環匯 (GPN) 2007 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Global Payments fourth quarter fiscal 2007 earnings conference call. [OPERATOR INSTRUCTIONS]

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 Payment's fiscal 2007 fourth quarter and year-end conference call.

Joining me on the call today are Paul Garcia, Chairman, President, and CEO, Jim Kelly, Senior EVP and COO, and Joe Hyde, EVP and CFO.

Before we begin, I'd like to remind you that some of the comments made by management during the conference call contain forward-looking statements that involve a number of risks and uncertainties. For these statements we claim the protection of the Safe Harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. While these statements reflect our best current judgment, they are subject to risks and uncertainties that could cause actual results to vary, which are discussed in our public releases including our most recent 10-K. We undertake no obligation to revise any of these statements to reflect future circumstances or the occurrence of unanticipated events.

In addition, some of the comments made on this call may refer to normalized results, which are not in accordance in 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 this morning, July 26, 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. Then Joe will further discuss our financial results, as well as provide an update on our next generation technology platforms as promised. Next, I'll review our fiscal '08 outlook. And lastly, Jim, Joe, and I will be available for a question and answer period.

Now, for our financial results. We delivered solid fiscal '07 results. For the fourth quarter our revenue grew 17% to $280 million, and our normalized diluted earnings per share grew 10% to $0.45.

For the year, our revenue grew 17% to $1,062 million, and our normalized diluted earnings per share grew 21% to $1.87.

Our growth was driven by good performance in our merchant services segment, while our money transfer segment met our near-term expectations, both of which I'll discuss in a moment.

Starting with our merchant services segment, our ISO's continue to drive growth in our domestic direct channel. We continue to have success in retaining our customers and in signing new ones, including three new ISOs signed in this quarter.

Our credit and debit card transactions grew 29% for the quarter, with revenue growth of 18%. For the full year, our transactions grew 25% with revenue growth of 16%.

Our spread for the quarter increased into the low single digits while spread remained constant for the full year. This reflects the favorable impact of smaller merchants added through our ISOs, which generally have higher spreads than larger merchants. This favorable impact on spread was mostly offset by pricing compression related to merchants added through our direct sales force.

For fiscal 2008 we are expecting low teen to high teen annual revenue growth for our domestic direct channel.

In Canada, both our credit and debit card transactions, as well as our revenues, grew 5% for the quarter. For the fiscal year, our credit and debit card transactions grew 4%, while our revenue grew 8%.

We experienced a low single digit decline in our Canadian credit card spread for the quarter and a mid single digit decline for the full year.

For the year, our Canadian revenue growth was primarily driven by a favorable Canadian currency exchange rate and card association incentive revenue.

For fiscal 2008, we are expecting high single-digit to low double-digit annual revenue growth for our Canadian channel.

Our joint venture with HSBC contributed $13.4 million in revenue for the quarter, and $48.4 million in revenue for the full year. The full year results reflect the momentum achieved in the Asia-Pacific region through our sales initiatives, as previously discussed. This momentum was partially offset by revenue growth challenges in Taiwan as a result of the unfavorable credit environment compared to prior year. We do, however, believe that our Taiwan revenue has stabilized and we expect growth in this country during fiscal '08.

Additionally, we've made significant progress on converting HSBC's multiple backend platforms onto our existing infrastructure. I'm pleased to announce that we are ahead of schedule and that we will complete the first of these conversions prior to the end of our '07 calendar year.

On a reported basis for fiscal 2008, we are expecting annual Asia-Pacific revenue growth of between 30% to 40%, which reflects the impact of improved organic growth and a partial year of results during fiscal '07.

On a pro forma basis for fiscal '08, we are expecting annual revenue growth in the low double-digits to high teen range.

Our central and eastern European merchant channel had revenue growth of 15% in the fourth quarter, with growth in credit and debit card transactions of 11%. For the year, revenue grew 9% with credit and debit card transactions growth of 15%.

Our revenue growth during fiscal '07 was primarily driven by a favorable year-over-year check currency exchange rate, our Diginet acquisition, and strong transaction growth. This growth was partially offset by price reductions granted on contract renewals as well as the deconversion of the previously discussed large customer, which was substantially completed by the end of our fiscal '07 as anticipated.

During fiscal 2008, we expect this deconversion to have a mid single-digit unfavorable impact on our revenue growth in this channel. For fiscal 2008, we are expecting annual growth in the mid single-digit to low double-digit range.

Our domestic indirect and other revenue declined 4% during the quarter, with steady credit and debit card transactions compared to last year's quarter. For the year, revenue declined 10%, with a 4% decline in credit and debit card transactions.

As previously discussed, the recent improvement in these results compared to the first half of fiscal '07 reflect the annualization of certain price reductions granted last year on multiple contract renewals, in addition to growth from a limited number of customers.

We are expecting this positive trend to continue into fiscal '08, and are anticipating revenue declines in the low single-digit to high single-digit range for the year.

Moving on to the money transfer segment. This segment had total revenue growth of 11% for the year. This growth met our near term expectations and reflects the impact of a competitive domestic pricing environment, as well as exceptionally strong results in prior year.

In the U.S., our transactions grew 18% for the year with revenue growth of 6%. Transaction growth was driven by both same store sales, and an increased domestic branch footprint.

We ended fiscal '07 with 875 domestic branches as compared to 835 branches at the end of our prior year.

In Europe, we ended the fiscal year with 68 branch locations as compared to 40 in the prior year. As a result of our European branch expansion, we achieved 73% transaction growth and 62% revenue growth in this channel for the year.

For fiscal 2008, we expect total money transfer segment revenue growth in the mid single-digit to low double-digit range. Importantly, we expect our money transfer growth will improve in the second half of fiscal 2008 as we anniversary the impact of the trends that I have just discussed.

I'll now ask Joe to further discuss our financial results, as well as our next generation technology platform. Joe.

Thank you Paul. In our press release we included GAAP income statements and schedules that reconcile GAAP to normalized results. In comparing fiscal '07 results to the prior year, we excluded restructuring and other charges and stock option expenses from our normalized results as shown in these schedules.

In comparing fiscal '08 results to fiscal '07, however, we intend to include stock option expenses in our guidance and in our normalized actual results for both periods since we have now annualized our adoption of FAS 123(R).

Per our standard practice, we will continue to exclude restructuring and other charges from our fiscal '08 guidance and from our normalized actual results.

As anticipated, we expect to incur approximately $2 million in such charges during the first half of fiscal '08 in connection with the operating consolidation plan that we announced in March, 2007.

Moving to our fiscal '07 and fourth quarter financial results. Our merchant services segment operating margin was 25.8% for the quarter and 27.9% for the year. These results reflect declines compared to the prior year due to several previously discussed factors, primarily the impact of high growth in our lower margin ISO channel, and the impact of our lower margin Asia-Pacific acquisition.

For the quarter, these two impacts were partially offset by the successful collection of a merchant card operating loss relating to a fraud situation that we had fully reserved for during the second quarter of fiscal '07.

For fiscal '08, we are expecting a merchant services operating margin of 25.5% to 25.9%. This range represents an expected decline compared to the prior year, primarily due to strong expected growth in our lower margin ISO channel.

Our money transfer segment operating margin was 10.2% in the current quarter and 10.9% for fiscal '07. These results reflect declines compared to the prior year primarily due to the competitive domestic pricing environment that Paul discussed, combined with our branch-based high fixed cost model.

For fiscal '08, we expect a money transfer operating margin in the low double-digit percentage range.

For our corporate area we expect fiscal '08 expenses to grow in the low single-digit to mid single-digit range compared to fiscal '07, including stock option expenses in both periods.

Based on our segment guidance, we expect a fiscal '08 total company operating margin of 19.1% to 19.5% compared to a normalized fiscal '07 operating margin of 20.8%. These amounts include the impact of stock option expenses in both years, but exclude the impact of restructuring and other charges.

Moving to our non-operating line items. We expect $12 million to $15 million in income from the net of our interest and other income, and interest and other expense during fiscal '08. Also for next year, we expect minority interest net of tax of $9 million to $12 million, and an effective tax rate of between 32% and 33%.

Lastly, we expect approximately $82 million in average diluted shares outstanding for the fiscal year, excluding the impact of potential share repurchases.

Capital spending for the quarter was $12 million. Our capital expenditures this year have primarily related to technology spending, including for our new G2 platform in the U.S., in addition to merchant terminals in Canada.

For fiscal '08, we expect capital expenditures of $40 million to $50 million. This expected growth over prior year is primarily due to increased merchant terminal spending in Canada and in the Asia-Pacific region.

We continue to make progress on our next generation technology processing platform, which we refer to internally as our G2 platform. This G2 platform is planned to be a new front-end operating environment for our merchant processing in the U.S., Asia-Pacific and Canada, and will replace several Legacy platforms that have higher cost structures.

Aside from cost advantages, there are many other benefits to this new platform such as increased speed to market of new products, ease of scalability, enhanced reporting options, hardware environment flexibility, and compliance with EMZ and PCI standards. In addition, G2 is being designed as a potential integration platform for future acquisitions, which may help us achieve higher acquisition synergies in the future.

Our current migration plan is to begin converting the first of several Asia-Pacific front-end platforms to G2 during our fourth quarter of fiscal '08. During fiscal '09, we expect to complete additional Asia-Pacific front-end conversions and intend to finish these Asia-Pacific conversions during fiscal 2010.

Also during fiscal 2010, we intend to complete the conversion of our two Legacy front-end platforms in the U.S. onto our G2 platform.

Lastly, in fiscal 2011, we intend to complete the conversion of our Canadian front-end platform.

As in any multiyear technology project, our conversion schedule is based on estimates that are subject to change.

As of our fiscal '07 year-end, we have spent approximately 70% of the total expected capital expenditures required to complete this project. In connection with this project, we have already achieved savings related to technology vendor rate reductions for fiscal '08. We expect to achieve additional savings in fiscal '09, although the majority of our total G2 cost savings are expected to occur in fiscal 2010 and fiscal 2011.

In summary, we are very pleased with this project and with the progress that we are making. We believe our G2 platform is an attractive investment and will further solidify us as one of the most efficient payment processing companies in our industry.

Paul will now discuss our fiscal '08 guidance and our ongoing strategy. Paul.

Thanks Joe. Based on our current market trends and our ongoing growth strategy, we are providing annual revenue guidance for fiscal 2008 of $1,168 million to $1,220 million, or approximately 10% to 15% growth over $1,062 million in fiscal 2007.

We are also providing annual fiscal 2008 diluted earnings per share guidance of between $1.85 to $1.94, which reflects growth of 5% to 10% over fiscal 2007 normalized diluted earnings per share of $1.77.

This guidance includes stock option expense, but does not include any other significant acquisitions or potential restructuring and other charges.

When I consider the long-term growth prospects of Global Payments, particularly the emerging Asian and Central and Eastern European markets, I continue to be very enthusiastic about our future.

Operator, we'll now go to questions.

[OPERATOR INSTRUCTIONS] Kartik Mehta, FTN Midwest Research Securities Corporation.

Thank you. Good morning Paul and Jim. I had a question. Paul, last year you talked about improving the direct sales force and making that part of the company more productive. Maybe an update on where you stand and have you seen progress in that part of the company?

Yes, Kartik, I'm pleased to say we have seen progress. It's still, though, very much a work-in-progress. A sales force is basically as good as its lead sources, and we have put more effort into generating rich lead sources for our sales force as well as addressing some management, which we did a while ago, compensation issues, tracking, et cetera. And the sales force had a couple of product wishes that we took care of as well.

Now it's all about generating rich leads for these guys to augment what they are able to generate through their own accord. And I'm pleased with the progress to date.

Paul, if you look at the margin on the merchant side of the business, how much of an impact are you seeing from Asia because of the increased investment you're putting in that side of the business?

Yes, Asia, clearly, we think long term is margin accretive but for the near term it clearly will be margin dilutive because, Kartik, as you can imagine, when you add hundreds of new sales people over a fairly short period of time, many of whom you not only have to train on your products you have to train on sales techniques, they're not going to be terribly productive day one. So that's been an expense as well as building out the infrastructure, putting in the management, opening new offices. So, clearly, we haven't given exact guidance on that but clearly it has hurt us.

And a question on the money transfer business. Are you still seeing competition at least for the U.S. to Mexico corridor on the FX side? And is this a business without the easy comps that can return to maybe low double-digit revenue growth?

I'm going to let Jim answer the first part, I'll answer the second. We are hopeful at the tail end of the year that we are banging up against easier comps, number one, and number two, Jim will share with you in a second that we're seeing some pricing stabilization which is helping. What we've seen in June, what's continuing in July is encouraging to that end too.

So yes, we do think this is a business that can return to those growth rates, that's our hope. Jim.

And regarding fiscal '06 we saw modest 2%, 3% pricing decline as we talked about last -- for this past fiscal year '07. Starting in the second quarter timeframe was the point, maybe November, December timeframe we started to see a more dramatic drop in the marketplace. It wasn't just around FX but clearly FX was part of it and that lower price has remained through the balance of the year, as Paul just mentioned -- or balance of the fiscal year and into the first couple of months of this year we have seen a stabilization. We're not seeing the declines that we had experienced last year. The transaction growth has returned back to the mid-teens so we are feeling good that if those trends continue then the business will clearly see growth numbers in the range of double-digit.

On the Eurofill side the business continues to do very well where we have seen explosive growth on the top line coupled with the doubling of the number of branches that we have in the market, in the Spanish market in particular. And we are encouraged, as long as the pricing stabilizes in the U.S. that we will see DolEx continue to gain ground.

The other thing I would mention is we've slowed down in terms of opening branches because there is a much better opportunity in the marketplace to acquire today than there was previously as the smaller guys are equally affected by the events of the slowing in housing, coupled with the immigration tightening.

So Jim, would it be fair to say you still like the branch model and that's what you'd focus on rather than going to an agent model?

As we've said before, as long as it's a growing business, the fixed cost model we think is a superior model as well as for compliance and a host of other reasons. So I think for the foreseeable future, as least as it relates to DolEx and Eurofill we're in the branch business, but if we saw opportunities to expand other corridors or even in this corridor that was an agent model I think we would at least take a look at it.

Thank you very much.

Paul Bartolai, Credit Suisse.

Thanks, good morning. You guys saw a pretty nice pickup in the revenue growth and transaction growth in the domestic direct business. I just wonder if you could provide any color there? Was that more macro driven or is this something you guys did a little bit better on the quarter?

Paul, that's a good question. We did see a big improvement in the quarter, which was nice to see. As I mentioned in the third quarter call we did expect to see a sequential improvement, perhaps not as large as what we did see, but clearly it was driven by the ISO channel. In particular, we had a couple of nice signings and one particular conversion that had a positive impact. But overall the ISOs by and large did better in the quarter.

Okay. And then looking at the spread there in the domestic direct between transaction growth and revenue growth, I mean any sense when we could start to see that narrow or just provide any more insight on what we should expect there?

The difference between transaction and revenue growth in domestic direct is largely caused by a mid single-digit decline in our average ticket, which is a nix issue due to the growth of the ISO channel, which typically have lower average tickets than merchants, what we're getting from our direct sales channel.

Our spread actually has been relatively constant for the year. We had some compression on the direct side but that's been offset by the growth of the ISO channel. Again, those merchants have higher spreads than merchants we're getting from our direct business so it's generally been awash.

The rest of the difference is coming from non-transaction-based revenue growth that are not based on credit or debit card transactions. It would include the monthly fees that we're charging, equipment fees, and our check and gaming business.

So there if they're just not growing their fastest transaction then it's causing a natural disparity between that transaction growth and the domestic revenue growth. We've seen that differential occur now for several quarters and I don't see anything causing that to dramatically change in the near term.

Okay. And then looking at margins, staying in the direct business here -- or the merchant business, sorry, is there any possibility you could quantify how much of the margin compression you expect in '08 to be just from the mix shift versus margin compression in the base business?

It is almost all the issue of the ISO growth being a very high grower but also having a lower margin. Of the 200 to 240 or so basis point decline that we're calling for, I would say 100% of that is the ISO impact.

In fact, we actually saw a little uptick in the spread in the base business so that's actually helping.

Okay great. And then last question, Joe, you mentioned there was a recovery in the fourth quarter related to the merchant. Can you quantify that impact on the fourth quarter?

I can. It was roughly $1 million. We talked about this on our second quarter call as a fraud situation that we had fully reserved for but we said that we were still pursuing those funds. We did collect those funds in the fourth quarter.

So the $1 million benefit showed up in the merchant operating income?

Yes.

Okay, great. Thank you.

Dan Perlin, Wachovia Securities.

It's clear that the domestic revenues jumped up sequentially. I'm wondering to what extent you have a number of ISOs that you may have already signed but not converted to merchants to the portfolio or to your processing portfolio?

That's very perceptive Dan, that's exactly what happened. We're in the process of signing additional guys and that takes a while to convert. There was one meaningful ISO last quarter that had a flurry of conversion and so that is a piece of it.

But it's not stagnant. I wouldn't want you to reach a conclusion that we don't think we continue to get some lift and this is a positive trend that continues. We're going to continue to sign ISOs, we're continuing to convert those ISOs. Even this large ISO still has some conversion opportunity. So we think it continues.

I was thinking more along the lines of how many do you have yet to actually convert over. Because it was clear that it happened this quarter, I'm hopeful it happens again over the course of 2008 and I'm just wondering as you sit here and you look at the visibility in your revenue growth of that line item, how many -- if you could just quantify, I guess, how much incremental business you already have signed but not converted? That's more of a forward-looking question.

I would say what we see are mid-sized. I mean the one that Paul just mentioned in particular happened to be much larger and I think you might see one or two of those a year. And that's generally a competitive takeaway for a variety of different reasons, not necessarily just because of price. It's largely service or some other factors.

What we see a larger list of this year than we have previously are mid=sized and even smaller ISOs. The universe of large ISOs is finite and the ability to move them from one processing relationship to another is a long sales cycle. There are lots of new guys interested in getting into the business and so we're trying to service that group more than we have in previous years.

Dan, once again, this would suggest that we have some robust growth to look forward to. Our June numbers look pretty darn good in that area as well. So that's good news.

And presumably that conversion in this quarter also was one of the reasons for the margin degradation in merchant?

Yes.

Sequentially, okay. The other question I had, maybe for Joe specifically, is as you look at the first quarter, Joe, it's a pretty kind of steep grow over that you've got to go through for the margin side for merchant. I'm wondering, I know in the past you've talked about how in like the first quarter of 2006 you had some issues and that's why the margins were so much better potentially in the first quarter of '07. But I'm wondering is there any reason that the first quarter for you guys could be, from a margin standpoint, materially higher than were you in the full year?

Let me just try to talk about my talk back on the first quarter. The seasonality issues that we've talked about in prior quarters related to Canada in the first quarter I believe will still hold, and Canada generally will provide a higher revenue and earnings lift in that first quarter due to the June, July, August months of the year. And they're just generally higher spending.

It is true, though, that the first quarter of last year was a very good quarter and that will likely provide a very tough comp for our first quarter of fiscal '08. We will likely have margin decline in that merchant services channel and it may very well be that the (inaudible) decline that we see in the year on a quarterly basis.

You also have the national merchant repricing that occurred in the first quarter of last year that won't have annualized yet, and that will cause a drag in the first quarter that we won't see in some of the other quarters.

And then, Paul, I think I heard you say that Canada you expected full-year, I think you said, revenue growth high single, low double?

Yes.

Is that correct?

Canada is high single to low double.

What would drive that? I'm really surprised to hear you say high single, low double growth just in Canada kind of given the trends on an absolute basis. As I look at that number, 54, 55, 54, it would imply that there's a pretty sizable uptick.

Well, there's some favorable FX that is certainly helpful. That's a nice tailwind. In addition, you have the Canadian group still every year finds a way to grow faster than market by adding new merchants and coming up with new products and repricing appropriately.

So we have a very effective management team up there and that's why the expectation is set where it is.

One of the components available to us for the next few years in Canada is the replacement of the terminal place to an EMD base. There is an incentive for us to do that, which is reflected in the revenues.

And one of the things you saw this past year, and you'll see this year as well, is heavier than normal spend on capital for replacing of those terminals. These are terminals that we own and rent which is still the business model in Canada. So accelerating that process does provide a benefit plus we have seen our ISO business, a number of our larger ISOs are now doing business in Canada as well. So I think there's a number of good positive fronts for them in the coming year.

Okay. Thank you guys very much, I appreciate it.

Liz Grausam, Goldman Sachs.

Thanks. Just to come back to the margins and the business mix in your merchant division. Is it worth it to grow as fast as you're growing if it has this implication on your margins?

And looking into '08 '09, are we going to continue to see margin degradation from this business mix or when do you see an inflection point where maybe the mix stabilizes from a margin standpoint?

Liz, that's a great question, I'm glad you asked it. The reality is when you have an opportunity to partner with some of the leading ISOs, and the business absent the accounting has wonderful margins but the way the business is accounted for it does hurt the overall margin of the business. But at the end of the day it's a very profitable business, throws off a ton of cash, and it grows like a weed. I love the business and I'm proud to be associated with the entrepreneurs who are driving it.

But we're not stagnant in the rest of the company. It is tougher to grow our base business just in a green field because of the size of it. You can't add enough sales people to really influence that significantly. You may get an occasional -- which we got a little bit in April and June from the Visa, MasterCard increases, you get a little push on that.

The opportunity -- and I think it's going to be more to your question, the inflection point will be more in '09, is the growth of Central and Eastern Europe and Asia. That business is extremely margin accretive and that business will be growing at -- we think we'll exit the year at terrific rates.

So, consequently as you grow that business -- and that doesn't even take into consideration a possible acquisition or two that could augment that business, we're hopeful that'll happen as well. So as those businesses grow organically at significantly accretive rates it does, in fact, help. And then also the ISOs will reach a point where the law of large numbers have to kick in a little bit. Now although the growth will still be dramatic it can't be at these type of levels forever.

Is that helpful?

Yes, that's great. And then, kind of building on your international and European strategy, I mean it'd be great to get those businesses in bigger scales, which they can offset some of the margin pressure that you may see in the U.S. What does your pipeline look like? I know you authorized $100 million to buyback last quarter, it doesn't seem like you exercised much of it. So, a view on what you're going to do with your capital if there are some good opportunities for better margin expansion overseas?

We clearly think that the best and primary use for our money is to make acquisitions. We do have a commitment to move forward on the announced buyback and we'll give you an update on that next quarter.

But the pipeline is decent particularly in Central and Eastern Europe. It's a little more complicated in Asia just because it takes a long time to establish those relationships. We've been in Central and Eastern Europe a lot longer, we've been working it a lot longer, and we're hopeful we'll see some things this year.

Great, thank you.

Moshe Katri, Cowen and Company.

Yes, thanks. Can you comment on maybe the ISO pricing environment, talk about maybe -- are you seeing any disruptive behavior from some of your competitors, maybe specifically First Data? Thanks.

Moshe, we initially saw a flurry of activity. Our ISOs are obviously subject to offers from lots of competitors, First Data included. These guys have very aggressive rates, very competitive rates, and have signed long term agreements with us. Jim, do you want to add something?

I think there was some of that maybe 18 months or so ago but I would say most recently -- you're going to hear the odd conversation of maybe a below market price for front-end processing services but I haven't seen it, it hasn't affected our ability to sign new business this year.

And then moving on to DolEx. I think in the past, Paul, you said that half of the branches in the U.S. are still going through an investment mode and maybe the other half is mature and I guess is profitable. Can we get an update on that?

Well, Moshe I don't recall saying that exactly. But clearly it takes a while, a year probably, for a branch to open and be profitable. So, there' a couple of things we're doing. We're slowing down the green field opening branches. We are buying branches at very good prices when available. It's a little bit opportunistic but the prices have come down dramatically. You pay on a per transaction basis and it's significantly less costly than it was. So a buy is a much more effective way to open and extend your footprint than a bill.

But we do have a critical look every week literally at our branches and we are probably, if anything, less -- we are quicker to take action if we think a branch is not reaching profitability. And to that end we've actually closed a number of branches. We've been a little more aggressive in that area. That may be what you were referring to.

Okay. And then finally, can we get an update on the Discover relationship?

Jim.

Yes, we just this summer, I think it was in June, did the first of our two front-end platforms in a beta mode, so we are now processing Discover transactions end-to-end for maybe 200 or 300 merchants on both our front-end platforms, which will also provide, although it's limited, Discover ability in Canada for cardholders there as well.

We expect during the second quarter to begin the migration of our entire base, coupled with our ISOs who are going to participate in the program, into this Discover acquiring program.

Okay. Thanks.

Greg Smith, Merrill Lynch.

I apologize if this came up, but is there any way to quantify the FX impact on the Canadian guidance on a year-over-year basis somehow?

We really can talk about historical impact of FX results and we actually include that impact in our SEC financials. But forward-looking FX impact is very difficult to quantify. It's highly complicated to try to forecast. You've seen a lot of volatility in the FX rate over the past six months, particularly in Canada. So we don't intend to provide assumptions or break that out on the forward-looking numbers. We've seen a lot of volatility and I've seen projections out there that show a deteriorating FX rate from U.S. to Canada in the second half of the year. But the projections are just so variable that it's too difficult to pinpoint any specific number.

But, Greg, we do look back though. I mean we will tell you what kind of impact it's had. As Joe said, it's just impossible to really with specificity -- we do have our assumptions but we'll have to see where they go.

Okay, fair enough. And then in Canada, I believe you may have been seeing some, well let me ask you, accelerated pricing pressure on the large merchant side, maybe similar to what we saw in the U.S. a few years ago. Are you seeing any of that and how do you think that plays out if so?

Actually, I would say several years ago we saw probably a much more aggressive pricing from a couple of our competitors. Most recently, not as much. But I think the large merchants are always at risk in terms of a competitive RFP process.

Okay. And then, Jim, maybe for you the Group X sale, the Queenstar, wondering if that's something you looked at and had any thoughts on the valuation?

I'm sorry, I didn't understand the name.

The Group X, money transfer, the company was bought by Queenstar yesterday. I men it just hit the tape last night and just wondering if that was something you guys had looked at.

I look at what gets up to me. I'm not familiar with that one in particular so I don't have a comment.

Okay. Thanks guys.

Andrew Jeffrey, Robinson Humphrey.

Good morning. I'm a little confused, I guess, by some of your comments regarding the merchant margin. I know, Paul, you've said in the past fiscal '08's going to be an investment year. I've taken that to mean investment in the HSBC sales force, investment in the emerging Arab sales force and infrastructure, platform consolidation, et cetera. Yet I think I heard Joe say that essentially the entirety of the merchant segment margin decline year-over-year was going to be a function of mix, which we understand to be accounting but mix nonetheless. So I'm trying to reconcile that with your comments regarding investment this year. With respect to EPS growth that's obviously going to trail revenue growth.

Well Andrew, let me clarify. Again, the 200 to 240-basis point expected decline, that range that we gave on merchant services, that is almost 100% the ISO channel. The international area, the Asia-Pacific in particular, we had 100-basis point unfavorable impact on margin during fiscal '07 that was largely a result of the acquisition. You're essentially buying a company that has a lower margin than what your corporate average is.

That 100-basis point impact is much less expected in fiscal '08. It'll probably break even maybe at 10 or 20-basis points at the most.

But I think what Paul is saying is that we could actually have positive margin impact from Asia if we weren't investing in that business. So, from a mathematical perspective there's no specific impact year-over-year, maybe 10 or 20-basis points at the most, but it's a result of very high revenue growth, but we're also growing expenses as well.

So it's an opportunity cost comment.

Right, that's exactly correct.

Okay. So the implication being with respect to the law of large numbers in the ISO channel and then the potential for accelerating profit contribution from HSBC Europe in '09, that fiscal '08 is sort of the period during which you'd see the margin diminution be the most intense. And then at some point theoretically, all else being equal, it should begin to abate.

Absolutely. In fact, the comment I made earlier to the question was we hope to exit '08 with some pretty healthy numbers that point to at least the trend starting to kick in. I mean you should see some impact and that's our hope.

Beyond just the investments that are being made on the sale side, we are also starting, actually I think it's this month, for the conversion of our first of 10 backend conversions. And as we move off the bank systems onto our systems, that will also help the margin in that region, just as you saw in years past with CIBC and National Bank.

Okay, that's helpful. And then what are you anticipating stock-based comp to be in fiscal '08, did you say?

We did not. Again, we're going to not break that out separately. It's likely to be similar to what we had in the past, but going forward we'll include the numbers in our normalized results so that it just won't be a separate number.

So you'll include it in total corporate expense on the segment reporting?

That's correct. And we'll compare ourselves against fiscal '07 GAAP results, excluding the restructuring charges.

Okay. Great, thanks.

Tien-tsin Huang, J.P. Morgan.

Hi, good morning. The question on HSBC and the margins, can you give us a rough sense of where you exited the year in terms of margins there?

Yes, I'm not sure how relevant the quarterly result is. The full-year margin is a high single-digit type of a number and we're expecting growth on that in fiscal '08. But, again, it may not be as relevant as the very positive revenue growth guidance that we gave for Asia-Pacific, which implies a big improvement on the organic revenue growth.

Okay, so high single-digit margins for the year and then probably higher incremental margins as we go forward with better revenue growth.

Yes, exactly.

Staffing plans on HSBC? I don't know if you shared, but where are we in terms of sales headcount in the Asia? What are you expecting here over the next several quarters?

Well, we talked notionally about 300 sales people. My personal belief is that we can have significantly more than that. We still have some build out to do with our management and our infrastructure, our lead generation, our tracking, compensation programs. I mean we're still fine tuning all of that.

But the country -- these territories are so vast, Tien-tsin, between India and China and the markets we're in, the other eight markets, are just huge. So you could pick a number basically.

I believe as long as the opportunity exists we'd be foolish not to expand our sales force aggressively. So I'll have more of an update next quarter on that. And I'd look for us to be making real investment there.

I think that makes great sense. One last question on the ISO. The three new ISOs signed this quarter, can you give us some perspective on the relative size of these new ISOs?

Paul Garcia; These aren't big ones but we announced -- when we do we'll tell you you guys. That's a great question though because we weren't incredibly clear on that. These are reasonable sized ISOs. In fact, we have a new program where we're actually incubating some smaller ISOs and so you may even see a pick up in ISO size as we get some smaller ones in. But these are a reasonable size but nothing that's truly going to move a needle per se. Okay great, thanks for all the details.

Adam Frisch, UBS.

Thanks, good morning guys. How are you?

Good. How are you doing?

Good thanks. Paul, I wanted to get kind of a perspective question in here. You guys have given a lot of detail and lots of good questions have focused on that. But historically Global Payments has been more of a beat and raise company. Obviously the last few quarters have been a little bit away from that. But, the two big data points that were most important to my thesis were an improvement in domestic direct in '08 revenue guidance being better than where it was last quarter. So it seems to me that we're starting to trend a little better or maybe you guys are feeling a little bit better about the business or just have a better view on '08.

And then I want to ask, what your view is in a nutshell on '08 as we move into '09.

Well, I'll take a shot at that and I'll ask Joe and Jim to jump in if they are so inclined.

Clearly we'd like to beat and raise, that's a wonderful place to be. We're not saying that is the case. We believe this is guidance that we spend a lot of time and energy on but I can tell you from the CEO perspective, Adam, that I'm very enthusiastic about this year and particularly enthusiastic about the investments we're going to make that I think are going to set up a fabulous '09 and '10.

And I personally look forward to being actively involved in reporting on lots of quarters to you and all your colleagues on our results, because I think we are as well positioned as we have ever been in our short life, and I couldn't be more enthusiastic about what I see in our future.

'08 was positioned maybe on the last call and the one before that as more of a transition year, one of investment. Seems like it's not going to be as doom and gloom as you guys kind of gave before.

I think that's true, we probably deserve that. We are, I think, understandably cautious. We always want to make sure that we meet our expectations that we put out. And so just by nature you'd be foolish to put aggressive assumptions out there. But we saw some numbers preliminarily, plus we were a little spooked by what we saw in the fourth quarter from the direct business, it didn't grow as nicely as it has been, that's rebounded terrifically.

So, that led to that discussion, you're right. This is a more optimistic group you're talking to so stay tuned.

And then in terms of the guidance, because I think it's so important what you do in the first half of the year, whether you exceed estimates or give a brighter outlook, right, because if '09 is going to be that much better than '08, then the faster we get to people looking at the stock on '09 numbers the better if you're a bull on the stock and obviously you guys are.

So I wanted to know, on your '08 guidance what could make it prove conservative or aggressive? What are some of the bigger moving parts that if you get this, this and this, right, you could have some upside but here are the challenges because we're certainly not out of the woods yet but things are beginning to look a little bit better. So, if you could just address what could move guidance higher or lower.

Adam, you're good, I would say that. We're all looking at each other as you're asking that question. That's a great question. I mean we're very early on in our year. We will say that we are enthusiastic about everything we've already talked about, which I don't need to repeat.

But there are always some things that could hurt you. I mean FX goes against you, that's -- as we said before you're not terribly smart because you get a lift from it and you're not dumb if you get hurt by it, it kind of is what it is.

And the general economy particularly with DolEx, with construction starts and things, those are things that concern us. Although, we think that the credit and debit are not necessarily recession proof but it doesn't have the dramatic kind of cause and effect issue in other industries. But a general slowdown would definitely make us a little more pessimistic. But we're kind of enthusiastic across the board.

Okay, last question. I think Liz asked about the buybacks, if I'm not mistaken. Just wanted to know, you brought it up last quarter as kind of we're going to wait. You approved it, you're going to do $100 million eventually or at least you're approved to do $100 million, now it looks like M&A might be moving back higher on the priority list than it was before. Given what's going on in money transfer, would you be more apt to do an acquisition there or something that is going to augment your performance on the merchant side.

I think we'd be less apt to do an acquisition on the money transfer side and more apt on the merchant side, that's where -- or the services side, that's where most of our focus is. And in terms of the buyback, I think you can do both. I mean it's a modest amount at $100 million and we think we could execute both.

At what point do you say, look, money transfer we gave it a shot, it's not really working, we don't like the fundamentals, too much headwinds in the next couple of years or whatever, what makes you say we're going to divest it?

I think that we're not ready to say that clearly. It's a good team, it's a good model, it's a good product. And in a world with increasing complexity, our model actually gives us comfort in terms of compliance. But any business -- and it's not just money transfer, anything that we have, if it looks like product obsolescence or the growth is dramatically impacting us or there are negatives, I think good management looks at everything at all times. But I wouldn't want that to be anyway a message that we're dumping this business because that's not the intent.

Okay, great, thanks guys.

Tom McCrohan, Janney Montgomery Scott.

Hi, just two small questions; most of my questions have been answered. The rebound that you talked about in the press release on the money transfer side, is that rebound incorporated in your full year guidance?

Yes it is.

Okay, great. And on HSBC I thought the guidance for the full year going into this quarter was $56 to $60 million, or was that on a fully annualized basis that $56 to $60 that you had previous?

I don't remember the exact numbers but that was a full year annualized number.

Okay, so how did the 48 come out on annualized, kind of in that range?

Yes, it came in within the guidance that had given.

And on the corporate overhead, which you disclose on your segment reporting package, how much of the $12 million of stock option expense just for this year ended is included in that corporate overhead? That's it. Thanks.

All of our stock option expense is included in that corporate line.

Do you have any outlook on corporate overhead ex options next year, growth rates?

Including options it will be the guidance that we gave, which was low single-digit to mid single-digit increase. We're not providing the guidance excluding options because we'll be reporting it both this year and next year included in that line.

Fair enough. Thank you.

Wayne Johnson, Raymond James.

Good morning and thank you for the update on the Atlanta transaction processing platform. That's very helpful. Just on the cash flow outlook, do you guys have a target cash flow of operations for this year? But also how should we be thinking about that over the next two to three years?

We don't have a specific cash flow from operating activities guidance number. I would expect that the amounts would track with our earnings growth. The settlement processing line is very difficult to estimate, it's more based on timing than anything else and the working capital lines are also similarly difficult to estimate. But generally, historically it has tracked with our earnings results.

And, Wayne, there's nothing that's going to change that. I mean this is one of the great factors of our business or basically most people in our space is that we generate a ton of cash and that's going to continue.

Okay, thanks. And going back to the currency again, and maybe I missed this so I apologize, but in the fourth quarter of '07, what was the currency impact in that particular quarter for the whole company -- Canada, Europe, Asia?

The whole company in the fourth quarter gave us roughly a percent of additional revenue growth.

I'm sorry did you say 1%

Yes.

Correct.

Really, no impact on the earnings guide.

Okay, that's great. And then going to Asia-Pacific. I understand it's a large opportunity and the more sales people there the better as that business matures and becomes more visible. But just to put some numbers on it, how many sales reps are there in that geography at the end of the fourth quarter '07?

We started with 100. We told you guys we were going to double that, we did. We actually did greater than that and we're working towards 300 as we speak.

And you're working towards 300 for the end of '08?

Paul Garcia; Actually I think it'll be greater than that. Okay good. All right, terrific, thanks very much.

Mark Sproule, Thomas Weisel Partners.

Thanks, appreciate it. A couple of quick questions, I apologize if they seem somewhat repetitive. If we look at the merchant volume growth, obviously ISO conversions and strength areas help, but what is it within the ISO community that's allowed the growth to be there? Is it new merchant signings that they're getting or is it just incremental volume from make shift to credit and debit? Or is the conversion helping to be a big part of that because obviously your growth is pretty superior?

I think it's primarily new business. We track how much business they bring in and the revenues those generate. That's a piece of it. The conversions is a piece of it. They also had a bit of spread pick up too. That helps too so their base business gets a little more revenue too. And it's a larger base so even a basis point helps there.

So, all in all, all those factors pretty much in that order.

Okay. And you mentioned you were going to start incubating some of the smaller ISOs out there. Given the fact that those are likely to be significantly higher sort of risk than your large ISO contracts, would that result in -- I'd assume it would result in a increase in reserves.

Actually the smaller ones the way they generally are set up is we mange the risk initially so we don't set up reserves for that anyway. We recognize (inaudible) there experienced. But I wouldn't infer from that we'll see any additional risk. If anything there probably -- we spend more time with them than having to work with the larger ones on a day-to-day basis.

Okay. And I may have missed this because I missed some of the European comments. But, given the fact that with the First Data acquisition and all the chaos around that, has that made it easier or cheaper to go out for acquisitions in Europe?. Has it changed sort of the environment? Obviously that was a very [froppy] payment period for a while as far as them going out for deals in Eastern Europe, has that made it a little different for your guys?

Well, one would hope. We haven't seen it yet. In fact, I think they announced a deal I saw today that crossed the wire, or yesterday, they bought somebody in First Data International. That would be our hope. When someone pays 7x revenue for a deal that is multiples higher than everyone else that gives you a little bit of a reason to pause. We're hoping we won't see that. I don't think they're just going to go away as much as I would love them to.

Got you. And one last question, on the DolEx side obviously we understand the issues within the money transfer business at large, but the platform was designed to also extend into some other financial services. Has that started to take some hold in the marketplace and is that going to help you longer term as far as kind of creating that kind of recurring customer base? Thanks.

We believe so. I mean this is an area that we've been talking about for several years now. We had an issue with a vendor over a year ago so we had to restart our store value card effort. But that product is complete, it's in the market in beta today in Texas. We intend to get that into Texas and California, our two big sates, within the next couple of quarters as well as check cashing. We offer long distance cards, cell phone tap up cards, and we are just starting to introduce insurance -- reselling insurance, pharmacy health cards, and things of that nature.

So, I think that was an area that when in '06 the business was growing as strongly as it did we probably should have reacted quicker but did not. I'm very pleased with the progress that the team's made where they stand today, and I don't think it's going to challenge the revenue side of DolEx overall but it will clearly be incremental and it's very high margin.

Thanks guys.

Robert Dodd, Morgan Keegan.

Hi guys. Just one quick question on the Discover relationship. I mean you said you expect to start rolling or transitioning the customers over the new platform in kind of second quarter. How long do you think that's going to take?

I think the bulk of it will be done assuming everything goes smoothly by Christmas, third quarter at the end. In the worse case, the bulk by the end of the third quarter.

Probably totally wrapped up not until the end of fiscal year but that will be the last 5%, 10% of the portfolio.

As we bring in new ISOs, particularly larger ones, they have to become enrolled in the program. What we were focused on initially is our base, our (inaudible) relationship, and our primary ISOs who have signed onto the program thus far.

And what's the participation level? Are the majority of your ISOs wanting to participate in that?

So far it's everybody who's been -- we've had conversations with, I think, we're at a 99.999%.

Robert, it's a great deal. We purchased and resold them basically at a pass through. We negotiated a great deal, Discover was very fair. It would be -- the ISO sees the wisdom of participating is truly a good deal for them.

Okay, thanks.

Charlie Murphy, Morgan Stanley.

Thanks. Very quickly, Joe, you said you'd have some cost savings in '08 from vendor contracts due to G2. Is there anyway to quantify that number?

No, we don't intend to quantify those savings, it's not a material number. But I think we made that comment to show that we're making progress on the G2 platform and we're already getting some (inaudible) from it. But it is included in the guidance.

Okay, thanks.

Tony Wible, Citigroup.

Most of my questions have been answered but I was hoping, Paul, you could spend some time highlighting what you would see as some of the catalysts for international growth if there's anything in any of the particular markets happening in the next few quarters that you would particularly want to focus on?

Thanks Tony, that's a great question to wrap with. I'll kind of work from Europe over. I think in Europe a couple of things have to happen. We have made some progress in signing financial institutions in some new Eastern and Central European locations, but truly the model, not unlike the U.S., is you want to be a direct acquirer, I mean you want to be able to sign business directly through your own sales force, the same model that we've had in the U.S. and Canada and the model we have in Asia.

So consequently, we're looking for an opportunity to do that and hopefully we'll have some progress to offer you on that.

The next would be, of course, acquisition opportunities. There's a number of those. But I think the more material is being control of your own destiny, growing a sales force, taking advantage of the platform, and pursuing that strategy.

In Asia, it is all about organic. It's going to be, I think, more difficult to make some acquisitions. And although I kind of glossed over on Central and Eastern, we do think there are some acquisition opportunities there that are not as obvious to a lot of people in markets that probably don't have as much competition, they're emerging markets. And I think there's emerging markets with huge populations and I think that's going to be very interesting.

Now, in Asia, just because it's taken a long time to establish our self, it is going to be mostly green field and the catalyst there is simply feet on the street. And that's a great way of growing, it's very sustainable. So we are absolutely going to be increasing that sales force and offering new better products, offering services that this market has not yet seen, and becoming increasingly more sophisticated and having that expectation.

How long would it take you to migrate some of the ATM driving capabilities that you have from [Muso] into the Asian market, which I guess there's certain markets certainly within Asia that are more in the ATM driving mode rather than the acquiring mode right now it seems.

Well, currently the relationship is on the acquiring side with HSBC and I think it's kind of limited in that regard. I think other opportunities once we get beyond this initial couple of years could become available. And that would be one of them that we would look at.

How long would that process take, Jim, to migrate some of the technology from Muso over the driving capabilities over to Asia?

Well, the expectation for Asia, as Joe mentioned on the call, is to convert onto a G2 platform so it's really -- functionality would need to built into the G2 platform more than porting over Muso's. But it's not something that's currently on the horizon. So I don't think I could give you a definitive answer.

Okay, thank you.

Operator, does that conclude?

Yes, sir.

Okay, well I want to thank you all for joining us on our call today. We appreciate your continued support of Global Payments.

Ladies and gentlemen, this conference will be available for replay starting today at 1:00 pm and ending at midnight on August 9, 2007. If you wish to listen to the replay, please dial 866-385-0198, or international participants can dial 203-369-0395. This concludes our conference for today. Thank you for your participation, you may now disconnect.