Euronet Worldwide Inc (EEFT) 2004 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Euronet Worldwide first 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, EVP and General Counsel of Euronet Worldwide. Thank you, Mr. Newman. You may begin.

Good morning and welcome, everyone, to Euronet Worldwide's quarterly results conference call. We will be presenting our results for the first quarter 2004 on this call and we have Rick Weller, our CFO, and Mike Brown, our Chairman and CEO, with us today.

I'd like to take this opportunity to invite all of you to our 2004 annual shareholders meeting, which will be held at the Doubletree Hotel in Overland Park, Kansas, at 2 p.m. on Monday, May 24th. We hope you all will be able to join us for that.

Before we begin our call, I need to make a statement concerning forward-looking statements made 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 or 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 period ended December 31st, 2004. Copies of that filing and other public filings with the SEC may be obtained by contacting the company or the SEC.

Now I'd like to turn the call over to Rick.

Thank you, Jeff, and good morning and welcome to everyone who's joined our first quarter 2004 results call. To get started, if you can turn to slide number four, in the first quarter our revenues reported were $81.1m, operating income $6.5m, EBITDA $10.1m and earnings per share of 9 cents a share. This earnings per share of 9 cents excludes the effects of FX, discontinued ops losses and early retirement debt cost.

The revenue of $81.1m represents a 16% sequential quarterly increase over the $70m fourth quarter revenue and an improvement of 2.5 times over the first quarter last year. Operating income of $6.5m reflects a 14% increase over the $5.7m reported for the fourth quarter of '03 and a significant increase over the $1.2m posted for the first quarter of last year.

The EBITDA of $10.1m is a 15% increase over the $8.8m achieved in the fourth quarter of 2003 and 2.5 times the amount achieved in the first quarter of last year. Earnings per share of 9 cents for the quarter reflects a 13% improvement over the 8 cents posted in the fourth quarter of 2003 and a significant improvement over last year's first quarter loss per share of 3 cents.

On slide five, you can see that in 2004 our quarterly revenues continue the sequential quarterly improvement trends we posted throughout last year. I'll point out here that while our EFT business posted lighter first quarter revenues, in line with our expectations, the prepaid business continued to produce strong, double-digit sequential quarterly growth rates. In the first quarter, we saw a 17% growth from the e-pay business. Transact was included for all three months versus two months in the fourth quarter, and Precept, which was acquired in January was in for the full quarter in this first quarter.

On slide six, here we illustrate the sequential quarterly improvement of EBITDA and operating income. You can see that the improvements are consistent with our revenue growth. You also can see here that both of these profit measures reflect improvements, period over period.

Now on to slide seven to go deeper into our segment results. This slide seven simply illustrates our three segments, consistent with our previous reporting, the EFT processing segment, prepaid business and software segments. And, again, I'll point out that as we review our segments, bear in mind that more than 90% of our revenues are recurring.

On to slide eight for transactions. Here on slide eight you can see we had transactional growth in both the prepaid and EFT segments. While our EFT first quarter revenues were down by $900,000, our first quarter EFT transactions increased over the fourth quarter transactions. The revenue decrease is the result of our seasonally high fourth quarter transactions generated through the ATMs we own. As you may know, we have consistently experienced, over the last five years, the same fourth quarter to first quarter seasonal trend. Moreover, these fourth quarter EFT transactions are, on average, our highest-yielding transactions and directly impact our operating income.

Despite the seasonality of transactions on ATMs we own, we had positive transactional advancements from our outsourcing and network participation agreements, together with ATM-based mobile phone recharge transactions. The total ATMs owned or managed under outsourcing agreements increased from 3350 at the end of the year to 3870 by the end of the first quarter, further supporting transactional growth. All said, we are pleased with the transactional growth of both the EFT and the prepaid segments and believe the fundamentals of the business are appropriately positioned for the next quarter.

On slide number nine here you can see the prepaid and EFT revenues. You can see that they are a direct reflection of the transactional growth discussed on the previous slide.

Let's move to slide 10. Here on slide 10 we've presented a summary of our segments, sequential revenues and profits. In the EFT segment, the revenue decrease was largely the result of the seasonally strong fourth quarter, which had a direct impact on operating income and EBITDA. However, you should note that the growth of transactions, as discussed earlier, had a positive effect, by almost neutralizing the impact of the nearly $1m revenue decline 4Q to 1Q to about $200,000 to $300,000 on op income and the EBITDA.

Net/net, our EFT business performed slightly better than our expectations for the first quarter. Moreover, with 3870 ATMs under management as we exit this first quarter, we believe we are well positioned for the second quarter.

In the prepaid segment, we posted both improved revenues and enhanced margins. The 26% sequential revenue growth was, again, the result of strong e-pay growth, supplemented by a full quarter of Transact and the addition of Precept in January to the segment for the full quarter.

Of the prepaid segment's $12.8m sequential revenue increase, 60% came from e-pay growth and 40% came from a combination of the Germany and U.S. prepaid markets. As you can see, this prepaid growth was leveraged through to both operating income and EBITDA.

Our software business, which was in line with our expectations, was lighter in the first quarter due to a strong fourth quarter. The software business is an important element in our total business, but, as you can see, at less than 4% of our consolidated revenues, its movements have a lesser impact on Euronet as a whole.

Corporate and other expenses increased by approximately $300,000, largely due to professional fees, insurance and annual compensation increases. We would expect corporate and other to be flat to down as we continue the year.

Overall, good segment results for the initial quarter of 2004.

Now some balance sheet observations, in particular debt, on slide 11. At the end of the fourth quarter of '03, we had $65m. That improved to $62.1 at the end of the first quarter. That improvement was the net result of positive impacts this quarter from the dollar strengthening against, principally, the euro, which gave us a reduction of about $800,000. We borrowed an additional $4.4m, $4m of which related to the Precept acquisition. We had repayments or we repurchased $5m of our 12-3/8% bonds at par and we had other repayments of $1.5m, getting us the total reduction of almost $3m.

Subsequent to the quarter end, we had our first installment payment, first of three installment payments, against the Precept debt of about $700,000 and we repurchased an additional $5m of 12-3/8% debt at par. We also drew down on our B of A line to the tune of $2.5m. With respect to this B of A borrowing, we expect that it would be repaid in the quarter with cash movements or the cash will be used to further reduce higher-cost debt, either the e-pay acquisition debt, which is at 8%, or the high-yield bonds at 12-3/8% debt rate. So our debt, as we estimate it at the end of April, is slightly less than $59m. With these two $5m bond repurchases, or a total of $10m repurchased over the last few months, our total high-yield bonds outstanding are now at $32m.

On slide 12, I'll round out the rest of the comments on the balance sheet. Here on slide you can see that our balance sheet improved in all key areas -- assets, cash, equity all increased and debt was reduced -- the right moves. You can see that with the debt reductions, coupled with EBITDA improvements, our credit stats further strengthened this quarter end. And with our additional April debt repayments, net debt to annualized quarterly EBITDA is now less than 1:1. Our balance sheet continues to strengthen, quarter-to-quarter.

In summary, on slide 13 you can see that our 9 cents a share in earnings per share continued to improve sequentially, in line with our expectations and reflects a 12 cent per share improvement over last year's negative 3 cents.

This concludes my part of the discussion. I'll turn it over to Mike.

Thank you, Rick. I'm going to cover today the highlights of each of our three business segments as Rick defined earlier in the presentation. As you know, our EFT processing segment is broken down into two geographical divisions for ourselves. The first is EMEA, which is Europe, Mideast and Africa, and the second is Asia-Pacific, which is primarily India.

In the prepaid side in Europe we have e-pay and Transact covering the UK, Australia, with e-pay and Germany with transact. We've got Asia-Pacific, too. Part of Transact is-- I'm sorry, part of e-pay is in there and we also have our U.S. business that we have branded PaySpot. Pardon me.

If you'll move on now to slide number 17, we'll get started with the meat of the presentation. Here we have our EFT processing, both our quarterly operating income and EBITDA. We'll show you those-- we've shown you those results by quarter, which show consistent improvement over last year. You can see slight decreases in operating income and EBITDA Q4 '03 to Q1 '04 due to the normal seasonality fluctuations that we see every year.

To give you an example, Germany is one of our countries, one of our very profitable countries, that is very affected by seasonality of the holiday traffic around Christmas time and we've tracked a trend in Germany over the past five years where about 29% of a year's annual revenues in Germany occur in Q4 as compared to 21% of those same annual revenues in the first quarter of the year. That 8% gain in revenues can account for approximately 1 penny a share.

I'd also like to point out, and we did this with the two extra boxes in the Q3 '03 numbers, that the third quarter reflects a one-time $800,000 benefit that we've mentioned to you before from the sale of the Hungarian ATMs that enhanced both our EBITDA and op income lines. If you kind of take that one-time gain out, you see nice sequential progress through the year of '03 and now we're moving on into '04. If you compensate for the seasonal strength of the fourth quarter, you can see that we've got a nice trend where it was a nice quarterly improvement.

If you'll move on now to slide number 18, here we've got the geographical breakdown of our EFT processing segment over the last couple of quarters. Here you can kind of see what happened here with this quarter. Our EMEA numbers, Europe, Mideast and Africa, remain strong. We've got strong margin improvement in our EMEA operating income. There's an 18% margin this period compared to 12% margin in the same quarter last year, Q1 2003, and we've got a 30% EBITDA margin.

In our Asia-Pacific operations where we're making investment, most notably in India, it continues to develop very nicely, which I'll cover more on the next slide. Note that our revenue improved slightly. It was about a half a million dollars last quarter. It's $700,000 this quarter despite the seasonal trends due to our expanding ATM outsourcing base. By next year it is our hope that this division will be approaching positive cash flow.

If you'll move on now to slide number 19, first we'll talk about EMEA and the two large deals that we signed towards the middle to the-- I think it was in third quarter of last year. That was Raiffeissen Romania and HVB, which is HypoVereinsbank in Poland. And I'll give you an idea, those are two large outsourcing contracts, one for 600 ATMs, the other for 700-plus ATMs, and here's the progress on them.

Raiffeissen Romania, just to remind you, is the third largest retail bank in Romania and by far the largest Raiffeissen outside of their host country, Austria. We have approximately 270 ATMs of the 600 that we are contracted live today. At the end of Q1 we had about 144 ATMs live.

And on the HVB contract, which is a combination of the two banks they bought, BPH and PBK, HVB Poland is the third-largest bank in Poland. We have-- even though it says right here that we have 120-plus, actually I got a flash from Poland this morning, we have 191 ATMs now live of the 700 outsourced ATMs, so we're making nice progress on moving both these large contracts through the implementation stage.

We expect to see a moderate impact in Q2 of these two contracts and a full impact of these deals in Q3 and Q4 for this year's results.

We also signed two smaller HVB outsourcing deals. Look for some press releases on them in the near future. Both of them combined, though, total a bit less than 100 ATMs, so it's not significant, but it's two more indications of us-- of our growing partnership with HypoVereinsbank in Germany, which I think, if I remember correctly, is the second-largest bank in Germany.

We also have a new-- if we move to Germany, we have a new sponsor bank in Germany for the ATMs that we own. That will help make our German business even more profitable as we move into the future. I think that starts to take effect either May or June of this year and we had a new record for processed transactions of 11.6 million average monthly transactions that we processed through our Budapest processing center here in the first quarter of 2004.

In India, give you a quick update there. Our Cashnet India shared network is where we switch transactions between our current member banks. So a cardholder from one bank can go to Bank B and it will be switched back to Bank A, his bank, and we do that switching and we charge a switching fee for that.

We now have nine total banks signed up. We have five of those live. We just connected another-- a bank here recently which added more than 350 ATMs to a total of 2600 ATMs that we now have in that network. With a little luck here over the next quarter or so we'll bring on the additional four banks that will give us nine banks altogether.

In our India ATM outsourcing business, which is probably our highest margin business there at least our highest revenue business, we've brought live now 423 of the 579 contracted ATMs that we're managing for it. That adds up as follows. DCB, which is Development Commercial Bank, we have 107 ATMs contracted, 94 of those live. We have IDBI Bank. Today it has 297 outsourced ATMs live and they plan to implement another 75 this year. And you might have seen the recent announcement with Citibank where we've contracted for 100 ATMS, we have 12 live.

And kind of hot off the presses, I got an e-mail this morning from-- or actually a call from Dan Henry, who was in India today, and they've signed an additional extension to the DCB agreement where we're now going to add another 100 more ATMs over the coming quarters to the 107 that we have currently contracted for.

So business development is moving very nicely in India, as well.

If you'll move on now to slide number 20, this table shows our ATM count by category. It shows you how many we have live at the end of the quarter, how many under contract and then, you know, we have the total after install of the ones that we have contracted, so you can kind of see where the numbers are going.

As we showed you last quarter, we-- we'll do this every quarter as we implement these two big deals because we have so many new ATMs kind of hanging out. As we have discussed on our last two calls, we're transitioning from a Euronet-owned ATM econometric model to more of a bank-owned ATM econometric model with outsourcing as a key component of our business. When the contracted ATMs that we have now are fully live, the Euronet-owned ATMs will represent only approximately 16% of the total in the network.

On the next two slides, slides number 21 and 22, you can see a geographical breakdown of these ATMs. I'd also like to mention on these slides, slide number 21 in particular, these numbers are-- or number 22, as well, these numbers reflect our ATM counts at quarter end, so some of those updates I gave you on these implementations have been work in progress that we've done since the end of the quarter. You'll notice here that Romania says 144 and we've got significantly more than that now, as an example.

All right. We'll move on now to slide number 23 and we'll talk a bit about the prepaid processing segment. It's our newest business line and it's certainly doing well for us.

First of all, where we're sitting right now is we are the largest international electronic prepaid processor, with the largest electronic prepaid market share in the large markets of UK and Germany and Australia, as well. We also have substantial and growing market share in our five other markets in Poland, Ireland, New Zealand, Malaysia and the United States.

We processed an average of 16.2 million prepaid transactions a month in Q1 across more than 150,000 POS locations or POS devices and more than 60,000 locations. All in all, we now collect, process, settle, give the right people the right money to the tune of about $3b worth of annualized prepaid airtime.

This division is showing phenomenal growth in several very large markets. We can take a look at it further. If you wouldn't mind going on to the next slide, slide number 25, it shows you the results of this growth in both operating income and EBITDA. This graph is pretty much self explanatory. We've got excellent numbers. We're very pleased with this growth.

Move on to slide number 26 and we'll talk to you about the financial highlights. OK, so the prepaid highlights for the quarter, when you look at the numbers this quarter, keep in mind that we have reported a full quarter of business from our two newest acquisitions, Transact in Germany and Precept in the U.S. Also note that the comparable results from Q1 2003 include only two months for e-pay.

So just kind of as a recap there, we have two months worth of Transact's numbers in our Q4 numbers in '03 in Germany. In Precept we had zero in Q4 and it all started in Q1 of this year and when we compare quarter over similar quarter prior year, we had purchased e-pay in February so we only got two months in Q1 of '03.

Our op-- our revenue was $62.9m, up 26% over last quarter, excellent growth. 40% of the $12.8m of revenue growth that you saw quarter-to-quarter is in the U.S. and the Germany markets, while 60% of it reflects e-pay results. The prepaid revenue is up 261% over the same quarter last year. In op income, $6.4m, 36% over Q4, and a whopping 327% over same quarter last year. EBITDA has increased approximately $2m in each of the last several quarters and it's increased by more than $5m over the same quarter last year.

If you move on now to slide number 27, we'll talk about some prepaid business highlights and kind of a-- we can start with the update on retailers. Here in the-- you know, retailers kind of make the world go round here. The more retailers you have, the more POS devices, the more transactions you can acquire.

In the UK, Sainsbury's and post office, between these two major clients we added more than 44,000 POS terminals to our e-pay network in the latter part of Q4 and the beginning of this quarter. These are fully live and contributing to our bottom line.

In Poland we again doubled our POS count. We have now more than 1200 POS terminals live in that nascent market at mobile operator stores and independent retailers. I'd like to also remind everybody that Poland is a market of 40 million people almost, so this could be a very large market for us.

In Germany, our Transact subsidiary signed an agreement with a virtual mobile operator that, when fully implemented, will add approximately 8000 electronic cash register-type terminals. They're not implemented yet, but we hope to implement those over the next quarter or so.

We also signed an agreement with a second vending machine company for software and processing. We are now the processing partner of the two biggest vending companies in Germany. Both vending machine manufacturers will roll out units for self-service purchases of prepaid airtime at high frequency off-premise sites.

I'd like to talk you about the U.S. now here for a minute. Our branded-- our brand in the U.S. is PaySpot. Of course, we added our Precept acquisition in early January of this year. Due to the addition of the Precept business, our U.S.-based PaySpot subsidiary now accounts for approximately $5.7m in prepaid revenue, which accounts for 9% of our total prepaid revenues in our business.

We're pleased with the success of the U.S. prepaid business so far and we do believe that there is significant potential for growth in this market. We intend to expand this business both organically, through added retailers and selling initiatives, as well as possibly through acquisitions if we can find the right ones and if they're available at an accretive price.

If you move on now to slide number 28, this slide helps summarize our prepaid business and gives you a bit of a geographical overview of that segment, kind of where our POS locations are. I'd just like to point out, again, four of these bullets. In the UK, e-pay's first market, live with 120,000 POS terminals, up 18,000 from last quarter, thanks primarily, as I mentioned before, to Sainsbury's and the post office. In Germany, Transact has more than 11,000 POS locations processing prepaid transactions. In Poland, as I mentioned, we're up to 1200 terminals now and the U.S. is up to about 7200 terminals as we speak today across approximately 48 states. Current prepaid total -- 150,000 points of sales at 60,000 different locations in this variety of countries.

Now I'll move on to the software solutions segment and then we can wrap up our presentation. On the software side, software is moving along nicely. We had solid results in revenue, operating income and EBITDA. Software is a very strategic piece of our business. This is the software that we run in our ATM processing centers. We also sell this to a number of banks around the world and-- which gives us excellent inroads for future outsourcing and it also allows this business to do the research and development necessary in a funded fashion for the rest of our business. This segment had a strong quarter in sales and we've got a comfortable backlog of $4.5m.

Slide number 31 just gives you an idea, a little granularity in the 98 projects that we have in process and what we've been doing over the last quarter.

I'll now move on to slide number 32 and end with my summary. I think we've kicked off 2004 with a great first quarter. Euronet is clearly the market leader in international ATM outsourcing and prepaid services. More than 90% of our revenues are recurring and growing in nature and we continue to have consistent quarter-on-quarter improvement, including our 16% sequential quarterly growth in revenue, a 13% sequential quarterly growth in earnings per share and substantial top to bottom line leverage.

We strengthened our balance sheet with $10m in debt payments, the $5m in Q1 and the $5m in Q2. We certainly do like that.

And we've had positive EPS, earnings per share, of 9 cents in Q1, excluding foreign exchange, debt retirement losses and discounted operations.

We are giving a bit of guidance here. We do expect our second quarter earnings to be-- earnings per share to be slightly better than this quarter, Q1, and this concludes the presentation portion of this call.

We can now open the floor for questions. Diego [ph], can you do that for us, please?

Thank you. Ladies and gentlemen, at this time we will be conducting a 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 would like to remove your question from the queue. For participants using speaker equipment it may be necessary to pick up your handset before pressing the star key. We'll pause for a few moments to receive questions.

Our first question comes from Tony Wible with Smith Barney. Please state your question.

Thanks. Good morning. Great quarter. I was hoping we could spend a little time talking about a couple of the pricing metrics, revenues per ATM and the revenue per prepaid transaction. I thought there was a very nice improvement sequentially in the prepaid revenue per transaction. I was hoping you could comment a little bit about that. Is that a result of you going in kind of newer markets and seeing a little bit better pricing there? And then on the ATM side--

Tony, I couldn't quite hear the last thing. You kind of-- could you get a little bit louder there?

Sure. Can you hear me now?

Yes, um-hmm [affirmative].

Great. I just wanted to basically go into that prepaid business and talk about is the slight sequential increase that you've seen the result of you going into new markets? And what are kind of your expectations as we look ahead in that business? And a similar question, the revenues per ATM. Could you talk a little bit about what you expect as far as what the net revenue per ATM would be from an increase in potential transactions per ATM versus, you know, more ATM installations?

Yeah. Let me give you a few qualitative comments. First of all, you know, bringing us now to two acquisitions in the U.S. with Precept, obviously a chunk of that growth, revenue growth and our net this quarter was accounted for by the growth of the U.S. business and particularly the added acquisition of Precept. So we continue to expect in the prepaid segment to have growth both organically and you saw that with our numbers just because-- if we said that 40% is the U.S. and Germany and that means 60% is, you might call it, same-store sales growth-- not same-store, but same geographic growth, organic growth of new business.

We expect that to continue grow, both organically and, possibly, inorganically if we can find the right acquisitions that would be, you know, positive to the company's earnings over the long term.

So as far as-- one thing that you might want to remember, too, we account for our revenue differently in our different countries. It's actually the same accounting, but in Germany, as an example, we're more of a transaction processor and so our revenues per transaction are going to be smaller than those, you might say, in the UK and Australia, where we have to-- where we basically post the commission paid by the retailers, even though we split that commission with the retailers and they keep, you know, maybe three-quarters of that.

So you'll see revenue growth will look-- will be higher margined in Germany than it is in the UK, but as a-- in just percentage terms they're both growing very nicely.

Right. I figured that one. You know, obviously, the German market doesn't have that pass-through commission. That's why I was somewhat surprised to see the improvement in revenue per transaction sequentially, given that there's actually a little bit more German revenue, it appears, this quarter.

Right. And that-- Germany will continue. We have high hopes for Germany. There is certainly less conversion from scratch cards to electronic there, although that's happening more and more every day. We also get, on average, a higher margin than we do in the-- the U.S. give us higher margins than most any of our other markets on how much we get to keep out of a transaction.

The U.S. is still kind of a nascent market when it comes to prepaid. The large mobile operators haven't fully decided or got their act together yet with respect to the potential of this. Because of that, the quantities are lower on a per capita basis here of prepaid than any other developed country in the world and to keep the retailers interested, the mobile operators are forced to pay higher commissions.

Right.

You know, over time quantities will go up and margins will come under pressure, but at the end of the day, when you-- if you've got the right retailers like we have in the UK and other markets, margin pressure ends up being our friend and our competitors' enemy.

Right. And could you just provide-- last question is, could you just provide any color on your future thoughts on revenues per ATM as we look ahead? Thanks.

I think-- I would imagine that our revenues per ATM will be in about the same kind of range as they are now. I would imagine, over time, they'll get some pressure put on them, but so far we've done a good job of not seeing much of that because we give a lot of added value and we're also going into markets where there's little or no competition.

Our next question comes from Robert Dodd with Morgan Keegan. Please state your question.

Hi, guys. Excellent quarter. One picky question on interest income and then another general question. Was there any, you know, one-off CD redemptionizing like there was in the first quarter last year for interest income this quarter or can we expect it to go, you know, up sequentially from where it was? It was a bit higher than I was expecting.

And then second question, can you give us any color on what's going on in the UK now? I realize it's only, you know, four weeks since Vodafone pulled scratch cards, but anything you can give us on that and the impact there we would appreciate.

I'll give the answer to the second question. We haven't seen a direct impact of the Vodafone move, but it's-- for one reason, it's because they've got about eight weeks worth of scratch cards in the channel. So we probably won't be seeing that-- seeing a full quarter's effect of that until the third quarter of this year.

But again, with Vodafone removing scratch cards from the market, they telling the market that they will print no more scratch cards, this gives an incentive, also, to the other mobile operators to do the same, which, again, pushes more and more people to the electronic distribution channel and, obviously, we've got the lion's share of market share there in the UK, so we tend to benefit. This is another case of the rising tide lifting all boats and we happen to have the biggest boat in the water right now.

And, Robert, on the interest income, we did have some higher-than-average balances in our trust accounts in the first quarter, principally because of the timing effects as we exited the end of '03. So there wasn't any kind of unusual or one-time items in there. We did have some higher-than-average balances just because of timing, but, as you can see in the numbers, we've also increased the amount of flow-through through these accounts, which should continue to give us, you know, yet growing average balances as we go forward.

So, you know, I wouldn't expect any kind of significant drop off because of one-time items in there, but we did have a little bit of benefit because of the higher average balances in the first quarter.

Thanks.

Our next question comes from Pete Swanson with Piper Jaffray. Please state your question.

Hi, thanks. Congratulations on the good quarter. A question about the transaction break-out within prepaid. Can you help me understand the percentage of your total transactions in the quarter within e-pay, within Germany and then here in the U.S.?

Yeah, I just don't happen to have those numbers at the top of my recollection here, Pete. I mean, I can give them to you in a separate discussion, but I just don't happen to have them offhand.

OK. And let me make sure I understood, did you say e-pay was up 17% sequentially from a revenue standpoint?

Right.

OK. A question about the pipeline or the business opportunities within ATM outsource processing. How is that looking now relative to, you know, three months ago and six months ago? You seem to be penetrating existing customers with new business. Are new large banks getting more interested now?

I think, in general, the attitude towards outsourcing is certainly more open-minded. It gets more open-minded every quarter. We don't have any large-- big, large deals in our pipeline, but we've got a multitude of smaller deals.

One thing that we are certainly benefiting from is the fact that we have multiple contracts with these multi-national banks and so we've been able, like with HVB, to sign two more and, of course, with Raiffeissen we've got the Romanian deal and that's like our fifth Raiffeissen deal. Citibank we've got a bunch of countries with Citibank, as well.

So as these large, multi-national banks go into more countries, they want this, you know, distribution channel challenge solved for them and they know they've got a good partner for this. So we'll just kind of follow them around as they go. But a lot of times, they're not huge ones like the two we just knocked off. It would surprise me that in the next six months we got a deal that was, you know, 700 ATMs.

OK, that's fair. And then two quick questions for Rick. Tax rate expectations for the remainder of the year, please?

Well, we always try to keep from being real projecting on that, but I would expect that our tax rate, based on what we've posted in the first quarter, to continue throughout the period to slightly up because we'll continue to generate more and more profits from those countries that are in tax-paying positions. So, you know, we should see a little bit more tax float-- or that rate float up a little bit, but I wouldn't expect it to move up in a real significant fashion.

OK. And final question, can you tell me what cap ex was in the quarter and what your forecast is for the year, if there have been any changes to that?

No. It was about $2.5m in the quarter and we expect it to be-- there's really kind of two parts to that answer here. The first part is, cap ex in our mainline business we have-- we said in our 10-K that we would expect it to be somewhere in the, I think, about $6m to $7m for this year with a fairly substantial portion of that necessary for our EMV triple-DES and chipcard reader upgrades in our-- in the 1000 ATMs that we own.

In addition to that, we, as part of the HVB outsourcing agreement, you may recall that we said that those are type 2 ATMs and we will enter into a purchase and then a sale/lease-back type of a transaction with an affiliate entity of HVB. So technically, we will have about $8m of cap ex come on to our books when we complete that transaction or roll out all those ATMs. Mike gave you an update on kind of where we stood on those. So we will technically move those on to our books as a purchase and then we, as well, will have a similar amount of lease financing go onto our books.

So you won't see cash flows from us, basically, to cover that.

Right. It's just basically a transaction for the bank to facilitate moving those assets off of their-- off of their books.

OK. So kind of the core cap ex for the business, $6m to $7m, no real changes there.

Right.

OK, great. Thanks. Congratulations.

Thank you.

Our next question comes from Franco Turrinelli with William Blair & Company. Please state your question.

Hi, Mike. Hi, Rick. Could you give a sense of the rate at which the Germany and U.S. operations are growing internally, kind of compare and contrast with the existing e-pay business?

I don't have those numbers at my-- you know, at my fingertips. Rick's giving me-- Actually, Rick may have it on the tip of his brain. He's saying 10% for--

Yeah, we're seeing-- we're seeing about then 10-ish to 12-ish percent in the U.S. and the German businesses and in our UK and Australian businesses we're seeing it about that 15% to 17% range. And the difference there is really just, we believe, principally stemmed by the-- or driven by the in-country mobile operators driving to, you know, remove scratch cards from the market places there. So that just drives our electronic top-up a little bit quicker in those other markets. But good, strong sequential double-digit growth coming out of all of our markets.

And, Mike, the new HVB contracts, new countries for you or existing countries?

No, no. Well, there actually are existing countries. There might be another new country. I'm trying to remember where these two were. I think one was in Czech and maybe one was in Slovakia. So maybe it's our existing countries. Is that right? Yeah. And they added up to, I think, 70 or 80 ATMs between the two of them.

Well, I think it's a sign of the change in the company that you don't know where your new contracts are.

Well, maybe I'm just getting weak-minded in my old age.

May be. One question that I have for you in terms of the wording on the press release -- and I can't claim credit for having spotted this -- but you talk about growing the prepaid business both through internal sales and promotional efforts and I was wondering, particularly on the promotional efforts, what you meant by that? Thanks.

I mean, basically that's just adding retailers in the normal course of business. So-- and we do that through-- I mean, sometimes we give a-- you know, a $5 spiff to an ISO to bring on a new terminal or something, and-- but basically it's just our organic growth of the business.

Thanks, Mike.

Um-hmm [affirmative].

Our next question comes from Tim Willy with A.G. Edwards. Please state your question.

Thank you. Good morning. A couple of-- a handful of questions here. First, just some housekeeping. Rick, could you clarify, I think what you were saying about prepaid is that the first quarter is a good core run rate, all of the acquisitions, et cetera, were now on there for the full quarter? Is that correct?

Correct.

OK. So we work with that going forward. Two questions about sort of ramp-ups and deployments. First is on the ATM deployment schedule. You've got about 1550 left. Are those likely to be all be deployed through the balance of this calendar year and will it be generally equally distributed over the next three quarters or how should we think about, you know, trying to ascertain the impact as we build our models for that part of the business?

You can break that down into two segments, Tim. The Raiffeissen and HVB contracts, you could call them a group, and so the balance of the ATMs on those contracts we would expect to have most all of them live by the end of Q2 and the remaining ones outside of that, like the ones in India and some of these new contracts over the balance of the year. And as far as how many per quarter, I don't think we have that number exactly. Maybe a good estimate is, you know, equally distributed across the quarters.

OK. But they should all be on by year end?

Yes.

OK. India. You've said in prior quarters that you expected that to start generating a profit, I think, in the back half of this year. The loss hasn't widened; it's remained fairly stagnant sequentially, but do you still believe that at least by 4Q you would be generating some kind of operating profit in India?

Well, that's what we're hoping.

OK.

We'll kind of see. This is all dependent upon how fast we can get those ATMs and a lot of this is-- you know, some of it's you're just waiting on the bureaucracy of your bank partners, or not bureaucracy, but just getting sites approved and so forth. I mean, we're dealing with a third-world country there.

Yep. OK. And my last question is on the U.S. prepaid. 7-11 made an announcement yesterday about doing a big rollout. It seems to be sort of like a-- almost like a private brand kind of prepaid phone that can only be recharged in their stores, if I read their press release correctly.

Yep. Yeah. Right.

Two questions. One, I'm curious if there's any chance at all that-- whether it be 7-11 or another kind of convenience or gas-store company were to try to do this same kind of concept if there's a way for you to get in there and be the electronic top-up engine?

And then second of all, you know, if you look at the landscape of who's trying to promote prepaid in the U.S., it seems to be a lot of people, none of the major carriers making a big push. Do you think that, as a result of no one or handful of players pushing it and controlling the market that the durability of the commission structure is likely to last longer than what you say in Europe? Because you have no single carrier that's got a lot of leverage with the retailers or vice versa.

I think that's a thoughtful perception, Tim. I think when you only have-- when you have an oligopoly of three or four guys, even though they're not theoretically supposed to be meeting in the back room deciding things, I think they do. When you've got this large group of tier-two people, either as virtual mobile operators or as their own operators out there, you're right. They can't quite get their collaborative act together so that it is possible that you could see larger, wider margins for a longer period of time.

With respect to the 7-11 deal, you know, they're just one of the probably hundred or so small, you might say, virtual mobile operators or private labelers of mobile operator time and I think it is interesting that they're forcing everybody to go back to 7-11 for this, because this really hasn't worked, as best we can tell. Customers want to be able to get more airtime when they run out and they don't want to have to make a special trip to a special kind of store. At the end of the day, ubiquity is what's important. You want to be able to have the convenience of recharging everywhere.

But they're just one of many and it looks like-- it doesn't look like we'll get that business this week, but we'll keep trying.

Great. Thank you very much, Mike.

Um-hmm [affirmative].

Our next question comes from Pete Heckmann with Stifel. Please state your question.

Good morning. Following up on the fourth quarter implementation of the UK post office, can you talk about how that rollout has gone, the uptake in turns of transaction volumes at those types of locations? And then, to follow up on the questions from the fourth quarter call in terms of, maybe, that contract taking some share from other locations?

Yeah. When we lit up the post office and that-- they all lit up almost on-- you know, across a very short time period, we saw our transaction numbers go up immediately. It's now become one of our top five customers or accounts in the UK. We expected to see some cannibalization of our smaller Mom and Pop stores, but we didn't see too much of that, maybe because we've got higher volume stores and a lot of times these post offices might be taking them away from lower volume stores.

We would expect that our post office contract has hurt our competitors and it certainly has helped us. It's been just a great contract for us.

OK. And so what would you estimate your UK share to be now?

I-- you know, that varies by mobile operator. If I was a betting man, I'd say we're at 40% to 45%.

OK, thanks.

Um-hmm [affirmative].

Our next question comes from Gary Prestopino with Barrington Research. Please state your question.

Most of my questions have been answered, but could you talk a little bit about what your growth strategy is for this U.S. prepaid? I mean, you're only on 7200 terminals, which is, you know, rather minimal in the U.S. Could you just elaborate a little on that?

We're going to continue to grow organically, like I mentioned, going out there and finding new sites, both the Precept and the AIM people are very good at their business. We're going to get-- we're going to keep rolling out new sites. And even though we only have 7200 of them, we've got very profitable-- a very profitable estate. I don't know everybody's numbers in the country, but it wouldn't surprise me if we've got the most profitable estate of terminals in this country, all people included.

So we're going to continue to be careful. That's one of the things that John and Paul from e-pay have taught us. They put their POS terminals where people buy scratch cards. They've concentrated on higher-volume locations and we'll let everybody else take the lower-volume locations.

We could also-- we may also, Gary, grow this like I mentioned through inorganic methods, through acquisition, if we could find the right acquisition and everything works all right.

If you're saying you put them where people buy scratch cards, I mean, how many potential locations does that give you?

I don't know. I read one study one time -- and I don't know how accurate this is -- and they said that when you add up all the convenience stores, gas stations and grocery stores there's 300,000 locations in this country. How that works for here, I'm not quite sure, but I'll try to-- you know, we'll try to hone in on that.

I might also mention that, just like in the UK, the U.S. is the same. The smaller stores-- I mean, if you can find those little, high-volume Mom and Pop stores, they're going to be way more profitable than a given location at a large chain. So we're focusing on profitable locations. I don't have an ego here. I don't have to have the biggest number; I just want to have the biggest profit.

OK. Thank you.

Mr. Brown, there are no further questions at this time.

Good. Well, this is actually-- brings us right up to the hour. I want to thank everybody for taking their time to listen to this call and I'll look forward to talking to you all again in about 90 days. Thank you very much.

This concludes today's conference. Thank you for your participation.