Euronet Worldwide Inc (EEFT) 2003 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Euronet Worldwide second quarter earnings conference call. (CALLER INSTRUCTIONS). It is now my pleasure to introduce your host, Mr. Jeffrey Newman, Executive Vice President and General Counsel. Thank you, Mr. Newman. You may begin.

Good morning, and welcome, everyone to Euronet Worldwide's quarterly results conference call. We will present our results for the second quarter on this call. We have Rick Weller, our CFO, and Mike Brown, our CEO, with us today. For those of you who tried to log on to this call through our corporate Website, we would like to apologize. Our ISP has been having a server problem which they are currently addressing. Hopefully, all of you have been able to access the PowerPoint presentation through the VCall link we included in the press release. The PowerPoint was also included in an 8-K that was filed this morning and is currently available on Edgar, if you can access Edgar.

Before we begin, I would like to make a statement concerning forward-looking statements on the call. During this conference call, representatives of Euronet Worldwide will make statements concerning the Company's or management's intentions, expectations or predictions of future performance, including selected financial guidance concerning the Company's results. These statements are forward-looking statements. EuroNet's actual results may vary materially from those predicted or anticipated in such forward-looking statements as a result of a number of factors, including competition and technological developments affecting the market for the company's products or services, foreign exchange fluctuations, and changes in laws and regulations affecting Euronet's business. Additional explanation of these factors and other factors affecting the Company's results are set forth from time to time in EuroNet's periodic reports filed with the U.S. Securities and Exchange Commission, including, but not limited to, its Form 10-K for the year ended December 31st, 2002, and its Form 10-Q for the quarter ended March 31st, 2003. Copies of these filings may be obtained by contacting the Company or the SEC.

Okay, I will now turn the call over to Rick.

Thank you, Jeff, and good morning to all who have joined us for this second quarter update. Let's get started. I'm on slide Four. Here you can see that we reported $48 million in revenue; operating income of $2.8 million; EBITDA of $5.9 million; and EPS of 1 cent per share, excluding FX losses. Our revenues increased 45 percent over the $33 million reported in the first quarter, and compared to the same quarter last year, a 175 percent increase. Operating income of $2.8 million reflects the 133 percent increase over the first quarter's $1.2 million, and a 180 percent increase over last year's second quarter. EBITDA of just shy of $6 million represents a 51 percent increase over first quarter's $3.9 million, and almost a 90 percent increase over last year's second quarter. And earnings per share of 1 penny, excluding the FX loss, which represents EuroNet's first positive quarterly EPS, historically, compares to a negative, or a loss per share, of 3 cents, again, excluding FX, and a gain we recognized on the UK sale of the first quarter of a negative 3 cents a share. The spread there gives us a 4 cents a share improvement, quarter on quarter.

In summary, we had a good quarter, with improvements in all areas and fundamentals.

Now, on Slide Five, I want to update you on our guidance for the balance of the year. As you know, at the end of the quarter, end of first quarter, we affirmed our guidance of 20 to 22 cents a share. At this time, we are revising that guidance to 10 to 13 cents a share. This revision of guidance is primarily based on five key factors. First, signatures on ATM outsourcing agreements have been slower than anticipated. Second, the takeover and implementation of ATMs for two in-hand and contracted outsourcing agreements in Slovakia and India has been slower than originally planned. These first two items make up approximately half of the difference in our revised earnings guidance. While they will impact this year, provided we close certain key outsourcing agreements yet this year, they should not adversely impact next year's momentum.

Third, we have decided to enter the Polish and U.S. prepaid transaction processing markets. These initiatives will require certain market entry costs. These costs account for approximately 2 cents a share.

Fourth, the U.S. dollar continues to weaken to the euro and the pound. While we did see some weakening in the first quarter, approximately 2 to 3 percent, that weaknesses has now increased to approximately 10 percent in the euro since the beginning of the year. With our current level of Euro-based debt, which represents approximately 75 percent of our total debt service costs, this 10 percent weakening of the dollar amounts to about 2 cents a share.

Finally, the mix of profit generation among various taxable and non-taxable countries has changed somewhat, contributing to about a penny a share.

While we believe it is appropriate to revise our guidance at this time, we continue to build our ATM outsourcing pipeline, and believe we will see successful agreements signed yet this year. And, as you will see in the second quarter earnings update, the prepaid business continues to see strong growth and profit contributions. Furthermore, not to diminish a cent or two per share, a cent a share is approximately $270,000. To this end, we believe a couple of cents per share initial invested, is a relatively small investment to enter the Polish and U.S. markets. These investments should leverage themselves quite nicely in the next few years. We believe we need to move quickly in this prepaid area to position ourselves for consistent and sustainable future growth. I am sure you'll have a number of questions about this revision, and we'll be glad to cover them with you in the Q&A session following our prepared comments.

Now, moving on with more discussion on the quarter, on Slide Six. Here, we present the organizational view of how we manage our three operating segments. The discussion this morning will follow these three segments -- ESP, prepaid and software. And, I will point out, as we have said in prior quarters, over 90 percent of our revenues are recurring.

Now moving to Slide Seven. You can see that our total transactional growth continues. This quarter, we processed almost 50 million transactions, an 18 percent increase over a full quarter of the first quarter, and 167 percent increase over the second quarter a year ago.

On Slide Eight, this chart graphically illustrates a 52 percent Q-on-Q revenue growth for the combined transaction processing segments of prepaid and EFT. I will note that second quarter was benefited by the additional month for e-pay, because January was not in the first quarter results. Had January been included, these two segments combined would have seen almost 15 percent sequential quarter-to-quarter revenue growth.

On Slide Nine, we provide the segment make up of the revenue stream. Here, also, bear in mind that the first quarter does not include e-pay's January revenue of approximately $9.4 million. Prepaid and ESP both posted growth over first quarter, and in line with strategy, software maintained its revenue levels. As this chart illustrates, prepaid makes up approximately 67 percent of the total revenue, and EFT approximately 25 percent.

On Slide Ten, you can see the sequential quarterly improvement in operating income and EBITDA. Our EBITDA is now at almost $6 million, quarterly, or a seven or eight fold increase over just the fourth quarter of 2002.

Now, as we turn to Slide Eleven, let's look a bit deeper into the make up of the operating results. While there are quite a few numbers on this slide, I believe there are a few key messages. First, all segments posted improved results in all categories from revenue to operating profit to EBITDA. More specifically, on the EFT business, bear in mind that the first quarter had about an $800,000 one-time revenue from a contract termination. Excluding this one time item, the EFT revenue would have improved about $1 million, Q-over-Q. And, I will note that the prepaid business has been burdened with almost $0.5 million of amortization from the purchase price allocation. Second, corporate expenses were held flat with the first quarter. And third, while you cannot see it on this chart, both EFT and software managed expenses flat to down over the first quarter. In summary, improvements in all areas.

Let's move to Slide Twelve, for a few quick comments on key balance sheet categories. Total cash increased, but it was related to the restricted cash balances administered with the e-pay business. While we can't use these cash balances for operating purposes, we do benefit from the float, as borne out in interest income in our income statement. On unrestricted cash, it decreased approximately $800,000 over the first quarter. This was the net result of operating cash flows of approximately $6.2 million, offset by $3 million in interest payments, $2.6 million in net debt reductions and $1.3 million in capital expenditures, leaving approximately $100,000 to round out the difference. Our receivables and current liabilities increased, largely as a result of the increased transactional volume in the prepaid business. And, goodwill and intangibles decreased due to amortization and GAAP accounting impacts of certain NOL benefits. Finally, as I mentioned, we had a $2.6 million net debt payment, but you can see that our debt increased by almost $1 million.

So, the next slide, Slide 13, we walk through how the debt has changed, and where we expect it to be by the end of the year. Here you can see we started the quarter with approximately $70.9 million of debt. We borrowed a bit, $300,000, and we paid off 2.9 million, netting to the $2.6 million. You can see the impact of the exchange rate of $3.5 million that resulted largely from the pound, more significantly the euro, strengthening against the dollar. Also note here -- is a $3 million acquisition debt payment made in early July, bringing our debt, now, to about $68.8 million. In addition to this $3 million early third quarter payment, we expect to further reduce debt through cash flows to approximately $63 million by the end of the year. And note the $63 million does include about $7.5 million of convertible acquisition debt, convertible at $11.43 per share. At $63 million debt levels, that would represent approximately 2.5 times our current annualized EBITDA run rate.

As a final comment on debt, as you may know, the debt markets are active, and we are evaluating refinancing options, none of which would be share dilutive.

That wraps up my comments on the income statement and balance sheet. I will turn it over to Mike to continue with the segments.

Thank you, Rick. Today, I'm going to cover, as I did last time, our three business lines, EFT Processing; Prepaid Processing; and Software Solutions.

Please move onto Slide Number 15. First, as a reminder -- Rick mentioned this here briefly -- but in Q1, we had, in the EFT segment, we had a one-time favorable contract cancellation payment of over $800,000. This was not money accrued for no effort, in fact, we worked many man hours on the project in both Q4 in Q1, which delayed the limitation of other projects. But, I wanted to have you keep this in mind as we look at the progress of this business segment, moving forward, Q1 into Q2.

Move onto the next slide, please. This slide, here, on EFT processing -- it shows our quarterly transaction growth. You can see steady quarter on quarter improvements in this division. In fact, our quarter one to quarter two, '03 growth was 16 percent in transactions.

Move on to next slide, Slide Number 17, this slide shows the EFT processing revenue growth for the last six quarters. As you saw in the prior slide, transactions are growing, and, after considering also that we've got here -- you will notice in Q4, '02, we've got -- we show what the UK sales number was, so that you could do a proper comparison here. We had disposed of the UK assets early in Q1, if we raised $30 million, which we used, of course, to buy e-pay in the same quarter. The revenues are growing nicely after taking into consideration the UK sale effect. Also, remember, too, that when you look at revenues going from Q1 '03 to Q2 '03, that number is artificially high in Q1 '03 by the non-recurring one-time event of $800,000. So, had we not had that in Q1, you can see that just our fundamental recurring transaction processing revenue grew considerably Q2 '03 over Q1 '03.

Next slide here, on Slide Number 18, we are showing our operating income and EBITDA results compared to the prior quarter, Q1 in '03. You can see steady improvements here of of income -- of op. (ph) income and EBITDA. Once again, we normalized for one-time events in Q1 and Q2, the recurring business had Q-on-Q improvements of both EBITDA and op. income of almost $1 million. Not taking into consideration the one-time events, and just using these numbers as you see ahead of you, right here on this slide, op. income grew by 50 percent Q2 over Q1, and EBITDA grew by 15 percent Q2 over Q1, '03.

Now, move onto the next slide, Slide Number 19. We wanted to show you, again, the breakdown in financials between our original core business of EFT processing, and that is our Amia (ph) region, that is Europe, Mideast and Africa, as opposed to the Asia-Pacific region. A couple of notes here. Number one, we have put this slide out here to point out the fact that we are making a big investment in the Far East right now in Asia, primarily in India. We have already seen the fruits of those labors. I will talk to you more about what we have done with cash net, later in this presentation. And also the fact that we do have an outsourcing agreement for 458 ATMs with IBBI (ph) Bank in India, which we are in the middle of implementing right now. And that is why you could see that basically, the $2 million kind of run rate of expense that is caught in these areas is starting to pay off. But not -- if you break up that from the investment in Asia-Pacific, and you look at Amia by itself, you can see that the business had growth in revenues up a bit -- it was only 2 percent growth, really, going from Q1 to Q2, but bearing in mind the contract cancellation, this was quite a nice growth.

We had a 14 percent op. income margin in Amia, up from 12 percent in Q1, and we had a 29 percent EBITDA margin in Amia up from 27 percent margin in Q1. So, we've got steady improvements in the fundamentals that make up our business and our recurring revenue, vis-a-vis EFT processing.

Moving onto the next slide, Slide Number 20. Here is kind of the processing kind of headlines. First, we will talk about Amia again, Europe, Mid-East, Africa -- we've got Tatra Rife-hizon (ph) Bank. Tatra Bank is located in Slovakia. It is the fourth Rife-hizon Bank customer, and our first outsourcing agreement in Slovakia that we announced towards the end of last year. We had two ATMs live with this outsourcing contract at the end of Q2. We've got eight live now, but we are filing now to the point where we have all the operational go-ahead to continue to roll out the remaining 142 ATMs to give us 150, in all, before the end of the year.

On HVB, HVB is the second-largest bank in Germany -- it's Hypo-Vereinsbank. This is the fourth time that we have contracted an HVB bank somewhere in Amia. We announced earlier a pilot for 25 ATMs -- maybe about six months ago with this client, towards the end of last year. and, after the successful pilot, this client has now increased the number of ATMs that they wish to outsource cash management to to Euronet up to 200 ATMs.

Now, we'll move to Asia. In Indonesia, we will start with, we're there with mobile recharge. Indonesia is an interesting market. Here we have what we call mobile pop-up or mobile recharge due to handsets, where an individual prepaid telephone customer -- a cellular customer -- can buy more minutes by basically typing in a small SMS (ph) message into their phone; we route that message; we route the transaction and settle it with the bank. Here, in this part of the world, or in Indonesia, the banks are in control of this mobile pop-up. The excitement is building. They make money off of the commissions paid by the mobile operators, and we make money off the commissions paid by the mobile operators. The banks have taken full control of this. They are signing up 4 to 500 users per day to use mobile pop-up; and we now have more than 50,000 customers registered in Indonesia. We're looking to bring the same excitement to India, as well.

Now I will talk to you about India; there is a lot going on India. Every day it seems like more things to announce. The two biggest areas that we'd like to talk about -- that I'd like to talk about today -- is cash net and also our outsourcing customer IDBI. First, we will talk about Cash Net. Cash Net is India's first nationwide sharing (ph) ATM switch, which offers member banks (indiscernible) ATM transaction processing across multiple banks. It is basically an inter-India cross-bank switch. We do this from Euronet's state-of-the-art processing center this located in Mumbai (ph). Cash Net will offer the switching service across more than 1300 ATMs. From the four member banks who have signed so far, they account for over 6 million debit and credit card customers, and they have ATMs that cross over 100 cities in India. We are happy to say now that Cash Net is actually live with its first ATM. We are live, ourselves with the first 25 ATMs in IDBI Bank, but Cash Net, itself, just yesterday, went live, hooking up its first two member banks, that's Citibank and IDBI Bank. We went live so that all 280 IDBI ATMs, and 170 Citibank ATMs can now put cards in each other's ATMs and they are routed and switched and settled through Cash Net, which is Euronet's company in India. The four founding member banks, again, are Citibank, IDBI Bank, Standard Charter bank and UTI (ph) Bank.

Now, a quick update on IDBI. I mentioned to you earlier they are one of the founders; they are actually the settlement bank for Cash Net. They are also an outsourcing customer for us. We intend to implement 450 ATMs in total. Our estimate is about 400 by the end of this year, '03. And it is proceeded with very careful timetables due to our client -- IDBI -- who's being very diligent and deliberate, since this is the first time outsourcing has ever occurred in India. We have rolled out the initial 25 ATMs. We have studied those ATMs together with our client. They feel comfortable with them. We have worked out all the operational ticks. It's taken a little longer than I would've liked, because they are being a little bit conservative, but that's okay. This is the first time it's happened in India, and it will be a great showcase for other banks and other outsourcing contracts.

Now, our India operations center and this client are ready to ramp up again, and rollout more ATMs at a steady pace, as we move in towards the end of the year. This customer accounts largely for actually our (indiscernible) contribution that we projected for this year when we had to revise our estimates for earnings this year. This will not affect at all, however, next year's implementation, because we still plan on having the full 400 live with them by the end of this year.

Let's move onto the next slide, please. Here's our classic ATM by category. Some people like to run models. And, this is for the people who do. We've got our comparison of last year's numbers, last quarter's numbers. We've also noted that we have done an as-reported and a post-UK number for 6/30 so people we can see that we've basically moved the UK ATMs that we originally owned, moved them down to Category Three, which are not owned by third parties. In Q2, though, I want to point out, in this segment of our business, our ATM count increased by 125 ATMs, about 25 in India and another hundred across Amia. So that's nice growth, and that is a good part of what accounted for the growth in both revenues and profits, moving from Q1 this year to Q2 this year.

Moving onto the next slide, Slide Number 22, it's those same numbers or the same countries -- just a map of where we have our ATMs. Slide Number 23 gives you a breakdown of each of those countries, one by one, in each of the three different categories.

Now, we will move into the Prepaid Processing Segment, our newest segment, that started with the acquisition of e-pay earlier this year. Move on, please, to Slide Number 25. You will see the quarterly growth here in transactions for e-pay. You will notice that we did include the January numbers here to have an effective comparison, quarter-to-quarter, as we can see this thing move. Please note that the growth in transactions from Q1 '03 to Q2 '03, is actually the second-largest quarterly jump in actual transaction numbers in the Company's history.

Move on now, please, to Slide Number 26. You can see the revenue growth, quarter-by-quarter, over the last three quarters. We did include January in a different color here. These are not revenues that we were able to book in Q1, but, had we added those in, based upon the fact that we did the transaction in February, you could see a more effective comparison.

Move on, please, to the next slide, Slide Number 27. In a similar fashion to the last slide, we have included January in our comparisons of Q1 '03 to Q2 '03, and we compare our op. income and our EBITDA, our two best yardsticks for our Company's improvements in results. Again, like I said, we presented this as if January is there. You should also note that the second quarter's operating income, that includes both operating income and EBITDA, includes costs of approximately a quarter of $1 million, as new market development costs, as Rick mentioned earlier. So, both those numbers, if we would not be entering these new markets of Poland and the U.S., would've been about a quarter of $1 million higher in Q2 '03.

Okay. Now we will move onto Slide Number 28. Note that here -- first of all, the topline numbers are as follows. Revenue 32.2 million; op. income 2.7 million; for prepaid processing and EBITDA, $3.7 million. Note here that for ease of comparison, we have included January's e-pay numbers so that we could do an effective pro forma quarter on quarter comparison. Also notice that this segment is growing robustly, and for that reason, we are expanding into some additional new markets that I will talk about in a moment. We have taken out these expansion costs in some sub-bullets, so as to highlight the positive trends we see in the baseline business of e-pay.

Okay. Eighty-five percent -- start with revenues, 85 percent increase over 17.4 million in Q1. If you pro forma that, adding January's numbers, it would have been a 20 percent increase in revenue, quarter on quarter. That is tremendous!

On op. income, 78 percent increase over the 1.5 million in Q1. That is what booked. It was an 11 percent increase over the 2.5 million pro forma of Q1, 2003. And, if you include January and exclude the new market costs, it was basically a 20 percent increase in op. income. So the ended up with a 20 percent increase in revenue and 20 percent increase in op. income, when you take out these other factors to make a more effective comparison. Also, please note that that 2.7 million would've been 3.2 million, because we have a little less than $500,000 that hits us every single quarter now with the amortization costs of the purchase of e-pay earlier this year -- another non-cash amortization cost. Our EBITDA was 70 percent increase over the 2.1 million in Q1; 9 percent increase over the 3.4 million in pro forma of Q1, 2003. Also notice that the EBITDA would have been 3.9 million, if you exclude the new market development costs.

All right, now we will talk about prepaid processing -- kind of the business highlights. In this business, just like any EFT process -- in the EFT Processing Segment -- we are out here to make more money next quarter than we are this quarter. We do this by two different ways. Number one is to expand to new retailers in our current markets and number two is to add new markets that we might expand into using our platform.

First, we'll talk about new retailers. We continue to sign up new retailers every day. Right now, as you might remember, we do about a third or so of our topline comes from independent retailers, and two-thirds of our topline comes from the chain stores and the large box (ph) stores. So, to make money here, we've got to kind of work on both sides. On the independent side, we are adding about 100 new independent retailers every month to our roster -- people who are selling electronic pop-ups in the UK and also -- about 100 new in the UK and we are adding more everyday also in Australia, as well. Also, we went live with the Iceland grocery store chain in the UK. This is a niche market vendor for frozen foods and grocery in the UK. Iceland has 700 locations.

Okay. Now moving onto new markets and new countries. Euronet and e-pay both are working on a number of new markets, and will provide more details in the coming weeks. But first we will talk about Poland. Poland is the largest market in Central Europe with a population a little bit less than 40 million people. There are 13 million mobile users and about 8.5 million of them or so are prepaid users. We are leveraging the agreements with all three mobile operators that were struck by Euronet over the last three years, when we have done either a handset or ATM pop-up -- electronic pop-up -- in Poland. We are using the e-pay technology platform to drive what is right now -- the current count is 137 live locations and terminals. One note is that we are using the e-pay processing center in the UK; we are leveraging the customer service and local language expertise of our Euronet/Poland operation. We continue to add new sites and retailers and we will give you a further update next quarter.

But, I will tell you this. By moving into a brand-new non-English-speaking market in the first full quarter, after the e-pay acquisition is a real accomplishment. We had to hook our processing centers together to be able to route the transactions to get the content, basically the electronic pop-ups, for the pins; we had to connect Budapest to the UK; we had to put everything -- we had to put the e-pay platform for the first time into non-English implementation. This was a very complex rollout. But, it's a testament to both the transportability of the e-pay technology platform and its operation and technical staff and designers, and also their counterparts at Euronet Poland to be able to basically be live in a new non-English-speaking market with all these connections in the first full quarter after the acquisition. That was a good accomplishment for our people.

In Ireland, we will move onto -- in Ireland -- we're now live in Ireland with 30 Tesco stores. There are 80 Tesco stores. As you know, we do Tesco in the UK as well. We have expanded that to Ireland, and we are live with all the Irish mobile operators as well.

In New Zealand, we announced our entry into New Zealand on April 24. This market sales and development are being handled out of our Australian office. I think we have one person in New Zealand kind of keeping an eye on that. But we are leveraging our Australian office, and also, all the transactions just like in Australia, in New Zealand, are being processed out of the UK office.

Now, I will talk about the United States here briefly. Euronet has done a lot of study, and we have decided to enter the U.S. market for prepaid processing. The U.S. market is large and getting larger. Currently, there are approximately 15 million prepaid users in the U.S. These users accounted for approximately 5.7 billion in revenue in 2002. And the Tower (ph) Group estimates this number to grow to 17.6 million billion in 2007. Today, most all of these 15 million prepaid users add more credit to their prepaid accounts by the purchase of printed scratch-off cards, not unlike the UK only two to three years ago. The U.S. market is quite a bit different than the UK or any market that we've entered to-date. There are many prepaid distributors; there are many prepaid companies causing a very fragmented industry here in the U.S. Moreover, the U.S. operators have not aggressively adopted the prepaid product offerings, kind of like the European offer -- the European operators several years ago. They seem a little bit pensive, but we believe this will change, just like the Europeans did over the next months and years.

Euronet intends to leverage the e-pay technology platform. Also, we hope to leverage e-pay's relationships with Votophone (ph) T-Mobile (ph) and Vergys (ph), which are three of the five or six largest U.S. players, and also use our local expertise to attack this market. We hope that our experience overseas will help us make a success of this large, but complex, market. More news to follow. But we have decided to enter, and a lot of people have asked that question.

That's all we have for new markets. We will move on to the software solutions segment, and our division, Slide Number 30 and 31. Let's move onto 30 and 31. Thirty-one shows our Q2 financials for the software division. Revenues 3.8 million; op. income .4 million; EBITDA .6 million. We expect our software division to develop -- to continue to develop a strong and sustaining business, and they are absolutely doing that! Compared to the prior quarter, this division's revenue held steady at $3.9 million. Op. income and EBITDA increased, however, Q2 over Q1 by about $100,000.

Other highlights, and as we kind of look forward, we look forward -- and two key barometers here are the contract sales number and the software backlog number. Contract sales increased, year-to-date, from $2 million in Q1 to $3.7 million in Q2. These are sales that we've contracted to implement, and we'll be in implementing those over the coming months. Our software backlog was reported at $4.9 million in this quarter; that is up from $4.3 million in Q1.

Next slide. This division is holding strong just as we intended for it to do. Our software has been implemented in more than 60 countries around the world, and the banks like our integrated approach to transaction management. In this quarter, we had seven banks on five-year maintenance agreements, in addition to new business in several locations, as you can see by some of these bullet points.

We also released a new version of our Internet banking software, and implemented our ITTS (ph) credit card platform in two different areas. This software, and the software that's produced in this division, I want to remind everybody is the backbone of our operations centers in Hungary, India and Indonesia. It is an integral part of our business, and it is certainly paying for itself. And, we are very happy with where we are with software, right now.

In summary, as we move onto Slide Number 33, we are actually very happy with this quarter. We reported our first positive earnings per share, excluding FX, for the first time in the history of this organization. Our three business lines are growing steadily and continue to show quarterly improvement. As I mentioned, earlier, the EFT business grew by almost $1 million, excluding one-time events, and our prepaid business grew, in revenue, and op. income, both at 20 percent, quarter on quarter improvements over Q1, excluding, of course, the new market investments.

We had net reductions in debt of $2.6 million, and the company did revise our guidance for 2003. We revised that now to 10 to 13 cents per share for this year.

Also, if you'll move onto Slide Number 34, we will start with some questions. But, we also have some supplemental data in the following slide that is supplied as required by the SEC to reconcile certain reported information to define GAAP depth (ph) line items, and we don't intend to discuss this right now, but it is here -- it's there for your volition if you'd like to take a look at it.

Operator, I would like to open this for questions, please.

(CALLER INSTRUCTIONS). Pete Heckman (ph) with Stifel, Nicolaus.

Good morning, guys. Congratulations on a good topline in the quarter. I have to say that this e-pay acquisition really -- while I was skeptical at first, really does appear to be an excellent addition to your company, it really seems to be a huge driver of topline, and hopefully bottom line, going into the future. I guess, my issue is, you know, I've been covering this stock for three and half years now, and the consistent thing we have seen is progress across the board, perhaps slower-than-expected progress. But, when you guys enter new markets, you tend to overestimate the near-term revenue opportunity, overestimate the ease in which you can enter these markets, and underestimate the expenses. And, when I look across the Company and I see India and Slovakia and Uganda and Serbia and all these different countries, I just have to believe that you guys are spreading yourselves way to thin. And the shareholders, after you being public for seven years, deserve profits. And, I think if you enter the U.S. market, even though I think it's a great opportunity, the competition in the U.S. market is significantly higher. And my guess would be that you'd do no better than breakeven in 2004 if you enter the U.S. market. What I would ask you is please justify your continued expansion into these new markets. And, try and give us some idea when we could expect some real return on these investments.

I think those are some good comments, most of which I agree with, at least the first part when you're saying all those nice things about me.

(laughter) -- the double-edged sword.

Right. Sometimes I would say we have underestimated how long it does take to get into a market. But, in a number of markets that we have gotten into, we are pretty careful, now. We don't get into a market unless we see a pretty quick payback. And, we really spent significant money on the last quarter or two of last year and we will this year in Asia, as an example. But we really believe if you take a look at the things we have signed and the progress we are making India, we do have outsourcing contracts in hand. As we bring those outsourcing contracts live, it's going to minimize this investment on this loss that we are doing in those areas. And it should -- you know, we hope to see next year, with a little luck, Asia, worst-case, maybe -- I won't say worst-case -- but, you know, internally, we don't expect it to lose what we did this year, which is about $2 million. We expect to take a real big bite out of the that, and maybe with a little luck, we can break even, and the next year, make a lot of money. When we take a look at other markets, yes when we go -- I will tell you when you take a look at Uganda as an example or Serbia as an example. As we entered both of those markets, we had a no lose deal in front of us. We cannot help but make money in those -- in both those markets from the get-go. We were able to make a significant contribution to where we own a third of a joint venture in Serbia by basically contributing our software technology and expertise. So, Serbia we're making money from the get-go. In Uganda, that is an outsourced deal, where everybody paid for everything upfront. We made money from the get-go there, too. And we hope to do more things, actually in some of these places in Africa that a lot of these people are either afraid to or don't know how to go into. We'll structure similar kinds of deals like the Uganda one there.

Your qualitative comment on the U.S. is half accurate and half not. The U.S. is an enormous market. There are no competitors, now. This is a cottage industry right now with a whole bunch of little guys. There is nobody making significant money. Certainly, nobody who has the quality of the technology platform like we have with e-pay. So, we believe if we can bring that technology platform here -- over here, at virtually zero cost, then, what we will do is we will go into this market carefully, to make sure that this thing could be a payout market for us in the near-term. I, like you, want to see profits, in fact, major profits, as soon as possible. And, I am tired of people thinking that I'm going into new markets just to kind of push out -- kind of kick the can down the street. So, as you see us going into new markets -- in Poland, we were live in a quarter with 137 terminals, in a market that has nobody doing what e-pay does in the UK. They entered Australia in a similar vein about three years ago, and now, at about 70 percent market share. So, we will go into markets. We are kind of picking them carefully. In fact, we have crossed Paul and John and e-pay and Dan and I over here with the Euronet team -- have gone through a number of markets around the world, and to be honest, we have crossed out 90 percent of the potentials, because we don't believe we can have a payout quick enough or big enough to be worth our time. So, I bear your comments in mind, but I think we will see the fruits of those labors pretty quickly here in the U.S. And, you're going to start to see them even by next year in Asia.

Okay. Clearly, Poland and Ireland, being up and running in the first quarter -- that's great. That was a surprise to me. I guess, do you have an estimate of what the market development costs would be for the U.S.?

We're right now, formalizing our plans. We do know it's a big market. We are trying to decide what piece -- how big a piece we want, how profitable we want to have, when. I can't give you that estimate quite yet, but as we move over the next quarter or so, I think by the next time we get on the conference call, I will be able to quantify that a little bit better for you. I'm not going to spend a ton of money between now and then to try to figure it out. We're closing in on it, but I'm not prepared yet to help you.

Okay. Thanks, Mike.

But just to give you kind of a quantitative on that, we're spending 100 to 150K a quarter now in the U.S. So that is our investment; it is not enormous.

Robert Dodd (ph) with Morgan Keegan.

I was wondering if you could give us some kind of update on where commission rates are going on the e-pay side? I look at the second quarter, it looks like revenue per transaction was about $1.40 with currency benefit. It was $1.50 in the first quarter. And then also, could you tie that in with -- I mean -- Poland I can understand; Ireland is a bit more competitive than Poland; it's al-Fira's home turf -- (multiple speakers) in Europe.

Let me let you in on a few things. Ireland is actually -- has better margins than the UK. It's just the way every single country's mobile operators set up a different scheme. We have a little bit better margins there than we do with Tesco in the UK, and we couple that with the fact that we virtually don't have a sole up in Ireland. We're running it all out of the UK. It becomes all additive to us. So, if we can be in the al-Fira's backyard, and start to see a lot of these scratch cards converted at Tescos, to electronic pop-up, we think that's going to basically sap their market share. And just much like what we have done, really, in England. By our best guess, our market share is 35 percent plus. And, our market share is either stable or growing. And, that is at the expense of people like al-Fira.

And, if you could talk about the commission rates overall in the UK, Australia -- are they stable? Any pressure there?

Yeah, Australia is stable; Ireland, like I mentioned, is new, but is slightly better than the UK. New Zealand is stable, too. It's much like Australian numbers. The UK -- the growth commission numbers have -- are starting to drop between what the mobile operators pay when we originally did the acquisition -- it was at about 7.5 percent, average. And now two or three of the five mobile operators have taken that number down to 7 percent. And, what this means for our big box guys, on the grocery store chains and petro stations and so forth, it really doesn't change our net at all because we really charge them a transaction fee -- not a percent. When it comes to our independent retailers, we have in those agreements, the ability, basically, to push the same thing down to them -- the same terms down to them. So, we still make the same percent we did make before, but they make a half a point less.

Thanks.

So what you actually -- if this continued, and nothing else changed, you might see our revenue growth slowing slightly, even though our net would increase as a percentage, slightly.

The other comment to that, Robert, in terms of the number of transactions -- you said it looked like it went down a bit on the average size there -- we have benefited by the mobile operators continuing to move some of the low dollar denomination scratch cards off the shelf, which pushes those guys over into the e-pop-up, which then contributes a little bit on average, lower transaction price. But we are ending up having more transactions come through the process.

Yeah, just as an example on that, about mid-last year orange and the UK eliminated its low denomination scratch-off printed cards, which forced people, if they wanted a low denomination amount of pop-up, to go to an electronic channel. T-Mobile has done it, just on the same thing, just announced it a couple of weeks ago. So, once those printed cards are kind of being used up and they get through the channel, then we should see an increase in lower denomination pop-ups from them. That's not bad, though. That is actually -- from the big box guys -- that's going to help us a lot because it's more transactions.

Tony Weibel (ph) with Smith Barney.

Good morning. My question kind of ties on the previous question. You mentioned that the gross (ph) commission in the UK market (technical difficulty) down a little bit and you were able to pass that through. So a lower pass-through revenue running through your earnings model. How come cost of goods sold was up? Intuitively, it seemed like you would benefit on the cost of goods sold line. And I'm really more or less looking at cost of goods sold on a percentage basis, and the basis point increase we saw sequentially. And to tack onto that, in the U.S. market, what do you make of the BCGI (ph) news that Verizon wanting to go direct to self-prepaid (ph) minutes?

Let me take the first part of that for you, Tony. The cost number or the margin number there. That's largely the result of the mix of the larger retailers there in that; as a percentage of the revenue, we've got a higher amount, or a higher proportion of our revenue coming in from the larger retailers, where we are making less profit off of those. And that's in the form of a higher cost, because we're giving back to that retailer a larger cut of that 7 or 7.5 percent.

The other thing was the comment that Mike made in terms of two to three of the carriers having announced intentions to take the commission rate from 7 to 7.5 percent down; that only happened by one of the carriers in the second quarter that was towards the tail end of the second quarter. And we will see the other one or two carriers coming into the mix into the third quarter.

Is that a secular shift, then, that now people are buying the minutes at large retailers?

I don't know that you are seeing necessarily that. It's just that we continue to be successful with a number of these large retailers, you know, witness our announcement earlier in the second quarter, end of first quarter on the Safeway deal. Safeway was doing virtually no business at the middle part of the first quarter, and now it is moved into our top 10 customer list. So --

And from the customer's perspective, Tony, Safeway was selling scratch-off cards. They've just now moved to electronic. So to the customer, it's just a different method. It is still the same channel.

And the BCGI (ph) news?

What was that news again?

That Verizon was considering no longer going through BCGI; I believe that they were looking to sell the prepaid minutes directly without third parties?

Well, I think, you know, I think -- I think BCGI, you know, has given a decent service up to this point. But I do question, honestly, whether their model is a model that will match a more mature market. And I think all of these things actually give us an impetus. Because there is -- every single one of those mobile operators out there are looking at electronic distribution. They're looking at direct connections with just a couple of people, not the hundreds and hundreds of people who have connections by virtue of all of their pin purchases today. We think that this market is kind of growing up, maturing a bit. The numbers of phones are growing, and we think that we could be well-positioned to take a chunk of that.

In the U.S. market, would you be looking to go to the mobile operators directly or continuing to work with --

You are not kidding (ph). We're going to go to the mobile -- as we mentioned, we've got relationship with three parent companies of these mobile operators, or joint venture partners of these mobile operators, right now in Europe. We are, you know, the lion's share market distributor in the UK for the Votophone as an example. And so we can go talk to the (indiscernible) and we can go talk to these guys here in the U.S. about direct connections, and they can connect it up to the same platform they have connected it to in the UK.

The other thing to keep in mind as I best understand the BCGI and Verizon relationship is BCGI functions more in terms of doing their platform processing of the stored value transactions. And so, that is --

In their whole prepaid thing, and what you see is, in the old days when there was enough prepaid, you outsourced your prepaid platform. And now these boys are getting big enough where they want to have their own platform.

And so I think it makes more sense, or many of the carriers are taking a look at how they manage that stored value platform internally, because it's just their -- it's in essence, their billing engine, as opposed to a post-pay customer.

Next question.

Gary Frustapino (ph) with Barrington Research Associates.

I want to go back to Slide Five, here, with some of these factors for guidance update. You are saying the timing of ATM outsourcing contract is going to hit (ph) you for 4 cents per share. Now, I don't know, are these things that lucrative that they are immediately accretive? Because if I take 4 cents per share, I get about $1 million of net income from these contracts that you are not going to get because they were pushed back. But yet, if I take the 20 cents per share guidance that you'd given us, that comes out to about -- prior to this guidance downward -- that comes out to 5.4 million. That seems like a lot of net income from some of these contracts.

Well, Gary, first of all, we're talking about several large contracts. We're in kind of the detailed version of talking to several big banks with multi-million dollar kind of contracts per year. And, as I have mentioned before, when we get a new one of these, we've got about an 80 percent flow-through. So, yes, I mean, losing one million bucks is very possible by just having one of these things pushed out, in a six month period, let alone having two or three or four like we are working on right now. They're very, you know, this is good business. You will notice if you take those one-times out of the EFT Processing Segment, basically our revenues went up about -- like 1.1, 1.2 million, and our net was a little over 1 million as a result of that. So, you can just see the flow-through going from Q1 to Q2, excluding the one-time events. So, yeah, this 4 cents, million bucks, real easy to see.

Do you have any idea when you will be signing -- do you think you will get these things booked by the end of '03?

You know, I thought I'd have them booked by, you know, May. I thought I would see a full half year worth of implementation. But it has not happened that way. All I know is that we have not lost one yet. We are still in discussions. We've just got to somehow create the impetus to get these guys to sign it. And so -- and I can't tell you when that would be. If I knew that I would be -- I would really, certainly really appreciate it, as would you.

Thanks.

Next question. I think we can take two more questions. We're supposed to only take one, but we're running out of time. We will take two more.

Franco Terinelli (ph) with William Blair & Co.

Hey, Mike. Good morning. On the EFT site, could you also help me out? I remember there's a number of network participation deals that came into the mix this quarter. Can you kind of help me think through the contribution of increased ATMs, versus the contribution of network participation deals? Thanks.

Well, the network participation agreements, we don't include that in our ATM count. We -- kind of in an order of magnitude, we can see, on a network participation agreement -- and again, it depends on which bank it is, and the number of ATMs and the number of customers they have and all that different type of stuff. But, you know, it can range, on an annual basis, from a penny to two or pennies a share in terms of bottom-line contribution, again, depending upon the size of that particular bank and the number of customers.

But, it won't increase our ATM count, because basically what that means is we're selling access to our network, say, in Poland for example -- that's where we signed a few of these lately -- where we sell transactions, you might see wholesale to a bank, they then limit the charges they give to their customers to go to that -- those ATMs, kind of like looking at our ATMs as an extension of theirs. So, it becomes, for no new cost at all, they are virtually 100 percent blow-through deals.

That's what I'm driving at. You had about 1.1 million in sequential EFT processing increases. I was wondering (multiple speakers) --

What percentage of that was --

Not exactly percentage, but directionally, how those prepaid -- how those network participation deals are working out, and are they adding materially to the revenue growth?

Yeah, without giving a lot of details, I can give you kind of a perspective on one of our network participation agreements or a type of a transaction like that. We were able to see about a threefold increase in transactional volume from the beginning of the time when we converted to this new agreement, just about, you know, four or so months later. So, we were able to see through the second quarter, coming, you know, nice transactional growth, as a result of that type of an agreement.

Between that and some of the other sponsorship changes and so forth, we've probably got three deals that hit in the first half of the year that range from 40K a month positive net to 70K a month.

Thanks.

And also don't forget a chunk of that growth -- of that 1 million and 1 or whatever you just said, is because we did add 125 ATMs and they are throwing off revenue. You know, more ATMs means more -- you know, we measure ourselves by contribution per ATM per month; the more ATMs we get, the better. Last question, please.

Robert Dodd with Morgan Keegan.

Just a quick question on again, the guidance. If I look at the second quarter number, if I adjust it to a 30 percent tax rate, which is what I was expecting, on (indiscernible), it looks like the tax rate alone accounted for about 2 cents in the quarter. Your guidance, for the full year, you are saying the tax impact is going to be about 1 penny for the full year. What kind of tax -- can you give us any kind of idea what kind of tax -- rate we're looking at in the second half of the year?

Well, the tax rate on the EFT business is more difficult, because you've got the mix of a number of different loss and profitable countries there. And those countries that are in losses, you know are (multiple speakers)...

These are not losses, currently; these are NOLs that we've built up.

Right, NOLs. So we're not in a position of having to pay tax there. But, if you take a look just at the quarter, we had almost $900,000 there in terms of tax expense. That was a little bit higher, but it wasn't in the 2 cents a share range. I would put it in the category of a couple of hundred thousand dollar range for the quarter, here. And again, as we go through -- and some of that was as a result of the timing on some of our profits coming through in some of those countries, so that the timing contributed a bit to that -- that difference there. And so, when we take a look at the balance of the year, the roughly penny a share, you know, we're looking at somewhere in the 300K type of range; you kind of split that over the couple of quarters and you are back to about what we saw come through in the second quarter, there.

Okay. Thanks.

I would like to thank everybody for listening in on this call and spending and hour with us today. We're available if there are further -- if there's a little bit of information or clarification on this -- on these slides, we will make ourselves available. But, I think we've got a lot of information in these slides. I would suggest everybody kind of look through it and digest that a bit. And I look forward to talking to you next quarter. Thank you, very much.

Thank you, very much, ladies and gentlemen. That does conclude this morning's teleconference. You may all disconnect your lines at this time, and have a wonderful day. Thank you, very much.

(CONFERENCE CALL CONCLUDED)