Global Payments Q2 Earnings Call Transcript

123jump.com Staff
25 Jan, 2009
New York City

The transaction processor reported revenues rose 30% to $401.1 million despite the unfavorable impact of foreign currency exchange rates. Earnings increased 26% from a year ago to $48.91 million. Earnings per share grew to $0.60 compared to $0.48 in the prior-year quarter.

Global Payments Inc. ((GPN))
Q2 2009 Earnings Call Transcript
January 6, 2009 5:00 p.m. ET

Executives

Jane Elliott – Vice President of Investor Relations
Paul Garcia – Chairman, President and Chief Executive Officer
David Mangum – Executive Vice President and Chief Financial Officer
James Kelly – President and Chief Operating Officer

Analysts

Thomas McCrohan – Janney Montgomery Scott
David Koning - Robert W. Baird & Co., Inc.
Robert Napoli - Piper Jaffray & Co.
Franco Turrinelli – William Blair & Company
Timothy Willi – Avondale Partners, LLC
Tien-Tsin Huang - JPMorgan
Wayne Johnson – Raymond James & Associates
Julio Quinteros – Goldman, Sachs & Co.
Charles Murphy - Morgan Stanley
Bryan Keane – Credit Suisse
Andrew Jeffrey - SunTrust Robinson Humphrey Capital Markets

Presentation

Operator

Ladies and gentlemen, thank you for standing by and welcome to the Global Payments second quarter fiscal 2009 earnings conference call. At this time, all participants are in a listen-only mode. Later we will open the line for questions and answers. If you should require assistance during this call, please press “*” then “0”. As a reminder, this conference is being recorded. At this time, I would like to turn the conference over to your host today, Vice President of Investor Relations, Jane Elliott. Please go ahead.

Jane Elliott

Good afternoon and welcome to Global Payments fiscal 2009 second quarter conference call. Our call today is scheduled for one hour and 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 10-K.

We caution you not to put undue reliance on forward-looking statements and as such, any forward-looking statements made during this call speak only as of the date of this call.

In addition, some of the comments made today 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 8-K filed today, January 6, 2009 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.

Paul Garcia

Thanks Jane, and thanks everyone for joining us this afternoon. Even with macroeconomic headwinds we achieved strong financial results for our fiscal 2009 second quarter, with revenue of $401 million, which represents 30% growth and normalized earnings per share of $0.60 representing 25% growth over last year.

Our North America segment reported strong growth primarily driven by successful pricing initiatives in Canada offset by an unfavorable foreign currency exchange impact. We are pleased with our international merchant segment. Growth there was primarily driven by our joint venture with HSBC in the United Kingdom which added $55 million of revenue in the quarter. In addition we continued to achieve solid revenue growth from sales initiatives in our Asia Pacific region. These results include the initial impact of unfavorable foreign currency trends which will affect our full year. David will take you through the details of the FX impact a little later. But I’m happy to report that on a constant currency basis our revenues and EPS growth would have been 37% and 39% respectively. For the quarter, I am also pleased to report transaction growth of 16% in the United States.

While the underlying fundamentals of our business remain strong, we are not immune to broader economic trends. However, we are quite fortunate to have a number of favorable factors helping to offset these trends as our industry continues to see a secular shift from paper to card-based payments in the US and in other parts of the world and we will continue to benefit from that shift.

Our international segment continues to track with our expectations. We have a formula for going into each market and applying our know-how across all functions of the business to produce optimal results in each respective market.

You have seen the success of this formula applied to our Asia Pacific business, where revenues grew 30% for the quarter and we are seeing improved performance in our UK business as well.

Next consistent with our long-term strategy of expanding internationally in both existing and new regions, we continue to actively pursue acquisitions in market with growth opportunities. We focus on potential transactions with meaningful market share which will position us to benefit from card-based secular trends, including increased acceptance and penetration as well importantly, as the evolution of network fees.

We believe we are in an excellent position to benefit from payment trends around the world particularly in markets such as China, India, and Russia. While these are small markets to us today, we are laying the foundation for solid businesses which will draw long-term growth.

As a case in point, we are increasing our investment in Russia with the UCS acquisition which we expect to close during the first half of calendar 2009. While we all know that there is geopolitical uncertainty in Russia today, I feel confident that the investment we’re making in UCS and the market share we’re gaining will provide a first-mover advantage in an exciting and dynamic region of the world.

Now, before I turn it over to David to discuss segment and financial details, let me tell you just how delighted I am to have David as part of the Global Payments team. I’m sure many of you know him from his past life at CheckFree.

In summary we have a strong balance sheet and the right management team in place to help us expand our global merchant business. David.

David Mangum

Thanks Paul and let me just say I’m happy to be here and look forward to working with all of you on the call today.

I plan to cover constant currency, selected business performance, margins, and balance sheet and cash flow highlights. First, given the unprecedented change in the FX markets we added a constant currency schedule to 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. Using this approach our reported revenue and earnings growth of 30% and 25% for Q2 would have been 37% and 39% respectively. The weakened Canadian dollar drove the majority of the unfavorable impact in the current quarter as we anticipate it will for the full year.

As we look ahead to the rest of fiscal 2009 we have reviewed forecasted exchange rates from a number of sources most of which suggest roughly flat rates from today’s levels and our material geographies of Canada, the UK, and Central Europe for the rest of the fiscal year.

As a result and as you have seen in our press release we have revised our full year revenue guidance to reflect the significant impact of negative FX trends and to a lesser extent, the difficult economic environment. Our reported EPS guidance will likewise be affected by the negative FX trends. The reduced revenue outlook is partially offset by reduced expenses in some geographies and generally reduced costs overall.

On a constant currency basis, we expect our earnings growth outlook to be 21% to 25% for 2009, essentially unchanged from our previous outlook. Also, please note that currency rates may continue to fluctuate and any major variance to that outlook may cause our reported earnings to vary as well.

Next, on a quarterly basis, I plan to highlight the performance of certain business lines we think are important for you to understand. North American merchant services segment revenue grew 12% for the second quarter with our ISO channel continuing to drive most of the growth.

Domestic direct credit and debit card transactions grew 16% during the quarter and we had total revenue growth of 9% in the United States. In Canada, credit and debit transactions grew 6% and revenue grew 20% for the quarter. Money transfer segment revenue grew 2% with total transactions declining 13% and locations declining about 9%.

Turning now to margins, our normalized operating margin increased 160 basis points to 20.6% in the second quarter due primarily to the negative impact of currency exchange rates. We expect our operating margin to be lower in the second half of the year when compared to the second quarter and we expect full year reported margins to be about flat when compared to prior year.

During the quarter we spent $9.7 million on capital expenditures, mostly related to infrastructure technology and merchant terminals. Our full-year expectation remains unchanged at about $45 million as we expect increased merchant terminal spending in the second half of the year.

At the end of the quarter, our available cash totaled about $120 million. Our ability to generate cash flow remains solid and when combined with our untapped $350 million line of credit and our overall debt capacity we have a solid platform to support our long-term growth objectives.

And now I’ll turn the call back over to Paul.

Paul Garcia

Thanks David, based on these current trends we are updating our GAAP-based 2009 annual revenue guidance to $1.550 billion to $1.580 billion or 22% to 24% growth over fiscal 2008. We are also modifying fiscal 2009 annual normalized diluted earnings per share guidance to $2.14 to $2.21 reflecting 8% to 12% growth over our fiscal 2008.

On a constant currency basis our annual diluted earnings per share growth of 21% to 25% remains within our previous quarter’s expectation of constant currency growth range of 22% to 26%.

Finally while the current business environment is challenging our market position remains strong and we are taking share in each of the markets we serve.

Operator, we will now go to questions.

Question-and-Answer Session

Operator

Thank you. Ladies and gentlemen, we will now conduct a question-and-answer session. If you wish to ask a question, please press “*” then “1” on your touchtone phone. You may remove yourself from the queue at any time by pressing the “#” key. Once again, if you do have a question please press “*1” at this time. Our first question will come from Tom McCrohan with Janney Montgomery Scott.

Thomas McCrohan – Janney Montgomery Scott

Hi, good morning. Good afternoon, sorry. Just a quick question, a follow up Paul and David on the currency, could you help us allocate the $23 million adverse impact this quarter on revenue from currency between Canada and some of the other regions in your business.

David Mangum

Tom, I think that we’re not going to get into real specifics on the country-by-country basis but as you likely know the majority of that number is Canada and then the other geographies, the UK, the other parts of Europe really comprise in equal parts almost the minority of the amounts but the majority, significant majority is Canada. That’s probably about as detailed as we’re going to get on that for the moment.

Thomas McCrohan – Janney Montgomery Scott

And then implicit in your guidance, I just want to make sure I heard you correctly is that you’re assuming based on, you guys aren’t currency experts just kind of pulling data from other sources, that your guidance is assuming the US dollar stays at the same level relative to Canada for the rest of the year? Is that implicit in how we should read your guidance?

David Mangum

Yes, so I would suggest you think about it in this way, our outlook is indeed based on the recent FX trends but it does accommodate some further strengthening of the US dollar by maybe as much as 5% to 8% against all of our key currencies.

Now you’d have to know which one is moving in which direction obviously but that’s how we sort of thought about the forecast. We’re not really assuming much weakening but our outlook also accommodates a little bit of modest weakening at the margin as well. And you just saw a little bit of that happen in Canada over the last couple of days.

Thomas McCrohan – Janney Montgomery Scott

Right. Just last question on the US business, can you give us a little color on what you’re seeing in average ticket prices?

Paul Garcia

Yes, I will take that David. Tom, we saw and I’ll be happy to share a little bit during the December which of course is our third quarter, although we haven’t closed the books on December, we have some volumes and some transaction counts, and we did see a lowering of the average ticket amount in December.

Now it’s important to remember that particularly for our ISOs a 100% of our fees are derived on a per transaction basis so we’re fairly agnostic. It does impact us on the direct side where we charge a percentage of the transaction but we have that bet pretty well hedged.

Thomas McCrohan – Janney Montgomery Scott

Great. Thanks very much.

Operator

Next we’ll hear from Dave Koning with R. W. Baird.

David Koning - Robert W. Baird & Co., Inc.

Hi guys. First of all, in the US I think I remember a few quarters ago was when you anniversaried a large ISO and growth has been decelerating a little bit since then, largely macroeconomic I would imagine, I’m wondering should we expect further deceleration in that US merchant line or maybe how should we think about that in the economic situation right now.

Paul Garcia

I think there’s a couple of pieces to that question, firstly you’re correct, your memory serves you correctly, we did have a significant ISO and the ISO is anniversarying and so that is an issue. Number two, the ISOs did experience some of these macroeconomic headwinds that all of us are experiencing and their growth per se has slowed. So you have both of those factors.

Now on the other side, slow growth for the ISO is still strong double-digit organic growth. So please keep that in mind.

James Kelly

And if you remember as well the ISOs target market are smaller merchants to the extent the economy is challenged and we have - some of our ISO is focused very heavily in restaurant so those markets would see either a greater attrition or just slower year-over-year sales.

David Koning - Robert W. Baird & Co., Inc.

Okay, great. And then secondly, in Canada it looks like on a constant currency basis revenue growth actually, it looks like it accelerated pretty nicely in Q2, and I’m wondering was there an incremental pricing benefit there this quarter? Was there anything else going on just to cause that acceleration?

Paul Garcia

No, I think this is common in the first year after we’ve had a pricing change from the networks or associations. The rate at which the card spend occurs on the various type of cards, high rewards cards versus low rewards cards, are going to have an impact and so as you go into the holiday season if people are spending more on premium cards, there’s a greater cost associated with making sure we process that transaction at the right interchange and therefore the cost can go up and therefore you can see an acceleration because of the season even though it might have been a weaker Christmas season and our holiday season than in the past.

We still would have seen the benefit of the pricing strategy.

David Koning - Robert W. Baird & Co., Inc.

That’s great. Thank you.

Operator

Then from Piper Jaffray we’ll hear from Bob Napoli.

Robert Napoli - Piper Jaffray & Co.

Thank you. Good morning or good afternoon. The transaction growth and revenue growth in the United States, 16% and 9%, can you remind me what that was last quarter for the transaction growth.

David Mangum

For the first quarter, you mean the last sequential quarter, Bob?

Robert Napoli - Piper Jaffray & Co.

Yes, sequentially, yes.

David Mangum

You saw 20% transaction growth and 12% revenue growth.

Robert Napoli - Piper Jaffray & Co.

Okay and by any chance could you give me what that was in the month of December?

David Mangum

For the month of December?

Robert Napoli - Piper Jaffray & Co.

Yes.

David Mangum

No, we’re not going to quote the transaction amounts for the month, Bob.

Paul Garcia

We haven’t even closed the books yet. We do have some transaction and volume data. As I said we did see some softening vis-à-vis previous December, but we still had double-digit growth in our market so still looking pretty good.

Robert Napoli - Piper Jaffray & Co.

Okay. I was a little bit confused when you gave your guidance, the currency that you’re using in your guidance, I’m sorry, I was a little bit confused. It sounded like you were using, expecting some strengthening of the dollar in some markets and some weakening in other markets.

David Mangum

I apologize if I confused you. Our basic forecast calls for the rates to be about flat with where they are today with kind of the exit rates. But our range accommodates further strengthening of the dollar at the margin. Did that help?

Robert Napoli - Piper Jaffray & Co.

Yes, it’s helpful. You said last quarter that you were going to give us revenue for the UK for the next year, the HSBC UK acquisition.

David Mangum

I don’t know what we said last quarter. I can tell you revenue was $55 million for this quarter which I think is the number you’re after right now.

Robert Napoli - Piper Jaffray & Co.

Yes. And the tax rate was, this quarter looked a little bit lower, is that tax rate a good run rate?

David Mangum

No, that tax rate is a little light for the rest of the year. In fact I think your full year rate ought to approach 33%, so you’re going to see the rate above 33% probably in Q3 or Q4 as we, based on our current outlook netting to something just below 33% for the full year.

Robert Napoli - Piper Jaffray & Co.

Okay and then last question just on Russia, I guess on that acquisition I know it’s not a huge acquisition, about $120 million and could you give any feel for what’s going on in that market. Obviously, the world has changed quite a bit since you announced that deal in early September with oil prices and politically in some regards, so understand you’re still excited about it Paul for the long-term and you had said initially that that was going to be immediately accretive. Do you still look at that as being an accretive deal? Has there been any significant material change in the trends within that acquisition?

Paul Garcia

There were some changes. They are experiencing some of the same challenges we all are. There is a MAC clause in anything we do so we have the right which we are not, they have not tripped that. There hasn’t been anything material per se. We still believe this thing is near-term accretive, very excited about our management team there and it’s not without risks. You know, and Russia is a challenging part of the world but I do think it’s well worth that risk and I think you’re quick to point out it’s $120 million bet. It’s a big bet for us. It’s not a bet the company bet, but it’s a big bet for us but I will go on record as telling you that I’m very pleased with this deal and I am confident that the advantages we’ll get from being a first-mover in Russia far outweigh the risk.

Robert Napoli - Piper Jaffray & Co.

Thanks. And that’s close you said by June of this year? Is it still that?

David Mangum

Yes, we think, we think outside. We gave our self a comfortable range here.

Robert Napoli - Piper Jaffray & Co.

Okay. Thank you.

David Mangum

Thanks Bob.

Operator

Moving on to Franco Turrinelli from William Blair & Company

Franco Turrinelli – William Blair & Company

Good afternoon. A couple of quick questions if I may. Going back quickly to that tax rate, I mean this was lower than certainly we had modeled, is there something to do here with the currency impacts, or is this just some better tax planning that you guys have been able to do.

David Mangum

I think my team would like to take credit for better tax planning. In general, there’s no big abnormal item happening to drive that lower than you might have expected. It is reasonable tax planning than the business mix.

Franco Turrinelli – William Blair & Company

Although and again, David, this isn’t really a question for you since you weren’t here at the time but I don’t think a 33% tax rate was embedded in the prior forecast or guidance, was it, maybe that’s one for Paul?

Paul Garcia

I think that’s a fair point. We have done a little better job managing the tax issues so that’s a very fair point, Franco.

Franco Turrinelli – William Blair & Company

No, no I don’t mean it as a negative. Less tax is good, right?

Paul Garcia

Yes, it is. We will take everything we can get.

Franco Turrinelli – William Blair & Company

The whole weakening and strengthening, that’s confusing but less tax is good even I understand that. Okay and then one other question if I may. Turning back to the US performance, is it possible to just kind of get a sense from you, that was a sequential slowdown in revenue, is that do you think entirely macro factors or is it also just some anniversarying of some new contracts or ramp up of prior additions.

James Kelly

I would say at this stage it’s largely macro. The ISO that was referred to in one of the previous questions, that actually was here in ’06, I think it anniversaried in ’07, they’ve been here for a few years now. So I think what we’re looking at is really just larger ISO business so to some extent that that’s going to slow over time, just a law of large numbers, and this, as we all know is a much more challenging economy than we saw at the start of this fiscal year and the numbers are reflecting it.

Franco Turrinelli – William Blair & Company

But having said that, it sounds like your December commentary was that the, things haven’t gotten any worse certainly.

James Kelly

I don’t think we’ve seen a greater decline. I think that, I don’t think we want to say the word stable but as you know that we had a good December and we’re feeling January is just getting started but we’re still feeling good about core business in each of the regions.

Franco Turrinelli – William Blair & Company

Okay. And lastly, if I may for Paul and Paul, this is, I am actually going to ask you to do the impossible here because when you gave the guidance back in October there was some forecasted impact of currencies because we’d already started to see some changes I think particularly in the Canadian dollar at the time. What I’m really trying to get to with this is if you to the best of your ability kind of back out the impact of changes in foreign exchange rates, operationally and fundamentally, what’s happened to your guidance? Has it essentially stayed unchanged, have you actually improved it, or are there some pockets of weakness that we should be aware of?

Paul Garcia

That’s an excellent Franco. I don’t think it’s impossible, I think it gets to the heart of it. If in fact we did have a constant currency we would be talking to you about a guidance that was clearly within the range but it wouldn’t be in the top of the range. We would be comfortably within what we guided you to but we would be feeling these macroeconomic headwinds and that does have some impact on the results.

So that is, so said another way, we would be talking about a guidance that, we wouldn’t be changing the guidance but we’d probably be guiding you towards more the midpoint of that as opposed to comfortably feeling we were going to hit or exceed it.

Franco Turrinelli – William Blair & Company

Excellent. That’s very helpful. Thank you Paul.

Paul Garcia

Great. You are welcome.

Operator

Moving on to Tim Willi with Avondale Partners.

Timothy Willi – Avondale Partners, LLC

Thanks and good afternoon. I apologize if I ask something that has been asked. I had to jump off for a second but on money transfer, has anybody asked you to talk a bit about Mexico versus Europe pricing volumes, etc.?

Paul Garcia

That’s already been asked.

Timothy Willi – Avondale Partners, LLC

Okay. Obviously Mexico continues to be an erratic market I guess if you look at the macro stats that come from Bank of Mexico, so just any kind of feel you can give about not only what you saw at the macro level, but I know you’ve also been working with your footprint and shutting down unprofitable stores and driving the profitability of the business up, so just any thoughts on those two topics.

James Kelly

Well, I think you summarized it. We are trying to weather a bumpy market for homebuilding in particular which is construction was the principal service that was provided by the people that support or use the DolEx service. I would say the US market has continued to see weakening. I haven’t seen sequentially in the last 45 days or so, I think pricing for us has remained relatively stable and we haven’t been reducing price.

We’ve tried to introduce pricing programs to deal with a smaller average ticket. Historically, the average ticket stayed really constant the last several years, many years, and recently we’ve seen some softness in that area.

So, I don’t think there’s much more color then will run through our earnings for now and see how the business improves on a macro basis coming this next calendar year. In Europe, Europe was late relative to DolEx to seeing the weakening in the market that they clearly have as well. I think the positive on Europe though is we have seen a greater stabilization, faster in pricing and even some modest improvement on transactions recently. But Europe is feeling the same pressure for the same reasons that DolEx did. It’s just feeling it later than DolEx did.

Timothy Willi – Avondale Partners, LLC

Okay. And then over the last year or so you guys have been pretty assertive or aggressive, whatever the word you want to use about pruning the branch network to really focus on profitability of the locations, given that the sequential drop here appears just to be a handful of locations, should we from the purposes of modeling and thinking about profit margins, assume that you’ve pretty much run through that review of the franchise and feel like you’ve basically shut down what you needed to shut down in terms of locations that weren’t meeting hurdle rates.

James Kelly

I think it would be hard for me to say that there isn’t opportunity for further closures if they’re warranted. I think we’ve taken care of what was in front of us but this is a transient population. They move and have markets based on opportunities. You remember with oil reaching very high prices over the summer, not that long ago we were seeing $5.00, Texas was booming in construction and oil and therefore that was a very hot market. We still have some locations within Arizona which is one of our toughest markets because of immigration reform focus there and some of those branches continue to do very well. So some of this we’re still working through but I would say that right now we’re comfortable with where the base is but we’re going to continue to look to reduce costs whether it’s payroll or non-payroll, all the way through this process.

Timothy Willi – Avondale Partners, LLC

Okay and then if I can just ask a question on FX, if there’s a simple way to answer it great, if it’s something that I need to be given a tutorial on offline I completely understand but when you gave guidance last quarter, and I think you articulated about $0.07 a share through the balance of the three quarters, since that timeframe the Canadian dollar looks to come in maybe around call it 10% to 15%, but the magnitude of the revision and you talk a lot about currency being a reason for that and in simplistic terms saying Canada is a significant majority of it. I guess I’m having a hard time wrapping my head around a 10% revision in earnings given that the Canadian dollar seemed to only come in about $0.10 to $0.15 and as a percentage of all the revenue it’s not like it’s half of the revenue of the company. Am I missing something in accounting or is this a hugely profitable operation that’s probably just more profitable than any of us realize where that 10% move could cause such a major change in your outlook because of the Canadian dollar.

David Mangum

Tim, this is David. I don’t think that you’re missing anything necessarily but I would point out a couple of things to you. That movement in the Canadian dollar is close to 20% than 10% which is really important, first fact to think about when you’re trying to play with your model and look at the impact.

The second is, from my way of thinking at least just an initial pass of the company, we’ve made the right strategic decision to try and consolidate expenses on a platform, and that means we have a bunch of Canadian dollar expenses that are actually occurring in the US in US dollars. That means from a translation perspective it looks like Canada is more profitable than it is and it has a bigger impact than you looking at it from the outside would ever think. And again, I think it’s for the right operational reasons but at the end of the day it is bigger and that would be the one thing you’re missing, you really can’t see from the outside looking in.

Timothy Willi – Avondale Partners, LLC

Okay. So just we’ve got a revenue contribution from Canada that we can all see but the bookkeeping profit contribution from Canada obviously appears to be notably larger than the revenue contribution.

Paul Garcia

I think Tim, this is Paul, to support that too, just look at the adjustment in the top line guidance versus the bottom line guidance and you can see the difference. That was what David said.

Timothy Willi – Avondale Partners, LLC

That’s a good point. I appreciate the help there. Thanks.

Operator

And from JPMorgan, Tien-Tsin Huang.

Tien-Tsin Huang – JPMorgan

Hey guys, thanks for taking my question. The transaction growth, I thought on the US at 16% was actually a bit higher than what we expected. I was hoping maybe to get a bit more color on the key drivers behind it. Thinking about new merchant adds, ISO wins, merchant attrition, of course same-store growth, getting a lot of questions about that. Can you give some color behind those drivers and whether or not you’ve seen any change in trend there?

James Kelly

Tien-Tsin, this is Jim. I would say that in the US it’s largely organic growth and organic is for us is not just same-store sales which, many merchants are flat or down and some are down pretty substantially but it’s by segment. This is our direct sales efforts, our efforts in the gaming business. We’ve had a lot of success adding a new business in gaming even though it’s a small segment and then the ISOs, while the ISOs are not growing as a group at the rate that they have historically, they still had a very strong impact on business and I think that helps propel pretty impressive numbers for this situation.

Tien-Tsin Huang – JPMorgan

Right. So you really haven’t seen any slowdown in new merchant adds, obviously it’s come in a little bit but it sounds like the pace of new merchant adds and merchant attrition perhaps is not coming in as much as—

James Kelly

Yes, I think it’s less to do with the impact of adds and attrition, clearly they have been impacted, but I think it has to just do with ISOs continuing to do well and our merchants on a comp basis whether it’s average ticket coming down as Paul said earlier, or they are just not doing as well year-over-year we’re still gaining market share and we’re getting market share through signing up locations.

Tien-Tsin Huang – JPMorgan

Got it. Okay, that’s helpful. Then on the Asia Pac, nice sequential revenue uptick there, anything unusual and also can you give us an update on the margins within Asia Pac, how is that tracking.

Paul Garcia

Let me take the beginning of that and then I will have David pick up a piece of it because we want to clarity something too. We had a couple of things that we did in Asia that will continue to carry through. We’ve done some pricing adjustments. We are adding new business, dynamic currency conversion, has driven in some new business for us at very nice margins as well. But we did see a little slowing in December in Asia that quite frankly surprised us, more so than we actually saw in some other markets like Canada.

And even more than we saw in the US. Hong Kong in particular, which is a pretty big market, a pretty big piece of that Asian business now, was hit pretty hard and we’re digging into exactly why that is but overall margins are improving significantly in Asia. We promised you that last year and we’re following through on it and volume growth has been pretty good. We also got a little plus from the Philippines as well. We suspect that, and we have more digging to do, we suspect that part of the issue in Hong Kong is just generally wrapped up in travel and entertainment because that’s a big piece of that business for us. We have most of the hotels and a lot of the tourist destinations and those are just off. David, do you have any additional comment?

David Mangum

No. Maybe I’ll just supplement one thing to make sure that folks don’t miss it, which is, we did indeed have the Philippines acquisition close, while that’s not particularly a big number, it is a brand new number so it helps a little bit at the margin.

Tien-Tsin Huang – JPMorgan

Okay. So, as we recast our expectations for Asia Pac, should we still assume sequential growth from here or is there something different that we should consider given the jump off in the end of the quarter.

Paul Garcia

I will tell you this it’s a little too early to tell. We, truly Tien-Tsin, it’s pretty small, it isn’t going to have an impact. We baked in a little caution into our guidance with what’s going on in Asia. We’ll have some more color on that shortly. As you well know it’s all about the Chinese New Year too which is approaching so the holiday period per se is a little funky there anyway. So there’s still, it’s still too early to answer that question appropriately.

Tien-Tsin Huang – JPMorgan

Okay. Well, I am glad to get that margins are working. The last one from me. I guess at the Analyst Day, Paul you suggested a stronger appetite to do acquisitions including large deals in the US, is this still the case and how does the acquisition pipeline look now.

Paul Garcia

Yes, that’s a great question. Let me stick to appetite first and then we will talk for a second about pipeline. We do have an appetite. I think we have an envious balance sheet. We have a good balance sheet. We have access to some pretty cheap money. We have some great relationships with our bankers and I think there are some deals out there and I think these deals will get a little better even over time.

So to that we have a pretty full list of candidates and we are actively looking in the United States, in Europe and in Asia. In terms of size, we are interested in potentially some things that are a little bigger than what we’ve done. There are of course some tuck-in opportunities but there are some larger opportunities and those take more time, they’re more complicated but we’re working them hard.

I think in every environment there is an opportunity and in challenging times I think there are opportunities to expand through acquisition and we are very anxious to make some of those happen.

Tien-Tsin Huang – JPMorgan

Good, good. I appreciate the currency outlook in that Schedule 9, it’s helpful, should we expect to get that going forward, David?

David Mangum

I think you ought to expect help from us on currency to the extent that you really needed to deal with the business and that’s certainly the trend right now.

Tien-Tsin Huang – JPMorgan

Great, got it. Thanks guys.

Operator

And next from Raymond James, Wayne Johnson.

Wayne Johnson – Raymond James & Associates

Hi, yes, good afternoon. I was hoping to get an update on the G2 and data center consolidation, can you remind us where we are right now in that process and again, what is the timeline for completion and potential margin benefit once the project is finalized.

James Kelly

Wayne, that was in the outlook. In terms of the project I think as we mentioned at the NYSC we brought our first region live in October which is, Macau, a small market, 1,000 merchants. We begin the migration of Hong Kong which is our biggest Asia Pacific market this month and that’s kind of a beta cycle for the initial group of merchants and provided we don’t have any difficulties we’ll continue to move through that conversion in a pretty expeditious manner.

We have, as I said in the conference, we have it lined out for the rest of Asia, for the UK whose requirements are under development now as well as Canada, so I think you’ll continue to hear updates. I don’t think at this stage we’re prepared to give you the net impact on a country-by-country conversion. It’s not something that we have done historically but the system is working quite well. We’ve had no disruptions in service as a result of the October conversion which we’re very pleased with and this project took longer than we expected but thus far is looking to meet operational expectations and we’re very pleased with the progress we’ve made.

Paul Garcia

This is Paul. As you’ve asked before you want to pin down when are we going to see the benefits on the bottom line and what’s the magnitude and we haven’t been specific, we promised you some more information on that. We will tell you that we’re on schedule to get a big chunk of that next year and we are very hopeful to give you some more information on that as these plans unfold.

James Kelly

And let me just clarify, one of the challenges is for example, Macau HSBC Asia Pac does not give us a bill specific to the bill for processing front-end transactions. It’s just a lump of expenses that constitute the services that they can charge us in the transitional agreement. Once the service is ended, it’s very clear to us how much is now off the bill versus what was on there previously so as Paul said, once we start these conversions we know what our costs are, we’ll very clearly know what their costs are and I think David will be able to give you some color in the coming quarters once we have greater visibility. But in each instance that we do a conversion going back to the CIBC and National Bank conversions, these are always very accretive and they will be very productive because we’ll have less systems to support going forward.

Wayne Johnson – Raymond James & Associates

Okay, great. That’s helpful and also on the direct side, on the domestic business what percent of transactions are credit card versus debit.

James Kelly

It’s still the majority, the vast majority. Canada it’s the opposite but the vast majority is still credit cards. In the US credit card being signature, debit or just regular credit card we would view debit --

David Mangum

Wayne, this is David and that percentage really hasn’t moved much in the last few quarters, if you’re thinking about trends or something too.

Wayne Johnson – Raymond James & Associates

Right. Terrific. Okay. Well, thank you for that. Welcome David and thank you for the update on Asia that was very helpful as well.

David Mangum

Thanks Wayne.

Operator

And from Goldman Sachs, we move on to Julio Quinteros.

Julio Quinteros – Goldman, Sachs & Co.

Great. Hey guys. Can you go back through the margin build, I think I understand the part on Canada and how that translates in terms of the profit impact, but can you just walk us through maybe that same sort of logic as far as it relates to Europe and Asia Pacific in terms of where else there might be some hits to the margin side of the story given the currency move I guess is the first part of my question. And then secondly, touched a little bit on the drivers to margins given the platform of consolidation efforts, etc. where else do we have room from a margin perspective to continue to offset some of this currency headwind on the margin side.

David Mangum

If you’re thinking about FX, we did talk about Canada before and that’s obviously the largest piece and the piece with the most margin impact and requiring maybe the most margin explanation. If you look at the other geographies, whether you think of it as Central Europe or the UK or the emerging impact at the margin from the Asian geographies, I think what I would encourage you to do is look at the margins for the segment and not think of those entities as wildly varying from those margins and then apply that logic to drive it to an earnings number and again you’ll find that that revenue logic, the logic of Canada being the vast majority of the earnings impact and looking outside relative to the revenue will hold true as you go through the other geographies. So don’t overcomplicate this. The rule of thumb really does kind of work in the other geographies, if that makes sense, will you.

Julio Quinteros – Goldman, Sachs & Co.

Definitely.

James Kelly

And the reason being we have not integrated the UK, we just started, and we’ve only done a small piece of Asia. We’ve done the back end for Hong Kong Macau. We’re just about to do the front end, we’re doing that for Macau, we’re about to do it for HK. So, as we move through these markets we’ll have a greater concentration of expenses, much smaller expenses, but expenses being borne out of the US because that’s where the primary processing centers are located.

Julio Quinteros – Goldman, Sachs & Co.

All right. Got it and then just the last part to that question as it relates to margin levers, how are you guys thinking about pricing as we go into fiscal 2009, any updates from the networks as it relates to pricing and any opportunities that you guys see there?

Paul Garcia

Julio, if we were to rank them, that clearly is the largest, of course the one we have very little control over. If the associations do something dramatic and I only point you to Canada as a case in point, they do something dramatic, we will appropriately administer that in a way that’s fair for our customers and competitive in the market but does produce some benefit for us.

And I am firmly of the belief that the associations will continue to address interchange and I think over time it comes out, it has to, it absolutely has to. I can’t point to a timeframe and right now it’s all over the place, MasterCard in fact pretty dramatically decreased prices with a transaction that they put in, non-interchange based called (inaudible) and it’s taking all different forms. It’s going to continue to get complicated. That in and of itself is not a bad thing for us either. But I think at the end of the day it comes down. I can’t promise you it happens in fiscal or next year or fiscal ’10 but I will promise you it does happen and when that does, that is good news for everybody in our business.

Julio Quinteros – Goldman, Sachs & Co.

Got it. And finally, I don’t know if this is possible but I was hoping that you would be able to provide just a little bit of a view or some way to reconcile back to some commentary around October when Visa and MasterCard at the time suggested that growth in the US credit side was I think at that point already approaching negative growth and yet through November your growth I think was running at plus 16%, if I got it right, how do we tie those two pieces together.

Paul Garcia

I think the big part is that Visa has 100% of Visa and MasterCard has 100% of the MasterCard, we don’t. So we’re able to take market share and both Jim and David have weaved that into their comments and it’s something we’re very proud of. We’re taking market share in every single one of the territories we’re in, every area, United States and Canada and Asia and Europe and we will do so in Russia and that’s a big part of our growth. It’s quite frankly at the expense of our competitors.

Julio Quinteros – Goldman, Sachs & Co.

Understood. Okay, great guys. Thank you.

Operator

And from Morgan Stanley we will move on to Charlie Murphy.

Charles Murphy - Morgan Stanley

Thanks. The 29% to 31% constant currency revenue growth forecast for FY09 with the caveat that it’s hard to predict the next six months, what do you see particularly in the international business that gives you confidence in that forecast and if it’s possible to include commentary on December in the answer that would be helpful.

Paul Garcia

The international business has to include Canada and we have a tremendous amount of visibility. Canada actually had a very strong holiday period. We were delighted with that so we are encouraged with what we saw in Canada and of course we have the dynamic of what we have in place in Canada driving a lot of, not only revenue growth but profit growth.

The GPE, the Global Payments Europe business is doing fine. Its growth was fairly steady. Asia, with the exception of Hong Kong looked pretty good. We’re trying to figure out what’s going on in Hong Kong. Now that’s not a huge amount of impact on EPS for sure because we’re just getting that business to where it has a margin and it is profitable. But in terms of, and in terms of revenue growth it’s not a big driver either but there’s so much opportunity in those markets I continue to be bullish there too. So the answer to the question is everything I’m seeing, even with some of the macroeconomic headwinds, everything I’m seeing from our markets encourages us that we’re seeing nice organic growth.

Charles Murphy - Morgan Stanley

Okay and just as a very quick follow up, just to clarify the transactions in the gaming business, those are included in the US transaction growth number you provide? Does the 16% growth include the gaming business?

James Kelly

No, gaming is broken into two components. One component is check, a guarantee business. We issue a card called a VIP card. That would not be included in those numbers but a big piece of the business is credit card cash advance at the cages and that business would be in total transaction growth and we have seen some wins there that we have announced and so it’s a piece of it but I think we win and lose merchants all the time so I wouldn’t view that as anything out of the ordinary relative to the overall health of the US business.

Charles Murphy - Morgan Stanley

Is it possible to get any sense for how big transactions in the credit card cash advance business are relative to the merchant acquiring type transactions?

Paul Garcia

They’re not very big. It’s very tiny.

Charles Murphy - Morgan Stanley

Okay. Thanks.

Paul Garcia

You are welcome.

Operator

Moving on to Bryan Keane with Credit Suisse.

Bryan Keane – Credit Suisse

Hi. Most of my questions have been answered but I just have a couple of clarifications. The 29% to 31% in revenue, is there an organic growth number if you ex out acquisitions that we can think about.

David Mangum

We haven’t called that out Bryan. I think the piece that really is important to you is the UK and we’ve been calling that out consistently quarter by quarter so you can get to what’s pretty much an organic number out of just reducing for the UK and as you know for this quarter it was $55 million.

Bryan Keane – Credit Suisse

Okay. Anything seasonally in that number going forward third and fourth quarters?

David Mangum

In which number? You are talking about the --

Bryan Keane – Credit Suisse

The $55 million you just mentioned.

David Mangum

No, if you’re sticking with constant currency the answer really is no, not a whole lot of variability or seasonality coming through that number.

Bryan Keane – Credit Suisse

Okay and then the FX drag for fiscal year ’09 now is the $0.26, obviously it was positive in fiscal year ’08, so just looking for the EPS benefit it was last fiscal year.

David Mangum

So the benefit itself for last fiscal year?

Bryan Keane – Credit Suisse

Yes, due to FX.

David Mangum

I think we’re going to stay, if we can, focused on 2009 and the impact of the really material changes. Certainly, you can assume that you’d have seen a difference in growth overall and at the end of the day you know last year was a reasonable revenue growth number but also investment year for us at the operating line and the new geographies and some of the new processing and so you find income obviously reduced a little bit but at the end of the day I think we’re trying to stick to ’09 and just give you a frame of reference where the business stands today from a trend and a fundamentals perspective.

Bryan Keane – Credit Suisse

Okay and then just a clarification on the US business, it was a little hard to understand but are there ISO contracts that are anniversarying or nothing meaningful going forward in the US business.

Paul Garcia

We worked the model clearly when that question was first asked. The question was, there’s two things, number one do we have any ISO contracts up. Our ISOs are pretty well locked up and they are happy, we are happy, and I will let Jim speak little words about that. In terms of that big ISO that anniversaried, they did anniversary a while ago but they’ve added increments of business since and that is anniversarying as we speak too because they didn’t come on just day one, it took them a while to convert all that business. Jim, you want to speak to the relationship with the major ISOs at all?

James Kelly

We have good solid relationships as they are evidenced by strong agreements and I don’t know of any that come to mind that are at risk that would have a, would warrant a conversation on the call. So I think that’s what I want to say.

Bryan Keane – Credit Suisse

Hey good. And then obviously it’s a tougher economic environment, is there any change in pricing in the merchant acquiring business?

Paul Garcia

Mean thing, the pricing that we actually offer to the merchants, no, we haven’t seen, the ISOs, their pricing is fairly constant. Our pricing is fairly constant. The rates we’re offering our ISOs are fairly constant. The pressures we’re seeing really are a more challenging environment in terms of volumes being produced by the merchant base.

Bryan Keane – Credit Suisse

Okay and just finally on the money transfer I think transaction volume was down 13%. I didn’t hear David, if you broke that out between Europe and domestic.

David Mangum

I actually did not and kind of hoping we don’t do a whole lot of that going forward but I don’t really have that right in front of me Bryan, sorry.

Bryan Keane – Credit Suisse

What was the 13, what’s that comparable to last quarter?

David Mangum

Give me one second.

James Kelly

I don’t have it for last quarter but I can tell you that most of that 13 or a lot of that 13 has to do with the store closures that we’ve gone through. We closed up 20 this quarter, 19, 20 and we would have had closures last quarter so I think you have more of an impact of store closures and modest growth because of the macro trends that are now in Europe as well as they’ve been say for a couple of years.

David Mangum

Thanks for the few seconds. Negative 7%, so 7% drop last quarter, Bryan.

Bryan Keane – Credit Suisse

Okay. Thank you very much.

Operator

Moving on to Andrew Jeffrey with SunTrust.

Andrew Jeffrey - SunTrust Robinson Humphrey Capital Markets

Hi guys. Thanks. Just a point of clarification on a couple of things. David, did you say that the full year tax rate would be around 33%?

David Mangum

Yes, it would be approaching it, Andrew. I don’t think it will get all the way to 33.

Andrew Jeffrey - SunTrust Robinson Humphrey Capital Markets

Okay, pretty big increase in the second half. But I assume that that probably trends down over time, especially as you add businesses like Russia and continue to grow in foreign markets, should we think about the trend directionally being down in the tax rate.

David Mangum

I think at the margin we should think about that trend in that way given the geographies we’re chasing for growth, yes.

Andrew Jeffrey - SunTrust Robinson Humphrey Capital Markets

Okay and then with regard to the operating margin, I think you’d cited that currency obviously adversely affects it, ex currency, would you be looking for the operating margin to be rising year-on-year, certainly the EPS would imply that that would be the case but and you talked a little bit about Asia, but generally on a consolidated basis, should we think about the trend being up and then potentially even more in ’10 as we start to really see the benefits of your G2 project.

David Mangum

I think that ex currency the trend should be generally upward and it should be at the margin on kind of a sequential basis. Whether or not we ever see an enormous impact as this or that geography comes online for G2 we can take up at a later date, but the trend in general should be expansion but at the margin.

Paul Garcia

We clearly understand that our job as management is we have a high fixed cost low variable cost business that lends itself to terrific leverage and our business is to bring in more revenue, leverage that, produce higher margins. That’s what we’re here for and that is clearly our objective.

Andrew Jeffrey - SunTrust Robinson Humphrey Capital Markets

Okay. And then finally you mentioned market share in the domestic merchant business can you talk about a couple of considerations, one your model, the ISO-centric model versus either the bank, referral channel or the direct sales force model and whether you think the way you go to market is relatively beneficial from a share sales point today, and then two, whether or not when you look at what’s happening at First Data, that’s had any impact on your business yet or whether you’d anticipate that it would.

Paul Garcia

Okay, let me take those. Personally, in terms of the three models you mentioned Andrew, the ISO, the bank referral, and the direct, they’re all different. The ISO is priced on a per transaction basis so in an environment where transaction counts actually benefit from decreased tickets, we actually benefit. Two, $10 transactions is worth more to us than $1 million transaction if we processed through our ISOs, as an extreme example.

On a bank referral it is a more like a direct, typically the bank gets a piece of the revenue or referral fee and we own that contract with the financial institution typically sponsoring. It’s a discount rate and it’s very nice business. It’s a little different. You can’t leverage it as quickly but it’s good business and our direct model is the most expensive of all of them first year. But in the long-term direct business actually has the highest margins over a longer period of time assuming that you keep that business. They’re all great, they’re all different, and they all pay you somewhat differently.

So in terms of First Data, they are still a formidable competitor but they do, they are less active in terms of acquisition activity and I think they have their set of challenges with a pretty significant debt load but we certainly aren’t counting them out but am pleased to say we’re not seeing them a lot in terms of bidding up deals so that’s a good thing.

Andrew Jeffrey - SunTrust Robinson Humphrey Capital Markets

Okay. Thank you.

Paul Garcia

Is that helpful?

Andrew Jeffrey - SunTrust Robinson Humphrey Capital Markets

Yes. Thanks.

Andrew Jeffrey - SunTrust Robinson Humphrey Capital Markets

Okay.

Operator

And ladies and gentlemen, that was our last question. Mr. Garcia, I’ll turn the conference back over to you for any closing statements.

Paul Garcia

Thank you Operator and thank you all for joining us on today’s call. We appreciate as always your support of Global Payments and wish all of you a healthy and prosperous 2009.

Operator

Ladies and gentlemen, this conference will be available for replay starting today at 8 o’clock PM Eastern Time and ending at 8 o’clock PM Eastern Time on January 20, 2009. If you wish to look for the replay, please dial 1-888-203-1112 or international participants may dial 1-719-457-0820 and enter passcode 6754093. This concludes our conference for today. Thank you for your participation. You may now disconnect.