Euronet Worldwide Inc (EEFT) 2005 Q3 法說會逐字稿

Greetings, ladies and gentlemen and welcome to the Euronet Worldwide third quarter earnings conference call.

(Operator Instructions)

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 third quarter 2005 on this call. We have Rick Weller, our Chief Financial Officer, Mike Brown, our Chief Executive Officer, and Dan Henry, our Chief Operating Officer, with us today.

Before we begin, I would like to make a statement 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. Factual results may vary materially from those predicted or anticipated in such forward-looking statements as the result of a number of factors including competition, technological developments affecting the market for the company's products and services, foreign exchange fluctuations, and changes in laws and regulations affecting Euronet's business.

Additional explanation of these factors and other factors affecting the company's results are set forth from time to time in Euronet's periodic reports filed with the US Securities and Exchange Commission including, but not limited to, its Form 10K for the period ended December 31, 2004 and its Form 10Q for the periods ended March 31 and June 30, 2005. 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 over the call to Rick.

Thanks, Jeff. Welcome everyone who has had a chance to join the call. Let's get started on slide four.

For the third quarter 2005, the company delivered revenues of $137.4 million, operating income of $13.8 million, EBITDA of 19.6 million, and diluted earnings per share of $0.24, excluding FX. Each of these key P&L line items reflects significant year-over-year improvements. Revenues, operating income, and EBITDA improved by 38% respectively year-over-year and the company's diluted earnings per share, again FX gains or losses, improved by 50% from the $0.16 posted last year in the third quarter.

If we now move to slide five, we'll start to look at each area more closely. Here on slide five, not only can you see the third quarter 2005 improvement over 2004, you can see that sequentially year- over-year improvements continue as we look back to the third quarter 2003.

Let's move to slide six. Consistent with revenue growth, we see that our profit indicators of operating income and EBITDA continue to reflect our leverage of revenue growth to the bottom line. Given our third quarter's $19.6 million EBITDA, we are now approaching 80 million annualized EBITDA. And if you accept that the earnings that we get from the float of our prepaid business of approximately $1 million per quarter, the annualized EBITDA would exceed $80 million.

Slide seven, please. Here on slide seven, we illustrate quarter-over-quarter transaction growth. The 45% increase in transactions year-over-year has been instrumental in revenue growth I reviewed with you just a couple slides earlier.

We continue to see transaction growth in both the EFT and prepaid segments. For the EFT segment, this transaction growth has been stimulated by an increased number of ATMs under management, continued expansion of our key, multinational bank customers, and card penetration rates. And in the prepaid segment, growth continues as prepaid mobile subscription rates increase, scratch cards shift to electronic, more retailers are signed on, and more terminals are deployed.

Now on to slide number eight. Here on slide number eight, let's review our segment's year-over-year quarterly results. As you can see, our consolidated revenue year-over-year-- consolidated quarterly revenues and operating expenses year-over-year grew 38% across all business segments. Our sequential quarterly operating margins improved in all areas-- EFT, prepaid, and consolidated.

Starting with the EFT segment, revenues grew by 26%, with approximately a 57% improvement in operating income. As Dan will discuss in more detail, our EFT segment continues to see both top line and bottom line benefit from our success in both the European and Indian markets. We continue to add to our count of total ATMs managed, and have consistently seen improvements in transaction volumes. Moreover, we entered the fourth quarter with almost 1,000 ATMs under contract for installation over the next 12 to 18 months.

On the prepaid front, revenues improved by 43% year-over-year, while operating income improved by 20%. And you may have noticed that our average revenue per transaction decreased somewhat compared to last year and last quarter. It's a mixed matter. This is almost entirely due to the addition of transactions from our ATX acquisition completed earlier this year. You may recall that ATX processes transactions for prepaid distributors across a number of smaller markets. For these transactions, ATX gets about $0.10 per transaction, compared to about $1.20 we get elsewhere.

Additionally, as you know, Germany's growth, which again is largely transaction fee-based, contributed to this change. This mix change shouldn't be viewed negatively. In most all of our other markets, where we share about 80% of the mobile operator commissions with the retailers, in these markets, we only get a transaction fee. But that transaction fee has virtually no direct costs related to it. It's very high-margin business.

The 43% versus 20% difference in revenue growth and operating income growth is more than accounted for through increased operating investments we discussed in prior earnings calls. If you recall, we reported approximately $1.7 million as increased investment spend in the US, Germany, and Australian markets in the last three quarters to take advantage of emerging growth opportunities.

And our entry into the money transfer and bill payment business consumed approximately $400,000 in the third quarter of this year, whereas last year we had none. Further, you may recall that in the third quarter of last year, we benefited by approximately 700,000 from higher than average terminal sales in our German markets.

Regarding prepaid's growth margins, while not illustrated on this slide, as a percentage of revenues, it improved compared to both last year's third quarter and last quarter, the second quarter. Finally, as we suggested in last quarter's call, our operating margins in the prepaid segment produced, in this third quarter, the expansion we expected. We are obviously pleased with these positive directions.

Now to slide nine for a few comments about the balance sheet. Our balance sheet remained relatively constant through this quarter. Our cash increased by approximately $2.5 million. You may recall that toward the end of second quarter, we triggered our revolving line of credit on a short-term basis to accommodate cash flow timing, and we repaid it shortly after quarter-end. If not for this repayment, cash would have improved quarter-to-quarter by about the amount of the EBITDA, offset by cash-based capital expenditures. You can see that our total debt decreased by $14.7 million, as I just commented on, and our debt and capital ratios improved a bit over the prior quarter as a result of the revolver repayment I commented on, together with the continued EBITDA expansion.

Finally, you will note that the September 30 balance sheet does not include the recently placed $175 million convertible bonds because while the offering of the bonds was completed prior to quarter-end, the actual closing did not take place until just after the end of the third quarter. However, if you were to add the approximate $170 million in net proceeds to our unrestricted cash, its balance would now exceed $220 million. And likewise, the $170 million bond obligation added to total debt would increase that balance to approximately $340 million. Briefly, the $175 million convertible was placed with the 3.5% coupon and was a 37.5% conversion premium on the conversion price or converted- convertible at $40.48 per share.

Again, since this transaction was not completed on or before September 30, it will be reflected in the fourth quarter balance sheet.

Let's move to slide 10, and I will wrap up with a few comments on earnings per share. Our diluted earnings per share of $0.24 met our expectations for the third quarter. Note that these numbers, earnings per share numbers, exclude the impacts of FX. Compared to last year, we improved by 50% our earnings per share and continued to improve nicely quarter-to-quarter. With respect to the EPS calculation, you will likely notice the convertible shares were in the total diluted shares. That's because unlike in the past three quarters, where the bonds have been outstanding, the if-converted calculation method resulted in a slight dilution in earnings per share this quarter.

So, according to the US GAAP requirements, we included the convertible shares in the EPS calculation, and at the same time, excluded the related interest expense. As we noted in our earnings release, we do not expect them to be-- we do expect them to be dilutive in the future. On a similar as if-converted basis, we do not expect the recently issued $175 million convertible bonds to be diluted until our quarterly earnings per share are about $0.40.

And finally, as we disclosed in our earnings release, the compensation committee reconsidered the use of stock options for long-term management incentives. As many of you know, the emerging corporate trend has been in favor of restricted stock rather than options. Rather than making an annual award of options this year, the committee recently approved the award of certain restricted shares to non-executive management, and is currently considering an award to executive management. Executive management being basically the 16 Bs. The total of these awards is estimated to be about 500,000 shares that will generally vest over seven years. Therefore, starting in the fourth quarter of 2005, we estimate our recurring quarterly expense of these awards to be approximately $500,000, or roughly $0.01 a share.

Now, to Dan for EFT segment.

Thanks Rick. We'll now move on to discuss the EFT processing segment. Please go to slide 13, if you will. Slide 13 gives a snapshot of our EFT results. Our $26.3 million revenue was up 26% over the same quarter last year. Our resulting $6.6 million operating income saw a 57% increase over third quarter 2004 operating income of $4.2 million. We continue to see a strong improvement in our operating income margins year-over-year and quarter-to-quarter. Our operating margin of 25% in Q3 2005 increased from 20% same quarter last year, and improved by one percentage point over just the last quarter. Our $8.8 million EBITDA in Q3 2005 saw a 35% increase over the same quarter last year.

Go to the next slide. Slide 14 graphically illustrates our consistent and improving quarterly operating income and EBITDA results for third quarter 2005, together with the past two years. We're pleased with our EFT team's positive performance year-over-year. Our margins are consistently improving, and our teams are working hard to maintain this momentum.

Next slide, please. Slide 15 outlines key EFT business highlights in Europe, Middle East, Africa, and India. First in Amia (ph), we signed an ATM drive-in network participation in a Raiffeisen Bank in Poland. We're very pleased with our efforts in extending our partnership with Raiffeisen Group, a leading multinational bank in central Europe. This agreement with Poland extends our partnership with Raiffeisen to seven countries.

We completed an ATM network upgrade in ENV (ph) certification for Visa and MasterCard in the Czech Republic. We are one of the first ATM networks in central and eastern Europe to obtain both Visa and MasterCard check card (ph) certifications. This was no easy task. In our last call, we announced our joint venture in Bahrain with a 49% equity stake to build an ATM outsourcing business with AFS. We have now signed our first customer, and our processing center is set up to go live by year-end. We're really pleased with the progress there.

As we said in our press release on October 11, we acquired Instreamline S.A. in Greece, a wholly-owned subsidiary of Piraeus Bank. Piraeus is the third-largest private bank in Greece. As part of this acquisition, we secured an 8-year exclusive agreement with Piraeus Bank in Greece, Albania, Bulgaria, Romania, and Serbia, to invite credit card and POS outsourcing services. We now have a multi-country relationship with another leading multinational bank. Consequently, with this agreement, we now provide outsourcing services for a portfolio of approximately 400,000 credit cards and more than 30,000 POS terminals in central and eastern Europe. Also in this agreement, there's a provision for us to provide ATM outsourcing services for Piraeus Bank's 140 ATMs in the Balkan region, a nice little plus on this partnership.

Furthermore, with the in-stream line acquisition, we're not strongly positioned in the credit card POS outsourcing market, which obviously compliments our current EFT/ATM outsourcing offering.

Next slide, please. Slide 16 goes onto business highlights in India. First, I want to mention that despite the week-long, devastating floods in Mumbai in July, which brought the city to a standstill, our network in Mumbai stayed up and running, enabling our India team to offer uninterrupted services to our customers. This is an instance where our team has stood by our business, watchfully (ph) providing uninterrupted financial transaction convenience at any given time. Hats off to our team in India for literally weathering the storm. They were stranded in the offices for 48 hours and continued to offer outstanding service to our customers. Just a tremendous job by our guys.

Additionally, at India Cashnet, continues to be the largest shared ATM network with ten live-member banks and a combined total of 5,191 ATMs. That's a 53% increase in ATMs year-over-year in our Cashnet network, which now accounts for about 30% of all the ATMs in India. We currently have ATM outsourcing agreements with eight banks, with a total of 1,210 outsourced ATMs live in India. Outsourced ATMs in this market had more than doubled year-over-year. And, finally, we have an additional 436 ATMs in India under contract, to be implemented over the next 12 to 18 months.

Next slide, please. On slide 17, we outline our combined ATM categories by quarter. Since our last call, we've added 276 ATMs to our EFT network. We now have a total of 6,841 owned and/or outsourced ATMs. That's a 27% increase over Q3 2004. This 27% increase, year-over-year, is especially impressive after having significantly increased the ATMs in our network count in Q2 2004 by 1,300 ATMs from the two large outsourcing agreements we signed and brought live over the last year.

In the ATMs "Under Contract" category, we have 997 ATMs under contract-- just short of 1,000-- not yet installed. This "Under Contract" category shows the number of the ATMs our banks have committed to add to our network over the next 12 to 18 months. At the backlog equal to approximately 15% of our current base, this number does include the 140 ATMs we will add from the Instreamline acquisition.

Finally, in addition to a good backlog, we have our sales teams working hard, continuing to fill a pipeline with more ATM agreements in all of our markets. And if past performance of our sales team is any indicator, I'm confident-- fingers crossed-- we'll be announcing a couple new contracts before the end of the year.

Now, I'll hand the presentation over to Mike to cover the prepaid segment.

Mike?

Thank you, Dan. After looking at your numbers, it looks like you've got a lot to be proud of. I'll tell you what's happening here in the prepaid processing segment. Our prepaid processing revenues of $107.7 million increased by 43% over last year's revenue of $75.4 million in the third quarter.

Our op income of $9.2 million shows a 20% increase and our EBITDA of $12.5 million shows a 34% increase over third quarter 2004. I'd like to point out that the 20% increase in op income appears relatively low year-over-year due to some one-time items that appeared last year-- and Rick did mention those-- and some investments that we've made over the last three quarters. But I will talk a little bit more about those in the next slide.

Based on the sequential quarter-to-quarter results, we saw about a 5% increase in our top line growth, while our op income and EBITDA were up 11%. Our op income margin of 8.5% improved from 8.1% in last quarter, Q2 2005, while our EBITDA margin of 11.6% improved from 11% in the second quarter of 2005. All good numbers. Next slide, please.

On a year-over-year comparison, you can see a consistent growth in our operating income and EBITDA in the prepaid processing segment. As seen in the previous slide, our prepaid op income increased by 20% year-over-year. EBITDA saw a 34% increase over the same period. As you may recall, in the third quarter of 2004, we had benefited from a stronger than average terminal sales in Germany, which contributed approximately $700,000 in additional gross margins, which fell directly to our op income and EBITDA line.

Furthermore, you will likely recall in our prior three quarter discussions, where we disclosed that we have increased our market spend by a total of $1.7 million. We did this to go after the attractive Australian, German, and US prepaid markets. As I had mentioned on the previous slide, we saw op income expansion in this third quarter as a result of those successful efforts.

Viewed differently, had we not made approximately $1.7 million in additional operating spend in these key prepaid markets, and launched the money transfer and bill payment business, and additionally had the benefit of the Q-3 terminal sales last year, our operating margins would have improved by approximately 60% over third quarter 2004.

However, as I have said in the past and continue to firmly believe, these investments are smart and reasonable in periods of growth, opportunity, and earnings expansion that we have in a number of our markets. We continue to see improvements in our prepaid margins, and we expect our operating margins to be between 8% and 9% over the next couple of quarters, depending on seasonality and other such factors.

This estimation also takes into consideration the investments that we're making to grow our money transfer and bill payment services business, which now falls under prepaid since the acquisition of TUSA.

Move on, please to slide number 21 and we'll talk a little bit about the business highlights in Q3 for prepaid. We saw continued growth momentum in our prepaid markets with the addition of a significant number of new retail locations contracted through major retailers. And here is just a few of those highlights.

In Australia and New Zealand, we're talking down under here, we renewed our agreement with Allphones, the largest independent cellular chain in Australia. We completed also the rollout of all Telecom New Zealand cellular stores, premium dealers, and the Gold Petro (ph) stores.

In the UK, we signed Marks and Spencer, a very well-known name, premier department store chain. We signed four new virtual mobile operators for top-up distribution in the UK We also added two new e-wallet products to our prepaid portfolio, which allows customers to deposit money into an e-wallet linked to their mobile phones, enabling them to pay for lottery and gaming services, which we're seeing as a growing trend in mobile telephony.

In Spain, we signed Shell Petroleum and have initiated the rollout at their 400 petro stations.

Moving on to the next slide, we'll continue with Germany. Here we signed three of the top five drugstore chains- Rossmann, Müller and dm-drogeriemarkt. We have rolled out almost 2,700 outlets to these three drugstore chains in the past month or so, and will complete over the next month. You might have seen that in our press release dated October 21. We're very happy about this. We also signed 1,000 Riva (ph) convenience stores for prepay. Riva ranks among the top five retailers in Germany by market share. In Poland-- this continues to be a strong market for us. We like this market. We see continued growth in terminals, 6,800 terminals in Q3 2005, which is two and a half times the number of terminals where we were one year ago in Q3 2004.

In the US, we signed Marathon Oil, a large oil company to rollout prepaid in as many as 4,000 stores there. We also signed Sunoco, another leading petroleum company, to rollout prepaid in up to 820 of their stores. I might add that the outlets of both of these companies were previously served by competitors.

Finally, we announced the strategic alliance with Verifone to integrate our prepaid functionality into their payment systems.

Now we'll move on to the next slide and talk about our first full-quarter business highlights in the money transfer and bill payment segment. Next slide, please. We operate our money transfer and bill payment business under the name Euronet Payments and Remittance, Inc. and it is part of our prepaid processing segment. As you may recall, when we acquired Telecom USA last quarter, they had about 350 sending locations here in the US. Since then, we have increased our point of sale presence by 200 locations by the end of the quarter. These locations are a combination of stores serviced by PaySpot and non-PaySpot retail stores. Actually, the number is now up to 275. We have added a few more, even since the end of the quarter. The majority of the rollout of these extra stores, since we bought Telecom USA, is scheduled for Q4 this year.

We also received our points of distribution on the receiver side by 1,500 locations in the three countries of Mexico, Bolivia, and the Dominican Republic. We also rebranded our product to create a strong brand identity and awareness in the market. We call our name Vilos. Vilos, in Latin, means velocity and metaphorically relates to speed, which aptly describes the delivery mechanism of our patented money transfer and bill payment technology. In linguistic research conducted by us in a number of countries, besides being meaningful, we found that Vilos to have an international appeal, transcending the language barrier. Our targeted launch campaign starts in November of this year. This campaign currently focuses on retail and consumer marketing in English and Spanish to build brand preference and awareness among our top target audience.

We see great opportunities for our money transfer and bill payment business, and we're focusing on gaining a larger market share of the US and Latin American markets.

I'd also like to reiterate that we're still only operating in three states-- North Carolina, South Carolina and Georgia, which were the three states that Telecom USA was operating in when we purchased them. But we're working on building our retailer base right now in Oklahoma, Arkansas and Michigan, which currently do not require us to have a special license to operate. And finally, in the rest of the states, we're in the process of obtaining licenses to operate. Next slide, please.

In summary, this was actually a heck of a quarter. We continued our earnings momentum with third quarter diluted earnings per share of $0.24 over the earnings of $0.23 in Q2 of this year. We grew our managed ATMs by 27% over the third quarter of last year. And let's not forget, we have almost 1,000 more ATMs in backlog.

We added credit card outsourcing and point of sale processing to our EFT product offering, with the acquisition of Instreamline in Greece, which makes us all the more competitive in our core markets in central and eastern Europe. We signed over 7,500 prepaid retail locations with major retailers, consisting of leading drugstore and petrol chains. We rebranded our money transfer business and initiated the expansion by signing now 275 sending locations in the US. We raised also $175 million through our bond issuance earlier this month, with very favorable pricing terms. We are currently investing these proceeds on a short-term basis, at rates equal to or better than the coupon, and we fully expect to put this money to use over the coming quarters and years, generating positive shareholder returns.

And finally, we would expect that our fourth quarter 2005 earnings per share to be $0.25, even with the $0.01 per share cost Rick earlier talked about, relating to the recent restricted common stock awards.

Overall, another successful quarter.

This concludes our presentation portion of the call, and we would be happy now to take questions. Operator, can you assist please?

(Operator Instructions)

Our first question is coming from Tony Wible of Citigroup. Please proceed with your question.

Good morning. I've got a couple of questions. I was hoping you could start off by talking about the most recent acquisition. Should we be thinking about this as being a product, where you will eventually be offering merchandise processing on a proprietary level at your e-top-up locations? Or when you're emphasizing credit card, are you talking about something independent of the e-top-up?

Yes, that would be independent. This is very much on the EFT side of our business. As you probably know, Tony, we do offer merchant processing in a number of our countries right now across the terminals. In the UK, we offer it. In Germany, we offer it, and in the US, we offer it. US just within the last month or two, Germany for a long time, and the UK probably for about eight months. So we are trying to expand that to the retailers where that's appropriate.

This acquisition, however, was very much on the EFT side. We want to be stronger and have more expertise in the POS business. We believe that that complements the ATM services that we provide for a number of the central European banks. Makes an even bigger barrier to entry for the next guy to come in. Makes us quite competitive.

So would you say that you're going to maybe approach bundling the merchant processing on the terminals in a proprietary fashion, or will you seek partnerships? In other words, do you see yourself in the merchant marketing space as being more or less a reseller or independent provider?

Tony, on the processing, in our speak entirely we call this P.O.S. processing. Really, we're a partner with our banks as they are doing the merchant processing- merchant acquiring, I should say-and we're doing the processing of those transactions across the bank's network of terminals and their network of retailers. We're finding that in our primary markets in central and eastern Europe, a lot of the banks still very much want to be in the merchant acquiring business, and so out of our spirit of being the service provider to the banks on ATMs, on their POS networks, and on managing their credit card portfolios, it's not our driving intention to become a merchant acquirer.

How much cash did you guys spend for that Greek acquisition?

Tony, we spent about $14 million, and we signed about a $4 million note payable over three years with them.

There was no equity?

No equity, correct.

Okay. Great. Could you guys talk a little bit about two different things? One is this Verifone agreement. I guess it's kind of news to me. Could you discuss the scope of that arrangement? It is exclusive and how proactive would they be in selling that service? And two, is any outlook you guys might have for 2006 as far as color for revenue on both the segments?

With respect to the Verifone agreement, what this is nice for is here in the US, what they are going to do is rollout our application on their terminals, so people can just turn it on easier and also help us integrate to some of their more robust configurations that they have, like their Ruby systems and so forth, so that we can get into small chains, petrol stations, and so forth and be kind of ready to rock 'n' roll on this. They have got something like 60,000 locations. Terminals out there right now that that they have sold here in the US through those kind of systems, so as they continue to upgrade those and so forth, we see some possibility there. They are marketing for us and we're helping marketing for them.

These are terminals that they have sold directly?

They are systems that they have sold directly, exactly. And in answer to your second question, as far as revenues next year, we continue to just maintain our philosophy that we'll give EPS guidance quarter-by-quarter. But the nice thing is, you can get some idea of where we're looking just based upon the fact you can kind of take this quarter and you can multiply that by four to get some kind of an annual run rate, and you take a look at our backlog and so forth. And you can see we're feeling pretty comfortable about next year.

When we think about 2006, aside from on the qualitative side, is there anything that we should be paying attention to or taking a special note to when running our models? In either the Euro or any countries or interchange rates?

I don't think there is anything outside of-- you have done a pretty good job with the models so far. We're just going to continue to-- we're going to continue to close more EFT deals. As you know, all those EFT deals are quite high-margin deals. We'll keep bringing those on, we'll bring our current backlogs to ATMs on a prepaid side. We are pretty excited about what we think we can do within the next year on the money delivery and bill payment business. Just turning on these retailers in Germany, as an example, is just a great thing because these-- when you compare Germany to the UK, a lot of people say well how come Germany hasn't made a larger conversion from a scratch card to electronic?

Part of it comes down to the ubiquity of terminals and the ability to buy prepaid at multiple locations. As we keep adding on these grocery store and drugstore chains, it's just Germany will change and we believe will provide an impetus to the mobile operators to point people towards the electronic methodology, much like they did in the UK. So we're excited that we're putting all these things in place, adding these things by the thousands, adding new terminals by the thousands per quarter, so we can see some of these markets really accelerate.

As Germany takes off, that's an indirect country where you would see a higher margin, lower average revenue per transaction but...

Oh, absolutely.

...a comparable amount of operating income per transaction?

That's exactly right. So, we know we kind of have a race going here. We have the US, which is kind of on the e-pay, UK model, which has higher revenues, lower margin, because you have to give about 80% back to your retailer. In Germany, you've got the flip side of that. So both of the markets are high-growth areas for us. We'll kind of see how the mix works out over the next year. But in any case, it's going to improve our bottom line.

Last question and I'll jump off. Is the equity compensation, will you guys be breaking that out separately? Can I presume the tax rate on that is zero?

The latter answer is correct. We currently are in an NOL in the US, so we won't be able to benefit that from a tax point until we have consumed that NOL. Separately, break it out. We haven't specifically talked about that, Tony, but we probably will. It won't be materially different than that 500,000. Now, also keep in mind that this does not include the full-- the effects of the FAS123R accounting, which will be effective first quarter of 2006, and we'll make separate and appropriate disclosures for that.

Sounds great. Thanks a lot, guys.

Our next question is coming from Mark Marostica at Piper Jaffray.

Good morning. Actually, this is A.J. for Mark. Congratulations on your quarter. Mike, just on the prepaid side, I just want to clarify, too. Does your repaid operating margin assumption include the Vilos spend?

Yes, it does.

Okay. So based on that, and if you look over the last few quarters, it looks like you've got really stable operating margins in prepaid. Can you talk a little bit more about the marketplace and when there might be any significant repricings coming due? I shouldn't say repricings. Significant contracts coming due

Well, I think your observation is accurate. I've gotten into money delivery making some of these investments, our margin would have been up quite a bit in the prepaid side. But as we look at the prepaid segment, the fact of the matter is these contracts are always coming up. I try to stress to people that competition in this side of our business has been there since inception, and continues to be so. On average, our retailer contracts in the prepaid side are probably about three years or so in length. And so, that means about a third of them are coming up every year. . But so far, we really haven't lost anybody of significance. We have continued to work well with these retailers, where sometimes they try to squeeze us a little on one part of margin, we try to squeeze back by giving them extra services. So this is our life. It hasn't changed since we have been in prepaid, and we don't expect it to change to the negative, at least as far as we can see right now.

Okay. Then also, sticking with prepaid, how about in terms of the different markets, the geographies. You talk about some of the trends you're experiencing, in terms of what are the growth trends. And also more specifically, on the US markets. Can you give us a little bit more color on how the US market has been ramping. Any significant new signings? And on top of that, this Verifone deal. Verifone, I think, has about close to 50% market share of US point of sale terminals, around that mark. On top of that, will you be training their sales force? Will they be going back to existing customers? A little color there would be helpful.

Actually, we have gone in and talked to their sales guys. They have called us in on special quotes, like to chains of petrol stations and so forth, where they might have their integrated cash register and pump system. Then we go in and talk to them. So these things are-have decent close cycles, that take a little bit of time. But we're trying to help them sell and they're trying to help us sell.

Then in terms of the market breakdown, a little bit more color on the markets.

Well, the US market actually has made a lot of progress over the last year. These MV&Os (ph) are really starting to kick in. We're finding that people like Sprint, who now own both the Boost and half of the Virgin brands, are realizing that prepaid can make a lot of money for them. We see that there are probably around between 23 million and 25 million prepaid phones in this market. That number could triple over the next n (ph) years, just to bring the US up to the same number of per capita mobile phones in this country as you see in Europe. So we're still very bullish about the US by closing a couple of these recent bigger deals, and we just continue to get mom and pops every single month. We get hundreds of them. It looks like it could be a very nice market for us.

Lastly, and I will jump off here. Are the operating margins there, of course, above the-- I guess the UK, traditional e-pay business that you bought? And also, can you give us an update on UK revenue growth in the quarter on prepaid? Thank you.

Our-- we have a slightly better margin here in the US. It's a little bit less advanced. It's a less mature market than the UK. And so in general, the mobile operators are paying higher commission, so that gives a little bit more for everybody to keep. But we have structured our deals where we keep a piece off the top, much like we have in the UK. So as the margins come down over time, we intend to pass the lion's share of that on to the retailers. And so we feel pretty good about the US, where that is.

And then you asked about where the UK is?

Yes, UK revenue.

Yes, actually UK has been-- I think it's surprising all of us. It's still very robust, for a mature market. Spend must be increasing for all the reasons that we've mentioned before. People are doing more things with their phones. People are buying more expensive kinds of services, surfing, gaming, and so forth. The UK, far from being a dormant market, grew very nicely for us last year. Had not the dollar strengthened, it would have looked even better.

Thank you.

Our next question is coming from Robert Dodd of Morgan Keegan. Please proceed with your question.

Hi guys. A few questions. On the Instream acquisition, can you give us an idea of what the revenue contribution? You said $0.01 to $0.02 in earnings. Are we looking at $4 million or $5 million in run rate revenues?

A little bit more than that, Robert.

Can you just run us through, as well, the earn outs for next year? I've got Dynamic Telecom in second quarter of next year. Are there any other announced that are coming up that I should remember?

The Dynamic Telecom actually concludes with the fourth quarter. It will be settled up in the first quarter. And then in roughly the third or fourth quarter of next year, would be a settling of the earn out with Movilcarga in Spain. And again, both of those, Robert, are disclosed in our queue. And we'll update that disclosure there.

On the reason for the big convert and the $175 million, in the K you indicate you're in discussions with some potential acquisitions. Can you give me an update on what's going on there?

As you know, first of all, we have closed Instream right afterwards. So obviously, we were having negotiations with them at the time we did the deal. We will probably always have three or four in the hopper, at various stages. But as you do due diligence, you might find out that it isn't all that it's cracked up to be, or maybe it's better than it's cracked up to be. So things might change as things go. We only announce them after we get them. But we're talking to a number of acquisitions in multiple markets right now, both on the EFT side now a little bit more. And also with prepaid. You can kind of call Instream really the first significant acquisition we have made on the prepaid side in the years and years-- EFT side, I'm sorry.

On the Marathon and Sunoco, on the prepaid side, both of those were a bit bigger than your typical merchants running in the US. Did your money transfer product have any play in your winning those bids from a competitor?

Robert, this is Dan, and I could say yes, absolutely it did. Both those retailers are very excited about the potential of not just the money transfer, but also the bill payment solution that we can rollout in those stores. So we're already able to see some very quick benefit from the acquisition.

Thanks.

Our next question is coming from Franco Turrinelli of William Blair & Company.

Good morning, gentlemen. Actually, many of my questions have been asked. I did want to check with Rick to just make sure that I'm doing the math correctly. If I bank out the four x, as you suggest that we do for comparability, it looks to me like the convert should be treated as not converted. Is that correct?

No, the convert would be treated as in the shares, both added in the shares. But then again, keep in mind-- pull out about $800,000 of interest expense related to that. And there is a supplemental schedule that's attached to the earnings release that goes through that particular calculation. But do keep in mind, the 4.2 million shares have been added into the diluted shares outstanding.

Okay. Thanks, Rick. We'll take another look at that.

Our next question is coming from David Parker of Merrill Lynch. Please proceed with your question.

Good morning, everyone. Rick, just building off that last question, you talked about the crossover point for the second convert at being around $0.40 per share. Can you remind us where the crossover point for the first deal was?

About 20.

Okay. And then on the-- the tax rate looked a little bit lower this quarter than normal. How should we model that going forward? And can you talk about some of the drivers in there?

The tax rate-- and again, this is a little bit like EPS calculation here. It would only appear that way because of the calculation of the expense into the pretax income, and that number is bigger because of gains that we got on FX. But we actually don't have benefits or taxes on that gain. So if you exclude the FX from the calculations, you would see that our effective tax rate went up a little bit this quarter, compared to the second quarter. And we would expect it to remain within those same general ranges as we finish the year.

Okay. Good. In regards to obtaining the state licenses for money transfer, you have talked about moving into some of the neighboring states that don't require state licenses. How are you progressing in obtaining the licenses for the big states, though?

A couple of them we have applications in. We have all of the applications for the other states, and it's a matter of really kind of complying or making sure that we've got the information to be able to complete the application, because some of these applications-- I won't take you through all the boring details. But we require things such as us engaging a private investigator to do backgrounds checks on officers and directors. So we just have to go through the process of getting those things done, getting fingerprints, et cetera. But we have got every one of those states, in some way or another, in process of gathering the information, completing the application, so they can be filed.

So you anticipate it occurring in the next three months, six months, nine months?

We would certainly expect the filing within the next three months, okay? Now, at that point, though, it's kind of the-- you're up to the regulator to be able to turn the approvals around on them. Some states we understand that they will turn them reasonably quickly. Other states-- for example, New York-- may take a bit more time and effort. But, we would hopefully see-- start to see some of these licenses being awarded, give or take, first quarter.

Okay. Good. And then final question. You have mentioned bill pay a little bit. Can you just talk a little bit more, provide a little bit more color around bill pay? And then also check verification-- when do you anticipate those becoming more meaningful revenue contributors?

On the check verification, actually, we're rolling that product out with a partner here in the states by the name of e-checks. That has just begun a couple of weeks ago. On the bill payment, the bill payment just falls on the exact same method that we have on the money transfer, where it's an enrollment service, using the card as identification purposes. We gateway through check free to the billers, so we have access to 5,000 billers. It is a fee per bill of $1.50 to $2.50 per bill payment. And it's a service that initial response from our retailers are very enthusiastic about. And we are running it live in our three states now. We're seeing good transaction growth on it. Again, just tapping into and servicing a lot of the unbank population.

Actually, the transaction growth on this side is pretty impressive, over the last month or two.

It's growing off a small base, but it's growing very nicely.

Great. Thanks, guys.

Our next question is coming from Sunil Paumpater of Granual (ph) Capital Management. Please proceed with your question.

Hi. In the ATM business do you expect that revenue per transaction will continue to decline. Would you mind to describe what are the dynamics that you are seeing in this marketplace. And in which markets revenue per transaction looks like weaker and which are stronger.

Did you ask this on the prepaid segment?

No, on the ATM side of the business, EFT, on the ATM side.

Sunil, this is Dan. The -- as we've said for years, kind of if you're watching revenue per transaction on our business, it is -- it's an okay indicator, but it's not an absolute indicator in terms of our business.

On the ATM side, we generate revenue per transaction anywhere from $0.7 to $4 a transaction, so it really all comes down to mix. And if you think that on our shared network in India, on the cash net ATM'S, those transactions are growing nicely, but we just get $0.9 a transaction on those. We have no CapEx in terms of owning ATM'S or on operating those ATM'S. So really the decline in revenue per transaction is really just a result of mix on both the ATM side as well as in the prepaid side. But that is not necessarily bad thing. As a matter of fact, it's all quite a good thing.

I would just offer that generally speaking, in the ATM business, we - - we have two components to the pricing structure of our agreements. One is a fixed recurring fee per ATM served, and the second is a -- kind of like a per click or per transaction fee.

Typically on the front end of a transaction with a bank, that will be substantially all the fixed recurring fee, structured with some per-click type of things, so as cards increase in the market and transactions increase, we're going to get some incremental benefit out of that.

So when we -- when we sign up a customer, whether that customer is processing 2,000 transactions per month per ATM or 10,000 transactions per month per ATM, there is no difference really in our underlying cost structure, but you can obviously appreciate that that's going to produce a different -- a different answer in the mathematical calculation of revenue divided by transaction.

So as Dan said, you know, it's probably not the best indicator or best way to track the success of that business. We really look more to the top line and the expansion on the bottom line in that business.

It's kind of profit per touch point rather than profit per transaction, would be a better way to look at it.

Okay. On the money transfer business, now, you are currently transacting in three states. And probably I think you said that you would get licenses in the first quarter of 2006. Do you think money transfer business would be the fastest growing for the prepaid segment and that would driving the overall growth rate in that division?

I think the money transfer by itself has enormous potential, but it's going to take a while to get both the licenses and then the launches live in each of those markets. So we see 2006 as a building year for us.

And I would say in terms of trying to reinternalize your question is that sans money transfer, we still see the prepaid business having good, solid growth next year on its own merits.

Right and you can see this quarter's growth and expansion of margins and so forth very much to our betterment. Really, the money transfer business still rounds to zero effectively.

We see the money transfer business as being an important and significant element of a combined product offering to our retailers. It helps us attract retailers, it helps us retain retailers, it's a nice product, has good margin streams, and has global application for us. So it's not a -- if you will, a stand-alone product focus. It's a focus of going after that money -- that cash remittance kind of product market out there.

We are now at the top of the hour so I would like to say if you have some questions you didn't get to ask, feel plea to call Mike or Rick or I. We're happy to talk about our favorite subject with you at length. We really appreciate your interest and support.

And thank you everybody.

Thanks everybody.

Ladies and gentlemen, that concludes the teleconference. You may disconnect your lines at this time. Thank you for your participation.