環匯 (GPN) 2008 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to Global Payments first quarter fiscal 2008 earnings conference call. At this time, all participants are in a listen-only mode. Later we will open the lines for questions and answers. (OPERATOR INSTRUCTIONS) As a reminder today's conference will be recorded. At this time, I would like to turn the conference over to your host, Vice President of Investor Relations Jane Elliot. Please go ahead.

Thank you, operator. Good afternoon and welcome to Global Payments' fiscal 2008 first quarter conference call. Joining me on the call today are Paul Garcia, Chairman, President and CEO; Jim Kelly, Senior EVP and COO, and Joe Hyde, EVP and CFO.

Before we begin I 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 as 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 8K dated today, September 27, 2007, which may be located under the Investor Relations area in our website at www.globalpaymentsinc.com. Now I would like to introduce Paul Garcia. Paul.

Thanks, Jane. Good afternoon, everyone. The agenda for our call today is as follows. I will summarize our financial results and review recent trends and events. Then Joe will further discuss our financial results. Next I will discuss our fiscal '08 outlook and then lastly, Jim, Joe and I will be available for a question and answer period.

Now for our financial results. We are very pleased with our first quarter results. For the first quarter our revenue grew 19% to $311 million, and our normalized diluted earnings per share grew 6% to $0.54. Our growth was driven by solid performance in our Merchant Services segment while our Money Transfer segment met our near-term expectation, both of which I will discuss in more detail in just a moment. Starting with our Merchant Segment our ISOs continue to drive strong organic 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 during the past quarter. Our credit and debit card transactions grew 30% for the quarter with revenue growth of 24%. Due to the continued success of our ISO channel, we're raising our fiscal 2008 annual expectation to high teens to low 20% revenue growth for our domestic direct channel.

In Canada our credit and debit card transactions grew 4% for the quarter while our revenue grew 9%. Our Canadian revenue growth was largely driven by our transaction growth and a favorable Canadian currency exchange rate. Due to continued strength in this exchange rate, we're raising our fiscal '08 annual expectation to high single-digits to low teens revenue growth for our Canadian channel.

Our joint venture with HSBC contributed $16.1 million in revenue for the quarter. Our expectation for fiscal '08 annual Asia Pacific revenue growth remains at 30 to 40% on a reported basis. On a pro forma basis our expectation is for low double-digits to high teen revenue growth. This growth reflects a positive impact from our continued sales initiatives and investments partially offset by challenges in Taiwan as previously discussed. Additionally, we made significant progress in converting HSBCs, multiple back end platforms onto our existing infrastructure. I am very pleased to announce that we have completed our first back end conversion in Macao and we're currently focused on conversion efforts for the Hong Kong back end.

Our central and eastern European merchant channel have revenue growth of 4% in the first quarter which growth in credit and debit card transactions of 10%. Our revenue growth was primarily driven by the favorable impact of our November 2006 Diginet acquisition, a favorable year-over-year check currency exchange rate and solid transaction growth. This growth was partially offset by the deconversion of the previously discussed large customer and to a lesser extent price reductions granted on contract renewals. We continue to expect this deconversion to have a mid single-digit unfavorable impact on our fiscal 2008 revenue growth in this channel. As such, our annual fiscal '08 revenue growth expectation remains at the mid-single-digit to low double-digit range.

Our domestic indirect and other revenue declined 5% during the quarter with a 1% decline in credit,credit and debit card transactions. We continue to expect a fiscal '08 annual revenue decline in the low single-digit to high single-digit range.

Moving onto our Money Transfer segment in the U.S. our transactions grew 13% for the quarter while our revenue grew 1% which reflects the impact of a competitive domestic pricing environment. Transaction growth was driven by same-store sales expansion and branch acquisitions completed in the quarter. We ended the quarter with 898 domestic branches and 71 European branches as a result of our European branch expansion. We achieved 49% transaction growth and 47% revenue growth in the European channel for the quarter.

For fiscal 2008 our expectation for total Money Transfer segment revenue growth remains 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 '08 as we anniversary the impact of the pricing trends that I just discussed. I will now ask Joe for further -- to further discuss our financial results. Joe.

Thank you, Paul. In our press release we included GAAP income statements and schedules that reconcile GAAP to normalized results. Our first quarter GAAP results include $1 million in restructuring charges relating to employee termination benefits in connection with the Operating Center Consolidation plan we announced in March 2007. These restructuring charges have been excluded from the following discussion. Our Merchant Services segment operating margin was 27.6% for the quarter which reflects a decline compared to last year, primarily due to high growth in our lower margin ISO channel and the impact of our Asia Pacific acquisition including the effect of investments in sales and infrastructure.

For fiscal '08 we continue to expect a Merchant Services operating margin of 25.5% to 25.9%. Our Money Transfer segment operating margin was 10.6% for the current quarter which reflects a decline compared to the prior year, primarily due to the competitive domestic pricing environment that Paul discussed combined with our Branch Base high-fixed cost model. For fiscal '08 we continue to expect a Money Transfer operating margin in the low double-digit percentage range.

Our Corporate expenses declined during the quarter primarily due to lower share based compensation expenses although we do not expect this trend to continue for the remainder of fiscal '08. For our Corporate area, we expect fiscal '08 expense growth ranging from 0% to growth in the low single-digits. Based on our segment guidance, we continue to 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 nonoperating line items, we expect 9 million to $12 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 8 million to $11 million and effective tax rate of between 33% and 34%. Lastly, we expect average diluted shares outstanding for the fiscal year to be in the range of 81.0 million to 81.8 million. During the quarter we completed $67.9 million in open market repurchases of 1.8 million of our shares outstanding at an average price of $37.27 per share including commissions paid. Capital spending for the quarter was $9.6 million. Our capital expenditures for the quarter primarily related to technology spending including for our new G2 platform in the U.S.

In addition to Merchant Terminal spending and our Operating Center Consolidation plan. For fiscal '08 we continue to expect capital expenditures of 40 million to $50 million. Paul will now discuss our fiscal '08 guidance and outlook. Paul.

Thanks, Joe. Based on current market trends and our ongoing growth strategy, we are raising our annual revenue guidance for fiscal 2008 to $1.195 billion to $1.247 billion or approximately 13 to 17% growth over $1.062 billion in fiscal 2007. We are also raising our annual fiscal 2008 diluted earnings per share guidance to $1.87 to $1.96. This reflects growth of 6 to 11% over our 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. We will now go to questions.

(OPERATOR INSTRUCTIONS) Our first question today comes from Charlie Murphy, Morgan Stanley. Please go ahead.

Joe, quick one. Did you say the 33 to 34% tax rate was for this year?

For fiscal 2008.

Okay. Is that a modest raise from last call?

I am sorry, is that a modest range? Rate.

Is that up from last call and if so, why?

I guess it is a modest range -- rate from last call, and it is really the effects of relatively more earnings in our higher tax rate jurisdiction like North North America relative to our international areas. We're continuing to have to take a valuation allowance in certain Asia Pacific subsidiaries due to the investment we're making there, and we're not able to take full advantage of the lower tax rates in that region.

And then thanks very much. Paul, I was wondering if you could describe how your business plans may change in the event of a forced lower interchange in Europe?

Yes. You're referring to some of the news. There is also news that hit the wire today about Justice's is looking at possible collusion with the associations domestically, too, on interchange, and there is always a rash of these, Charlie, as you well know. Bottom line is lower interchange typically so long as it is still significant enough to encourage card issuers to be in the business, lower interchange is a good thing for the merchant acquirer. It is a good thing for our merchants obviously because they receive benefit to that, but typically depending on the size of the merchant, there is something left over for the inquirer, so generally that is good news in any geography.

Okay. Thanks a lot.

Liz Grausam, Goldman Sachs your line is open.

Great. On the Merchant Services, we certainly saw a steep acceleration in the direct business this quarter. Can you help break us out certainly with some of the concerns around consumer spending in the market just given the overall economic back drop, how much of that was really driven by ISO conversions and new wins in your business, and what are you seeing from a same-store sales transaction trend in your business right now across credit and debit?

Let me do the beginning of that, and then I will ask Joe to pick up. I would say in having discussions with our ISO customers, and some experience we have with our own sales force, we are not seeing much of an impact from consolidating credit markets and issue that is are affecting our economy. Now, it isn't a precise science, and we have such a diversified portfolio that we're fairly buffeted from any impact anyway, but I would say we're not seeing much change either in same-store or in impact from our ISOs, Joe.

The fourth quarter domestic direct revenue grew 18%, and the first quarter of this year grew 24%. That's a 6% variance. Half of that came from the improvements in the ISO channel, and the other half were improvements in our direct sales and check and gaming channels. The ISO channel is -- most of the ISOs are continuing to grow very strong. It is not one in particular. There was a VISA/MasterCard repricing we believe the ISOs took advantage of, and that has a positive impact on our revenue and then on the direct sales and check and gaming we just got an past some repricings that have occurred in prior years and we made some good progress in both of those channels.

And after being in kind of a high teens growth range last year in that direct business, should we be looking for this type of growth in the 20% plus range sustainable for the end of the year, through the end of the year? Is that the vast majority of the upside in your guidance going forward?

We did raise the guidance in domestic direct for the year, and the ISO revenue is not an easy number to forecast. We basically are basing it on recent trends. I would expect -- I haven't seen anything that would cause me to think the trends are going to change in the next couple of quarters. I would expect in the fourth quarter to have sequential slowdown compared to the third quarter just as a result of the big ISO conversion we completed in that fourth quarter and the effect of some of some of these VISA/MasterCard repricings that have occurred.

Great. On the Money Transfer segment we saw better data come out of Mexico for the month of July. Can you help us understand what you've seen in that business in terms of transaction trends and pricing trends over the course of the quarter and how you're feeling about that market now? It certainly feels a little bit more stable across the industry.

It does relative to pricing, I believe it has stabilized at least against the major competitors, our two larger competitors. I would say with the smaller players it remains pretty intense on price, so I am not sure that it is over in terms of price compression, but nothing close to what we've seen in the past for the last couple of quarters it's been relatively confident, as Joe said in his comments, we should see that annualize by our third quarter in the second half of the year.

And the transaction trends?

We've seen at least domestically we've seen pretty good transaction growth in low teens, Europe, as we comment on is substantially higher but hasn't faced the headwinds of construction market change in the U.S. together with the immigration challenges.

Great. Thank you.

Thanks, Liz.

Kartik Mehta, FTN Midwest your line is open.

Question on the HSBC joint venture, Paul. If you look at that joint venture, I am assuming you're anticipating better margins as we move forward. Would the margin impact be the result of investments you're making now or is it scale, so I guess what I am trying to figure out is is scale going to solve all of your margin issues or is it that the investments using less money for the business is going to help?

Well, I think it is up. It is actually a little more complicated than that. The issue is this was a pretty profitable business, and we have taken it if anything and pretty significantly damaged the profitability because the amount of investments we're making in the business, and it is all about building that scale. It is all about growing that business significantly, but you add to that the conversion efforts. Now, this first conversion that we did in Macao is a big deal. It worked well. We picked Macao because it is the smallest market, but it worked well, and we are going to be rolling out Hong Kong next, in actually pretty short order. Hong Kong is the biggest market of that entire JV as it currently stands, so that will yield some pretty significant savings down the road as well. It is kind of a double pronged approach, make big investment to grow this business aggressively taking advantage of HSBCs fantastic footprint through Asia, and then make the investment to say have the most efficient operation you can, and it is going to be awhile before these margins are even close to what we're joined here in the U.S., but over time I think these are very accretive margins, I mean significantly accretive is my expectation over time.

Great, and last question maybe a little bigger picture, Paul, you've always said you have opportunities for acquisitions. As you look at marketplace today, do you believe those opportunities still relevant out there or is does it make sense to leverage a balance sheet and buy back shares so I guess you weigh those two options. Is the option to invest in the business and grow the business and improve margins through acquisitions a bigger opportunity than buying back shares?

That's a great question, Kartik. You can imagine I get that fairly often, also the dividend question gets thrown on top of it. How about a big dividend. I think that we have a fair amount of cash. We are great cash generator. We absolutely believe that the first and foremost use for our cash is to make acquisitions. Now, we haven't exactly been announcing a lot of them recently, but you shouldn't read into that we don't have a very active pipeline. Quite frankly, we walked away from a number we could have, we could have done if we were simply prepared to do diluted deals or deals that didn't meet our criteria, and there should be some sense that we're still very disciplined. I think the acquisition pipeline has never been better. We have a major competitor whose position changed recently, and who knows if that has any impact on stickly international -- particularly international opportunities. I believe it could although we'll have to wait and see. I would say wait tuned.

Hopefully we'll have some things to talk about in the next quarters activity in terms of acquisitions and you'll be pleased with where we're putting that money to use. However, with that said, we did announce a $100 million buyback. We purchased almost three quarters of that, $68 million of that stock, stock, about a 1.8 million shares, and I know that's modest, but that's the first time we've ever done that, and would we consider other programs, we may, and it is something we would discuss with our board from time to time after we get through this $100 million authorized amount.

Great. Thank you very much.

Thanks, Kartik.

Dan Perlin, Wachovia Securities, your line is open.

Thanks. I want to talk about your ISO conversion pipeline. As I went back and looked at the numbers today, it looks like you've done, including the three you just announces, somewhere between 13 and 15 new ISO signings in the past 12, 18 months. I am wondering you signed them, but how many of those have actually been converted?

Well, Dan, there is a couple different mixed metaphors here. The one that Joe referred to with the question that Liz asked earlier about is this growth because you had a big ISO continue, you announced 24%, why doesn't that continue in your direct channel, and we're telling you to it's high teens to low 20%. One of those ISOs was a really big guy, and that will annualize, and that will have an impact on this overall growth. But --

Was that the one you did in the fourth quarter?

Say again.

Was that the one you did in the fourth quarter?

Yes.

It was one we talked about last year. It may have --

You did it in October?

Primarily the fourth quarter.

Okay.

Now, the other ISOs, again, I don't want to guess, but my guess is after saying that I am going to guess and I am going to guess, and I would say we are virtually all converted because a number of these are ISOs that have been started by individuals we're familiar with that perhaps sold their businesses or incubating new ones or have concepts we believe in, and they're starting at a smaller base. It is more of a build scenario, and they pretty much don't have a big portfolio to convert. Jim, do you want to add color?

All the ones we newness previously, they've been converted, generally the largest ones take maybe 6 months, longest maybe 9 months, but generally from signing to conversion it is 3 to 6 month time period.

Okay. There is not a big conversion kind of number of merchants going to come over because I know in the past you had two ISOs. One was a big conversion portfolio of merchants that would come over and this is the one you talk about in the fourth quarter, and then you had some merchants or some ISO that give you the incremental business but not the entire business.

I see what you're driving at. There isn't another big guy that we announced amongst those ISOs that you mentioned that is waiting to swing huge amounts of business. These have been smaller deals that we signed.

And generally what you're describing, they would leave the front end terminal side of the business, the front end with a competitive platform, and instead of risking conversion at the front end, they would convert the back end and all the new business would be on Global at that point.

Other opportunities as a result of first data that you see that could happen in the course of the next 6 to 9 months?

I think any time there is change, change causes people to look around and so we hope it is an opportunity, but they're very strong competitor, and I don't expect because they're in a different structure they're going to be less of a competitor.

Okay. We've been hearing that the interchange categories in Canada might be expanding, so I guess one is that true, and, two, if so, do you think you're going to be able to benefit from some price increases potentially?

Yes. The plan I think it is for next fiscal year, but I am not entirely precise on that, but for us next fiscal year, at least the VISA side is changing its pricing structure, and I don't know whether it has been publicly announced, and I wouldn't want to comment here, but they are going to modify pretty substantially the way they calculate and reimburse or pay (Inaudible) inquiries an interchange.

And that should presumably be pretty good for you guys.

Dan, I would say that Canada as you recall has a portfolio of much larger merchants.

Right.

In that scenario they're priced similar to the U.S. which is more of a pass through, so that scenario there is no opportunity to do anything but pass through interchange. For the smaller merchants; however, that opportunity certainly exists. To keep a reasonably small amount.

And then one last quick question. With this I guess (Inaudible) deadline ultimately looming for the end of this calendar year, at least start of it, I am wondering if you're supplying your ISOs with enough terminals , new terminals that would give them the opportunity to go in and maybe incrementally drive their revenue growth

This started probably 7, 8 years ago. It has been our -- hasn't been our practice to resell terminal to say ISO unless they're very small ISOs that need our assistance. All our major ISOs have multi-year relationships with the major providers [PHONE] (Inaudible) , Hypercon, [JennaCO]-, use to be Littman prior and they would obtain them directly, and many of the ISOs that we do business with have attractive placement programs with merchants that effectively put a terminal out for free provided that there is a multi-year contract or relationship with the ISO, and I think that's one of the things that has driven growth, accelerated growth in the last couple years is this concept of placing terminals, not all ISOs do it, but some of the larger ones have been very effective in

I was just really referring to Jim's earlier comment or Joe's earlier comment about capital spending, and he mentioned terminal spending.

Our capital spending would largely be Asia where we place terminals ourselves, and those terminals are ours as well in Canada , we're in the rental model where this this goes back to when we acquired the businesses, both business's from CIBC and National Bank. They would own the terminals and rent them to the customers, and therefore we are required to have those terminals on our balance sheet as an asset. In the last starting maybe 18 months or so ago, we've gone to a process of having to recycle all our terminals in Canada from non-EMV terminals to EMV terminals, and that is causing a more significant investment that will run out in the next 18 months to 2 years we should be through the bulk of

Super. Thank you very much.

Dave Koning from Baird. Your line is open.

Hi, guys, nice results.

Thank you.

When we look at the merchant operating margins going forward, I guess first of all when we kind of look at last year's progress from Q1 to Q2, there was a pretty significant fall off, somewhere around 500 basis points, and I know last year we had repricings and Asia Pac coming on. I am wondering this year how we should think of margin progress from Q1 to Q2. Seems like it should be down but probably not as much as last year and maybe you can comment on that a little bit.

I do believe that the first quarter margin is higher relative due to seasonality and we would expect a similar drop off in Q2, maybe not as much as we saw last year, but it should likely drop off, and the rest of the year isn't as affected by seasonality. I will remind you, though, in the third quarter last year in the merchant business we benefited significantly from Canadian Card Association incentives, a multi-million dollar revenue and earnings impact in that quarter that caused that third quarter margin to be higher than it otherwise would, so pay attention to that in the third quarter of this year when you're looking at year-over-year margin comparisons.

Great. Thanks. One follow-up. If you can commented a little bit about the Discover relationship and what impact you estimate for this fiscal year?

I don't believe we separately disclosed the size of it, but the Discover relationship for our Global Direct and our CO-America relationship began effective September 1, so we converted off the Discover system all merchants that were previously accepting Cards and processing through Discover they are processing through Global and then in addition, we've enabled and contacted all the merchants that are, again, Global Direct and Co-America through our joint venture. We contacted those not previously acceptor to now let them know they can accept Discover Cards as they would VISA/Master Card, so we're excited about the program, the conversion was smooth and we're now poise starting October to convert our ISOs. We'll be purchasing those portfolios and reselling them to ISOs beginning October, and that will run the balance of our fiscal year.

Great. Thank you.

Thank you.

Tony Wible, Citigroup, your line is open.

I have a question, Paul, are we entering a phase in the U.S. market where just the ISOs are just naturally going to continue to gain more market share as maturity creeps in and we see dichotomy emerging between what the compensation is that this ISOs versus some of the direct sales force on some of the bank-owned processors.

Tony, did you catch the last part of that? Tony, could you repeat the last part?

Just basically is seems like there is a dichotomy that's emerging where you have different compensation structures with some of these ISOs than you do with some of the bank-owned processors that clearly aren't growing at the same rates that you are and I am wondering if this is a beginning of a bigger secular trend that you see emerging where ISOs are going to continue to pick up more share.

Tony, that's a tough one. I will tell you that we do have a high expectation for ISOs, but they seem to favorably surprise us every quarter. These guys are -- we keep seeing the law of large numbers are going to kick in, and the bottom line is we are blessed with some of the largest, most successful ISOs, and it seems they go from strength to strength. They get stronger, they get bigger, they get more creative, and I do believe you clearly have two sets of ISOs, a have and have-notes. I think that the ISOs are pretty strictly focused on the mid-markets or small merchants. There are exceptions where some have fairly sized customers, but typically they're sweet spot because of a commission-only sales force is the mid-to small sized merchant, and the direct efforts that go on with our competitors on our own are kind of in a different sphere, and they're not growing as quickly as the ISOs grow either. In that scenario they're probably is a dichotomy.

And within Asia, is it possible to get I think we'll have an organic year-over-year growth rate that we're now seeing and when would you expect some of the investments to date, in Asia starting to pay dividends.

I will take the last part and let Joe speak to the first part. In terms of dividends, Tony, I would argue we're getting dividends now. We have a sales force that's over 300 and growing. They are costing us more than they're producing, but yet the seeds are being sown for a successful program. We look at how much business they bring in per person , and a number of metrics, and that's all looking very good. I would say we're getting the return on that investment right now.

In terms of the investment we made, we talk about Macao. That's a big deal, getting Hong Kong converted is a big deal, adding management, expertise, getting relationships with FARs. All of those are time and energy. In terms of producing accretive margins I talked about, that's a much longer. I would be hesitant to give you an exact time frame. It is not that fiscal year clearly. It is going to be a bit until now I think the margins improved, and the business is showing steady improvement, but it is going to be sometime before this thing really pays a dividend. I will give one quick aside. Coke-Cola, E.Neville Isdell commented recently, although Asia is a massive part China in particular a massive market for them, one of the largest, still continues at an investment strategy, looking to continue to make investments to reap the rewards down stream he's not trying to maximize the near-term. I think it is a

Is it fair to say when you're looking to deploy cash, then, it makes more sense to spend cash on acquisitions and other markets outside of Asia than in Asia to spend it more organically?

Yes. I think that's correct. Part of it is more difficult to make acquisitions in Asia, too, quite frankly. You have to have years of relationships with financial institutions and of course it has to tuck in with our relationship with HSBC, but there really is some opportunities to do some smaller deals there, but it is more of an organic structure, and the acquisitions we're looking at probably are more focused outside of those markets, central and eastern Europe in particular.

Last question, dealing with the money transfer business, can you just talk about the competitive environment, particularly when it comes to foreign exchange spreads? I don't know if you have been seeing less competition there as the pace has weakened versus the dollar, seems like some of our competitors might be capturing more of the foreign exchange spread. Is that also an opportunity for DolEx?

Our pricing is market-by-market, and it is really branch-by-branch, and it will be against the competitors and each of the major competitors are always around the other other corner, so I don't think you can give a sweeping statement. We remain competitive whether it is on a commission side or on the FX side relative to the market, and what works in the local market and one price does not fit all for all of these different markets. As I said earlier, though, I think the large decline we saw last year in price we have not seen a continuation of that. It is flattened out substantially from where it was previously.

So quarter to date is that trend still hold up, has there been any more recent change post quarter end.

It is still holding up as we speak.

Great. Thank you.

Thanks, Tony.

Andrew Jeffrey, Robinson Humphrey, your line is open.

Good afternoon. Paul, thinking about Europe market that should give you some pretty good growth here, I realize you're yet to anniversary a major customer deconversion, but if you get to the back half of this year and you look to '09, shouldn't this be a market for you that drives not only pretty decent revenue growth acceleration but also maybe a little better contribution to segment profitability?

Andrew, you're exactly correct on both fronts. In fact, the margins from that business today are quite attractive, so it already is a great margin driver, and in terms of revenues, when these things anniversary, including the price concession we made which happens, in the not too distant future, we're looking at I think a solidly growing business that's expanding steadily without benefit of any acquisition opportunities, and I am hopeful one or two of those pops, too. With all of that said and done, I am very bullish on the market and unlike Asia there is near-term margin accretion on that business, immediate.

Right. Okay. And then it seems like we're creeping toward some stabilization in the domestic merchant profitability, if you sort of try to strip out HSBC and if you look at the in's and the outs of ISO conversions and pricing and growth within the install base of ISOs, is that a directionally as we look out past 2008 a decent assumption or does the continued growth in the ISO mechanically given the gross revenue reporting drive down the margin maybe to slower pace? I am trying to gauge directionally how you think about segment profitability given all of the pluses and minuses.

Andrew, the ISOs continue to grow, that's what's causing the margin impact. Those ISOs are growing fast in '09, that margin impact will likely be there. Our strategy is to continue to invest in that channel. It is a wonderful channel. It is providing earnings growth for us, but to also ultimately get back to margin growth through expansion in earnings in our international areas as well as improvements in our non-ISO area in our North America channels, but no other really detailed comment other than that for future years.

Can I infer, Joe, that there is the potential for a deceleration in the decline?

Yes, that's clearly the potential as our investments -- if international can grow, that will cause a deceleration of that margin decline relative to where we are today.

I would have to throw in DolEx, although it's much smaller impact, but Andrew, DolEx with the margins its produce are highly dilutive to what they're experiencing.

I appreciate that. Thanks a lot.

Larry Berlin from First Analysis, your line is open.

Good afternoon, guys, hope you're doing well.

Hi, Larry, how are you doing?

Good, good. Go Cubs.

It is interesting who Hilary Clinton would support, would she support the Yankees or the Cubs.

Depends on which state gives her more money of course.

That's what she said last night.

Yes, I am sure. A couple of quick questions for you. First, Paul, you spoke so fast I missed what you said at growth for the Asian market.

I think when I talked about growth in the Asian markets it was an answer to a question of at what point do you produce -- first of all, can you produce accretive margins in Asia, and I said yes we absolutely can. Secondly, when do we think that will happen. I didn't give a definitive time frame.

I meant your guidance at the very front, your initial comments.

Sure. I got that. Hang on a sec.

Asia guidance on a pro forma basis is low double-digit revenue growth to high teen revenue growth and on a reported basis it is growth of 30 to 40%.

Right.

Okay. Great. What was the stock base compensation for the quarter? Or the option base compensation?

Well, the total share base compensation which would include not only stock options but also restricted stock was roughly $3 million in the quarter.

Okay. One last thing. On your direct sales force with the United States, just curious how you feel about their progress and how they're doing in hitting merchants and merchant categories and where you might have them focus at this point?

That's a great question, Larry. I am delighted with the progress we made during the quarter. We're getting stronger and stronger. It still has to go some to move the needle because the base business is so big, but I feel very good about the management there. I think we're finally figuring this out. Years ago we had it, and we kind of lost our way, and I think we're back to getting it again. It is about referrals, and we are signing up referral sources, primarily community banks and also very clever other sources such as web-hosting businesses that are involved in merchant activity, and some other kind of A-typical referral sources plus good solid management in that group, so I saw great statistics for the quarter, and I am hopeful that continues. Since that's under Jim, I will give him a chance to say something.

Thank you.

That's good enough. I think he is serious. Sorry, Larry.

It is okay.

We replaced essentially the entire management team over the last 18 months, and the team today is headed up by Ed Myers, and Ed and his team are doing a terrific job, and as Paul said this is a multi-year effort, but we're seeing numbers for the first time that are moving in the direction that we were pleased with.

Great. Thank you very much, guys. Have a good evening.

Bye, Larry.

Tim Willey from AG Edwards your line is open.

Thanks. Actually it is Tracy McMillian sitting in for Tim. Starting off I guess in Europe, I am curious about your comments. The challenges that you faced in the past I suppose as far as banks' resistance to adopting your more traditional sales method, can you talk about that? I understand your opportunities, but the banks stance and that cultural difference if you will? Can you kind of touch on that topic?

Sure. I think the European issue is that we are in an indirect processing business today in Europe, so the -- you have a pretty big uphill battle to sign a financial institution and convince them to switch all the merchant processing. It sounded like signing big ISO to switch the merchant processing from whom ever they're using internally, externally to you, and then, of course, you don't have the control on how much business they bring in because it is their sales force. It is an indirect model, great way to enter a market but long-term I think you wanted more to a direct model but find a way to do so and year in partnership or at least not competing or at least have the blessings of your major customers. We are in the process of developing that strategy, we're executing on our indirect model, we have signed new customers well beyond the Czech Republic, we opened new markets. I think probably most significantly, Russia with our efforts in those markets are yielding results. We've expanded to Slovakia, obviously. We're in Poland. We're going to other markets in eastern and central Europe. Also as an acquisition in Bosnia and the [Baukins] offers opportunities, too and we're looking at potential to pursue the next phase of that in conjunction with our customers and I am excited about both, we're getting a reasonable revenue lift from the indirect model, but the expectation is that you could accelerate that through a direct model.

Are you getting the sense that there is potential for one of your major clients or a new signing to be in the more traditional direct model?

I think it is fair to say that European banks are not unlike U.S. banks. They recognize they do some things well and some things they don't do as well, so the short answer to that is yes.

Okay. Switching to Asia, just wanted to hit on a couple of the key points I think you offered before and if you mentioned these I apologize. You just mentioned your sales force is still slightly above 300, is that right.

Correct.

You made one conversion so far. I guess maybe an update on the training process you talked a great detail in the past as far as almost starting with from scratch, sort of how that is going, the success they're having, maybe challenges you're having in bringing on or moving people up the chain as far as in training and management positions and the sales activities.

Well, I can speak for hours on that, and I won't, but I will say that we've been more successful in some markets than others. We haven't made the success. The leaps I hope to in India. We still have a long way to go there, it is a massive market, but there is massive training obstacles. In some markets we made huge advances and added people. We're actually starting to turn around Taiwan. We're seeing a positive impact, that business had gone south significantly. We have new talented in there. We have better tools, better training, better management, and I am seeing that turn around. Some other markets that were not as significant for us are starting to look pretty good. So I would say it is still very much a work in progress. We're spending a lot of time and energy on it.

And as far as the changes, the final changes I suppose in China, and foreign banks allowance to issue Cards, can you talk about your -- when do you think that's going to start to trickle through or you guys would be able to benefit from that in any --

We actually have an allocation to be able to require [RMV] transactions, local currency transactions, financial institutions can today issue cards in local currency, and we are in the process of applying through the governmental authorities to -- and the regulatory bodies within China to give us the ability to do that, and that process is in place. Even when that happens, you're not going to see a huge swing. Most of the -- I mean the lion's share of the revenue in China comes from international transactions.

Yes. Okay. Switching to U.S. market, as far as the ISOs, wanted to dig into the specific industry as a whole. Just curious, if you look at the ISO industry and what's going on within that specific sector, are you seeing consolidation say among the let's call them the unregistered ISOs and registered ISOs, are you seeing sort of the growth of the larger more tech savvy if you will gobbling up the smaller ones, the smaller ones having more difficulty and disappearing or are you seeing growth throughout from the let's say the level three or four small ones up through the full liability and larger say super ISOs?

I would think it is a little more the latter although the big guys seem to be growing at a disproportionately quicker rate, but they're not doing through acquisitions. This is organic growth. Our ISOs haven't done any big deals acquiring other ISOs. This is true organic growth because they have the means. We talked about terminals earlier. They have the ability to do a number of things including provide free devices. They have new products. They're aggressive in pricing because they have the ability, and they can pay commissions at a more handsome rate, so the big ISOs as I said earlier going from strength to strength, but the smaller ISOs are doing okay, too. They still have nice growth rates, it is just not the massive growth rates the big guys are experiencing.

And touching on one last topic on that item, we've heard more and more about smaller tech providers or companies that is are focusing on helping ISOs with whether it is data analytics, reporting, different devices. Do you see that as; A, do you see it? B, do you see it as any threat as far of taking some opportunity from you or is that a complement to what you guys are currently doing?

I think there is very little of that in the marketplace. If go to the ETA, you will see a lot of vendors showing, but traditionally ISOs are self-service. They handle everything in-house and what they can't handle in-house they use processors such as Global and in rare instances they will use companies maybe to assist in creating a CRM solution for their Customer Service tools, but beyond that, I think it is fairly limited. Now, there are some ISO that is are much more focused on technology solutions where they're not selling terminals and they're more Gateway providers or mini Gateway providers, but beyond that, I think the ISOs run a very efficient, lean organization, and they generally don't use outsiders.

Okay. All right. Two last quick ones. Can you break out your depreciation by segment? Do you have that available?

I do not have that in front of me. It will be in the 10-Q that we'll file next week.

And as far as your actual agent location growth, did you close any locations in this recent quarter in the U.S.?

You mean in terms of our processing facilities?

Sorry, I am speaking DolEx.

Each quarter there are branches we open or acquire and then there are branches under performing, and that could be for a variety of reasons, but yes we do close branches. I don't think we would reported a net number I don't think we report open and closes and acquisitions. We're doing very little in terms of opening new locations and for those that are struggling because of the recent price impressions we've closed, so --

Okay . In Europe I just wondering,ing, seemed like kind of a light number I guess, and just the quarter-over-quarter growth. Just maybe, maybe not, but was there some slowdown or reason for -- I know it is a small area.

No. I don't think it was a slowdown. We were continuing to open branches, maybe at a slightly slower rate than we had in the last year, but we closed one or two outside of the Spanish market where Spain is our clearly our largest market, but nothing significant, actually all the branches in Spain are doing quite well.

Okay. Great. Thanks a lot.

David Parker from Merrill Lynch, your line is open.

Good afternoon, everyone.

Hi.

I just have one question. You mentioned in one of your responses your success in gaming was driving some of the growth in the direct domestic business. Can you just provide more color specifically around maybe some of the win's that is you've had, how you're differentiating yourself in the marketplace and your strategy going forward in that business?

Well, we offer three primary services, ATM which we do through a third-party and two in-house solutions, one, which is cash advance and the other is a check cashing effectively. We do that through a card we issued called a VIP Card. We believe at least on the check side that our product is a better mouse trap than we win a lot of deals and not because of price but because of the solution that we offer. I think in an area that we in the last couple years have struggled on was the cash advance side of it. This is cash on a credit card. That product is called player cash, used to be called cash-and-win, and that has seen a turn where we're able to successfully sell multiple products into properties as opposed to just one or the other. We wouldn't necessarily list off the names, but these are everything from Reservation properties to properties along the Mississippi Coast and River Boat, as well as the primary properties in and around Las Vegas.

Great. Thank you.

Thank you.

Adam Frisch from UBS, your line is open.

Thanks. Good afternoon, guys.

Hi, Adam.

I was wondering if you could talk about the domestic direct channel? I am surprised it is almost 6:00 and no one has asked about margins yet because the turn of the events around the revenues you kind of touched on, but the uptick in margins I also think is pretty significant, best quarter since the first quarter last year. Do you guys track this segment on a sequential basis to assess the operating trends or is there enough seasonality to look at it on a year-over-year basis?

We look at it both ways, Adam, but we do have a seasonality issue in the first quarter, it is not an issue, it is just that in Canada we have higher spending in June, July and August, so the first quarter margin from that perspective will likely be the highest margin of the year on an absolute basis.

Okay. So we're seeing revenues get better, margins, too. Should we continue to see that transpire through the year or are there events we should be aware that would create a tougher comp at some point or bump in the road later on in the year, like conversion or renewal, anniversary or something like that?

We're talking about the merchant market?

Yes.

The biggest as I said before is the third quarter of last year we benefited from Canadian Card Association incentives, and the year-over-year margin difference in that third quarter will probably be the second largest decline of the year. The first quarter we had a 450 basis points margin decline in this quarter, but we're calling for a 200 to 240 basis points decline for the full year, so that implies that that decline gets better over the last three quarters of the year which is a positive. The second biggest declines that I said will likely be the third quarter, so definitely take that into account when looking at your model for margin and earnings per share.

Okay. Great. And one final thing. Are there any areas or metrics in which you're seeing signs of increasing or beginning weakness in the economy, some people look at things like furniture stores or electronic stores or something like that. Is there anything out there that is suggesting to you the consumer is starting to roll a little bit?

I will say kind of this is more anecdotal, but I will tell you that I have an association with somebody that has a big furniture operation, and he said it is a very tough market. He is also in the southeast in a big way, and in particular in Florida, and he is feeling it, but I said earlier, Adam, we're probably not the bell weather everyone thinks we are because our portfolio is so diversified in in our ISOs, and I have conversations with our ISOs as does Jim and Joe and we just aren't seeing that as much. I see it. I read it. I at that you can to guys like that, but it is just not necessarily translating to us into something that's palpable.

Even in the restaurant space because I know you guys are diverse and maybe not a good indicator but you know the signs you saw in prior downturns and stuff?

Yes, we have, but a lot of our ISOs are heavily restaurant based, and --

They're still doing okay?

We don't generally try to measure as a rule all of our merchants comp year-over-year. You have ad locations and other changes and it would be a challenge to measure it that level. I think it is a good comment, but I don't think we have good statistics on year-over-year. Most of our if all our growth is coming through gaining market share either in our direct business or in our ISO business.

Got it. Thanks, guys.

Adam, there is one other you have to say that there is another peculiar . It is even in this guy that I know who has this furniture operation, credit cards still account for a larger percentage of his sales every year, and you have that uptick, too, and that kind of throws a curve ball into all of

I think a lot of people forget that the secular trends versus the consumer trends.

Exactly. There is two different concepts totally.

I think a lot of people forget about though. Okay Guys, thanks a lot. Nice quarter.

Thank you.

Our last question will be from Mark Sproule from Thomas Weisel. Your line is open.

Thanks, guys. This is Dan Hayes in for Mark. If you could just comment briefly on your Canadian segment, despite almost 10% growth lag the rest of the segments, and this with a fairly strong currency, is currency, is there anything that we should know about there, any issues, any opportunities, just a little more color there. Thanks, guys.

I think the Canadian businesses we talked about in the past is a much more mature market, slower growth rates. We are not as invested in the ISO business although we have some of our U.S. ISOs as well as Canadian based ISOs that support the business. We also are much larger market share in Canada than we are in the United States, and therefore we're going to move more like the market than you're going on see in the U.S., and we have a heavy concentration of debit and debit growth in Canada is at a much lower speed than what you would see in the United States. Otherwise those aside the business we think is doing terrific is a high margin business and a great management team that's been supporting it since we acquired the business in 2001.

Perfect. Thanks,Thanks, guys.

Thank you.

Well, thank you, everybody, for joining us on our call today. We tremendously appreciate your continued supported of Global Payments.

Ladies and gentlemen, this conference will be available for replay starting tote at 6:30 p.m. and ending at midnight on October 11, 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.