環匯 (GPN) 2010 Q3 法說會逐字稿

Thank you for standing by and welcome to Global Payments' third-quarter fiscal 2010 earnings conference call. At this time, all participants are in a listen-only mode. Later, we will open the lines for questions-and-answers. (Operator Instructions). As a reminder, today's conference will be recorded. At this time I would like to turn the conference over to your host, Vice President of investor relations, Ms. Jane Elliott. Ms. Elliott, please go ahead, ma'am.

Good afternoon, and welcome to Global Payments fiscal 2010 third-quarter conference call. Our call today is scheduled for one hour. Joining me on the call are Paul Garcia, Chairman and CEO; Jim Kelly, Vice Chairman and COO; and David Mangum, EVP and CFO. Before we begin, I'd like to remind you that some of our comments made by management during the call contain forward-looking statements that 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 caution you not to put undue reliance on forward-looking statements. Forward-looking statements made during this call speak only as of the date of this call. In addition, some of the comments made on this call may refer to certain measures for full-year fiscal 2009, which are not in accordance with GAAP. Management believes these results more clearly reflect comparative operating performance. For a full reconciliation of normalized to GAAP results in accordance with Regulation G, please see our press release filed as an exhibit to our Form 8-K dated March 31, 2010, 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?

Thank you, Jane, and thanks for joining us this afternoon. For our fiscal 2010 third quarter, we delivered solid financial performance from continuing operations, with revenue growth of 11% to $398.5 million and diluted earnings per share of $0.58, or 35% growth compared to last year. A weaker US dollar provided a lift to our financials in the quarter and accordingly, third-quarter revenue and EPS growth were 6% and 18% respectively on a constant currency basis. Despite the challenging macroeconomic environment affecting all of our regions, we continue to steadily execute against our plan, delivering solid results. I'm also pleased to note that average ticket amounts were sequentially stable on a global basis during the quarter. We are hopeful that this foreshadows future improvement and overall economic conditions in each of our regions.

Now I'd like to address a couple of specific initiatives we've been working on. Firstly, as you know, we have been focused on developing a worldwide front-end authorization system, which we refer to as G2. We completed the core development and base testing earlier this fiscal year and have been working to convert all of our markets onto this new platform. Today we successfully processed for seven of our 11 Asian markets, representing the majority of our volume in that region. We are now working towards converting our US platforms to G2, which we expect to be live by September of this year. We intend to provide greater insight on G2, its savings and scheduled migrations for the United States, Canada and the UK, as well as all other markets during our July earnings call.

Next, as many of you are aware, we have been endeavoring to directly process RMB transactions in China. Currently, there are no western processors handling RMB transactions in mainland China. After literally years of work I am delighted to announce that we have secured the endorsement of both China UnionPay (CUP), and importantly, the People's Bank of China for our initial RMB launch in Beijing. They, in turn, encouraged us to approach the Beijing Bank Card Market Coordination Committee for membership. I am pleased to inform you that we have received unanimous approval from the 30 members of this committee. Although we have satisfied all of our requirements, one final step remains before we can actively begin acquiring RMB transactions in Beijing. Namely, HSBC is required to become a direct member themselves of the Beijing Bank Card Market Coordination Committee, and must complete its own approval process. The Bank is endeavoring to do so as we speak and consequently, we are hopeful that we will be offering CUP card acquiring services to Chinese merchants this summer.

Now, here's David to discuss the financial details. David?

Thanks, Paul. During the third quarter, on a year-over-year basis the dollar weakened against both the Canadian dollar and the British pound, driving a positive effect on our financial results. On a sequential basis, however, the US dollar strengthened against the British pound and weakened against the Canadian dollar. Our outlook for Q4 assumes that the US dollar remains constant or slightly strengthens against the British pound and remains constant or slightly weakens against the Canadian dollar. Any fluctuations in currency rates, of course, may cause variances to our outlook. Our North America Merchant Services revenue grew 7% for the quarter, driven by solid performance from our US ISO channel and overall US transaction growth of 14%. Average ticket amounts in the US were slightly up sequentially from the second quarter and down 6% from last year. Overall, US debit growth continues to outstrip credit growth. Total debit represents over 50% of our transaction base, while PIN debit represents less than 10% of total transactions.

In local currency, our Canadian revenue declined about 4%. We believe that macroeconomic conditions there remain difficult, resulting in flat transaction growth compared to last year, more volume processed by large national merchants, and some spread compression. On a positive note, our average ticket amounts have shown slight sequential improvement recently, but it's too early to call out an overall positive trend given the difficult conditions in this market. International Merchant Services delivered revenue growth of 24%, driven in part by a favorable British pound exchange rate and continued solid performance by United Card Service in Russia. Our UK business continues to execute well despite a difficult macro environment. As expected, our Asia-Pacific business grew 18% for the quarter and we anticipate full-year revenue growth in the mid teens from that region. Total Company operating margins from continuing operations for the third quarter were about what we expected at 18.5%, up from 17.4% last year.

We continue to see the opportunity for modestly expanding total Company operating margins for the full year. Earnings performance for the quarter benefited from a lower effective tax rate of 29.3%, which drove $0.03 of unexpected additional earnings per share. $0.02 primarily relates to an R&D tax credit in the US that came earlier than expected, which will not recur in the fourth quarter. The remainder relates to a more advantageous mix of international earnings, which we do expect to carry through the fourth quarter. We now expect our full-year fiscal 2010 effective tax rate to be about 30%. We continue to generate strong cash flow. At the end of the quarter we had total cash and cash equivalents of about $590 million, with available cash of about $250 million.

During the quarter we spent about $16 million on capital expenditures. We anticipate spending a little more than $50 million for the full year. This is a bit higher than our original estimate, due to some incremental investments, including a new investment in our own disaster recovery facility. Relative to cash earnings, amortization expense for continuing operations after noncontrolling interest for the third quarter totaled $7.9 million, and we expect about $30.7 million in total for the full year. Please note that amortization will fluctuate over the course of the year due to currency translation. Finally, I am pleased to report that we have made solid progress toward the divestiture of our money transfer business and we anticipate closing the deal in the fourth quarter.

Now I'll turn the call back over to Paul.

Thank you, David. Based on our current outlook for continuing operations, we are raising fiscal 2010 annual revenue to $1.615 billion to $1.625 billion, or 10% to 11% growth over fiscal 2009. We are also increasing our fiscal 2010 diluted earnings per share expectations to $2.49 to $2.54, reflecting 19% to 21% growth over fiscal 2009. We continue to be pleased with our business performance and we are actively pursuing acquisitions in all major markets, with a focus on merchant portfolios and other technology companies, as we expand our global presence and product offerings. I feel confident that we will continue to deliver on these opportunities as we pursue our global expansion strategy.

Operator, we will now be pleased to go to questions.

(Operator Instructions). And for our first question we go to Kartik Mehta with Northcoast Research.

Good afternoon, Paul. I had a question for you. You talked about platform consolidation and I realize you really want to wait till the summer to talk a little bit more about how it's going to benefit the Company, but can you talk about maybe in terms of percentages how it might benefit the Company, as in September would you anticipate getting at least 10% of the cost benefit and then it grow from there, or is there some different formula for that?

Kartik, we do just exactly as you just said. We prefer to give you some explicit detail in our call in July when we layout our guidance. Clearly this is a big project we've been working on for a lot of years and we're reaching some milestones and we will have all that data, I promise, but I am going to take a pass and wait until July to share that.

Paul, you talked a little bit about China UnionPay and maybe the initial launch and your ability to acquire merchants. I'm wondering, will there be limitations on how you're going to acquire, or geographic limitations or when this is all -- whenever you get the approval, the last bit of approval that you'll be able to acquire throughout the whole country?

Yes, that's a great question. So, let me be clear. So we initially applied in Beijing, because you actually have to do it by market, so a similar application process would have to happen. Now, we're believing and as we've actually been given encouragement to believe that if we do as well as we think we're going to do here -- [and we have a reasonably we will] -- that those approvals in other cities -- and quite frankly Beijing being the capital, and being the toughest probably of all the markets, and of course next we're focusing on Shanghai and then rolling it out. Kartik, we have 12 offices in 12 mainland Chinese cities as we speak, so those are the big markets and the only restriction would be approval in each of those markets and we're hoping that would happen in pretty short order once we get the initial approval.

And just a last question, you talked about Canadian transactions, and I'm wondering if you can compare to the last quarter in terms of any changes in mix you've seen or any change in volume that might be different than just the last quarter?

Kartik, this is David. Not a lot of changes from the last quarter. We saw similar to last quarter, flat transaction growth and so when we step back and look at Canada in terms of a bigger picture, we do believe economic conditions there remain challenging. As a result, we're seeing slightly higher attrition levels, as you know. We think, by the way, inside that number is a lot more bankruptcies than we've seen in the past there. We see, obviously, more volume coming to us through national merchants, which obviously happens at a lower pricing level or a lower spread. Again, [wed] then the flat transaction growth.

At a market level, environment's probably a little bit more competitive. We've got one provider reentering the market, being a little more competitive with an ISO strategy. We've got reasonable growth from our own ISOs there. They're called [ESEs], as you know, but our own ISOs there that happen at a little more competitive pricing level. So all in, net-net, some spread compression, overall flat transaction growth in really a tough macro environment. If we look at that again, stepping back and thinking about the market, we've obviously ramped up our activity on new sales, on merchant retention efforts. We certainly expect to work through this, and come through this eventually. Hopefully the quote I had in the prepared comments on average tickets is a hopeful sign. It's too early to tell, but all in, I think we'll execute through this. But you've got a tough environment and then some competitive pressures that are a little stronger than they were, call it a year or so ago.

Thank you very much.

Thanks, Kartik.

And we go next to John Williams with Goldman Sachs.

Good evening. Thanks for taking my questions.

Hi, John.

I was curious to know, you talked a little bit in the release about how the ISO channel in the US has been a pretty solid growth driver for you in the quarter and I was curious to know if you could break out how much of the US growth was organic versus the ISO channel? I guess you guys can do that.

Yes, John, this is David. We really don't break out by channel our US growth. We can give you a little bit of color. Certainly the 14% transaction growth we quote in the release is largely fueled by the ISO channel, but all in, we really don't break or disaggregate the US out into its pieces.

Okay. Any update on what you've seen thus far? I guess it would be March through the first 30 days or so?

Yes, John, it's still March, barely, but -- so we don't have a ton of data because we haven't even closed out the month. But I would tell you that what we have seen is no dramatic changes from this current trend. The current trends are actually a little encouraging, aren't they? We're not seeing a decline in average ticket, we're seeing some stabilization, seeing a little pickup in same store. so I think it's encouraging what we're seeing.

Sure, and then did you give a level that the average ticket stabilized at? It's still negative, right?

Yes, we actually did not give a level. It is still declining in general. Year over year it stabilized sequentially is really what we're talking about, which is how we're looking at things right now. But we did not quota percentage, no, John.

Okay, appreciate the time. Thanks.

Thank you.

And we go next to Jason Kupferberg with UBS.

Thanks. Good afternoon, guys. Wanted to start with a question on China and appreciate the update there. Congratulations on Beijing. Any way to size this opportunity? I guess if we just start with the Beijing piece and you think out about the next year or two years, whatever sort of context you would like to place it in, any way we can start to formulate some ranges around that?

Yes, that's a great question. I think that's probably the heart of what Kartik was trying to get you to and I didn't answer it totally clearly. So here -- but thanks for the opportunity. So, Jason, here's the deal. We've been working on this for years, so we finally have this. We're going to be the first Western company to do this. But we still have some heavy lifting to do. So we're going to get into Beijing. We have a pitch we think that will compel people based on our international expertise and our new ability to acquire CUP. We think it puts us in a unique proposal -- proposition for our merchants. So we have -- we're making an investment in people. We're investing in the products and tools and the offering to the merchants. But with all of that, it's still going to take some time before this really has any big impact for next year.

I think -- now, if you give me two years out, like you just said, I think it's a more significant thing. There are -- CUP talks about two billion debit cards in a country that has a billion people and they use these cards now, so the opportunity, I think, in that market is massive. And what that translates to, I think you have to give me a little bit of time to see how we make out on this, but the projection's -- you can [Chinaforic] on this -- you can get yourselves so wrapped up in the possibilities that you throw out some unrealistic potential. But at the end of the day we think this thing could be significant. I think we are talking a couple of years for that significance and I would say stay tuned.

Okay, that's fair enough. Then maybe a broader, longer-term, kind of strategic question. What do you think the right mix of North America versus not North America revenue should be over the longer term for the Company?

Yes, I think that we are hopeful that we'll get more and more and more from outside of North America, and I think that -- we've said we clearly think the majority of our business will come from outside the US. But Canada's a big driver on this and hopefully one day Mexico will be, as well. So the change -- that'll change the answer a little bit, but we do see accretive growth coming from Asia. We see accretive growth coming from Russia and Central Europe. The UK is mature. Canada's mature. Mexico has some real opportunities, too. So I think that outside the US the answer would be a significant amount would come from outside the US. North America, I'd have to think about that. We don't really look at it that way, but it would be less, but hopefully still all the big growth and eventually a huge part of our business comes from outside that area.

Understood, and last one for me. I know you mentioned in passing in the opening remarks that UCS had a solid quarter over there in Russia. Can you put a little more meat on the bone there in terms of perhaps some metrics to give us a sense if the traction is ramping up there in Russia?

Yes, Jason, it's David here again. I think it may be a little early before we start quoting metrics and then routinely bringing them out to you every quarter. The reality is Q3 in Russia -- our Q3 in Russia is seasonally light. We saw the business execute well through it, continue to drive more volume and take market share. We're just getting started, though, ramping up our sales efforts and really driving the metric space, the approach to managing the business, so give us a little bit more time to report back on that. But really solid performance and good solid management happening there.

Yes, and let me just -- Jason, let me just add a little bit, having come back from Moscow. I'm really pleased with what I saw over there. So I met with a lot of big customers, obviously met with management and our big partner, (inaudible) Bank, so we're charging -- we're changing the mix a little bit, giving us more control over the sales engine, and I think that will yield some positive differences, too. Plus, we're looking at other opportunities and there are several in that country. So I remain very bullish on Russia and I look forward --

Okay, thanks.

-- to share a little bit more with you.

Me, too. Thanks for the comments.

Our next question comes from Tom McCrohan with Janney.

Hi, thanks for taking the question. I had a question on value-added services. You mentioned in your prepared remarks that you're looking at some technology acquisitions potentially and just kind of curious if those are some sort of value-weighted service that you're going to add to money -- to merchant processing?

Yes, not the money transferred, thank you. (LAUGHTER) For merchant processing, yes. There's -- I don't want to be specific because we have a couple things going on, but I think you hit the nail on the head. So there are some areas that we could strengthen, there's organic ways to do that through product development and there are some companies that offer some great products that make sense that we would look at. So that's generally and I think you could guess what are the three or four areas we're looking at.

Okay, and then my last question's just on transaction growth. I think you said 14% for the quarter and I'm just trying to figure out how to put that in context with the 19% growth in the US. Last quarter how much was that, just a day count variance? I know you mentioned last quarter there was a one less day processing day, but it sounded like some more was going on there and I just wanted --?

Yes, I don't know there's a whole lot going on there, Tom. These kind of answers are always colored by who knows what's going on at sort of a macro level. But at it's simplest level year over year we have a few less processing days this Q3 compared to last year's Q3. We also have a few less processing days compared to Q2. I think really all in that wed to the fact that those ISO numbers get bigger every year probably explains your delta for the moment.

Okay, thanks.

Thank you.

For our next question we go to James Kissane with Banc of America.

Great, thanks. I know you guys don't want to talk too much G2 on the call today, but if you look the at margin improvement year on year in the international business, can you credit G2 for a portion of that, maybe quantify a little bit for us?

I don't know that we can quantify it, but it's a fair point related to Asia. As you know, we're live in seven markets in Asia with G2, so we have four left to go, as we mentioned earlier in the prepared comments. The Asia margin, as you know, has gone from break-even not too long ago into the low double digits now on a run-rate basis, and, yes, there's a piece of that attributable to G2. The majority of it, quite honestly, is more scale, more growth, more profitable transactions from products like dynamic currency conversion, but there's no question, there's a little G2 in there, as well. Really can't, or I suppose won't break it out for you at that level. The numbers are really quite small and the savings of G2 come from reductions from the invoice we receive from HSBC for other processing, so it can be a little challenging to break out that discreetly.

And, Jim, not to beat around the bush, we understand it's a big driver of margin. We understand there's a high expectation on where we are with it and this is a multi-year program. We've got some benefit, we're going to get some more next year and we're going to get some more the following year, and we're going to lay that out with some specificity, truly, much more than we've ever done before.

That'd be great and just one more question. Last quarter you were talking about the shift in consumer behavior up in Canada but now seems like you're talking a little bit about some increased bankruptcies, I guess, in the small business arena and maybe a little more competition, so it sounds like you;re getting a little more appreciation in terms of the factors going on out there. Could you break out or rank which factors are having the biggest impact on growth in Canada?

Yes, I could try and add a little bit more color to it. I think what you're seeing is the product of us continue to drill down and continue to analyze and learn more and more about it. I'm not so sure it's so much about consumers or was a month ago, but it does begin with macro, which obviously has consumer impact in terms of spending, et cetera. And we think that macro then drives, obviously, consumer behavior, which is the elephant in the room for every one of these conversations about any market or any level of growth that we're seeing anywhere on a global basis. But that level of -- that challenge in terms of macro would drive a little higher attrition, a little more volume to the bigger box merchants, maybe flat overall transaction growth.

It all kind of works together and so when you wed to that a little bit more of a competitive environment, you've got a challenge for some interim period in that market while you stabilize, while you reorient some of the pieces of the business and begin to execute against the new challenges. I think we're in the midst of doing that. We've got discreet plans against which we're executing in Canada. We'll work our way through it to move forward. To be perfectly honest -- you wanted me to break it out -- I'd give a chunk of each piece of what you might think of as a Canada challenge to those four or five variables I just mentioned.

Jim, let me say something about Canada, too, if I may. That actually -- I should have said in the last call as well, just to kind of level sets it. Canada is this great market for us, wonderful management team. We have a big piece of that business, and it's a single-digit grower. The market is a single-digit grower and we're kind of a size where that's where we're going to -- you can't grow too much faster than the market because we're of a size that we are. Now, every couple years something happens. We get fortunate. We got an opportunity last year. We grew much faster, significantly faster than single digit because of that opportunity. This year you have kind of a double whammy. You have a little bit of that impact and a little give back on that, and you also have, you also have the impact of the economy slowing.

But Canada, I think, will present other opportunities in the future. You got to be in the game to get it. I think the next opportunity will be debit. That won't be huge next year unless we just get really lucky, but I think the future upside on that, it's going to be another event like we had last year with Canada. So Canada is a great market. Every so often you're handed a nice opportunity. Maybe debit is as big, maybe it's not, but it's an opportunity in the future and I love that market.

Very helpful, thanks.

Thank you.

For our next question, we go to Bryan Keane with Credit Suisse.

Good afternoon. I think you touched on it a little bit, David, but the delta between transaction and revenue growth in the US widened a bit. What's causing that?

Yes, so, Bryan, let me drill down to that. I'm glad you asked that question, should have appended it to my earlier comment about the US. So you guys may recall that last year we saw a number of our larger ISOs bill some annual fees for PCI compliance in this quarter, and you'll recall we talked about that being a couple points of growth, which would have left you in the $10 million to $12 million range. While those fees are again being billed, this year they're being billed more ratably over the period of months. If you actually took out the impact of the change in billing technique for those fees you'd find revenue growth in the US would be 8% rather than the 5% we reported. So then if you start to take your transaction growth of 14%,your average ticket decline of 6%, the numbers start to make a little bit more sense and track a little bit better with the back-end formulas you drive in your models just to sort of sanity check them.

Yes. No, that's helpful. And then what we should we expect then for a revenue growth rate out of the US going forward?

Well, do you mean in terms of the implicit view of Q4?

Yes, I guess. Yes, I'm just trying to figure out if it should accelerate from these levels based on the comps even out or a little bit better transaction growth, or just some of your thoughts there?

Yes, so let's talk about both sides of that for a second; sequential and year over year, if that's okay. So the way to think about the US as you head into Q4 is I would describe it as modest uptick, a little seasonal. We really don't have a seasonal Q4, but we do have a seasonally light Q3, so think of it as a modest sequential uptick due to continued ISO performance and just the fact that we have a few more processing days in Q4 versus Q3. Same thing would kind of hold true as you look out to year-over-year growth. We've got a few more processing days than last Q4. The ISOs continue to take market share and drive solid growth. So, I would think if you're modeling -- it depends on where you want to be in terms of the revenue range, but you're going to model growth being couple to handful of points higher in the US in Q4 year over year versus what it was in Q3 year over year.

Okay. And I know you talked about Canada being down 4% on constant currency so it looks to us about $12 million or so of revenue was from Canada. I guess is that -- that drives the majority of that $0.07 benefit in the quarter, is that right, Dave?

You're speaking specifically FX, yes, Bryan?

Yes.

Yes, that's roughly correct, Bryan, yes.

Okay. And just the follow on to that is then if you look on the year-over-year basis, if I back out that FX gain you got in Canada, the margins really do fall quite a bit. I know you touched on it a little bit, but I want to make sure I'm not missing anything.

Well, FX is obviously help to margin so the margin conversation is a conversation about all the pieces coming together and what does that mean as we go through the course of the year. This year, on a year-over-year basis, FX is our friend in Canada. It's marginally our friend in the UK, I suppose. A fair amount of that, as you know, was planned, some of it was not planned. So all in it's certainly factor and when we talk about our performance for the full year, whether it be earnings, margin or revenue.

Okay, thanks a lot.

Thank you.

We go next to Tien-Tsin Huang with JPMorgan.

Thanks so much. This will be a follow up to Bryan's question. Just the -- I guess in the third quarter the North American operating expenses looked like it actually picked up a little bit sequentially, David, and then it looked like the quarter revenues were down sequentially. What's driving that dynamic exactly?

Tien-Tsin, I'm sorry, we had a speaker cut out in the room for a second. Would you mind repeating the beginning part of your question? I apologize.

No worries, man. Just thinking about the North American operating expenses, just looking at that it was up sequentially and the revenues were down sequentially. What's driving that, that dynamic, I guess?

Yes, there are two relatively simple answers, although the dynamic can be challenging and a little confusing. The first is, sequentially we did see that uptick in ISO billing. It wasn't the kind of number we saw last year, but as you know, that's dollar-for-dollar expense and revenue so that's a little bit of it. And the reality is the rest of the expenses that are hitting North America, be it a little bit of IT investment or operations expense, are staying flat or with some investment just trickling up a little bit.

Got you. There's nothing else unusual in terms of one-timers or in tender fees, et cetera?

No.

Got it. On the China side, when you do the acquiring in China will you also be doing the processing as well? And I guess maybe if you can comment on how spreads look over there it would be helpful for us to think about just the model, let alone the revenue outlook?

Yes, Tien-Tsin, it's -- on CUPs they have an interchange and you typically add basis points to it. Even though it's a PIN-based debit it isn't necessarily sent, although in some markets it is. Now keep in mind, we process three CUPs a day in a PIN-based environment in Hong Kong and Macau. Now we will be doing -- we're providing all of the services. Initially we'll be utilizing CUP actually to do some of these as we build our own functionality. But the merchant -- it will all be transparent to the merchant so it's not unlike actually people buying services from us. So we will put together the seamless service offering, seamless to the merchant, but we will be utilizing CUP initially and then migrating to our own use.

Okay. I want to ask about Jeff Sloan coming on as President. Maybe the -- I guess I'll ask what was the primary motivation there? Should we interpret it to mean that Global will be a lot more active in consolidating the space?

Well, clearly Jeff is one of the smartest, if not the smartest [fin tech] guy on the face of the planet, and we've known him -- he took us out -- we're having our tenth anniversary this coming February and he was the Goldman banker that took us out on our IPO so we've known him intimately for a lot of years. But Jeff will help us find opportunities, but that's not his primary focus, it's part of his focus. And, yes, we are interested in finding new opportunities. Tien-tsin, we try not to get books. When you get a book you're in kind of the same level as everyone else and it tends --.

Right.

-- to go to the guy writing the biggest check. The biggest deals we've done are deals that we ferreted out ourselves and I think Jeff will be extremely helpful in that regard. But he's also a really smart guy and I'm confident that he will be another smart guy amongst this group. There's a great saying that someone brought to my attention that no one of us is as good as all of us. It's just another smart person to help us think strategically, help us open up new markets, and of course do some deals as well.

Got it. Okay, thanks for that. Last one, kind of another on the spot kind of question, but I know you're not going to share with us the G2 savings until next quarter if it's consistent within the pa -- like you -- as you've said in the past, but it seems like there's just a wide range of expectations out there. So just looking at Street expectations for next year, looks like 11% EPS growth. Do you see any disconnect there in terms of expectations versus reality, because it seems like we're hinging a lot here in terms of what you're going to talk about in July. Can you comment on that at all?

Yes, Tien-Tsin, I would say that we can't because that'd really be giving you guidance at this point and we're just not prepared to do that.

Okay, appreciate it. I hope you appreciate why I asked.

I know. Listen, I don't -- if the tables were turned I'd be asking the same question.

Okay. Thanks a lot, guys.

Thank you.

Thanks, Tien-Tsin.

We go next to Chris Shutler with William Blair & Company.

Hi, guys, good afternoon.

Hi, Chris.

Hey, Chris.

So just a couple of quick questions. First, the international operating margin was really strong again this quarter. I calculated the incremental margin internationally was about 40%, down a little bit from north of 60% last quarter, but -- and you've already talked about the dynamic currency conversion. Really just wanted to get a sense what else is driving that international operating margin higher? And then also, is the -- have the recent pricing initiatives in the UK played into that?

The answer to your second question is yes. So the pieces really of international that are operating, frankly, as planned are the Asian margin continues to make progress. It's a very straightforward scale conversation. We talked a little bit about G2 earlier relative to Asia, but it really is all about increasing scale, increasing volume, and increasingly profitable transactions, as you pointed out, Chris, relative to DCC. Then we have the UK, which is certainly the largest source of revenue amongst the international assets and its pricing is actually holding quite well. When you do the modeling and you think about how to introduce a price you model in a certain assumption of how much of that is going to leak back to the merchants over some period of time with rate reviews, questions, things like that. And we're actually running a little ahead of where we thought we'd be in terms of how much of that we're giving back to the merchants to put it a little more bluntly. So feeling pretty good about the progress there.

Still a lot more to go in the UK and the UK's doing that amidst some pretty challenging macro conditions, so stay tuned as the UK continues to make progress and execute well. And then our Russian venture continues to execute very, very well. The team there is operating ahead of our plan. It's obviously a very small number, so ahead of plan is a relative statement, but those are the pieces. And then going the other direction, as you know, is the Central Europe business, our Czech Republic business. It's a little more challenged. We did, indeed, reprice one other decent-sized customer this past quarter, as expected, so that continues to drive margins a little bit downward. So we've got Asia and the UK fueling the expansion, with a little bit of Central Europe going the other way and a little bit of lift from Russia, all of which really down to execution as planned in Asia and pretty solid execution with repricing help in the UK.

Okay, great. Thanks. And then on Canada, could you just comment if you saw any kind of material benefit this quarter from the Olympics?

I think when we peel back the merchant types I don't know that we saw material benefit. There's clearly a benefit in the numbers, and I think you saw some stabilization on metrics that suggests we got a little bit of help there. How to peel that and separate it from general stabilization is really difficult.

Yes.

But I think that certainly helped us over the course of the winter months.

Okay, fair enough. Then last question, just on China. How should we think about modeling the hiring ramp that needs to happen in China in anticipation of what you're going to be doing in Beijing? How many people do you already have on the ground, how many do you need to add, and is there really any upfront expense associated with that, or is it really just that we're going to see the expense coming to the P&L as we see the incremental revenues?

Yes, I think fair question, Chris. I think we're the latter. There is some -- there is hiring and we are actually beefing up the Beijing operation in anticipation of this. But these guys pay back pretty quickly. You have a different metric, of course, in China. You're not paying the sales people what you pay them here.

Sure.

And they're producing -- to Tien-Tsin's question earlier, they're producing pretty similar returns to the US. So it's a great investment. It will require an investment, but it's not going to be something that's going to bleed us until we get a return. So it's pretty quickly paid back.

Okay. Thanks a lot, Paul, I appreciate it.

You're welcome.

Fur next question we go to Glenn Greene with Oppenheimer.

Thank you. Good afternoon.

Hi, Glenn.

Just a quick question, Dave. You were starting to go down this path, but could you give us a little bit of color more on the UK,what you see in terms of the environment, what revenue might have looked like? And I think the big driver, really, of the international margins has probably been the UK. If I recall they were running in the mid-30s. Is that kind of reasonable?

Well, I think that you rewind almost a year ago, Glenn, you'd have seen it on a $200 million run rate in the US, and many of you and your colleagues would have modeled it to the 30%, so we've never really quoted that. I can tell you it's healthy margins and they are north of the total Company margins. And what we have there is a great market opportunity given the partnership we have with HSBC and the opportunity compete, we think, very effectively against the rest of the market with a terrific service offering that will only improve in time as we migrate our back end and move on to all of our systems with G2, as well. So we're teeing up some really nice conditions in the UK, but you really can't escape the challenging macro there, as well.

So we've got a situation where we're effectively repricing, we are doing a nice job managing the sales force, and as you know, we've redrawn the territory so we've remapped ourselves with the branch network in order to maximize the leads. And now as we execute going forward we think we're in terrific position. But the point of my color a moment ago is just giving a little bit of credit to the team there for effectively repricing, getting a little bit more than we thought as we rolled it out maybe a month or two -- a couple months ago. I think it's effective October for most of it, but still recognize that that's as challenged of macro environment as you can find out there today, quite frankly.

Any way to give some color on average ticket or transaction trends for that market?

I think we're going to stick with not giving that kind of color for markets where we really don't operate the systems and can't quite control the metrics and ensure the definitions are exactly the same as everything you see when we talk to you about the US or Canada. So the answer unfortunately is probably no for now, Glenn.

Okay. And then just quickly on the Canada FX, if I recall back from a while ago I think the contribution margins here are very high, north of 50%, and that's largely what I think explains the $0.07 EPS impact. Just want to make sure I'm thinking about that right?

You're thinking about it correctly. If you rewind all the way back to -- going the other direction, literally a year ago, you're thinking about it correctly. Your math is -- your formulated math is correct.

Okay, great. Thanks.

Thank you, Glenn.

We go next to Moshe Katri with Cowen and Company.

Okay, thanks. Can anyone talk a bit about some of the other international initiatives that you're focusing on, maybe update on where we are in terms of penetrating the markets in Brazil and in India? Thanks.

Okay, Moshe. So Moshe, we're in India. We have a partnership, that's one of the 11 Asian countries we have with HSBC, and we have people that sell at literally every Indian state; although it's not a huge market for us, primarily because it's not a huge market for HSBC. So we continue to look at other opportunities to further expand our footprint in India. And I don't have anything specific to say about that other than we're working diligently to do just that. In terms of Brazil, we -- there is an opportunity in Brazil, and we are very interested in that, and I don't have anything specific to announce at this point, although we are hopeful that we will be successful with our efforts in Brazil and we will have something to talk to you about.

Okay, fair enough. Then going back to Canada, we haven't heard a lot about maybe your view on what's happening with Interact. Obviously their recent requests to go public was rejected by the regulators. Your view on that, is that a setback for Global? And then is First Data a big factor in terms of the fee pressure and pricing pressure that you're seeing in Canada? Thanks.

Moshe, first of all, at Interact, yes, we were disappointed. I don't -- setback's a little strong. It would have been a nice catalyst for Canada next year, but we still have Visa and MasterCard pursuing what they're pursuing and we believe that that is going to happen. Because at the end of the day, it's good it's good for the Canadian consumers. It'd be tough to hold that back. So we think that in itself will be a catalyst. It wouldn't have been as immediate as Interact. The Interact's the one player and that would have been fairly significant fairly quickly, so we were disappointed. The -- but remain tuned, let's see what happens on that. And what was the last part? I'm sorry.

First Data.

First Data. Yes, First Data as a reason -- First Data is active and aggressive in every market. I would say Canada is not one of their larger. Our biggest competitor in Canada is the [Monaris], which, of course, is Bank of Montreal and Royal Bank of Canada. And First Data is in Canada, but not in a very big way.

Thanks.

You're welcome.

We go next to Dave Koning with Baird.

Hey, guys, and just following up on Bryan and Tien-Tsin's question about North American EBIT, it looks like on a constant currency basis EBIT is down year over year now for four quarters in a row. To me it seems like the encouraging thing is we might be anniversarying something and we might be returning some growth in the next couple of quarters. I'm wondering if you can just talk about that a little bit, if we have anniversaried something now that we've gone through four quarters of that?

Yes, Dave, without specifically commenting on the math of the constant currency I do think that we have the opportunity for anniversarying things, frankly helping us a fair amount over the coming quarters. That's certainly a part of the answer to Canada, as we work through a tough macro with a little more competition there's a real opportunity to bring that through over coming quarters. And in the US, this is about -- a little bit about mix and about ISO, and to the extent we can anniversary some of the challenges and checking game in the alternative products, there's an opportunity to keep turning the curve our direction over a period of time. No promises, because some things at a macro level have to fall into place. But I think that what you've described is a fairly astute analysis without, again, acknowledging whether your constant currency's dead-on or not, if you know what I mean.

Yes, sure, that's fair. I guess the only other question I had was the free cash flow, when we ex out the settlement movements and minority interest movement, it looks like this quarter it was well over a dollar, $1.15, something in that ballpark per share and year to date a little over $2.50 or $2.60. I'm wondering if that's how you would look at it, as well. If it is that high should we expect a little bit of a downward adjustment in Q4 because maybe the working capital helped quite a bit the last few quarters?

Yes. Well, I think -- let me describe to you how I look at it. We obviously don't quote it and don't guide to it so I have to be a little circumspect here, but if you were going to start with operating cash flow and then normalize for variances in settlement and any sort of money transfer beneficiary line items, and then also normalize for the minority interest distributions and then take out your CapEx, you get a decent size number. I don't think you get quite as far north as that dollar you quoted for just this quarter alone. but you have a number that's going to [have you] and be over $200 million year to date. It's a pretty solid number, one you may find us chatting a little bit more about over time as we keep growing the business.

As you head to Q4, though, you are correct. I would not expect a repeat of Q3, if for no other reason than CapEx based on, as you heard in the prepared comments for me, anyway, that CapEx will be up fairly materially in Q4 based on our current projection as we launch a couple of initiatives we hadn't originally planned that are quite strategic and important for the business, namely the -- our own disaster recovery site. So expect it to be a little down from what you saw in Q3. But I think your point's a really good one. This is a solid cash flow generator and as I've discussed with any number of you, we're going to do a better job of being able to show that to you over period of time from a disclosure and reporting perspective.

Yes, that's great. Thank you.

Thank you, Dave.

We go next to Robert Dodd with Morgan Keegan.

Hi, guys. At the risk of boring you again a quick question about G2, but a simple one. On the processes currently in the US, the work done there, are the costs being expenses or capitalized?

Oh, Robert, I'm sorry. I was looking at Paul. The answer to your question is the costs are largely being capitalized right now, so at the time we go forward with a launch and begin to take costs off of -- whether it's the US P&L or eventually Canadian P&L, we will also bring a pretty sizable asset into service that we'll begin amortizing. That amortization period for each market in which we operate's going to be about -- it's going to be ten years. The asset'll amortize based on transaction volumes, or projected transaction volumes. So we've got a little bit of amortization right now. For example, in the Asian P&L, small enough that you obviously can't notice it in the midst of the progress we're making in Asia, and then eventually we'll bring in that asset for the US, Canada, UK, and eventually Russia. So there will be amortization coming through at the same time the savings begin to show through, as well.

Okay, got it. Thank you. And then just on MasterCard pricing in April a couple weeks from now, when that assessment fee changes does that, or do you expect it to have any affect on -- obviously there's a round-up opportunity, but I'm thinking of it, does it trigger any ISO contract renewals or anything like that? I wouldn't expect it to, but could you clarify that?

Robert, it does not have any impact in terms of triggering anything. There is a slight rounding opportunity and I think you said it just correctly.

Maybe just a little more color, just to make sure if you're talking about MasterCard specifically, quite honestly, Robert, it's a minimal impact to us.

Got it. Lastly, you talk -- China, obviously you've seen a lot of attraction it seems to be there, it's early stages, has there been any change over the last short period, week or so, given the talk that the US or (inaudible) [Visa or MasterCard might take China, the WTO, on the processing part?]

Yes, believe me, I've been reading that and got a lot of inbound inquiries on that, as well. The answer to that is no. The Chinese government in terms of their involvement of this has been, I think, very fair with us and the Bank of China and CUP have been incredibly supportive. And getting 30 banks, 30 banks to unanimously support to you to bring in a Western institution is no small feat and they did that, too. So I have to tell you, if you judge things by your own experience, I have found this process -- it took a while, but on the other hand, I found this process to be very balanced. I felt I was treated very fairly, and it is their country at the end of the day. They make the rules and if you want to play you got to -- as long as it doesn't violate something that you feel strongly about, you have to play by their rules and we're fully prepared to do so and I think because of that, we're in a unique position.

Okay, great. Thanks, guys.

You're welcome.

For our next question, we go to Dan Perlin with RBC Capital Markets.

Thanks. Hey, guys, just a couple of quick questions. You talked about in the past that when you go into markets and you introduce more complexity to those markets that give you all the pricing opportunities and I'm wondering as we sit here today a couple things. One is, you talk about the UK repricing, I'm wondering what the competition is doing. Are they following you guys in creating more complexity, or are they still sitting by the wayside? I'm not sure I fully appreciate what they're doing, so if you could answer that question quickly that'd be one.

Okay. So the UK, you have an interesting environment in that you have the largest player that is engaged in conversations and they certainly recognize that every dollar generated or conversely every dollar lost has an impact on the ultimate value and that creates some aggressive behavior. So that is probably a little bit of an anomaly and it's hard to say who's following what here. So I would say we have not seen attrition pick up. What we're doing is sticking, and we feel it's very balanced, but when you have the biggest guy trying to figure out what their future is, it's very hard to answer that with a lot of specificity, Dan.

And maybe, Dan, just to clarify a little bit, our UK business right now operates on what we call a blended pricing model, so without the complex pricing element to start with headline rates and then deal with surcharges from there, not dissimilar to how all of our competitors operate in the same market. So the market isn't there yet. When we talk about adding complexity or managing more complexity in the market as it develops, that's a little bit more of a forward-looking statement than it is the way we operate right now.

Exactly. So an eventual conversion of that portfolio to our systems will enable us to do all the things we can do in Canada, for example.

Do you have to have -- I'm sorry, I didn't mean to interrupt. Do you have to have G2 converted in order for you to go to a blended model to a more consistent model with your existing platform?

No, we don't and this probably is an important distinction just to mention on the broader call while we have the opportunity. So G2 is about the front end. It's about authorizations. It's not where we price or settle. When we talk about a back-end migration of the United Kingdom that's when we talk about the ability to price more discreetly over time. That's the migration that still awaits scheduling and a more formal announcement from us to you guys to date, as we're still finishing gathering the requirements there that come to us from HSBC. But it's that back-end migration that's the key to pricing. G2 is not a requirement for the pricing. They are linked, but independent projects from a migration standpoint.

That's a very important part -- point, Dan. So you have a catalyst over time in this huge portfolio that's getting bigger that we'll be able to take advantage of.

Right. As you think about the other markets, and let's -- I suspect a mature market like the US and Canada to a lesser extent are -- although they offer opportunities down the road are probably not the ones that are going to happen, how should we think about rank ordering other markets where you can introduce, again, more complexity and therefore pricing opportunities? So UK is a huge one, but maybe there's -- maybe that's still going to come for fiscal 2011 and 2012, what about those other markets in Asia, what about Russia and what about even still the Czech Republic?

They're all smaller. I think the opportunities present themselves as conversions happen, but they're all smaller. So the big drivers for us are Canada, the US, and the UK.

And actually, to be perfectly frank, Dan, we've migrated seven of the 11 Asian markets to this back end -- to keep the nomenclature the same -- so it's a part of the Asia story as we speak already.

It's part of the Asian margin that was asked earlier, too.

Sure.

So it wasn't exactly G2, but it's part of the migration. G2's a piece of it, the back end's another.

Okay. And then, Paul, you made mention -- and I don't know if you were just misspeaking or what, but you said that China -- and the words I think you used were providing similar returns to US and China. I put question marks by that because the question is, are you providing similar returns in China as you think about that market in your indirect US business or your more direct ISO business?

No, I think what I would say -- so what we have in China is a direct model right now, so we have our own sales force operating and we are signing international merchants, because that's really all we can do mainland. In Hong Kong and Macau and Taiwan and other Asian markets we have all the merchants, big and small. Those spreads -- what I was referring to, Dan, is the spreads on those merchants, meaning what we make after interchange and assessments, is similar to, not higher than what we have in the United States. So what you make on these merchants is actually quite robust.

Okay, and then I think, David, in the past you actually gave us what Russia contributed, again it was still considered an acquisition, so can you tell us what the actual revenue contribution was this quarter?

No, Dan, I can't. Actually what we did is when we started off the year with Russia we talked to you about it being on a $30 million run rate and since then we have not broken it out and I think we'll leave it inside of the European revenue C as a line item.

Okay. And then I guess one last one, just very simple question as it pertains to Canada. You guys have a very large market presence there and I think it's somewhere in the 30s, but I don't know that you've ever actually given us the mix between size of merchants and given this is becoming such an issue, I wonder if you'd be willing to share that with us?

No, Dan, in none of -- not in any of our markets -- excuse me -- do we really break out by subchannel how the pieces come together, so I don't think it's necessary for you to get a gist for the macro challenges, or the macro-driven, whether the market challenges I described earlier, so I think we'll stick with that for now. We appreciate the question. I think we have said in the past that it is a market where we have some big guys, as well as some smaller merchants, whereas the US is predominantly mid market.

Okay. And then just lastly, I think you've said on a couple occasions, and this (inaudible) a month deep into it that you'd be disappointed if you weren't able to close an acquisition within six months so by my calculation we're now down to five months. So is that still a fair assessment, or should we be changing that time table?

I'm disappointed every day we don't close an acquisition, so I'd say if we said it you can certainly hold me accountable to it.

Okay. Thank you, guys.

You're welcome.

Thanks, Dan.

And ladies and gentlemen, this does conclude our question-and-answer session. At this time I will turn the call over to Mr. Garcia for his closing statements.

Well, thank you, operator, and thank you to everyone on the phone and your continued interest in Global Payments.

Thank you, Jim.

And ladies and gentlemen, this does conclude today's conference. Thank you for your participation.