Euronet Worldwide Inc (EEFT) 2004 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Euronet Worldwide Third 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 * zero on your telephone keypad. As a reminder, this conference is being recorded.

It is now my pleasure to turn the call over to your host, Mr. Jeffrey Newman, EVP and General Counsel of Euronet Worldwide. Thank you, Mr. Newman -- you may now begin.

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

Before we begin, I'd like to make our disclaimer concerning forward-looking statements. During this conference call, representatives of Euronet Worldwide will make statements regarding 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.

Our 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 our products or services, foreign exchange fluctuations, and changes in laws and regulations affecting our business.

Additional explanation of these factors or other factors affecting our results are set forth from time-to-time in our periodic reports filed with the US SEC, including but not limited to our Form 10K for the period ended December 31st 2003, and our Form 10Q for the period ended March 31st 2004 and June 30th 2004. Copies of those filings and other public filings with the SEC may be obtained by contacting the Company or the SEC.

Now I'll turn the call over to Rick Weller, our CFO.

Jeff, thank you. And welcome, everyone, who have joined us for this third quarter results call. We turn to Slide 4 and we'll get started.

Euronet's third quarter revenues were $99.9 million. Operating income was $10 million. EBITDA of $14.2 million and earnings-per-share of $0.16, excluding FX and loss on early retirement of debt.

The revenue of almost $100 million dollars represents a 15 percent increase over the second quarter of 2004, and an 88 percent increase over the $53.1 million reported last year in the third quarter. The $10 million in operating income reflects a 35 percent increase -- over $7.4 million for the second quarter of 2004 -- and a 170 percent increase over the $3.7 million produced in the third quarter of last year.

$14.2 million in EBITDA is a 31 percent increase over the $10.8 million of the second quarter of 2004, and a little more than 100 percent increase over the $6.8 million posted in the third quarter of 2003. And in this quarter, Euronet posted $0.16 per share as compared to $0.12 a share reported in the second quarter. Again -- all excluding the effects of FX, disc ops and debt retirement losses. These per-share earnings represent a 33 percent increase over the last quarter and a 167 percent increase over the third quarter of last year.

Now let's turn to Slide 5 to see revenue trends. Here on Slide 5, you can see that Euronet continues its sequential revenue growth, with a third-quarter growth of 15 percent. On Slide number 6, here we would present our trended operating income and EBITDA. Again, consistent with prior quarters -- Euronet continued to post improvements in both its operating income and EBITDA. And you can see the significance of the leveragability of the top line to the bottom line.

Moving to Slide number 7. As you know, we operate and manage our business in three primary segments. EFT], Prepay and Software. And we will address the total business by reflection on the contributions of each of these segments.

Moving to Slide number 8. You can see that in the third quarter, we continued to post strong improvements in transactional growth. This represents a 20 percent increase in transactions processed over the second quarter of 2004, and more than a doubling over the transaction levels processed in the third quarter of last year. These increases are attributable to the continued growth in the prepaid segment -- the full-quarter benefits of the second-quarter implementation of large outsourcing agreements in Poland and Romania, and the transactional momentum developing in the India market.

Let's move to the Segment Operating Results on Slide 9. As you can see, all segments posted improved sequential revenues, operating income and EBITDA. In racing jargon, we're hitting on all cylinders.

I'll mention a few highlights behind the segments, and Mike and Dan will take you through a more thorough discussion in just a few minutes. EFT business benefited from several things, including the full-quarter benefits of the second quarter's installation of the Polish and Romanian outsourcing agreements. Growth from the incumbent base of EFT customers through the addition of ATM and increased transactions, and from advances in our Indian operations.

In the prepaid segment, we had sequential transaction growth in all markets. And, as noted in our press release, we had stronger-than-average terminal sales in the German market. These strong sales contributed an additional $700,000 in gross margin, which fell directly through to operating income and EBITDA. Aside from the incremental operating lift in the quarter, we should as well benefit in future quarters from the stream of transactions that are produced from these terminal sales.

I'll also note here, in the prepaid segment... And you may recall that in the second quarter, we referred to some non-recurring margins that benefited the first quarter and not the second quarter. Here in the third quarter, we noted for you the better-than-average terminal sales. While these items caused some fluctuations between quarterly margin percentages, when we analyze the prepaid segment without these discreet items, we see that our operating margin as a percentage-of-revenue has remained constant -- at about 9.5 or 9.6 percent over the last three quarters.

Our corporate expenses remained relatively flat. And you can again see here the significant improvements in EBITDA, quarter-over-quarter -- which serves to further strengthen our free cash flows. In summary, through the gains in every segment, our revenues improved 15 percent quarter-over-quarter, and EBITDA 31 percent -- really reinforcing the leverage of all business segments.

Now, on to Slide 10, where we can discuss some balance sheet highlights. Our unrestricted cash increased from $32 million to about $37 million -- largely driven by operating cash flows, offset somewhat by debt payments and capital expenditures. Our total assets increased approximately $42 million. $5 million came from improved cash positions, $10 million from acquisition investments in the prepaid segment, and the balance from fluctuations in the prepaid trust accounts and operating accounts driven by higher revenue streams.

You will note that our debt has remained relatively the same. Debt was reduced because we repurchased another 4.4 million of our 12 3/8 bond, and it increased for some capital leases we took on. I'll discuss this in a bit more detail on the next slide.

Total shareholder's equity improved by about $18 million, as a result of net income, together with stock issued in connection with exercise of options, employee stock purchases and stock issuances in connection with the CPI acquisitions and the earn-out related to the AIM September 2003 acquisition.

With regard to our key financial indicators, you can see improving results along all debt-related metrics, with debt-to-total capital now at 36 percent. And we are now in a position where one year's EBITDA almost covers debt. On Slide 11, more details on debt.

Here in Slide 11, you can see several reconciling items, as we roll debt forward from the end of second quarter. FX caused our debt to increase by approximately $700,000 -- as a result of the dollar weakening a couple points against the Euro. You can also see we took on an additional $2.2 million in capital leases, which largely related to the EMV upgrades of our Germany ATMs, and we paid down another $4.4 million in high-yield debt. We also drew $2.5 million on our line-of-credit, at low single-digit interest rates, to help offset that 12 3/8 debt. In addition to the bond retirements, we also made in the third quarter another installment payment on the Precept acquisition note.

On the next slide -- Slide 12 -- you can see that of our roughly $71 million in debt, about $53 million relates to the combination of high-yield, acquisition and short-term debt. $18 million relates to capitalized leases we have in place, which are largely to accommodate Type 2 outsourcing agreements. While we are required to account for these as liabilities, these leases are directly tied to Type 2 agreements, and are recovered over the term of the contract. And you will see that we continue to make reductions in our total non-operating debt.

On the new developments front, you may have read a press release yesterday that we have signed a 2-year, $40 million revolving credit agreement with Bank of America. This agreement allows us to borrow in 3 currencies -- the US Dollar, the Euro and the British Pound, which will allow us to naturally hedge our obligations with our free cash flows.

This revolving credit facility will bear interest on a variable basis, which would currently be about 6 percent plus deferred financing costs. We can use the proceeds from this facility to retire existing debt, working capital, acquisitions or other general corporate purposes.

Our improving credit statistics and strong cash flows, as noted on the prior slides, has been instrumental in us being able to structure this agreement. We believe this agreement will allow us to continue to improve the structure and the cost of our capital.

On Slide number 13, I'll recap the per-share earnings. Our third quarter came in at $0.16 a share -- up from the $0.12 a share we reported in the second quarter. In arriving at our $0.16, you will notice a small increase in our effective tax rate for the quarter. This was the result of providing for the resolution of certain prior-year tax matters, and will not recur in the fourth quarter. We expect to see the fourth-quarter effective tax rate to return to approximately 35 percent. This $0.16 was a bit ahead of our expectations -- driven by advances in all segments, and on balance, produces a solid $0.16 recurring earnings-per-share.

I'll now turn to Dan for the EFT operating discussion.

Thanks, Rick. If we could just go ahead and move ahead 2 slides, to Slide number 16 -- just go ahead and push through this presentation so that will give us a good amount of time for questions.

Slide 16 graphically shows our consistent and improving quarterly operating income and EBITDA results for the past 7 quarters. For the past 2 quarters, our operating income in the EFT division has increased by more than $1 million USD sequentially each quarter. Consequently, our Q3 operating income is more than twice that of Q1, just 6 months earlier.

This strong improvement has come from a combination of improved results in India, implementation of some large ATM outsourcing agreements, growth in ATMs and transactions from existing customers, and continued costs control.

I want to flip to the next slide. Slide 17 has EFT results that speak for themselves. Again, we are very pleased with our quarter-on-quarter gains. Our revenues in the third quarter were up 16 percent from the second quarter, and provide a nice flow-through to operating income, which consequently is up 35 percent over the prior quarter. The resulting $4.2 million in operating income in the EFT division is more than twice that of what we showed just 6 months ago in Q1. So our compliments to our EFT teams in both [inaudible] and India for making such solid strides this year in those businesses.

Next slide -- Slide 18 -- outlines some highlights from our EFT business. This quarter, third quarter, we received a full quarterly benefit of the two large ATM outsourcing contracts in Romania and Poland -- which added 1,353 ATMs to our network. I think it's important to note that although we've completed the takeover of the banks' existing ATMs, that these contracts on both calls for the banks collectively to add an additional 300 ATMs to the network over the next 18 months. So we can expect even more growth from these contracts in the future.

Thanks to these contracts as well as good, strong organic growth, we saw transactions jump 30 percent over the prior quarter. And as earlier mentioned, this transaction jump helped to contribute to the more than 35 percent growth in operating income over the prior quarter.

We also signed a contract with Raiffeisen in Albania. What's nice about that is that's the fifth country that we now provide service for Raiffeisen in. And we continue to enjoy a great relationship with this bank as they expand throughout the region.

Finally, the final highlight framing is we renewed a contract in Poland with Lukas bank, for a multi-year ATM outsourcing agreement. Although this contract is not large by current measurements, it has reconfirmed our confidence in our revenue stream and our ability to renew contracts. And I'd like to point out that in EMEA, we do not have any significant ATM outsourcing agreements coming up for renewal in the next three years.

Up to the next slide -- Slide 19. Some highlights on our business with India. Now, Cashnet is our branded shared ATM network, and will resupport transactions between the banks that are members of Cashnet. Think of this as a [quarter lag] or a MAC or a NYCE or a Pulse Network here in the US.

We currently have nine members of Cashnet, 7 of which we have brought live, and have 3,400 ATMs in India linked together through Cashnet. This represents about 20 percent of the total ATMs in the market.

This is new, but we are working together with the banks, and we're building good consumer awareness. And transactions -- although we're starting from a low base -- are growing at about 10 percent month-on-month, right now.

Also, we've reached the mark of 582 outsourced ATMs in India with 4 member banks. We have an additional 280 ATMs under contracts with these banks, which will be implemented over the next 12 months. And finally, a major milestone was reached by a team in India with the generation of positive operating income in September.

So after 24 months of investment, we crossed that magic line. And due to the recurring nature of the revenues, we expect India will be producing positive results from this point, forward. So congratulations to our team in India.

Next slide. Slide number 20. Since our last call, we've added 307 ATMs. You can see that we have actually more than twice that number -- 655 -- listed in the "Under Contract" column. This number in the "Under Contract" column shows the number of ATMs or banks that have committed to add our network over the next 18 months. So that's, if you will, a backlog equal to 12 percent of our current base of ATMs.

And in addition to a good backlog, we have our sales teams out there working hard, as always, continuing to fill our pipeline with more ATM agreements in all of our existing markets, as well as some new ones.

So that's the highlights of the EFT business. Now I'll hand it over to Mike, to give you the highlights of the prepaid business. Mike?

Thank you, Dan. If you could move on to Slide number 22, you can see that the prepaid processing segment had a strong jump in both operating income and EBITDA in the third quarter of this year.

Next slide. Slide number 23, please. We'll first hit some of the prepaid financial highlights. Revenue. $75.4 million -- that's up 15 percent over last quarter's $65.6 million, and is up 107 percent over the $36.5 million from the same quarter last year.

Operating income was $7.7 million -- up 22 percent over Q2 '04's $6.3 million. And it's up 157 percent over the $3 million that we posted in our prior-year Q3 '03. Of the $1.4 million increase in operating income -- Q3 over Q2 -- $700,000 came from growth and recurring transactions, and the other $700,000 is attributable to stronger-than-average terminal sales in Germany. And as Rick said, we expect that these terminals will, of course, increase our ongoing German transactions. Just as I've said before a number of times, the more terminal sales, more ECR integrations -- both of those things fuel the ongoing transaction growth, and that conversion from scratch cards to electronic top-up in the market.

On EBITDA. $9.3 million. It's increased 21 percent over the $7.7 million in Q2 '04, and increased 138 percent over the $3.9 million in Q3 '03. All these numbers certainly are numbers to be proud of.

We'll move on to Slide number 4 and we'll hit kind of the business highlights kind of market-by-market. UK is our biggest market. It remains strong, with growing transaction volume. We continue to launch new products. We launched E-Voucher products with 2 mobile operators -- T Mobile and Virgin Mobile, in the UK.

We also had a new agreement that we wanted to mention, and it's with Napster. It provides vouchers for the purchase of online music. We are adding this service across two large retain chains, which brings another prepaid service across existing terminals -- no CapEx -- no real investment. And this one could be quite interesting for us, and we'll keep you informed.

We'll move on to Germany. Our German subsidiary, TransAKT, has had a very busy quarter. On our last call, we mentioned the signed contract in early Q3 for 11,000 electronic cash register terminals. I refer to these sometimes as ECR terminals.

The rollout of these terminals is underway. About 2 weeks ago, we turned on approximately 3,100 of these 11,000 terminals, and we're slated to have another 5,000 terminals rolled out in November. The remaining balance of a bit less than 3,000 terminals should follow in early 2005, in first quarter.

We obtained a certification, as well, for our combined tobacco/prepaid vending machine -- which allows our prepaid products to be sold at a number of locations 24 x 7. Transactions increased significantly quarter-on-quarter, despite a seasonal dip in August. In Germany, as in a number of these European countries -- particularly the northern ones -- August is a very popular month for vacation. A lot of people kind of leave the country and go to warmer climates.

In Poland, another large market for us -- and of course the largest market in Central Europe -- we added approximately 1,000 terminals in the third quarter -- which almost doubled our count. We also have a pilot underway in a major supermarket chain. So we're continuing to [inaudible] market. We continue to grab market share. Early market share. And we intend to control a large part of this market when it comes to electronic top-up.

Okay. Move on please to Slide number 25 in Australia and New Zealand. Australia prepaid business is strong, with increasing transactions. And we implemented approximately 400 new terminals in some retail chains. But additionally, we also added almost 400 terminals into independent retailers. In the US, we call them mom-and-pops. In Australia, we call it the route market -- which is a new focus for us in Australia. So we're happy about that.

In New Zealand, the mobile operators are starting to embrace the electronic top-up by offering better terms for e-top-up versus scratch-off cards. Better terms mean better commissions. When mobile operators add such incentives, our transaction growth is fueled. We've seen that happen in a number of markets.

Moving on to the US. In the US, our paid spot division -- we're seeing strong organic growth both in our POS network numbers and our transactions. And we had additional contribution from our July acquisition of CPI -- Call Processing, Inc. You'll also notice in the US that the POS network grew by 41 percent to 12,000 terminals, and it grew 25 percent even excluding the acquisition of CPI in that contribution. So we had strong growth just organically here in the US, as far as laying out these terminals.

In Spain -- let's move on to that. It's starting nicely. We have 75 terminals rolled out to date. Remember, in this market, we're currently targeting the tourist market and cross-border selling of prepaid top-up, and we have now validated consumer acceptance of our user-fee model. So this could be quite interesting for us as we continue to work this model through Spain and perhaps other countries, as well. We do plan on continuing our investment in this market.

Move on please to the next slide. Kind of a... Here are the numerical totals for prepaid processing. We did 20 million transactions averaged per month that were processed in Q3. Transactions grew 10 percent Q3 over Q2, in same-year. We have more than 168,000 POS locations that are now supported at 79,000 retail locations.

Next slide, please. We'll jump over here to the software solution segment, which is our final segment. Then we'll wrap up the presentation. Software is moving along nicely. We posted improving results in revenue, in operating income and in EBITDA. We have a comfortable backlog of $5.0 million. The software's doing just what it's supposed to do for us -- giving us profits and moving along nicely.

Move on to the next, which is the last slide -- our summary. In summary, I can't tell you how pleased we are with our quarterly results. We've exceeded EPS expectations for the quarter, with a $0.04 improvement over the prior quarter, which is up 33 percent -- up to $0.16 a share -- excluding CapEx and loss -- FX loss, discontinued ops and debt retirement.

We continue to have consistent quarter-on-quarter improvement, including a 15 percent sequential quarterly revenue growth, a 35 percent sequential quarterly growth in our operating income, and a 36 percent sequential quarterly growth in net income. All three numbers, we're proud of.

We are particularly pleased with the growth in our EFT processing segment. In EFT, we had a 30 percent quarterly increase in EFT transactions, which contributed to the 35 percent quarterly growth in that segment's operating profits. This shows the strong leverage we have in this segment. Our prepaid processing segment continues to have strong transaction growth -- up 10 percent this quarter over prior quarter -- which contributed to the 22 percent quarterly growth in the prepaid segment's operating profits.

We continued to increase our cash position this quarter, and we reduced our 12 3/8 debt. With yesterday's announcement for the increase of our credit facility with Bank of America, we have an opportunity to improve our capital costs considerably, moving forward.

Finally, as far as some guidance, we expect our fourth quarter earnings-per-share to improve by approximately $0.02 compared with this quarter's $0.16. So we're targeting approximately $0.18 for Q4 of this year.

That concludes our presentation portion of this call. We'll now open the floor for questions, and I thank everybody for their time in listening.

Thank you. Ladies and gentlemen, at this time we will be conducting a question-and-answer session. Franco Turrinelli, William Blair & Company.

I have a couple of questions for Dan and maybe I'll come back afterwards with some prepaid questions. Dan, as you look at the "Under Contract" total of 655, is that total a firm "under contract" number? Or is that kind of your assessment of the opportunity out there. If it's not your assessment, how much more do you think you can get from your existing partners?

That is actually a firm, under-contract number. But I want to be clear that these are not existing ATMs that these banks have. These are numbers that the banks have committed to us that they will add, based on the numbers they have, in terms of branches that don't have ATMs. Or, for example in India, where the bank has actually asked us to deploy ATMs on their behalf. They've given us hard numbers to go out and find sites and deploy that number of ATMs. So it is a solid number.

In terms of additional headcount, without exception, all of our banks that we can provide outsourcing for from time-to-time are going to have probably some growth to add some branches and such. So we'll have organic growth on top of that number from our existing bank contracts.

Dan, do you feel that you're sort of -- "tapped out" is the wrong word -- but where do you expect new growth to come from? Is it going to be more from leveraging existing relationships with Raiffeisen and the high bill of [reins] or is it going to be new banks? Is it going to be new countries? As you look at the mix -- 18 to 24 months -- where do you see that growth coming from?

It's going to come from all three of those fronts. We've got some great relationships with the multinationals. I think Raiffeisen a perfect example. I mean we're providing service to them in 5 countries. And I love the fact that they go with one service provider that will hit all of these countries for them.

So we've got those banks that are in essence delivering us new agreements -- new markets. Those banks are actually asking us to go into new markets. So what we have there is -- we'll enter a new market with a contract in hand, with one of these existing multinationals. That will open up that market for us to sign new banks in those new markets.

We have other new banks that are not multinationals, in some of our existing markets that we're going after. And then India -- and we're really at the beginning of that hockey stick in India, when it comes to ATM outsource agreements. There are 18,000 ATMs in India, right now, projected to grow up to 40,000 in the next couple of years. We are the leader in India when it comes to this full-service ATM outsourcing.

Talking about India for just a moment longer. Can you help us understand the revenue model for Cashnet a little bit better? I'm assuming it's different from the outsourced ATM model.

It is definitely different. And the cash [inaudible] is real simple. It's just a -- like I said -- it's like a MAC or a NYCE. When we are just simply switching transactions between member-bank owned ATMs. So it's just a small click-fee transaction. So obviously it's going to be a very high-margin business, but low revenue.

And I might add, too, that this is both ATMs that we drive... Remember there are 3,400 of them or so. And ATMs that they might even drive. So we're connected right into their switch with all these member banks. So we're not just limited to the ATMs that we're deploying in that market.

Tony Wible, Smith Barney.

Great quarter. I've got a number of questions, here -- starting actually with this Napster agreement. Can you just go into a little bit more detail? Is this an agreement that you expect to have some infrastructure in place by the holiday season. Is the deal exclusive? And can we expect to see potentially anything in the domestic market on that front?

Our own -- To date, we only have... There's a prepaid mentality in the UK. Everybody knows they go to all these retailers to get their prepaid top-ups and buy a few other things. So adding Napster to that was not a big stretch -- especially because so many of these kids have telephones -- prepaid telephones.

I'm not sure if it's exclusive. I'm sorry about that. I think we do hope to be live by the holidays. And we have some interesting expectations for this, but we're just kind of in a wait-and-see. Basically, this is for kids who want to download music on their computers. And they can buy -- they can buy that time from us at any of our locations that we offer it. And we've got two large retailers. We should be announcing within the next couple of weeks what that official Napster announcement that they'll do in the UK as they launch it.

Do you feel that might actually give you some leverage within the US market, to potentially increase the e-top-up in some of the convenience locations?

It could give us some -- it could give us some leverage. I mean it is indicative, though, of just that -- of what we do. We've laid down this infrastructure. Adding new products to it doesn't cost much. It's like virtually 100 percent margin flow through kind of business.

And we'll try -- we'll see if we can leverage it into other countries. But it's not just that you want to do it here. The market's got -- it actually has got to play out and make money in each of the markets, too.

Then just the last question has to do with...

Why don't we just send you one of those Napster gift cards for Christmas? Eh, Tony?

Oh, sure. As long as it's underneath a certain amount.

Right. I only want -- you know -- age-appropriate material downloaded, though.

One last question and I'll let somebody else jump on line. But now that you're finally seeing the growth in the indirect channel versus the direct channel... You've historically been in the e-top-up business. Can you comment on just the willingness to support the product by the people who will ultimately be reselling the product? So I guess whatever -- the tobacco companies or the scratch card distributors. It sounds like with the terminal adoption, that it's been strong. I just want to get some more additional color on the difference between the direct versus the indirect.

Well, you know we have an indirect. Basically, you have a direct model mostly all in the UK. And in Australia. Our Germany model from the very beginning has been indirect. We've gone through distributors and we've done the transaction processing for them, so it's more of a transaction click fee than a percentage. Adding the tobacco guys -- that's just one more in a similar kind of vein.

We don't necessarily like one over another. They both work. And actually in Germany, that's the way the mobile operators want to play the game over there. So we're happy and we're flexible enough to do it either way. The nice thing is, excluding our costs -- if you take into consideration the cost of collection that we have in the UK -- our transaction fees really on average don't differ much, market-to-market, when you get -- when you end up with net commission versus transaction fees.

And the companies you're working with on the indirect side are viewing you not as a competitor, but rather as a value-added partner?

Not really. And the mobile operators have been real clear about this -- that they want these distributors to go through ourselves. They don't want to have 15 different people connected into their accounting system. And you saw that in the UK -- very similar kind of mindset. Even though we go direct, the reality is the mobile operators have only granted five licenses in the UK to do electronic top-up.

Peter Swanson, Piper Jaffray.

Congratulations on the good results, guys. Question about the $40 million line-of-credit and improving your funding costs. How should we think about that from an interest-expense basis, next year? Is repaying some of the 12 3/8 debt one of the highest priorities for that? How should we think about that?

Well, Pete, we adjust like we said -- announced it yesterday -- signed it on Monday, here. So we've got to kind of sort through that. I think that as we said in here, it does give us the opportunity to substantially improve our capital structure and cost-of-capital. And I think that that would be an item that's toward the stack of our list of opportunities to leverage that $40 million line-of-credit, together with the $37 million in cash that we have on our balance sheet.

Okay. That sounds fair. Switching to the prepaid segment -- flat sequential operating margins last few quarters, as we back out some of the 1-time issues. What is your outlook for that, going forward, as we have the mix of business changing more from Germany, et cetera? Should we expect that to remain flat? Do you expect that to start to walk up? Just help me think through that.

Well I think that it should remain constant to potentially improving, as the strength of the Germany business takes foot. Takes hold. And in the US, where we currently enjoy higher margins in the business. So yes, we would expect to see some constant-to-upward tilt.

And one last question on prepaid. Can you give me a rough breakout of the $75 million in revenue? How much would've been US versus Germany versus traditional e-pay?

You know, Pete, we stopped breaking that out. We'll have some of that in our queue. We're going to kind of do the minimum, and let me tell you why. It's not going to make your life more difficult. But what we're finding here is that we're the only publicly held top-up provider in the world. And in each of our markets, these local guys try to latch on to anything that we say and do, and use that against us.

So we've found that it will probably -- starting at this point -- with the exception of what we're required to do with our SEC filings, we're going to try to blend these together into kind of a geographic kind of way, so that these... So we can continue to be competitive, gain market share and not let people use it against us. Being number 1 in the world is a little bit painful if you're -- if you're publicly held and they just keep sneaking around and saying, "Oh, they're making too much money off you."

[inaudible /crossing] That certainly is understandable. Thanks guys -- congratulations on the good results.

You can see the benefit, though, of being number 1. We made a lot of money.

Absolutely.

Robert Dodd, Morgan Keegan.

Have a question -- more detail than anything else. You said you've got no contact from the ATM side up for renewal for the next several years. How about on the prepaid side? Any big retailer contracts up for renewal?

On the prepaid side, since its inception, there are always contracts up for renewal. They -- these contracts last probably typically about 2 years to 3 years. So they're always -- they're always coming up.

The nice thing is, we've really never lost one. So we're going to just keep being competitive, as we are. We've got the economies of scale working against us. We add new products like Napster and things like this to help differentiate us from other people. And so that's kind of -- this is just kind of our life, there. I mean people think that contract renewals are a new thing. It's something that e-Bays' dealt with really since its inception.

Let me try that from another angle, being a bit more specific. How about the top 5 or the top 6 grocery-store chains in the UK? [inaudible] business. Any of those up for renewal in the next year?

Well Robert, maybe I can answer it a little bit differently. If we take a look at the percentage of revenue that we have coming up for renewal, somewhere between about 30 and 35 percent of our prepaid revenue will renew next year, under contract.

Then the last six quarters, you gave us a breakdown revenue EBITDA of profit from India. Is there any chance we can get that again this quarter?

Okay. If I may. I'm just kind of curious because I'm doing it on an FD standpoint.

[inaudible / crossing] Yes. Let's see. Maybe [inaudible] to say...

[inaudible / crossing] India -- India had in Q3 about $2 million in revenue. And I'm saying -- I'm saying India. I really should say Asia. Because that includes the overhead from Asia, incorporated, as well as Indonesia. $2 million in revenue and about a negative $200,000 in op income and EBITDA.

And about $100,000 in EBITDA.

Yes. You're right.

So about $200,000 in op income and about $100,000 negative in EBITDA.

Then looking at the tax rate for next year -- you kind of said 35 percent for the fourth quarter. Is that going to be flat? Or is it going to creep up if Germany begins to grow or grow faster on the prepaid side of the business? Will the tax rate drag it up a little?

Good question. And Germany will obviously add to the mix. But as you know, we operate in a number of countries that have some very positive effective tax rates. You know -- Poland --

Hungary's only 18 percent...

Hungary. Some of these countries are in the 16, 17, 18 percent. And maybe even 25 percent. So we expect to see that the growth and the full-year benefits of the revenues out of those countries that were contributing into partial years this year will give us a possibly -- certainly consistent-to-downward movement on the effective tax rate.

As you know, Germany's only one. The German prepaid business -- although as we expect it to grow a lot -- is just one of our prepaid businesses. It's offset by the prepaid business in the US. We're in effectively a low tax right now because of our NOLs. And then we've got all the EFT stuff, which is in general in lower tax-rate country. So when you kind of blend all the earnings together, that's how we end up with the trend flat-to-down.

Kim Willi, AG Edwards. Please proceed with your question.

Couple questions first on the EFT business. Just looking at revenue -- I'm sorry -- transactions per machine. You've been clicking off 30-plus percent growth, now. Which is a lot stronger than I guess I would've envisioned. And I'm curious if you could talk a bit about getting behind those numbers. Any kind of statistics you can share in terms of you elevating the transactions and revenue for customers that you've recently brought on? And then also just sort of looking at maybe the older parts of the franchise in Poland and Hungary. And what you're seeing from those machines. And then I have a couple of follow-ups.

In terms of elevating the transactions from the [used] machines, I have no -- maybe I would say that we probably are elevating them slightly from the fact that we're -- we always improve the uptime of those ATMs, once we bring them on.

But I think that the real strong growth of transactions comes from when we take over a bank's ATMs that are in branches. Those typically do much higher transactions-per-ATM than say one of our independently deployed off-premise ATMs. So I think that's what you've got. You've got these 1,300 machines that came on or bank-owned, branded, branch machines that had higher transaction volumes per ATM than our average of our own deployed. So you've got that factor.

In Poland, of our roughly 400 ATMs we have in Poland, we completed some network participation agreements this year, and brought it live to where there is -- it's attractive from a fee basis for customers of banks who have joined our network to use our Euronet-branded machines. They're very conveniently located. So we've seen good transaction growth on those machines.

I will say that then the final point on terms of transactions on -- as you mentioned -- our historic ATMs -- well, let me say two things. Historically, ATMs on other ATMs that we have under outsourcing agreements that we've had for a number of years -- you are seeing transactions go up on those ATMs, just as card-issuance in these markets continues to grow, and the customer base of these banks continues to grow.

But one final point on Germany. I will say that on the 400 ATMs that we have in Germany, because the economy in Germany is so painful right now -- those ATMs are all deployed in [inaudible] retail locations. Where you've seen footballs in those locations has dropped, our transactions on those ATMs has dropped. We've managed to more than offset that drop in transactions, with reduction in our costs of operations with the new sponsor bank agreement and also with the slight increase in our fee-per-transaction. So Germany's continuing to perform and improve. [inaudible / crossing]

As they have every year since we've had them.

Absolutely.

Would you say then -- so let's say we're looking forward a year from now. There have been no major new contract wins on the ATM business...

Now, wait a minute, Tim Willi. Just -- just bite your tongue.

I'm sorry.

You actually sound like you're running for office!

I've got a whole bunch of sales guys that are on payroll. Should I just go fire them all? Is that what you're saying?

No. Let's...

Then don't make an assumption we're not going to close anything between now and a year from now.

But just to make that assumption, and to illustrate your point -- it's for Tim?

Yes. I was going to say, "Let's see some press releases, then!" But would sort of same-machine growth probably moderate would you say like low double-digit transaction growth, once we get past the boarding of all these machines?

I mean clearly it wouldn't be 37 percent.

Are you talking an annual number?

Yes.

Yes. I would. I would say that would that that would be reasonable.

That's helpful. The second thing -- going to the PO as hardware sales. You look at the German market. You see the potential for ECR. I mean if you had to look out over 18-24 months -- what would you ballpark the aggregate contribution over that timeframe from terminal sales to be? Recognizing you can't predict it any given quarter, per se.

But are we just talking a couple million dollars of income over the next couple of years? Or could it be larger?

Income? Op income over the -- over a year?

I mean whatever kind of timeframe you're comfortable sort of laying out a thought on.

I mean a couple million dollars in total over a year, as we continue to have increases in sales may not be a bad number. I wouldn't expect it to be materially more than that. You know? It could be a little bit less. But I mean $2 million is a -- as a rough feel in terms of the margin produced from terminal sales over a year is not a bad number, maybe.

And then just one last question. Have you seen at all in let's say the UK -- but maybe even in Germany -- where there has been increased awareness in electronic top-up? Has that at all had any impact in people purchasing airtime over -- through an ATM? Now that people are much more aware of that method of buying airtime for their phones? Or more comfortable if they're at an ATM buying airtime electronically there than versus a couple of years ago when it was not such a prevalent part of mainstream behavior?

I think the simple answer is no. And here's an interesting thing, there. In the UK, which is obviously the most mentally with it, when it comes to doing electronic top-up -- although you've got to understand that probably 85 percent of those transitions happen with cash over the -- cash handed to a cashier. So an ATM wouldn't necessarily work. But there are a few ATMs in the UK that do top-up... Including our own. But the volumes have been insignificant.

But still, you know, a prepaid phone by-and-large is paid for in cash. So using a card to do it doesn't work in most all markets. And I don't -- from what I'm aware of -- I don't think there's a single bank in all of Germany that even offers it at the ATM.

Pete Heckmann, Stifel Nicolaus.

In the US, can you talk about how the US is evolving in terms of the competitive landscape, and what type of advantages you have in terms of size? Technology? If the market starts to look at more of a real-time e-top-up replenishment versus PINS and inventory. Does that give you an advantage over smaller players?

It's just -- it seems like there's been a lot of consolidation in the US market -- and clearly you're one that's emerging as one of the top five players. I was just wondering if there's some technology issues or some scale issues that are going to continue to put pressure on the smaller players.

This is Dan. Great question. How the market in the US is evolving. The consolidation in the US is getting close to done. You know 12 months ago, we looked at a -- we began looking at acquisition opportunities in the US, and pretty much everything we looked at -- we -- the things we liked, we bought. The things we didn't like, we passed on. And the ones we passed on have been acquired by one of our other competitors here in the US. And we think that the US right now is pretty much in the hands -- on the electronic top-up side -- pretty much in the hands of 3 -- maybe 4 players. We are one of those players. So any additional acquisitions here in the US we think are pretty small in nature.

In terms of our -- of our advantages that we have -- the fact that we do this worldwide in a number of countries and we do it many different ways -- I mean how we do it in the UK is different than how we do it in Germany, which is how -- it's different than how we do it in Central Europe.

We've got the technology really at our hands -- at our fingertips -- to implement the solutions as-needed, as the market here in the US evolves. I do think that the US is going to go to kind of a direct top-up model, directly connect to hosts for some of these carriers. But I think that's only going to happen when the carrier has enough phones out there and they're dealing with enough volume where it actually gives them some real savings once they do the direct connection.

When that happens, we -- I mean -- we do that every single day in other markets, so we certainly can do that and do that quickly. And that is a competitive advantage, I guess, to any other small players.

And even against the biggest ones in the US. Because the fact is, we currently process right now annually more top-up across some of our foreign subsidiaries, when added together -- it's in excess of the entire prepaid industry in the US. So if every single prepaid top-up that happened in the US all went through a single channel -- which it doesn't, of course -- it's scratch and electronic. It still would be a smaller volume than we process daily.

With that being said, obviously we still think the market in the US is a market that's going to have some pretty good size here in the coming years.

Our estimates are that probably on the electronic top-up side here in the US, through a combination of new phones that will be distributed and conversion from scratch card to electronic -- we think this market has fortified full growth ahead of it in the next 3 years.

We've just got to hope these mobile operators realize how much money they're leaving on the table.

Overall, on the prepaid side of the business -- when you look at the potential for renewals with retailers and the commentaries that suggest -- the competitors are suggesting to your customers that you're charging them too much money -- have you built in any assumptions as to either a mix-shift in the split with retailers? Or a slight erosion of the split? And so in terms of the prepaid business, would you expect that the gross margins in that business would be down slightly in 2005? Or do you think based on mix, volume or other issues, that you can keep gross margins pretty much the same?

No, I think Rick answered that. We expect them to stay flat -- to go up.

But it's considerable in the US, Pete. We've been careful to structure our agreements in a way that -- well we receive all these transactions stage costs regardless of what the carrier does on their commission. The commission rates in the US are significantly higher than in the overseas markets. And I believe -- this is my personal opinion -- is that they will always be higher than the overseas market, because the US is so fragmented, with so many carriers and so many operators. Whereas in these European markets, you'll have three -- maybe four operators. And they can all easily see what each other's doing and almost -- almost in concert. You know? Fixing or moving their prices. Here in the US, where you've got 8 national carriers and 30 regional carriers, there's always going to be somebody out there keeping high commissions in order to force their product.

And we see -- and I need to stress, Pete -- you know this idea of "competitors" has always been there. There's been 5 licenses granted in the UK since we started business. There are several in Germany since we started business. But we continue to acquire more market share and more transactions. And the nice thing is, as we add new products and so forth, we do it across the same infrastructure. So we've got full -- 100 percent flow through. So that's why we're able to be confident and comfortable about where our margins over the... at least over the next year to two are going.

Where I'm coming from is not that all of a sudden competitors are flooding into the market, but as you pointed out or as Rick pointed out in last quarter's call, is that you did see margin compression after a significant renewal -- based on one of your competitors trying to steal business from you in Australia. And I'm just looking at the statistics and seeing two competitors going public in Australia and the UK in the third quarter. I would assume they're better capitalized and are aiming for growth in the markets.

In order to do that, they're going to have to take some business from the market leader if they want to grow. So I'm just wondering if that -- if potential competition -- if you think potential competition could erode your gross margins -- or you'd have to give concessions on renewals with retailers on the split -- and in light of your answer, your answer is no -- at least not in 2005.

Yes. That's pretty much it, Pete. We certainly don't see it. And I'll [inaudible / crossing]

And to you point in terms of the competitive landscape in Australia -- you're right that that's probably going to get more competitive rather than less competitive. Where I think we have some confidence is we look at our two strong growth markets in Germany and the US. Both of which are on track to pretty soon eclipse Australia, in terms of size. And both those markets have great growth potential in front of them. So... Just kind of more the same as we continue to slug it out and win this game.

I think, Pete, as you can see in our third quarter, here, that we announced in the second quarter that we were going after the other vein of terminals over there -- that being the route market. We've already scored some successes, in that regard. So those volume lifts will, as well, help contribute to anything that we can see there, as Dan mentioned on any kind of margin pressure.

Thanks, Pete. All good questions. We've got about a minute left. Is there anybody else out there, or are we done?

Ali Mohammed, Boston Partners.

I don't understand a little bit this little idea of a little less disclosure. Because aren't you dealing with similar customers? Like isn't Vodafone going to realize they're paying you 7 percent in Europe and paying you 17 percent in the US? So you're probably getting higher margins? So I mean doesn't that help us as an investment community a little bit more to see what's actually going on, relative to the... I don't think they're reading your financial statements.

No, no. Actually you've got that mixed up with who we're worried about. Vodafone pays 7 percent to everybody in England. You know -- us included. They pay about 9 -- 8 or 9 percent to everybody in Germany. And in the US, they're going to pay in the teens. It's not the mobile operators. It's not the carriers. It's the retailers. And these are the guys that we have to split that commission with. And we want to make sure we keep our fair share of that commission.

So you don't anticipate any pressure coming from the mobile operators in the US? You feel like they're going to stay at that sort of high-teens level very comfortably?

Yes. Actually, in the US, we would expect over time that the margins that the commissions paid will come down. But we have the US agreement structured much like we have with our mom-and-pops in the UK, where we get our fee and then the retailer gets everything that's left. And so what that works out to be is that as volumes go up, a mobile operator might be able to drop volume -- I'm sorry -- drop commissions. But he has to -- he hopes that the volumes will more than offset that. Or he'll hack off the retailers, and like Dan said in the US in particular, it's so darned fragmented. You know? If a retailer's got a choice between selling T-Mobile at 12 and Cingular at 14 -- and I just made those two up -- he's going to see Cingular. It's just that simple.

I guess that's actually -- they're telling me -- they're waving their arms around here. So our hour is up. I want to keep this tight. I thank everybody for spending an hour with us today. We're excited about our results. And we look forward to talking to you after Q4 closes, in about 3 months or so. Thank you very much.