Euronet Worldwide Inc (EEFT) 2006 Q2 法說會逐字稿

Greetings ladies and gentlemen, and welcome to the second quarter 2006 earnings conference call. [OPERATOR INSTRUCTIONS] As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Mr. Jeffrey Newman, Executive Vice President and General Counsel of Euronet Worldwide. Thank you Mr. Newman. You may begin.

Thank you. Good morning and welcome everyone to Euronet Worldwide's quarterly results conference call. We will present our results for the second quarter 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'd like to make a disclaimer concerning forward-looking statements. During this conference call, representatives of Euronet Worldwide will make statements concerning the company's or management's intentions, expectations or predictions of future performance, including selected financial guidance concerning the company's results. These statements are forward-looking statements. Euronet's actual results may vary materially from those predicted or anticipated in such forward-looking statements as a result of a number of factors including competition, technological development, inspecting 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 but not limited to its form 10-K for the period ended December 31, 2005, and its form 10-Q for the period ended March 31, 2006. Copies of those filings and other public filings of the company may be obtained by contacting the company or the SEC. Euronet does not intend to update these forward-looking statements and undertakes no duty to any person to provide any such update.

Now I'll turn the call over to Rick. Rick?

Thank you Jeff, and welcome everyone. If you go to slide 5, I'll get started. For the second quarter 2006 the company produced revenue of $153.8 million, operating income of $12.2 million, EBITDA of $21.3 million and earnings per share of $0.26 cents excluding FX losses and share-based compensation. Revenues, operating income and adjusted EBITDA improved by 16, 8 and 16% respectively year over year. Finally the company's diluted earnings per share, again excluding FX and share-based compensation, improved by 13% from $0.26 cents from the $0.23 cents posted last year in the second quarter.

Now let's move to slide 6. Here on slide 6, we can see our revenue for the second quarter 2006 compared to the past two years' same quarter results. On an annualized basis, our revenues are now exceeding $600 million.

Let's move now to slide 5. Consistent with the revenue growth we see that our operating income and adjusted EBITDA improves as well. As you will likely recall, in the first quarter we adopted FAS 123(R) for share-based compensation. Share-based compensation charges were approximately $1.9 million in the second quarter 2006 compared to $1.3 million for the second quarter 2005. The increase in this year's expense is largely the result of the accelerated expensing requirements for performance-based restricted FAC awards that were not included in prior years.

The mix of share prices coming in and going out of the current period calculation and the growth of our employee base as a percent of revenue is higher non-cash charge amounted to approximately 5%. So if you equalize share-based compensation between quarters, quarterly operating income would have improved by 13% year over year. As a side note, I'll also point out here that our board recently approved the awarding of additional restricted stock. These awards will increase share-based compensation charges by approximately $500,000 starting the third quarter.

Accordingly when I commented on the year over year percentage increase in operating income a couple of slides back, I noted that operating income grew at 8% while revenues grew at 6%. So the additional share-based compensation expense I just discussed accounted for more than half of the difference. Further contributing to that difference was the exploration of a preferential exclusivity commission rate we were receiving in the Spanish prepaid market, and money transfer operating losses occurred in this quarter's results. We will comment more on these items in a few minutes.

When you look at the adjusted EBITDA results, you see that adjusted EBITDA grew consistent with the 16% year over year revenue growth. Note also, we excluded share-based compensation from adjusted EBITDA because we don't see share-based compensation as a cash-impacting expense. Moreover, in that adjusted EBITDA kept pace with our revenue growth despite the impacts of our expiring Spanish preferential commission and the money transfer investments, all other parts of our business continue to reflect the leveragable results we've been well-known for.

Slide 8 please. On slide 8 we illustrate year over year quarterly transaction growth. Year over year transaction growth has fueled the revenue growth we've reviewed a couple slides ago. Transaction growth came in both the EFT and prepaid segments.

Now to slide 9. On slide 9, I'll review our segment's year over year quarterly results, starting with the EFT segment. Revenues grew 25% with a 27% increase in operating income. Our EFT segment continues to see both top-line and bottom-line benefits from our success in both the European and Asian markets. We continue to add to our counts of total ATMs managed, and we have consistently seen improvements in transaction volumes. We're very pleased with these results, given that we continue to make significant investments in the Asian Pacific and its Eastern-Central and Eastern European markets. Dan will cover these in more detail when he speaks about EFT in a few minutes.

On the prepaid front, revenues improved by 11% year over year, while operating income decreased slightly by 2%. The difference between revenue growth and operating income is substantially all accounted for through the $1.1 million pre-tax impact, resulting from the expiration of the preferential exclusivity commission arrangement with a Spanish mobile operator and approximately $400,000 increase in net operating expenses of the money-transfer business that was acquired in the second quarter last year. If the Spanish business were excluded from the prepaid segment second quarter 2006 and 2005 results, our operating income from all other prepaid operations would have improved 22% year over year. Furthermore, if the investments of net operating expenses in the money-transfer business were excluded, together with the Spain impacts, quarterly operating income of all other prepaid operations would have improved 28% year over year. And finally, if you exclude the impacts of the Spain prepaid and the money-transfer business from the total prepaid segment, our operating income as a percent of revenue improved year over year, a nice result.

You may recall that in the first quarter earnings call we stated that the impact of the expiring commission would be approximately $600,000. During the quarter we took a more conservative position on the recovery of preferential commissions from retailers in interest of managing more closely the retailer's reaction. We did this because we felt it was the best practice for Euronet in the long-term. Accordingly our recovery of these preferred commissions will happen over a longer period of time. We also disclosed that while the preferential commission rate was expiring, we had started distributing through our retailers mobile phone content of two other mobile operators, the other two mobile operators in Spain. Retailer acceptance of the multi-operator offerings has been very encouraging to date and should provide us additional opportunities from the existing retail base over time that should help offset the loss of the higher exclusivity commissions.

Aside from the impacts from the expiring Spanish commission and investments in the money-transfer business, all other pre-paid businesses came in with good year over year performance. The strength of our performance in our diversified markets enables us to take the position on recovery of the preferred rate from the Spanish retailers. Mike will cover more details about prepaid in a few minutes.

Now a few comments on our balance sheet on slide 10. Our balance sheet remained relatively constant this quarter. Our cash increased by about $9 million, which is the net results of the EBITDA offset by taxes, interest and capital expenditures. You'll note that our debt and related debt statistics remained essentially unchanged, while finally, while it does not show up on our balance sheet, in the second quarter we amended our revolving credit agreement to allow for greater operating flexibilities. We added a feature which allows us to increase the line from $50 million to $65 million, and we extended the maturity from October of '06 to May of '09. Since we have borrowed only about 7 under the line, and we've earmarked about $6 million for stand by letters of credit, we have more than $50 million available for general corporate purposes. Our $65 million line of credit, together with more than $230 million cash, gives us a strong and flexible balance sheet to grow the business.

I'll move to slide 11 and wrap up with a few comments on earnings per share. Our diluted earnings per share of $0.26 cents met our expectations for the quarter. Note that these earnings per share numbers excluded the impacts of FX and the new FAS 123 share-based compensation charges. Thanks for your time and attention. I'll now turn it over to Dan to chat about EFT.

Thanks, Rick. We'll now move on to discuss the EFT processing segment. If you just skip on over from 13 to slide 14. Slide 14 gives a snapshot of our EFT financial results, which show improvements in all of our key P&L line items. A revenue of $32.4 million in second quarter 2006 was up 25% over the same quarter last year. Our operating income of $8 million in second quarter saw a 27% increase over the same quarter last year. And our adjusted EBITDA of $11 million in second quarter saw a 26% increase over the same quarter last year.

Next slide. Slide 15 graphically shows our consistence in improving quarterly operating income and adjusted EBITDA results for the second quarter 2006 compared to the past two years' comparative quarters. Our EFT operating income increased by 27% year over year while our adjusted EBITDA saw a 26% increase for the same period. We continue to see improvements in our margins year over year. Operating income margin of 25% in second quarter 2006 increased from 24% same quarter last year, and our adjusted EBITDA margin improved from 33% last year to 34% second quarter this year. So again, another strong growth quarter for EFT.

We'll now move on to discuss the second quarter 2006 EFT business highlights. Jump to the next slide. Slide 16 outlines the highlights from Europe, Middle East and Africa. We saw a 31% increase in transactions processed on our ATMs managed year over year in our EMEA EFT business. For example, in markets such as Poland, we started deploying some of our own Euronet-branded ATMs, and transactions processed on these ATMs are increasing significantly. Between Euronet-owned and outsourced ATM machines, we currently have more than 2,000 ATMs in Poland which we operate. This accounts for approximately 23% of the total ATMs in this country.

We continued our expansion in investments in new EFT markets. We signed an agreement with a leading bank to roll out 100 ATMs in another new central-eastern European market. Live operations are planned for the third quarter. As stated in our last call, for competitive reasons we will not disclose the name of the bank or the new market at this time. Nevertheless we're very pleased with our continued efforts in opening new markets.

We've added a third customer in our other new Eastern European market, which we announced in the first quarter. The succession of agreements signed in this new market is indicative of the opportunities available for us to expand in this other market. Finally in EMEA we continue to expand our POS processing business by signing an agreement with Citibank Slovakia for POS processing.

Next slide please. In slides 17 and 18 we'll discuss a few of our highlights in Asia. First with India, we continue to successfully expand our ATM outsourcing agreements with existing customers. Centurion Bank of Punjab expanded their agreement to outsource their remaining 244 ATMs from their network to Euronet in India. This is in addition to 164 ATMs that we are managing for Centurion since February 2005. The bank has now outsourced their entire network of 408 ATMs to us.

We also added a new member to our Cashnet Shared ATM Network, HSBC. HSBC is a leading multi-national bank, and they joined Cashnet Network, which continues to be the largest shared ATM network in the country, accounting for more than 30% of all ATMs in India.

This year, we've had a little bit of a challenge with the Reserve Bank of India in delaying the approval of banks' multi-year ATM rollout plans. We expect by the end of this year there will be some approvals granted. This quarter we saw a 33% increase in our outsourced ATMs over second quarter 2005 and a 51% increase in contracted but not yet installed ATMs for the same period. However, sequentially quarter on quarter we saw only a 3% increase in live outsourced ATMs and a 15% increase in contracted but not yet installed ATMs. This is a direct result of the Reserve Bank of India regulation on new ATM deployment. Our team in India is making up for this shortfall with a more aggressive strategy in terms of taking over existing ATM networks and banks, such as Centurion Bank of Punjab in second quarter and ING in first quarter. In fact, as of last week, we've completed a takeover an additional 244 ATMs contracted from Centurion in June. We now have approximately 1,750 ATMs live and under management in India.

Next slide. Slide 18 outlines some of our highlights in China. At the end of the second quarter we had installed 58 ATMs in Beijing and Shanghai. The deployment of the remaining ATMs, primarily in Guangzhou province, has been delayed due to Post Bank. The bank's interface to the back office branches in Guangzhou is not standard with its other regional postal offices. The bank is currently implementing software changes to standardize this back office interface. We expect to install the remaining ATMs in a few months.

Moving on, I'd like to share a few early benefits experienced by Post Bank from our pilot ATM project. The bank saw a 27% increase in transaction volumes on the new ATMs deployed and managed by us, in comparison to the bank's managed old ATMs. This is primarily due to our installation of new ATMs in prime, high-traffic locations at the bank branches, our superior design and branding of these ATMs. The bank also experienced a significant increase in up-time on these new ATMs managed by us in comparison to their old ATMs, including a significantly improved turnaround time for problem resolution.

We also introduced automated tools and operational processes, which has reduced the workload of Post Bank staff, who can now focus more of their time on managing their core banking businesses.

Finally, we continue to discuss marketing efforts with Post Bank and other banks in the region, including our extensive software customer, Bank of China.

Next slide please. On slide 19 we outline our combined ATM categories by quarter. Since our last call we've added 253 ATMs to our EFT network. The slow-down in addition of ATMs quarter on quarter turnout work is mainly due to Reserve Bank of India regulation on new ATM deployment in India. We now have a total of 7,866 outsourced ATMs. That's a 20% increase over the second quarter of last year.

In the ATMs under contract category, we have 1,063 ATMs under contract not yet installed. That's a backlog equal to approximately 14% of our current base and shows a 25% increase year over year in this category.

Next slide, slide 20-- moving on to our software segment. We signed a significant agreement with OTP Bank in Hungary for extensive software. We're very pleased to close this agreement. It further justifies our decision to purchase the best piece of credit card issuing and merchant-client software available on the market today. We continue the implementation of the Moneris agreement with additional services and function requirements requested by this leading Canadian merchant enquirer. We completed all renovations of the Census Legacy Agreements, and we signed a major agreement with our ITM software with Westpac Bank in Australia. So it was a good quarter for our software business as well.

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

Thank you, Dan. If you'll just jump over here to slide 22. As you can see our prepaid revenues of $114 million in second quarter 2006 were up 11% over same quarter last year. Our operating income of $8.1 million decreased slightly, which was 2% over second quarter of prior years. Our adjusted EBITDA, as Rick mentioned before, saw 4% increase over last quarter.

As I mentioned in the last call and Rick talked about in pretty much detail, this quarter our prepaid segment results were impacted by the expiration of the preferential exclusivity arrangement we had with a Spanish mobile operator, and also by our incremental investments. We had more than we thought we would have a quarter ago in our growing money-transfer and bill payment businesses. If we exclude these two businesses, our pre-paid segment's quarterly operating income from all other prepaid operations around the world would have improved by approximately 28% year over year. And if you exclude just the Spanish business, the segment improved its year over year operating income by 22%. Either way, we've got strong businesses around the world. We did get hit by the Spanish thing, but otherwise we're feeling pretty confident about this line of business.

If you'll move on to slide 23, you can see the bars that are adjusted EBITDA and operating income. Weak growth for this segment. You can see quarter to quarter, second quarter '05 to second quarter '06 was primarily a result of the two issues that I mentioned before, the investments in money-transfer and a little bit in Spain as well.

Moving on to slide 24, I thought I'd give you a little bit more color here on the Spanish issue. Our preferential exclusivity bonus margins expired in May of 2006, as I mentioned it would in our last call. This reduction in bonus margins affected our overall prepaid margins in second quarter because the net operating losses from this margin came to $1.1 million, which is a bit higher than the $600,000 that we originally planned for second quarter. We chose to pass on only a portion of this bonus margin reduction to retailers and distributors in the short-term, and our plan is to spread this out over a longer period to guard against the loss of retailers while we cross-sell our additional prepaid products.

We also successfully added Aimia and Vodafone content on our terminal network. We doubled our addressable market in Spain by doing this. We now have access to 100% of the pre-paid content in this market, with they call in Spain as a tri-color prepaid offering. We have Telephonica, Aimia and Vodafone. We're on track now to offset the loss of this exclusivity bonus, and in fact our sales from Aimia and Vodafone as we sit today now account for approximately 35% of our retailers' sales, and we expect that these numbers will increase further in the third quarter.

In addition we're seeing good uptake of our new products, the first of which is long-distance, that we've rolled out to more than 1,000 terminals. Here's just kind of a comment on the side here. Despite a higher than planned loss due to the bonus margin reduction in Spain, we've still made our profit numbers for the company at $0.26 per share in the second quarter. The reason we're able to do this is because of the company. We're well diversified, both in our segments and in our geography. This is the beauty of our business.

If you move on to the next slide, slide 25, we can talk about our other markets. Here we show our—we can start with Germany and talk about that for a second. We signed and rolled out prepaid at 2,100 outlets for a leading discount retailer owned by Reva. This is the first discount retailer for which we have launched prepaid in Germany. We also completed the takeover of the remaining 500 terminals of DTV, a leading airtime distributor. These terminals were previously served by a competitor, and we now process pre-paid on DTV's entire terminal network, a good win for us. Congratulations to the German team.

We continue to add new prepaid wireless content. We signed an agreement with Blau, a new virtual mobile operator for top-up distribution. And our newest prepaid market, Austria, is on a roll. This market has one of the highest mobile penetration levels in Europe, theoretically 100% in penetration rate. Of the $8 million mobile subscribers in that market, about half of them are prepaid subscribers. We've rolled out prepay on more than 6,800 terminals, mostly through integrated electronic POS systems for Reva and Spar Stores. We're leveraging 100% of our German prepaid business resources to oversee the Austrian market, where we are currently positioned as the second largest prepaid provider. I might also add that just 3 or 4 months ago we didn't have any market share at all, so we've certainly made some fast progress in Austria.

In Australia and New Zealand, we renewed agreements with leading retailers in the Petro Fuel Channel-- BP and Mobil Quick in Australia and Shell in New Zealand. We signed "Mobile to Go," a new virtual mobile operator for top-up distribution, and we also added 600 new bank terminals to our route independent market channel. In New Zealand, we rolled out prepaid in 500 additional new stores in Q2, continuing to add to our merchant base. Very strong growth year over year.

Moving on to the next slide, slide 26. In the U.S. we continue to see an increase in our terminal network and transaction volume. Year over year our terminal network increased by 36%, while our transactions increased by 86% over the same period. The strong year over year growth we're seeing in our U.S. market indicates that our terminals are transacting more, meaning there are a lot more prepaid users than there were last year. In addition to more prepaid users, we're also seeing an increasing shift from scratch cards to electronic distribution among mobile operators and retailers and an increase in the transactions from our other prepaid products as well. All of these factors are continued signs of a growing market, and we're pleased that our investment in this market is paying off.

We continue to see a strengthening in our prepaid offerings. We've signed an agreement to launch a comprehensive gift card mall solution into 4,000 "C" stores in the U.S., and this product further complements our extensive prepaid product suite. In fact in the U.S. we have the most comprehensive prepaid product suite of all of our markets. In the U.K. we've introduced new top-up products, the popular i-Tunes product in Tesco stores and "Skipe" and Sainsbury's, two of the largest supermarket chains in the U.K. We also rolled out bill payment solution across our terminal network. We continue to expand the breadth of our product offering in many of our markets and on our existing prepaid terminals at very low cost, providing our merchants additional revenue streams and further enhancing our sales growth.

We signed two significant ATX agreements as well, one in the UAE, United Arab Emirates, and one in France. These agreements contributed significantly to our transaction increase this quarter in our prepaid segment. We can't forget Poland. Our terminals and transaction volumes continue to grow in this market. Terminal growth increased 36% year over year, while transactions increased 84% for the same period. We see a similar train in this market as in the U.S. Transactions are growing a whole lot faster than our merchant base, another strong indicator that there are more mobile users being added to that marketplace.

If you'll now move on to slide 27, I'll give you a quick update on our money transfer and bill payment business highlights. We've got a new map this quarter, and you can see by looking at the colors of that map that we were granted licenses in additional states in Q2-- in 8 additional states, including license approvals in 3 of the top 6 remittent sending states-- Florida, Texas and New Jersey. The other 5 states that we received licenses for were Oregon, Nevada, Washington, Wisconsin and Alabama. We are now operating in 15 states total. Our sales teams are in each of these markets signing on new merchants and rolling out our money-transfer and bill payment services. We now have nearly 1,000 sending locations in the U.S., enabling consumers to send money to their family and friends in 15 countries in Latin America in a convenient way. Keeping in mind our target audience for our money-transfer products, we're focusing on ethnic, high-volume transaction stores in all of our operating market. This quarter alone we signed and deployed 240 new ethic stores, and we hope to see more volume coming out of such stores.

If you'll go on to the next slide please, slide 28—a few more highlights in this area. In kind of a recap in where we were since we bought "T USA" [TelecommUSA] one year ago-- Within a year of acquiring "T USA" we received money-transfer license approvals in 13 additional states, so that we can now do money-transfer and bill payment. Of these 13 states, licenses in key states such as Florida and Texas actually came earlier than we expected, and were quite a bit different in what the market told us--how long the market told us it would take. They kind of caught us by surprise. We were so successful so quickly. The approvals came within weeks of each other, and we now have access to these states, which send approximately 40% of all outbound money transfers to Latin America from the U.S. These newly approved states are keeping our sales teams extremely busy, and they're selling and signing merchants every day in all of these new states. And in fact because of these extra approvals, you saw that our expenses in money-transfer did increase. That's because we've hired additional sales bodies and hit teams to go expand our retailer base in these new markets.

Our investments that drive merchants, transactions and revenue in the money-transfer and bill payment business is beginning to gain momentum. Our sequential quarterly expenses increased by 17%, as I mentioned-- basically the sales team-- while net operating losses decreased by 6%. We saw a 32% sequential quarterly increase in our merchant base, and we now have, as I mentioned earlier, nearly 1,000 sending locations and the focus is on expanding into new ethic, high-volume transaction stores, which we call "suite spot" stores.

Ramp-up and transactions continued. We had a 41% sequential quarterly growth in transactions. We're starting to see the ramp up, and which is really the fruits of our labors in Q4 and Q1—Q4 of last year, late Q4 of last year, and Q1 of this year. The improvements in merchants and transactions resulted in a 40% sequential quarterly increase in our revenue. All in all, we're very pleased with this collective momentum, and we're looking forward to a more aggressive growth in this business.

The money-transfer industry continues to be lucrative to all players, and to aggressively expand into new markets and capture a larger market share of this pie, we've increased our swat teams in these new markets from 1 to 4.

Lastly, we are examining how to take this new product, the "T USA" product, overseas. I'll give you more on that next quarter.

If you'll move on now please to slide 29, in summary. You can see that we continued our earnings growth with second quarter EPS of $0.26 cents. This positive earnings outcome is more remarkable due to the significance of the Spanish business impact to this quarter in our prepaid results. We continue to make investments that further strengthen our diversified markets and products portfolio. A lot of people talk about diversification of revenues, products and geographical markets—well we have all of them. And this has proved to be bottom-line beneficial to us in each and every quarter, and each of these segments complements nicely our highly-recurring revenue business.

We're also very pleased with our four major investments this year in Central Europe, China, money-transfer and in card-processing. We continued our expansion in new EFT markets. The one name now-- the two new central European markets announced in Q1 and Q2-- present us with additional scope to grow our business, and Dan will tell you more about those and probably start to announce them next quarter.

We saw continued progress in China. Transactions are ramping up on new ATMs at the bank, and the bank is experiencing early benefits from the pile-up project managed by us. As Dan mentioned earlier, we're continuing our discussions with Post Bank to further expand the scope of the agreement. And a little aside on that Dan didn't mention—but as I got an update from our China group here recently, our very first ATM that we turned on for China Post did 1,000 transactions in the first day and has been doing about 1,000 transactions every day since. And that's quite a big difference than our classic European, Central European, model where maybe a busy ATM does 4,000 transactions a month. We certainly can handle these large volumes, and we have impressed China Post.

We've also expanded our money-transfer and bill payment opportunity and we received licenses in several states, including the significant states that I mentioned, now giving us access to 40% of the market. Our recently acquired card-processing business is beginning to show promise. We announced a significant agreement in this call with OTP, and we look forward to more progress in this business in the long-term. Although our investments in these growth companies or growth segments burned, or you could say, cost us $0.12 cents, or cost us approximately $0.12 cents in annualized earnings per share, we believe that these businesses will position us very well for 2007 and beyond. And finally, we expect our third quarter 2006 earnings per share to be $0.27 cents excluding the usual items. Another good quarter and lots more exciting opportunities ahead. This concludes our presentation portion of the call. We'll be glad to take questions. Operator, can you assist please?

Thank you. [OPERATOR INSTRUCTIONS] Our first question comes from Franco Turrinelli, from William Blair & Company.

Good morning guys. The question that I have for you is could you help us understand a little bit better the reasons for the sharp slow-down in growth—sequential slow-down in growth—in prepaid revenue and transactions. I'm not looking at the operating income—I'm looking at the revenue and transaction numbers.

Rick, do you want to handle this, or do you want me to?

Do you want to take the first cut, and I'll follow on.

Okay, good. Well, we have, first of all, we have seen a little bit of a slow-down here in the revenues, and I think that part of that has to do with the maturing of some of these markets. But I think, most importantly, you know on a year over year basis, if you exclude Spain as an example—I mean we had-- in investments in money-transfer, we had a 28% year over year improvement.

So although it is slowing some, we're seeing early indications of some good progress in a number of our markets. The U.S. is probably our single strongest growth market, followed up by what we're doing in Poland and Austria and Germany. We're still getting good growth even out of the U.K. and Australia. So, Spain did hit us. We expected to have those extra two operators probably three quarters earlier than we got them, so that put us kind of behind the 8 ball in growing the transactions in that market, as opposed to what we originally anticipated, but we're seeing that the take-up had been strong here lately, so we hope that we can get some good growth as we move forward. I think still this market is a market where we own about $250,000 cash collection locations.

And our key to life there in this market is as each of these markets expands, make sure that we're able to follow on with additional products and services sold across those terminals. It's a tremendous asset to have those cash collection locations, and that's why we intend to be deploying more products across them. So you'll see the transactions go up, without the cost of infrastructure going up. So we should get some leverage.

Mike, the only thing I would add to that is that, Franco, if you were to, in essence, kind of proforma back to the revenue line the margins on the Spain business that hit, as you know, both the top line and directly fall through to the bottom line, and you redid that map, it would show that we'd have about a little bit better than a 4% sequential quarterly growth rate annualized about 16ish kind of percent there or better. So, I understand the basis of your question, but a little bit of other math I think involved in that, and as Mike said, we are seeing good traction out of other growth markets, whether that's the Pole and the U.S., the Austria, the Germans and places like that.

And then, in terms of the impact of these payments or any other one-time items in the next quarters, what should we be thinking of in terms of adjusting our thinking in terms of comparison.

Franco, we don't have any other kind of, you know, one-time items that we would anticipate in the third quarter here. You know, we've obviously put out our guidance expectations for the third quarter to $0.27 cents, so you know we've got all that stuff baked in there. You know we'll continue to make our investments in the Asia Pacific markets and the Central and Eastern European markets and the money-transfer markets. You know right now, again, what we expect to make in those market investments has been, again, baked into the $0.27 cents. You know, some things were changed during this quarter a bit like it did last quarter. You know we might modify that but we would still expect to deliver the results.

I think also it will be this quarter when we begin to take back some of that margin in Spain that we allowed the retailers to keep, you might say, and because we're taking it back in phases that are more—in a little bit slower fashion because we want to make sure we don't shock them, and have them leave us before we've had a chance to cross-sell them all of our products.

Thank you sir. Let me ask the question a different way. When did the bonus agreement expire—first quarter this year, right?

No, no, no, no. May.

May. Okay, Thank you.

And so we got, you know, it hit us with—and I mentioned that in the last call—it hit us for, you know, two full months worth.

And Franco, so obviously, it hit us for only two of the three months, but you know we're expecting, as we said, some recovery of that as we go into the third quarter, which you know, it, together with all the other things, enable us to continue the increase in the EPS into the third quarter.

Okay, thanks.

Our next question is from Mark Marostica with Piper Jaffray.

Good morning guys.

Good morning.

The first question regarding Spain relates to the percentage of operating profits that Spain represents of your total pre-pay business. Create for me a sense of the relative size of it.

Well, we disclosed obviously what it would do on a year over year change, and you can see that that was a pretty big difference. You know now the amount—as we've had you know a reduction in that margin, is obviously a lower percentage. I don't have that number just off the top of my head—but I'm going to tell you it's less than 10%, but I just don't happen to have the number on the top of my head, Mark.

Then, as you look at the—and I don't know if you've disclosed this in the past, but the current operating margin of the Spain business relative to what it was would be interesting, and where do you think it will go from here and by when? I'm just trying to get a sense of the trending there.

Well, I don't have the top of my mind the number on the first part of your question, but where we expect it to go from here—we do expect it to improve as a result of really three things—a. we will continue to push down the loss of the favorable commission rate. We'll just do it over a longer period of time than we had originally thought. Two, as Mike said, we've got the multi-color or tri-color product offering that we'll continue to distribute and get out across the rest of our retailer base. And three, the introduction of other prepaid or cash-based kind of products at the terminal, such as our long-distance products. So we do expect to see that the Spanish market will recover or improve. We're just being a little more cautious about how long we'll get to recover that.

Also I'd like to add, Rick, that Mark—this bonus margin that we had granted from Telephonica was an exclusivity margin, and the only place that we have anything like that is Spain. So Spain is a very weird country when it comes to pre-pay. And basically we took over a couple of companies that I think Telephonica was worried might be a real credit problem for us. We were able to negotiate from them a very favorable rate for a period of time with all of us thinking that we'd be able to get the other two mobile operators a little bit quicker. So by the time we lost the margin we had more than made up for that by having a tri-color offering. Unfortunately, the mobile operators in Spain were—had less than business common sense, and it took us a little bit of time to get the other two mobile operators on board. So now we're a little bit behind the 8 ball. So, it's one of those things where you look at Spain and it's weird, but it does not translate at all into any of our other markets. We don't have anything like this in the other markets.

I know in the past you've talked about operating margins for the entire pre-pay business in the 8-9% for fiscal '06 I believe. With the results year-to-date, you know, would you sense that we'll be, you know, below that range?

For the year? For the whole year?

Yeah.

Maybe just slightly.

Okay. And let me move on quickly to the ATF business. With the China Post delay—and perhaps you could walk us through that a little bit—it sounds like it's on their end, not yours.

Yeah, it's actually—we've got kind of good news bad news here. There's a lot of politics going on in China as we understand. First we were originally scheduled to go out in 3 cities, and it was Shanghai, Beijing and Guangdong, in those provinces, and they've kind of broken their—Post Bank is broken into 35 different regions. And so those were the three regions that got us when we signed the contract. And they got us, for technical reasons and political reasons, a different province kind of horned their way in and stole us away from Guangdong, and then I think Guangdong heard of our success in the first 2, and they kind of—you know, they kind of put themselves back in as the third one we were going to connect to. Unfortunately on their end they've got more of a decentralized system that takes a little bit longer to hook to, where you've got to hook it up to several different authorizations centers. And because of all this himming and hawing and wasting 4 months to get started, and then now that we have a more complex certification process with them, we're just delayed.

But all in all, basically where they think we are is very favorable, as compared to where they thought we would be I think even in January. So we'll do—you know, our goal is to get more business, and in fact it's because of our success, you know, we're in, I would say in substantial discussion with them to extend that contract in certain ways. It won't be one of these magic—they have about 7,200 ATMs today. They plan to have about 8,500 ATMs by the end of the year. We're not going to get a deal for 8,500 ATMs. It will be sold really province-by-province. And so we really have kind of like 35 sales cycles to go through, and so it'll take us a while to kind of go through them all. But the nice thing is, the first two that we brought live, Beijing and Shanghai, which are obviously 2 more progressive, you know, front of mind locations, have been very pleased with our progress. And so we're talking to them about seeing how we can expand our offerings.

And then one last question—I'll turn it over—and that relates to the announcement by NCR earlier this week that it had received some large purchase orders ATM from China Construction Bank and Bank of Communication. I'm just wondering if you view that as a competitive win on the service aspect of the deal or you know—

Now we're the—actually, Mark—we're the only people to provide end-to-end ATM management and switching and operation services. We're the only outsourcer of our kind in all of China. NCR does what it does—it does there what it does in many markets, it provides the ATMs. Sometimes it provides parts and secondline maintenance depending on the Chinese bank, but you know things like CAP forecasting, switching, all the kind of electronic data processing stuff they don't do.

Very good, I'll turn it over.

Our next question is from David Parker with Merrill Lynch.

Hello, David.

Good morning. I was just wondering if you could talk about some of the timing of these events—when you expect to maybe close on that China deal, and then also same with the ATMs, just the issue with the Reserve Bank of India, when you expect that to subside.

Maybe I'll take the first one and let Dan take the second. First of all let's not misquote me here. We are in substantial discussions with Chinese Post to extend that, but that doesn't mean we've got a deal ready to rock and roll and sign right now. As soon as it gets signed I'll let you know. So we really don't give any kind of forecast on closing these deals because the results of which are binary—we either have them that quarter or we don't. And if I tell you I'll do one next quarter and I miss it by a quarter, you'll all hold it against me. So I've learned not to do any projections, but I can tell you honestly that they're talking to us about expanding our relationship. With respect to color on the—where we are with the Reserve Bank of India—Dan maybe you can give a little bit more color on that.

Yeah sure, thanks Mike. Yeah David, I just—one thing I always go by in China is that there's more than just one bank in China. So we are working aggressively on marketing towards not just China Post by other banks in that market. But on Reserve Bank of India, not to get into too much granular detail, but this is really regulation that's impacting all the banks across India where the Reserve Bank of India is trying to, I think, push banks to deploy ATMs to more rural underserved markets in the country. So the Reserve Bank of India is now coming under tremendous pressure by all the banks in India whose growth prospects and plans for the years have been delayed because of this. So it's one of those things where we keep thinking, any day now they're going to let up, but we've been thinking any day now for the last couple of months. But we would fully expect that by the end of this year they're going to give a green light, and the floodgates will open for a bit. But one thing I want to make sure the point that everybody picked up is that the Centurion Bank of Punjab ATMs that we picked up we've completed a takeover of all those ATMs this month of July. So we're going to be able to show some good third quarter growth over second quarter growth on ATMs in India. That's already in the bag.

Okay, second question is related to the money-transfer business. We heard earlier in the week from the leader in the space that they're seeing—or potentially going to see—some impact from immigration reform. Have you guys seen anything to that effect on your transaction growth?

I kind of chuckle—we're not using any excuses for where our results are. Our results don't necessarily track against the quote "leader" of the industry. We're growing so fast right now adding new states, adding new retailers, that we really haven’t seen much. We saw a little kind of quiver a week—in a week or two—of the quarter I think right around the election, but we don't—at the end of the day, this immigration issue per se is kind of a weak argument for the fact that they're still just as many people here as there were last week and 3 weeks ago, and more people are coming in all the time, and so they need to be served.

If they didn't send the money on a Monday [inaudible – background noise]. The send volume is still there, but it just might be delayed a day or two. No, we did not experience any major impact from that.

Okay, great. And then, final question is just—any timetable for when you expect to get the licenses in California and New York, and also when you expect maybe this business to break even?

Where we are—you know I'll tell you, it's funny, you talk--we have these discussions with the Secretary of State offices in each of the states, and Texas and Florida fell faster than they claimed they would. So we have had discussions with California, and supposedly we're quite close. We were under the impression that we were within a few weeks of that two months ago. So now maybe it's just taking a while—we're not exactly sure. So we know it'll happen, it's just a question of when, but to be brutally frank right now, with Florida and Texas coming in early, I'm up to my eyeballs in geography to cover with our sales team. So even if California came in tomorrow, I couldn't do much with it.

[Inaudible] David, I'll just add that we've completed all our applications, responded to all kinds of questions and things like that, so you know we're just at the mercy, if you will, of the regulatory bodies to get it through their process, and we have, you know, little ability to control the timing of that. So you know, while we would like to think that, you know, that we've answered all the questions, we've provided all the data—that no other state has found issue or reason to challenge our applications based on quality or character or things like that. You know we just have to be patient with those two states' regulatory processes.

And we might add, too, that we're multiple iterations into both of them. So, you know, we provide an application, and they come back with comments, want further information. We iterate that back to them, then they come back with more questions. So we're several iterations into this.

Okay, and your break-even expectations for that business?

You know, it depends on how many states we get how fast. I mean, we had a tough decision to make about a month ago, and that's should we break even a little bit earlier but have a much smaller number in '07 as far as profits—and so what we decided to do was be much more aggressive on the sales side now. If I got California tomorrow and I had to sign a couple more—and I signed a couple more sales teams, then that might delay it a bit, but I'm still looking—I don't have an exact number for you. It's a little bit fluid right now, but early results say, you know, it should be very promising for next year.

Thank you.

Our next question is from Tony Wible with Citigroup.

Good morning.

Hi Tony.

Hi.

How are you, Tony?

I was hoping we could start by highlighting the Spanish market, and how big you thought that market is as far as industry revenues, and what your current market share within the Spanish market.

We have about 30% market share there-- best we can gather with our two acquisitions. And then you said how big is it compared to other markets?

No, just how big in total revenues. I know in the past when you went in to Poland, for instance, you brought in a framework of how big the Polish market is.

Well there's—just to kind of put in perspective, it's a very mature market. They have about 40 million people in that marketplace—same size about as Poland in population, but Poland is still way down on the adoption curve as far as per capita handsets, you know. So, it could be—I would say Poland might be able to get there number of subscribers over the next 5 years, but still based upon disposable income, probably Poland's revenue potential is probably a little bit less. They have 40 million people in that market, U.K. has 55 million, you know Germany 80 million, and everybody's got about the same kind of percentage of prepay.

Do you guys have kind of like an industry number for the amount of pre-paid dollars that are sold in the Spanish market overall today?

We do—I don't have that number off the top of my head, Tony. I could probably look that up and give that to you because it's available through industry sources.

Moving over to China—I think that when you guys that you originally said it was a 90-day pilot. I just wanted to—

No, no, no—it was a 90 ATM pilot. They were going to review the results over about 6 or 7 months.

6 or 7 months. So do you still have to get to 90 ATMs or is that going to just—

We'll get there. I mean it's just—they're excited that we're getting there, and we've been very successful with the first two. We don't have to get to 90 necessarily to sign another deal, but we will get to 90.

Okay, that was my question—is about that. And lastly, is the cash that you guys have on hand—are you guys any closer to looking at an acquisition, either to add another line of business or expand?

Absolutely. I mean, I would tell you that at the beginning of the year by now I thought we would have closed one or two decent sized acquisitions, but based upon our due diligence and some of the, you know, quality issues that we've found as we examine them or maybe pricing issues, we decided to walk away, but we're looking at probably 2 or 3 things probably all the time, maybe 4 or 5 things all the time. And that's in both segments of our business across many geographies.

So you should be expecting something within the next quarter or so?

You know, predicting that is sort of like predicting an ATM sale, except it's even harder, because you're sitting there thinking everything's great, and then you get down to that last thing where you've completed your due diligence and you find this horrible skeleton in the closet, and you tell the guys about it and say I'm going to have to change my price, and they balk or we balk, you know. So you just don't know until you've closed one.

Understood.

Tony, I think it's fair to say that, as Mike said, we've got a number of transactions that we consistently have in—I don't know whether you want to call it the pipeline or on the radar screen. The predictability of if any of those would close and when is just very difficult, so we continue to do our homework, and we'll do the deal at the right time if it makes sense for us. But it's just difficult to project.

Last question's a housekeeping question for you, Rick. In the second convert that you did, would you happen to know off-hand what EPS level that into the share account?

About $0.40 cents a quarter—and that's, Tony, that's without the effects of FX and stuff like that. So, if we have an incredibly big FX gain, technically GAP would call us for it to come in, but about $0.40 cents a quarter excluding those unusual or weird items.

Thank you, appreciate it. Take care.

Thank you.

Gentlemen, there are no further questions in queue at this time.

Great. It's been a nice hour. Take care everybody.

And thank you everybody for taking the time. We'll look forward to talking to you in 90 days. Bye.

This concludes today's conference. Thank you for your participation, and you may disconnect your lines at this time.