Global Payments Q3 Earnings Call Transcript

123jump.com Staff
14 Apr, 2009
New York City

The payment processing company reported quarterly revenues grew 26% to $392.7 million. Net quarterly loss generated was $106.8 million. The company lost $1.34 a share compared to earnings of 50 cents a year-ago quarter and incurred a non-cash impairment charge of $148 million in the quarter.

Global Payments, Inc. ((GPN))
Q3 2009 Earnings Call Transcript
April 2, 2009 5:00 p.m. ET

Executives

Jane Elliott – Vice President, Investor Relations
Paul R. Garcia – Chairman & Chief Executive Officer
David E. Mangum – Executive Vice President & Chief Financial Officer
James G. Kelly – President & Chief Operating Officer

Analysts

Kartik Mehta – FTN Equity Capital Markets
Moshe Katri – Cowen and Co.
Glen Foder – UBS
Julio Quinteros - Goldman Sachs & Co.
Tien-Tsin Huang - JPMorgan
Bryan Keane – Credit Suisse
Robert Napoli - Piper Jaffray & Co.
Thomas McCrohan – Janney Montgomery Scott
Robert Dodd – Morgan Keegan
Roger Smith – Fox-Pitt, Kelton
David Koning - Robert W. Baird & Co.
Franco Turrinelli – William Blair & Company

Presentation

Jane Elliott

Good afternoon and welcome to Global Payments fiscal 2009 third quarter conference call. Our call today is scheduled for one hour. Joining me on the call are Paul Garcia, Chairman and CEO; Jim 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. Forward-looking statements made during this call speak only as of the date of this call and in addition, some of the comments made on this call may refer to normalized results which are not in accordance with GAAP. Management believes that normalized results more clearly reflect comparative operating performance.

For a full reconciliation of normalized to GAAP results in accordance with Regulation G, please see our press release filed as an exhibit to our Form 8-K dated today, April 2, 2009 which may be located under the Investor Relations area on our website at www.globalpaymentsinc.com.

I’d like to now introduce Paul Garcia. Paul?

Paul R. Garcia

Thank you, Jane. And thank you everyone for joining us this afternoon. For our fiscal 2009 third quarter we achieved revenue of $393 million, which represents 26% growth and normalized earnings per share of $0.45 representing 2% growth over last year. These results include the impact of unfavorable foreign currency trends and continuing macroeconomic headwinds both of which we detailed during our conference call last quarter. David will take you through the FX impact for the quarter but I am happy to report that on a constant currency basis our revenue and EPS growth are 38% and 25% respectively.

Our North American segment reported strong growth primarily driven by pricing initiatives in Canada partially offset by a weakening Canadian dollar. Transactions in Canada grew 2% for the quarter while U.S. transactions grew 15%. Our ISO channel continues to be the primary factor behind our transaction growth and expanding market share in the United States. Parenthetically we are seeing a high single digit average ticket decline in the U.S.

We saw solid performance from our international merchant segment this quarter. Growth there was primarily driven by our joint venture with HSBC in the United Kingdom which added $50 million of revenue in the quarter. We also advanced our integration initiatives in Asia. I am very pleased to note that we are now processing two Asian markets on G2, which as you may recall is our front end authorization system. In addition, we have converted four markets which are now successfully processing on our back end settlement platform as well. Finally, our money transfer business continues to face difficult macroeconomic and immigrant labor trends.

As a result, and as David will explain in detail, we recorded a non-cash impairment charge of $148 million. However, we have a strong management team in place that continues to execute well and is maximizing our earnings as evidenced by double digit operating margins and a significant increase in operating income produced in this very challenging environment.

Now here is David to discuss the financial details. David?

David E. Mangum

Thanks, Paul. I plan to cover the money transfer impairment charge, constant currency analysis, margins and some balance sheet and cash flow highlights.

First, our discussion of normalized results today has excluded the impact of a $148 million non-cash impairment charge related to our money transfer business. We identified this charge as part of our annual FAS 142 goodwill testing. The charge reflects the declining outlook for our money transfer business related to macroeconomic conditions affecting the construction industry in particular. The significant majority of this charge consisted of goodwill and there will therefore be no meaningful change to amortization or depreciation expense on a go-forward basis. We have no tax basis from the original money transfer stock purchase acquisitions and as a result we recorded minimal tax benefit from this charge and the resulting unfavorable impact is $1.79 per share.

Next, as we did last quarter we included a constant currency schedule in the press release labeled “Schedule 9” to help you understand the full impact, favorable and unfavorable, of currency on the growth of the business. To calculate this we converted our fiscal 2009 actuals and outlook at fiscal 2008 exchange rates. Foreign currency translation, largely driven by the weakened Canadian dollar, negatively affected our revenue and EPS by $35 million and $0.10 respectively for the third quarter, about as we anticipated.

Our expectation for the remainder of fiscal 2009 assumes that forecasted exchange rates will stay within a relatively narrow range around today’s levels in our material geographies for the rest of the fiscal year. Fluctuations in currency rates of course may cause variances to our outlook.

Operating margins for the quarter were about what we expected at 16.8%. The ISOs implemented new pricing strategies this quarter as they do from time to time which increased our revenue growth by a few percentage points with no corresponding increase to earnings. For fiscal 2009 we continue to expect normalized operating margins to be similar to those we reported in fiscal 2008.

Turning now to our balance sheet and cash flow. During the quarter we spent $8 million on capital expenditures mostly relating to infrastructure technology and merchant terminals. We now anticipate our full year capital expenditures to total approximately $35 to $40 million, down a bit from our previous expectation.

At the end of the quarter our available cash totaled about $140 million and our ability to generate cash remains solid. We have an untapped $350 million line of credit and significant overall debt capacity to support our long term growth objectives.

Now I will turn the call back over to Paul.

Paul R. Garcia

Thank you, David. We are maintaining our 2009 annual revenue guidance of $1.550 billion to $1.580 billion or 22% to 24% growth over fiscal 2008. In addition, our constant currency expectations for revenue growth of 29% to 31% remains unchanged from last quarter. We are also reaffirming fiscal 2009 normalized diluted earnings per share guidance to $2.14 to $2.21 reflecting 8% to 12% growth over fiscal 2008. On a constant currency basis our annual diluted earnings per share growth of 21% to 25% remains similarly unchanged.

In closing, we are very well positioned to execute our long-term growth strategy of further expansion in Europe, Asia Pacific and North America.

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

Question-and-Answer Session

Operator

Thank you, sir. Ladies and gentlemen, our question-and-answer session will be conducted electronically. If you would like to ask a question, please firmly press the “*” key followed by the digit “1” on your touchtone telephone. We will come to you in the order that you signal and if you find that your question has been asked and answered before you could ask it and you would like to remove yourself from the question roster, please firmly press the “*” key followed by the digit “2”. Also, if you are on a speakerphone, please make sure that your mute button is disengaged so that your signal can reach our equipment. Once again that is “*1” to ask a question and we will pause for just a moment to assemble the question roster. And for our first question we go to Kartik Mehta with FTN Equity Capital Markets.

Kartik Mehta – FTN Equity Capital Markets

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

Paul R. Garcia

Okay Kartik. Well firstly, we are seeing some pretty strong transaction growth in the United States primarily driven by our ISOs. And although they are off from what they have done in the past, this economy is impacting them as well, off for them is still solid double digit growth resulting in this 15% figure. In terms of same store we are clearly seeing some reductions. We are seeing average ticket reductions. We are seeing just slowing growth overall and it is obviously when you are enjoying 15% it kind of masks it. The reality is this economy is impacting us in the United States pretty profoundly.

Now in terms of the U.K. that is kind of a mixed message too. We are doing very well there. I think part of it is that we are taking share. There was some low hanging fruit we took advantage of. We added some sales resources and our management team there is just doing a fabulous job. I couldn’t be happier with them. And our largest competitor is really having its hands full with a lot of issues and consequently we have indeed been taking share. So that business has also been growing very nicely but there too the economy is impacting us. I don’t have as much same store stuff from the U.K. but what I have seen would support that it is slowing down on that kind of measurement as well.

Kartik Mehta – FTN Equity Capital Markets

Paul, in fiscal ’09 you have really benefited from the Canadian pricing. Obviously you benefited from the U.K. acquisition. As you look to the next 12 months what opportunities are there such as those that could really benefit Global?

Paul R. Garcia

Okay. Well, we have this inherent growth in all of our markets which is obviously helpful. Canada does have a grow-over with the impact of what they enjoyed this year but there is still upside for Canada. We have expense reduction opportunities as we go forward, less so in G2 but for next year we are starting to get some of that benefit as well.

And I would also say that the opportunity for growth in Asia is incredible. Now I think it is not going to be a huge driver next year but truly for the long term, Kartik, we find ourselves in a very unique position in China in that we are authorized to acquire Renminbi. We have some more work to do but we will have a unique proposition in a very exciting part of the world.

So, I look at kind of the long-term opportunities for next year and beyond and I am very encouraged.

Kartik Mehta – FTN Equity Capital Markets

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

James G. Kelly

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

Kartik Mehta – FTN Equity Capital Markets

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

James G. Kelly

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

Kartik Mehta – FTN Equity Capital Markets

Thank you very much.

James G. Kelly

Thanks Kartik.

Operator

For our next question we go to Moshe Katri with Cowen and Co.

Moshe Katri – Cowen and Co.

Hey thanks. Congratulations for a strong execution in this market. Paul, can you comment on transaction growth by credit and debit cards just to give us kind of a feel on where that is going? And then can you quantify the pricing benefit that you had during the quarter? And then maybe you can also share your views over MasterCard’s interim settlement that was announced yesterday with EC regulators. Specifically how it can or will impact Global’s business in Europe? Thanks.

Paul R. Garcia

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

David E. Mangum

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

In terms of parsing and pricing very directly, we are really not going to parse and pull apart the pieces or the pricing.

Moshe Katri – Cowen and Co.

Thanks.

Operator

For our next question we go to Jason Kupferberg with UBS.

Glen Foder – UBS

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

Paul R. Garcia

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

Glen Foder – UBS

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

Paul R. Garcia

I would say, and I know this sounds ridiculous, I would hope it didn’t have much of an impact because I think that if I imagine who you are talking about that script hasn’t been written and that is not kind of how we compete. Our ISOs have been pretty up front too. We have not tried to capitalize on anyone else’s misfortunes. I think even though we all compete aggressively we want all of us to prosper and kind of do well at the end of the day because that makes for a healthier organization.

I will tell you though that there are some merchants that are concerned about some of our competitors and that may have driven in some business. That is not something we have harped on. It is not something our ISOs have harped on. It is not something I really follow. That is two for two. I’m not being very helpful here.

Glen Foder – UBS

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

Paul R. Garcia

I’ll try. I think that is what it is; an opinion. I think that interchange does go down over time. It is kind of fluctuating all over the place right now. I think some of the questions that Moshe asked about the MasterCard settlement in Europe some of it has something to do with transparency. There might even be some requirements about that. I think that at the end of the day interchange comes down and that is a good thing for all of the processors because our fee is a very small part of the overall amount.

I don’t want interchange to come down so much that the card issuers aren’t encouraged to issue cards because this is a three-legged stool. We all need to work together. I think there is some room. I hope that happens and I think that will be good news for all of us including Visa and MasterCard quite frankly.

Glen Foder – UBS

Okay. Thank you.

Operator

For our next question we go to Julio Quinteros with Goldman Sachs.

Julio Quinteros - Goldman Sachs & Co.

Hi, guys, great. Can you just give us a little bit of color on the operating margins? I think they were a little bit lower than what we were looking for. I’m just looking for maybe some of the puts and takes on the margin profile as we think about it. And also just wanted to get this clarification. It sounded like the fiscal year ’09 target for margins is more or less; it sounded like it was flat versus fiscal 2008 at this point?

David E. Mangum

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

Julio Quinteros - Goldman Sachs & Co.

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

David E. Mangum

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

Julio Quinteros - Goldman Sachs & Co.

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

Paul R. Garcia

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

Julio Quinteros - Goldman Sachs & Co.

Got it, great. And just lastly on that point, any interest at all in doing more financial outsourcing or core processing? Or do you want to keep this more focused on the payment stuff?

Paul R. Garcia

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

Julio Quinteros - Goldman Sachs & Co.

Great. Thanks guys. Congratulations.

Paul R. Garcia

Thanks Julio.

Operator

We go next to Tien-Tsin Huang with JPMorgan.

Tien-Tsin Huang - JPMorgan

Hi, good evening. A follow-up I guess to Julio’s question, Fifth Third Processing, I guess the implication for Global? Was that an asset you considered acquiring? And I guess what are the implications of that deal and is that pipeline still there to do other larger acquisitions in the U.S?

Paul R. Garcia

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

Tien-Tsin Huang - JPMorgan

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

Paul R. Garcia

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

Tien-Tsin Huang - JPMorgan

Got it.

Paul R. Garcia

And repeat your second question, I’m sorry.

Tien-Tsin Huang - JPMorgan

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

Paul R. Garcia

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

Tien-Tsin Huang - JPMorgan

Is it impacting your sales efforts at all?

Paul R. Garcia

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

Tien-Tsin Huang - JPMorgan

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

David E. Mangum

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

Tien-Tsin Huang - JPMorgan

Okay. Just two more then, tax rate for the year, David? And then is it possible to get the U.K. revenues in the quarter?

David E. Mangum

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

Tien-Tsin Huang - JPMorgan

$50 million, terrific. Thanks, nice job.

David E. Mangum

Thanks Tien-Tsin.

Operator

We go next to Bryan Keane with Credit Suisse.

Bryan Keane – Credit Suisse

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

David E. Mangum

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

Bryan Keane – Credit Suisse

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

David E. Mangum

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

Bryan Keane – Credit Suisse

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

David E. Mangum

That is correct.

Bryan Keane – Credit Suisse

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

David E. Mangum

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

Bryan Keane – Credit Suisse

Okay and then going forward should that tick back up or is that relatively the right number?

David E. Mangum

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

Bryan Keane – Credit Suisse

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

Paul R. Garcia

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

Bryan Keane – Credit Suisse

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

Paul R. Garcia

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

Bryan Keane – Credit Suisse

Okay. All right. Thanks guys.

Paul R. Garcia

You are welcome. Thank you.

Operator

We go next to Bob Napoli with Piper Jaffray.

Robert Napoli - Piper Jaffray & Co.

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

Paul R. Garcia

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

Robert Napoli - Piper Jaffray & Co.

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

Paul R. Garcia

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

Robert Napoli - Piper Jaffray & Co.

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

David E. Mangum

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

James G. Kelly

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

Robert Napoli - Piper Jaffray & Co.

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

David E. Mangum

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

Robert Napoli - Piper Jaffray & Co.

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

Paul R. Garcia

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

Robert Napoli - Piper Jaffray & Co.

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

Paul R. Garcia

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

Robert Napoli - Piper Jaffray & Co.

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

Paul R. Garcia

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

Robert Napoli - Piper Jaffray & Co.

Thank you.

Paul R. Garcia

Welcome.

Operator

We go next to Thomas McCrohan with Janney Montgomery Scott.

Thomas McCrohan – Janney Montgomery Scott

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

David E. Mangum

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

Thomas McCrohan – Janney Montgomery Scott

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

David E. Mangum

I think you were talking about interchange so --

Thomas McCrohan – Janney Montgomery Scott

That per transaction one-half of $0.01 that went to $0.02? The NABU in particular.

Paul R. Garcia

Yeah absolutely, Tom. There is no limit on our ability to pass through expenses. We charge the ISOs a per transaction fee and then we pass through all others.

Thomas McCrohan – Janney Montgomery Scott

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

David E. Mangum

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

Paul R. Garcia

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

Thomas McCrohan – Janney Montgomery Scott

Great. Thanks, guys.

Paul R. Garcia

You are welcome.

Operator

We go next to Robert Dodd with Morgan Keegan.

Robert Dodd – Morgan Keegan

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

David E. Mangum

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

Robert Dodd – Morgan Keegan

Got it. Second one, Asia, obviously a slowdown from the prior quarter. Could you try and give us some color on how much of that was currency versus economic activity? Hotel space in Hong Kong actively down and that is a pretty big key business over there.

Paul R. Garcia

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

Robert Dodd – Morgan Keegan

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

Paul R. Garcia

We are calling it GPE, Global Payments Europe, and the Czech got a little bit of press recently when the Czech Prime Minister said that our stimulus plan was the “road to hell.” They are struggling and some of those economies are much more fragile and have less ability to rebound. We hope we don’t see any Icelands. I am not going to make any predictions there. I will tell you that Global Payments Europe as of right now is doing okay but it has its challenges though too. It is an indirect business and because of that it is very difficult to grow that significantly because you have to sign these mammoth banks and get them to convert so it is almost like a card issuance type of deal. It is a big deal to get or to lose customers and there also are a handful of guys that have more control and when pricing renegotiations happen that has a bigger impact on you too.

But just like China a little bit that is not about we have a 50% market share in the Czech Republic which is nice. Our aspirations are to expand dramatically beyond those regions to morph this to a direct acquiring model and that is why we were pointing at Russia at one point, 150 million people, the largest economy in that whole region and one that is not without its risks clearly and challenges but one that we are also focused on. So I would say stay tuned.

Robert Dodd – Morgan Keegan

Hey, got it. Thank you.

Operator

We go next to Roger Smith with Fox-Pitt, Kelton.

Roger Smith – Fox-Pitt, Kelton

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

James G. Kelly

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

Paul R. Garcia

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

Roger Smith – Fox-Pitt, Kelton

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

Paul R. Garcia

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

David E. Mangum

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

Roger Smith – Fox-Pitt, Kelton

Great. Thanks very much.

Operator

We go next to David Koning with Baird.

David Koning - Robert W. Baird & Co.

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

Paul R. Garcia

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

David Koning - Robert W. Baird & Co.

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

David E. Mangum

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

David Koning - Robert W. Baird & Co.

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

David E. Mangum

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

David Koning - Robert W. Baird & Co.

All right. Great. Thank you.

Operator

And we will take the last question from Franco Turrinelli from William Blair & Company after which Mr. Garcia will give his closing statement.

Franco Turrinelli – William Blair & Company

These are minor but both depreciation and amortization expenses seem to decline significantly sequentially but obviously not related to a write off. Is there anything to look at there?

David E. Mangum

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

Franco Turrinelli – William Blair & Company

Okay, great. Thanks.

Operator

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

Paul R. Garcia

Thank you, operator and thank you all of you for joining us on our call today. And thank you for your continuing interest in Global Payments.

Operator

And ladies and gentlemen, this conference will be available for replay starting today at 8 p.m. ET and ending at 8 p.m. ET on April 17, 2009. If you wish to listen to the replay, please dial 1-888-203-1112. I give that number. It is 888-203-1112 from the United States and Canada or international participants may dial 719-457-0820. I give that number. It is 719-457-0820 and enter passcode 2644471. I give that passcode. It is 2644471. This concludes our conference for today. Thank you for your participation. You may now disconnect.