環匯 (GPN) 2008 Q2 法說會逐字稿

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

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

Before we begin, I'd like to remind you that some of the comments made by management during the conference call contain forward-looking statements that involve a number of risks and uncertainties. For these statements we claim the protection of the Safe Harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. While thee 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 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 today, January 3, 2008, which may be located under the Investor Relations area in our website at www.globalpaymentsinc.com.

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

Thanks, Jane. Good afternoon, everyone, and happy New Year. We are quite pleased with our second quarter results. For the second quarter, our revenue grew 18% to $308.8 million, and our normalized diluted earnings per share grew 14% to $0.48. Our growth was driven by solid performance in our Merchant Services segment while our Money Transfer segment continued to be impacted by lower year-over-year pricing, both of which I will discuss 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 two new ISOs signs in a past quarter. Our credit and debit card transactions grew 28% for the quarter with revenue growth of 25%. Due to the continued success of our ISO channel, we are raising our expectation for fiscal '08 revenue growth to the low 20% range for our domestic direct channel.

In Canada, I'm very pleased with the long-term merchant referral agreement with HSBC that we signed and announced during the quarter. This agreement demonstrates our continued success in this market. For the quarter, our Canadian credit and debit card transactions grew 4%, while our revenue grew 20%, driven largely by a favorable Canadian currency exchange rate.

While we anticipate a continued year-over-year currency benefit for the remainder of this fiscal year, our third quarter revenue growth for this channel is expected to be in the low double digit percentage range. This expected growth is lower than our second quarter growth, primarily due to non-recurring card association incentive revenue realized during our fiscal '07 third quarter. For fiscal '08, we are raising our revenue growth expectation to the low to mid-teen range for our Canadian channel.

Our Asia-Pacific channel had strong revenue growth of 24% for the quarter. Due to these results, we are increasing our expectation for fiscal '08 revenue growth for this channel to 33% to 40% on a reported basis, or the low to high teen percentage range on a pro forma basis.

This growth reflects solid momentum gained from our continued sales initiatives and investments and a positive turn in our revenue growth from Taiwan as previously anticipated. We continue to make operational progress on our goal to be fully converted from HSBC's back and front end systems platform by calendar 2010.

As of today, we have converted both the Macau and Hong Kong back end platforms onto our U.S.-based platform. Our Central and Eastern European merchant channel had revenue growth of 7% in the second quarter, with growth in credit and debit card transactions of 10%. Our revenue growth was primarily driven by a favorable year-over-year check currency exchange rate, the impact of our November 2006 DigiNet acquisition, and importantly, solid transaction growth. This growth was partially offset by a 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 of favorable impact on our fiscal '08 revenue growth in this channel. Based on the continued strong check currency exchange rate, we are raising our fiscal '08 revenue growth expectations to the high single digit to low teen percentage range.

Our domestic indirect and other revenue declined 7% during the quarter but as anticipated; primarily due to industry consolidation. We expect a fiscal '08 revenue decline in the mid single digit to high single digit percentage range for our domestic indirect and other.

Moving on to our Money Transfer segment. In the U.S., our transactions grew 8% for the quarter, while our revenue declined 5%, which reflects the continuing impact of the competitive domestic pricing environment. Transaction growth was driven by same store sales growth in branch expansion compared to the prior year. We ended the quarter with 879 domestic branches compared to 855 locations last year. During the second quarter, we closed a number of unprofitable domestic branches, which caused a sequential decline compared to the first quarter of this year.

In Europe, we ended the quarter with 71 branches compared to 53 locations last year. For the quarter, we achieved 39% transaction growth and 48% revenue growth in this channel. We continue to expect the second half of fiscal '08 to benefit from the anniversary of last year's domestic pricing trends, although this benefit will be less than we previously anticipated, given the continued concerns over immigration domestically and the sharp decline in new home construction.

For fiscal '08, we anticipate Money Transfer segment revenue growth in the mid to high single digit percentage range.

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

Thank you, Paul. Our Merchant Services segment operating margin was 25.9% for the quarter, which reflects a decline compared to last year, primarily due to the continued high growth in our lower margin ISO channel; the ongoing impact of investments in our Asia-Pacific channel; the customer deconversion in Europe; and duplicated expenses in connection with our facility consolidation plan. Additionally, our check guarantee channel experienced higher than expected losses toward the end of the quarter due to higher loss rates coupled with lower collection rates, which we believe is related to the current economic environment. Although this trend did not have a meaningful impact on our second quarter earnings growth, we anticipate a relatively larger impact on our third quarter growth, especially due to strong collection rates achieved during the third quarter of fiscal '07.

Our Merchant Services margin was favorably impacted during the quarter by credits we received from a card association and from our domestic health insurance carrier, both of which related to prior overbillings of certain fees.

Lastly, due to strengthened foreign currencies compared to the U.S. dollar, we received a benefit during the quarter of $11 million in revenue and $0.04 in diluted earnings per share, most of which relates to our Merchant Services segment.

Looking ahead for this segment, we expect a Merchant Services operating margin of between 25.1% and 25.4% for fiscal '08. For the third quarter, we are expecting our Merchant Services operating income dollar growth to range from a low single digit percentage decline to a low single digit percentage increase, primarily due to the non-recurring card association incentive revenue realized during our fiscal '07 third quarter. Due to the non-recurring nature of this impact, however, we expect a return to stronger growth in our fourth quarter.

To a lesser extent, we also expect our third quarter earnings growth will be impacted by our year-over-year check guarantee results, as previously discussed. In addition, due to the timing of certain HSBC interchange pricing adjustments last year in our Asia-Pacific channel, we expect a modest headwind in our current year third quarter and a similar tailwind in our current year fourth quarter.

Lastly, we are also expecting a positive impact in our fourth quarter from anticipated changes in the Canadian market interchange structure. As a result of these factors, we are expecting third quarter diluted earnings per share of between $0.39 and $0.42, and fourth quarter diluted earnings per share of between $0.48 and $0.52.

Moving to Money Transfer. This segment operating margin was 3.6% for the current quarter, which reflects a significant decline compared to the prior year, primarily due to the factors that Paul discussed combined with our branch based high fixed-cost model. For fiscal '08, we are expecting a Money Transfer operating margin in the mid to high single digit percentage range.

Our corporate expenses increased 4% during the quarter and we continue to expect fiscal '08 expense growth ranging from 0% to growth in the low single digits. During the quarter, we completed the facility consolidation plan that we announced in March 2007, and incurred a modest amount of related restructuring charges. Based on our segment guidance, we expect a fiscal '08 total Company operating margin of 18.8% to 19.1% 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 now to our non-operating line items. We expect $12 million to $14 million in income from the net of our interest and other income, and interest and other expense during fiscal '08. Also for fiscal '08, we expect minority interest, net of tax, of $8 million to $10 million, and an effective tax rate of between 33.5% and 34%.

Lastly, we expect average diluted shares outstanding for the fiscal year to be in the range of 80.8 million to 81.5 million. During the quarter, we completed $19 million in open market share repurchases at an average price of $40.09 per share, including commissions paid.

Capital spending for the quarter was $13 million, which primarily related to technology spending, including for our new G2 platform in the U.S., in addition to merchant terminal spending and our facility consolidation plan. For fiscal '08, we continue to expect capital expenditures of $40 million to $50 million.

The $9 million on our business acquisitions line for the quarter primarily represented our Discover merchant portfolio acquisition, Money Transfer branch acquisitions, as well as a customer list and long-term merchant referral agreement in our Canadian channel.

Moving to the balance sheet, our reported cash increased due to strong cash flow generated during the quarter, which included $52 million relating to settlement processing. The majority of this $52 million relates to temporary timing differences, partially due to our Hong Kong back end system conversion. These timing differences will likely reverse during the second half of fiscal '08.

As previously discussed, our cash balances include amounts that we hold related to merchant reserve funds, which totaled $127 million at the end of the second quarter. This reflected an increase of $15 million compared to the end of the first quarter, primarily due to our Hong Kong back end system conversion. Prior to this conversion, HSBC was holding this cash on its balance sheet in connection with our transition services agreement.

In addition to merchant related reserve funds, our cash balances include other forms of operating cash that is either needed to manage our business or that reflect timing differences, such as cash in our Money Transfer branches or cash related to settlement processing. The remaining non-operating cash that is available for acquisitions, share repurchases or other strategic initiatives was approximately [$130] million at the end of the second quarter. Our primary strategy for this excess cash is to focus on seeking new acquisitions which we believe represent the highest potential return for our shareholders.

Paul will now discuss our fiscal '08 guidance. Paul?

Thanks, Joe. Based on current trends and our ongoing growth strategy, we are raising our revenue guidance for fiscal 2008 to a range of $1.231 billion to $1.257 billion or approximately 16% to 18% growth over $1.062 billion.

We are also raising our fiscal '08 diluted earnings per share guidance to a range of $1.89 to $1.96, reflecting 7% to 11% growth 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 European markets, and the strength of our ISO channel, I continue to be very optimistic about our future.

Operator, we'll now go to questions.

(OPERATOR INSTRUCTIONS). Tien-tsin Huang, JPMorgan.

Happy New Year, by the way. I guess let's drill down on Money Transfer. The 4% operating margin was a bit of a surprise. It looks like the implied operating expenses there actually climbed a little bit sequentially? Just trying to better understand what drove the change. Was it commission pressure? Were there some branch closing costs there as well?

I think most of it, because the model is different than the Asian model, where transaction growth rates were to our favor as those rates of growth have slowed from years prior. And we've remained competitive on pricing, has bigger impacts on the bottom line, though we did close a few more branches -- or a lot more branches than we would have historically. But if anything, we've been reducing expenses, not increasing expenses. So this is really a pricing issue in the market coupled with the factors that Paul outlined in his comments.

Okay. So how has pricing competitively changed here over the last quarter or so?

I think over the quarter there hasn't been as dramatic a change. As we said on previous calls, we had a large change December prior, so we are through that large increase. But as Joe said in his comments, the outlook for the business continues to be uncertain as it relates to the overall market because pricing continues to be a pressure, because of immigration issues together with construction and other factors that, again, Paul mentioned.

So I wouldn't say that it's stabilized. I would say that it has slowed in terms of declines but it has not abated entirely.

Okay. I also had a couple of questions on just the broader income statement. First, the cost of service line was flat sequentially, which was obviously a positive surprise. Any one-time items there worth calling out?

Other than the couple of credits that I talked about that we received in the quarter, that would have helped that line. But I think the biggest impact was in the second quarter, it grew 10%. In the first quarter it had grown 18%. The biggest difference there was the annualization of the Asia-Pacific acquisition, which is heavily concentrated in cost of service. Other than that, there is really nothing else driving that.

And then check -- my last question -- check and gaming, I'm assuming that's in that line as well. Did you call out the dollar amount? And also can you just remind us how big your check and your gaming business is in the aggregate and how that's growing and how the margins compare to the greater firm average?

I'll start with your last question first. The check and gaming business is not something that we've broken out. It's a smaller part of our business. It's less than 10% of our revenue. We've mentioned it now because of the losses have gotten a little bit higher. And it probably will cause a growth impact in the third quarter because third quarter last year was just an unusually strong quarter. I actually mentioned it in my comments on last year's third quarter call.

The margin on the business is very good but it's a type of a business where the revenue kind of stays the same and the earnings is dictated by the success of your collections. And our collections have not been as successful as we have been. And the margin lowers as a result. And we're attempting to manage the situation, go back to some of the merchants that we have and look for higher pricing to compensate ourselves for the lower risk. But it's hard to do that quickly.

Just a comment on the revenue side, I think as we've announced on -- in the gaming group in particular, we've had a number of strong signings of the growth rates both for the credit card cash advances together with the check cash advance business, which together comprise our gaming business, are doing well, from a revenue standpoint. And we view this as really a cyclical issue for the economy more than anything else.

And just to quickly quantify the dollar exposure on the potential losses on the check guarantee side?

Yes, it doesn't sound like a reserve that is sitting out there in the conventional sense of the credit card balance. These are losses that come from, as Joe said, we guarantee checks. And if the checks bounce, we collect the checks and we provide a reserve in the event that we don't collect the check. And those rates of collection improve and decline, and they have for the last 10 years, and they'll continue to. I don't think this is -- this is more of an anomaly than a trend.

Got it. Okay, thank you.

Liz Grausam, Goldman Sachs.

Just some questions on the overall Merchant Services margin. A little bit surprised to see you bring down the expectations for the margins for that group overall from your previous guidance, given how much strength you're seeing on your revenue lines and given how much currency benefit you had out in Canada.

If you could walk us through -- how much [of] the business mix is changing the margin profile of that business? How it is you think about potentially reinvesting some of the gains that you get from currency and managing the margin of that business? And give us some perspective on where you see that directionally moving, if you can, into '09.

Well, in terms of the margin guidance for the year, some of the decline or the fallback from our guidance that we had in the first quarter was due to just stronger ISO growth, more ISO revenue. The ISO's continue to do very well and that creates more earnings. But it has an impact on the margins. The check guarantee losses, as we talked about, was not something that I was anticipating as of the first quarter and that had an impact on the margin.

We are still investing internationally in both Europe and in Asia. And that has an impact on the margin. And then lastly, the facility plan consolidation -- we took a little bit higher duplicate expenses in the course of integrating the two facilities that we have there. And that has a temporary impact on the margin as well.

I don't think we're in a position to talk about -- or just not ready to go into fiscal '09 guidance. Obviously, the -- our intent is to continue to invest internationally and get some gains from those investments. The ISO channel will likely continue to grow and there likely will cause some level of margin impact there. But as we get closer to the year, we will talk more about that.

Great. And then on your Money Transfer business, obviously, a drag to growth and a drag to the overall Firm's margin and profitability. Is there any inflection point that you see on the horizon? It sounds like you're going to anniversary some pricing changes. And has the underperformance and greater cyclicality of this business brought you to think about more strategic options for this business going forward? Or are you still fairly committed to the Money Transfer segment?

Well, let me tackle that one. We're not pleased with the performance. I mean, 8% transaction growth in this environment domestically is actually not bad. We are quite pleased with our performance in Europe. But overall, you're right; it's a drag, particularly on the earnings and the anemic margins we had on the business clearly hurt us overall.

This was a business that was accretive to our growth rate and produced excellent margins. So this has been kind of a steady deterioration. And I think we all know the reasons. Does that result in us doing something with this asset? I think we look at every single asset we have. And it's our responsibility to make those decisions. I'm not prepared to say anything at this point. We are -- continue to be committed to the management team there. I think they're very smart. I think we still have the best product out there -- truly, the best product out there. But I would be disingenuous to tell you I'm pleased with the results; I'm not. So, it's an active discussion.

Andrew Jeffrey, SunTrust Robinson Humphrey Capital Markets.

Could you talk a little bit more about Asia, both from a revenue growth standpoint and from an ongoing investment standpoint? Obviously, you had a very strong quarter. The guidance you gave for the full year kind of implies maybe not as comparably robust as second half. Maybe you could touch on that.

And then I think in past discussions you've talked about '08 as being sort of the focal point of your investment in Asia. Is it right to think about the margins expanding as we move our way into '09, without getting into specific guidance issues there?

I would say that we are clearly running this business for growth, not for margin expansion at this point. And while we -- why I have said publicly, and I'll be happy to say again, that ultimately I think at the Asian business produces accretive margins. And I will stick to that. It's going to be a long time. I would think it would be not wise to think that we are going to expand these margins aggressively getting into fiscal '09. It's a longer investment cycle. We're just starting to make some serious investments in mainland China. And it's going to be -- having just come back and seeing that firsthand, it's going to be awhile before those investments pay off.

And that is one of the reasons that Joe pointed to for deteriorating margin in the Merchant Services segment and some of the guidance you're seeing that we're giving going forward.

So I'd say stay tuned on that. I am very bullish on where that growth is going. I think there are a couple of gives and takes right now. We're still ridding ourselves of some merchants, and that's why you're seeing a little lumpiness in some of that growth on profitable merchants that have an impact on some of the revenues.

But overall, I'm very bullish on that. And I think you will see some margins. I'm just not going to be pinned down right now as to when we will see that expansion.

Okay. And as far as the second half revenue growth is concerned, is the implication that there was some non-recurring revenue benefits in the second quarter in Asia?

In Asia, the comment that I made was -- well, in the second quarter we did have a small amount of a card association incentive revenue that provided a bit of a lift. Is that the point you're asking? Or is this the interchange related adjustment?

I think he was unclear as to -- Andrew, I think the answer to the question is that you were unclear about why it looks like there is some revenue moving around. It wasn't -- Joe talked about headwinds and tailwinds in the third quarter and the fourth quarter. There were some interchange adjustments as this thing settles in. There was some bucketing issues that we are dealing with.

Right. In the course of the transition services agreement for HSBC there was some variability in the interchange that was applied to the business in the third and fourth quarter. It's -- essentially, the short story is that the third quarter last year was abnormally high. The fourth quarter was abnormally low. So, for the Asia-Pacific revenue over the next two quarters you may see a small slowdown in the third quarter, a tailwind in the fourth quarter. Net result for the full year is a non-impact and we just wanted to give you that sensitivity before we got to those two quarters. But not a material impact to the total Company. It may play with the growth in Asia for the next couple of quarters, that's all.

You know, I have one of the things that's around my favorite subject, Asia. I believe that we are better -- this is a strong statement -- I think we're better positioned in Asia, and in China in particular than anyone, truly. And we have more of an infrastructure already. We have more of a focus. And quite frankly, although it is small because of the nature of the beast, I think we probably have a larger portfolio than anybody. So it is a great business.

Okay. And then one last one if I may, just in the domestic merchant business where you clearly continue to take share -- any changes in the competitive environment? any pricing concessions on these two new ISOs you signed in the quarter? Or are we just saying the over-execution or outperformance of your book of business?

I think you have two things happening -- they have the latter -- you have our big ISOs, the whole ISO portfolio, but primarily driven by our big ISOs, continuing to just go from strength to strength, doing extremely well, with a lot of aggressive things they're doing, like free terminals, et cetera. These are very entrepreneurial managers and doing a great job. The two ISOs that we signed, quite frankly, are smaller so they would actually not enjoy the full rate that the bigger guys do. So although they have very competitive rates, our ISOs, the larger they become, the better the rates they enjoy.

So, there is a bit of a pressure always as your ISOs grow. But then you offset that with new ISOs, quite frankly, at a higher rate until they produce those kinds of volumes. And it's producing a nice end result.

Great. Thanks a lot.

Adam Frisch, UBS.

Just wanted to -- I think a bunch of the previous questions cover this in bits and pieces, but I wanted to kind of just make sure we have the right picture on the merchant side. Obviously check is causing a little bit of volatility with the margins, if it's a quarter here and a quarter there, fine; it's no big deal.

But I wanted to just make sure on the merchant processing business, which is the business that everyone focuses on because it is your largest, that the formula or the way of thinking is still the same -- the U.S. is fairly stable and growing and you are investing in Europe and Asia who will eventually become more profitable with better growth in future years. Has anything changed from that general formula?

You know, Adam, I couldn't have said it better. That's exactly what the story is. We have solid growth with a lot of visibility domestically. We have solid opportunities in Asia, in Europe, where a significant investment mode in both of those. And when we say domestically, I really should say North America because we're referring to Canada as well. So that's exactly the story.

Okay. And the margin on the U.S. business is fairly stable from the last couple of quarters to where we are looking going forward? Nothing has changed there either?

In terms of the -- no, there is really no big change other than what I have highlighted.

Okay. And then the natural follow-up then, if check cashing is causing some volatility on the margin side, we've seen First Data kind of get out of the business or attempt to at certain points, what are you guys thinking about your check cashing business? Would you consider scaling it down or getting out of it?

We have a couple of different businesses within check. We have our gaming business, and that, quite frankly, is doing terrifically. And although we're seeing a little uptick there, it is a more collectible amount. And really it's a business that we're committed to.

The guarantee business, which is mostly for smaller merchants, and it's just what it implies; it's a guarantee on a check. That business dynamic has changed dramatically over the last 15 or 20 years. And the quality of the checkwriter today, quite frankly, has deteriorated. So you're having a scenario where a check guarantee was significantly less expensive than a bank card rate. And now they are significantly more expensive than bank card rates because the whole volatility.

So -- and then when you go through an economy, those riders are typically the ones that are impacted by things like mortgage prices. So that is a business. It is small, though. I mean, we haven't given a huge amount of guidance on that, but it's a very small business to us. And it is having some impact. But I would tell you, if the whole thing went bad, it is not a major deal here for us.

Okay. So I just wanted to make sure the important parts of the business are the same story.

And then I just wanted to focus on interchange for a second. Have there been any material changes there in the last few months or any anticipated in your fiscal second half that could help you on the growth and/or margin side?

Now that we're a global company, interchange is a pretty complicated subject because you have interchange implications and in the EU, you have interchange in Canada, interchange in Asia --

Maybe we can just focus on the U.S. since that's your biggest market.

Okay. Jim, why don't you take that, please?

There were changes, both MasterCard and Visa this past summer. Nothing in the fall, but for the spring at least to date, Visa is talking about some increases on their premium cards, the signature cards. MasterCard hasn't announced anything as of yet. And as well, Discover, now that we're an acquirer for Discover, consistent with the Visa/MasterCard structure, there are going to be some changes there as well. They're not anything close to what you saw in years prior. But they will have some impact; I think it will be immaterial for this fiscal year.

But as Joe mentioned, the Canadian market on the Visa side is going through some pretty substantial changes to align more to a U.S. model than the existing Canadian model. And that will likely have some positive impact.

Okay, guys. Thank you very much.

Adam, let me do one follow-on too, to be clear. I said the whole business could go bad in guarantees -- that would be a little bit of an overstatement. What I mean is that the business could experience some significant write-offs as a percentage. But because it is a relatively small piece of our business, it wouldn't have a major impact.

Got it. Okay, thanks again.

Kartik Mehta, FTN Midwest.

Hey, Paul, I just wanted to make sure I understood some of the comments you've made. I think, Joe, you indicated there were four primary reasons you gave for kind of the merchant margins being a little bit lower, stronger ISO growth, the check guarantee losses, investment internationally, and I think facility consolidation is what you said. If I understand right, you had already anticipated investment internationally in facilities consolidation. And after hearing your thoughts on the check business, Paul, it seems like the reason the margins are going to be a little bit less than you anticipated is just because the ISOs have been really strong. And that would be the primary reason. Would that be correct, Paul?

That is the primary reason. If we had to list them in terms of 1, 2, 3, 4, then ISOs is the primary reason.

As it relates to the facility consolidation, there were expectations of duration we would complete it. And it ran an extra month or so longer than we had originally planned; a host of reasons that have a period expense, which would have been higher than what Joe would have originally expected.

Okay. So would that be the second then, Jim, the second biggest reason in your opinion?

I don't know that I can rank it, Kartik, but --

That was a slippery slope I started there, sorry. But I would say that it wasn't -- while we forecast, we all have expectations; sometimes we meet them and sometimes we were late. And we were a little -- we were more focused on the service side of our customers and making sure that it was a smooth conversion. And that's why it ended up running a little higher in terms of expense than we had planned. But I don't think it would be easy to rank them all just here on the phone.

Far and away the largest year-over-year impact is the ISO.

Absolutely.

Far and away the largest.

And then one question, just to understand the guarantee business. I think, Jim, you said this is not an anomaly to losses. The losses you have already incurred, does that mean in the coming quarters you could get -- you could recover those and they'll be a positive and this is just somewhat of a temporary loss on the guarantee side of the business?

My comment, Kartik, relative to an anomaly is that this will occur from time to time. We record losses based on a historical rate of collections. When those collection rates decline, we increase the loss rate that we record in the income statement. So I don't anticipate that we're going to collect at a higher rate in the next quarter to offset what we've just charged off; largely because the economy has turned and businesses like a guarantee business, the check guarantee business, are going to feel that.

I'll tell you, one of the reactions we do have, instead of -- there was a question earlier about are you going to get out of the business or would you do something. What we can do in the guarantee side -- which, quite frankly, we do do, and sometimes it does result in the customer loss -- is that we approach customers and raise the rates, sometimes dramatically. If you have been experiencing X loss factor, and now it's X plus Y, we factor that in. We go back to the merchant. They either accept that increase or we no longer provide the service.

And a final question, Paul. You've talked about the gaming business and it is doing well. Obviously, a big competitor of yours had some issues here. Another competitor is trying to get out of the business. Does that provide opportunity for you to increase market share or is the market so competitive that that might not necessarily be the case?

We actually are picking up some customers. We've been successfully competing for some time. But I think our biggest competitor having some issues, it's not something that we've been reveling in by any stretch of the imagination, but where that offers market opportunities, we will take advantage of them. And quite frankly, we have signed a couple of notable customers recently.

Paul Bartolai, Credit Suisse.

We've talked a bit about the benefits that you received in the quarter. Any chance, just kind of given we have an issue with a year-over-year comp coming up in Q3, could we maybe quantify some of the benefits you received in Q2 this year from the credits you received?

They're not large enough to go through one by one and try to quantify it. The point there was only to let you know that they're out there. I think that the biggest year-over-year impact is the Canadian Card Association incentive that we got in the third quarter of last year. I've spoken about it a few times over the past 12 months. It was a multimillion dollar revenue and earnings impact, as I said on the last quarter call. Out of respect for the Card Association, just for competitive reasons we're not able to quantify that. And one of the credits we got was actually from a card association and we'd prefer not to quantify that. So, I'd like to do that, but we're just not prepared to break that out at this time.

Right. But what about in 2Q of this year, the benefits you guys received. Any chance you could -- I mean, not even one by one but maybe just an aggregate? So we could get some magnitude of the impact?

No, we're just not prepared to break that out at this time.

Okay. We've talked a little bit about the check business. Maybe if we could just go a little bit broader and talk about the macro impact in general. I mean, it certainly seems like the economy is something that could impact the check business and maybe some of the other businesses over the next few quarters. I mean, any comments on what you're seeing in the business in terms of the macro outlook?

So we're talking about the U.S. macro outlook?

Yes, I mean, just any change you're seeing in spending habits volumes or anything like that or --?

Aside from the check business itself, I wouldn't say that we've seen a big impact. Our December was strong growth. It wasn't as strong as November, so maybe there we were off, maybe just a little bit there. But it's only January 3. We haven't reviewed the full set of reports for the month. But I'm not seeing any major impact or new trend in our domestic business as a result of the economic environment.

So Paul, let me repeat just that because I think that's an important point. We did see a pretty blockbuster Thanksgiving period. And we did have a good Christmas but not to that level. So we did see -- we're kind of seeing what you're reading about; a little bit of a consumer slowdown. Still, because there is a lot of conversion from cash to check and to credit, we're still getting that uplift. And the growth was still really, really good. It was just really good around Thanksgiving and not as strong in December.

Okay, great. And then last question. And again, I think we've kind of beaten this to a dead horse, but I'm going to do it a little bit more anyways. When you look at the merchant margins, I mean, I understand some of the impacts and then there's some give and takes. But I mean, just given some of the strong volumes you've seen and the currency benefit, I'm still a little bit surprised at the lowering of the merchant margins. I mean, you kind of even mentioned that the gaming business is not that significant.

Has anything else changed in the base business, specifically the U.S. merchant business, from when you gave guidance the beginning of the year? I mean, it just seems with currency and some of the strong volumes, we're not seeing maybe as much leverage as we've seen in the past in that business.

Again, the ISOs continue to grow very strong. And as they grow strong, the margin is impacted by that growth. The non-ISO aspect of the business has actually improved over levels that we've seen in '07; we're getting a modest amount of growth from those channels. And I hope to see continued growth. But there has been no negative trend on the non-ISO side.

The margin hasn't moved that much in terms of our guidance. But to the extent that there has been some movement, it's largely for the factors that I described, which is ISO channel, investments in international, the check guarantee, and some higher expenses relating to the integration of that facility.

Okay, great. Thank you very much.

David Koning, Robert W. Baird.

Yes, I got just a couple more questions on Asia-Pacific. Over the last couple of quarters, I think you'd done -- I think you did 20% sequential growth last quarter, and about 15% sequential growth this quarter. I know you mentioned some kind of non-recurring items, et cetera, but that would suggest very strong year-over-year growth if that sort of pace would continue. And I'm wondering if there's any seasonality to maybe the Q1 and Q2 timeframe and that maybe they're just weaker natural quarters in the back half of the year.

You're talking in Asia? I don't think there is a huge amount of seasonality differences. I think that there's a lot of moving parts. And as we're investing in the business, the revenue has accelerated.

I think it would be difficult to take a look at it on a sequential basis. That's not the way that I look at it. But we just look at it on a year-over-year and how their results are trending. So, I don't have a clear answer to your question. I'm not sure that there's a pattern there.

Okay. And then how many sales reps do you have now in Asia-Pacific?

We last reported a number, that we've increased that, so, we've actually decreased a little bit in India as we're trying different models. We're kind of notionally in the 300 range with upticks in some areas and a little downtick in others. But quite frankly, as I said earlier, you could double, even triple that sales force. Once we build the proper infrastructure and roll out all of our products and get our conversions done, I mean, I think these markets can justify massive numbers.

We've added significantly in China, for example. We have not added -- in fact, actually took some away in India. And the rest of the markets are pretty stable, adding a little bit pretty much in every other market, but not significantly.

Mark Sproule, Thomas Weisel.

Last quarter we talked a little bit about the direct sales force and the improvement that you've started to see there and how that might help out a little bit. How is that progressed over the last quarter? And are you still seeing some improvement there?

I don't think there's any notable change from what we said previously. It continues to be very positive. New leadership that came in about 18 months ago has revamped the senior management team. And it's a variety of factors that have led to growth year-over-year, as Joe mentioned in his comments, both from our alliance with Comerica and our core of direct business; both are seeing good growth in the base and good growth in new sales across the board.

Okay. And then how is that -- I mean, is that helping to offset some of the ISO pressure that you're seeing on the margin side?

It is.

It is but when you put them in the context we're dealing with -- I don't know exact count, but somewhere close to 100 ISOs, all of which touch hundreds if not thousands of independent sales representatives as compared to our U.S. sales force, which is substantially smaller. So we just -- we're at a disadvantage. But again, the ISOs are focused on a vertical -- on a market, namely the smaller merchants, where our focus is for midmarket merchants. So we try to stay away from each other relative to competition and complement each other. And I think that we're going to consistently see stronger growth out of ISOs just because we have more of them, then we're going to be able to support from a direct sales force; at least at this time.

Okay. And as you've signed new ISOs, you said that two of the ISOs that you signed this quarter were on the smaller side, are you taking on an increased level of risk associated with the transactions that they're doing? Or have you been able to stay away from some of the higher risk type of activities and maintain a lower sort of tolerance there?

The new business that we've added either through our direct channels or through ISO -- or adding new ISOs, we have not changed our risk profile. So we are ever vigilant to stay away from problem areas and any new ISO relationship that we engage goes through the same credit review. And they are obligated to follow the same procedures as everybody else.

Got you. And then on the check cashing side -- and maybe stay away from the continual discussion of, but -- at what point does it get large enough that you separate that out from the other merchant platform businesses? I know you say it's less than 10%, your Money Transfer business is roughly 10% anyway. So, I mean, how big does it have to be before you start to separate that out and we can focus in on what the core business is?

I think the check business has got a long way. It's not a separate business in the Company. So, I don't -- and Joe and others would make that decision, but I don't see it in the near-term.

It's got a long way before it's 10%.

Yes.

Okay. And then on your cash situation, obviously, you continue to build up a lot of cash. Is there -- from an acquisition perspective, are you still looking aggressively in the international arenas? Are you seeing a lot more activity out there? Has the pricing sort of become more normalized and rational versus where we would have been (technical difficulty)?

Well, in terms of the markets, I think that clearly given First Data going private is going to have an impact on international expansion, as I think most people know. I think there's still expectations of strong pricing internationally. I think that's going to take some time to reset itself. But we see a very -- as Paul said, many times a very strong pipeline. And we're optimistic that we'll be -- continue to be successful on the international acquisition front as we had been in the past.

Greg Smith, Merrill Lynch.

Just following along on the acquisition commentary, just wondering if there is any chance that you might be looking at anything larger? Obviously, we've got a couple of public companies facing some issues. Is there any chance you may be shifting and possibly looking at a larger potential acquisition?

Wow, Greg. How do I answer that one? Well, we look at lots of stuff. And just because something is large or public wouldn't discourage us, as long as the fundamentals made sense. We kind of like doing smaller deals. We like doing deals that are strategic and [where] markets or potentially open up new markets to us.

But that's not to say we wouldn't consider something. So, yes, we're looking at lots of things. And I would tell you, though, that most of our focus is indeed internationally, as Jim just alluded to.

Okay. That's all I had. Thank you.

Robert Dodd, Morgan Keegan.

On the Discover portfolio inclusion, I know it's small, but can you give us an idea what your plans are to market that with your direct sales force? And then also how that's flowing through to your ISOs at this point?

Well, Robert, we are very -- we're just delighted to have done that deal, and with the first guy to market with that to our ISOs -- or to the ISO community. It is being marketed exactly the way a Visa/MasterCard transaction is. And many times, priced exactly the same way. And it is typically bundled to a merchant. So if you are a merchant target of our direct sales force or ISO, we would offer you an all-inclusive products. And you would get reporting that was inclusive and a common number to call for any customer service inquiry, funding. I mean it's truly a product that you could accept and not have to go to any additional amount of work to offer that to your customer.

We are seeing a nice uptick. It's another revenue opportunity for our ISOs. It's a revenue opportunity for our direct sales force. And we were able to acquire some of that business that Discover had signed where we had the Bankcard relationship.

And Jim, you want to add anything to that?

In terms of your question on ISO relationships, the program that we put in place and we have previously announced I think four, our four major -- our largest ISOs have already been converted and are participating in the program. In those cases, we purchased from Discover the merchants that related to the Visa/MasterCard accounts of those ISOs. And then simultaneously turned around and sold them to the ISOs, so that they enjoy the full benefit of not just new business, as Paul described, to sign up as a one-stop shop for statement and merchant contract, and the like, but as well they enjoy the full benefit of pricing for their existing portfolio.

So, they've been all very pleased with the program. And we are anxious to convert the rest of our ISOs -- hopefully have that done by the end of this summer.

Okay. Financially on that -- I mean, I'm trying to quantify in my head and I don't know if I can figure it out, to be honest -- what kind of impact could that have on your margins going forward as well? Because obviously we're talking about a sort of a non-organic increase in the ISO revenue, which is lower margin and will have a depressing effect. But I mean, is that going to be material or are you going to give us more indications of that at a later date? Or can you give us any hints now?

Well, I think the only -- it's all positive, both for our direct business, the spread increase from what we were earning on a non-bank card fee versus now as a full rate or effectively a full rate is all positive for the Company; even taking into account the purchase price of the portfolio.

As well for their ISOs where we charged a fee for switching the transaction to the ISO, we're now charging them a full end to end processing fee. So that's also additive. The offset to it are really two factors -- one, the ISO margin overall would be relatively consistent for a Discover transaction as a Visa/MasterCard transaction for the ISOs, so that's a drag on it. And secondly, Discover, while it's got great opportunity to grow, it's still relatively small in the marketplace. So in total, it's not big enough to have an impact; it's all positive, but I don't think it's going to be that noticeable. But it will help margins across the board.

Okay. If I can get one more question. Just moving on to DolEx, can you give us any hints on kind of -- are you looking at any changes in the pricing model or the commission model, rather, because obviously any adjustments to pricing at your end, as far as I understand, do not affect the commission payouts at the far end. So obviously that's where you get a margin hit. Have you have any discussions with any of your agents or your large payout agents with regard to a change in pricing at their end?

No, the short answer is I don't believe we've had any direct conversations. Many of these relationships are multi-year agreements. I think it's a good point, but those are based on the opportunities within the agreement. And as I said earlier, we're considering all options to reduce expenses, whether it's at the branch level or the corporate level, or at the settlement level.

Okay, thank you.

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