Euronet Worldwide Inc (EEFT) 2006 Q1 法說會逐字稿

Greetings, ladies and gentlemen, and welcome to the Euronet Worldwide first quarter 2006 earnings conference call. At this time, all participants are in a listen-only mode. [OPERATOR INSTRUCTIONS] 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.

Thank you. Good morning and welcome everyone to Euronet Worldwide's quarterly results conference call. We will present our results for the first quarter 2006 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 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 selective financial guidance concerning the Company's results. These statements are forward-looking statements. Euronet's actual results may vary materially from those predicted or anticipated in such forward-looking statements as a result of a number of factors including competition, technological developments affecting the market for the Company's products and services, foreign exchange fluctuations 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 U.S. Securities and Exchange Commission, including its annual report on Form 10-K, its quarterly reports on Form 10-Q and current reports on Form 8-K. Copies of those filings and our other filings with the SEC may be obtained by contacting the Company or the SEC.

Let me also mention before we begin that we've changed the presentation slightly. In the slide show, we've included certain definitions that will be used throughout the presentation on slide three, and you can refer to that slide during the call to understand those defined terms. Now I will turn over the call to Rick. Rick?

Thanks, Jeff, and welcome to everyone who's had a chance to join us. We were glad you could make it. If you go to slide number five, we will get started. For the first quarter 2006, the Company delivered revenue of $147 million, operating income of $12.3 million, EBITDA of $21 million and earnings per share of $0.25, excluding FX and share based compensation. Each of these key P&L line items reflect significant year-over-year improvements. Revenues, operating income and adjusted EBITDA improved by 25, 17 and 35%, respectively, year-over-year. And the Company's diluted earnings per share, excluding FX losses and share based compensation, improved by 19% to $0.25 from the $0.21 posted last year in the first quarter.

If you now move to slide number six, we will look more closely at each area. Here on slide number six, we can see that the first quarter revenue is keeping pace with the yearly improvement trend.

Let's move to slide number 7. Consistent with our revenue growth, we see that our operating income and adjusted EBITDA continue to reflect the leverage of our business. There is one key item I would like to point out as it relates to operating profits. As you likely noticed in reading the earnings release, we adopted this quarter the new accounting requirements for share based compensation. We elected to adopt FAS 123R on a modified retrospective basis, meaning we adjusted the prior quarters for comparability. For the first quarter of 2004, op income was reduced by $1.4 million from the previously reported amounts. Last year's first quarter's op income was reduced by $1.3 million, and for the first quarter of 2006, share based compensation was $1.9 million. The increase in this year's expense is largely the result of accelerated expensing requirements for performance based, restricted stock awards that were not included in prior years. It also was impacted by the mix of share prices coming in and going out of the current period expense calculation, and from the growth of our overall employee base.

I will also point out that while it does not impact op income, substantially all of the share based compensation expense hits the bottom line without tax benefits because of our current U.S. tax position where we carry substantial net operating losses. Accordingly, when I commented on the year-over-year increase percentage in op income, a couple of slides back, you will recall that op income grew less rapidly than revenues. That's largely because of the additional share based compensation expense. Further contributing to the difference was the inclusion of Essentis in the quarter and from continued investments in our money transfer business.

When you look at the adjusted EBITDA results, you will see that adjusted EBITDA grew consistent with the 25% year-over-year revenue growth. Also note, we included share based compensation, or we excluded, I'm sorry, we excluded share based compensation from the adjusted EBITDA numbers because we don't see share based comp as a cash flow impacting expense. I'm sure this quarter companies will be presenting the effects of share based comp in a number of ways and surely there will emerge a generally accepted way to discuss it in the reported results. But in this quarter, we wanted to provide both the actual expense numbers as well as make appropriate references back to the historical numbers that most of you have tracked.

If you now go to slide eight, here on slide eight, we illustrate our quarter over quarter transaction growth. The 38% increase in our year-over-year transactions is what's behind the revenue growth we reviewed just a few minutes ago. And as you can see, the year-over-year transaction growth came in both the EFT and prepaid segments.

Now to slide nine. Here on slide nine, we review our segments year-over-year quarterly results. As you can see, our consolidated year-over-year quarterly revenue and operating income growth of 17 -- of 25 and 17%, respectively, came across all business segments other than the software segment where operating income was approximately $500,000 less as a result of the inclusion this quarter of the January acquisition of Essentis. Starting with the EFT segment, revenues grew 25% with 32% improvement in operating income. Our EFT segment continues to see both top line and bottom line benefit from our success in both the European and Asian markets. We continue to add to our count of total ATMs managed and we have consistently seen improvements in transaction volumes. And as we shared with you last quarter, the EFT segment has been covering the cost of launching in China. Dan will cover more details about EFT in a few minutes.

On the prepaid front, revenues improved by 24% year-over-year while operating income improved by 15%. The difference between revenue growth and op income growth is substantially all accounted for through the approximate $600,000 net operating expenses of the money transfer business that was acquired in the first -- acquired after the first quarter of last year. So for the first quarter, the prepaid segment performed in line with our expectations. We did see some seasonal drop in prepaid revenues as we anticipated, but nothing outside of expectations. Mike will cover more details of the prepaid segment in just a few minutes.

Now to slide 10 for a few comments on the balance sheet. Our balance sheet remained relatively constant through this quarter. Our cash increased by about $4 million, the net result of EBITDA offset by taxes, interest, capital expenditures, and the acquisition costs of Essentis.

Let's move to slide number 11 and I will wrap up with a few comments on earnings per share. Our diluted earnings per share of $0.25 exceeded our expectations of $0.24 for the first quarter of 2006. Note that the EPS numbers include -- exclude the impacts of FX and the new FAS 123R share based compensation charges. So all in all, a quarter with results ahead of our expectations. Now to Dan to discuss the EFT segment.

Thanks, Rick. We'll now move on to discuss the EFT processing segment. If you'll just please flip to slide 14. Slide 14 gives a snapshot of our EFT financial results which show improvements across the board. Revenue of $29.9 million in Q1 '06 was up 25% over the same quarter last year. Our op income was $7.4 million in Q1 '06 saw a 32% increase over the same quarter last year. And our adjusted EBITDA of $10.4 million saw a 28% increase over the same quarter last year.

Next slide. Slide 15 graphically shows our consistent and improving quarterly operating income in adjusted EBITDA results for the first quarter 2006 compared to the same quarters over the past two years. We continue to see consistent improvements in our margins. Our operating income margin of 25% in Q1 '06 increased from 23% same quarter last year, and our adjusted EBITDA margin improved from 34% last year to 35% first quarter this year.

As many of you know, the seasonally strong Q4 and the weak Q1 make sequential growth very challenging for the Q4 to Q1 transition. But on the sequential quarter-to-quarter comparison, we got something to brag about. From Q4 '05 to Q1 '06, in the EFT segment, we improved our adjusted EBITDA margin by 3 percentage points and increased our operating income by $200,000 while maintaining our op income margins. Obviously we're very pleased with this progress and I want to thank all of the teams in the EFT countries and markets for continuing to deliver the growth.

Next slide, please. Slide 16, 17 and 18 outline the key EFT business highlights in Europe, Middle East, Africa and Asia. In India, we continue to pursue and make investments in new EFT markets. We signed ATM network participation agreements with two leading banks in a new eastern European market. For competitive reasons, we are not disclosing the names of the banks or this new market. That said, we are very excited with the opportunities available to us in this new country and we expect the business there to ramp up quickly.

We started to successfully expand our Euronet card services Greece operations into new markets. This is formerly in Streamline, the business we acquired in Greece a few quarters ago.

We have expanded our credit card outsourcing services into Serbia and Romania for a multinational banking client in Greece thereby establishing a multi-country relationship with this bank. We also launched a card loyalty program for the same Greek bank in conjunction with a leading airline. Our behind joint venture added two new customers for debit card outsourcing in ATM processing services. We are also now live with our first customer which we announced in Q3 of '05. As you may recall, we own 49% equity stake in SGAV, so its revenues and expenses do not show up in our EFT results but rather as equity and unconsolidated subs below the operating income line.

Next slide, please. Slide 17, a few business highlights from Asia. In India, we saw continued growth in ATMs under management in addition to signing new ATM outsourcing agreements. We signed an additional agreement with ING bank in India to take over their existing network of 100 ATMs. This supplements our Q4 '05 agreement with the same bank to deploy 200 new ATMs for ING. We currently have ATM outsourcing agreements with ten banks which gives us a total of 1,483 outsourced ATMs live and an additional 757 ATMs under contract to be implemented over the next 12 to 18 months. That's a 33% increase in outsourced ATMs compared to what we had in Q1 of '05.

The growth in India has been phenomenal. If you recall, exactly two years ago, we had 360 outsourced ATMs with three banks. Today we have agreements with ten banks in total, four times number of outsourced ATMs in our network in India. This is not only indicative of the opportunities available in emerging markets but it's also a testament of our success in such emerging markets. The first agreement is always the hardest. But once the operations ramp up, it's an upward trend all the way.

Additionally in India, we signed Reliance Telecom, a leading telecom operator in India to implement Euronet ATM mobile recharge services. Now over 12 million Reliance subscribers can purchase prepaid air time at ATMs throughout India where Euronet offers this service.

Cash net continues to be the largest share at ATM network. Now with 12 live member banks and a combined total of over 5,600 ATMs. That's a 51% in ATMs year-over-year in our cash net network which accounts for more than 30% of all of the ATMs in India.

Next slide, slide 18, let's talk about China. Let me start by sharing with you an interesting story published by China Daily. This story signifies the challenges faced by banks in China in terms of operating their ATM networks. The article reads, man spends a night with an ATM as reported by China Daily. A man has held an overnight vigil at an ATM that withdrew $12 from his account but failed to spit out the cash last week. The man spent the night by the ATM waiting for his money. He was told by a bank clerk the next morning there might be something wrong with the machine. He has to wait until the end of this month for his money to be returned when the bank system is automatically updated. Now as surprising or humorous as it may sound, such stories like this are not new to us. We have seen these types of inefficiencies in many of our markets when we entered them. That's precisely why we go to such places. However, I can tell you that China is the only emerging market we have entered so far that has more than 90,000 ATMs, and by the way, only 50 of those ATMs are outsourced and those 50 ATMs are outsourced to us.

So now for an update on our China operations. Of the 90 ATMs contracted by us with China Post Bank, we've currently installed and brought live 50 ATMs in Beijing and Shanghai. The remaining 40 ATMs will be installed in the next few months. Very pleased with our progress in China and we're starting to see a ramp-up in transactions processed on new ATMs. I was in China about three weeks ago and I can assure you from a meeting I had with the bank that the bank is equally very pleased with our progress and our service. And we have already begun discussions to expand the scope of this agreement with the bank.

Just like India, China has tremendous growth opportunities for us. This market currently has five times the number of ATMs when compared to India. Based on our success to date in India, we are very excited about what can be coming out of China over the next few years. Overall, a very good quarter for our EFT division despite the historical seasonality.

If you jump to the next and final slide on EFT, here we outline our combined ATM categories by quarter. Since our last call,we've added 402 ATMs to our EFT network. We now have a total of 7,613 outsourced ATMs. That's a 23% increase over the same quarter last year and a 6% increase over just last quarter. The 23% increase in ATMs year-over-year does include the 50 ATMs we deployed to date in China. In the ATMs under contract category, we have 1,057 ATMs under contract not yet installed. That's a backlog equal to approximately 14% of our current base and includes the remaining 40 ATMs to be installed in China.

With that, I will now hand the presentation over to Mike to cover our prepaids. Mike?

Thanks, Dan. We will move on now to discuss the financial business highlights of prepaid. If you go to slide number 21, we can see our prepaid financial highlights for this quarter. Our prepaid revenues of $111 million in Q1, 2006, were up 24% over the same quarter last year. Our operating income of $9 million in Q1, 2006, was up by 15% over Q1, 2005. And our adjusted EBITDA of $12.3 million in Q1, '06 saw a 22% increase over the same quarter last year. Based on the sequential quarter-to-quarter results, our revenues, op income and adjusted EBITDA for this quarter decreased slightly over the fourth quarter of '05. The decrease in revenues, op profit -- op income and adjusted EBITDA are largely due to the seasonal impacts we see at the turn of every year.

Let's move on to slide number 23 -- or 22. On a year-over-year comparison, you can see a consistent growth in our operating income and adjusted EBITDA in the prepaid processing segment. As seen in the previous slide, our prepaid op income increased by 15% year-over-year while EBITDA saw a 22% increase over the same period. In the first quarter of '06, we had approximately $600,000 in net operating losses from our recently acquired money transfer business. As you may recall, we didn't have these operating losses in the first quarter of last year. So viewed differently, had we not launched money transfer and bill payments business, which incurred the $600,000 net operating loss, our operating income in Q1 '06 would have improved by approximately 23% over the first quarter of '05. We believe that the earnings impact of our money transfer investments will be relatively short term in nature as we gain licenses and additional U.S. stage and leverage our U.S. based POS location. We continue to see our prepaid operating margins to be in the range of 8 to 9%.

Slide number 23 shows our prepaid business highlights in Q1 before moving on to our money transfer highlights. First we saw a continued growth in transactions year-over-year of 43% increase over Q1 '05. Transactions grew faster than revenues due to the acquisition in May of last year of ATX which processes high volume, low rate transactions, and the 9% decline in the Euro and the pound against the U.S. dollar.

So now let's look at each of our business countries. In Germany, another good quarter. We rolled out an additional 3,000 stores for a leading grocery store chain rollout and we have now rolled out approximately 5,000 stores in total for this chain. We also signed an agreement with Safety to roll out prepaid terminals at more than 80 Wal-Mart stores. Safety is the exclusive telecom provider for Wal-Mart Germany. This roll-out will begin in the current quarter, Q2.

In our last call, I mentioned the test launch in Austria for prepaid using our German platform. Since that call, we've successfully completed the rollout to about 2,000 stores and we are very pleased to leverage our prepaid technology infrastructure from Germany as we launched into this new market of Austria.

In Australia/New Zealand. Down under, we signed an agreement with I-Tunes in Australia to provide prepaid music downloads. This is a very popular product and with this new addition, we look forward to further enhancing our sales volume. In New Zealand, we signed one of the top two supermarket chains to roll out our prepaid in 150 stores. New Zealand is one of our growth markets and in Q1, we added more than 200 independent retail locations to our prepaid market base in this market. Additionally, this market more than doubled its terminal account over the same period last year.

In the U.K., we launched Web and S&S Top-up with Carphone Warehouse, a leading independent retailer of mobile phones and services. We also extended our multi-year agreement with a major grocery store retailer until 2008.

Going on to slide number 24. Here in the U.S., on a year-over-year comparison, we grew our sales volume by 59% while our transactions nearly doubled, 90% increase, and our merchant base increased only 44% over the same period. If you recall in 2005, we talked about increased operating investments in the U.S. market to take advantage of the emerging growth opportunity. The significant increases in year-over-year transactions and sales we now witness is indicative of our success in the growing U.S. prepaid market. We are confident that the U.S. market will continue to be a high growth market for us. We completed rollout to a combined total of 350 stores for two leading sea store chains. We signed three new sea store chains for 400 plus new stores. We are beginning to see the popularity of our bundled product strategy among our retail customers who are signing on for check and merchant processing, money transfer and bill payment products, in addition to our wide range of prepaid wireless air time products.

We also launched several new mobile virtual network operators products. We now offer over 100 products on a single pace spot terminal in the U.S. Some of these products, and actually most all of these products, have multiple denominations. As I said earlier, the breadth of our product offering is proving to be a competitive advantage for us in the U.S. which is a complex market in terms of the wide ranging prepaid product needs of customers. We offer one the best prepaid product suites to retailers in the U.S. which helps us drive the sales growth we are now experiencing.

In Spain, we expanded our agreement with Carpor, a large supermarket chain, to offer wireless product in addition to the telephonic product. Looking forward into Q2, we anticipate that our extra sales commission, which we received from being an exclusive historical distributor relationship with Telephonica, the Spanish mobile operator, will see. This cessation results in a 600,000 before tax and about 400,000 after tax impact on Q2's earnings. This contracted reduction has been anticipated for quite sometime with the plan to offset this reduction by selling the additional products from the other two mobile operators, Motophone and Amena, in collecting those commissions. I'm pleased to say that we are now distributing both of these new mobile operator's products, albeit that they were implemented recently and are just now ramping up so not generating enough revenues yet to offset the sales bonus that we lost from Telephonica.

In Poland. Poland continues to grow with strong improvements in terminals and transactions year-over-year. The terminal growth increased 37% year-over-year while transactions more than doubled, 125% increase over the same period last year. This market is adding mobile phones and more people are converting from scratch cards to electronic. This market is very similar to our U.S. market where transactions just continue to grow fast and even faster than our merchant rates grows and it translates into more customers purchasing at these terminals. Currently 40% of all top-ups are done electronically in Poland and this number will continue to grow presenting more opportunities for us.

Moving on then please to slide number 25. This outlines some of the key business highlights for our money transfer and bill payment in the first quarter. First, let's look at the status of our money transfer business. The states highlighted in orange indicate our current list of licensed and operating states, nine states in total. The states highlighted in red indicate the states where we have been granted a license and our operations are in the pipeline. That's six more states. And finally the states highlighted in yellow indicate states where our applications are submitted and pending approval.

Moving on to the highlights here, I won't go into this state by state. You've got the map. You can take a look at it. So I will go into some of the highlights here. We were granted licenses in five new states in Q1, Arizona, which is a nice state in the sun belt, Idaho, Kentucky, Kansas and Missouri. And we announced the last few states in our Q4 call that they had just come through in January. As you can see, we're starting to receive licenses and are expected to see more states grant us approval to operate. We now have 700 plus sending locations in the U.S. offering our money transfer and bill payment services. From a pro forma transaction growth perspective, we are seeing a 30% increase in transactions year-over-year.

Additionally, we signed distribution agreements in Mexico and El Salvador to expand our points of distribution by more than 1,000 locations. We currently have over 15,500 points of distribution on the receiver side in Latin America.

Moving on to slide number 26. In summary, you can see that we exceeded our forecast on our earnings per share with a strong first quarter EPS at 25%, I mean $0.25, despite seasonality. We saw continued success in our new markets including China where we are on track to roll out our contract at ATM for China Post Bank who are very pleased with our progress. You heard Dan talk about this. It's an exciting market to be in and we are looking forward to ensuring the success of that pilot and making more headway into this market. And if you take the anecdotal story that Dan told, we will do our level best to help customers sleep better at night.

We also launched our EFT operations in the new eastern European markets with agreements with two leading banks in that country. As stated by Dan earlier, we are not disclosing the name of the country or the banks for competitive reasons for the time being.

Next, we saw continued expansion of licenses for our money transfer operations in Q1, five new states, and we are optimistic that we will continue to be rewarded licenses to operate in additional space. This does take some time but they are definitely coming through. On the prepaid front, we continue to expand our prepaid product offering across multiple markets including the U.S., Germany, Austria and Australia.

And finally, we expect our second quarter 2006 earnings per share to be $0.26 excluding the usual items. Overall, another successful quarter. This concludes our presentation portion of the call and we will be glad now to answer questions. Operator, will you assist?

Thank you. Ladies and gentlemen, at this time we will be conducting a question and answer session. [OPERATOR INSTRUCTIONS] Our first question comes from the line of Mr. Tony Wible with Citigroup. Please proceed with your question.

Good morning, guys. I was hoping we could start off with just a couple housekeeping questions. Could you recap in the prepaid business what the organic growth is and just more broadly what kind of impact from foreign exchange you saw this quarter?

Tony, the organic growth quarter over quarter was substantially all organic as opposed to any acquisition. So good strong organic growth there Q over Q. In terms of the FX impact, if we look from fourth quarter to first quarter, it didn't change significantly, moved a little bit but not much. But if you compare to last year's first quarter, it moved quite a bit. You may recall that the Euro was in about 132 to the dollar exchange rate, kind of give or take in the first quarter of last year, and it was in about the 120 range this year first quarter. So that was in the ballpark of a 9 or 10% change year-over-year. So it had a rather dampening effect on our year-over-year performance. Had we not had that change in the FX, clearly our first quarter this year would have been much better over first quarter last year.

Am I doing my math correct in saying that if you had 70% of your revenues coming from Euro regions or currencies pegged to the Euros that then you would have roughly 5 to 7 percentage points of exposure to the top line this quarter?

Yes.

Next question has to do --

Except, Tony, I think and certainly that's the case, but I think we are at least in a fortunate position where the Euro appears to be expanding against the dollar.

Next question has to do with the guidance and just the growth rate. You guys have obviously cited a lot of positive factors that are driving the growth now and into the future. I guess I want to try and understand I guess the guidance and it looks like the growth having come down just a little bit. Is that essentially because of Spain in addition to the money transfer business requiring additional investment? Is that how we should be looking at that?

If you take a look at just those two things, that's probably the lion share of the -- I mean, that took $0.01 a share away from Q2 without us even starting the quarter.

Okay.

Give you a little more -- if you look at -- we spent $600,000 which is $0.015 because it's in the U.S. for money delivery or money transfer, so that is an investment and then in addition to that, about another 400,000 after tax in Spain. So if we weren't in money transfer and Spain didn't turn around, there would be $1 million difference.

Got you. Last question here and I will jump off. The pilot you are doing for trying to China Post right now, is there a time line set for when a decision would need to be made or any kind of parameters around how long they'll pilot?

Tony, this is Dan. The general parameters around it is that once the pilot is fully rolled out, there would be a 90 day evaluation period at which time the contract potentially could be expanded. But what we're real pleased with is that even though the pilot isn't completely rolled out, we're already in some earnest discussions with the banks in terms of what next cities we can take the service to.

And I know you are servicing two of the major cities there. Any idea how many ATMs, I know how many ATMS they have in total, but how many ATMs do they have in those two particular cities, Shanghai and Beijing?

I would say that each one of those cities they have about 300 to 500 ATMs in each one of those cities. Also, it's spread out across the entire country because obviously every one of their post branches is a bank. But they are, what is encouraging to us is that they are looking for doing some pretty significant growth in those two cities.

Thank you, guys.

Plus the other thing is as WTU allows -- WTO allows for the entrance of multinationals to come in, I think that's 2008, is they will all be focussed on the big metro areas.

Great, thank you again.

Thanks, Tony.

Our next question comes from the line of Mr. Mark Marostica with Piper Jaffray. Please proceed with your question.

Good morning.

Good morning.

First question relates to a follow-up in regards to the China opportunity. And I'm just wondering as you look at potential for expansion of the relationship with China Post, will any of this business goes up for competitive bid or is it the case that it's basically yours to get?

I can't say that it won't go up for competitive bid. There is always that likelihood or -- I should say always that possibility. But again, we see we were the first and the only that can offer such service in the market.

We are also the only one that's got a processing center, Dan, are we not?

That's correct, Mike. So we're pretty confident that we continue to do the good job and deliver and maintain the relationship that we should be able to just roll into and expand the agreement under the existing terms.

Fair enough. I know that you did not disclose the new eastern European market nor the two banks that you now have secured deals with. But can you give us a sense of the relative size of the opportunity in the market and the two deals, perhaps number of ATMs that are added to backlog or are they in the backlog? Maybe a little color there would be helpful.

They are not in the backlog and all those kinds of questions with detailed numbers may give you the ability to figure out what country it is.

We're not saying the population of the country and such. What this is an opportunity that we are going into the market and it's a pretty virgin market with a number of retail banks that have very low ATM counts and our pitch is to go in and say we as Euronet, we will deploy 300 ATMs in this market. We will build a shared ATM network for you from day one. But we're going to get three banks to pay a pro rata share of the cost of these ATMs so we underwrite the cost of the network pretty much from day one when we go live and then as new banks join the network, then it becomes a profitable business. We are looking at about a 300 ATM network rollout potential, phase one with this deal. And then we expect with that will bring the outsourcing of various banks, existing ATMs in that market.

Sounds good. The question on seasonality, I suspect seasonality but perhaps a little more color. The first quarter transactions were EFT were flat quarter over quarter and prepaid were down a little bit quarter over quarter. And I was wondering looking back to past years, we've typically seen an uptick or a slight uptick. Is it that the normal seasonality just showing itself this quarter? Or is there something else I should read into this?

I think you see the normal seasonalities are showing itself. Typically in the past quarters, we see the uptick in the fourth quarter and then in January everybody feels real poor and the transactions drop off. By March, March transactions are back up to November's level. So the seasonality we see this year with prepaid, with transactions dropping, Q4 to Q1, hits the spot right on the seasonality and what we are really proud of on the EFT side is that new business that came in in the first quarter, ATM ads in India, the Streamline acquisition for the EFT side for others is what gave us Q1 over Q4 growth. But for example our business in Germany, transactions dropped from Q4 to Q1. The seasonality is there. You can count on it.

Last question and I will turn it over. Essentis looked like it hurt operating margin in the software segment in the quarter. What type of drag are you expecting with regards to Essentis over the next few quarters? When should that be contributory and as you kind of look to how you can leverage that relationship to other deals, can you give us a sense for a pipeline of potential opportunities that that acquisition may give you?

Sure. This is Dan. I can tell you I will say publicly when we first looked into Streamline, I wasn't too excited about it because of the drag it would have on our earnings and the challenge of running a software business. But post acquisition, I'm very excited about what we have here. I think we have the best piece of software available today for merchant and credit card processing, bar none, in terms of its flexibility and scalability, cost point, et cetera. From a drag on our earnings standpoint, as we already given guidance on, we think it will be about $0.01 drag per quarter for the first half of the year. And it probably will be on a break even in terms of the second half of the year. But from what it can lead to as we have talked about this software being run by UBS in Switzerland, this is being run by Adee and Amro in the Netherlands. When I was in China three weeks ago, I had a meeting with Bank of China. And Bank of China has brought the product live and it has allowed us to introduce ourselves and some very interesting dialogue with Bank of China in terms of what their plans are to roll out that business. So where I get very enthusiastic about this opportunity is the acquisition that we made of Arksys a number of years ago, first it gave us ownership of BIP in terms of running our switches to run. Therefore made entry into India and China very low cost. But it also gave us entrees and relationship with a number of banks where we are allowed to enter in outsourcing agreements. I firmly believe that with incentives we have the ability tom now with a low CapEx investment, be able to build our capabilities for POS and credit card processing and based upon conversations we've had with some of our existing software customers that they sent us, I think we've got outsourcing opportunities available to us with a handful of those banks.

Thanks very much. I will turn it over.

Our next question comes from the line of Mr. Robert Dodd with Morgan Keegan. Please proceed with your question.

Hi, guys. Another question on seasonality, it was largely expected on the prepaid side as well. I guess could you tell us which markets were down sequentially? The U.K. I would imagine would be the obvious candidate. But were any of the other prepaid markets down sequentially?

On a seasonal basis, yes, Robert, Germany, because of its -- I mean, generally going to be the very high volume kind of heavy prepaid. But we did -- Germany and Australia, but we did see expansion in the United States, very nice expansion first quarter, because the growth rate there is just really, really strong. And Poland, New Zealand. But our big markets that are very significantly concentrated with prepaid users in those markets.

In Germany, in particular, how much of it -- did terminal sales, for example, drive that sequentially or was it primarily the curving transaction piece?

No. It was really the transaction piece. In Germany, a little bit more. One of of the things we also do in Germany is we do credit card processing there. So we get a little bit more of the holiday season processing there for those card transactions. So it's really nice in that it strengthens the relationships with retailers, gives us that extra product in Germany. But it does have a little bit more of a stronger seasonal impact than just the prepaid product.

Okay. There has been a story that on the Dow Jones in the Hungarian press, the OTP is going to buy some of your ATMs at some point. If I remember right, they bought some ATMs from you back in 2001 as well. Is there any truth to that or can you give us any clarity there?

Sure, Robert. This is Dan. That is the same transaction we talked about a couple years ago. What that article refers to is that up until now, the ATMs that OTP acquired from us had remained branded as Euronet ATMs. And so under the terms of that agreement, the ATMs were to be kept branded as Euronet ATMS for a period of time which then they were converted to be branded as OTP ATMs.

Okay, got it. And also this new eastern European market you are talking about, you have been ramping up over the last couple quarters and it should continue your own ATM basis. Is that tied to this deployment of ATMs in a new market so you can then sign outsourcing agreements on that, or will you further ramp up deployments of old ATMs?

Yes, on both of those, Robert. I will answer the second one first. We will continue to opportunistically roll out our own ATMs. We were continuing to do it in Germany. We are taking a pretty strong rollout of some ATMs in Poland, strong compared to what we have done in the past. We're looking to maybe do 100 machines there because that market is good and strong. The network that we own in Hungary -- I'm sorry, in Poland and Mike's actually over there right now, those 400 plus ATMs in great locations actually brings us into some great relationships with banks because they want their customers to have access to those ATMs. We then get connected to that bank system and it makes it real easy to connect to run those bank's ATMs down the road. So when we look at this new market we've announced that we want to roll out ATMs there in that market under shared ATM network basis, it allows us to drive that market, to get in there, build relationships with the banks and actually our ATMs that we roll out on an off premise shared basis actually reduces the number of ATMs that the banks themselves may roll out and leads into discussion of gee, I'll just outsource what I do have to Euronet. There is a method to the madness and it all makes money for us.

On the Essentis side, you bought that -- you basically bought the assets on the platform out of bankruptcy there. What's the status of the sort of sales infrastructure on that side? Is that what's driving the losses in terms of you building or growing the sales side of that business? When can we expect that to go -- ?

What we found with Essentis, as I said, is an excellent product. And actually had a pretty good sales pipeline but it stalled because no customers were willing to make any sort of commitments with Essentis based on the financial situation they were in. What we have been in the process of doing over the last three to four months is rebuilding the credibility of Essentis. We don't need to rebuild the credibility in terms of their product but rebuild credibility in terms of the financial strength of the business. And so we had Dave Morgan and Ken Heights, Anthony Brown, the gentleman with Essentis and also a gentleman who came from Euronet, kind of hop around the globe. Mike and I chip in when we can to just educate the customers and say, same great product, now with new ownership that's committed to growing it. As part of my meeting with Bank of China a couple, three weeks ago, is to reassure them of our commitment to that software and give them comfort they can count on that for their long-term growth. That's why we see that it's going to take the first half of this year to get customers comfortable with what we can do and the second half of the year before we start getting some commitments and some increased revenue coming through.

And if I can one more on that issue. What's the status of, if any, between Arksys and Essentis in terms of cross-selling the Essentis platform to the Arksys customers or even integrating the software into the Arksys bank platform?

There is not a lot of just raw synergies between those two software divisions. Essentis runs on an IBM main frame. The Arksys software runs on an IBM AS-400. We are seeing preliminaries, a lot of the prospects in Asia are AS-400 shops, as well as IBM mainframe shops, so we could come in and say, take Essentis for your card and POS and take Arksys for your ATM. But we're really not counting on a lot of that. Really, the main synergies that we have is that Cindy Ashcraft, who is the managing director of our software business in Little Rock, she has now taken responsibility for being the managing director of the Essentis business. The same core management team that was running Essentis, we just complemented them with Mr. Morgan who is in charge of our sales group, so we are leveraging our sales force, leveraging our management but leveraging our knowledge of running the software business in terms of revenue recognition and controls and et cetera, et cetera. So it's in essence it's a business that's pretty easy for us to digest, if you will, and understand it. But the Essentis team will pretty much still have to grow on their own merits.

Thank you.

Our next question comes from the line of Mr. David Parker with Merrill Lynch. Please proceed with your question.

Good morning, everyone. Dibels highlighted on their call yesterday that they are seeing tangible growth opportunities in central and eastern Europe. They are actually building a new facility, and then you guys have mentioned a few new deals that you're winning. Are you seeing a pickup in business or is it just business as usual?

I think for us, it's business as usual which has always been great growth and I think for guys like Dibels, who are just kind of waking up to it, they are starting to realize there is growth.

Just as a follow-up to a prior question on organic growth. Just moving on to a different subject. You're about ready to anniversary a number or three deals that you made in the prepaid business. You've been able to post greater than 25% growth on the top line for the last few quarters. Should we expect that growth to go to dip below 20% for the next few quarters as you anniversary those deals?

I don't see what the anniversary really has to do with that. Could you maybe clarify? David, I guess I anticipate implied in that is the kind of growth coming from acquisition type of activities. And this quarter we saw very little incremental lift from acquisitions. We can have a little bit more so in the second quarter. But I think it will, since we have been awhile since we've had a fairly substantial prepaid acquisition, I don't think we will see too much of the impact of acquisitions bleeding into these next couple of quarters.

So it's safe to say that you will be able to continue to post greater than 20% growth on the top line?

We don't ever answer that question. We give you one quarter at a time kind of earnings guidance. At least I don't think we have done it lately, have we Rick?

No, we try to stay away from those detailed estimates.

But we appreciate your question.

Okay.

Ask it again next quarter and you probably asked that last quarter and I forget.

Someone else might have. And then just final question. Any update on acquisitions and what your plans are for the cash on your balance sheet?

Well, we have. We have -- we probably have, I don't know, two, three, four, potential acquisitions that we are running them through our gauntlet at any given time that you would talk to us. We can't -- we won't close the deal unless it's the right deal. So all we do is tell you that we got them in the pipeline. And we were looking at several now. We were looking at several a week ago and a month ago. When we get one, we will close it and then we'll announce it. A couple times, honestly we have gotten what we know is 99.5% of the way there and then we find some skeleton in the closet that would force us to go back and reprice and maybe the seller would walk or balk. For that reason, we don't give any indications any more than what I said because it's kind of like an ATM contract. You never know when or if it's for sure ever going to sign. But trust me, I know we have a large war chest. I know that our 50, $60 million of positive cash flow per year is adding to that. I 'd certainly like to do some accretive transactions with acquisitions. But so far I'm not going to announce one today and I will let you know as soon as I get one.

Thank you, guys.

We do have a nice pipeline. Actually, our pipeline is really no smaller than it's ever been.

Great, thanks.

Our next question comes from the line of Mr. Franco Turrinelli with William Blair & Company. Please proceed with your question.

Gentlemen, good morning.

Good morning, Franco.

One quick question which is can you give us a little more insight into the Essentis revenue model? In particular, I'm looking to understand what your sensitivity is to the continued growth of your customers so, maybe Dan, you can talk specifically whether or not Bank of China would need to come back to you to expand the relationship as they grow.

I don't want to get too focused on just Bank of China but that's an example of one to where license agreement was signed there. We're actually a subcontractor to IBM which has the agreement with Bank of China at this point. But that license agreement calls for a certain number of cards and terminals that Bank of China would use to offer support. Once they exceed that number, they would be up for additional license revenue there. But the Essentis revenue line is again very similar to what we had at Arksys where we've got, Rick, you might help me out here. But it's 50 plus percent of revenue, I think, out of Essentis comes out of maintenance agreements. That's good, strong recurring revenue. We have another slug of percentage of the revenue that comes out of existing customers that need fixes and upgrades and et cetera. And then the other piece of revenue comes from new business. The company did come with a backlog of revenue that's coming through based on builds that are being done with Monaris which is a big merchant up in Canada so building that system for them as well as for a few others. The revenue line has visibility. And the revenue line has enough visibility to give us confidence to give the guidance we have given for this calendar year on Essentis.

Okay, but the key being that as your customers grow, you will be able to grow along with them.

Absolutely.

And again, part of just the P.R. campaign is for us to tell the customers that. That as you are growing, have faith that we're going to be here to grow with you. Let's sit down and talk your plans.

Great. Dan, actually I have a follow-up for you. It's deja vu all over again. You are talking about prepaid recharge at ATMs and I'm sure a lot of people on this call remember your efforts in Poland many years ago. Is this something that you -- is this a channel for prepaid that you see being applied to other markets other than India which is I think the only one that you talked to us about.

Yes, we had a solution up and running in Hungary, Czech Republic and Poland. We saw that a very small percentage of the prepaid purchases being done at the ATMs in those markets. We actually led in India with the solution. It was kind of a hot button, if you will, for the mobile operators and mostly the banks in India. And although it's kind of like that Mastercard commercial in terms of the revenue volume we will get off of signed prepaid on ATMs is going to be $20,000 a month. However, the connections that we have to 80% of all the debit card base in India, that's priceless. And that's really what the prepaid air time connections by the ATMs has given us in India is connections to all the those banks which now has made a lot of cash very easy, allows us to very quickly when we get an ATM outsourcing contract with the bank to take over those ATMs and ramp up quickly. With that being said, we actually are seeing probably a higher percentage of uptake of buying prepaid airtime at the ATMs in India than our other markets but on a relative basis to our overall business in India, it's going to be small.

What about markets where there is very, very high ATMs present? I'm thinking specifically of the U.K., Poland, Germany, where also you own ATMs and a couple of those markets. It would seem like a pretty easy addition to your distribution channels.

Right, and we have that. We do it in Poland with all three operators sell their prepaid through our ATMs. Czech Republic, Hungary as well. It comes down to the consumer habit. There is not -- there is not a grossly dramatic improvement in customer convenience of buying air time at the ATM as compared with buying it at the checkout counter or grocery store when they buy their beer and their bread. We just -- it's an incremental add for us and it's nice to have, but it typically does not move the needle in our markets.

It's really more so to have a good product to offer to the banks. It gives the banks a little supplemental income and things like that. We have product and things that we can put out there that others don't. It strengthens that relationship.

Exactly.

Great. And I can imagine you have the 24/7 convenience of an ATM might come in handy when you need to call home when you are still at the pub. I think that the dead horse of the day that we all have to flog is this guidance question for the second quarter, this buildup of network in this undisclosed eastern European countries, 300 ATMs, that can't be the Vatican City. Is that something that is impacting near term profitability in a meaningful way? Or is it not an issue?

Meaningful way?

I wouldn't put it in the category of meaningful at this point. We have been investing in that market for the last couple three or four quarters anyway. And we -- as I said, we signed two banks already to help underwrite the cost, rolling out that network and we believe by the time those costs really start hitting the P&L, we'll have the third bank signed up. I think it's really just as Mike mentioned, as was disclosed in our K, we've got some softness coming out of the Spain business and then the continued investments that we've been making in our other markets.

But Franco, in some of the markets that we do make these investments that are emerging markets, keep in mind that $0.01 of a share for us is only about $400,000. And so a few markets where we may invest a $100,000 a quarter, it doesn't take but a few of those to add up or a couple of them to add up to be in that $0.01 range. Recognizing the, I don't want to say insignificance, but the relative insignificance of that kind of spend for the kind of opportunity, we certainly believe that the opportunities are well worth continuing to put our foot forward in those markets.

Agreed. Thank you for the reminder. Thanks.

Thank you, Franco.

Gentlemen, there are no further questions at this time. Do you have any closing comments, Mr. Brown?

No. I would just like to thank everybody for taking the time to listen and we will look forward to speaking with everybody in about 90 days. Thank you.

Ladies and gentlemen, this concludes today's teleconference. Thank you for your participation. You may disconnect your lines at this time.