Euronet Worldwide Inc (EEFT) 2004 Q2 法說會逐字稿

Welcome to the Euronet Worldwide second-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. (OPERATOR INSTRUCTIONS) As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. Jeffrey 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's quarterly results conference call. We will be presenting our results for the second-quarter 2004 on this call. We have Rick Weller, our CFO and Mike Brown, our CEO 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 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, technological developments affecting the market for the Company's products and services, foreign exchange fluctuations, changes in law 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 results reports filed with the U.S. Securities and Exchange Commission, including, but not limited to, its form 10-K for the period ended December 31, 2003 and its form 10-Q for the period ended March 31, 2004. Copies of those filings and our other public filings with the SEC may be obtained by contacting the Company or the SEC. Now I will turn the call over to Rick Weller, our CFO.

Thank you, Jeff, and good morning. Welcome to all who have joined us for this second-quarter results call. If you turn to slide number 4 we will get started. Euronet's second-quarter revenues were $87 million. Operating income was 7.4 million. EBITDA was 10.8 million and 12 cents earnings per share, excluding the effect of FX and loss on early retirement of debt. The revenue of 87 million represents a 7 percent increase over the first quarter of 2004 and an 81 percent increase over the 48 million reported last year in the second quarter. The 7.4 million in operating income reflects a 14 percent increase over the 6.5 million in the first quarter of this year and a 164 percent increase over the 2.8 million produced in the second quarter of 2003.

And in this second quarter Euronet produced 12 cents per share in earnings as compared to 9 cents a share reported in the first quarter, again all excluding the effect of FX, disc ops and debt retirement losses. Now let's turn to slide 5 to see some revenue trends. Here on slide 5 you can see our sequential quarterly revenue trends, and you can see that revenue growth in the second quarter continues with its trends of the past representing more than a 7 percent increase.

On slide number 6 we present our trended operating income and EBITDA. Again consistent with prior quarters, Euronet continued to post improvements in both its operating income and EBITDA. Moving to slide number 7, we provide again an illustration of how we look at and manage our three primary business segments; EFT, Prepaid and Software. On slide number 8 you can see that in the second quarter we broke a new barrier with transaction levels of over 100 million. This represents a 30 percent increase in transactions processed over the first quarter of this year and a doubling of transaction levels processed in the second quarter of last year.

These increases are attributable to the continuation of strong growth in the prepaid segment together with the implementation in the second quarter of the large outsourcing agreement in Poland and Romania. Let's move to the segment operating results on slide number 9. Here on slide 9 I'll point out a number of key observations. In the EFT segment you can see strong sequential quarterly growth in revenues, operating income and EBITDA. These results have been significantly benefited by the installation of the two large outsourcing contracts in Romania and Poland. As we started the quarter we expected to largely complete the implementation by the end of the second quarter, but our operating teams did a great job and exceeded plan. That favorable execution helped us exceed our expectations for the EFT segment.

Our third quarter, therefore, will benefit from the full quarter effects of these insulations. In our prepaid segment revenues improved 4 percent, and operating income and EBITDA remained relatively flat. These results are influenced by several factors, including first on the revenue side as we expected we are seeing a moderation in the exceptionally strong growth rates coming from the prepaid market of the UK and Australia. And in Australia we are seeing some margin pressure from the large chain and corporate retailers, which is impacted both our top and bottom line results in that market.

Second, we have seen nice transactional growth in the German prepaid business, about 17 percent quarter-over-quarter. Remember that the Germany revenue is largely transaction based rather than derived from the receipt of a commission and the related payment of commission to the retailers. Accordingly, the German based revenues will fall largely to the bottom line, but overall revenue from the prepaid segment will not grow as quickly as they did during the UK high-growth period. But this is not financially unfavorable because of the gross margin per transaction in Germany is similar to that in the UK.

Third, in our Germany prepaid business where terminals are purchased by the retailer, we have had fewer terminal sales in the second-quarter compared to the first quarter. This is largely as a result of our focus on large ECR integrated customers. While this approach has had some impact on our quarterly terminal sales and operating profits, we believe the future opportunities are well worth the trade-off.

Fourth, as it relates to operating income we have made additional investments for the prepaid segment in the U.S. market, the tourist market of Spain and in Australia the independent retailers also known as the mom-and-pops. I'll hold further comments here in that I know Mike will want to expand on this in his.

Finally, you can see that corporate expenses increased approximately a quarter of $1 million over the first quarter. This increase is largely the result of insurance costs, resulting from a larger total business and increased professional fees to comply with the requirements of Sarbanes-Oxley. For the full year we expect that the cost to comply with Sarbanes-Oxley will accumulate to approximately $1 million.

On slide number 10, we present a few highlights of our balance sheet. Our unrestricted cash increased from 19 million to 32 million, largely driven by operating cash flows offset somewhat by debt payment. Our total assets increased by approximately $37 million. $13 million came from improved cash positions, and $5 million from the EPS and ATX acquisitions, while the balance came from fluctuations in the prepaid trust and the operating accounts. You will note that our debt has increased approximately $8 million, driven by capitalized leases whereby we leased the ATMs for the Poland outsourcing agreement and will recover the lease payments in the outsourcing fee. I'll comment more on debt in the next couple of slides.

Total shareholders equity improved by about $12 million as the result of net income together with stock issued in connection with option exercises, employee stock purchases and the ATX EPS acquisitions. With regard to our key debt metrics you can see consistence to improving results in the ratios presented. On slide 11 more details on debt. Here on slide 11, you can see several reconciling items as we roll forward the debt from the end of the first quarter. FX had minimal impact this quarter, actually a bit favorable as it relates to debt. You can also see we took on an additional 9.6 million in capital leases, largely related to the Poland Type II outsourcing agreement. We paid down about 5 million in high yield 12 3/8 percent debt, and we increased certain of our short-term borrowings to accommodate short-term pin inventory related to the prepaid businesses.

On our next slide you can see that our total $70 million in debt, about 55 million relates to the combination of high yield acquisition and short-term debt. $15 million relates to capitalized leases we have in place, largely to accommodate Type II outsourcing agreements. While we are required to account for these as liabilities these leases are directly tied to the Type II agreements and are recovered over the term of the contracts.

On slide thirteen we present Euronet's trended earnings per share. Our second quarter came in at 12 cents a share up from the 9 cents a share we reported in the first quarter. This result was a bit ahead of our expectation, largely driven by the rapid installation of the two large outsourcing agreements. Now I will turn to Mike for the balance of the discussion.

Let's start out with slide number 15. Again, I will cover each of our three business segments, EFT, processing prepaid and software solutions. So if you'd like to kind of jump to slide number 17 we'll talk about EFT for a minute. Here on this slide we show the operating income and EBITDA results by quarter, which show consistent improvements year-over-year. There are some anomalies here which I'll talk about. You can see the slight decreases in operating income and EBITDA Q4 to Q1 due to the normal seasonality fluctuations we see every year particularly in the EFT segment. Accordingly, if you compensate for the seasonal strength of the fourth quarter, we continue our trend of sequential quarterly improvements in the EFT segment.

I also wanted to point out that in the third quarter of last year this reflects a onetime $800,000 benefit from the sale of the Hungarian ATMs that enhanced the EBITDA and Op income line. Next slide, please, slide number 18. Here we wanted to compare our whole EFT processing segment with the geographical breakdown of the division as we have in the last few quarters. We are trying to point out where EMEA is, which is Europe, Middle East and Africa and our new investment market Asia-Pacific, in particular India.

Our EMEA numbers remain strong. Revenue is up $2.4 million over last quarter. We have very strong margin improvement in our EMEA operating income, 21 percent margin this period compared to 18 percent margin just last quarter. This shows the flow-through of our two large outsourcing deals in Romania and Poland. We also have a 31 percent EBITDA margin compared to 30 percent last quarter, again marginal improvement there. In our Asia-Pacific operations, which is primarily India, they continue to develop. And I will cover more about them later in the presentation, please note that our results here improved slightly as we continued to develop this market. Revenues doubled compared to Q1 due to our expanding ATM outsourcing base, and we also reduced our quarterly operating loss by $100,000 in Asia-Pacific by implementing more of these outsourced ATMs that we had in the backlog. As we have said in the past, by the end of this year we would expect this division that would be Asia-Pacific -- to be approaching positive cash flow.

Next slide please. Now we will talk about EMEA here in particular. I'm excited to announce the two largest deals that we discussed from the last couple of calls have completed the ATM rollout stage. Raffeissen in Romania which is the third largest retail bank in Romania and the largest Raffeissen subsidiary outside of Austria had all of their 575 ATMs converted to our outsourcing center by the end of June, and we are now starting the pilot phase of POS outsourcing. And then PPH and PPK which really (indiscernible)bank Poland HVB, it is the third largest bank in Poland we had 728 ATMs live by the end of June. I have got large compliments to both our Romanian, our Polish staffs for bringing these two contracts live as well as our EOC operating center in Budapest. Because of their hard work we're going to see the full impact of these deals in Q3 and Q4 for this quarter -- for this year's results.

We also this quarter signed two smaller (indiscernible) bank outsourcing deals; one in Slovakia and one in Serbia, which we should start implementing soon. In Germany we have completed the sponsor bank conversion that we discussed on the last call, which helped make our German business even more profitable. This was another conversion, and my compliments to the German staff for a fast conversion along these lines as well.

Now we will move on to slide number 20 and we're talking about India. Our cash net India shared network is where we switch transactions between our current member banks. We currently have 9 contracted banks, 7 of them are live and our connected ATM count has increased to more than 3000 ATMs. In our India ATM outsourcing business we now brought live 501 of the 850 contracted ATMs. We've also contracted another 100 ATMs with the LB Bank in India as well. Let me just remind you about some breakeven points that I've said on past calls. We are right now at 501 ATMs live in India. It takes 600 AS outsourced ATMs to be cash flow breakeven and 700 outsourced ATMs to be operating profit breakeven. We have 850 contracted. So we are well on our way to these breakeven points.

Next slide, please. This table shows our ATM count by category. You can see that since the last call we have increased our ATM account by 1222 -- I'm sorry -- 1227 or 32 percent increase. As we showed you last quarter we have a column here to the right which shows how these new contracts will affect our ATM accounts. As we have discussed on our last few calls we are transitioning from a Euronet owned ATM to a more bank owned ATM servicing center. And now Euronet owned ATMs represent only 17 percent of our total network. Now on to the next two sides 22 and 23, you can see the geographical breakdown of these numbers. I won't spend any time with them. I will move directly onto slide number 25 and the Prepaid Processing segment and cover where we are there.

There's a lot of numbers I like to convey. There is a lot of information behind this slide. I know that Rick commented on the results of the prepaid division and I will give you more information. You will notice our operating income line was approximately flat even as our revenues increased, which was a results of the slower growth in the e-pay markets combined with a number of investment in our up-and-coming market, and I will explain that now further. First, the transaction growth, which is an indicator of our current and future success and our largest markets was good. Total growth in prepaid transactions Q2 over Q1 of this year was 13 percent. This obviously annualizes to a growth rate in our combined largest market in excess of 50 percent.

On the UK side we had 11 percent growth. This growth is starting to flatten out as predicted, but it's a huge market and 11 percent growth is very nice. This is why we have invested in both acquisitions for newer markets plus investments within our markets to take up the slack as the UK continues to mature. On Germany, we had 17 percent growth Q2 over Q1 which annualized to an excess of 60 percent. Germany is preparing to be a serious growth engine for our Company. As you may remember, Germany's population of 83 million people is about 40 percent larger than UK's 59 million people. And the total number of prepaid telephones in Germany is about equal even though the population has such a large differential. So we believe there is growth potential for per capita prepaid phones in Germany, as well. In a few minutes I will also cover the retail highlights for Germany which are very impressive.

On the U.S. side we have 17 percent growth Q2 over Q1. This includes one month of our acquired EPS business and 7 percent organic growth from our existing PaySpot Company. Our operating profit growth is a function of the transaction growth and the margin or transaction fee we received from the retailer or the mobile operator. So let me make a few comments on margins in particular our U.S. margins. Our U.S. margins are pretty consistent with the exception of a onetime margin incentives for mobile operators that we gained in Q1. That netted us an extra in non-recurring $350,000 gain in Q1 in operating profit. Therefore our Q2 comparison started out about 350 K. in the whole from a run rate perspective, Q2 over Q1. We are happy to have made up nearly all that difference quarter-on-quarter.

The UK margins are under slight pressure but we're happy to say that the small retailers, the mom-and-pop stores as Rick mentioned represent approximately 70 percent of our margins, and those remain strong and unchanged. Historically we first focused on the small retailer in the UK, and later with that credibility added the large food, drug, petrol, and hypermarket chain. In Germany, which is largely transaction based, we see little or no margin pressure to date. However, we are now focusing on the electronic cash register integration projects, ECR projects, rather than discrete GPRS terminal sales as we have in quarters past. Therefore profits from Q2 terminal sales were not as good as we saw last quarter, which affect our overall operating profit in Q2. But in the long-term having an ECR integration to a retailer cements us to that retailer much closer and allows us to turn on more points of presence in a retail chain than we could justify with individual POS terminals. The results of these efforts will be seen in Q3 and Q4 of this year and beyond.

In Australia for first quarter '04 we have focused on corporations and chains for our locations. These sites are more susceptible to margin pressure but provide us a quick hit and dominant market share in the country. We are now starting to expand at some expense our mom-and-pop presence which is an investment on the outset, but the payoff should be worth the effort. In some ways due to the opportunity of the larger chain, Australia evolved in the reverse order the UK did some years back. Net net, as I said in the previous quarterly presentations we've been expecting to see the meteoric growth rate slow in the prepaid markets of Australia and the UK as they complete their conversion from physical scratch cards into electronic pop-up. I was pleased also that during the last 18 months e-pay gained about 10 percent market share in the UK at the expense of the competition.

Being in a winning and growing position we've taken measured steps in the second quarter in certain key markets or market segments so that we have growth engines for the prepaid division in the future. It appears that Germany will be the next very large growth engine followed a bit by the U.S. Poland is also contributing to our growth but to a lesser extent due to the size and income spend of that market. So on to slide number 26, Prepaid Processing highlights for the quarter you can see revenue 65.6 million, up 4 percent over last quarter and up 104 percent over same quarter last year. Op income 6.3 million which is down 2 percent over Q1 and up 133 percent same quarter last year. EBITDA is decreased about one percent from quarter to quarter.

If you move on now to slide number 27 we can go over some of the business highlights. In the UK and Australia we added a total of 7000 POS terminals in these countries, and we initiated service with the UK's most recent mobile operator, Hutchison HG 3 which operates under the brand-name THREE, it is one of those 3G third generation mobile phone companies. And as I mentioned we are investing in the mom-and-pop market in Australia as well.

In Germany our transact subsidiaries signed agreements that when fully implemented will add 11,000 electronic cash register ECR terminals in 2200 locations in Q3 which is our current quarter. Watch for the press release on these deals when the terminals are fully implemented. Traditionally large retailers only announce after all their stores are live and operational, but we can tell you that we have signed the contracts and will tell you who the people were a little bit later. But what excites me the most about prepaid in this country is that in Germany it seems to be shaping up to offer similar growth to what we have experienced in the UK. Germany is a bit different than the UK because the mobile operators are not collaborating with each other. This causes the market to evolve a bit slower.

In the UK mobile operators saw the benefits of electronic top-up and band together to promote it. Originally prepaid top-ups were found primarily in the mom-and-pop stores, but once a large number of chains signed up for ECR integrations at thousands of retail locations the mobile operators really started to get behind the idea. These mobile operators provided incentives to both retailers and the customers to abandon physical scratch cards and move to locations that offered electronic top-up. As electronic prepaid services obtain ubiquitous coverage throughout Germany and we are certainly not there yet at only about 25 percent converted, we cannot guarantee that growth rates will accelerate similar to the way it did in the UK, but we are encouraged by these early market developments and hope that they well.

We are starting to see this occur even before the implementation of the 11,000 terminals I just mentioned. Remember we grew transactions 17 percent Q2 over Q1, and that's even without all these 11,000 extra terminals. So I would expect Germany to be a strong growth engine for Euronet's profits. After these 11,000 terminals are lit up and into next year. On the U.S. side we are also seeing substantial transaction growth in this very immature market as we enlarge our POS terminal network both organically and through acquisitions. We have recently acquired two companies in the U.S. In May we acquired EPS which is based in Houston and in July CPI, which operates under the brand-name TeleBuck$ and is based in Texas. With these two acquisitions we have added approximately 3000 terminals and our U.S. PaySpot subsidiary will represent in excess of 10 percent of our total prepaid revenues beginning in Q3 '04.

Next slide, please. In this slide number 28 we'll focus on our investment markets for prepaid. First let's talk about Poland. In Poland we have added another 500 POS terminals to our network. Most of these terminals were transact GPRS type terminals. These wireless terminals allow us to quickly implement prepaid solutions in areas that don't have strong fixed line infrastructure. This is another example of how well our various prepaid divisions are working together to deliver state-of-the-art solutions in new markets. Think about this for a minute. In Poland we use the e-pay platform to monitor and settle the transactions. We use our Polish EFT customer service people to handle the end country back office challenges. We get our prepaid content from Budapest which has had online connections to Poland's free operators for the last four years, and we can now use the transact GPRS terminals interfaced to London to offer Euronet a competitive with retailers.

Our ability to work together to have each of these divisions and acquisitions work together with our EFT division just shows a unique opportunity and a unique position that this Company has in attacking these markets. We are also very pleased to announce that our e-pay Poland operation posted its first operating profit in June '04, less than a year after launch. I guess this moves Poland now out of the investment model and into the profit producing category beginning in Q3 2004.

On to Spain. We have an interesting opportunity that we're chasing and investing in Spain. We are exporting our e-pay solutions to stores in Spain that primarily target the tourist market. Into those stores and across our terminals we are cross-border selling prepaid air time for mobile operators and customers based in the UK and Germany, two very large tourist concentrations in Spain. This effort enables our current customer base to travel to Spain and still have the ability to add credit to their prepaid phone.

On ATX we discussed the ATX acquisition at our annual shareholder meeting but let me touch on some highlights of this deal. ATX software is a rapidly growing prepaid service provider based in London. It was started in 2003 by 2 French guys, one is a sales whiz and the other a technical whiz. They wrote their own software package for the conversion of scratch card distribution into electronic top-up. The company already has 20 plus countries, has customers in 20 plus countries, it has a run rate now processing more than 2 million transactions per month across 14,500 terminals. ATX has positive net earnings and significant growth potential and so far is ahead of their plan for 2004.

So we're certainly happy that we have begun to ally with ATX. And let me recap the structure of the ATX deal; we will purchase 10 percent now. We did purchase 10 percent, and we have a call option on another 41 percent with a fixed price within a year, all of this of course pays 100 percent in Euronet stock.

Moving on to slide 29, this slide helps to summarize our prepaid business and gives us a geographical overview of the segment. I will not go into market by market, but just look at the total accounts -- POS accounts, more than 162,000; retail locations more than 168,000. We are certainly the global leader for them. Transactions, we're doing more than 18 million transactions per month in Q2.

Now the software solutions segment moving onto slide number 31. Software is moving along nicely. We posted improving results in revenue, operating income and EBITDA, and we have a comfortable backlog of 5.9 million as we look forward.

Moving on to the last slide, slide number 32, in summary we are very happy with this quarterly results. We've exceeded our earnings per share expectations for the quarter with a 3 cent improvement to 12 cents for Q2, excluding FX and loss on debt retirement. Our Romanian and Polish service team implemented the ATMs for the two major outsourcing contracts a little earlier than anticipated. Strong work from those teams which helped us realize greater benefits in this quarter. We continue to have consistent quarter on quarter improvements including a 7 percent sequential quarterly growth in revenue, a 14 percent sequential quarterly growth in earnings per share and a 33 percent sequential quarterly growth in net income.

Our Prepaid Processing segment continues to have strong transaction growth up 13 percent over last quarter. And when you evaluate our Q2 results net of some opportunistic investments the prepaid operating income is still growing. We have significantly increased our cash position this quarter, and finally a little note for the future. We would expect that our third-quarter EPS to improve by 2 to 3 cents per share. This includes the presentation portion of this call. We will now open the floor for questions.

(OPERATOR INSTRUCTIONS) Tim Willi with A. G. Edwards.

Two questions, one is, and they are growth on pricing and margins and I have a feeling they probably won't be the only questions on that this call, but could you just again go back through the margin dynamic in Australia? I was writing feverishly but couldn't get it all and then I have a follow-up on the UK market.

Australia we've had a little bit of margin pressure this quarter. It was primarily from large retail chains, petrol chains and the like to put a little margin pressure as we renewed their contracts. Australia is not as well protected as the UK is because in the UK we derive 70 percent of our margin from mom-and-pops and only 30 percent from the large retailers, so as the large retailers try to exert a little margin pressure it just doesn't flow through to the bottom line quite as dramatically.

So in Australia when we have seen some margin pressure which has affected our profits in that market, which is why we've actually -- we actually began the beginning of Q2 spending a good amount of money in Australia to develop the mom-and-pop and what they call down there the route market, which is the small retailers. So it was opportunistic how we developed that market. We went to the big guys first because they said yes, where in the UK we went to the little guys first -- it gave us credibility to get the big guys. So now we are going to develop the little guys because that will give us a little bit more insulation from margin pressures.

Did you say what the mix is in Australia?

Australia is 100 percent, (indiscernible) a big guy, chains whether it be a petrol chain or a convenience store chain or a grocery store chain or whatever.

And going to the UK, you've obviously got more mom-and-pops there which you've said, but with the large retailers am I correct in assuming that you have a vast majority of those with integrated cash registers that makes it a bit of a more sticky application for them?

Absolutely. You know we have as a recap we have six of the top six grocery store chains. We have Wal-Mart ASDA, we have British Petroleum. We have a bunch of other chains, drugstore chain Boots (ph) the chemists. So it's an extremely sticky kind of relationship. Actually the implementation of any one of those takes between 6 and 18 months. So even though you get a little bit of margin pressure from these guys the reality is they can't just pop you out and stick in another one because everybody is short on IT resources, and it gives you a pretty strong, kind of leverage over those guys. Where in Australia we are in the chains but we are just now starting to do the ECR integrations. They're more with our terminals there.

Do you have any major renewals in the UK in the next 12 to 18 months, and with that that last question I have let me just draw on another addendum; do you have any fears that slower growth in the UK market could result in more aggressive pursuit of your customers by competition as people try to find ways to still maintain attractive growth in the market that seems to be admittedly and expectedly maturing.

Let me first talk about competition. We only have one competitor in the UK, and they have about 8 percent market share that offers ECR integration. Nobody else does; everybody else is in the mom-and-pop market.

Is that Alphyra?

No that is not. It used to be called Omega Logic, it was purchased by EPS, POS or something that was purchased so they are little guys and they have actually lost market share to us and others since basically just to us since we purchased e-pay. So our competitors out there don't offer ECR integration yet. Maybe they can claim that they would give it to them, but nobody is doing it. So that is another reason why I think we have never really lost a customer in the UK. And we do some of the largest guys in the UK have contracts that are -- I do not have that contract renewals in front of me, but their contracts are usually one to two years. We kept them over the last five years, and so I don't think we are at significant risk here.

Tony Wible with Smith Barney.

I was actually hoping you could talk about two things. One on the ATM front could you talk about what your expectations are for your backlog and how many ATMs you think in the back half of this year you might be able to add? And then two, on the ATX acquisition can you talk about what you might expect as potential accretion if you end up executing on that purchase? Thanks.

I think as far as number of ATMs in backlog, we've got probably about maybe less than 200 ATMs kind of contractual backlog in EMEA. And as we mentioned, we have about 300 or so in India. That's how many that we are -- actually 349 in India with current contracts.

In the prospects for new deals?

There's new deals out there, and we're signing them. We haven't run across any like 700, 800 unit deals, but there is more than a handful of 3, 4 and 500 unit deals. So we're still the only people getting these, the reality is nobody's got a deal from us yet. And just a question of that long close cycle, and everybody knows we need to close some deals by the end of this year so that we can have them implemented early part of next year. We will let you know those things as they come, but the deals are not drying up by any means and you know, one thing I made a trip to Poland and Romania two different trips in the last six to seven weeks, and these two huge deals that we just did are being watched by everybody in both of those countries and others.

And we are noticing that just the attitudes are loosening up a quite a bit because we have taken these things over flawlessly. We've improved their uptimes and can prove that to them and the word is getting around. Nobody wants to be the first to do anything, but the last thing you want to be is uncompetitive because you're the last. So we're pretty pleased at adding all these things on. You saw adding 30 million transactions quarter to quarter without a blip. That's the kind of stuff that impresses people.

And can you revisit your comments with regards to Germany in the prepaid business and any incremental business you said that there was somebody you expect to sign up relatively soon. What kind of incremental contribution could that have to the margin?

I am not sure, I have got some internal numbers, and I am not going to share those with what they do, but these are people who currently sell physical scratch cards, and there is two or three different contracts here. When you add them all up there is 11,000 locations that we intend to light up in Q3. And what that will do is it will totally eliminate scratch cards in those locations. And it will all start to come through our switching center. So these are the kinds -- from just a qualitative point of view this is kind of what happened with e-pay the year before we bought them. They were growing kind of slow. They were losing money for the first few years.

They are not making much, and then when they kind of got ubiquity or critical mass around the country, the mobile operators could offer incentives to both the retailers and the customers to go electronic. So I think soon as we light up these 11,000 and a couple of the other deals we have got kind of in the cooker right now, you will start to see the mobile operators in Germany being a lot more courageous on how they deal with the market in moving people toward electronics. And when that happens, we're sitting at about 60 percent market share now in Germany. I can't wait. That is -- Germany could be -- if it evolves like the UK did, and we stay in this position we are going to have a monster on our hands, and it's going to be fun.

So should we be essentially expecting almost a doubling in Germany's contribution given that you have 14,000 point of sales there now?

You know, as you got to understand the quality -- and this is, as I mentioned that is 2200 locations. So it is not quite a doubling because this would be multiple lanes in a grocery store or something. I don't know -- I think if you say you double it that's probably not accurate because the bulk right now of prepaid goes across these mom-and-pop stores. So it won't be quite that mix but I guess you could say we've got 2200 locations. We'll see how the numbers work out; it would not be unreasonable to say that we've increased our numbers by a quarter-sh or 30 percent. The nice thing is they are all going to turn on in one day. So by the beginning of Q4 we should have these things starting to ramp up in time for Christmas.

Peter Heckmann from Stifel Nicolaus.

Could you comment a little bit again number one competitors, I've been reading a little bit more about competitors. PayPoint in the UK looking to file an IPO later this year, and then -- one competitor that was new to me more recently was called Natural Intelligence or Dial Time, (ph) they were saying they had about 7000 locations in Australia for prepaid and I had not heard of them before. Could you comment on how those competitors are positioning themselves in the marketplace?

And number two, I read a piece that Vodafone reduced their commissions payable to intermediaries from about 8 percent to 5.5 percent in Ireland effective August first. And realized Ireland is not as an important country to you know, but do you see that as an indicator that you will see that type of commission cuts perhaps in the UK and Australia or other markets?

You know, every market is different, and that is the difficult thing about our company and having a quick little elevator speech. In the UK, as you know about a year ago they reduced from 7.5 percent to 7 percent. But it isn't us or even our retailers that will give them pushback. The fact of the matter is probably 70 percent of all these top-ups happen through these big box retailers. And to those guys we have basically a transaction fee. So if the margins go down we don't lose any money. But these guys won't let the margin go down. That's an interesting thing when you think about something like 15, 20 percent of all of the UK's top-up goes through Tesco as an example and Tesco wants to flex they can tell the first mobile operator to drop their commissions and I'm not going to carry you anymore, and then all of a sudden that mobile operator has 20 percent less revenue.

So, the nice thing is we are kind of an intermediary managing 800-pound gorillas. And so I don't think it was one big fell swoop we're going to see this thing drop 5.5 percent. Our contracts also allowing the mom-and-pops that if there is margin reduction we pass that virtually 100 percent on to the retailers. So we are insulated to some extent. I don't expect it to happen very quickly; if you do see margin erosion. In the past they've done that commensurate with the volumes that have hiked up but I think actually the mobile operators might have a more difficult time in the future as scratch card become totally a thing of the past, and volumes start to flatten out. It will be a harder value proposition for them to make to the retailers. So we're really a service provider on behalf of everybody, and I'm rather optimistic on if this A, would even occur and two, how big it would affect us.

And then --

On that other competitor, I don't even know who they are. Sorry, they may have 7000 locations but they are certainly not doing the -- we're doing 50 percent of the volume in that country. So I don't know. There is about five or six other guys sharing the other 50 percent.

And as regards PayPoint, do you think --?

PayPoint is interesting. They are kind of -- they go into mom-and-pops, and they might be having an IPO, but I don't know how that changes anything really, other than they are owned by a consortium of utility companies, and maybe the utility companies finally want to get their money out. They have lost market share to us for the last year. When we turn on the post office, we stole market share. When we increased our other mom-and-pops, we stole market share. We did it at the expense of people like PayPoint and Alphyra.

It looks like British Telecom and the other utilities sold out their position to institutional investors late last week.

I see.

Mr. Robert Dodd with Morgan Keegan.

Several questions. First of all, can you tell us, was there any non-recurring items in Q2? You mentioned there was a $350,000 op profit gain from an incentive, I guess, in Q1, prepaid. So is there anything similar either in the prepaid or initiation fees on the ATM side or anything like that, a non-recurring items that might distort profits in Q2?

None nearly to that -- we always have a few little puts and takes up 50K here and 80K there kind of thing every quarter. That was a real big one because it was a super incentive given to us here in the U.S. that we were able to take advantage of. But nothing like that really in Q2.

Okay, and in the UK can you tell us the status of Vodafone scratch card inventory? Is it all gone, or is it still --?

I don't have the status numbers. My bet is it is gone now, Robert. They told us in the letter that we got from them they said they expected that inventory to be on the shelf for six to eight weeks, and it's been 12, 13 weeks since then.

Okay, and then moving onto Germany just quickly, you said several times sequential transaction growth 17 percent, just a clarification on the slide it said 9.8. Is the 17 right or is the 8.8 right?

I have to look at my slide. Let see if we made a faux pas here. Which slide does it say 8 percent?

Good question.

No, that is the U.S. is 8 percent, 8.5 percent.

On slide 20, as Germany developed like the UK.

8.8, that must be a mistake. That's a screw up, Robert. Sorry, that is 17 percent, not 8.8 percent.

Then also in Germany are you seeing a TeleCash show up at all? I mean TeleCash status owned operation over there drives 190,000 point-of-sale terminals, and they claim that they can all support mobile top-up.

That's not true. And I don't think that's what they claim or they would be lying. They have something like 4 percent of their total base is connected to do top-up now.

Okay, thank you.

We have been actually in discussions with them because they don't really get this top-up thing. They are an EFT processor, we have been in contact with them and maybe we can work something out with them or whatever, but they are certainly not pushing any volume worth counting in that country.

Okay, and then on the ATM side, can you characterize, try and characterize the contribution that you got in Q2 from the two ATM deals? Was it in for at least 1/4, a third, 3/4?

We kind of popped our number by about a penny a share on account of those two deals coming live earlier than we thought.

Okay, and then finally I know we always ask this, tax rate in the first half of the year now it has averaged about 37 percent. Is that about right for the full year?

Robert, we actually saw a little bit of a reduction in our effective tax rate in the second quarter, which was driven by the stronger than expected growth out of the outsourcing deals. Because in those deals they are either in no or very low tax rate countries. So as we continue throughout the year we do expect that our mix of profit from the higher tax rate countries will be just a little bit higher. So we would expect to see that our effective tax rate continuing through the balance of the year will be about what our year-to-date number is so far.

Okay, and then just a final question. Would you expect or hope to see prepaid revenue growth accelerate sequentially as Germany, Poland, U.S. et cetera (indiscernible) and are we going to tick along this lower growth rate --.

No, no. I think, Robert, we will see it kick in. We did have some decent revenue growth. If you would take out the onetime kind of margins, the benefit that we had in Q1, and you take out some of these investment areas that we've made in Australia and Spain and so forth, we basically gave up there's really about a 2 cents a share impact that we would have had if we didn't do either of those. So really it looks like our operating profit was flat. Probably would have been closer to up $700,000 had we not consciously made those investments or not have that 350,000 onetime deal in Q1. So really that's why we feel good. It is going nicely just as we said. And as we move into Q3 and Q4 lighting up more terminals, it's going to only accelerate.

Thanks.

Tim Willi with A. G. Edwards.

Mike, in the ATM business just going to your commentary about people watching, Polish and Romania conversions and maybe higher interest levels coming out of that experience in terms of staffing and conversion teams, can you give any sense as to how that may have grown over the last year as you had some very strong pipeline signings. And to the extent that it was material on a relative basis are you inclined to keep people on staff to prepare yourself for the eventuality of maybe signing another major deal at some point in the future? And I guess just your thoughts on making sure you have the resources there ready to go even if that large contract may not materialize in the near-term timeframe.

Basically our staff at our operations center in Budapest has stayed, actually gone down slightly over the last two years. So we are doing more with less. We are ready for that next contract. We will implement it, pretty darn quick with the people that we have. The only staff that went up by virtue of these two deals were I think we added one or two people in Poland just for the local management of so many more transactions. And we did not have a full Romanian team, so we've added about ten or twelve people to do the back office and the local coordination. But in our operations center you give me another contract, I'll hook it up with who I have right now.

What is the finder's fee?

I will negotiate that off-line. Probably be more than you make right now.

On the Polish prepaid market, in terms of talking about investments and new money to ramp up revenue growth in other markets, as you look at Poland and it's making a small profit and it's obviously a fairly sizable population, do you see things that may make you think about accelerating investment there in terms of feet on the street and systems? Or are you pretty comfortable that what you've got in place there can handle the job relative to what you are seeing?

In Poland we are utilizing third parties like manufacturers rep kind of guys or people who go out there and help us find retailers, we are using our own staff, we need the retailers as well. Another thing that has helped us in Poland is a lot of the places that sell these cards are these little kiosks and they have got electricity but they don't even have a phone line. So now having a GPRS terminal has given us the ability to get into those kiosks with a value proposition that is really unmatched in the marketplace. So I think that add another 500 on top of the 1500 or so that we have in last quarter is good, we're getting -- we're attacking the high-quality sites first. There are some chains. We lit up (indiscernible) a giant big food store chain but that was only 17 locations. But they are all hypermarket locations in Poland, so we will see more of that happening here quickly. I think we are doing a lot and I think Poland is going to be good but we're going to win that game in Poland.

I think they are telling me we're on for an hour now. I'll take one last quick question, and then we are going to shut down.

(indiscernible) with Boston Partners.

You were talking in response to Pete Heckmann's question about the contract structure you have with the mom-and-pops in Europe. Were you saying that you, if there were to be some margin compression coming from the cellular guys that you would have to absorb that margin compression in your contracts or (multiple speakers)?

Our contracts provide that we pass that margin compression to the retailers through it and they get 100 percent of that burden.

They get the burden, so you have (multiple speakers)

Yes, that's correct.

That's all for the questions. I would like to thank everybody for taking the time today. I'm looking forward to next quarter and posting some new numbers on the board here. We are pretty happy on this end, so thank you for taking your time.

Ladies and gentlemen, this concludes today's conference. You may disconnect your lines at this time.