Global Payments Inc.
Q3 2009 Earnings Call Transcript

Published: 3 Apr 2009

[Operator:]

Welcome to Global Payments’ third 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, Ms. Jane Elliott. Ms. Elliott, please go ahead Ma’am.

[Jane Elliott:]

Good afternoon and welcome to Global Payments fiscal 2009 third quarter conference call. Our call today is scheduled for one hour. Joining me on the call are Paul Garcia, Chairman and CEO; James Kelly, President and COO and David Mangum, 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 and in addition, some of the comments made on this call may refer to normalized results which are not in accordance with GAAP. Management believes that normalized results more clearly reflect comparative operating performance. For a full reconciliation of normalized to GAAP results in accordance with Regulation G, please see our press release filed as an exhibit to our Form 8K dated today, April 2, 2009 which may be located under the Investor Relations area on our website at www.globalpaymentsinc.com. I’d like to now introduce Paul Garcia.

[Paul Garcia:]

Thank you Jane. Thank you everyone for joining us this afternoon. For our fiscal 2009 third quarter we achieved revenue of $393 million which represents 26% growth and normalized earnings per share of $0.45 representing 2% growth over last year. These results include the impact of unfavorable foreign currency trends and continuing macro economic headwinds both of which we detailed during our conference call last quarter. David will take you through the FX impact for the quarter but I am happy to report that on a constant currency basis our revenue and EPS growth are 38% and 25% respectively. Our North American segment reported strong growth primarily driven by pricing initiatives in Canada partially offset by a weakening Canadian dollar. Transactions in Canada grew 2% for the quarter while U.S. transactions grew 15%. Our ISO channel continues to be the primary factor behind our transaction growth and our expanding market share in the United States. Parenthetically we are seeing a high single digit average ticket decline in the U.S. We saw solid performance from our international segment this quarter. Growth there was primarily driven by our joint venture with HSBC in the United Kingdom which added $50 million of revenue in the quarter. We also advanced our integration initiatives in Asia. I am very pleased to note we are now processing two Asian markets on G2, which as you may recall is our front end authorization system. In addition, we have converted four markets which are now successfully processing on our Back End settlement platform as well. Finally, our money transfer business continues to face difficult macro economic and immigrant labor trends. As a result, and as David will explain in detail, we recorded a non-cash impairment charge of $148 million. However, we have a strong management team in place that continues to execute well and is maximizing our earnings as evidenced by double digit operating margins and a significant increase in operating income produced in this very challenging environment. Now here is David to discuss the financial details. David?

[David Mangum:]

Thanks Paul. I plan to cover the money transfer impairment charge, constant currency analysis, margins and some balance sheet and cash flow highlights. First, our discussion of normalized results today has excluded the impact of a $148 million non-cash impairment charge related to our money transfer business. We identified this charge as part of our FAS 142 goodwill testing. The charge reflects the declining outlook for money transfer business related to macro economic conditions affecting the construction industry in particular. The significant majority of this charge consisted of goodwill and there will therefore be no meaningful change to amortization or depreciation expense on a go-forward basis. We have no tax basis from the original money transfer stock purchase acquisitions and as a result we recorded minimal tax benefit from this charge and the resulting unfavorable impact is $1.79 per share. Next, as we did last quarter we included a constant currency schedule in the press release labeled “Schedule 9” to help you understand the full impact, favorable and unfavorable, of currency on the growth of the business. To calculate this we converted our fiscal 2009 actuals and outlook at fiscal 2008 exchange rates. Foreign currency translation, largely driven by the weakened Canadian dollar, negatively affected our revenue and EPS by $35 million and $0.10 respectively for the third quarter, about as we anticipated. Our expectation for the remainder of fiscal 2009 assumes that forecasted exchange rates will stay within a relatively narrow range around today’s levels in our material geographies for the rest of the fiscal year. Fluctuations in currency rates of course may cause variances to our outlook. Operating margins for the quarter were about what we expected at 16.8%. The ISO’s implemented new pricing strategies this quarter as they do from time to time which increased our revenue growth by a few percentage points with no corresponding increase to earnings. For fiscal 2009 we continue to expect normalized operating margins to be similar to those we reported in fiscal 2008. Turning now to our balance sheet and cash flow during the quarter we spent $8 million on capital expenditures mostly relating to infrastructure technology and merchant terminals. We now anticipate our full year capital expenditures to total approximately $35-40 million, down a bit from our previous expectation. At the end of the quarter our available cash totaled about $140 million and our ability to generate cash remains solid. We have an untapped $350 million line of credit and significant overall debt capacity to support our long-term growth objectives. Now I will turn the call back over to Paul.

[Paul Garcia:]

Thank you David. We are maintaining our 2009 annual revenue guidance of $1.550 billion to $1.580 billion or 22-24% growth over fiscal 2008. In addition, our constant currency expectations for revenue growth of 29-31% remains unchanged from last quarter. We are also reaffirming fiscal 2009 normalized diluted earnings per share guidance to $2.14 to $2.21 reflecting 8% to 12% growth over fiscal 2008. On a constant currency basis our annual diluted earnings per share growth of 21% to 25% remains similarly unchanged. In closing, we are very well positioned to execute our long-term growth strategy of further expansion in Europe, Asia Pacific and North America. Operator, we will now be happy to go to questions.

[Operator:]

(Operator Instructions) Your first question comes from the line of Kartik Mehta – FTN Midwest.

[Kartik Mehta:]

Paul, I was hoping you might be able to give a little bit more on U.S. and U.K. transaction growth. I know your U.S. transaction growth was 15%, pretty impressive, but I was wanting to get a feel for…I know you don’t do this but kind of same store transactions or what the market is really doing right now.

[Paul Garcia:]

Firstly, we are seeing some pretty strong transaction growth in the United States primarily driven by our ISO’s. Although they are off from what they have done in the past, this economy is impacting them as well, off for them is still solid double digit growth resulting in this 15% figure. In terms of same store we are clearly seeing some reductions. We are seeing average ticket reductions. We are seeing slowing growth overall and it is obviously when you are enjoying 15% it kind of masks it. The reality is this economy is impacting us in the United States pretty profoundly. Now in terms of the U.K. that is kind of a mixed message too. We are doing very well there. I think part of it is that we are taking share. There was some low hanging fruit we took advantage of. We added some sales resources and our management team there is just doing a fabulous job. I couldn’t be happier with them. Our largest competitor is really having its hands full with a lot of issues and consequently we have indeed been taking share. So that business has also been growing very nicely but there too the economy is impacting us. I don’t have as much same store stuff from the U.K. but what I have seen would support it is slowing down on that kind of measurement as well.

[Kartik Mehta:]

In fiscal 2009 you have really benefited from the Canadian pricing. Obviously you benefited from the U.K. acquisition. As you look to the next 12 months what opportunities are there such as those that could really benefit Global?

[Paul Garcia:]

We have this inherent growth in all of our markets which is obviously helpful. Canada does have a grow-over with the impact of what they enjoyed this year but there is still upside for Canada. We have expense reduction opportunities as we go forward, less so in G2 but for next year we are starting to get some of that back as well. I would also say that the opportunity for growth in Asia is incredible. Now I think it is not going to be a huge driver next year but truly for the long-term we find ourselves in a very unique position in China in that we are authorized to acquire RMB. We have some more work to do but we will have a unique proposition in a very exciting part of the world. So, I look at kind of the long-term opportunities for next year and beyond and I am very encouraged.

[Kartik Mehta:]

A last question Jim, on the money transfer business could you talk about the trends you saw in the quarter? First, for U.S. and Mexico and then maybe Europe. Did they stay the same through the quarter? Did they get worse or better? Kind of maybe what you are seeing so far.

[James Kelly:]

I would say that the news for the corridor continues to be as it has been in the last six months or so. I don’t think we have seen any increase in the slow down. I think it is probably a steady state of still a market tied heavily to construction and construction as we all know is under severe pressure so this channel for us will continue to fight its way through as Paul commented. I think the management team is doing an outstanding job in a really tough economy.

[Kartik Mehta:]

What about the pricing environment? Is that still about the same or has it gotten more or less aggressive?

[James Kelly:]

I would say that is not an area we have seen as much aggressive behavior as we have seen in the past so I don’t think you could ever say it is stabilized but we are not seeing the type of decreases we saw in the past. It has been relatively stable for us for several quarters.

[Operator:]

The next question comes from Moshe Katri – Cowen and Co.

[Moshe Katri:]

Paul can you comment on transaction growth by credit and debit card just to give us kind of a feel on where that is going? Then can you quantify the pricing benefit you had during the quarter? Maybe you can also share your views over MasterCard’s interim settlement that was announced yesterday with EC regulators. Specifically how it can or will impact Global’s business in Europe?

[Paul Garcia:]

That is a bunch. I’m going to take the last one first and ask David and Jim to fill in a little bit. In terms of what MasterCard announced yesterday we got that on April 1 and we have been reviewing that document and having conversations with MasterCard. I have to tell you quite frankly we still have some questions. We are unsure as to the impact. You read the same thing I did. It is calling for a lot of transparency. There are interim agreements. They are discussing continuing to have discussions about this agreement that is very much an interim agreement. I think the short answer to it is that we don’t know enough yet to really comment other than I will tell you that transparency isn’t necessarily a bad thing. We are pretty transparent as well. It is calling for December 2010 mandatory requirements. That is a long way off and I think a lot can happen between now and then. I would say stay tuned to that. I think David is going to do the debit and credit card part.

[David Mangum:]

I’m going to stick to a pretty high level on this one because I really don’t want to get into parsing the various markets by the splits. As a general rule and I’ll say debit as a general rule is growing a little bit faster than some of our other transactions but overall I think the way to think about our model or the basic results is we don’t see a big mix shift happening right now. I’ll try to leave it at that for now. In terms of parsing and pricing very directly, we are really not going to parse and pull apart the pieces of the pricing.

[Operator:]

The next question comes from Analyst for Jason Kupferberg – UBS Securities.

[Analyst for Jason Kupferberg:]

I was wondering, in the past you have helped quantify how much of your top line growth came from the ISO channel. I was wondering if you could give us an update on that for this quarter and how it compared to last quarter.

[Paul Garcia:]

I don’t think we have quantified exactly how much growth has come from the ISO’s either top or bottom other than it has been a significant driver of growth. The ISO’s have been growing pretty much across the board at a double digit rate even in this difficult market. We really haven’t given a ton more color than that. We have told you in the past it is a significant driver and a significant portion of our U.S. domestic portfolio. Other than that we haven’t really provided a bunch more color.

[Analyst for Jason Kupferberg:]

We have been hearing from some bank owned acquirers they have been having some difficulty in signing new business due to troubles at their corporate parents and merchants unwillingness to go with somebody who may have some solvency issues. Does this dynamic lift your sales efforts at all? If it did can you sort of give a direction of magnitude? A lot? A little?

[Paul Garcia:]

I would say, and I know this sounds ridiculous, I would hope it didn’t have much of an impact because I think that if I imagine who you are talking about that script hasn’t been written and that is not kind of how we compete. Our ISO’s have been pretty up front too. We have not tried to capitalize on anyone else’s misfortunes. I think even though we all compete aggressively we want all of us to prosper and kind of do well at the end of the day because that makes for a healthier organization. I will tell you though there are some merchants that are concerned about some of our competitors and that may have driven in some business. That is not something we have harped on. It is not something our ISO’s have harped on. It is not something I really follow. That is two for two. I’m not being very helpful here.

[Analyst for Jason Kupferberg:]

Turning to the regulatory front, a little bit higher level than the last question, there is a lot of regulation being talked about here in the states. I just want to get your view on how could that impact the card industry at the end of the day? I know you have some strong views there. I’m just wondering if you could opine for a little bit?

[Paul Garcia:]

I’ll try. That is what it is; an opinion. I think that interchange does go down over time. It is kind of fluctuating all over the place right now. I think some of the questions Moshe asked about the MasterCard settlement in Europe some of it has something to do with transparency. There might even be some requirements about that. I think that at the end of the day interchange comes down and that is a good thing for all of the processors because our fee is a very small part of the overall amount. I don’t want interchange to come down so much that the card issuers aren’t encouraged to issue cards because this is a three legged stool. We all need to work together. I think there is room. I hope that happens and I think that will be good news for all of us including Visa and MasterCard quite frankly.

[Operator:]

The next question comes from Julio Quinteros - Goldman Sachs.

[Julio Quinteros:]

Can you just give us a little bit of color in the operating margins? I think they were a little bit lower than what we were looking for. I’m just looking for maybe some of the puts and takes on the margin profile as we think about it. I also just wanted to get clarification. It sounded like the fiscal 2009 target for margins is more or less flat versus fiscal 2008 at this point?

[David Mangum:]

That’s right. The full year margin for the total company we are thinking will be about flat with last year. If you wanted to break apart the pieces for Q3 just a little bit you can see North America’s margin was down a little bit, 9 points refers to currency and the impact that we have had from Canada there. I also mentioned in the call a little bit earlier the ISO fees we saw come through this quarter. If you skip then down to international you see a little bit of margin expansion which was in line with what we expected. You can see the money transfer business stabilizing around 10%. Again, pretty much what we expected to see for the quarter. So all in, from our perspective not a lot of surprises. Yes it is down from the previous quarter. You are seeing the full quarter impact of FX across all of our geographies. Remember you only saw a partial impact of that in Q2. That sort of takes you into Q4 as we kind of look toward a full-year flat margin on a truly annual basis.

[Julio Quinteros:]

That Canada thing last quarter can you just walk us through that one last time just to make sure we have the correct puts and takes in terms of the expense base versus the revenue recognition?

[David Mangum:]

I would be happy to. If I understand your question correctly it is about the relative contribution of Canada. You are familiar with the pricing annualizes in April starting almost a year ago. In our Canadian operation we have made what I think I hate to say as the new guy was the right strategic and operational choice to centralize a fair amount of our cost base here in the United States. So we lack what you might think of natural hedges in the Canadian geography. We by and large have them in our other geographies. Again, for the right business reasons we have a fair portion of the Canadian expense base here in the United States. That means when we take a revenue number from Canada and translate the revenue as well as the earnings or income contribution from Canada into U.S. dollars we take a proportionally larger hit on the income line than you would expect or you would see in any other geography. Again, it is what I view as the right operational reasons. Our contribution margin in Canada, not our real margin…not our effective margin totally loaded, is higher than you would expect. It is quite significant.

[Julio Quinteros:]

Paul, more on the strategic picture. Lots of consolidation going on in the space it is looking like here. What is your view in terms of if you had to choose today U.S. versus international? Are you still more focused on the international marketplace or are you seeing some things domestically here that could be attractive to you?

[Paul Garcia:]

I think we are very focused on international but you are exactly right. There are some opportunities that come along only occasionally in the U.S. The U.S. outside of our ISO business is probably where we have our smallest footprint. We would like to build out a more direct model in the United States and if there is some opportunity to do so that makes sense to us we are going to pursue them.

[Julio Quinteros:]

Lastly on that point any interest at all in doing more financial outsourcing or core processing? Or do you want to keep this more focused on the core payment stuff?

[Paul Garcia:]

I think it is payment stuff is what we are focused on. Absolutely and positively. This is a great industry. It doesn’t scream out for diversification so we are very focused on payments.

[Operator:]

The next question comes from Tien-tsin Huang – JP Morgan.

[Tien-tsin Huang:]

A follow-up I guess to Julio’s question, with processing I guess the implication on Fifth Third for Global? Was that an asset you considered acquiring? What are the implications of that deal and is that pipeline still there to do larger acquisitions in the U.S?

[Paul Garcia:]

Are there opportunities for us to do other deals? Clearly. Is Fifth Third a nice asset that we would have liked to have done? I really can’t comment on that. I will tell you they are a tough competitor and they have a good portfolio. I wish them the best of luck. It is the first time we have really seen recently a PE firm jumping in like this. You saw they hired Pam Patsley too. We wish them the best of luck and we will be out there competing with them.

[Tien-tsin Huang:]

The Harland payments breach how is this playing out in the marketplace? Does it change your approach to security and I guess the G2 platform conversion?

[Paul Garcia:]

Before we say something about Harland let me go back and just give you a tiny bit more color on Fifth Third. I was speaking to their merchant portfolio. What those guys purchased was some stuff that quite frankly we are not involved in; EFT networks, ATM networks and that would not be something we would be focused on and that would be something we would not be interested in acquiring. I don’t know if that is helpful. Repeat your second question, I’m sorry.

[Tien-tsin Huang:]

I was just asking about the Harland payments breach and has this changed at all your thinking about security and the G2 platform conversion and what sort of ripple effect in the marketplace as well?

[Paul Garcia:]

Clearly I think everybody in the industry, every Visa and MasterCard executive, every acquirer, a lot of big merchants and a lot of consumers. This has had a significant impact on all of us. If something good comes out of all of this it will be because we will more closely examine everything we do to make sure we protect this data. We spend a huge amount of time and energy. We have people who are dedicated to this. We pay outside resources to professional hackers to try to attack us constantly and pay them real money to do so. We have thousands of attempts on us every day and I feel that we have looked at this very closely. We look at it all the time. We look at it even more closely now. I think in terms of that impact it may turn out to be positive for the industry in that we are all doubling our efforts.

[Tien-tsin Huang:]

Is it impacting your sales efforts at all?

[Paul Garcia:]

I think from the ISO perspective I think that Harland is struggling. They have been a very difficult competitor and I think there is probably some pick up. That was answered earlier. They are not being targeted by anybody we are associated with but that just has to happen. You could say the same thing about our largest competitor in the U.K. They are struggling with some issues and we are not doing anything to target them yet we are going to…someone has to sign those merchants and we do compete.

[Tien-tsin Huang:]

Just a couple of quick housekeeping if you don’t mind. Your guidance implies a little bit of a sequential step down in revenue and we typically see an increase in the fourth quarter. Is there anything that is unique that is driving that implied fourth quarter guidance?

[David Mangum:]

Nothing unique beyond what I mentioned a little earlier in the call which was the ISO fees we saw come through in the third quarter which were worth a few points of revenue growth. So you kind of have to set those out a little bit before you go back and you model Q4 and then it just becomes a question of what does FX do or not do. Then how tough are the conditions really in North America and particularly in our international operations.

[Tien-tsin Huang:]

Just two more then. The tax rate for the year? Is it possible to get the U.K. revenues in the quarter?

[David Mangum:]

Sure. Tax rate for the year is the same as we thought it would be last quarter; approach 33% for the full year. You just saw us post 32.1%. This is the effective tax rate of course. You should see a similar rate probably in Q4. Again approaching 33% for the full year. The U.K. generated $50 million in revenue in the third quarter.

[Operator:]

The next question comes from Bryan Keane – Credit Suisse.

[Bryan Keane:]

David can you help me with the ISO fees, exactly what those were? I wasn’t aware that happened this quarter.

[David Mangum:]

From time to time they will work on their price strategies and adjust them. We saw a somewhat bigger adjustment than we might have foreseen come through this third quarter. You won’t see it repeat itself in the fourth quarter. It happened to be a little more sizeable. It happens all the time. This time a little more sizeable and worth calling out to you guys. If you think about Tien-Tsin’s question a moment ago how do you model Q4 on a sequential basis?

[Bryan Keane:]

It is not a one-time fee though is it? Wouldn’t that fee carry through to the fourth quarter so there is still a step down sequentially in revenue between third and fourth?

[David Mangum:]

Actually in this case these fees did come through, they will repeat themselves by the way but they won’t come through monthly. So you do start with a lower base in Q4.

[Bryan Keane:]

Then the profit, the margin in the business I think you made a comment ends up being the actual operating income ends up being the same? So that is part of the reason why the North American margins were under pressure?

[David Mangum:]

That is correct.

[Bryan Keane:]

The minority interest dropped a little bit more than I thought in the quarter. It went to $8 million and I think it was up $11.3 million last quarter. I was just surprised that it fell. Can you help us with that?

[David Mangum:]

Yes, I think you see a little bit of seasonality there and a little bit lower performance in our domestic joint venture with Comerica and a little bit lower performance in Asia Pacific.

[Bryan Keane:]

Going forward should that tick back up or is that relatively the right number?

[David Mangum:]

I think you will see it tick down a little bit in Q4. Again, as Paul mentioned and I mentioned a little bit of the macro conditions are tougher abroad even than they are in America right now.

[Bryan Keane:]

Finally, Paul you mentioned there is still upside in Canada. I know the major price increase starts to anniversary this quarter. Can you just talk about what you meant by that upside that will continue in Canada?

[Paul Garcia:]

I did say we have growth and we do. But it doesn’t go away. We still continue to get the benefit of that and the guy who is running our business, Jordan [Cohen] has been very focused on adding new customers and is doing pretty well. There are a couple of other opportunities to present themselves from time to time too which are competitive in nature so I am still bullish on Canada.

[Bryan Keane:]

I’m going to sneak in one more. The Russian acquisition of UCS, I didn’t hear about that. Is that still on plan and on schedule to close any day?

[Paul Garcia:]

Yes. Let me update everyone on where we are with that deal. We are currently in discussions with the seller as we speak about the terms and conditions of that agreement. I really don’t have much to add right now because we are having active dialogue.

[Operator:]

The next question comes from Robert Napoli - Piper Jaffray.

[Robert Napoli:]

The SG&A for this quarter was a lot higher than I thought. Did it have something to do with the ISO pricing? $180 million up from $164 million last quarter and that was a driver to certainly a piece of the lower operating margin. Is there anything you can point out there?

[Paul Garcia:]

You put your finger on it. It is largely a factor of that ISO pricing strategy. To your point and maybe this will bring it home even a little bit more obviously that one probably ticks down a little bit through Q4.

[Robert Napoli:]

Can you put a dollar number on kind of the non-recurring ISO revenue and expense?

[Paul Garcia:]

I point you back to the same number from earlier. It is a few points of revenue for the quarter. I don’t want to be much more specific than that.

[Robert Napoli:]

On the money transfer business, why take the impairment now? In your discussion Jim on the money transfer business it made it sound like it is a tough business but generally steady trends. Is it just a realization you are not going to get the returns you thought you were when you acquired it? Why this quarter?

[David Mangum:]

Maybe I will give you a bit of the financial and let Jim speak to the trends. We do our annual goodwill test each January 1. That is a formal reassessment of the outlook for the business. As we take a hard look at a business that is being managed very well and maximizing profit the question becomes when growth out for the future, the near-term especially. At that point as we build those projections it is tough to see it turning the other direction right now. Despite some pretty good management it is a construction industry. It is the macro environment. I will let Jim add some color.

[James Kelly:]

I think my comment was more to how it is handled the more recent economy in terms of this evaluation. Looking out several years and the outlook several years out this year versus last year has changed because of the events that have occurred in the last six months and so I don’t think it is a choice of ours now versus next quarter. The annual impairment test was done and this was the outcome from that review.

[Robert Napoli:]

On the minority interest and this is a $0.02 per share item which is why I bring it up. You show the tax provision; there was provision for taxes of like an 18% rate this quarter. There was no provision last quarter. With no provision and $0.02 per share is there some level of tax that we should assume within that minority interest? It jumps around a lot.

[David Mangum:]

It does jump around a little bit. I can’t track exactly the numbers you quoted. I would say you bounced a couple of places geographically on the income statement. Here is the real answer. We had a few true ups in that minority interest tax rate this quarter that won’t recur. So I don’t think your model is challenged. My guess is the true ups caused a disconnect with what you expected to see and you are right to see that disconnect. As we head into next quarter you should see it settle back down to the tracking you have seen the last couple of quarters. So maybe the mid six figures and things like that rather than the big bounce up you saw this quarter.

[Robert Napoli:]

On the debit/credit mix, you kind of talked about pin debit as opposed to mixing in signature debit. What percentage of your business is true credit I guess and then signature debit and pin debit?

[Paul Garcia:]

I can say pin debit we have given some color on that in the past. It is not very big. We are not a huge pin debit guy. We don’t have a lot of petroleum and all that. In terms of signature we don’t break that out. In other words we look at it as a credit card transaction whether it is debited directly from your account or it is something that you pay when you get an invoice. The pin debit is less than 10% and then the rest of it is credit and I can just tell you we are very close to what Visa and MasterCard are reporting on how many cards they have out there because we actually did look at it. You can tell by bin range. We just don’t really track it all the time. We are pretty close the last time we looked to where Visa and MasterCard is on their issuing on signature versus just a regular credit.

[Robert Napoli:]

Are you seeing a decline on the credit side versus, not including pin debit, or do you just not look at it that way?

[Paul Garcia:]

I think I see where you are driving now. That is an excellent question. In other words the revolvers versus the transaction. The transactors aren’t as impacted as much as revolvers who have other issues. I don’t have anything quantifiable but I would tell you intuitively you have to be correct.

[Robert Napoli:]

You talk about a unique position in China. I was hoping you could maybe give me some feel for that. Are you starting to see I think China is a pretty minor business for you right now? Is that not correct?

[Paul Garcia:]

China is. We have a big presence in Hong Kong and Macau but that is a meaningful amount of revenue in Asia right now but it speaks to the opportunity. We have very little in mainland. We have a lot of offices and a lot of activity. What I was referring to was the local currency, the RMB, do be an acquirer of those transactions there is not a ton of those to acquire at present. But we have a relationship where we have been offered and approved the opportunity to acquire in local currency and to work with CUP, China Union Pay. We have some work to do to get that implemented and there are some other governmental approvals necessary but we are very focused on that. I believe we will have a unique proposition and be one of the only, if not the only western company that can offer these services throughout China. I think over time as this country offers more and more of these vehicles to its consumers we will be in a perfect position to help enjoy that growth. So I am very excited about that.

[Operator:]

The next question comes from Thomas McCrohan – Janney Montgomery Scott.

[Thomas McCrohan:]

I have one question that is specific to the domestic ISO business. I am just curious who absorbs the cost increases, the per transaction fee increases when Visa and MasterCard come out with pricing changes for acquirers they recently imposed. Is that per transaction fee absorbed by both payments or is it absorbed by your ISO’s?

[David Mangum:]

In any re-pricing from the card network associations those would be passed on to the merchants unless the ISO is entrusted in absorbing them. I don’t know one associated with us that would be so it gets passed on to the merchants as we would in our domestic base or really in any market that we do business.

[Thomas McCrohan:]

So the contract between the merchant and the acquirer, or the ISO or Global is really technically the acquirer allows you to pass off non-interchange related pricing increases?

[David Mangum:]

You were talking about interchange…

[Thomas McCrohan:]

That per transaction one-half of one cent and went to two cents?

[Paul Garcia:]

With NABU in particular, absolutely. There is no limit our ability to pass through expenses. We charge the ISO per transaction fee and we pass through all others.

[Thomas McCrohan:]

Their contract with the merchant is they can do that without having to renegotiate with the merchant the price?

[David Mangum:]

The contract is between Global, the member and the merchants. The ISO has an agreement with Global but ultimately these are contracts with Global so those contracts provide as Paul just described the ability to pass those fees directly through.

[Paul Garcia:]

Typically it is interchange fees and assessments so yes it is all covered.

[Operator:]

The next question comes from Robert Dodd – Morgan Keegan.

[Robert Dodd:]

Almost a follow-up to that and then two others; in the U.S. you have 15% transaction growth this quarter. You said high single digits average ticket compression. Should we be looking for next quarter revenue growth in the mid single digit range or are you going to be able to pass through enough of the NABU price increase to drive that maybe into the high single digit range or maybe even low double digits, assuming transaction growth stays where it is?

[David Mangum:]

We don’t really parse the revenue expectations by market and growth. I guess I could tell you it is easier to think about sequentially for purposes of the call tonight if you reset the base a little bit for the ISO pricing strategy we have now talked about a couple of times and then allow for some modest sequential growth across the board in North America you will get a sense of where the pieces are going. I’d rather not speak to parsing out the geographies with next quarter’s growth expectation.

[Robert Dodd:]

Asia, obviously a slow down from the prior quarter. Could you try and give us some color on how much of that was currency versus economic activity? Hotel space in Hong Kong actively down and that is a pretty big key business isn’t it?

[Paul Garcia:]

I think most of it is economic activity. RMB is pretty flat. We have lots of other currencies however but they don’t fluctuate the way the Pound or Euro or the Canadian dollar does typically. They do bounce but not to the extent. I think it is economic activity is the majority of it. We clearly are not immune at the end of the day and I think the story about Asia is not so much some of our hotel traffic is down a little bit because we hope that bounces back and I think it will. It is really a bigger story of what are we going to do at the end of the day in China and in India. That is the huge opportunities.

[Robert Dodd:]

Can you talk a little bit about Eastern Europe? Obviously the various questions about whether Hungary is going to still be around or if it is going to do an Iceland. I haven’t heard the same kind of scare about the Czech Republic but how is [moves] or whatever we are calling it this year doing and how are their customers doing at this point?

[Paul Garcia:]

We are calling it GPE, Global Payments Europe, and the Czech got a little bit of press recently when the Czech Prime Minister said that our stimulus plan was the “road to hell.” They are struggling and some of those economies are much more fragile and have less ability to rebound. We hope we don’t see any Icelands. I am not going to make any predictions there. I will tell you that Global Payments Europe as of right now is doing okay but it has its challenges though too. It is an indirect business and because of that it is very difficult to grow that significantly because you have to sign these [Mamna] Banks and get them to convert so it is almost like a card issuance type of deal. It is a big deal to get or to lose customers and there also are a handful of guys that have more control and pricing renegotiations half and that has a bigger impact on you too. Just like China a little bit that is not about we have a 50% market share in the Czech Republic which is nice. Our aspirations are to expand dramatically beyond those regions to morph this to a direct acquiring model and that is why we were pointing at Russia at one point. 150 million people, the largest economy in that whole region and one that is not without its risks clearly and challenges but one that we are also focused on. So I would say stay tuned.

[Operator:]

The next question comes from Roger Smith – Fox-Pitt, Kelton.

[Roger Smith:]

I just want to go back to that Visa and MasterCard pricing increase to the acquirers. Is that a real transparent increase to the merchants or can you end up getting some pricing benefit yourself there?

[James Kelly:]

I think that is up to either Global in the case of our pricing strategy, our competitors or our ISO’s. It generally will be a discrete line on most merchant’s statements. Historically you would not have seen the half penny that was charged on I would say most of the people in the industry. Some competitors go to most discrete line. Most did not. I think in this case given its magnitude you are going to see it as separate. In some cases some people may mark it up. Some people may just pass it through indirectly.

[Paul Garcia:]

I think Jim would agree it is basically big merchants clearly transparent. It is a straight pass through. Smaller merchants it is going to be bundled and most of the ISO’s will take the opportunity to mark it up a little bit. Not dramatically but in small amounts.

[Roger Smith:]

Like you said it is a much more dramatic increase than maybe we have seen in the past. Is this something that will fuel the anger in the merchants about the whole discount fee and interchange fees or do you think there is not going to be much of a reaction from the merchants from this pricing initiative?

[Paul Garcia:]

You have to look at the size of the merchant. In terms of small merchants in the MasterCard case it is going from a half a cent to 1.95 cents and for a small guy that is kind of lost in the wash. I don’t think it is a massive amount. For a big merchant that can exceed what they are paying for processing. So big merchants have some volume breaks too because of their size and the associations I think correctly so have addressed it through some different guidelines applied to those that produce huge amounts of volume that have significant market position. Will it cause kind of disruption? I think it has been fairly well accepted. I don’t think anyone likes to see pricing increases but clearly Visa and MasterCard need to fund their operations. It is not an interchange. It goes directly to both associations both in Visa and MasterCard’s case. I for one understand why they did it. I don’t think we will see a lot of disruption at the end of the day because of it.

[David Mangum:]

I would also add that for both the card associations these fees go back anywhere from 5-10 years but the rate has not changed. So another way to look at it is there has not been an increase in a long period of time for this type of charge.

[Operator:]

The next question comes from David Koning - Robert W. Baird.

[David Koning:]

If we look at the North American merchant margin they were about 21% this quarter and it looks like if we exclude that ISO pass through revenue this quarter maybe closer to 22% margins. I know it was down quite a bit just due mostly to the Canadian currency. I’m wondering if we do have currency just hold here now and we don’t get big price benefits out of Canada going forward is that 22% or so is that a good go-forward margin or might there be a little bit of downward pressure on that just because ISO’s tend to grow a little faster than the rest of the business?

[Paul Garcia:]

Speaking only to Q4 I think that is an appropriate way to think about the fourth quarter until the next go-forward quarter. We are obviously not going beyond that in tonight’s call as you know. I do think you put your finger on it and yes as you think about Q4 and how the pieces come together in Q4.

[David Koning:]

The one other question on the North American merchants, on the EBIT line it was down a little year-over-year and again I know that is currency related. Was that all in Canada or was any of that decline in the U.S.?

[David Mangum:]

I’m sorry, yes. The vast majority of that is Canadian and Canadian FX. I would tell you as we probably discussed last quarter the other product line in the United States in some of our check and gaming type businesses face the same challenging macro environment so you probably see the income generated by those being down a little bit as well.

[David Koning:]

But the core U.S. merchant business was still up year-over-year in terms of EBIT?

[David Mangum:]

If you pull the pieces apart again the biggest thing to think about is Canada and the FX and sort of what I call the “other” product lines.

[Operator:]

The final question comes from the line of Franco Turrinelli – William Blair.

[Franco Turrinelli:]

Both depreciation and amortization expenses seem to decline significantly sequentially but that is not related to a write off. Is there anything to look at there?

[David Mangum:]

Probably just some of the translation of some of the balance sheet accounts from international. Then I think a little bit of a drop in depreciation. I’m not aware of any big items there. No business items.

[Operator:]

At this time we will turn the call over to Mr. Garcia for his closing statement.

[Paul Garcia:]

Thank you all of you for joining us on our call today. Thank you for your continuing interest in Global Payments.

[Operator:]

Ladies and gentlemen this conference will be available for replay starting today at 8 p.m. ET and ending at 8 p.m. ET on April 17, 2009. (Operator Instructions) This concludes our conference for today. Thank you for your participation. You may now disconnect.