Global Payments Inc.
Q1 2009 Earnings Call Transcript

Published: 3 Oct 2008

[Operator:]

Welcome to Global Payments first quarter fiscal 2009 earnings conference call. (Operator Instructions) At this time I would like to turn the conference over to your host Vice President of Investor Relations, Jane Elliott.

[Jane M. Elliott:]

Joining me on the call 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 are subject to risks and uncertainties that could cause actual results to vary which are discussed in our public releases including our most recent 10K. 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 may refer to normalized results which are not in accordance with GAAP. Management believes that normalized results clearly reflect comparative operating performance. For a full reconciliation of normalized to GAAP results in accordance with Regulation G, please see our press release filed as an exhibit to our Form 8K dated October 2, 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 R. Garcia:]

We achieved strong financial results for our fiscal 2009 first quarter. For the quarter our revenue grew 30% to $405.8 million and normalized diluted earnings per share grew 31% to $0.71. Our North American segment reported strong growth primarily driven by successful pricing initiatives in Canada and a favorable foreign currency exchange benefit. We were delighted with our international merchant segment performance which was primarily driven by the favorable impact of our joint venture with HSBC in the UK. Additionally, we continue to achieve solid revenue growth from sales initiatives in our Asia-Pacific region. Now let’s look at the segment details. Our North American merchant services segment grew 16% in revenues for the first quarter. We continue to focus on signing small and mid-size merchants in the United States through our ISO channel and our own direct sales efforts. We also continue to sign mid and small sized ISOs that have the potential to drive future growth and as such we signed five new ISOs this quarter. Our domestic direct credit and debit card transactions grew 20% during the quarter and we had total revenue growth of 12% in the United States. In Canada our revenue grew 29% for the first quarter primarily due to favorable pricing trends and a positive impact from the Canadian currency exchange rate. Our international merchant services segment experienced revenue growth of 176% primarily driven of course by growth in Europe. Our European expansion was due to the recent acquisition of 51% of the HSBC UK merchant business as well as a favorable year-over-year check currency exchange rate. As part of the UK acquisition we received a seasoned management team with the leadership skills and the track record to support our future expansion plans. In our Asia-Pacific region we grew revenue by 29% for the quarter as a result of continued momentum gained through pricing strategies, our sales force initiatives and new product introductions. Turning to our money transfer segment, we achieved total revenue growth of 5%. In the United States transactions declined 10% for the quarter. This decline was partially due to a 13% reduction in the 780 domestic branch locations at the end of August compared to 898 locations last year. Despite this reduction in branches our domestic revenue declined only 1% in the quarter due to favorable year-over-year pricing and very importantly our total money transfer operating income grew 20%. In Europe our money transfer revenue grew 37% for the quarter and we ended August with 90 branches. This strong revenue growth was primarily due to transaction growth of 9%, favorable pricing compared to the prior year, and a favorable year-over-year foreign currency impact from the Euro. Now moving on to recent announcements. Firstly, we expanded our Asia-Pacific joint venture with HSBC on September 4, 2008 by adding the Philippines to the existing 10 countries and territories that were included in the JV. The JV paid HSBC $20 million in cash with global payments, 56% ownership obligation equal to approximately $11 million of that $20 million. In addition, the Philippines are now included in the existing 10-year marketing alliance whereby HSBC will refer new merchant customers from its extensive branch network to the joint venture. We also recently announced an agreement in the Russian Federation to acquire United Card Services which we refer to as USC. USC is a leading direct merchant acquirer and an indirect payment processor operating in the high growth payment markets of Russia, also enjoying an expanding economy. Under the terms of the agreement we will pay $120 million to acquire UCS which had calendar year 2007 revenue of $34.2 million. Additionally, UCS entered into a 10-year marketing alliance agreement with Rosbank which has historically provided agent bank referrals and Visa and MasterCard bank card sponsorship. As part of this acquisition we are receiving a dedicated and experienced management team and we look forward to working with them upon the completion of this transaction. I believe this to be an important step in expanding our footprint internationally and we will continue to look for additional opportunities using the same financial and operating discipline that has become a cornerstone in our acquisition strategy. I’ll now ask Joe to further discuss our financial results.

[Joseph C. Hyde:]

Our press release includes a GAAP income statement and a schedule that reconciles GAAP to normalized results. Our normalized results exclude restructuring charges and certain non-recurring non-cash items. As Jane mentioned, please see today’s earnings press release for more information. Before I begin reviewing our results I’d like to describe several new disclosures included in our press release. First, we provided a reconciliation of our diluted EPS guidance. We added this disclosure to assist in reconciling our first quarter results and our full year guidance on a constant currency basis given the recent volatility in the foreign exchange markets. As evidenced, we expect our constant currency growth over the next three quarters on a combined basis to remain relatively consistent with first quarter levels. The most significant expected change comes from foreign currency which added 5% of diluted EPS growth in the first quarter compared to an expected 5% reduction to our growth for the rest of the fiscal year. An additional new disclosure was to expand our segment reporting as a result of our UK acquisition and anticipated future international expansion. In the press release we provided the historical financial results by segment for fiscal 2007 and fiscal 2008. We also provided the supporting detail behind our effective tax rate calculation for these same periods. Lastly, on the balance sheet and cash flow statements we have included the full line item detail in the same expansive format used in our quarterly and annual SEC filings. In connection with this change, we have separately disclosed the amortization of acquired intangibles and share-based compensation expense. We are very pleased to provide all of these new disclosures to increase the level of transparency to our financial performance. Now on to our results. We were pleased with the 17% growth in operating income that we achieved in our North America segment during the quarter. These results were largely driven by strong revenue growth in the United States and Canada and the related economies of scale benefits. Our expenses in North America were largely in line with our expectations. Our international merchant services operating income grew 297% during the quarter primarily due to the impact of our 51% UK acquisition. To assist you in calculating organic revenue growth, we intend to separately disclose the revenue achieved from this acquisition during the first year after completion. As such, we achieved $43.3 million in UK revenue during the quarter which was consistent with our internal expectations. The impact to operating income of this acquisition has been greater than expected primarily due to lower profits in costs than planned. Moving to money transfer, this segment’s operating income posted strong growth of 20% for the quarter as Paul discussed. This growth is the result of improved pricing compared to the prior year and the closure of unprofitable branches. Our corporate expenses increased during the quarter from the prior year primarily due to the expansion of our corporate area to support our continued growth in addition to costs associated with completing our UK acquisition. On a consolidated basis our normalized operating income grew 38% compared to the prior year and our normalized operating margin increased 130 basis points to 22.9%. We expect strong operating income and operating margin growth for the full year as a net result of the trends that Paul and I discussed. The net of our interest income and interest expense line items resulted in $1 million in income during the quarter, which is a reduction from the prior year primarily due to the impact of our UK acquisition and lower interest income rate domestically. Our minority interest during the quarter grew significantly compared to the prior year primarily due to our 51% UK acquisition. Adjusting for the impact of current exchange rates and an additional month of UK financial results on a pro forma basis, our minority interest would have been in the $10 million range. We expect this will be the approximately quarterly run rate going forward subject to fluctuations in the earnings of our two joint ventures with HSBC and our joint venture with Comerica. Our effective tax rate for the quarter was 32.9% as compared to 35.4% in last year’s quarter. This decrease was primarily due to a favorable impact from the lower UK statutory income tax rate of 28% and certain tax planning initiatives. We expect a similar effective tax rate going forward subject to one-time items such as changes in tax reserves due to income tax statute expirations. Capital expenditures for the quarter were $7.7 million which primarily related to technology and merchant terminal spending. For fiscal 09 we continue to expect capital expenditures to modestly increase over the $45 million spent last year primarily as a result of our UK acquisition and continued technology in merchant terminal spending. Moving on to the balance sheet, our reported cash was $288 million at the end of August. Despite the current economic environment and the credit issues other companies have experienced, we believe that we are in a position of significant financial strength. We expect to easily meet the repayment obligations on our five-year term loan using internally-generated cash flow and we have an uncapped $350 million line of credit with a group of stable commercial banks. We grew our net cash provided by operating activities by 78% during the quarter to $67.8 million and we expect strong cash flow growth for the fiscal year. Lastly, we believe that our healthy balance sheet provides us with a competitive advantage in pursuing our acquisition strategy. Paul will now discuss our fiscal ‘09 guidance.

[Paul R. Garcia:]

Based on current trends in our ongoing growth strategy we are raising our fiscal 2009 annual revenue guidance to $1,640,000 to $1,680,000 or 29% to 32% growth over the $1,274,000 in fiscal 2008. We are also raising fiscal 2009 annual diluted earnings per share guidance to $2.37 to $2.45 reflecting 20% to 24% over our fiscal 2008 normalized diluted earnings per share of $1.98. This guidance excludes future acquisitions or potential restructuring and other charges. I continue to be very positive about the long-term prospects of Global Payments especially in our international markets and in the continued strength of our North American merchant channels. We’ll now go to questions.

[Operator:]

(Operator Instructions) Our first question comes from Daniel Perlin - Wachovia Securities.

[Daniel Perlin:]

It sounds like you’re moving into some of the smaller ISO channels and I’m wondering to what extent do those smaller ISOs rely in terms of selling some of their incremental equipment utilizing third-party lessors? And the second part of that question is, are you prepared if at all to step in since you’re financially much more viable than maybe some of their lenders?

[Paul R. Garcia:]

The first part of the question in terms of moving into that channel, we really pursued ISOs of all sizes from small, medium to large full liability 50/50 and zero liability so I’m not sure there’s a shift there, just how we’ve historically signed more smaller ISOs than larger ones on a frequency basis. I think in terms of the terminal buys, I haven’t heard anything recently to suggest that it’s problematic to get credit to purchase and then lease or just outright lease. We haven’t had ISOs at least in the US coming to us and asking but I would suggest if they were, I think we would be amenable to it but the credit markets are changing rapidly these days so I think we’ll stay tuned and continue to try to support that channel with as much support as we have historically.

[Daniel Perlin:]

On the HSBC UK venture, you’ve owned it only for a short period of time but I’m just wondering, there’s been a lot of incremental moving parts as we’ve seen some pretty significant deterioration in a lot of economies overseas. I’m just wondering to what extent are you trying to manage that? Are you seeing any changes in the market over there? And then if you could maybe just comment about how you’re rolling out in terms of the Asia-Pacific platform consolidation?

[Paul R. Garcia:]

I’ll take the HSBC question and Jim, I’ll ask you to deal with the AP conversion. In terms of the HSBC question, they were number three in the market and they were kind of marking time. And although management had a number of I think really excellent ideas, they weren’t in a position to implement a lot of innovation. That’s one of the reasons the bank felt this was such a good idea. They reached out to us and of course we happily did this, and there is a fair amount of low-hanging fruit, is the answer to the question. Although there are pressures in every economy around the world and we’re in uncharted territory so let’s see where this goes, but right now we’re seeing nice growth from that business and as I said we’re taking advantage of some of the low-hanging fruit including adding some sales resources in places that could support them readily. So it’s looking pretty good. Jim, you want to talk about AP?

[James G. Kelly:]

Sure. We’ve completed our certifications for the [D2] platform with both Visa and MasterCard at this point in time. So that was a milestone that was good to pass that recently. We are contemplating for the front end starting this month to put a few merchants into beta and assuming that goes according to plan, we’ll start to roll through Macao partly this calendar year; if not, the start of next calendar year. Then Hong Kong will follow. On the back end we have five countries including the Philippines which we just recently announced the purchase of. Those are slated to begin conversion maybe the late first quarter or early second quarter of next year. So I think this’ll be a big event for us to get D2 up and live in production and then the back end continues to do well. We’ve already converted two countries in the region, Macao and Hong Kong. This will give us another five, seven in total with four to go.

[Operator:]

Our next question comes from Analyst for Tien-tsin Huang - J.P. Morgan.

[Analyst for Tien-tsin Huang:]

A question on the US economy. Can you give us some color on what you guys are seeing kind of intra-quarter? I know it’s not a same-store sales growth type story here, but just any color on trends you’re seeing volume-wise intra-quarter please?

[Paul R. Garcia:]

We have seen some softness domestically. Now the good news is softness for us with our strong ISO channel still means pretty significant growth. It’s just not as robust. Fortunately we’re in a lot of other places but clearly we have seen some softness. Things are developing as we speak. Who knows where this economy goes but I’d like to refresh your memory that this is a nice place to be even in recessionary times. There’s lots of data that suggests that credit cards always grow even in recessionary times. And then there’s the whole concept that it’s discretionary versus non-discretionary spending and we’re rich with non-discretionary channels like education and health care and the like, government. So I think it is a cautious environment. We are watching carefully. But I think we’re as well positioned as one can be given the macro trends.

[Analyst for Tien-tsin Huang:]

Talking about moving towards smaller ISOs or signing smaller ISOs, does that give you an opportunity to maybe price a little more aggressively? I know you guys have seen some pressure from renewals on your bigger ISOs. Are you getting maybe a little pricing lift as you kind of move downstream to smaller ISOs?

[Paul R. Garcia:]

The answer’s yes. There’s a huge amount of discipline in it. It’s all volume driven and the ISOs many of whom know each other extremely well. So you have to be a very honest broker here. So smaller ISOs have higher pricing and larger ISOs have lower pricing, and they’re offered opportunities through tiers, etc. to get to various levels. But yes. That is one of the advantages is you do price them somewhat higher than the really big guys. But you’ve got to keep in mind, you’ve got to make them competitive so it’s not huge differences.

[Analyst for Tien-tsin Huang:]

I saw yesterday Banco de Mexico had pretty weak numbers for August for Mexico money transfers. I’m just curious, have you guys noticed anything incremental maybe between July or August or is there something that you guys saw as well? Any color there. And then maybe also if you could talk a little bit about the demand environment overseas with Europe? You definitely posted great revenue growth but just incrementally are we seeing a slowdown in demand in both Mexico and in Europe? If you could talk to that please.

[James G. Kelly:]

Domestically in DolEx as the numbers suggested, July was a slower month. August we saw some rebound relative to July. As Joe reported in the numbers, as did Paul, the quarter was still a very good quarter for us in this business as it was in the fourth quarter of last year. So while we like the rest of the competitors in this market place are working through a much slower market than we did a couple years ago, I think from a performance standpoint I think we’re still doing very well. In terms of Europe, that market similar to the US has clearly seen a slowdown. Most of this business is tied to construction, agriculture, construction being the largest piece, and their dependence on construction and construction growth has slowed such as we have seen in the US. Now I would refresh your memory that we also acquired a business last quarter in Europe so part of the growth you’re seeing there is aided by the addition of another 15 or 17 branches.

[Paul R. Garcia:]

I’ll just add one thing. It’s also very geographic. Arizona’s not doing great. No one told the people in Texas that there’s a potential recession. Their economy’s doing wonderfully. There are a ton of jobs for those who would use our services, and with the terrible storms that swept through there, even more so. So I think there’s kind of a nice tailwind at least in that region for us and we are very heavily concentrated in Texas.

[Operator:]

Our next question comes from Patrick Burton - Citigroup.

[Patrick Burton:]

One balance sheet question first. The increase in accounts receivable, could you just take us through that please?

[Joseph C. Hyde:]

That is the effect of two months of the UK revenue which we did not collect until September.

[Patrick Burton:]

So nothing ex that event? DSOs back to normal?

[Joseph C. Hyde:]

Yes. Next quarter that should come down. I think it was up $40 million from May. Everything else being equal, it’ll be up one month of UK revenue or $20 million. So we should get a positive inflow in the second quarter.

[Patrick Burton:]

And to follow up on the prior question, in terms of June, July, August sequentially you didn’t see any material sharp fall off in volume numbers in the US particularly in the month of August? I’m sure you don’t want to comment about September but whatever you’re seeing would be helpful on a real-time basis?

[Paul R. Garcia:]

Are we discussing DolEx or merchant?

[Patrick Burton:]

By merchant please.

[Paul R. Garcia:]

We definitely saw some softness domestically in the first quarter for our merchant business both within the ISOs and within the direct business. The direct portfolio which is a piece of that business and the ISO is the other piece, both did see it. What I was saying was that this business has a couple good things going for it

[Patrick Burton:]

In raising your guidance you’ve taken all that into account, etc?

[Paul R. Garcia:]

Yes. Clearly. We looked into that and we absolutely took that into consideration. And I hope everyone appreciated too we took great pains to break out some of fx numbers for you to really give you a feel.

[Patrick Burton:]

And to highlight, you’re actually forecasting a headwind the next three quarters, correct? -$0.04 I think?

[Paul R. Garcia:]

We are domestically, yes.

[Joseph C. Hyde:]

Yes. We are forecasting a headwind over the next several quarters.

[Paul R. Garcia:]

And that goes well too with our domestic business, back to your point.

[Operator:]

Our next question comes from Robert Napoli - Piper Jaffray.

[Robert Napoli:]

I have a question on revenue guidance and the affect on some currency. If you look at the full year revenue guidance and the first quarter revenue, if you annualize the first quarter revenue to the full year, it’s not that much below the full year guidance. What type of revenue affect are you modeling for in your low end, high end guidance figure? Could you talk about that, because the revenue guidance seems a bit conservative?

[Joseph C. Hyde:]

The revenue impact is less on a percentage basis than the earnings, so in the quarter we had 5% positive EPS benefit but on the revenue it was only a 2% benefit. We will likely have some amount of drag in the next few quarters on revenue but I would not expect it to be more than up a percent or two at the most as compared to the earnings per share which is expected to be another 5% impact.

[Robert Napoli:]

Now does the revenue guidance level essentially taking into account the unknowns with regards to the rapidly changing global economic environment?

[Joseph C. Hyde:]

Yes. We have done our best to incorporate that between the low end of the guidance and the high end of the guidance. It’s very difficult to try to forecast but we do believe that we have incorporated the potential for the current kind of environment and where we might go from here.

[Robert Napoli:]

You guys are in great shape with the balance sheet. The deal prices must be coming down or maybe people will pull them from the market but there can’t be that many bidders for some of these deals compared to what you had in the past, especially with First Data. Are you seeing a decent flow of additional deals? Do you have as much as you want to handle at this point? You have made some pretty attractive acquisitions. Do you consider your hands full at this point in time? You still seem to have enough dry powder to take advantage of your strong balance sheet.

[Paul R. Garcia:]

We would like more acquisitions. We have a fairly deep pipeline in terms of the competitive nature of them. It hasn’t dropped off as much as one would think. There is a lag factor. And there’s always of course, unless someone is terribly motivated to get a deal done, they can always pull it. So there’s always that moderating impact as well. But the biggest influence is what you mentioned initially and that’s the First Data who is aggressively bidding these things. It’s kind of not in there as actively and that’s helped a great deal. So yes, we look to get some more deals done. We’d like to see more and more deals and we’re working diligently to make that happen.

[Robert Napoli:]

On Russia, a very interesting acquisition with tremendous long-term potential but are you seeing significant changes in the spending in that market with both political and the oil markets, the effect of those items?

[Paul R. Garcia:]

On a macro level I think on the consumer per se not as dramatic. That business is growing pretty well. Rosbank is a good partner. There’s a lot of issues with financial institutions in those markets too, but remember the majority of Rosbank was bought by Société Générale. So they have some great footings. We’re very bullish on Russia. Now it is a complicated market as you pointed out and there are dynamics that are developing every single day there around the world and Russia has a couple extra ones thrown in with their political situation. But it’s well worth the gamble. We’re delighted to be there. We think we are better positioned than anybody.

[James G. Kelly:]

I would also add that we’ve been working with this opportunity for quite some time and we’ve gotten to know the company quite well. And while we haven’t closed, we have been able to monitor its performance and at least up until recently they’ve been doing quite well. And I don’t see why that’s going to change in the near future.

[Operator:]

Our next question comes from Gregory Smith - Merrill Lynch.

[Gregory Smith:]

I don’t think this has quite come up, but the bump up in guidance is pretty sizable. Can you walk through what’s really changed in the two months since you last gave the guidance? I guess we have the Philippines in there but we don’t have Russia in there so I’m still trying to figure out what’s really changed over the past two months?

[Joseph C. Hyde:]

Sure. There are two major areas that are impacting the increase in guidance, which we were very pleased to be able to do this quarter. The first is in Canada. The pricing trends that we’ve talked about that have been very favorable to us have continued so and have even been better than what we’ve expected. As we discussed on the last call, we had forecasted that that benefit would tail off during the course of the year and that has not occurred so far into this quarter. And we’re just more bullish on the likelihood of that benefit continuing. There’s also been over the past couple of months a push towards a migration of consumers to premium credit cards in Canada and under the new pricing structure that has provided a significant benefit for us that we did not expect or plan for. The second area is the UK acquisition has been a higher benefit than we expected. As I mentioned in my earlier comments, the revenue was largely within our expectations but the expenses have been lower than we planned. As we talked about on the last call, we signed this deal in late June, closed it a week later, were on a call with you all a few weeks after that, had not owned the business for even a month at that time, had not seen any actual monthly data on our books at the time of that call, and so it’s a very new deal for us. And to complicate that, this is a business that did not have a P&L historically. It was really a product line within the bank and they were not attempting to measure the profitability of it the way that we are doing now. So most of the expenses were comingled with other expenses within the bank and the 8K we filed which had financial statements in it were largely the result of allocations within the bank. That allocation methodology was still being discussed and still moving around somewhat at the time of our call, and we did not place a high level of reliance on it because it’s largely allocated and we did not expect the allocation methodology to necessarily be the same in the future. So having two months of actual data now is not a lot of data but it’s a lot better than having zero monthly data, so the expenses came in lower than we thought and we have flowed that through the rest of the year which is a very positive story.

[Gregory Smith:]

And I expect there’s no claw back provisions on their part when they see your numbers, right?

[Paul R. Garcia:]

Remember, they get 49% of the results so they’re very happy. No. These guys are very happy.

[Gregory Smith:]

On your line of credit, we’ve been hearing about other companies tapping their line of credits just in case and it sounds like you guys didn’t do that at all inter-quarter. Have you been to the point that given the credit environment you want to tap that just in case?

[Joseph C. Hyde:]

We were aware that other companies were doing that and we had a lot of discussions with our bank group. We have a wonderful group of banks, very successful, J.P. Morgan, Wells Fargo, Bank of America, and they made it very clear to us that the facility is there if we need it. But we did not feel it necessary to pull that down especially given some of the concerns with the money market funds that are out there. So all of our cash today is in very safe money market funds most of which are under the new US Treasury money market insurance program. So we feel good about that and we had no other need to draw down on that line. We’re cash flow positive every month that we’re in business. So it just did not make sense to take it to that point of extreme and put additional expense on the company through borrowing costs for that purpose.

[Gregory Smith:]

On Russia, are there clear synergies with your existing Eastern European operations? And what’s the competitive landscape like in Russia?

[Paul R. Garcia:]

There are synergies. The good news is that we have a staff in Russia now that works for the group in Prague and they’re familiar with each other, so we’re looking for some synergies as we speak. In terms of the competitive environment, there are a number of other players but UCS we think is in a better position than any of them and quite frankly I think they’ve been in business longer than just about any of them.

[Operator:]

Our next question comes from Julio Quinteros - Goldman Sachs.

[Julio Quinteros:]

Just to make sure I understand the currency mixes, as we’re looking at the UK, Euro and Canadian as well, what would be the proportional contribution from each one of those currencies as you think about the revenue expectations going forward and the drags that you’re sort of factoring in now?

[Joseph C. Hyde:]

The Canada revenue is shown separately. The UK revenue I gave at being $43 million in the quarter and that’s two months of data, so it’s roughly $20 million per month. So I think you have a good sense for that. I think the additional color I can provide is that in Canada we have a much higher contribution margin if you will in that business because we’ve synergized with the rest of the United States in that area and it just has a very high margin from that perspective. And as a result we are probably more exposed on the earnings side to Canada than we are in any of the other currencies. For example, in our UK deal the margin’s much lower than we have in Canada but we also pay 49% of that out as minority interest which provides an even greater natural hedge for us. So changes in currency can impact our revenue. On the earnings side it’s mainly Canada.

[Julio Quinteros:]

I didn’t hear you say anything about the Euro so I’m guessing that’s all UK, the British pound?

[Joseph C. Hyde:]

Again the only place where we’re exposed to the Euro is in our Europe money transfer business which is just very small and the margin in that business is also smaller than we have in our other businesses. So there’s really a minimal impact.

[Paul R. Garcia:]

The Czech Corona is kind of moving along generally with the Euro and they’re part of the EU of course and they are going to convert presumably to the Euro eventually. So just with that caveat.

[Joseph C. Hyde:]

That’s a good point. We have had a very large lift in the Czech currency exchange rate that the exchange rate has been up 35% over the prior year quarter although we don’t expect that to continue over the next several quarters. But that’s another element.

[Julio Quinteros:]

Just switching over to the contribution from looking at the international merchant services margins now, the contribution from the UK obviously played a big part of that. Just kind of doing some back of the envelope calculations here, if you look at the quarterly margin contribution of what you had last quarter versus what you have now for the international merchant services segment, it almost seems like that operating margin for that UK business is in excess of 30%, probably north of 35%. Is that a sustainable rate? And can you also talk a little bit about having those lower expense benefits, is that something that’s a one-time situation or would you have to build out some other type of items that would eventually bring down some of that margin contribution that you saw from the UK this quarter?

[Joseph C. Hyde:]

While we don’t intend to give a lot of detail on earnings within the international segment, we intend to talk about it as a whole but since the UK deal is new to us, I’m happy to get you some color as to where the exact margin was. It’s actually in the high 20% range in the quarter. Going forward we’re expecting that to continue. Of course we’ve only had two months and we’ll know more after we have had the business for a longer period of time. We’re going to make some investments in that business as well but we have included in our guidance that high 20% range for the rest of the year.

[Julio Quinteros:]

On the UK business, how much of that work you guys are doing there is online channel versus actual physical merchants?

[James G. Kelly:]

The vast majority is still brick and mortar merchants. They do have a very solid international acquiring solutions but it’s relatively new and on a comparative basis it’s small compared to the bricks and mortar. I’d also add to Joe’s comment about the margin in that business. As we integrate the UK just like with CIBC and National Bank and Asia that we’re currently going through, we would expect that to help the already strong margin in the UK. That’ll help it in the out years.

[Operator:]

Our next question comes from Andrew Jeffrey - SunTrust Robinson Humphrey.

[Andrew Jeffrey:]

Just to expand a little bit on the ISO discussion, it sounds like you’re getting sort of broadly a more diverse ISO channel. Were there any significant changes worth calling out? For example, any of the top four or five ISOs that I know have historically had sort of a disproportionate effect going away or were there any other changes other than the natural progression of the business over time?

[James G. Kelly:]

No, there haven’t been any changes relative to the high end or the middle or the lower side of the equation. As I said earlier, our strategy has been to service the channel and we’re really willing to support anybody at introductory levels, zero percent liability programs to a share liability to a full liability. You are correct. We have a number of those large successful organizations that have been with us for many years and those relationships I think are in good shape and we expect those to continue.

[Andrew Jeffrey:]

Can you remind us when some of those larger contracts come up for renewal?

[James G. Kelly:]

I think we’ve said historically there are none planned in the next 12 to 24 months. There’s nothing imminent and typically on a renewal they tend to stay with us because the cost of moving is complicated. It’s not to say that we won’t lose ISOs but our track record thus far I think has been very good in that regard.

[Andrew Jeffrey:]

In Asia, growth continues at pace. I know the first quarter can be sort of a seasonally light quarter. Can you call out the operating margin or income contribution from Asia? I know you cycled through a pretty meaningful investment there. Are you starting to get some natural economies of scale or is it still too small to have hit that inflection point on margin?

[Paul R. Garcia:]

We are in fact in the markets that we are getting some significant volume from where we have a commanding position. And that would be Hong Kong particularly because that drives still a lot of volume. The rest of the countries are more developmental. Some, China and India, are extremely developmental. It’s going to be a while. But we did promise some margin growth and that’s our intent to deliver that in that business. And over time this business absolutely positively will be margin accretive.

[Operator:]

Our next question comes from Adam B. Frisch - UBS Securities.

[Adam B. Frisch:]

Question on merchant margins. They were better across the board but I wanted to delve into North America for a minute. Specifically, if pricing and fx in Canada were cited as areas of strength, does that imply that the US was down year-over-year on a margin basis but this is the type of margin trend we should see from this segment, kind of flattish to up a little bit going forward?

[Paul R. Garcia:]

That’s a fair question. As we said earlier we definitely saw some softening in the domestic business in the US. And because this is such a scale business, when you see some of that it doesn’t delever. So although we still have growth particularly from the ISO channel, it wasn’t as robust as in earlier periods. So we did see some softening that did translate into margin. So that’s exactly right.

[Adam B. Frisch:]

Do you expect it to be kind of flattish through the fiscal year in terms of margin?

[Paul R. Garcia:]

Yes, we are. In fact we’ve taken that into consideration and even deteriorated it a little bit more for our forecast.

[Adam B. Frisch:]

So again then the plan goes back to what you’ve been saying for the last 12+ months that US should be stable and the margin expansion should come from Europe and Asia?

[Paul R. Garcia:]

Well long term clearly.

[Adam B. Frisch:]

Should that be the formula in fiscal 09?

[Paul R. Garcia:]

We actually are ahead of what I led you guys to believe but we’re feeling very good about where we are. And we did talk about margin expansion for the year overall with all those components and the last two you mentioned are clearly part of that driver.

[Adam B. Frisch:]

If you could touch on the contractual aspects of your ISO relationships, what if any impact are slower consumer spending trends having on revenues and margins? Is there any kind of hedge built into them based on volumes like we see with the networks?

[James G. Kelly:]

No. You’re suggesting if they’re transactions accounts dropped, that would change the margin?

[Adam B. Frisch:]

Right, because they get on lower volume bands or something like that?

[James G. Kelly:]

I guess that possibility exists but as Paul said on an ISO they all continue to do quite well and I don’t think any of them that I’m aware of are in jeopardy of some material change one way or another.

[Adam B. Frisch:]

In terms of the ISOs, are they less willing to switch vendors right now because they don’t want to disturb their client base in this kind of environment?

[Paul R. Garcia:]

I think the answer to that is yes. I don’t think that’s necessarily an economics environment situation. It’s very disruptive. We have very aggressive entrepreneurs that run these ISOs and they are constantly pushing us, leveraging us, putting us against others and in some cases making demands, some of which we will meet and some of which we will not meet. That could at some point result in an ISO leaving us but what we’re saying is at the end of the day, the numbers we provide you take into consideration just about any contingency that we could see. I can’t predict exactly what will happen. I think it is unlikely that if an ISO slipped a notch because of the economy that we would penalize them however. That would be unlikely.

[James G. Kelly:]

I would just add as well to that, the market is still very competitive for pricing. So while some of our competitors are not as active in acquisitions as they have been historically in the area of signing up ISOs or domestic business, those continue to be aggressively priced and I think that’s always attractive for organizations. So we have to balance all the needs of our customers as well as the needs of our shareholders when we reach agreements with these guys.

[Operator:]

Our next question comes from Kartik Mehta - FTN Midwest Research.

[Kartik Mehta:]

I wanted to find out if you think that there’s been any change from bank philosophy because of the recent turmoil we’re seeing either domestically or internationally for their merchant business?

[Paul R. Garcia:]

The answer is yes. These guys do have in some cases very valuable assets and I think that this is an opportunity to monetize. In some of the unfortunate scenarios like Wachovia, they have referral agreements with our competitors and I’m not exactly sure how that’s going to shape out. The same with WaMu. They had a referral agreement that one of our competitors paid handsomely to receive. I think that just goes away. These are interesting times right now and I think that there are opportunities that will present themselves if you have enough dry powder and willpower. And that’s what we’re hoping for.

[Kartik Mehta:]

Are there any other parts of the world where Visa or MasterCard might be making changes to either interchange or assessment that could benefit you going forward?

[Paul R. Garcia:]

Yes. The answer is every place we are literally. Not trying to be sarcastic. Truly, they are in fact looking at all the markets and you saw in Canada what could happen. There were some interesting rulings from Australia that the government is stepping back from the basically control of that environment although they’re still making demands on the associations. But yes, I think Visa and MasterCard are looking at lots of changes in every market we’re in. That’s generally a good thing particularly when the interchange goes down.

[Kartik Mehta:]

On your Asia-Pacific, I think you said you added some sales people there, you’re introducing new products. Could you quantify maybe the number of sales people you’re adding and maybe how many you had and what you went to? And maybe talk about some of the new products you’ve added that help that joint venture?

[Paul R. Garcia:]

We’re about 275 sales people in Asia roughly. That’s up but not dramatically. In terms of products we’ve done a number of things. Having a currency product has been a big demand. Go ahead Jim.

[James G. Kelly:]

I would say there’s probably three, DCC being one, the group there. Shortly after we closed on the deal, it opened this up in a couple of key markets for us and I think that’s been a good opportunity for certain vertical markets. Delayed payments for large payments to say a store that sells television sets would enable the customer to pay over a period of time. That program we do together with HSBC enables us to premium price the offering. And then in terms of terminals, the bank pretty much restrained during the year we were between signing and closing and restrained the amount of new terminals being released in the market place, and we have rectified that situation with larger terminal buys as Joe said in his comments and part of those buys have been to that market.

[Kartik Mehta:]

Have you seen an increase in customer attrition? I know you said there was some softness from a transaction standpoint. Has that resulted in a greater number of businesses just going under?

[James G. Kelly:]

No, we haven’t seen it on an attrition basis. I think where we’re seeing it, I think our ISOs as well, average tickets have come down so that has an impact on our contribution because a big part of what we bill is a spread basis opposed to a per transaction. And then just overall softness in sales more than on an attrition basis.

[Operator:]

Our next question comes from Charles Murphey - Morgan Stanley.

[Charles Murphey:]

I was wondering if I could get transaction growth in Canada, Asia and Europe?

[Paul R. Garcia:]

Sure. In Canada it was kind of mid single digits in transaction growth.

[Joseph C. Hyde:]

In Asia we’ve not historically provided that data. It’s probably tracking just underneath the revenue because we have had some re-pricing benefits there. And then in Europe again we did not provide it because of the impact of the UK deal. We’ll have to think about how we approach transactions in Europe going forward but transactions have been running in kind of the teen level.

[Paul R. Garcia:]

They’re pretty consistent with revenue growth in both those markets. The excerption was Canada.

[Charles Murphey:]

Could you give us any sense for how quickly UCS can grow on the top line organically and how accretive you expect it to be in the first year when it closes?

[Paul R. Garcia:]

In terms of their top line growth, they’ve grown pretty nicely since we announced this transaction. This is a good solid grower, probably in the 15% to 20% range and we think that’s sustainable. In terms of accretion I would think of a small amount of accretion on this thing. I mean this is all about a footprint in an exciting market and not unlike China. We are going to eventually look for accretive margins but initially you’re in an investment mode, will be expanding, there’s lot of things their president wants to do and he’s a terrifically talented executive that’s going to take some investment on our part. I think it’s just a great story.

[Operator:]

Our last question comes from David Koning - Robert W. Baird, after which Mr. Garcia will give his closing statements.

[David Koning:]

We’ve heard some ISOs say that voluntary attrition has actually been reduced in this economy and they’re taking advantage of that by raising prices several basis points. Now you probably don’t get a benefit from ISOs raising prices, but on your direct business are you taking any advantage of that type of trend?

[Paul R. Garcia:]

We have not done anything out of the ordinary in the last quarter nor do we anticipate in the future. We do see exactly what the ISOs do. I think they’re pretty aggressive, more so than we are quite frankly because our direct portfolio is very different. And you’re right. We don’t get benefit from that because we get transaction fees for those guys. Jim, do you want to add any color to that?

[James G. Kelly:]

It’s not something I had heard recently that there were pricing initiatives around the economy. I think you typically see it in the spring and fall for matching up with the Visa, MasterCard and now Discover releases. But I don’t know of anything out of the ordinary. And the changes that are going into effect in October are not that significant.

[David Koning:]

One thing on the cash flow statement. There was a $5.7 million I think inflow from a sale of contractual rights. What was that item?

[Joseph C. Hyde:]

There are two items in there. About half of that relates to the divestiture of a portion of our interest in a Russian credit information company. The other half relates to our Discover program. If you remember, we purchased the merchant portfolio of Discover. And in connection with that we have as a benefit to our ISOs we’ve been selling the contractual rights to future commissions on Discover transactions to our ISOs so that our ISOs could sell Discover services. And the proceeds from some of those sales have started to come through and that’s about half of that impact.

[Paul R. Garcia:]

Thank you to all of you for joining us on today’s call. We appreciate your support of Global Payments and we sincerely hope to see you at our Investor Conference at the NYSE on October 15. Thanks so much.

[Operator:]

Ladies and Gentlemen, this conference will be available for replay starting today at 8