環匯 (GPN) 2008 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to Global Payments' third quarter fiscal 2008 earnings conference call. (OPERATOR INSTRUCTIONS) As a reminder, today's conference will be recorded. At this time, I'd like to turn the conference over to your host, Vice President of Investor Relations, Jane Elliott. Please go ahead ma'am.

Thank you. Good afternoon, and welcome to Global Payments' fiscal 2008 third quarter conference call. Joining me on the call today are Paul Garcia, Chairman, President and CEO; Jim Kelly, Senior EVP and COO; and Joe Hyde, EVP and CFO. Before we begin, I'd like to remind you that some of the comments made by management during the conference call contain forward-looking statements that involve a number of risks and uncertainties. For these statements we claim the protection of the Safe Harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. While these statements reflect our best current judgment, they are subject to risks and uncertainties that could cause actual results to vary which are discussed in our public releases, including our most recent 10-K. We undertake no obligation to revise any of these statements to reflect future circumstances for 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 a press release filed as an exhibit to our form 8-K dated today, March 27, 2008, which may be located under the investor relations area on our website at www.globalpaymentsinc.com. Now I'd like to introduce Paul Garcia. Paul?

Thanks, Jane, and good afternoon, everyone. Before I begin, I know most of you have heard about the tragic passing of our colleague, Raul Limon, who served as President of our Money Transfer segment. Last weekend Raul was involved in a fatal car accident in Mexico. He was a visionary, a superb executive, and a good friend. Raul will be greatly missed. As a credit to Raul, his management team is deep. To that end, George Zelinski will assume responsibility for North America and Jose Salinas will continue to run Europe. Both George and Jose have been with DolEx since its inception and will report to Jim Kelly.

Moving now to our financial results. We are pleased with our third quarter performance. For the third quarter our revenue grew 19% to 310 million and our normalized diluted earnings per share grew 5% to $0.44. Our growth was primarily driven by solid performance in our Merchant Services segment. In addition, our Money Transfer segment had improved revenue growth primarily due to recent favorable pricing trends. Now let's look at the segment details. Starting with our Merchant Segment our ISOs continued to drive strong organic growth in our domestic direct channel. Our credit and debit card transactions grew 27% for the quarter with the revenue growth of 26%. Based on these results, we are raising our expectation for fiscal '08 revenue growth to the low to mid 20% range for our domestic direct channel. In Canada our credit and debit card transactions grew 3% while our revenue grew 12% as anticipated. Revenue growth was largely driven by a favorable Canadian currency exchange rate. In addition, we expect to benefit from pricing initiatives related to changes in the Canadian market interchange structure starting in April 2008 with the majority of the benefit to be realized in fiscal '09. Based on this expected benefit and a continued strong Canadian currency exchange rate, we are raising our fiscal '08 revenue growth expectation to the mid teen percentage range for our Canadian channel.

Our Asia-Pacific channel had strong revenue growth of 29% for the quarter. Due to these results, we are increasing our expectation for fiscal '08 revenue growth for this channel to 44% to 47% on a reported basis, or the low to mid 20% range on a pro forma basis. This growth reflects solid momentum, gain from our continual sales initiatives and investments in addition to strategic pricing initiatives and a positive turn in our revenue growth from Taiwan. We continue to make operational progress on our goal to be fully converted from HSBCs back and front end system platforms by calendar 2010. Our central and eastern European merchant channel had revenue growth of 18% in the third quarter with growth in credit and debit card transactions of 13%. Our revenue growth was driven by 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 pricing reductions granted on contract renewals. Based on the continued strong check currency exchange rates, we are raising our fiscal '08 revenue growth expectation to the low to mid teen percentage range. Our domestic, indirect and other revenue declined 8% during the quarter 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 this area.

Moving on to our Money Transfer segment. In the U.S. our transactions grew 8% for the quarter while our revenue increased 4%. These improved results are primarily due to the anniversary of last year's competitive domestic pricing environment in addition to steady transaction growth. Although pricing trends in this business can change quickly, we with are very encouraged by the stability of the current pricing environment. During the quarter we closed a number of unprofitable domestic branches and we ended the quarter with 825 domestic DolEx locations. In Europe we ended the quarter with 71 branches compared to 57 locations last year. For the quarter we achieved 27% transaction growth and 33% revenue growth in this channel. For fiscal '08 we continue to anticipate Money Transfer segment revenue growth in the high to mid single digit percentage range. I'll now ask Joe to further discuss our financial results. Joe.

Thank you, Paul. In our press release we included GAAP income statements and schedules that reconciled GAAP to normalized results. Our third quarter GAAP results include a non-recurring non-cash operating tax item of $7 million that reduced our SG&A expenses. The impact of this item has been excluded from our normalized results. We were pleased with the performance of our core businesses during the quarter. Ow Merchant Services normalized operating income grew 5% to $65.1 million. These results were better than expected due to the strong revenue growth that Paul discussed in addition to lower than anticipated operating expenses. In particular, we did not see a slowdown in our U.S. revenue growth during the quarter as a result of the economic environment. Our ISO growth was steady during the quarter and we saw modestly higher growth in our direct sales channel due to improved sales force effectiveness. As expected, the successful market penetration and high growth in our ISO channel lowered our total company operating margin on a reported basis during the quarter. Importantly, however, our contribution margin from this channel has remained steady with the prior year and our contribution income has grown over the prior year.

Also in the U.S., our operating expenses were lower than planned which includes a benefit from our facility consolidation program and lower than expected merchant operating losses from credit and debit card processing. As expected, we also received a foreign currency benefit during the quarter similar to level we saw in our second quarter. Partially offsetting these favorable impacts were non-recurring Canadian card association incentive payments received in last year's third quarter in addition to our higher losses in our check guarantee channel compared to the prior year. Both of these items were previously discussed and anticipated and we expect our check guarantee loss trend to improve during the fourth quarter. Looking ahead at our Merchant Services segment, we expect an operating margin of between 25.2% and 25.4% for fiscal '08.

Moving now to Money Transfer. This segment's operating income was $1.2 million for the quarter which was consistent with our second quarter results. This is significant because we have historically experienced a sequential decline in earnings between the second and third quarters as the third quarter has seasonally lower money transfer volumes. We also incurred costs during the quarter associated with the unprofitable branch closures that Paul discussed. As such, we are encouraged by our money transfer results in the quarter and we are beginning to see a stabilization of this business. If the improved pricing and steady transaction growth trends that Paul discussed continue during our fourth quarter, we would expect to see growth in money transfer earnings and operating margin in that period compared to the prior year. For fiscal '08 we are expecting a Money Transfer operating margin in the mid to high single digit percentage range.

Our corporate expenses increased 2% during the quarter and we continue to expect fiscal '08 expense growth ranging from 0% to growth in the low single digits. We also expect a fiscal '08 total company normalized operating margin of 18.9% to 19.1%. For our non-operating line items we expect the following for fiscal '08: $12 million to $13 million in interest income net of interest expense, $8.5 million to $9.5 million for minority interest net of tax, an effective tax rate of between 33% and 33.5%, and average diluted shares of approximately 81 million. Capital expenditures for the quarter were $9 million which primarily related to technology and merchant terminal spending. For fiscal '08 we continue to expect capital expenditures of $40 million to $50 million.

Moving to the balance sheet, our reported cash increased to $388 million due to strong cash flow generated during the quarter partially offset by timing differences relating to settlement processing as expected. Excluding our merchant reserve funds and other operating cash, we had approximately 170 million in excess cash at quarter end. Our primary strategy for this excess cash is to focus on new acquisitions which we believe represent the highest potential return for our shareholders in addition to future share repurchases or other strategic initiatives. Paul will now discuss our fiscal '08 guidance. Paul.

Thanks, Joe. Based on current trends in our ongoing growth strategy, where are raising our revenue guidance for fiscal 2008 to a range of $1.250 billion to $1.260 billion or approximately 18 to 19% growth over $1.062 billion in fiscal 2007. We are also raising our fiscal '08 diluted earnings per share guidance to a range of $1.95 to $1.97 reflecting 10% to 11% growth over our fiscal 2007 normalized diluted EPS of $1.77. This guidance includes stock option expenses but does not include any other significant acquisitions, restructuring or other charges and the favorable operating tax item that Joe discussed. I continue to be very confident and enthusiastic about the long term prospects of Global Payments, particularly in our international markets and in the continued strength of our North American merchant channels. We are expecting robust growth in our fourth quarter with normalized diluted earnings per share ranging from $0.49 to $0.51 or 14 to 19% growth over the prior year. Operator, we'll now be delighted to take questions.

Thank you. (OPERATOR INSTRUCTIONS) We will take our first question from Kartik Mehta with FTN Midwest.

Good afternoon. Paul, I wanted to get your thoughts on the ISO business, obviously doing extremely well. I was wondering what the drivers are. Is it that you just have a few ISOs that are doing extremely well or is it that you're gaining market share and signing more ISOs or that they're all participating and that's the reason the business is doing so well?

I think, Kartik, it's a little bit of everything. We do have a number of big ISOs who continue to kind of go from strength to strength but we're also signing smaller ISOs who I believe with going to be successful and some we signed a couple years ago are growing to be quite sizable themselves. I can't really pin it on one thing other than we are fortunate to have a very robust group of ISO customers.

Maybe, what's the sustainability you think of this growth? Obviously the comps will get tougher and tougher and I wanted to get your thoughts on the visibility and sustainability of the growth.

Yes. Kartik, I think the the law of large numbers have to kick in here sometime. We are, quite frankly the ISOs are exceeding our growth expectations and our growth budget. Every year we budget for something less and the ISOs seem to exceed it. I believe that they can still sustain above market growth but over time this channel has to slow somewhat.

Paul, I think in your prepared remarks or Joe's prepared remarks he said one of the obvious uses for cash will be acquisitions and I'm just wondering what's the competition like for acquisitions? How has it changed over the past year and do you think it's more difficult or less difficult?

Well, Kartik, it has changed for a couple different reasons, but I think probably the biggest, of course, is that the most inquisitive competitor is no longer aggressively pursuing acquisitions. It doesn't necessarily mean they're not doing it all together, but they are less visible in these activities. I also think that sellers have a more realistic, for whatever reason, objective in mind and I think the acquisition pipeline has never been more robust and I'm confident we'll get some deals done. We promise near term accretion and we promise deals that we can explain to you pretty simply that make sense for our company and fulfill our mission and I hope to deliver on all those promises in the not too distant future.

Thanks a lot.

You're welcome.

Thanks, Kartik.

We'll take our next question from [Charlie Murphy] with Morgan Stanley.

Paul, in the fourth quarter you -- anniversary large conversion. Are there any deals out there for ISOs that you're bidding on that could help the comps in fourth quarter and into fiscal '09?

Charlie, you're right. That is true. We do anniversary a big conversion, but we obviously have baked all that in. So when we tell you we're expecting a robust quarter we, of course, have anticipated the benefit of past signings and, of course, the rest of our business. I mean I'm sure 29% growth in Asia wasn't lost on anyone and we also will be getting a smaller benefit from some of our other activities, including Canada, and at end of the day we're feeling very good about the fourth quarter.

Okay, great. As a quick follow-up, is it possible to remind us what the benefit to EBIT in the third quarter was from foreign exchange?

Joe?

As I said, it was very similar to the second quarter level. The -- is running between $0.04 and $0.05 of a positive impact for the past couple quarters and would likely expect that in the fourth quarter.

Great. Thanks very much.

You're welcome, Charlie.

Take our next question from Dave Koning with Baird.

Yes, hi, guys. You mentioned the Canadian interchange about benefit the last couple quarters and I know it kicks in April 1. I'm wondering sequentially how big of a benefit that is to Q4 and then maybe more importantly on a full year basis how big do you expect that profit (inaudible) to be in Canada?

Dave, sequentially it won't be that large because it's a partial quarter. We've not finished the whole budgeting process on that, so it's a to-be-seen, but we think it will have some impact of some importance for us. We haven't really given a lot of specificity on that. We -- when we give our guidance for fiscal '09 in our July call, we'll be as specific as common sense in the competitive nature of these things would allow us to be. That's why I'm being a little cagey on that, too. We -- you wanted to have as much full disclosure as you can, but you have to understand you live in a competitive world. So I would just summarize by saying it doesn't have a huge amount of impact in Q4. We do think it does have a nice lift for us in '09 and we have not specified at this point, nor am I prepared to exactly how much.

Okay. That's helpful and just one follow-up. In Asia the last couple quarters you've grown mid to high 20%. I know originally you kind of talked about strong double-digit growth. Is there any reason that the growth was so strong recently or is this the type of growth that could continue for the foreseeable future?

Yes. That's a great question. I've said publicly I think Asia-Pacific a 30% organic grower. I just didn't give specific time frames and I'm not prepared to say that we can sustain 29% at this point. I was very happy. I will say though that what we have seen in a turnaround in Taiwan I believe is sustainable. We had -- we continue to do very well l in virtually every market with the exception of India which continues to be slow for us and -- but in terms of sequential growth in India and year-over-year in India, even though that's looking good, although it's a much smaller base. So I got to tell you I'm very pleased and, once again, we'll give some more guidance for '09 in July on that, but our expectation for Q4 is pretty solid growth in AP.

All right. Thanks. Great job.

Thank you so much.

We'll take our next question from Adam Frisch with UBS.

Hey, guys, good afternoon.

Hey, Adam.

Couple quick questions here. SG&A costs and I'm sorry if I missed this on your prior Q&A. I've been bouncing between your call and another one. Your SG&A costs were a little bit higher than we thought. Wondering if that's a greater commission payout to the ISO channel or is there some other dynamic going on there?

I'm going to give Joe a chance to dig that out and I'll first (inaudible) for saying that there's a call that you would leave us for. It's typically, SG&A a lot of the SG&A growth typically is ISO growth and it's kind of a barometer of our ISO growth if you look at SG&A. They do track pretty closely and Joe?

There wasn't anything in particular on the quarter. The biggest driver, as Paul said, is the growth in the ISO channel, but I didn't see anything else significant in the quarter.

Okay. So this then leads me to what the real crux of the issue is with your stock and that is great to see the revenue coming back. You're raising your targets and all that kind of stuff. That's great to see, but I think the real issue is on margins and if we're going to continue to see compression on the merchant side like we have been in the last couple quarters or we're actually going to see some kind of stabilization or even a reversal in '09. I know, Paul, you don't want to give formal guidance yet and I'm not asking you to, but that's what's going to basically determine the direction of your stock I think for the next 12 months. Are you prepared to give directionally what you're thinking for '09?

Well, I tell you what I can tell you. I can tell you about Q4. We are anticipating a nice bounce in margin in Q4 and you haven't seen that for a long time. I mean sequential bounce in margin Q3 to Q4. You clearly didn't see that last year. You got a little bit of something in '06 but certainly not as robust as we're going to see in fiscal '08. I think that's reassuring for all of us. Secondly, the very first question we got from Kartik was how sustainable is this ISO growth? I think that the ISO growth is very important to us, it's a very profitable business, they're great partners but over time you can't grow at this amount and as we grow the company around it, the impact on margin from the ISOs is going to be less dramatic and ditto with the revenue we'll be getting from Canada which a lot of that falls to the bottom line. All that conspires I think for a happy story for '09 but we're not really prepared to say too much beyond that.

Okay. So looking at the May quarter let me ask it this way, I'm not asking the same question, but let me ask it a different way. The uptick, the sequential uptick, the year-over-year uptick, is that because of the efforts that you're building around the ISO channel or are there some specific things in the May quarter which are just breaking your way and that's going to add to a higher profitability?

That's an excellent question. You got a couple things. You have Asia which is now becoming more meaningful. You have some good things happening in Europe. We're going to see a nice balance in DolEx. That foundation's been laid. You're going to see that. I think those are all material. You get a little something from Canada. Joe, anything else you'd throw into that mix?

Check guarantee losses was an item specific to this quarter and we don't expect that to be a drag in the fourth quarter or beyond.

And I also think this is inherent leverage, Adam, as you well know. We're not adding expenses as quickly as we're adding revenue. So you're going to get the sustained inherent lift that that leverage provides. So I think all that produces, I wish I could tell everybody the exact date when the margins start climbing, but that's what we're working towards and I couldn't agree with you more strongly on your observation about what's holding the stock back.

Okay. But all the things that you cited for the fourth quarter are not necessarily one hit wonders. They're a longer term trends.

Every single one of them I mentioned is a long term.

Okay. And the last question I had is on the Money Transfer business. You said pricing is getting a little better. Looks like we're getting a little bit of a bounce here. Something that is sustainable there as well? I know it's a small part of your business and everyone is more focused on the merchant side, but are you generally more optimistic for the next 12 months or are you just saying this is just going to be the same kind of question as the merchant side, is this going to be a temporary thing?

Yes. I think I'd be less bullish on answering that one. I think the merchant I can say I see sustainability there. The Money Transfer business can change. We kind of carefully put in a line in the speech saying that the sustainability of this pricing environment it can change. Now if that does stay with us and we're able to sustain these pricing, then you're going to see that type of growth. We're also have much better comps in Q4 too and that will continue into next year. We have some work to do in that channel. I'd say stay tuned.

Okay. Sounds great. Thanks a lot for the color. I appreciate it.

Thanks, Adam, great questions.

We'll take our next question from [Josh Elding] with Piper Jaffray.

Thanks, good afternoon. Those were good questions. Those were a lot of my questions. I guess I had a couple quick ones. Just on the check and gaming side, is that still viewed as a very core business line for you and I think the last time we talked about this last quarter that business was somewhere in the 5 to 10% range of revenue. Is that still kind of in that same range and are you seeing faster or slower growth out of that business?

Well, I'll do the first one and I'll let Joe handle and Jim handle the last. The first of all it is core, particularly the gaming part. We really like that business and there are some visible competitors that are struggling a little bit and we are doing what you're supposed to do in a free market and we're taking advantage of that. So I'm very pleased with that business. In terms of the check guarantee business, we remain committed to it. It is not a big business to us. The gaming has grown from nothing to be a much larger driver of that whole business, but taken in totality it's still like 5%. I mean it's not a big business. Anyone want to add anything, Jim or Joe?

I would also say in terms of the sale process on the direct side and also in some of our ISOs this is a product that they sell together with the bank card services. Our competitors offer in-house solutions as well so, I would say that it has been core, it will remain core and the growth rates on the gaming side maybe because of economy more than anything else are a little bit slower than in maybe years past but still is a great business, great returns, losses there much less than in the core guaranteed business.

And then were the third quarter losses kind in line with what you had expected? I know that you guys talked about that last quarter that, they were going to be up.

I think they were in line and as Joe said, we've taken action internally which generally means price increases to merchants.

Yes.

The contracts on the check side have tremendous flexibility in terms of adjusting prices if loss rates change materially and we did see that as we've talked about the last couple quarters and we think we're past the lion's share of that and we'll see improvement into the fourth quarter and beyond.

Great. And on the Asia-Pacific business it seemed to me that we were going to be expecting a little bit of a headwind here in the third quarter and growth was extremely strong and then there was some talk of maybe a pickup in it the fourth quarter. Is it possible to accelerate year-over-year growth into the fourth quarter or is that going to be too much information to get into?

Yes. I think it is a little too much to parse to that degree. I will tell you I am pleased with everything that's going on there. I tonight -- you know, we're not telling you we're going to get 29% growth in the fourth quarter from Asia-Pacific, however, but I think long term this thing is a 30% grower and we're working diligently to get there sooner than later. I just don't think it starts now and goes forever.

Okay. And I guess I had one more kind of nitpicky question and that has to do with the guidance to the tax rate, the 33 to 33-1/2, in the third quarter I calculate about a 31% tax rate and I guess it has something to do with the tax benefit in this third quarter. Is that kind of included in the outlook or how do we think about that?

The lower tax rate in the third quarter did not relate to the one-time operating tax items $7 million. That's a separate issue. We had a reduction in valuation allowances that we had established for certain of our Asia-Pacific subsidiaries during fiscal '07. We were able to release those as a result of higher expected earnings performance from those subs over the next several years. That was the biggest impact. A secondary impact was the statutory income tax rate in the Czech Republic; however, recently lowered.

Okay, great. Thanks.

You're welcome.

We'll take our next question from Andrew Jeffrey with SunTrust.

Hi. Thank you.

Hey, Andrew.

Paul, 2008 has obviously been a pretty focused investment year. especially in emerging markets and it seems like you're reaping some of the benefits of those investments. Can you just comment directionally as to where you think you are in terms of especially with regard to HSBC, building out the infrastructure, building out the sales apparatus and consequently where we are in the margin progression in the business because I know in the past you've stated that it's effectively a loss leader, and I'm wondering if it we're nearing the end of that investment cycle or if you think this is something that will persist for, through, beyond fiscal '08, for example.

The short answer is it does -- it improves, but the drag on margin does go beyond fiscal '08 and here's the headlines on it. We have -- we are getting a real return on our sales investment. We have something north of 300 sales people. We've opened 14 offices in China. That's expensive but once again that's leading -- I mean that's producing benefit obviously prior to the Beijing games. This is a big deal. The infrastructure, per se, is pretty well set with the exception of India. We kind of have what we're going to have with some tweaking. The big benefit will come from getting off of the HSBC system. Right now we have the worst of both worlds. We have all this infrastructure, we have the costs we have here and then we have the costs we have there and until we can eliminate those costs we're really not going to get the quantum leap in margin. Over time this business is margin accretive to our corporate margins and that will steadily progress through '09 and I will make a note to give more color on that if we can in July when we give more guidance.

Okay. Thank you. And then with regard to the domestic merchant business it's almost a foregone conclusion and maybe this is in the wake of the success of the Visa IPO that credit card processors and the associations the merchant acquires are effectively immune to consumer spending downturn either by virtue of market share or secular shift in consumer behavior. Can you address that broadly? I mean clearly the ISO channel has been a driver for Global well in excess of the market but at what point, and maybe it's a function of transactions versus payment volume, but at what point does a consumer led recession start to dent your business to the extent that we can see it externally?

Andrew, that is an incredibly important question and it's one I don't have an answer for. All I can say is what we have seen and what we have seen is steady volume. I think for all the reasons you said, consumer behavior, you all know the story about discretionary versus nondiscretionary use. We're fortunate that we have a portfolio that's made up of a lot of nondiscretionary charges, medical, education, taxation, government services and those benefit in this kind of an economy, but I will tell you the day after September 11 when the world stopped spinning I mean we had no transactions. We clearly -- anybody that would suggest a severe downturn doesn't impact merchant acquires or Visa and MasterCard quite frankly at least domestically; I think that would be foolish, but I can tell you we haven't seen anything of any note and also not terribly unlike Visa and MasterCard, we are rapidly approaching a significant percentage of our revenues coming from outside of our borders and that's, I think, a very good thing.

Thank you very much.

You're welcome.

We'll take our next question from Thomas McCrohan with Janney Montgomery Scott.

Hi. Thanks for taking the question. I just have a followup on the check guarantee business. What did you see in that business to lead you to believe that things are getting better not worse given what is going on in the economy going into Q4? That's all I have. Thanks.

As Jim said, we've assessed our merchant portfolio and identified those merchants that have higher risks and higher bounce rates, loss rates and we have gone back and raised those rates. We've changed our risk management approach to those merchants and in that sense you can absolutely control the earnings that you're getting from those merchants. You just simply raise the rates. The third quarter also had a negative impact partially because the third quarter of last year was so low and that -- so it's kind of two things happened and I just know that the fourth quarter of last year was a more normal amount and based on the current trends we're seeing already in the current fourth quarter, feel very confident that the type of negative impact we with saw in the third quarter will not exist in the fourth quarter.

Now I have to add one thing on this to be very clear. We're not suggesting that losses go down. I mean if we think the economy still continues, but I think that as a percentage of increase over last quarter that's a big part of it and we are in fact taking some measures that will have some impact, but we're not saying that losses will return to Q1 levels here, but we baked all that into our forecast.

Can you disclose the balance for credit losses?

Say it again, Tom. I'm sorry.

The allowance for losses, what was it this quarter?

Let me see. It will be in the 10-Q, but it was roughly $7 million in the third quarter compared to $3.6 million in this the quarter last year and you can't take the absolute variance between those because as we've also had higher revenue as well. So the earnings difference is not simply the subtraction between those two numbers, but it is a higher number and we have had a lower margin in that third quarter compared to the third quarter last year.

And I'll add one other thing, too, which we didn't mention. This is an important point. The gaming business, which is a larger driver of that whole check group, has significantly lower balance, but even more importantly, significantly higher collection rates. So the ability to collect a balanced gaming check is magnitudes higher than a bounced check from a small merchant.

Great. Thank you.

You're welcome.

We'll take our next question from Tien-Tsin Huang with J.P. Morgan. Please go ahead.

Thanks. Jumped on a little bit late. First question I had was on interchange legislation, Paul. I was wondering if you had any updated thoughts on that and any impact on Global Payments given what we've been reading about on the Hill.

Okay, Tien-Tsin. I'll do my best. It's HR5546. This is a wild piece of legislation that is not the clearest document and I think the most aggressive interpretation would tell you that the house is proposing that they control the entire pricing to merchants. I think probably more reasonable read is that they're really talking about interchange. They would appoint some type of panel of expert judges should the parties not agree. I mean it sounds like a train wreck quite frankly. We've seen this before. We saw it in Australia and I think well meaning legislation, poorly drafted but well meaning legislation to supposedly help consumers had just the opposite impact. They lowered interchange dramatically. The banks then went to the consumer and said you have a rewards card. You're going to pay more. Used to get a 30 day free ride, no more. We're going to charge you for this, charge you for that. They recouped their full costs and the retailer got the benefit. The consumer didn't get lower prices from the retailer and got higher prices from the bank. It was exactly what they didn't want to accomplish. I think that -- I'm a big free he market guy. I hope these things die of their own weight. I couldn't imagine how this would work. I personally think it's not going to happen, but I think over time we will see he pressures to lower interchange and that at the end of the day is good for us. I think this piece of legislation is terrible, but I think interchange will come down over time and at the end of the day that's very good for acquires.

I would agree. How about the idea of greater transparency around interchange? Do you think there's potential there and, you know, what are the implications there for the acquires?

Well, I think that Visa/MasterCard is doing their darndest now. They're separate organizations. They have some great governance in place on how this is done. I think it will kind of take care of itself over time, plus there are other products out there that are offering 0 interchange. I don't know if they have a lot of legs, but it's a competitive world. I think that's all good at the end of the day, too. I personally think interchange comes down, I think that's a good thing for everyone. I think it's a good thing for Visa/MasterCard at the end of the day and I think their visibility will only increase.

Okay. I agree. Thank you. The question about I guess First Data on their call they gave a lot of interesting data points. They talked about a mixed shift towards the big box retailers, warehousing. They also talked about a mix shift towards pin debit and also looked like pricing was weak I'm sure as it was correlated. Did you see any of those trends as well? Do you care to comment on that?

Yes. I read that script several times and I would say we don't do the level of interrogation against the database that First Data may be doing. We do look at absolute numbers which we shared with you. We haven't gone back and done comps or even parsed it to big box versus little guys. He seemed to indicate that the little guys were hurting. That would run contrary to what we've seen with our ISOs. It could just be this great growth from our direct business and our ISO business but, Tien-Tsin, at the end of the day I think the best thing for us to do is just report and try to give you as much color as we can without trying to equate that to what the economy does overall because I don't think we -- any of us really know that.

Okay. Very good. Second if I could just ask also quickly on the Europe operations. I know it's still pretty small but I was hoping you could maybe remind us on the business mix in that segment still trying to do some more work there. In particular, how much is coming from card processing versus merchant acquiring, the ATM driving? Can you rank that for us in terms of contribution?

Yes. Let me talk about what we're trying to do there and I'll ask Joe or Jim to throw those numbers out. The business isn't 100% indirect at this point. Our hope is to morph that to more of a direct model. We have some opportunities to expand into some very attractive geographies. There are some acquisition opportunities. We're pursuing all of that. We also have some partnership opportunities with existing financial institutions. It is primarily driven by merchant followed by ATM and a little bit of equipment sales. I don't -- have we shared the exact numbers, Joe, in the past?

We have a slide on our various road show materials either on our website or on our most recent investor day where you can get a good sense for the revenue split. I don't have an update as of today.

Yes. I don't want to guess. It's not at the top of my pad.

Okay. But how much have the businesses actually generated outside the Czech Republic today?

Okay. It is still pretty Czech Republic focused for now, but we are starting to get some meaningful business out of Russia and the Ukraine and Slovakia and we are a little bit in Poland and we are expanding, so we're getting some --

It's 10 or 15%.

Yes. I'd say 80% across the Czech Republic.

Very good. Thank you, as always.

We'll take our next question from Robert Dodd with Morgan Keegan.

Hi, guys. On the ISO side you mentioned that the contribution margin was stable and profits were up. I mean can you give us directionally any color on what the margins are going to do within the ISO business? Are they going to compress because the bigger ISOs are growing faster or are they going to expand or what's the movement going to be within that business?

I don't know if we can add any more color there. I think our point was that on a contribution basis the margin has been steady and most of the revenue and earnings there come from the large core group of ISOs that we've had for many years but I don't believe that we're in a position to break out any additional color.

Robert, I can tell you this that clearly the big ISOs either through contractual ability because they hit buying thresholds or contracts expire which were through most of those they get concessions and sometimes they get concessions even because they're just got partners and we try to keep everyone as happy as we can. Clearly, their pricing continues to go down. That's offset somewhat by the leverage in the business, but it's also importantly offset by smaller ISOs who grow and have much higher pricing. One of the reasons we haven't parsed this thing exactly, remember we talked about giving some non-GAAP data, is that the -- if we did that, it would be really competitively, it would hurt us from a competitive standpoint because someone could get pretty quickly at what their price is and a customer could get pretty quickly what their price is. So I think at the end of the day if your question is do the ISO pricings come down for the big guys? Of course. Is it replaced with leverage and what we've seen from smaller, I would say to date that's exactly what's happened.

Okay. Thank you. Can you give us an update on what the status is on the discover portfolio both with your direct all of indication and then with the ISO reselling that you're doing with the portfolio there?

Sure. We started the conversions last September and we converted our direct portfolio as well as our alliance with Comerica in September followed by our four largest ISOs in October. This February we started moving the rest of the base and the expectation is by August our Phase I which is really all the ISOs that were here about a year or so ago will be complete and then they'll be parallel efforts to enable our front end for indirect customers and then any ISOs added after the fact. So most of it will be done by this summer in terms of our direct business and then it will probably complete within the next six months for the rest of them.

Okay. Thank you. And just one more nitpicky one, if I can. On the minority number you had almost 8 million through the first three quarters and you guided 8-1/2 to 9-1/2, so that's a pretty substantial decrease in expense in Q4. Can you give us an idea what's going on?

There's some variability in that line item, particularly that relates to Asia. There's just a lot of moving pieces that it's not a reflection of the business itself or performance. It relates to how we are accounting for it and how we're charging certain expenses into the joint venture, but I do agree that there is some movement there.

Thank you.

And we'll go next to Tim Willi with Avondale Partners.

Thank you and good afternoon. I had two questions. One was just a housekeeping one. First, could you go back over what the revenue and transaction growth was in the domestic Money Transfer? I didn't catch all of that, Joe.

Just one second. In the domestic Money Transfer segment the transactions grew 8% for the quarter and the revenue grew 4%.

4%, okay. And then is there any way that you could just talk about maybe the progression of the domestic business in terms of transaction run rates as the quarter moved along? I know you talked a lot about pricing was probably the nice surprise there, but was there anything relative to transactions that caught your eye as the quarter progressed?

Nothing significant. As we said, the transactions were fairly steady with the second quarter. I don't have the number in front of me but I believe it was close to 8% transaction growth in the second quarter and we had a revenue decline of 5% in the second quarter. So when you have the similar transaction growth and revenue growth of 4% in the third quarter, that tells you that the spread in your pricing improved to get the (inaudible).

But it wasn't like one quarter on transaction growth might have made the entire quarter whereas a couple of other months might have been a little bit weaker than you would have thought. It was fairly evenly dispersed in terms of transactions across all the months? I only ask because the Mexico numbers looked really bad in January.

Clearly the transaction growth rates stayed as Joe said, they were relatively constant for most of last year. So we've been trying to maintain the transaction growth rates and we've given up margin as a result of that. That's really been the historical mindset in the last -- well, we anniversaried a fairly large decrease a year ago December and we started to stabilize because of factors in the marketplace coupled with just our desire to see if we could press prices up a little bit and so far we've been able to press them up without sacrificing transaction growths, at least at this time. Now as Joe said in his comments and Paul also reiterated, it's a somewhat fluid market. Right now we feel good about it, but it still remains a work in process.

Okay. If I could just ask one last question on platform conversions. Over the next couple of years as you move everything onto one platform, I know you won't give exact dollar numbers, but could you maybe just sort of frame, you know, looking at the investment you've spent on the new platform and the sort of ongoing benefit you would expect in terms of cost savings or returns sort of what kind of magnitude would you be thinking that you can get $2 of sort of ongoing annual savings once this is all taken care of for every dollar you've invested in building it, in it I way to think about that longer term?

Yes. I think we're going to be hard pressed to put a metric to savings. We embarked on the G2 platform many years ago really out of necessity we have platforms that have been with us since really the inception of the previous parent company in D.C. So some of of it is just moving to the next generation which is just a requirement to be in the business. We're now also going to benefit from consolidation of Asia onto these platforms and our Canadian business onto the platforms. So I think you can be assured that what we're spending we're expecting to recover and then some. So they all have returns, about but to try on give you a metric at this point I think would be a guess that wouldn't necessarily have much value anyway.

Okay. Thank you.

You're welcome.

We'll take our next question from Glenn Greene with Oppenheimer.

Thank you. I was going to ask a very similar that Tim just asked on the platform consolidation, but could you just sort of give us an update where you are on that whole process, sort of the time frame and I think you alluded to previously you didn't expect much cost benefit in fiscal '09, it was more of a '10 issue. Could you just remind us where you are in the process and of how to think about the potential benefit or were you, in response to Tim's question, sort every backing off the cost savings?

No. Not backing off the cost savings but to be able to put a metric to it $2 to $1 spent or something in that magnitude, I tonight that know we'll ever be that granular. What I did say, though, there is a return. It's not a deminimous return but it's a return on all our investments and this is going to equally be a return not only for the U.S. business but it provides opportunities for savings, some of which we've already seen this year which we commented on previously for consolidation of our Canadian business which is on a third-party platform for the front end and also the consolidation that's under way from Asia onto these platforms. So it's all good news. It's just going to come over a period of time. It's not something that can occur instantly because we're talking about four front ends in Asia, another front end in Canada, two in the U.S., and then back ends in Asia that need to be converted and that's going to take several years to complete.

But is the time frame still the bulk of it sort of gets completed sort of '010ish?

I think, Glenn, the financial benefit is really we really enjoy that in fiscal '10 because it comes from a lot of shutting down systems and you can't really do that until you totally complete it. We get a lot of other benefits, more customer support systemic benefits, but the real dollars are absolutely in '10. We haven't given exact dollars on this, but we have said it is material. It will be material. Our expectation is it will be material and we'll give as much guidance when we get a little clover to the event as we can.

I assume it's tracking to your expectations in it terms of the whole process at this point?

I would tell you that initially. You ask me that a year ago, it was behind. We are back on schedule. Like all big projects, what happens is you expand the scope and you fall behind. We've expanded the scope significantly, but we're on track and I'm feeling darn good about it. In fact, we just did the review with the board, so I'm very pleased where we are.

Okay. And just a little bit of color on your acquisition focus, Paul. I suspect it's predominantly international but any sort of domestic focus order of magnitude whether you do a large deal, small deal. Is it all merchant acquiring or just a little bit more granular are in sort of how you're thinking in terms of your priorities from a strategic perspective?

Well, it would be all merchant acquiring with the exception of maybe adding a little something to DolEx probably a little more European based. And it is merchant acquiring. We would consider opportunities domestically. They would have to meet all our criteria. Most of our focus and most of the names in our pipeline are international but I wouldn't rule out domestic and we're pretty active. I'm hoping to have some real conversations with everyone in the not too distant future about these opportunities as they become reality.

Is there anything that's sort of been precluding you from getting deals done? It's just a matter of sort of negotiations? I mean it's been a while since you've sort of done anything pretty material or significant. It's just a function of the credit markets, the environment or --

It's none of those. I appreciate that last comment. Thanks a lot. It has taken us a while to get some deals done. We're very cognizant of that, particularly business development guys. No. It's the complexity, particularly international transactions are very complex, particularly when you have various shareholders in various domains and that is primarily it. We have been working diligently on these and stay tuned.

Okay. Thank you very much.

We'll go next to Wayne Johnson with Raymond James.

Hi. Yes. Good afternoon. I was just wondering if you could just give us an update on how you felt the FDC takeover by KKR if that has changed the competitive landscape for better or worse.

Well, Wayne, I have to tell you, they are still an aggressive competitor and they are signing business and working diligently towards getting new opportunities. I think they've been less inquisitory and I know they talked about putting some money aside for acquisitions, but I suspect we'll see less activity. I think it is public record that they've reduced a lot of cost associated with business development staff. That's common knowledge and I think that's translating into them being less inquisitory and less aggressive so that's good, but in terms of them being a head competitor, they're still very tough.

And do you think that the cost benefit of migrating all the various platforms to G2, do you think that will come before or after First Data's data center consolidation is complete?

I would say a minded complex. Theirs is a different level of complexity. Now I can't opine how long it will take them, but I do know something of those since I sold a previous company to them and it is -- they have a much more complex environment and a bigger task at hand.

Great. Thank you.

You're welcome.

And we'll go next to [Pat Burton] with Citi.

Hi, congratulations on the quarter. Paul, similar to that question on First Data let me ask a different one. With both the associations being now public, how do you think that might change the business over the next few years? Thanks.

Thanks, Todd, and welcome back. The association I think is a net gain for all of us, First Data, Global Payments, anybody in the merchant acquiring space. Associations were more bank eccentric. They were controlled by the banks. The banks kind of called the shots, the issuing financial institutions, and it's a different world now. We as merchant acquires drive a lot of revenue for the associations. I think they're fully cognizant of that and I have seen tangible changes in attitudes and activities. So I think it's a net positive for all of us in the acquiring space.

Thank you.

You're welcome.

And we'll go next to Greg Smith with Merrill Lynch.

Hey, guys. On the association issue just is there any possible of them somehow raising pricing that could potentially impact you in a negative way or would you just have the ability to pass that on? Any thoughts along those lines?

Yes, Greg, we would. I mean what the association -- of course, what funds their activities are assessments and they are cognizant of that and you've seen some assessment increases very cleverly with cross border transactions, some pretty dramatic ones from the associations quite frankly. We just pass those on. They're complex to do because you have to separate transactions, but we do that. That's part of our job. We would pass them on. I would hope they wouldn't be too aggressive with those. I don't think there is a -- I mean I guess anything's conceivable, Greg, but I haven't seen a tax, per se, aimed at merchant acquires. I think quite frankly in the question that Pat asked I think the associations see us as partners more now than they ever have and quite frankly we are.

Good, good. And then do you have much gas station business? Is there any sort of incremental benefit here from higher fuel prices for you?

Yes. We don't have much petroleum, but you're right, that's going to raise those average tickets dramatically for those that process, but we have some small petroleum exposure. We do some check business with petroleum, but we don't have a ton of it.

Okay. And then lastly, I'm sure you've looked at your accounting every which way just the issue with ISOs and the margin pressure, but any chance you could ever move to more of a net-net kind of revenue rather than running the commissions through the SG&A line?

We talked about it. That would be non-GAAP. We talked about non-GAAP measures but what I said earlier is that if we did that, our competitors and even our customers and I don't think they'd want people to understand exactly where they are with that, would have significant amount of visibility into that pricing and that is what's holding us back more than anything. What I prefer to do is make it a non-issue by growing the company and expanding our margins and then we won't have to answer these questions.

Good answer. Okay. Thanks a lot.

You're welcome.

We'll take our next question from (inaudible) with Goldman Sachs.

Hi, guys. It's actually Liz Grausam. Had a question. You talked a lot about the discretionary versus non-discretionary component of your portfolio, but if you'd help us maybe quantify how you think about the portfolio makeup, the Global's processing maybe between debit and credit, what percentage of your transactions are coming from each of those categories and then also any of your merchant breakout of where you see kind of the most defensive non-discretionary as a percentage of your portfolio today.

Liz, once again, Joe had this answer for an earlier question. We do have some of this on our website. I have to think back to some of our earlier investor presentations, but we show kind of what are the major categories, retail, restaurants but then in the non-discretionary we have things like education and taxes and healthcare and other services and we have a bunch of that. We have a pie chart that shows some of it. I don't have the exact and I don't want to get, but I would tell you you definitely do see a movement and it is a significant enough piece of business for us that quite frankly I think that's one of the reasons our transaction counts are what they are.

And the debit versus credit breakdown, do you know that as a percentage of your transactions?

We do actually. I don't have that in front of me. I will tell you that we describe -- when we talk about debit, we talk about pin debit. Signature debit for us is just the same and I think you're referring to pin debit.

Yes.

We had given that. It is growing steadily. That growth has slowed a little bit because it's still growing quite nicely and it's still growing faster than credit, but it slows a little bit just because it's been fully penetrated and, Liz, I don't have those. I'm sorry, but it hasn't changed material from what we've shared.

It's around 10% of the total U.S.

Okay. And then on the M&A environment, one last question on that, it seems like we heard comments that a lot of that activity may be focused in Europe. Has the trends of the environment impacted your ability to do work on those deals and do you see kind of European local competitors actually bidding on those properties making it more difficult for a U.S. company to approach them?

Yes. That's an excellent question because the dollars change pretty dramatically particularly against the Euro or currencies that are soon to become Euro and I would tell you that local competitors are always out there. Fortunately some of our focus is also in Asia, but I'm still very optimistic I'll announce some deals in complex areas where currency has made the deal more expensive but still pretty good deals.

Great. Thank you.

And we'll take our next question from Dan Perlin with Wachovia.

Thanks. I just wanted to try and reconcile one thing. Your fourth quarter incremental margins in Merchant Services are expected to be pretty significant. So I'm not complaining there clearly, but the question that I have is as I listen to you talk about Canada and central eastern Europe and all the other line items, they all look like they should be about flat sequentially with the exception of the domestic direct market which causes me to be a little leery because of all of those I would have thought that would have been the one that pressures margins. So what -- how should I think about that? Is it that your domestic non-ISO piece of business is actually growing faster and you're get a bigger mix shift in smaller ISOs versus larger?

We are getting an improved benefit from that domestic direct non-ISO sales force but it may be difficult to try to address that question in the angle that you've approached it. I think it's easier to explain that the fourth quarter margin should improve relative to the third quarter because of a variety of factors, improved growth in Asia, in Europe that major customer is -- we're nearing the anniversary of their exit, we'll have a partial anniversary in the fourth quarter and a full in the first quarter of next year. We'll get a benefit in Canada from the repricing initiatives. In the U.S. we won't have the Canadian card association incentive headwind that we felt in the third quarter. The check guarantee impact will be much less in the fourth quarter and the Money Transfer results we're expecting to have better earnings in the fourth quarter as well. So there are a variety of factors for why we feel the fourth quarter will be better, but I'm not sure that --

I want to add, too, Dan, it's possible that you're referring to revenue and not necessarily earnings. For example, I did say we had a wonderful Q3 in Asia. I'd love to see 29% again. We're not necessarily telling you that's going to happen in the fourth quarter, but I do think that we have better margins in the fourth quarter as we continue to improve margins. So even if I have a little less revenue growth, I would expect greater profitability and I think you could ditto in central Europe with that operation. So that's a little bit of a change, too. So we're not telling you these businesses are going to be flat in the next quarter. We expect to see growth in those as well.

Right. Growth year-over-year. I was thinking more sequentially, Paul. Asia-Pacific being 19 million on an absolute dollar basis in the fourth quarter, I don't see why it shouldn't be there again, same thing with central and eastern Europe. I don't understand why it shouldn't be around 14.7, 15 million. The big outlier to me sticks on to be domestic direct, but we can follow up offline.

Okay.

It's all good. I'm happy margins are going up.

Anything else, Dan?

No, I'm sorry. I'm good. Thank you.

Okay. Thank you.

We'll take our last question from Josh Elding with Piper Jaffray after which Mr. Garcia will give his closing remarks.

Great, thanks. I just had a couple quick followups. Just with regards to the looking at Money Transfer real quick. On the European side that's kind of been the little bit more exciting piece of that and after seeing some pretty significant growth in revenue, kind of looks like it slowed a bit here in the third quarter and I was just wondering is there any particular reason why we had a flat quarter-over-quarter revenues there?

Well, I think as we described this business, it does -- that tends to be a slower quarter versus the summer or the fall quarters historically. Secondly, as the business in the U.S. struggled in the last year, we spent or made less of investment in opening new branches. In Spain we slowed down the pace of which we were opening them. We've looked at acquisition opportunities there in lieu of just straight opening, opening costs a lot more money from the standpoint of running losses generally for the first six months to a year until you get the business up to a cash flow profitable basis, but the business itself on a year-over-year basis where the stores have been open for a year continues to do very well from all the major metrics which is transaction growth, revenue growth and pricing also is very stable.

Okay. And I guess the last question on that. As far as some of the outlets, the DolEx outlets, they've been churning down here for a couple of quarters. At what point is that going to kind of continue to be the trend or at what point do we see that kind of stabilize and start to grow again?

Well, I think we've mentioned in this last quarter we've seen improvement in the pricing market and; therefore, with pricing stabilizing and transactions growing you're just going to naturally see growth. The business does have leverage characteristics. That was what originally attracted to us muck other things and so you'll see those as well and I think Joe outlined those in his comments for the fourth quarter. If prices stabilizes into the next fiscal year, we'll see that continue.

Okay, great. Thanks a lot.

Thanks, Josh. Well, ladies and gentlemen, thank you so much for joining us on today's call. Thank you for your continued interest in Global Payments and we appreciate your continued support.

Ladies and gentlemen, this conference will be available for replay starting today at 7:00 p.m. central and ending at midnight on March 9, 2008. If you wish to listen to the replay, please dial 888-203-1112 or international participants can dial 719-457-0820. This concludes our conference for today. Thank you for your participation. You may now disconnect.