Euronet Worldwide Inc (EEFT) 2005 Q4 法說會逐字稿

Greetings, ladies and gentlemen and welcome to the Euronet Worldwide fourth quarter 2005 earnings conference call. [OPERATOR INSTRUCTIONS] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. Jeff Newman, Executive Vice President and General Counsel of Euronet Worldwide. Thank you, Mr. Newman, you may begin.

Good morning. Welcome everyone to Euronet Worldwide's quarterly results conference call. We will present our results for the fourth quarter and the full year 2005 on this call. We have Mike Brown our Chief Executive Officer; Dan Henry our Chief Operating Officer; and Rick Weller our Chief Financial Officer with us today.

Before we begin, I need to make a disclaimer concerning forward-looking statements. During this conference call, representatives of Euronet Worldwide will make statements concerning the Company's or managements intention, expectations, or predictions of future performance including selected financial guidance concerning the Company's results. These statements are forward-looking statements. Euronet's actual results may vary materially from those predicted or anticipated in such forward looking statements as 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 results are set forth from time to time in Euronet's periodic reports filed with the U.S. Securities and Exchange Commission including but not limited to its Form 10-K for the period ended December 31, 2004 and its Forms 10-Q for the periods ended June 30, 2005 and September 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'll turn the call over to Rick.

Thank you, Jeff. Welcome to everyone who's joined us for a review of the 2005 full year and fourth quarter results. For the full year, revenues were 531 million, up 39% over '04, operating income was 52.8 million, up 50% over last year. Adjusted EBITDA of 75.2 million was a 47% increase over 2004's EBITDA of 51 million. Full year earnings per share came in at $0.95 a 61% increase over 2004's earnings per share, excluding FX losses, disc. ops, and losses on retirement of debt. With respect to the full year earnings per share, you may notice the $0.95 is greater than the sum of our quarterly earnings. That's the result of the rounding benefit throughout the year. Together with the effects of the convertible bonds being dilutive for a couple of the quarters but not for the full year.

Moving to slide number five, again this year, we posted a substantial increase in 2005's revenues over 2004. Over the past two years our revenues have more than doubled and as it seems each year, we break through more barriers. This year we broke the $500 million revenue barrier, a meaningful accomplishment.

To slide six, you can see that in 2005, we continued to post improvements in transactional growth. This represents a 54% increase in transactions processed over 2004 with similar improvements coming from each of the EFT and the pre-paid segments. EFT transaction growth was principally driven by a 26% increase in ATMs managed, together with the full year benefits of Polish and Romanian outsourcing implemented in mid-2004. The pre-paid segments transaction growth came across all markets together with some benefits from acquired companies. In the pre-paid segment organic growth accounted for approximately 70% of our year-over-year increase while acquired revenues made up the difference.

Next slide. Here on slide seven, you can see in the yellow and blue bars of 2005, the $52.8 million in operating income and $75 million in EBITDA I referred to a few slides back. This chart also reflects the continued improvement in the quality of our earnings where you can see that our EBITDA expanded more than operating income. This $75 million in EBITDA net of CapEx, interest paid, and taxes paid generated approximately 40 million in free cash flow in 2005. We're producing a high quality of earnings from our highly recurring revenue streams.

Now to slide eight for some focus on segments. Here you can see we had similar growth rates produced by both EFT and pre-paid segments, with a slight edge to pre-paid. When dissecting the op income and EBITDA results, you can see that EFT doubled its top line growth of 36% to the op income line which grew 71% year-over-year. This year-over-year improvement reflects the strong leverage in the EFT segment. Dan will discuss EFT in much more detail in a few minutes. In our pre-paid segment we posted 42% year-over-year growth while at the same time, we continued to point out the maturing trends in the UK and Australian markets. On pre-paids op income, you'll see it didn't grow at the same rate as revenue. As you may recall, in prior quarters, we reported increased spend in key markets. We reported that we increased our market and support costs by 500,000 in the fourth quarter of '04, another 500,000 in the first quarter of '05 and finally, an additional 700,000 in the second quarter.

Moreover, in the second quarter, we announced our addition of money transfer to our product suite and took on an incremental 3 to 400,000 in quarterly spend to further our money transfer interests. If you were to do a pro-forma calculation of revenue and operating income improvements year-over-year by excluding these additional costs, you would see that they each grew by essentially the same percent. Finally, our pre-paid segments gross margins of 20.8% in 2005 compared to 20.7% in 2004. All in all a very strong year and a year where we could afford to make investments in the future. Mike will provide additional insights on the pre-paid segment in a few minutes. Now, let's discuss per share earnings in the next slide.

I'm on slide 9 now. For the full year of 2005, our diluted earnings per share of $0.95 is a 61% increase over 2004 diluted earnings of $0.59 and roughly an eight-fold increase over the last two years. Note that these EPS numbers exclude the impacts of FX, disc. ops, and loss on debt retirements. With respect to the EPS calculation, you likely notice that the convertible bonds were included in the diluted shares in the fourth quarter but not for the full year. That's because under the if converted calculation, per share earnings were diluted for the 1 and 5/8 convertibles for the quarter but not for the year. That's largely the result of the significance of the FX losses earlier in the year when the dollar strengthened significantly. As we noted in our earnings release, we would expect the 1 and 5/8 bonds to be dilutive in the future. The 3.5% convertibles were not dilutive in either the quarter or the year. On a similar as if converted basis, we do not expect the October 175 million convertibles to be dilutive until our quarterly earnings per share are nearly $0.40 a share.

Now that we've hit a few highlights on the year, let's make a few brief comments on the quarter. To slide ten. For the fourth quarter 2005 the Company delivered revenues of 144.3 million, operating income of 14.7 million, adjusted EBITDA of 20.6 million, and earnings per share of 0.25 excluding FX losses and disc. ops. Each of these key P&L line items reflect significant year-over-year improvements. Revenues, operating income, and EBITDA improved by 28% respectively year-over-year. The Company's diluted earnings per share, again excluding FX and dis. ops improved by 25% from the $0.20 posted for the year in the fourth quarter.

If we now move to slide 11, we'll take a look at each of these areas more closely. Here on slide 11, not only can you see that the fourth quarter 2005 improvements over 2004, you can see the substantial yearly improvement continues when looking back to the fourth quarter of '03.

Let's move to slide 12. In slide 12, we illustrate quarter over quarter transaction growth. The 46% increase in transactions year-over-year has been instrumental in the revenue growth presented on the previous slide. We continue to see transaction growth in both the EFT and the pre-paid segments. For the EFT segment, transaction growth has been stimulated by an increased number of ATMs under management, continued expansion efforts of key multinational bank customers, and card penetration rates. And in the pre-paid segment, growth continues as pre-paid mobile subscription rates increase, scratch cards shift to electronic, more retailers are signed on, more terminals are deployed and more products are added to the terminals.

Now to slide 13. Consistent with the revenue growth, we see that our profit indicators of operating income and EBITDA continue to reflect the leverage of our revenue to the bottom line. Given our fourth quarter's 20.6 million EBITDA, we are at approximately 83 million annualized EBITDA. By adding pre-paid segments, float earnings of more than $1 million a quarter, our annualized EBITDA is approaching 90 million. To emphasize the significance of this level of EBITDA generation, it is now more than our revenues were just four years ago.

On to slide 14. Here on slide 14, let;s look at the segments on a quarter over quarter basis. As in the annual results EFT eft segment continued to show its leverage by improving revenues and op income by 24%. More to follow here by Dan in a few minutes. In the prepaid segment we grew year-over-year by 30% and op income improved 18%. The difference largely due to the incremental market spend and addition of the money transfer product I previously discussed. The prepaid segments gross margins relaxed a bit, about 0.5% over the third quarter and the prior year. This was largely the result of a stronger mix of larger retailer volumes where the margins are lower than average. A bit higher terminal sales, fear of U.S. based mobile operator distribution incentives, compared to the prior quarters and the country mix. None of these individually were significant. They just all went in the same direction this quarter. I'll also point out that we had no mobile operator rate changes of significance in the quarter. Mike will make additional comments in a few minutes. All in all, we finished the quarter right in line with our expectations.

Now to the next slide. Slide 15. Our diluted earnings per share of $0.25 met our expectations for the fourth quarter. Note that these EPS numbers again exclude FX, disc. ops, and losses on debt retirement. You may also note that we had a more favorable effective tax rate in the fourth quarter. This resulted from the favorable review by tax authorities in certain countries. While we realized some benefits, we would have still reported $0.25 a share without these tax benefits. Overall, high quality of earnings for the quarter.

Now to slide 16 for some comments on the balance sheet. Since the third quarter 2005 closed, our balance sheet changed significantly with the sale of the convertible bonds in October. We issued $175 million in 3.5% bonds that are convertible in seven years at $40.48. This conversion price represents a 37% premium over the close price the day we sold the bonds. Our net proceeds of 170 million were added directly to unrestricted cash. You can see this accounts for the change from 50 million to 220 million. We're currently earning interest at or at least equal to or better than the coupon. So net/net, the unused proceeds are not diluting our earnings. We fully expect to put this money to use at attractive rates of return, but we will be prudent in what we invest in. In addition to the 220 million in unrestricted cash, we are on a run rate of producing about 50 million a year in free cash flow to further strengthen our balance sheet and better position us to invest in the future. And as you can see, our key balance sheet indicators are strong and enabling us to efficiently manage and grow the business.

To slide 17 for one last comment on the balance sheet. Here you can see our debt increased by the amount of the convertible issue I just spoke of, together with a small piece for acquisition-related debt, and the use of certain lines of credit largely triggered in the fourth quarter to accommodate local seasonal needs. Our $50 million line of credit remains virtually untapped further strengthening our financial leverage. And based on the last 30 days average trading price of our stock, we've covered 86% of the conversion premium on the 33/63 convertibles and 25% of the conversion premium on the 3.5% convertible bonds. If this trend continues, we would expect the bond debt to convert to common equity. In summary, on most any front 2005 was a good year. Now to Mike and Dan. Next slide, please.

Thanks, Rick. This is Dan. If you just flip onto the 19, nice little map of the world there. We'll start with as of today. Euronet Worldwide has offices in 19 countries. We now have approximately 1,000 employees and 23 offices worldwide working together to bring financial payment convenience to millions of people around the world.

If you'll go to the next slide, slide 20, we'll start on the EFT processing segment. We started Euronet 12 years ago in Budapest, Hungary with one business segment EFT processing. In the following slides you will see that this segment continues to deliver strong growth every year. Today, EFT generates approximately half of our operating income and with the other half coming from pre-paid processing, it makes for a well-balanced company and two divisions both with solid growth and quality earnings. Over the last two years the landscape of the EFT segment has changed considerably. We are r market leaders in the EFT transaction processing in multiple countries. 13 countries in EMEA and two of the largest markets in the world, India and our newest addition, China. Our continued growth in EMEA is a statement of our strategy to focus on emerging markets and to become the service provider of choice to banks in these markets. In Asia, our decision to enter India is starting to pay dividends. We have signed a number of new agreements in 2005 and have many more opportunities in the pipeline. Our newest market, China, is very exciting. We had the first mover advantage in China and we will take full advantage of this lead, just like we have in our other markets.

Next slide, slide 21. This is a snapshot of where we stand currently within our EFT segment. We are the largest pan European ATM processor. We are one of a kind company that does multicountry and multicurrency processing in Europe, Middle East, Africa, and Asia. Large multinational banks such as HPB, Uni Credito, Raiffeisen, GE, Citibank, and others see this as a great benefit as they expand. We have the largest nationwide shared ATM network of 5500 ATMs in India. Our network connects approximately 30% of all ATMs in India. We now have processing centers in five countries, Hungary, India, Greece, Serbia, and now China. Combined they support 15 countries and 14 currencies. And all our ATMs work in multiple languages and some even process in multiple currencies.

We have more than 60 host to host connections with banks and international card organizations. Europay MasterCard, Visa, American Express, Diners, and China Union Pay as well as a number of other national networks and switches. We are processing EFT payment transactions across more than 30,000 point of sale terminals in Romania, Croatia, Serbia, and Greece. This is more than a threefold increase over the 9,700 terminals we operated in 2004. We have a network of more than 7,200 ATMs. This is a 26% increase over the number of ATMs we operated at the end of 2004. Additionally, we have more than 1,100 ATMs under contract, 16% of our current base. The majority of these ATMs in backlog we expect to bring live over the next 12 months.

We processed 360 million transactions in our EFT segment in 2005 averaging almost 1 million transactions per day. To put this in perspective our ATM suspends approximately 22 billion USD equivalent last year for payments and cash withdrawals. In terms of year on year performance, this division did a great job as they increased ATMs by 26%, tripled point of sale terminals and posted a 55% increase in transactions.

Now for the financials. Next slide. Slide 22 shows the EFT financial results with improvements across the board and again we're very pleased with our year on year gains. For the full year our revenues grew 36%, operating income grew by 71%, and EBITDA increased by 50%. As you can see, we witnessed a strong flow through to the bottom line year-over-year.

Next slide. Slide 23 shows the EFT financial rules with improvements across the board. Again, we're very pleased with the quarterly year on year gains. Operating revenue of 29.3 million in Q4 2005 was up 24% over same quarter last year. Our operating income of $7.2 million in Q4 2005 saw a 24% increase over same quarter last year. Our EBITDA of $9.5 million in Q4 2005 saw a 16% increase over same quarter last year.

Next slide. Slide 24 graphically shows our consistent and improving quarterly operating income and EBITDA results for the fourth quarter 2005 together with the past two years. Our EFT margins continued to expand. Our operating income margin increased from 19% in 2004 to 24% in 2005. And our EBITDA margin improved from 30% last year to 33% this year. We are particularly proud to experience margin expansion while simultaneously investing in new markets like China. This strong consistent improvement in op results in 2005 has come from a combination of continued growth in EMEA and newer growth in India. Implementation of ATM outsourcing agreements in markets, good organic growth in key markets, focused acquisition such as Instreamline and EuroPlanet and habitual and continued cost control. So my compliments to our EFT teams in both EMEA and India for yet another profitable year. We'll move on to discuss Q4 2005 and full year business highlights in the processing segment.

Next slide, please, slide 25. Slide 25 outlines a few EFT processing -- a few EFT business highlights in Q4 2005. India has been on a role signing ATM outsourcing agreements for the year and for the year brought in a number of agreements totaling 900 additional ATMs. The two most recent agreements we announced in January which were signed in Q4 2005, ABN AMRO bank for 300 ATMs includes taking over the bank's existing 90 ATMs and deploying 210 new ATMs. We are currently live with 100 of these ATMs. We all signed ING Bank for 200 new ATMs. With the addition of these two agreements we now have ATM outsourcing agreements with five of the six multinational banks with retail presence in India.

We completed two acquisition in EMEA towards the end of 2005. In December, we purchased the remaining 34% ownership shares of EuroPlanet. We now own 100% of the shares of this Serbian company. This business provides outsourcing services for 292 ATMs, 6200 point of sale terminals, and more than 580,000 debit cards. In the first week of January 2006, we acquired Essentis, a leading provider of card issuing and merchant acquiring solutions based in the UK. This company gives us a very robust multicurrency, multilanguage platform to grow into merchant acquiring and issuing process and activities as an outsourcer. I'll expand on this more in a subsequent slide.

In a very significant move, we entered China with an ATM outsourcing agreement with the Postal Savings Remittance Bureau, more commonly known as China Post Bank. We signed a pilot project with China Post Bank to deploy 90 ATMs in three cities, Beijing, Shanghai and Hungjao, the three largest commercial centers in China. We have currently installed 18 ATMs in Beijing and will be lice with our first ATM in Shanghai tomorrow. China Post Bank currently has more than 6,000 ATMs operational across China. Euronet China is a joint venture between Euronet and Ray Holdings. We hold 75% of the ownership stake in the Company. Ray Holdings holds the other 25%. Ray Holdings has an excellent relationship in the market with local banks and telecom operators among others. Over the last year, we have worked on setting up a processing center in Beijing and hiring an experienced local team to service the market while simultaneously working on signing the agreement with China Post Bank. In the next few slides I will share our views on China and the key market statistics of this country.

But first let me talk about Essentis. If you go to the next slide, slide 26. Essentis was established in 1986 by SEMA Corporation, who was a very successful distributor of the CardPak credit card software. The team at SEMA embarked on an effort to build a very flexible and robust back office software and card issuing merchant acquiring software. SEMA invested upwards of $50 million in building a multicurrency, multilanguage, fully EMV and chip card compliant product that runs on an IBM main frame. We are very impressed by the product built by the team at Essentis. In fact, we believe it's the best piece of credit card merchant acquiring software available today.

A good number of blue chip banks who use the Essentis products would agree with us. ABN AMRO in the Netherlands supports 6 million debit cards with this software. UBS in Switzerland 1.4 million credit cards. Flonaris, a merchant acquirer in Canada has 350,000 merchants that will soon be running with our software. Bank of China purchased the software and intends to issue 15 million credit cards. After SEMA merged with Schlumberger a few years back it was determined that Essentis was no longer core to the new company and it was sold to a private financial investor. Through accommodation of lack of capital and what we believe were some questionable business decisions Essentis found themselves in dire straits at the end of 2005. In the first week of January we purchased the assets of Essentis out of an administration proceeding for a nominal purchase price of $3 million. This acquisition will not be accretive in 2006. We will experience about $0.01 or so a share a loss per quarter from Essentis through at least each of the first two quarters and reducing thereafter for the balance of the year.

Next slide, please. Now a little bit about China. Some of this you already know. Some of it might be news to you. China, as you all know, is the world's largest market. Population 1.3 billion people. This is over 20% of the people on this planet. The country's 2005 GDP growth was 9.8%, up 9.5% from 2004. Many of you already know these macro market statistics.

As for ATMs, like the economy in China, ATMs are big and growing fast. The graph on this slide illustrates a current ATM count and projected growth in central and eastern Europe and India as compared to China for the period 2005 to 2009 according to a retail banking research report. For a fair comparison, we have combined Poland, Slovakia, Croatia, Czech Republic, and Hungary to form our central and eastern Europe view. Where we currently have EFT operations. By 2009, China is projected to deploy 39,000 additional ATMs, taking its total to 130,000 ATMs. While countries in central and eastern Europe together are projected to deploy 5,350 additional ATMs during the same period and India is projected to deploy 12,000 additional ATMs. For a market as large as China, this growth is well overdue and justified when compared to the market the size of central and eastern Europe. While India expects to add another 12,000 ATMs China expects to grow four times that. As you can see, all of our markets have excellent growth opportunities, some more than others.

If the projected 11% annual growth in ATMs in China through 2009 happens, it will rank third after the U.S. and Japan in terms of total number of ATMs by 2009. Even with these significant ATM additions, China will still have only 100 ATMs per million population compared to the U.S. of approximately 1400 per million population by 2009. I think it's easy to see there's a lot of growth potential and opportunity for us in China.

Moving away from these ATM market statistics we'll look at our strategic entry into this market. We are the first and currently the only company to provide end to end ATM outsourcing services in China. Our agreement is with the fifth largest state-owned bank, China Post Bank. The state owned banking sector in China is the driving force within the Chinese banking industry today. We believe that based on the country's ATM growth projections the various banking reformations and foreign investments from some of the world's largest banks China provides us with an excellent opportunity to assist domestic and foreign funded banks to expand and manage their ATM networks. Being the first in the market allows us to capitalize on these market opportunities.

Next slide, please. Slide 28. On our final slide on EFT, we outline our combined ATM categories by quarter. Since our last call, we've added 370 ATMs to our EFT network. We now have a total of 7211 managed ATMs, that's a 26% increase over year end 2004. In the ATMs under contract category, we have 1123 ATMs under contract, not yet installed. This shows the number of ATMs our banks have committed to add to our network over the next 12 to 24 months. That's a backlog equal to approximately 16% of our current base and includes both ING in India and ABN AMRO in India agreements, but does not include the contracted ATMs in China.

Finally, as we mentioned in Q2 2005, we have seen market demand and profit opportunities for independently owned ATMs. We have selectively made additions of our own network, Category One, ATMs. We have added approximately 70 ATMs in Q4 and we expect to continue to do so selectively throughout 2006. All in all, a great year for our EFT business segment. In addition to a good backlog our sales teams continue to work hard to fill the pipeline with more ATM agreements in all of our markets. I liked to thank John Romney, Tony Grandage and their respective teams in India -- in EMEA and in Asia for yet another great year in EFT. I'll now it over to Mike for the pre-paid presentation. Mike?

Thank you, Dan. Now we'll move to our pre-paid processing segment. We can move on to slide number 30. Just like we highlighted our strength in the EFT segment we wanted to highlight those in our pre-paid division. Here's where we are in pre-paid. We're the largest international electronic pre-paid processor with the largest electronic pre-paid market share in the UK, Germany, and Australia and substantial and growing market share in our seven other markets which are Poland, Ireland, New Zealand, Malaysia, Indonesia, the U.S., and Spain. We have four processing centers located in the UK, Germany, Spain and the U.S. that processes our transactions for our ten pre-paid countries.

We have partnerships with more than 60 different mobile operators for top up distribution and both national and regional carriers throughout the U.S. and other locations. We processed 348 million transactions in 2005 from our four processing centers. We offer pre-paid mobile air time and other pre-paid products across more than 237,000 POS devices located at more than 127,000 storefronts. And just to give you an idea of the size of this, we process and collect approximately $6 billion U.S. worth of annual pre-paid air time.

Moving on to slide number 31. We see our pre-paid financial highlights for the full year '05 and we can see the improvements in each of our P&L items over last year. Our annual pre-paid revenues of 411 million in 2005 were up 42% over prior year. Our annual operating income of 34.7 million was up 23% over 2004 while our annual EBITDA of 46.5 million saw a 34% increase over 2004 results of pre-paid.

On to slide number 32, our pre-paid revenues of 111.7 million in Q4 2005 were up 30% over the same quarter last year. Our op income and Q4 '05 was up 18% over Q4 '04 and our EBITDA in Q4 2005 saw 29% increase over the same quarter in the prior year.

Moving on then to slide number 33. On a year-over-year comparison, you can see a consistent growth in our operating income in EBITDA in the pre-paid processing segment. On a pre-paid front, annual revenues improved by 42% year-over-year where operating income grew by 23%. The difference in revenue, growth, and operating income growth is more than accounted for due our increased operating and investments we discussed on prior earnings calls. As Rick summarized earlier, we have been making substantial operating investments in '05 that we didn't have at the same time last year in 2004 and in high growth markets such as the United States, Germany, Poland and also in our money transfer business to take advantage of these emerging growth opportunities. We're starting to see these investments come through with each of these markets posting a significant increase in terminal growth in 2005. Understand that terminal growth proceeds transaction growth and once we have the transaction growth, we make more money.

For instance in Germany, the U.S., and Poland, those three countries accounted for more than half of our organic terminal growth in 2005. The total organic terminal growth of almost 48,000 terminals in these three markets accounted for 28,000 of those terminals. And we're pleased to see that we posted volume gains in all of our markets year-over-year. As mentioned in our third quarter call, we estimate our operating margin to be between 8 and 9% in pre-paid. We have seen our margins to be in this range in 2005 and we expect the margins to be around the same number for the next couple of quarters.

Looking ahead, we expect to make additional investments in 2006 in key products and markets as we did in '05. We believe our opportunities to grow our pre-paid business in certain markets, in some markets are higher than others so we plan on leveraging our existing pre-paid terminals to be able to offer other products that are profitable such as money transfer, bill payment, and so forth.

If you'll move on to slide number 34, this shows our pre-paid business highlights in Q4. I'll touch on some of these points just briefly. In Spain we signed an agreement to distribute Aminet, the second major pre-paid mobile air time carrier and this rollout has begun. We all signed with a large supermarket chain, adding 380 POS terminals and expanding our product offering.

In Germany, we signed -- Germany, we've been busy in Germany. We signed and completed a rollout at a combined -- with a combined total of 4,000 outlets of two different lottery chains. We announced these two agreements in December 2005 and we're pleased to have completed this rollout for a vast majority of the contracted outlets of the two leading lottery chains. We also initiated a test launch in Austria for pre-paid using our German platform. We've started rollout of 50 outlets and we're very excited to explore the new opportunities in this market.

In the United States, we added 2,400 transacting outlets in Q4 2005. This is a 15% increase just over the prior quarter of Q3 2005. We completed rollouts to all our contracted Sunoco outlets. We witnessed a two-fold increase in sales volume compared to the previous supplier. This is an example of what we do here in the U.S. when we've got a crack team of people trying to improve on sales productivity and service to our suppliers. So I thank them for that. This increase has resulted from -- basically from better installation combined with organic growth that we're witnessing here in the U.S. pre-paid market.

As mentioned in my previous slide, Germany and the U.S. signed and rolled out a significant number of outlets in Q4 2005 and for the full year of 2005. We expect to see the full benefit of these in 2006.

If you'll move on to slide number 35 we'll talk about the UK for a minute. Here we implemented our voucher product across our retail network. We also installed chip and pin pads at nearly 1,300 stores of a large chain of news agents that provided credit and debit card processing service at these stores. This is significant as we've mentioned in the past that we add more product across the same terminal base, we have very high flow throughs in this additional margin.

In Australia, we implemented an integrated cash register system, ECR System for the first time in the Franklin supermarket chain and also at West Bank integrating their banking terminals. In New Zealand we signed three physical distributors for pre-paid converting over 150 sites to electronic. In Poland, this is another growth market year for us. We continue to see a significant increase in terminal growth, 7900 terminals in Q4 2005 which is a 58% increase year-over-year. We all signed an agreement with Citibank to process bill payment transactions on Citibank and Euronet POS terminals.

On to the next slide, please. Slide number 36 sums up a few of our 2005 pre-paid business highlights before we move on to our money transfer highlights. We saw an annual transaction growth of 52%, 348 million transactions in '05 compared to 229 million in 2004. We also added more than 60,000 POS terminals ending at 237,000 for 2005. A 35% increase year-over-year. Our 2005 acquisition of TelecommUSA saw us adding two new products Money Transfer and Bill Payment. These two products are directly consistent with our core business of transaction processing and our acquired patented Money Transfer technology is compatible with our pre-paid terminal.

We expanded our pre-paid network in Spain, with a second acquisition, Telerecarga and in the U.S., we further expanded with our pre-paid business acquisition of Dynamic Telecom. We also launched pre-paid in a new market, Austria, toward the end of the year and we look forward to exploring these opportunities. We continue to sign or renew agreements with leading retailers in a number of markets including drug store and lottery chains in Germany for the first time. We look for new types of transactions as we move forward. We added new products such as Money Transfer, Bill Payment, Gift Card, Check Processing, pre-paid debit cards among others. We'll now move on to discuss our money transfer business and its highlight.

On slide number 37, lot of people have been calling me up and asking me about what are we doing in Money Transfer. Here's kind of what we've been up to. As you may recall, when we acquired TelecommUSA, they were operating in three states. North Carolina, South Carolina, and Georgia. Today we are operational in seven states. North and South Carolina, Georgia, New Mexico, Michigan, Kansas, and Missouri and we received licenses for the last two states just in January. We have our sales people signing up stores and deploying new terminals in each of these seven states every single day. We installed, trained, and merchandised 200 new sending locations in the U.S. which we announced in Q3 2005. We now have 500 plus sending locations in the U.S., offering our Money Transfer and Bill Payment products.

When we acquired T-USA, they had 350 sending locations. In the last few months we have looked into these stores' profitability and ended up pulling out approximately 100 of these locations. However, we're pleased with our additions which are prime profitable locations for our new products. The new additions to our sending locations, are a combination of both Pay Spot and non-Pay Spot service stores here in the U.S. and we signed in existing states, North Carolina, South Carolina, and Georgia as well as those newly operating states of New Mexico, Michigan, Kansas, and Missouri. We have currently over 14,500 points of distribution on the receiver side in Latin America and offer consumers in the U.S. access to more than 5,000 billers for bill payment services. We successfully launched our new brand name Bilos in Q3 2005 and we've rebranded all our existing points. We also expanded our product offering to include Bilos bill payment targeted at non-Hispanic customers.

If you'll move on now to slide number 38. We can see the status of our money transfer licenses and our current operational markets within the U.S. for our money transfer operations. As you all know, we are currently focused in the U.S. to Latin America, money transfer corridor. This slide provides a clear picture of where we stand today with our money transfer operations in the U.S. For discussion purposes we've classified our operations in some of the primary sending states into three categories.

The first are states where we are currently operational, which includes the original three T-USA states plus the four additional ones that we've added post acquisition. These are outlined in blue and orange respectively. In category two states where operations are in the pipeline, these six states are outlined in red. And finally, the last category lists the 13 states where our applications are submitted and pending approval. These states are outlined in yellow.

This slide shows also a table which indicates the number of stores we have under each of the category for our money transfer and bill payment products and also the stores that are serviced by Pay Spot our U.S. pre-paid subsidiary under the same category as state. This table is pretty self explanatory and you can see that we have a well laid out network. For instance if we convert approximately 15% of our 10,000 plus Pay Spot stores in all these state, we would increase our sending location for money transfer products to 2,000 plus stores within the U.S. We also intend to make investments in these businesses and we continue to expand into more states waiting on those licenses.

Finally, on slide number 39 in summary, you can see that we had a great year. We have consistently increased our transactions, our revenues, our op income, our EBITDA, our EPS for the last 12 quarters. We are the first and currently the only company to offer end to end ATM outsourcing services in our newest market China, the world's largest market. India continued to gain momentum in 2005 and we're looking forward to more meaningful growth in that market as India continues to heat up. We launched Money Transfer, a strategic product acquisition to our pre-paid segment. We currently are leveraging our U.S. pre-paid locations for money transfer. We managed over 7200 ATMs at the end of '05, this is a 26% over the end of '04.

We successfully raised additional very cost effective capital and we now have $220 million in unrestricted cash. We're generating approximately 40 million in free cash flow and have access to another 50 million in lines of credit. We're very well funded as a company. You saw a 61% increase in our earnings year-over-year. Annual EPS of $0.95, excluding FX discontinued op losses and early retirement of debt. We met our earnings expectations in Q4 '05 with diluted earnings per share of $0.25 over earnings of $0.24 in Q3 again excluding FX, discontinued op, and early retirement of debt. As we look ahead, we expect Q1 2006 EPS to be approximately $0.24 which reflects our traditional seasonality of the first quarter and our investment in both China and the Essentis acquisition. That concludes our presentation right now. We will be happy to take some questions. Operator?

Thank you. [OPERATOR INSTRUCTIONS] Our first question is from Mark Marostica from Piper Jaffray.

Question for you in regards to a comment Rick made about the growth of operating profit in the pre-paid segment. I think you mentioned that there was a stronger mix of larger retail volume in the quarter. I'm wondering, is this a one off item here for the quarter? Is this a trend we should expect to continue?

Well, I think that one is the fourth quarter tends to be a seasonally strong quarter there. So we may have seen some heavier volumes come into the existing stores we have. We have also continued to be successful with the large merchant chain. And as Mike mentioned, whether it was in UK or some other markets we've been successful at getting into some of these high volume, high traffic locations. And so I think that it does have an opportunity to continue to bring in higher volumes in the future. But I do think that we had some lift from the fourth quarter seasonality.

And, Mark, I think from a mix perspective, when you just think about we have yet to quantify this. But when you think of people's shopping habits during the fourth quarter, I mean everybody's running around for the holidays. They're spending less time walking into the little convenience store to buy their pre-paid top up and they're finding themselves in big box stores and grocery stores a lot more often. You may have a little bit of a mix issue and in fourth quarter we could see some pressure on our average transaction revenue, our revenue per transaction just due to the mix that you have going in to bigger box stores.

Got it. Then another question related to your comments on Bilos. Understand it's been somewhat of a drag given the investment levels that you've been putting into the business. Wondering what type of timing should we be thinking about when Bilos turns the corner, turns profitable? Then tied to that I suppose is the question around the 13 states you've submitted applications. When do you think you'll get those up and running? Thanks.

Well, I guess to answer your first question, when do we think that this investment's going to kind of turn around from our $0.01 a share burn per quarter, we think that we should see that start to turn around toward the end of this year beginning of next year. We are investing a lot. Because we see this as a big strategic bonus for the Company. The key though like you were alluding to is we need to get ourselves out -- we need to get licenses in a number of other states. Several of the licenses have popped out a lot quicker than we imagined. It took us through October, November, and December basically to get all our license applications into the most key states. We're finding that every state is totally different. We measure our states by the thickness of the application. They range from a quarter of an inch to two inches. Some of them take longer than others.

I think in general we've been pleasantly surprised at how fast they're going. We even -- California's a key market to us. We even have received kind of what did they call it, Rick? A preliminary approval for California. Which is a huge market for us and has a huge number of crossovers to our Pay Spot location. So even though that was kind of a bugger of market -- I mean a state to get approved, we've already received preliminary approval subject to providing them a number of technical things, which we're in the process of doing. So we're getting kind of optimistic on this licensing. But we'll let you know kind of as it happens.

Sounds good. Two small housekeeping items. Q1 guidance of $0.24 does that include the $0.01 of planned dilution from Essentis?

Absolutely. Absolutely.

Then lastly, your tax rate guidance embedded in the Q1 number, what would that be? How should we think about the tax rate going forward over the next few quarters?

I think it will be higher than what we had -- a little higher than the fourth quarter. So kind of between the fourth quarter and the third quarter. I'd say slightly under the 30% kind of mark.

Great.

Mark, a little addition. I mean, when you take out the Essentis acquisition and that drag of $0.01 a share on Q1, that would put us at basically flat quarter to quarter, Q4 to Q1. In our minds and if you've watched our business over the last number of years, that implies growth because you have this huge seasonal uplift in Q4 combined with a huge seasonal downdraft in Q1. To be able to know that just maybe on an apples to apples comparison you're going flat, there is an implication of organic growth there.

Thanks. I'll turn it over.

Thank you.

Your next question is from Tony Wible with Citigroup Investment Research.

Hi guys, I got a list of questions. To get it started in China, do you see any of your current banks already in China or currently looking to go into China?

Tony, it's Dan Henry. We don't see any of our current banks currently in China because they're not yet allowed but we see a number of them are in the process of moving into that market. A lot of them through making investments into some of these state-owned banks indirectly. And we are in conversations with those banks now that our entry in China has been official.

Okay. Great. And in tying into the acquisition, you guys have historically been very disciplined about only doing deals that are accretive. This one looks to have a little bit of a head wind. What is the strategic side of this deal. Is there some kind of angle that will help you out with the bank longer term?

If you think about our business in India and our business in China, we open up those data centers, launch those businesses with total investments of around $2 million. That includes the software and building that data center. We're able to do that because we own the Arkansas Systems platform. When we saw Essentis, as we're looking to expand on our EFT offering for not only ATM but credit card and POS processing, and we were looking at the markets and what's available on the pieces of software out there. When we saw that we were able to buy the whole company of Essentis for about the same cost as just buying a license for their software, we thought that was something that we just couldn't pass up. We believe that just like we've done with ArkSys in terms of we built a captured R&D business, where that business is generating for us $2 million a year of operating income. Yet provides software and support to drive and grow our EFT business, we intend to reproduce that success with the Essentis.

In the near term do you see any particular service that that might help you launch or any particular country that you're in that might help you land customers?

Well, we did see for example the Bank of China uses that software. So we're in good discussions with Bank of China just because of the relationship with Essentis. It is -- Essentis is also kind of bringing us westward, if you will. UBS in Switzerland. ABN AMRO in the Netherlands. So those are certainly conversations we like to have. We really think it opens us up to being able to take that software platform and either solely our own or maybe in a partnership with a bank who has the application currently being able to build a very robust card issuing and merchant acquiring, or merchant acquiring support platform for the outsourcing side of our business.

Actually Tony when you look at the banks who bought this software, they think it's the best software in the world for acquiring and issuing. And to have a world class piece of software that we were being able to basically buy on fire sale is tremendous because I think we now have the possibility of moving from just a POS processor, an ATM processor to a real live acquirer a serious western standard acquirer and issuer for credit card processing for banks all over the world.

Two last housekeeping questions. One is, how much of an impact did foreign exchange have on your revenues this quarter? And then the last one would be how fast is the UK market in pre-paid growing currently?

Let me take both those. The FX actually was a bit of headwind for us this quarter. The euro moved down by a little more than 3% versus the average of our third quarter. So our revenues would have probably been reported at another $2.5 million higher with some similar kind of fall throughs to the bottom line had we not experienced that kind of head wind on the FX.

That's 2.5 million relative to the third quarter?

Right. Right. And we've tried not to whine in our numbers here about the impacts of FX because sometimes it helps you and sometimes it doesn't. But you're right that we did have an impact in the fourth quarter which was generally against us. With respect to the UK market, we've continued to see single digit kind of growth in terms of that market. It's not -- we're certainly not taking reversals. But we've continued to see. I'd say that those have been in the kind of upper single digits certainly on a year-over-year basis.

Do you happen to have the pre-paid direct costs on hand for the quarter?

I don't happen to have it here right now.

Great. Thank you.

Our next question is from Kim Willie with AG Edwards.

Good morning. Couple questions. First, Mike, if you could -- this may be the longer question of the three in terms of the answer. But could you talk about the cash you have and where you see the most likely opportunities to put that to work? I'm assuming it's obviously mostly on the M&A front whether you can characterize that by geography or business line, just sort of how that M&A pipeline looks and how you guys are thinking about it.

Well, my comment on the cash, is we've got a lot of it and we're creating a lot of it every day. When we did our second financing just to kind of give you a little bit of a flavor, we actually had in our targets three different acquisitions that we thought we might be able to get in by around the end of the year. We were able only to do one of them and the reason for that is because as we looked under the hood of the other two, we found out that these cars were broken. And so as we repriced our offer, we basically ended up losing those two deals. We do see significant opportunities all over the globe, geographically and also we're starting to see them now as well in EFT as well as in pre-paid. There might even be some money transfer opportunities to round us out in other countries and so forth. We're just kind of looking everywhere for good accretive transactions that have that kind of organic growth that we were bragging about on this call.

With good operators.

Yes, with good operators. At the end of the day we don't want to buy something and have to fix it up. And so strength of management is key and that's what's made us successful so far. So we'll -- it's not burning a hole in our pocket, that money. We've got a positive spread of just basically our overnight investment. So we'll try to pick them carefully like we have in the past and make these all accretive.

Okay. Second question on the pre-paid business. I just want to make sure that I understand the margin structure correctly. What we saw this quarter was larger retailers, the lack of sort of incentive commissions from the carriers and I think you also talked about the discretionary investment. Those were the major drivers of the margin this quarter?

That's it. Right, Tim.

Okay. Just out of curiosity, thinking about the pricing environment, and I guess in the UK where you deal with a lot of those large retailers, during the course of '05, I would imagine you had a couple that went through a renewal process or just an automatic renewal. Were there any kind of pricing changes with larger merchants? That were noteworthy at all or did they stay the same?

I'd say -- understand in the UK market, the most maturing competitive market, we have had you might say retailer pressure margin pressure for five years running. So far because we're the biggest guys out there doing almost twice the volume of number two, we've been able to hang on to these guys. And actually figure a way to end up making more money off them every year, not necessarily less money off them every year. So we're always in the -- we always have kind of bare knuckle fist fights with them. But at the end of the day I'm going to service them very well and they know that. So we've been able to keep ourselves flat to growing in each of those. The nice thing is the market's been growing along with it so I'd say no new news there. Yes, we had a couple of renewals. I think at the very beginning of last year if I remember correct is when we renewed the Post Office for like another four, five years. So and that's one of our biggest customers there. So we've been generally very successful in that market.

Okay. Last question regarding new markets of entry. I think one of your largest and longer standing customers, Raiffeisen has been in the press lately with some fairly aggressive plans on the retail front in Russia. Any comments specific to them or just your thoughts on that market. And if you think any of your customers other than Raiffeisen may be eyeing it up and would you be interested in moving with them to that market.

This is Dan Henry. We'd love to see Raiffeisen continue to expand. As you know, that was -- our business in Romania is driven a lot by our relationship with Raiffeisen. We've always said there's a number of new markets we're always continuing to look at. I don't think it's any secret that Russia obviously has got to be one of those. Not only Raiffeisen but a number of our other multinationals are eying that market or making investments in that market. So we think that it's probably really only a matter of time before we can structure the right deal with the right bank to bring us into Russia.

Do you think you need to build a data center in that geography or could you run it out of one of your existing ones.

That's a very interesting question. Technically we could run it out of Budapest. Politically, it might be required for us to have some sort of data center presence in Russia. I say politically just from a conceptual political standpoint not any real political.

It also might just depend on the bank itself like if we do Raiffeisen we're processing five or six of their countries out of Budapest. They might not have a religious problem with it. But you go to a different bank and they may. So we'll just have to see how those chips fall. Obviously we'd prefer to do it out of Budapest because we can and it's cheaper.

Great. Thank you.

Thanks, Tim.

[OPERATOR INSTRUCTIONS] Our next question is from Robert Dodd from Morgan Keegan.

This is actually Michael Shepherd in for Robert. Just a couple quick questions. On your Serbia location, is there an opportunity for cash savings for closing that data center?

Yes, no. The data center, that business historically comes through a joint venture that we did there. So the software and the AS400s are already there. We have -- the team in Serbia is really top notch. And from a cost standpoint salary perspective, they're very, very attractive from that standpoint as well compared to the rest of the market that we have in eastern and central Europe. So really what we think is that what we're finding is that our main cost of a data center for us really is the staff. What we see what we have in Serbia is we've inherited a very talented staff that is mobile. We already have a number of that staff working with our team in Budapest moving there for a couple weeks each month, off a couple weeks. So we're probably -- have really no intention or need to shut down that data center, nor do we think if we did we'd have any significant financial savings. Probably a better way to phrase it, is we intend to leverage the talent and the capabilities we have in that data center.

They're actually a pretty impressive group of people.

It's a nice piece of business but in the grand scheme of things against the consolidated total it's not that big of an element.

Okay. Great. And you mentioned on money transfer you were operating in seven states there. We notice you left out the Texas market. Any comments on that?

Well, I mean, we have -- we filed.

Just a matter of our own internal definitions of technical filing and answering questions back there. But Texas is being pursued as much as those other 13 that are in that category three.

Hi, guys. I just got back in. Could you give us an idea what the Instream contribution was for fourth quarter, if any?

We haven't disclosed that. It was accretive to us but it didn't make our numbers.

And then on the Essentis acquisition, if it was -- by the sound of it you bought it out of essentially a liquidation auction, if the product's so great, why didn't anybody else bid more?

We did find it in the final throes, 11.5th hour of that that someone else was coming in and trying to grab a hold of it.

One of the big boys.

But we persevered.

Okay. Thank you.

Our next question is from David Parker with Merrill Lynch.

Good morning everyone. I joined late so I apologize if this has already been asked. But can you just speak broadly about the single European payment initiative and how that provides an opportunity for you, or if it does?

It doesn't -- I mean as far as we're concerned, we process transactions. If they want to do a single clearing or a single -- if they can actually get these things to work, I don't think it's going to change our business much. The fact of the matter is those initiatives are supposed -- I think they're scheduled to hit in, what, three years or something like that. They're behind on about everything else that they're doing. We don't see this as a big--.

David, I think what we're seeing is causing it. It's almost like Y2K. The banks have plenty to do as it is already. This is one more thing that's being laid upon them. In essence what it does is it creates opportunities for us. Because it just -- when something adds to the banks they're looking for how can they lighten their load? We can always step in and take a piece of that. It's good for us.

Okay, good. On the pre-paid side, what percentage of your transactions are actually top up versus these new programs that you're starting to roll out? Can you specifically address what you're doing on the gift card and pre-paid card side?

Very small. Right now because we've just started to launch some of these new endeavors, a very small percentage of our transactions are these new ones. We'll probably see probably a more aggressive rollout of those in the U.S. first and then into other markets like the UK they're working on them, too. As far as gift card, pre-paid we're looking at MasterCard, Visa rollouts, pre-paid MasterCard and Visa. Independently branded gift cards. We do a number of different programs. A lot of these retailers want them as a check-off item. The fact of the matter are they're not yet moving the dial as far as volumes go. But we could see that happening over the next couple of years. So we got to play the game.

We think it will also just help on stickiness at retailers.

Absolutely.

Okay good. And then finally just the EFT margins, was that just primarily or solely related to the investment in China?

That was a big piece of it, as well as the op income that we received from Instreamline has a lower op income margin that what we typically see in the rest of our business.

We've got purchase price amortization on some that stuff. So it was heavier on amortization side this quarter obviously than the prior ones.

Okay. Thanks guys.

Operator. I think we're past the top of the hour so I think we better cut the questions. And I want to tell everybody thank you for taking the time to spend over an hour with us. We had a lot of information. We're pretty happy about last year and can't wait for this one. Thank you very much.

This concludes today's conference. Thank you very much for your participation. You may disconnect your lines at this time.