentially branch acquisitions in the U.S. for DolEx, which would open up other corridors, whether it is part of Europe or Asia?

We're looking at this. Those are tough to find. Most of these of course are agent models, but we usually consider that as something that was perfect. So we continue to look at all those opportunities.

Okay and then just last question, first, do you have a metric for the organic transaction growth rates in Asia? The second question, related, is what kind of visibility do you have on timing for that to start contributing to revenue growth?

I don't have a lot of color on either of those. We have not provided the organic revenue growth. This thing, we have only owned it eight months. As we have this business for a longer period of time we will be delighted to share that with you. I will say though the revenue growth has been modest because of the business that we have cleaned up. We shared that earlier too.

We hope to enter '08 in a pretty clean environment and then grow this business at a very nice rate and that will be clear and we will discuss what that is. And at that point it will be accretive we hope to our overall growth rate.

Okay, great. And then just last question, very quickly is, I, correct me if I'm wrong, but you guys today operate five or six different data center facilities; is that correct?

No, actually in the United States we offer one primary -- we have one primary facility that has two platforms that operate in that there is a DR facility as well in the U.S. Canada has a data center with a backup as well. That is the second. And then through -- MUZO has its own data center, and then -- or Central Europe. And the HSBC acquisition has multiple data centers. The project, the G2 project that we have underway is focused right now to consolidate our two U.S. platforms, which is one data center, onto a common platform without affecting customers. So it will be a behind the scenes; the customer will never know that they went from one system to the other.

Following that or in parallel with that we see the multiple systems in Asia being consolidated onto that same platform base here in Atlanta. And then, finally, sequentially, and our current thinking is to see the Canadian system, which is currently with a third party being migrated onto one common platform. So that is the -- kind of at 10,000 feet -- that is the expectation. For the current time MUZO, which is really a different business in terms of indirect processing exclusively, at this time we're focused on the businesses that are providing direct acquiring services, which are the ones I just described, and so those are the first three on the list.

Tony Wible, Citigroup.

I would like to start off, Paul, by just addressing the preliminary guidance that you implied with your comments. The comps that we look at in the first quarter do look to be very tough. Is it fair to say that a lot of the total '08 preliminary guidance is way down by that first quarter?

Again, the first quarter was very strong relative to the first quarter of the prior year. But there was nothing unusual in the first quarter of this year that would not necessarily not reoccur in the first quarter of the '08 year. It seems like it is a much bigger quarter in terms of earnings contribution because of the seasonality. If the Canadian revenue were to change or were to change from recent trends then that could have an impact on that Q1 number, but we're expecting reasonably similar seasonality next year, excluding any of the onetime items that we talked about this year, like the big Canadian card incentive in the third quarter that we received. We would not expect necessarily to receive those in the third quarter of next year.

Just looking back, Joe, sequentially, you guys have never beaten by $0.13, which was the magnitude -- I'm sorry, never increased earnings per share by about the $0.13 ex options between the May and the August quarter this past year. Historically it has been kind of a $0.06 or an $0.08 step up.

Actually, if you go back several years ago we had a very strong first quarter. I think it was in '04. The first quarter has historically always been, Joe mentioned, the Canadian pricing -- the structure for the Canadian business, we earned a higher interchange on foreign cards. Foreign cards see greater use in Canada during the summer months. So we will expect another strong start of the year our first quarter. And I think as Joe was mentioning there were some benefits that did not -- that occurred in the year prior that may be comparative look as strong as it did in the first quarter.

Right. And that is what I'm kind of getting to. Is the preliminary guidance you comment on 2008 more skewed down by the first quarter? It sounds like it's kind of a mixed answer that I'm getting.

Not expecting any significant deviations quarter to quarter in '08. '08 will be a reflection of timing of other initiatives that we put in place. It is very difficult to try to tell you -- I don't know what Q1 of '08 is going to look like right now. We have not finished the budgeting process. Any of the onetime type items that we talked about during this fiscal year may not occur next year and could have an impact on the year-over-year growth. But I just don't have any more color to give you on that.

Could we talk about how long it would take to dial up any cost savings on platform consolidation? I know you guys have put out some dates in the course of this call, but is that an aggressive timeframe that you guys have put up? Is that a conservative timeframe? Can you provide a little bit of color about how long it takes to consolidate certain aspects of the platform?

I think it is kind of a realistic. I will pick one you did not offer up. What we said is -- and we have not given in all fairness -- a whole bunch of detail on this. But what I just said earlier was there will be some positive impact from the platform consolidation in our fiscal '08, and we will, and we will give you more color on that during our July call. We're going to get the lion's share of it in future years, which I said, so I repeat that. And we will give you, once again, more color on that as well. So there's not a lot more I can add other than that. I'm sorry.

Okay, last question is on Asia-Pac, can you comment about what you guys would have seen year over year if you had the Asian business a year ago? So kind of an organic growth rate?

You know, I think the Asian -- Tony to answer your question -- the Asian business per se, actually, just kind of went -- was kind of flattish because of all the things we did. But I think we've told you it is about $60 million roughly, that is what the annualized would have been. So if that is what you're trying to get at, you could back that out. I'm not really sure as to the question.

I'm looking for a year-over-year growth rate. So what was HSBC one year ago this same quarter?

We will see.

What we said at the beginning of the year was that the guidance that we gave which we really have not changed, would reflect single digit growth.

Yes.

And that's the impact of a number of items. It is HSBC not as focused on the business leading up to the acquisition. It's the elimination of certain high-risk accounts. It is the issues that have occurred in Taiwan and from a country perspective the entire country has been down on the very, very developed credit card market. So put all those factors together, it is probably a single digit number and that's why we really have not -- it is probably not reflective of what our expectations are for the future, so we have not talked about the year-over-year numbers. (multiple speakers) when we get into next year we will do that.

And clearly our expectation is that this thing can grow robustly.

That is where I was going to head next, Paul. With doubling the sales force, can you talk about where those new reps are located, what countries specifically are targeting? How long does it take for a rep to kind of ramp up to your productivity expectations?

Firstly we're not going to stop there either. We have doubled and we're going to increase even further. Our partner is delighted with the results to date. What we're finding is extremely well-educated, very focused individuals that don't have a lot of sales training. In fact, because this is all new in these environments, that we're finding people that really don't understand financial services. So we have a bit of a training program to get people up to speed but these are highly educated, very motivated individuals that have the ability to get up to speed. But we're not hiring other sales reps from other companies selling bankcard services. That does not exist, basically. So we are hiring new people to training them, getting them up to speed. But there's so much opportunity that the return on that investment and because a salesperson in Asia, because of the nature of the markets, costs you significantly less than a North America salesperson. But their productivity is very similar to a North American salesperson, meaning they are bringing in as many accounts. And the accounts are not quite as big but the profitability is excellent on those. So the return on that investment is terrific.

In terms of where they are located, we're in 10 countries and territories, Tony. They are pretty much where you would think with the exception of China. We don't have a big sales force in China per se, mainland. We have some. We have salespeople in Beijing, we have salespeople in Shanghai, but that is just scratching the surface of the opportunity. We have robust salespeople -- a number of salespeople in Hong Kong and Macau, and of course Taiwan as well. But the opportunity to increase the sales force in China and in India is significant. Because it is just those massive market opportunities.

And the Chinese government just announced -- announced previously and were good to their word -- that they would let what they call foreign institutions, non-Chinese institutions, transact business in Renminbi, the local currency. And they indeed did that. They allowed a number of banks in March, which is the timeframe they set out, to acquire -- not bankcard acquire -- but to deal with consumers in local deposit in Renminbi, and eventually that will happen for acquiring bankcard transactions as well. Clearly in the next 12 months that will happen. So that is very exciting.

Tom McCrohan, Janney Montgomery Scott.

I have two quick follow-up questions. The first one is the domestic merchant processing business. Can you articulate how the average ticket per merchant -- you talked, I think in your comments that that has been going down, at the margin the average ticket process per merchant, why that would impact your pricing? Because I thought that model with the ISOs that you guys kind of got a fixed per transaction fee, and the average ticket was kind of irrelevant.

I think your question was transaction accounts. We were indicating the number of transactions. But it also applies to our domestic business too. Joe, do you want to put some more color on that?

Yes. The decline in the average ticket is not correlated to the spread. I did not mean to imply that. It was to, we were trying to reconcile the transaction growth number in the quarter to the revenue growth number and there was 11% difference between those two numbers. I was just trying to help reconcile the two. A lot of it is from average ticket declines, a little bit from spread declines and then the rest from revenue that is not based on credit or debit card transactions, that is not growing as fast as those transactions. So that reconciles you back down to the 12%.

It also, Tom, although it is correct, that the ISO pricing many times is transactional based. The transaction -- while these transactions go down, it's transaction based. And that gets to your earlier point.

Our base business, our direct business, typically is not. It is basis points. And the average ticket increases you actually make a little bit more. The average ticket goes down, you make a little bit less.

Fair enough. What was confusing to me is I guess the common perception is that the small to mid size merchants are a little more profitable. I was just trying to reconcile the comments on the pricing for you guys coming in and being under pressure with the fact that the margin, you're getting smaller merchants, which are, you would think more profitable to you, but that is not what you're seeing?

The growth of the small and mid-market merchants are coming from the ISO channel, and the ISO channel has a lower overall margin.

Fair enough. As a follow-up, one of your competitors, which does a lot of processing for banks and is one of the alliances -- I think you can figure out who they are -- was talking about major platform consolidation within their business. Do you today have any similar arrangements with banks? Or is that something that could be an opportunity for you guys next year if a large bank customer of your competitor says, you know, why if I have to go through a platform conversion, then maybe I should just pick up the phone and talk to you, Paul.

Tom, I think that is a great point, and I would like to advertise that right now. We are here and we would love to talk to you. And if you're not happy with your current processor we are a very viable option for you. And we do have people that sell into those channels and that is not lost on that.

But is that something you are aggressively pursuing to foreign bank relationships similar to the way one of your competitors does?

I think that we're pursuing it -- I don't know if aggressive is the right term. One of the things that we offer that really makes us different is when we go into a market, we will say, okay we're not going to process for four financial institutions in this area. We're going to marry somebody, give them exclusive opportunities in those markets. As we are bring in other financial institutions they will participate with our existing partner as a part of the JV. So does limit what we do. But there are some of those opportunities domestically that we would consider and we do have conversations like that.

Okay. And the last question on Money Transfer. Given the pricing pressure you see on the -- as the pricing goes down, how sticky is that price? I mean if things get better and transaction volume picks up, is it difficult to raise prices after you lower them?

You know the beauty of what we have at DolEx is that they physically have the ability to change it by day, by location. The question is, I think the spirit of the question is, once somebody gets used to a lower price, can you raise?

Right.

We have raised prices before. But I'm not suggesting that is necessarily going to happen. We think this continues to be a commodity and it is going to be price sensitive. So if you get real revenue growth here you're going to have to grow your transactions aggressively because we don't see pricing coming up. Maybe stabilized, as Jim said, but we clearly don't see them increasing.

If you looked at your portfolio, Paul, of merchant stores on the DolEx side, what percentage of that portfolio do you think has aggressively lowered prices? Are there sections of your portfolio that have not been impacted yet that you expect to be impacted in the next twelve months?

I'm going to back up. The point I just made was about DolEx pricing, I'm [hoping].

Yes, and that is what I was talking about.

Now you are talking about merchants.

I meant to say Money Transfer. Sorry.

Money Transfer? I would think that the price is different by market. But I think I would just have to fall back on my earlier statement, that I don't see anything -- and Jim can jump in here -- I don't see anything that would give us encouragement that we will be raising prices on DolEx.

Yes, maybe I will ask the question again. Sorry, I must have been confused when I said merchant. The Money Transfer portfolio you have today, the DolEx branches, you've obviously had to lower some prices to remain competitive. But are there portions of your portfolio, certain geographies, that have yet to be repriced down?

Oh, I see.

I would say the competitors in this market and in the states that we're in, they're in each of those states as well. We have been -- we have adjusted prices in just about every market. It has not been every single one but it is the lion's share. They're generally the border states, it is generally California, Southern California in particular, Arizona, Texas, even into Florida and Georgia. So I would say that as it jumps where we don't see it moving form where we sit in March, we don't see a major move again down. Coming up in price is, as Paul said, is really difficult. If the market allows it, we clearly will take advantage of it, but that is not our intention. We tend to be the price leader and we're going to remain that.

Fair enough. One last quick question. Do you guys do anything in the prepaid space and is that an area that you might consider for an acquisition down the road?

I'm not sure that we would -- I guess we would consider anything that would be able to fit in to either the card business or the DolEx business. The DolEx actually has a product that is underway where we have developed a system, actually acquired the software, and that is planning for a launch hopefully in the next not too distant future. And that would be a prepaid solution to our DolEx customer so that is just using us as a point of -- to transfer money, but it would offer a service where they could store money on a card.

In terms of prepaid gift cards, we offer a couple of different programs to our merchants and to our ISOs with other vendors currently.

Dan Perlin, Wachovia.

I wanted to think about a list of things they could be the potential offsetting factors to margin degradation in 2008 because clearly, Paul, your comments about '08 are what is driving your stock down 13%. So one, I want to just kind of flush some of these things out. And so the list that I have here is you have got G2 that might be potentially impactful in '08. And part of which you're also going to I think reduce significantly the amount of compliance issues that would resolve around having multiple platforms down to 1. So that might free up your time for sales.

You have got conversions from the Asia platform, which I think you have 10 maybe, going down one or two per year. You've got interchange volatility, which we know is 100% gross margin. You have got potential to reprice things in Canada given your market share. You have got the Asian sales force hopefully ramping up and becoming more profitable. And then you've got ISO growth slowing. That actually helps margins I would think; not hurt margins. So what are the other things I'm missing? What is being telegraphed in your stock right now? What you're saying is that expected low single-digit or mid single-digit revenue or earnings growth here. And I just have a hard time believing that.

You know we -- and I think we're trying not to be that strong in that statement too, Dan. What we're saying is that when you look at all the ranges of possibility, that clearly exists. So when you preliminarily look at numbers I think that's a possibility and it behooves us to discuss it.

But we are, as I said earlier, it is our job as management to do everything we can to see that does not happen. What you just mentioned are some good ones. But some other things, for example, we mentioned the facility consolidation. That is significant. And I think that the opportunity to fully realize that benefit is something we will look at in all of our operations. There are other opportunities to fully leverage our infrastructure and we're going to be looking at that as well. So that is of course offset by all of the investments we think are important for us to make. So I think you have got the big ones. Joe, do you think that Dan get the --?

Well, I think that the other major items are the other sales channels that we have in Canada and in the U.S. outside of the ISO channel, as I said. And those channels have not done as well this year, and if they can do much better next year, have a much more profitable revenue stream for us and then that could really help. But if those channels -- which is a big portion of our revenue base -- if those do not perform well, then that could create a bigger headwind for us.

Referring back to a question that Tony asked earlier about the first quarter comp, did the November quarter, your second fiscal second quarter this year, didn't you reprice a large national merchant and that was one of the reasons for the degradation sequentially? Therefore, you would still have that in August but not November so to speak?

That is true. That is true. That did have a big impact on the domestic direct revenue in the second quarter and will continue and won't annualize until the second quarter of next year.

Also this indirect business, only declining 7%, is that a run rate that we should be thinking about for the full year, because clearly that is a very high margin business for you guys?

That is a high margin business and that was a pleasant surprise in the quarter. I don't -- in the six or seven years I have been here I have never seen that channel decline anything less than a double digit. So that is encouraging. I'm not prepared to call that a new trend, but it is something that we will watch closely over the next few quarters. But that is a very high margin revenue stream, as well.

And then lastly -- and really don't want to spend a bunch of time on it because I think most people hit it -- but in terms of DolEx pricing, isn't it mostly in the FX spread as opposed to the 60 per transaction sans the FX spread?

Well, it is a little bit of both. We have two components; it's about 50-50, but in some markets, as Jim mentioned, we're expanding -- we're focusing on expanding beyond Mexico. And some of the immigration issues have been more Mexican centric, believe it or not. In other words we're getting some other immigrants coming in. So our activity in other markets have picked up. But in some of those markets there are no FX opportunities because their currency is [pegged] to the dollar. And so then it puts much more focus on the spread. But I would say that we have been reducing the actual fee as well as the FX. Jim?

That's fair. I think that FX has seen, as you alluded to, I think the FX has seen more of the compression, then the commission is we have a pretty aggressive rate in the marketplace on commissions. And I think where the competition has moved is on FX, so that has had an impact on it. As Paul said, some of the countries that have grown pretty dramatically for us recently are either low introductory prices or they are non FX countries.

And then lastly, as you think about the '08 guidance that you referred to, is it possible that we would actually see absolute EBIT growth in terms of dollars being greater although margins compressing 100, 200 basis points? Should we even consider that option?

Again that is probably a little more color than we can provide. We're happy with the comments that we made but we just don't have enough visibility into next year to give more than that.

Carla Cooper, Baird Investment Management.

Just quickly, could you talk a little bit -- give us a little more detail in the check business and also the casino vertical? I did not hear those talked about and wondered if they might have shifted this quarter. Thanks.

Other then -- I think Joe made a comment around the collection rates that have seen an improvement, and that was largely around the consolidation of one of the two facilities that is being consolidated into our primary facility. The gaming business is doing terrific. It is a smaller business relative to the other ones that we have talked about, so it does not get as much color. But in terms of market share, growth and just transaction growth, we have been incredibly happy with a business that has been entirely organic from its start maybe five or six years ago.

The core check business, as Joe also alluded to, I think has continued to be a tough market and so we have not seen the same level of growth this year that we have in years past. And I think that just has a lot to do with the fact that checks are just a smaller part of the payment option for merchants these days.

Operator, another question?

Our final question is a follow-up question from Paul Bartolai from Credit Suisse.

Just a quick follow-up. Given your comments on the ISO margin impact, would it be possible to quantify what portion of the domestic direct business is coming from the ISO channel? And then as a quick follow-up to that, given your comments on the strong growth you are seeing in the ISO market still, maybe you could just talk quickly about what you're seeing in the non ISO domestic business, and is that still growing?

Well Paul, first of all, we have not given and we are not prepared at this moment, to give you exact data on the percent that the ISO business makes up of our direct. The ISO business is the fastest-growing element of our business. And portions of our direct business grow quite nicely. But once again it is a function of just a large, stagnant portfolio that is going to be tougher to have impact on. So that kind of ebbs and flows. A lot of it is contingent on interchange fluctuations as well. But generally we have given you quite a bit of color on Canada, and you know how those numbers work. So that is about all I could say on that.

Okay, well that concludes all of our questions, and I wish to thank all of you for joining us on our call today and for your continued interest in Global Payments.

Thank you. Ladies and gentlemen, this conference will be available for replay starting today at 1 PM and ending at midnight on April 13, 2007. If you wish to listen to the replay, please dial 866-424-7873 or international participants can dial 203-369-0863. This concludes our conference for today. Thank you for participating. You may now disconnect.