Global Payments Inc.
Q3 2010 Earnings Call Transcript

Published: 1 Apr 2010

[Operator:]

Welcome to Global Payments third quarter fiscal 2010 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.

[Jane Elliott:]

Good afternoon and welcome to Global Payments fiscal 2010 third quarter conference call. Our call today is scheduled for one hour. Joining me on the call are Paul Garcia, Chairman and CEO, Jim Kelly, Vice Chairman and COO, and David Mangum, EVP and CFO. Before we begin, I’d like to remind you that some of 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 10-K. We caution not to put undue reliance on forward-looking statements. Forward-looking statements made during this call speak only as of the date of this call. In addition, some of the comments made on this call may refer to certain measures for full year fiscal 2009 which are not in accordance with GAAP. Management believes these results more clearly reflect comparative operating performance. For a full reconciliation of normalized to GAAP results in accordance with Regulation G, please see our press release filed as an exhibit to our Form 8-K dated March 31, 2010 which may be located under the investor relations area on our website at www.globalpaymentsinc.com. Now, I’d like to introduce Paul Garcia.

[Paul Garcia:]

Thank you Jane and thanks for joining us this afternoon. For our fiscal 2010 third quarter, we delivered solid financial performance from continuing operations with revenue growth of 11% to $398.5 million, and diluted earnings per share of $0.58 or 35% growth compared to last year. A weaker U.S. dollar provided a lift to our financials in the quarter, and accordingly third quarter revenue and EPS growth were 6% and 18% respectively on a constant currency basis. Despite the challenging macro economic environment affecting all of our regions, we continue to steadily execute against our plan, delivering solid results. I’m also pleased to note that average ticket amounts were sequentially stable on a global basis during the quarter. We are hopeful that this foreshadows future improvement in overall economic conditions in each of our regions. Now, I’d like to address a couple of specific initiatives we’ve been working on. Firstly, as you know, we have been focused on developing a worldwide front-end authorization system which we refer to as G2. We completed the core development and base testing earlier this fiscal year and have been working to convert all of our markets onto this new platform. Today, we successful process for seven of our eleven Asian markets, representing the majority of our volume in that region. We are now working towards converting our U.S. platforms to G2 which we expect to live by September of this year. We intend to provide greater insight on G2, its savings and scheduled migrations for the United States, Canada and the U.K. as well as all other markets during our July earnings call. Next, as many of you are aware, we have been endeavoring to directly process [RemMB] transactions in China. Currently, there are no Western processors handling [RemMB] transactions in mainland China. After literally years of work, I am delighted to announce that we have secured the endorsement of both China Union Pay and importantly the People’s Bank of China for our initial [RemMB] launch in Beijing. They in turn, encouraged us to approach the Beijing Bank Card Market Coordination Committee for membership. I’m pleased to inform you that we have received unanimous approval from the 30 members of this committee. Although we have satisfied all of our requirements, one final step remains before we can actively begin acquiring [RemMB] transactions in Beijing; namely, HSBC is required to become a direct member themselves of the Beijing Bankcard Coordination Committee, and must complete its own approval process. The bank is endeavoring to do so as we speak and consequently we are hopeful that we will be offering CUP card acquiring services to Chinese merchants this summer. Now, here’s David to discuss the financial details.

[David Mangum:]

Thanks Paul. During the third quarter on a year over year basis, the dollar weakened against both the Canadian dollar and the British Pound, driving a positive effect on our financial results. On a sequential basis however, the U.S. dollar strengthened against the British Pound and weakened against the Canadian dollar. Our outlook for Q4 assumes that the U.S. dollar remains constant or slightly strengthens against the British Pound and remains constant or slightly weakened against the Canadian dollar. Any fluctuations in currency rates of course, may cause variances to our outlook. Our North American Merchant Services revenue grew 7% for the quarter driven by solid performance from our U.S. ISO channel and overall U.S. transaction growth of 14%. Average ticket amounts in the U.S. were slightly up sequentially from the second quarter and down 6% from last year. Overall U.S. debit growth continues to outstrip credit growth. Total debit represents over 50% of our transaction base, while Pin debit base represents less than 10% of total transactions. In local currency, our Canadian revenue declined about 4%. We believe that macro economic conditions there remain difficult resulting in flat transaction growth compared to last year, more volume processed by large national merchants and some spread compression. On a positive note, our average ticket amounts have shown slight sequential improvement recently, but it’s too early to call out an overall positive trend given the difficult conditions in this market. International Merchant Services delivered revenue growth of 24% driven in part by a favorable British Pound exchange rate and continued solid performance by United Card Service in Russia. Our U.K. business continues to execute well despite a difficult macro environment. As expected, our Asia Pacific business grew 18% for the quarter, and we anticipate full year revenue growth in the mid teens from that region. Total company operating margins from continuing operations for the third quarter were about what we expected at 18.5%, up from 17.4% last year. We continue to see the opportunity for modestly expanding total company operating margins for the full year. Earnings performance for the quarter benefited from a lower effective tax rate of 29.3% which drove $0.03 of unexpected additional earnings per share. $0.02 primarily relates to an R&D tax credit in the U.S. that came earlier than expected, which will not recur in the fourth quarter. The remainder relates to a more advantageous mix of international earnings which we do expect to carry through the fourth quarter. We now expect our full year 2010 effective tax rate to be about 30%. We continue to generate strong cash flow. At the end of the quarter, we had total cash and cash equivalents of about $590 million with available cash of about $250 million. During the quarter, we spent about $16 million on capital expenditures. We anticipate spending a little more than $50 million for the full year. This is a bit higher than our original estimate due to some incremental investments including a new investment in our own disaster recovery facility. Relative to cash earnings, amortization expense for continuing operations after non controlling interest for the third quarter totaled $7.9 million and we expect about $30.7 million in total for the full year. Please note that amortization will fluctuate over the course of the year due to currency translation. Finally, I’m pleased to report that we have made solid progress toward the divestiture of our Money Transfer business and we anticipate closing the deal in the fourth quarter. Now, I’ll turn the call back over to Paul

[Paul Garcia:]

Thank you David. Based on our current outlook for continuing operations, we are raising fiscal 2010 annual revenue to $1,615 million to $1,625 million or 10% to 11% growth over fiscal 2009. We are also increasing our fiscal 2010 diluted earnings per share expectations to $2.49 to $2.54 reflecting 19% to 21% growth over fiscal 2009. We continue to be pleased with our business performance and we are actively pursuing acquisitions in all major markets with a focus on merchant portfolios and other technology companies as we expand our global presence and product offerings. I feel confident that we will continue to deliver on these opportunities as we pursue our global expansion strategy. Operator, we will now be pleased to go to questions.

[Operator:]

(Operator Instructions) Your first call comes from Kartik Mehta – Northcoast Research.

[Kartik Mehta:]

You talked about platform consolidation and I realize you really want to wait until the summer to talk a little bit more about how it’s going to benefit the company, but can you talk about maybe in terms of percentages how it might benefit the company? In September would you anticipate at least getting 10% of the cost benefit and does it grow from there or is there some different formula for that?

[Paul Garcia:]

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

[Kartik Mehta:]

You talked a little bit about China, U.K. and maybe initial launch and your ability to acquire merchants. I’m wondering, will there be limitation on how you’re going to acquire or geographic limitations whenever you get the last bit of approval that you’ll be able to acquire throughout the whole country.

[Paul Garcia:]

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

[Kartik Mehta:]

You talked about Canadian transactions and I’m wondering if you can compare them to last quarter in terms of any changes in mix you’ve seen or any change in volume that might be different than just the last quarter.

[David Mangum:]

Not a lot of changes from the last quarter. We saw similar to last quarter flat transaction, and so when we step back and look at Canada in terms of a bigger picture, we do believe economic conditions there remain challenging. As a result, we’re seeing slightly higher attrition levels. We think by the way inside that number is a lot more bankruptcies than we’ve seen in the past there. We see obviously more volume coming to us through national merchants which obviously happens at a lower pricing level or a lower spread, again with the flat transaction growth. At a market level, the environment is probably a little bit more competitive. We’ve got one provider re-entering the market being a little more competitive with an ISO strategy. We’ve got reasonable growth from our own ISO’s there that happens at a little more competitive pricing level. So all in, net net, some spread compression, overall flat transaction growth and really tough macro environment. If we step back again and start looking at the market, we’ve obviously amped up our activity on new sales, on merchant retention efforts. We certainly expect to work through this and come through this eventually. Hopefully, the quote I had in the prepared comments on average tickets is an early sign. It’s too early to tell, but all in I think we’ll execute through this, but you’ve got a tough environment and then some competitive pressures that are a little stronger than they were a year or so ago.

[Operator:]

You're next question comes from John Williams – Goldman Sachs.

[John Williams:]

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

[David Mangum:]

We really don’t break out by channel our U.S. growth. We can give you a little bit of color. Certainly the 14% transaction growth we quote in the release is largely fueled by the ISO channel but all in, we really don’t disaggregate the U.S. out into its pieces.

[John Williams:]

Any update on what you’ve seen thus far in March, the first 30 days or so.

[David Mangum:]

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

[John Williams:]

Did you give a level that the average ticket stabilized at? It’s still negative, right?

[David Mangum:]

We actually did not give a level. It is still declining in general year over year. It stabilized sequentially is what we’re talking about which is how we’re looking at things right now, but we’ve not quoted a percentage in there.

[Operator:]

You're next question comes from [Jason Cupberger – UBS]

[[Jason Cupberger:]

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

[Paul Garcia:]

That’s a great question. I think that’s at the heart of what Kardik was trying to get to and I didn’t answer it totally clearly. So thanks for the opportunity. So Jason, here’s the deal. We’ve been working on this for years. So we finally have this. We’re going to be the first Western company to do this, but we still have some heavy lifting to do. So we’re going to get into Beijing. We have a pitch we think will compel people based on our international expertise and our new ability to acquire CUP. We think that puts us in a unique proposal, proposition for our merchants. We’re making an investment in people. We’re investing in the products and tools and the offering to the merchants. But with all of that, it’s still going to take some time before this really has any big impact for next year. I think now if you give me two years out like you just said, I think that’s a more significant thing. There are CUP talks about two billion debit cards in a card that has one billion people, and they use these cards. So the opportunity in that market is massive, and what that translates to, I think you have to give me a little bit of time to see how we make out on this, but the projections you can be China [inaudible] on this. You can get yourself so wrapped up in the possibilities that you throw out some unrealistic potential. But at the end of the day we think this thing could be significant. I think we are talking about a couple of years for that significance, and I would say stay tuned.

[[Jason Cupberger:]

Maybe a broader, longer-term kind of strategic question. What do you think the right mix of North America versus non North America revenue should be over the longer term for the company?

[Paul Garcia:]

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

[[Jason Cupberger:]

I know you mentioned in passing in the opening remarks that UCS has a solid quarter over there in Russia. Can you put a little bit more meat on the bone there in terms of perhaps some metrics to give us a sense of how the traction is ramping up there in Russia?

[David Mangum:]

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

[Paul Garcia:]

Let me just add a little bit, just having come back from Moscow. I’m really pleased with what I saw over there. I met with a lot of big customers, obviously me with management and our big partner Ross Bank. So we’re changing the mix a little bit giving us more control over the sales engine, and I think that will yield some positive difference too. Plus, we’re looking at other opportunities, and there are several in that country. I remain very bullish on Russia. I look forward to sharing a little bit more with you.

[Operator:]

You're next question comes from Thomas McCrohan – Janney Montgomery Scott.

[Thomas McCrohan:]

I had a question on value added services. You mentioned in your prepared remarks that you’re looking at some technology acquisitions potentially and I’m just kind of curious if those are some sort of value added service that you’re going to Merchant Processing, not the Money Transfer.

[Paul Garcia:]

For Merchant processing, yes. I don’t want to be specific because we have a couple of things going on but I think you hit the nail on the head. There are some areas that we could strengthen. There is organic ways to do that through product development and there are some companies that offer some great products that make sense that we would look at. So that’s kind of generally, and I think you could kind of guess the three or four areas we’re looking at.

[Thomas McCrohan:]

On transaction growth, I think you said 14% for the quarter, and I’m just trying to figure out how to put that in context with the 19% growth in the U.S. last quarter, how much of that was just a day count variance. I know you mentioned last quarter there was one less day, processing day, but it sounded like some more was going on there.

[Paul Garcia:]

I don’t know if there’s a whole lot going on there. These kinds of answers are always colored by what’s going on at a macro level, but at its simplest level, year over year we have a few less processing days this Q3 compared to last year’s Q3. We also have a few less processing days compared to Q2. I think really all in, that led to the fact that those ISO numbers get bigger every quarter probably explains your delta for the moment.

[Operator:]

You're next question comes from James Kissane – Bank of America.

[James Kissane:]

I know you don’t want to talk too much about G2 on the call today, but if you look at the margin improvement year over year in the international business, can you kind of credit G2 for a portion of that, maybe quantify it a little bit for us?

[David Mangum:]

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

[Paul Garcia:]

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

[James Kissane:]

Last quarter you were talking about the shift in consumer behavior up in Canada, but now it seems like you’re talking about some increased bankruptcies I guess in the small business arena, maybe a little more competition, so it sounds like you have a little more appreciation for some of the factors going on out there. Can you break out or kind of rank which factors are having the biggest impact on the growth in Canada?

[David Mangum:]

I can try to put a little bit more color to it. I think what you’re seeing is the product of us continue to drill down and continue to analyze and learn more and more about it. I’m not so sure it’s so much about consumers or was months ago, but it does begin with macro, which obviously has consumer impact in terms of spending, etc. We think that macro then drives obviously consumer behavior which is the elephant in the room for every one of these conversations about any market at any level of growth that we’re seeing anywhere on a global basis. But that level of challenge in terms of macro would drive a little higher attrition, a little more volume to the bigger box merchants, maybe flatter transaction growth. It all kind of works together and so when you wed to that a little bit more of a competitive environment, you’ve got a challenge for some interim period in that market while you stabilize, while you reorient some of the pieces of the business and begin to execute against the new challenges. I think we’re in the midst of doing that. We’ve got discrete plans against which we’re executing in Canada. We’ll work our way through it and move forward, but to be perfectly honest, you wanted me to break it out, I’d give a chunk of each piece of what you might think of as a Canada challenge to those four or five variables I just mentioned.

[Paul Garcia:]

Let me say something about Canada too. I should have said in the last call as well, just kind of level sets. Canada is this great market for us, wonderful management team. We have a big piece of that business and it’s a single digit grower. The market is a single digit grower and we’re kind of at a size where that’s where we’re going to, you can’t grow too much faster than the market because we’re of a size that we are. Now, every couple of years something happens. We get fortunate. We had an opportunity last year. We grew much faster, significantly faster than single digit because of that opportunity. This year, you have kind of a double whammy. You have a little bit of that impact and a little give back on that and you also have the impact of the economy kind of slowing. Canada I think will present other opportunities in the future. You’ve got to kind of be in the game to get it. I think the next opportunity will be debit. That won’t be huge next year unless we just get really lucky, but I think the future upside on that, it’s going to be another event like we had last year with Canada. Canada is a great market. Every so often you’re handed a nice opportunity. Maybe debit is as big. Maybe it’s not, but it’s an opportunity in the future and I love that market.

[Operator:]

You're next question comes from Brian Keene – Credit Suisse.

[Brian Keene:]

I think you touched on it a little bit David, but the delta between transaction and revenue growth in the U.S. widened a bit. What’s causing that?

[David Mangum:]

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

[Brian Keene:]

What should we expect then for a revenue growth rate out of the U.S. going forward?

[David Mangum:]

You mean in terms of the implicit view of Q4?

[Brian Keene:]

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

[David Mangum:]

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

[Brian Keene:]

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

[David Mangum:]

You’re speaking specifically FX?

[Brian Keene:]

Yes.

[David Mangum:]

That’s correct, yes.

[Brian Keene:]

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

[David Mangum:]

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

[Operator:]

You're next question comes from Tien-Tsin Huang – J.P. Morgan.

[Tien-Tsin Huang:]

In the third quarter the North America operating expenses, it looks like it actually picked up a little bit sequentially and it looked like the quarterly revenues were down sequentially. What’s driving that dynamic exactly?

[David Mangum:]

I’m sorry, we had a speaker cut out here in the room. Would you mind repeating the beginning of your question? I apologize.

[Tien-Tsin Huang:]

Just thinking about the North America operating expenses, just looking at that it was up sequentially and the revenues were down sequentially. What’s driving that dynamic?

[David Mangum:]

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

[Tien-Tsin Huang:]

Nothing else unusual in terms of one timers or fees etc.?

[David Mangum:]

No.

[Tien-Tsin Huang:]

On the China side, when you do the acquiring in China, will you also be doing the processing as well and if you can comment on how spreads work over there it would be helpful for us to think about a model let along the revenue outlook.

[David Mangum:]

They have an inter-change and typically you add basis points to it. Even though it’s a pin-based debit, it isn’t necessarily sent, although in some markets it is. Now keep in mind we process for CUPS today in a pin based environment in Hong Kong and Macao. We’re providing all of the services. Initially we’ll be utilizing CUP actually to do some of these as we build our own functionality. But the merchant will be transparent to the merchant, so it’s not unlike people buying services from us. So we will put together this seamless service offering, seamless to the merchant, but we will be utilizing CUP initially and then migrating to our own use.

[Tien-Tsin Huang:]

I want to ask about Jeff Sloan coming on as President. What was the primary motivation there? Should we interpret to mean that global will be a lot more active in consolidating the space?

[Paul Garcia:]

Clearly Jeff is one of the smartest, if not the smartest tech guy on the face of the planet and we’ve known him. He took us out. We’re having our 10th anniversary this coming February and he was the Goldman banker that took us out on our IPO so we’ve known him intimately for a lot of years. Jeff will help us find opportunities, but that’s not his primary focus, it’s part of his focus. Yes, we are interested in finding new opportunities. We try not to get books. When you get a book you’re in the same level as everyone else and it tends to the guy writing the biggest check. The best deals we’ve done are the ones we ferreted out ourselves and I think Jeff will be extremely helpful in that regard. But he’s also a really smart guy and I’m confident that he will be another smart guy amongst this group. There’s a great saying that someone brought to my attention that no one of us is as good as all of us. It’s just another smart person to help us think strategically, help us open up new markets, and of course do some deals as well.

[Tien-Tsin Huang:]

I know you’re not going to share with us the G2 savings until next quarter, consistent with what you’ve said in the past but it seems there’s just a wide range of expectations out there. So just looking at street’s expectations for next year it looks like 11% EPS growth. Do you see any disconnect there in terms of expectations versus reality because it seems we’re hinging a lot here in terms of what you even talked about in terms of July. Can you comment on that at all?

[Paul Garcia:]

I would say that we can’t, because that would really be giving you guidance at this point and we’re just prepared to do that. If the tables were turned I’d be asking the same question.

[Operator:]

You're next question comes from [Chris Shepler – William Blair & Co.]

[[Chris Shepler:]

The international operating margin was really strong again this quarter. I calculated the incremental margin nationally was about 40% down a little bit from north of 60% last quarter, and you’ve already talked about the dynamic currency conversion. I really just wanted to get a sense of what else is driving that international operating margin higher and then also have the recent price initiatives in the U.K. kind of played into that.

[David Mangum:]

The answer to your second question is yes. The pieces of international that are operating frankly as planned are the Asian margin continues to make progress. It’s a very straightforward scale conversation. We talked a little bit about G2 earlier relative to Asia, but it really is all about increasing scale, increasing volume and increasing profitable transactions relative to DCC. Then we have the U.K. which is certainly the largest source of revenue amongst the international assets and its pricing is actually holding quite well. When you do the modeling you think about how to introduce the price. You model on a certain assumption of how much that is going to leak back to the merchants over some period of time with rate reviews and questions and things like that, and we actually are running a little ahead of where we thought we’d be in terms of how much we’re giving back to the merchant, put a little more bluntly. So we’re feeling good about the progress there, a lot more to go in the U.K., and the U.K. is doing that in the midst of some pretty challenging macro conditions. So stay tuned as the U.K. continues to make progress and execute well. And then our Russian venture continues to execute very well. The team there is operating ahead of our plan. That’s obviously a very small number of ahead of plan is a relative statement. So those are the pieces. Then going in the other direction as you know is the Central Europe business, the Czech Republic business. It’s a little more challenged. We did indeed re-price one other decent sized customer this past quarter as expected, so that continues to drive margins a little bit downward. So we’ve got Asia and the U.K. fueling expansion with a little bit of Central Europe going the other way and a little bit of lift from Russia, all of which down to execution as planned in Asia and pretty solid execution with re-pricing help in the U.K.

[[Chris Shepler:]

On Canada, can you comment if you saw any material benefit this quarter from the Olympics?

[David Mangum:]

I think when we peel back the merchant types I don’t know that we saw a material benefit. There’s clearly a benefit in the numbers and I think you saw some stabilization on metrics that suggest we got a little bit of help there. How to peel that and separate it from general stabilization is really difficult, but I think that certainly helped us over the course of the winter months.

[[Chris Shepler:]

On China, how should we think about modeling the hiring ramp that needs to happen in China in anticipation of what you’re going to be doing in Beijing? How many people do you already have on the ground? How many do you need to add? And is there really any upfront expense associated with that or is it really just we’re going to see the expense come into the P&L as we see the incremental revenues.

[David Mangum:]

I think more of the later. There is hiring and we are actually beefing up the Beijing operation in anticipation of this. But these guys pay back pretty quickly. We have a different metric of course in China. You’re not paying the sales people what you’re paying them here, and they’re producing pretty similar returns to the U.S. so it’s a great investment. It will require investment but it’s not going to be something that’s going to bleed us until we get a return, so it’s pretty quickly paid back.

[Operator:]

You're next question comes from Glenn Greene – Oppenheimer.

[Glenn Greene:]

Can you give us a little color more on the U.K. of what you see in terms of the environment, what revenue ought to look like and I think the big driver of the international margins is probably been the U.K. If I recall they were running in the mid 30’s. Is that kind of reasonable?

[David Mangum:]

I think that if you rewind almost a year ago, you’d have seen it on a $200 million run rate U.K. and many of you and your colleagues would have modeled it to the 30%. We’ve never really quoted that. I can tell you they are healthy margins and they are north of the total company margins. What we have there is a great market opportunity given the partnership we have with HSBC and the opportunity to compete we think very effectively with the rest of the market with a terrific service offering that will only improve with time as we migrate our back end and move on to all of our systems with G2 as well. So we’re seeing some really nice conditions in the U.K. But you really can’t escape the challenging macro there as well. So we’ve got a situation where we’re effectively re-pricing. We are doing a nice job managing the sales force, and as you know we’ve redrawn the territories. We remapped ourself with a branch network in order to maximize the leads. And now as we execute going forward, we think we’re in a terrific position. But the point of my color a moment ago was just giving a little bit of credit to the team there for effectively re-pricing, getting a little bit more than we thought as we rolled it out a couple months ago. I think it’s effective October for most of it, but still recognize that’s as challenges a macro environment you could find out there today quite frankly.

[Glenn Greene:]

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

[David Mangum:]

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

[Glenn Greene:]

On the Canada FX, if recall back from awhile ago, I think the contribution margins here were very high, north of 50% and that’s largely what I think explains the $0.07 EPS impact? I just want to make sure I’m thinking about that right.

[David Mangum:]

You’re thinking about it correctly. If you rewind all the way back to it going the other direction, literally a year ago you’re thinking about it correctly. You’re formula math is correct.

[Operator:]

You're next question comes from Moshe Katri – Cowan and Company.

[Moshe Katri:]

Can you talk a bit about some of the other international initiatives that you’re focusing on and maybe an update on where we are in terms of penetrating the markets in Brazil and India?

[Paul Garcia:]

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

[Moshe Katri:]

Going back to Canada, we haven’t heard a lot of your view on what’s happening with One Interac. Obviously, their recent request to go pubic was rejected by the regulators. Your view of that, is that a setback for global? Is First Data a big factor in terms of the fee pressure and pricing pressure that you’re seeing in Canada?

[Paul Garcia:]

First of all, Interac. We were disappointed. A setback is a little strong. It would have been a nice catalyst for Canada next year, but we still have Visa and MasterCard pursuing what they’re pursuing and we believe that that is going to happen, because at the end of the day, it’s good for the Canadian consumer, so it would be tough to hold that back. We think that in itself will be a catalyst. It wouldn’t have been as immediate as Interac, the one player and that would have been really significant fairly quickly, so we were disappointed. But remain tuned. Let’s see what happens on that. First Data as a reason, First Data is active and aggressive in every market. I would say Canada is not one of their larger. Our biggest competitor in Canada is Monaris which of course is Bank of Montreal and Royal Bank of Canada. First Data is in Canada, but not in a very big way.

[Operator:]

You're next question comes from David Koning – Robert W. Baird.

[David Koning:]

Just following up on Brian’s question about EBIT, it looks like on a constant currency basis, EBIT is down year over year now for four quarters in a row, and to me it seems like the encouraging thing is we might be anniversaring something. We might be returning to growth in the next couple of quarters. I’m wondering if you could just talk about that a little bit if we have anniversaried something now that we’ve gone through four quarters of that.

[David Mangum:]

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

[David Koning:]

The free cash flow, when we X out the settlement movements and minority interest movement, it looks like this quarter it was well over $1.00, $1.15 or something in that ball park per share and year to date a little over $2.50 or $2.60. I’m wondering if that’s how you would look at is as well, if it is that high, should we expect a little bit of a downward adjustment in Q4 because maybe the working capital helped a little bit the last few quarters?

[David Mangum:]

Let me describe how I look at it. We obviously don’t quote it and don’t guide to it so I have to be a little circumspect here, but if you were going to start with operating cash flow and then normalize for variances and settlement and any sort of money transfer beneficiary line items, and then also normalize for the minority interest distribution, and then take out your CapEx, you have a decent sized number. I don’t think you get quite as far north as that $1.00 you quoted for just this quarter alone, but you have a number that’s going to be over $200 million year to date. It’ a pretty solid number, one you may find us chatting a little bit more about over time as we keep growing the business. As you head to Q4, though, you are correct. I would not expect a repeat of Q3 if for no other reason that CapEx based on, as you heard in the prepared comments from me, that CapEx will be up fairly materially in Q4 based on our current projection as we launch a couple of initiatives we hadn’t originally planned that are quite strategic and important for the business, namely our own disaster recovery site. So expect it to be a little down from what you saw in Q3, but I think your point is a really good one. This is a solid cash flow generator and as I discussed with any number of you, we’re going to do a better job of being able to show that to you over time from a disclosure and reporting perspective.

[Operator:]

You're next question comes from Robert Dodd – Morgan Keegan.

[Robert Dodd:]

At the risk of boring you again, a question about G2 but a simple one. Of the processes currently in the U.S., are the costs being expenses or capitalized?

[David Mangum:]

The costs are largely being capitalized right now so at the time we go forward with a launch and begin to take costs off whether it’s the U.S. P&L or eventually the Canadian P&L, we’ll also bring a pretty sizable asset into service that we’ll begin amortizing. That amortization period for each market in which we operate is going to be about ten years. The asset will amortize based on transaction volumes or projected transaction volumes, so we’ve got a little bit of amortization right now for example in the Asian P&L small enough that you obviously can’t notice it for the progress we’re making in Asia. And the eventually we’ll bring that asset in the U.S., Canada, U.K. and eventually Russia, so there will be amortization coming through the same time the savings begin to show through as well.

[Robert Dodd:]

On MasterCard pricing in April a couple of weeks from now, when that assessment fee changes, does that or do you expect it have any affect? Obviously there’s a round up opportunity but I’m thinking does it trigger any ISO contract renewals or anything like that? I wouldn’t expect it to but could you clarify that?

[Paul Garcia:]

It does not have any impact in terms of triggering anything. There is a slight rounding opportunity, and I think you said it correctly. Just to make sure, if you’re talking about MasterCard specifically, quite honestly it’s a minimal impact to us.

[Robert Dodd:]

China, obviously you’re seeing a lot of attraction there in the early stages. Has there been any change over the last short period, week or so given the talks that the U.S. edged on by Visa and Mastercard might take China to WTO on the processing market.

[Paul Garcia:]

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

[Operator:]

You're next question comes from Daniel Perlin – RBC Capital Markets.

[Daniel Perlin:]

You’ve talked about in the past that when you go into markets and you introduce more complexity in those markets that gives you all the pricing opportunities, and I’m wondering as we sit here today, a couple of things. One is, you talk about the U.K. re-pricing. I’m wondering what the competition is doing. Are they following you in creating more complexity or are they still sitting by the wayside? I’m not sure I fully appreciate what they’re doing so if you could answer that question that would be one.

[Paul Garcia:]

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

[David Mangum:]

Just to clarify a little bit, our U.K. business right now operates right now on what we call a blended pricing model, so without the complex elements to start with headline rates and then deal with surcharges from there, not dissimilar to how our competitors work in the same market. So the market isn’t there yet. When we talk about adding complexity or managing more complexity in the market as it develops, that’s a little bit more of a forward-looking statements than it is the way we operate right now. An eventual conversion in that portfolio to our systems will enable us to do all the things we can do in Canada for example.

[Daniel Perlin:]

Do you have to have G2 converted in order for you to go from a blended model to a more kind of consistent model with your existing platform?

[Paul Garcia:]

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

[David Mangum:]

That’s a very important point. You have a catalyst over time in this huge portfolio that’s getting bigger that we’ll be able to take advantage of.

[Daniel Perlin:]

As you think about the other markets, and I suspect a mature market like the U.S. and Canada, to a lesser extent although they are opportunities, they’re probably not going to be the ones that happen. How should we think about rank ordering other markets where you can introduce again, more complexity and therefore pricing opportunities? The U.K. is a huge one, but that’s maybe still to come for fiscal ’11 and ’12. What about those other markets in Asia? What about Russia and what about even still the Czech Republic?

[Paul Garcia:]

They’re smaller. I think opportunities present themselves as conversions happen but they’re all smaller. The big drivers for us are Canada, the U.S. and the U.K.

[David Mangum:]

Actually to be perfectly frank, we’ve migrated seven of the eleven markets to this backend to give the nomenclature the same. So it’s a part of the Asia story as we speak.

[Paul Garcia:]

It’s part of the Asia margin that was asked earlier too. So it wasn’t exactly G2, but it’s part of the migration. G2 is one part of it. The backed end is another.

[Daniel Perlin:]

You made mention, and I don’t know if you were kind of mis-speaking or what, but you said that China, and I think the words you used were similar returns to the U.S. and China. I put question marks by that because are you providing similar returns in China as you think about that market in your kind of indirect U.S. business or your more direct ISO business?

[Paul Garcia:]

I think what I was saying, what we have in China is a direct model now, so we have our own sales force operating and we are signing international merchants because that’s really all we can do in mainland. In Hong Kong and Macao and other Asian markets, we have all the merchants, big and small. What I was referring to was the spreads on those margins, meaning what we make after interchange and assessments is similar to if not higher than what we have in the United States. So what you make on these merchants is actually quite robust.

[Daniel Perlin:]

In the past you actually gave us what Russia contributed. It was still considered an acquisition, so can you tell us what the actual revenue contribution was this quarter.

[David Mangum:]

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

[Daniel Perlin:]

A very simple question as it pertains to Canada. You have a very large market presence there. I think it’s somewhere in the 30’s, but I don’t know that you’ve ever actually given us the mix between size of merchants. This is becoming such an issue. I wonder if you’d be willing to share that with us.

[David Mangum:]

No. Not in any of our markets do we really break out sort of by sub channel how the pieces come together. So I don’t think it’s necessary for you to get a gist for the macro challenges or the macro driven challenges I described earlier, so I think we’ll just stick with that for now.

[Paul Garcia:]

We have said in the past it’s market where we have some big guys as well as some smaller merchants whereas the U.S. is predominantly mid market.

[Daniel Perlin:]

I think you said on a couple of occasions, and this is now a month deep into it, that you’d be disappointed if you weren’t able to close an acquisition within six months. By my calculation we’re now down to five months. So is that still a fair assessment or should we be changing that timetable?

[Paul Garcia:]

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

[Operator:]

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

[Paul Garcia:]

Thank you to everyone on the phone and your continued interest in Global Payments.