Euronet Worldwide Inc (EEFT) 2003 Q4 法說會逐字稿

Good morning ladies and gentlemen and welcome to the Euronet Worldwide fourth quarter earnings conference call. At this time all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder this conference is being recorded. It is now my pleasure to introduce your host Mr. Jeff Newman, Executive Vice President and General Counsel of Euronet Worldwide. Thank you Mr. Newman you may begin.

Good morning and welcome everyone to Euronet Worldwide quarterly results conference call. We'll present our results for the fourth quarter and the full year 2003 on this call. We have Mike Brown our Chief Executive Officer, and Rick Weller our Chief Financial Officer with us today. Before we begin, I'd like to make a disclaimer concerning forward-looking statements. 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 selective 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 the number of factors, including competition and technological developments affecting the market of 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 US Securities and Exchange Commission, including but not limited to its Form 10-K for the period ended December 31, 2002 and its Forms 10-Q for the period ending March 31, 2003, June 30, 2003 and September 30, 2003. Copies of these filings may be obtained by contacting the company or the SEC. Now I'll turn the call over to Rick.

Thank you Jeff and good morning to all who have joined us today. If you move to slide four of our presentation we'll get started. First few comments on the first quarter and then on the next slide I'll comment on the full year. For the fourth quarter, we reported revenues of $70m, operating income of $5.7m, EBITDA of $8.8m, and earnings per share of $0.08, after excluding the affects of FX and discontinued ops. The $70m revenue increase represents a 32% increase over the $53m reported in the third quarter of '03 and almost 300% increase over the fourth quarter of last year. Our operating income of $5.7m represents a 50% increase over our third quarter results of $3.7m and a $6.6m change over last year's loss of $900,000. EBITDA of $8.8m for the quarter is a 29% increase over the $6.8m in the third quarter of '03 and almost 400% increase over the fourth quarter of last year. And the $0.08 a share compares to $0.06 reported in the third quarter, again, excluding the effects of FX. These fourth quarter results are the latest of four sequential improving quarters for Euronet, that contributed to the full year results on the next slide. Here on slide five, we highlight the full year of 2003 where revenues were $204m, operating income was $13.3m, EBITDA was $25.4m and earnings per share for the full year, again excluding the affects of FX, the UK sale and any discontinued ops with $0.13 for the full year. The revenue of $204m is almost a tripling of last year's $71m and the trailing 12 months EBITDA of $25m are clearly significant improvements over the prior year. By almost all measures 2003 has been a good year. Now to the rest of the slides to discuss the fourth quarter and the full year in more detail.

On slide six, you can see the consistent sequential improvement quarter-to-quarter. Our fourth quarter revenue represents a 32% increase over the third quarter. This growth was mostly driven by a 27% increase in transactions and about 5% to 6% coming from FX rate driven by the weakening US dollar to the euro and the British pound sterling. On slide seven, you can see our sequential EBITDA and operating income improvement. The nice upwardly trend mirrors quite nicely our revenue growth. You can see here that our bottom line numbers track consistently with our topline growth. And isn't this a beautiful chart. On to slide eight, well, 2003 was a better year than the previous three and that said I'll move to slide nine. Here on slide nine you can see that in 2002 the traction for bottom line results was being established, but in 2003 we took it to a new level. Now let me drop down a level or two and talk a bit about segment results.

On slide ten, we illustrate graphically how we manage our segments. Consistent with each of our previous three quarters, we will discuss the business in three segments of EFT processing, prepaid processing, and software. Flip to slide 11, like consolidated revenue, you can see consistent sequential transaction growth, overall we had a 27% growth in transaction, with stellar growth from our new prepaid segment. In prepaid, we benefited from continued shifts from scratch card to e-top-up, installation of two significant new retailer agreements, the post office in Sainsbury seasonal strength, the acquisition of Transact and the launch in the United States in the prepaid market. Our EFT segment has well reported consistent growth driven by the operation of more ATM, more transactions, and the seasonal lift we usually experience in the fourth quarter.

On slide 12, again you can see the consistent tracking of transactions to revenue. Now on the next slide some more nitty-gritty details about the segment results. This slide represents a very condensed version of what we report on our segment in our 10-Q's and 10-K, and is an area where I consistently get a good number of questions throughout the reporting season. So, I would like to point out few key things here. First, generally speaking all segments improved in revenue, OP income, and EBITDA. The EFT segment, you may recall in the third quarter that we reported an $800,000 gain due to the sale of the Hungarian ATM's together with the outsource signing a long-term outsourcing agreement. If you exclude that $800,000 benefit from OP income and EBITDA, the EFT operating income margin improved from 11.6% to 14.5%, and EBITDA margin improved from 21% to 25%, both reflecting bottom line leverage of the 22% revenue growth. In Prepaid, you can see that the 37% revenue increase leveraged itself to the bottom line as witnessed in an improvement in operating margin of 8.2% to 9.4% and EBITDA margins improvement from 10.6% to 11.8%. Corporate expenses remained relatively flat although you may recall that in the third quarter we reported the expensing of certain one-time item. The nonrecurring nature of these expenses was generally offset in the fourth quarter with the achievement of incentive bonuses. Now on to the balance sheet for a few highlights.

Please turn to slide 14. This slide provides a roll forward of our debt, we started the quarter with $68.7m, that increased by $4.9m due to FX changes, those FX changes were principally driven by the strengthening of the euro and the pound sterling to the US dollar. Borrowings increased by $4.8m, this was the result of about $1m on transacts acquired balance sheet, about $1.7m for capital leases largely to support expansion of capacity at our data center, our ATM data center to accommodate the two large outsourcing agreements that we signed in the fall, and this capacity will almost double our capacity there. And we borrowed about $1.7m on a short-term basis to fund cash inventory driven by the seasonally higher cash withdrawal. You know from previous announcements that we converted about $8m of the e-pay acquisition debt and finally we maintain this from cash flows of about $5.3m. At the end of the year we closed with about $65m in debt. $43m of which is the high yield bond and about $12m to $13m is the last of the three pieces of the e-pay acquisition debt. We will continue to pay close attention to our debt level and as warranted reduce them through free cash flow and other opportunity.

On to slide 15, few words about the rest of the balance sheet. Unrestricted cash improved from $12m to $19m, total assets increased over the prior year from $66m to $305m. But if you were to exclude the trust account assets related to our Prepaid business that we put on the balance sheet, total assets would be approximately $190m. We previously discussed debt, and you can see here that our shareholders equity from last year improved from $6m to $82m. The stockholders equity improvement was generally attributable to the gain on the sale of the UK Network together with the issuance of equity in relationship to the e-pay and Transact acquisition.

Regarding our debt level and our ability to service it, we have provided a few key service or coverage ratios. You can see that each metric has improved significantly over last year. We will believe that they will continue to improve as we manage the business in '04. And my final slide, I conclude with our full-year view of earnings per share, which again, excludes FX, UK gain, and

. In the same pattern, the transactions, revenues, EBITDA, and op income, our EPS has consistently improved quarter-to-quarter. For the full year, we closed with $0.13. Thank you for your time and now, over to Mike.

Thank you Rick. I am going to cover the highlights of each of our three business segments, as you can see on slide number 18. First, We'll start with slide number 19 and 20 on our EFT Processing Segment. Okay, on slide number -- after kind of being in business here for about nine years, I thought it might be good on the EFT side to show you where we stand right now as a company, a little snapshot of this. We are right now, the largest pan-European ATM processor and we are one of only a few companies that process transactions in multiple European countries. That's why these very large multinational bank like HypoVereinsbank, Raiffeisen Bank, GE, and Citibank like to work with us. We are the largest nationalized shared network in India, supporting 20% of all of India's ATM. We have two state-of-the-art operation centers. Our first one, of course, in Budapest, Hungary and our second in Mumbai, India and combined main support, 12 countries, and 12 different currencies, we have approximately 45 host-to-host connections with several banks and international card organization, including MasterCard, Europay, Visa, American Express, Diners, connections to the national switches like LINK, etc. We are processing EFT payment transactions across 3,000 POS terminals, which will double when we fully implement the Raiffeisen Romania contract. We have a network of 3,350 ATMs to date with approximately 1,500 more that are contracted, so our total ATM count will be approaching 5,000 this year. We averaged about 11m transactions per month last quarter and continued to grow these numbers of transaction. In our ATM and POS devices, process, settle, balance, give the right money to the right people to the tune of about $7b last year, just out of this EFT segment.

We'll move on now to slide number 21. You can see the op income and EBITDA results by quarter, which show consistent improvement. Please note that in this EFT Processing Segment, our third quarter reflects a one-time $800,000 benefit from the sale of our Hungarian ATMs that Rick mentioned before, which obviously, enhanced by the same amount our EBITDA and op income lines for that quarter. Bearing this in mind, you can see quarter-to-quarter improvement in our recurring revenue base and our recurring op income and EBITDA lines. Please move on then to slide number 22 and we wanted to show you a breakdown our EFT Processing highlights and we wanted to break this down by our two divisions within EFT Processing, our EMEA division and Asia-Pacific. As I mentioned before in all throughout 2003, we are making an investment in Asia-Pacific and we wanted to break that out, so you could see that investment and then more closely analyze how we are doing in our regional segment in EMEA. We've strong margin improvement in our EMEA operating income, 18% compared to 10% in the last quarter of last year, Q4 2002. We have a 29% EBITDA margin in EMEA.

In our Asia-Pacific operations, most notably India, this segment is growing rapidly, which I'll discuss more in the next slide. If you take a look at our revenues, our op income, and our EBITDA, they all improved slightly as we continue to develop this market. Revenues increased by $500,000 compared to last quarter as we're starting to implement some of those outsourcing contracts I have spoken to you about in the past as we've mentioned throughout this year by next year we expect to be approaching a positive cash flow position with our Asia operation.

Next slide please. Okay we're going talk to you about just some of the business highlights of what happened in Q4 2003. In Q4, our EMEA operation center was upgraded in both hardware and software doubling our network capacity and ensuring that we've got enough power to process all the new transactions that we have as contracted with our ATM and POS fields, which we announced last quarter and are scheduled to come live throughout Q1 and Q2 of this year. Two of those large outsourcing deals have begun implementation. Raiffeisen in Romania, which is the third largest retail bank in Romania and the largest Raiffeisen subsidiary outside of Austria has approximately 50 ATMs live today. HypoVereinsbank in Poland, which is the third largest bank and made up of the combination of BPH and PBK banks, which started our certification processes in Poland, to bring that contract live. I'd like to reiterate that our main significant contract as I've mentioned in the last two conference calls, we do not expect to see much impact at all as a result of these contracts in the first quarter of this year, 2004, we'll see a moderate impact in 2004's second quarter and we'll see -- and we expect to see full impact in Q3 and Q4 as we bring these contracts live. Another point, ING Bank Slaski is one of Poland's five largest bank and also a software customer of ours. ING Bank Slaski with 331 branches will operate expanded ATM services to their 1.4 m cardholders on Euronet's 450 ATMs in Poland. This is one of about four, five network participation agreements that we've signed over the last few years in Poland. In India, our CashNet India shared network were we switch transactions between our current four member banks now has 2,264 ATMs interconnected for these four member. Additionally, we have contracted with four more banks, which will mean that soon CashNet will support eight banks on a total of 3,100 ATMs. DCB Bank in India has just signed with us an outsourcing agreement for 100 ATMs that they would like to have in by the end of March of this year that was announced last Tuesday. They start with 64 of their own and they want us to help them add 36 more. IDBI Bank, which is our third significant outsourcing customer in India, we currently have 251 outsourced ATMs live now and we're planning with them to have 300 live by the end of Q1 of this year. We're also live with two mobile operators in India, Orange Hutch and Airtel, which -- where we provide ATM and SMS Recharge connected to nine different banks in all their cardholders. So, as you can see we conclude 2003 with another very busy quarter.

If you move on now to slide number 24, this table shows our ATM account by category. As we illustrated to you last quarter, we've shown the prior quarter's close numbers, then we have the 12/31/03 numbers, we have a special column that says, under contract these are additional ATMs that we have primarily between our broad base in an HDB that other contracts is low in India. And we have the total number of ATMs that we expect after the installation of these new contracts. If you'll note too there has been some changes, we've consistently over the last two years and significantly in 2003 with the sale of the UK Network, clipped ATMs from ATMs that we own to ATMs that were outsourced to third parties and banks. If you note that right now we have -- we're now to 25% of our total managed ATMs that we own and by the time we implement the contract that you see in the third column that number will be 15%. This shift in own to outsourced ATM has benefited the business in several ways including limited capital consumption or Capex and leverageable margins with each additional outsourced ATM.

On the next two slides number 25 and 26, you can see the geographical breakdown of these numbers. I'm only going to make one comment on slide number 25, this is as of the end of Q4 by country, I did mention to you earlier that we have 58 ATMs live in Romania now at our Raiffeisen Romania contract, these came live shortly after the first of this year, that's why they are not included in the 12/31 numbers, and Romania would stay zero. So, around about 50 right now. Now we can skip across to slide number 27 where we will talk about our Prepaid Processing segment. This is our newest division and we have got a lot to talk about here as well, but maybe now try to move to slide number 28. Just like we highlighted our strengths in EFT segment, I wanted to just take a step back here and talk about what we have accomplished on the prepaid side of our business. We are the largest international electronic prepaid processor with the largest electronic prepaid market share in the UK and Germany and Australia, and substantial and growing market shares in each of our other six markets in Poland, Ireland, New Zealand, Malaysia, Indonesia, and the US. We are currently operating in nine different countries, we have direct partnerships with 31 different mobile operators including recognizable names such as Vodafone, T-Mobile, Virgin Mobile, and Orange, and we offer top-up for many more national and regional carriers throughout these countries and the US and other locations. We process almost 14m prepaid transactions per month across more than 126,000 POS devices at more than 59,000 locations. All in all, if you add it all up, we now collect and process and settle with mobile operators, merchants, and consumers about $3b worth of annualized prepaid airtime. This division is showing phenomenal growth, so let's look into it a little bit further. Here on slide number 29, here are the op income and EBITDA numbers continually increasing over all of 2003. Next slide please.

We will move on now to slide number 30, and we will talk about some of our Prepaid Processing financial highlights. Revenue $50m, up 37% over last quarter, op income $4.7m, up 57% over last quarter. Our EBITDA was increased by about $2m over last quarter, and up 51% over the prior quarter. I would also like to add that our prepaid op income included some additional expenses in Q4 for annual performance bonuses based on the fact that our prepaid team exceeded all of our expectations. I would also like to point out that we have got two months of Transact GmbH Germany business in these reported numbers. Transact, as I mentioned to you in our last conference call, is the market leader of electronic prepaid top-up in Germany, it specializes in payment processing services and software for EFT transactions as well as prepaid mobile airtime transactions on POS terminals. The company currently supports top-up purchases of more than 9,000 of their installed 20,000 POS terminals, and Transact has agreements with all of the large mobile service providers in Germany including T-Mobile, Vodafone, O2, and E-Plus. We are excited about Transact because they are the market leader for electronic top-up in Germany, because Germany is a darn big market, because Germany is in its early stages of its shift from scratch cards top-up to electronic top-up. In addition, Transact has some additional technology, particularly their GPRS wireless terminals, that will help us in this segment, not just in Germany but in other countries, but we believe that Transact will continue to be a strong contributor to the company as we move in to this year and next year.

Okay, we would like to move on please now to the Prepaid Processing business highlights slide, that would be slide number 31. Just a quick recap, of course, about Transact in Q4 of '03, got two months worth of their numbers into our numbers of '03. We also purchased Precept, it is a US-based company which will join our PaySpot division. Precept brings with it 4,500 terminals to our portfolio, they are experiencing very nice growth, and they are a profitable company and will add, of course, to our numbers beginning in this quarter, Q1 of 2004.

I would like to give you an update of what we have done with retailers in this prepaid division. Retailers drive the business, the more touch points you have, the more good touch points you have, the more transactions you are going through on the independent side, it was independent retailers. We continued to add approximately 500 retailers per quarter in the UK and we doubled our ATM count in Poland to about 700, a little over 700 at the end of Q4 last year. With Sainsbury in November, we had successfully launched all the terminals for this contract, the Sainsbury contract which is the third largest supermarket chain in the UK. We now support top-up at all six major supermarket chains in the UK. The UK Post Office. You probably saw in our press release last week, regarding the UK Post Office. This was a huge contract. This is our largest retailer today and we have now completed the roll out of top-up support at more than 17,000 of its location platforms. In Q4, Transact was busy in Germany as well, signing new top-up agreements with Shell, Germany adding 600 terminals, B&P Nobelcom with 200 terminals, and AGS Group with 300 or more terminals. So, we have been busy kind of all over the map here.

Let's go on now to the next slide, which will be slide number 32. We will give you just a few business highlights. Here we've kind of geographically given you a playground where we have our POS terminals and we will only get a point out, three of these points right now. First of all, in the UK, which is e-pay's first market is wired with 102,000 terminals -- I am sorry 102,000 POS locations, up about 40,000 from last quarter, thanks primarily to the Sainsbury and the Post Office contract. I would also like to point out in Poland, our nascent market, where we use the e-pay system right now. We are live with more than 700 mobile operator stores and was gone live now with the

hypermarket stores. We have contracts of

with the three, all three mobile operators for mobile operator content. In the United States, since the end of the quarter, we had 2,800 locations, with the electron distribution of prepaid services via the POS terminal, primarily through our AIM acquisition in September of last year. We also added Precept in January. This will add about 4,500 terminals bringing us to about 7,200 across 48 states right now. If you want to -- in total, we have total POS count of approximately 126,000 terminals.

We would like to move on now to slide number 33 and 34. We can talk to you about our software solution segment, including R&D. Q4 financial highlights. Revenue $4.3m, year-to-date revenue $15.7m. All through the year, we are telling you that we are targeting around $15m in revenue and we exceeded those numbers. Software is moving quiet, moving along very nicely. We had solid results in revenue, operating income, and EBITDA. This segment had a very strong quarter in Q4, which also brought our -- not only did we bring a lot of revenue in, and recognized a lot of revenue, we had nice contract sales, year-to-date now $9.3m and we have a nice comfortable backlog of $5.7m in this segment.

Move on to slide number 35. Just as a wrap up, we had record sales in Q4 2003. We added ten more new customers in 2003. We did onsite implementation in 19 different countries with more than a 100 different projects. So, we have been pretty busy here in the Software segment and I'd also like to point out that there are software which is used at both Bank Slaski in Poland where we signed a contract last quarter for network participation and also in Raiffeisen in Romania, where we signed a contract, as you know that we are implementing for ATM outsourcing. Having a good reputation with these banks, as our software customers certainly helped us get these network participation and outsourcing contract wins. All right.

Everyone now move on to slide number 36. This is kind of our summary slide for our presentation. You can see Euronet is clearly the market leader for international ATM outsourcing and prepaid services. We have more than 90% of our revenues that are recurring. We have had consistent quarter-on-quarter improvements all through last year. We strengthened our balance sheet considerably and has substantial top to bottom line leverage. We did $5.3m in debt payments in Q4 of last year and we converted $8.1m note of the former e-pay owners into stock. We had a positive EPS of $0.08 per share in Q4, excluding CAPEX, discontinued ops in the UK sales, which gives us $0.13 for the year, excluding those same factors. We would expect that even despite the fact that Q1 is traditionally a lower quarter for us due to the seasonality of the ESP business that we are expecting in Q1, 2004 to have earnings per share similar to or slightly better than Q4 of 2003. That ends my comments for the day, they are supplemental data after this presentation that you can see if you like to go through it, and right now I would like to open up the floor now for questions for either myself or Rick Weller. Thank you.

Ladies and gentlemen, at this time, we will be conducting the question and answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two, if you will like to remove your question from the queue. For participants using speaker equipment, it maybe necessary to pick up your handset before pressing the star key. Please standby while we poll for questions. Our first question comes from Tim Willy. Please state your question.

Good morning, Mike. I guess if I could just ask a question, maybe sales in for some of your newer markets. Could you I guess just give us a feel for, first of all in Poland, you know, is there anyway to compare and contrast the ease of sales right now in terms of signing up merchants versus how it was when the UK first was sort of rolled out by e-pay. And then second, just looking at Germany and the number of POS locations you have versus the UK, and the low penetration rates in Germany. Could you talk maybe about what you're doing or what you've done with the sales force in Germany, and just sort of how you get to a level

with the UK, which I would assume is, you know, very realistic overtime to see that market begin potentially close the size of the UK in terms of POS locations?

Okay, you asked how we are kind of rolling out in Poland versus how the UK did five years ago. Being honest I wasn't there five years ago, and I don't know that exactly, but talking to John and Paul, the indication was when you are very first starting in a market, and people use to scratch our cards, and you're trying to put a tunnel in their place, you've got to do some convincing, until you start to see the market change. Another thing that you have is, it's kind of chicken and the egg thing situation, because until you get enough of these retailers sold, the mobile operators don't have the confidence to do incentives to push them harder, but you don't, even though the mobile operators cooperate that they're not necessarily avid pushers of the electronic distribution, because they don't want to mess up their current distribution channel, okay. So, in other words the first few steps are lot harder then the following steps, but still with that 700 annually we find our first hyper market chain,

there are several other things in negotiations now for cash register integration. So, I think things will move along in Poland nicely for this year. With respect to Germany, I do need to -- we do need to, you know, we have got a pretty simple business, but everybody thinks we are kind of complex, and the reason is because when you guys ask me a question, and you say what about sales? Everybody kind of assumes that there is a single answer for all of you or for all of the world. The reality is right now in Germany versus the UK there is a considerable difference in locations of where people currently buy their scratch cards, okay. In the UK, people are buying a lot through the chain groceries, and Germany that's not the case, but we've got tons of locations in prior to the post office contract. We were locking now at all sets of these big groceries store chains. It's those same groceries store chains in Germany, as the similar ones in Germany don't sell many scratch-off card. When you get a grocery store chain you get all their locations and everyone of their little cash registers aisled as a POS location, so your numbers are extraordinary. In Germany we had a little bit different challenge there. What we need to do is, we do need to focus on those chains and develop them, but they are currently not selling tones of scratch cards. Where we need to focus on are all the tobacco shops and small mom and pops and gas stations. Those are the places where you see the significant number of sales in Germany and that's where we have focused. So as you might find out, is when it's all said and done, Germany has less locations or certainly its high volume places will be in less or different locations than you might see in the UK. Where we are strong right now is with distributors like

, Lakerland is a tobacco distributor. There is jobber who comes in to small shops, gas stations and so forth, they supply them with their cigarettes, candy bars, little confectionaries and so forth. They are also the largest scratch card distributor by far in all of Germany will something like 60% to 70% of all the distribution. We do have a contract with these guys and we continue to roll out terminals out there at their spot. Where they won't be aggressive enough, we'll be aggressive on our own and we will look for new kinds of places. So it's not a direct comparison, but we are making good progress and attacking virtually all the places that currently sell scratch-off cards right now and you'll see more announcements as we move through this year.

Could I just ask one follow-up on Germany.

Yes.

Does that difference in the location point, does that in terms of the margin and how margins and cash flow develop in Germany versus how it did in the UK. Is it a situation where it's a little bit more intensive, less efficient, sales process but over time because you are dealing with more independence, once you get half that phase and have the broad distribution you are dealing with much higher margin transaction because you are dealing with a much bigger independent merchant base versus up in the UK where you are dealing with the large retailers?

That is possible and also we get a larger commission from the mobile operators in Germany right now as a block because it is a less developed market.

What is that commission?

It changes, where we get about 7% in the UK, we get about 8% or 9%, is that about right?

A little less.

Little less than 8% in Germany.

Great. Thanks a lot.

Yes.

Next question please.

Our next question comes from Tony Wible. Please state your question.

Thanks. Great quarter, guys. I was hoping if you could comment a little bit about your US roll out and potential strategy here in the US. Who are you focusing in right now for the locations and are there any potential design from big chain names?

I think -- let me point out, I'm not going to give you all my secrets here, but what we intend to be is the largest, most profitable, pre-paid processing company in the US. What we know for a fact is, we couldn't be profitable in the UK if we only had the large Big-Box stores, because those guys have all the pricing pressure that they'll put on you. So some of our competitors here in the US have signed a number of those Big-Box stores,

focused on where the profitable stores are and these guys are bleak in mind. They have got tones of people, tones of IT and aren't making any money. We're kind all back and I think rather than being big, I would like to make a lot of money. So we are going to focus on our retailers, they can generate that money to us. People like Precept and AIM are very profit focused. We'll continue to add terminals with them and those kinds of organizations and we see a number of them. We don't have any large chains now, we'll probably focus, maybe less on the large chains and more on the medium chains and the small guys and that's fine with me.

Our next question comes from Franco Turrinelli. Please state your question.

Good morning Mike, good morning Rick.

Good morning.

Couple of things for you, and I guess this is really kind of built from the previous questions. The operating margin was a significant surprise to me with pre-paid in the quarter and I guess I'm kind of wondering how you can go? I mean, particularly with the addition of so many Big-Box stores in the UK, I would expect if anything, the pressure to be the other way and it's a very impressive margin. If you could maybe just give us some insight into that?

How high can we go, the sky is pretty high, right? Franco. I think here's what it comes down to. We are at this point right now in all components of our business, and all our transaction components of our business or we have very high flood rates. Our fixed costs are basically covered and as we continue to bring in more pre-op margin kinds of revenues, we bring a large percentage of that to the bottom line. That's one thing that we have going forward. I think that those margins can continue to go up, and understand too, you're going to see some little bit different things happen, as we bring more of Transact online. Transact is more of a transaction processor and we booked just the transaction fees there. So, maybe, we get hand euro 0.12, euro 0.15, euro 0.25 of transaction depending on what kind of transaction. We get some terminal fees in addition to that, but those revenues are going to be actually smaller causing a larger flow through than you might say what our e-pay business, or we have to book the whole 7%, even though we might only keep 1.5 points of those seven points. So, kind of keep an eye on that as you work your model. You'll see that there probably will be pricing pressure, I imagine over time, but there is a point at which we believe that the mobile operators cannot push to commissions lower then, because at some point, the retailers will refuse to sell their product. And they are kind of approaching this right now with the big box stores. You actually might see some negotiations going in the other direction, but certainly the downward pressure has slowed down quite a bit. It's got to be made worthwhile for Tesco or a Wal-Mart Asda or a Sainsbury to distribute these products, and that's what gives us that cushion in here where we know we can always make some money. Because those same kind of margins of the big guys are going to negotiate through us what the mobile operators will get on the mom-and-pops and medium-sized chains where we make a lot larger margin.

Our next question comes from Pete Heckmann, please state your question.

Good morning guys. I wanted to follow-up and this is perhaps an extension of Franco's question, but on the Post Office and the Sainsbury, clearly two very important and very large contracts that extend your leading market share in the UK. I'm wondering can you -- I don't expect you to disclose specific details of the terms of these contracts, but can you give some indication of the terms of these contracts, and say, with the Post Office and knowing the traffic that goes through there, could there be some cannibalization of supermarket volume towards the Post Office locations in terms of top-up volumes? And if that would happen, what might we see in terms of overall margin trends on a per-transaction basis?

Well, these are some active good questions. First, I can answer your first question. We're not going to talk about the terms of our agreements. We are trying to have our agreements fair based upon the size and volumes that are generated out of each of our customers. I'm not going to go into that, but I will tell you, your second question actually is a good intuitive question, because the Post Office does have tons of locations. In many cases, it's almost like a mom-and-pop store. When we originally did it, we expected some cannibalization of either our supermarket store chains or our independents. What we have come to believe now after a month and half or so of numbers is that we've seen little or no impact at all in our supermarket chains or our independents. However, we believe that our market share popped up with these two. And what that means is we must have stolen market share from the independents of our competitors. And so, where we didn't see it, we see there are several of our -- we kind of focused on some of the best independents. We've got a pretty strong criteria for this and what we're seeing is probably that has done more conversion of scratch to electronic that's where some of that increase in market share came from. And second, I think we were up from our competitors, which I'm in a very good mood about.

Our next question comes from Robert

. Please state your question.

Hi guys, good quarter. I have got several questions actually. Going back to the Post Office just briefly, the distribution you now have of having the Post Office on top of all the grocery store chains, it's much more

. Are you seeing any signs from the mobile operators as they might be willing to pull some of the additional, lower denomination scratch cards they have more distributions electronic top-up?

Actually, we watched that actually happened through last year, well probably most of the mobile operators, I think all of the large ones have pulled off the lower denominations scratch-off cards. There are five operators, I can't remember what each one did but the big guys, T-Mobile, Orange, Vodafone, I think they have all eliminated their lower denomination cards throughout last year, which fueled some of our growth. So, you are right, as we get volume equated distribution, there is less and less room, or need of having scratch-off cards and several of these guys have already professed out loud that they want in the pretty short-term to be without scratch-off cards altogether. So, I don't think it's going to be a long time until that happens.

Okay. And then in Germany, you said a lot of distribution through tobacco stores, I know that's the primary distribution network for the lotto tickets as well, and in Czech Republic there is a deal not with you guys I mean, but those of you, where you talk of to them over lotto ticket buying terminals, I guess any chance you can get a deal like that in Germany?

Well, we would love to, we are working on all the deals. We have actually chased those kinds of deals down in a couple of countries and lot of kind of interesting things, that is state run or local, government run and there is a lot of regulation built on it. Some of them are more open minded to doing, even having these discussions, and some are almost limited by law not even to have those discussions. So, as best we can tell in Germany, it looks like a possibility. We will give you updates if we can close that deal.

Okay. Then on the ATM side, at just the beginning of last year you had an agreement with an independent ATM installer in Europe, I think, it was called IAD or something like that?

Yes, we call them an independent ATM deployer, right.

Can you give us an update on what that's doing of whether that?

Actually we have given an update in the past, that contract was for about, I don't know, 300 or 400 ATMs something like that. And they were trying to launch into a new country, we were prohibited at that time to tell you which country that was, but I will give you a hand, it was kind of North Europe. As it turns out, the bank consortium all that together against that independent wouldn't let them have access to the cards in their market. So, that contract gets kind of fell away. That's why we have excluded in over the last two quarters on all our kind of to do less or our ATM in process with. So, that's another thing, every market is a little bit different and that small Northern European countries, they basically lost out the competition-- the banks lost out to the independent competition.

Our next question comes from Dan

. Please state your question.

Hi. I am just trying to understand the FX loss a little bit better. Is that something that you guys can work on hedging going forward and if currency rates stay where they are, will these losses continue?

Well, maybe I will ask Rick answer this question, although from my perspective, we are not really hit on hedging because you just never know where it's going to go in what point in time, but I will ask Rick talk to that for a second.

Yes, there is probably a couple of different ways to look at it, but the way we look at it, is while we do have a loss that shows up on our GAAP financial statements because we have to convert the foreign currency that we operate in to a US dollar balance sheet income statement. We raise the majority, if not, the substantial portion of our money in those currencies and so when you take a look at our debt, which is one of the key drivers to the adverse impact on our P&L, that debt generally rests in euros and pound sterling. And as you know from our results out of e-pay or out of our ATM business that's where we are producing our bottom line profit, is in pound, sterling, and euro. And so while we have a GAAP financial statement loss because of the conversion, we really are fairly nice to be matched up with the generation of profits in the currency that we have to pay down our debts in. So, we believe that we have closer to a natural hedge as opposed to going out and investing in instruments that would give us a hedge against a US dollar position that ultimately has to be paid back in those currencies that I mentioned, so that generally keeps us from wanting to go out and focus on getting hedge instruments because we are nicely matched up naturally. If any thing we may want to move more our Euro debt to Sterling debt, because we have a stronger production of bottom line coming out of UK there.

Our next question comes from Gary Prestopino, please state your question.

Yes, on the tax rate, what was the tax rate that you had ex foreign exchange and non-recurring items for Q4 and what should we use for 2004?

The first one, I will answer and the second one, I will be a bit more nebulous on. Q4 was about 43%, 44% on an effective tax rate if you exclude FX, because as you could understand, it wouldn't flow through our tax return. We have consistently seen the effect of tax rate come down, albeit, in our business it's quite difficult to apply an effective tax rate because, as you may know, we do not file a consolidated return, we have got to pay tax in each of the respective jurisdictions that we operate in. So, as we have accumulated more and more profits, those profits have become a greater share or let's say percentage against the total P&L versus the loses or non-profitable pieces, business or country that we were in. So, we were at 44% in the fourth quarter, I would expect to see that that number continues to come down, but to give a precise number, I'll hold off on that.

Okay. We have got time for one more question.

Our final question comes from Tony Wible, please state your question.

Thanks. I had follow-up question for you guys, actually two of them. One, I was hoping that you could comment a little bit about the pipeline in EFT Processing business, I know you have had a lot of activity there, what are your expectations going forward? And then also, if you could just comment about, I know that the pricing in Germany is a little bit different so looking at --?

Hello?

One moment please. Please go ahead Mr. Wible.

I was wondering what pricing would be if you had it normalized for the German business in the prepaid?

Normalized. What do you mean by that Tony?

I think you record revenues a little bit differently in Germany as you were alluding to, with Franco's question?

We don't use a different set of rules, but the fact is we have a transaction-processing contract in Germany, so we don't record the revenues as the 7.8% or 8% commission. So, you want us to try to normalize that with the --

Well, just some kind of qualitative comment about how pricing is doing, because if you just looked at it optically, it looks like pricing might have been a little bit down per transaction, but that's probably because of the fact that Germany, the way that your recording transaction?

Yes, that's exactly -- combination of Germany, because of that, because we might get between EUR$0.10 and EUR$0.25 per transaction or we get a cut of the pie. In the UK, you couple that also with the fact that we brought in two very large customers where in the UK, that probably makes us look more like a transaction processor really then somebody could share in a lot of that commission. So, those two things will look like there is really a price erosion or margin erosion, but the fact as a matter is not, it's just a different way to look at it.

I was looking for a different kind of information there. And then on the ATM side of the business, I know you guys have a lot of contracts recently, but what does the future still look like?

We know that there are very few, very large contracts left out in Central Europe, we are looking both in Western Europe and in Central Europe, but we still seem to see, we keep running across more and more deals, the nice thing is everybody now knows us, we have been in business now for almost 10 years and we run and buy more and more outsourced ATMs in all of Europe. So, we are trying to get a name by ourselves here. We are continued on the strategy of using our multinational account, the ones that have banks in multiple countries and following then into different countries. And, I think, you will see more of that in the future. So, we have got a pretty decent pipeline, but we will see less 700, and 800, 900 unit deals than more of the 500 and 400 kind of deals.

All right, thanks. Once again a great quarter.

Thank you very much. And to everyone, I guess that's the end of our questions now. I want to thank everybody for taking their time this morning and listening in. We hope to see you again here in about 90 days. Thank you very much.

This concludes today's conference. Thank you all for your participation. All parties may disconnect now.