Euronet Worldwide Inc (EEFT) 2008 Q1 法說會逐字稿

Greetings and welcome to the Euronet Worldwide First Quarter 2008 Earnings Conference Call.

At this time all participants are in a listen-only mode.

A brief question and answer session will follow the formal presentation.

(OPERATOR INSTRUCTIONS) As a reminder this conference is being recorded.

It is now my pleasure to introduce your host, Mr.

Jeff Newman, Executive Vice President and General Counsel for 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'll be presenting our results for the first quarter 2008 on this call.

We have Mike Brown, our CEO; Kevin Caponecchi, our President; and Rick Weller, our CFO, with us today.

Before we begin, I need to make a disclaimer concerning forward-looking statements.

During this conference call, representatives of Euronet Worldwide will make statements concerning the Company's or 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 developments affecting the market for the Company's products and services, foreign exchange fluctuations, and changes in laws and regulations affecting Euronet's business.

Additional explanation of these factors and other factors affecting the Company's results are set forth from time to time in Euronet's periodic reports filed with the US Securities and Exchange Commission, including, but not limited to, it's Form 10K for the period ended December 31, 2007.

Copies of those filings and our other public filings with the SEC 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 Weller, our CFO.

Thank you, Jeff.

And welcome, everyone.

For the first quarter 2008, the Company delivered revenue of $247.1 million, operating income of $12.1 million, adjusted EBITDA of $29.5 million, and cash earnings per share of $0.29.

The increase in revenue and adjusted EBITDA year over year was largely the result of last year's acquisition of RIA in early April.

Operating income benefited as well from the acquisition but also included significant intangible amortization charges as required by GAAP.

Moreover, as you may have read in our earnings press release and as we mentioned in our call on the yearend results, we wrote down our investment in MoneyGram shares as well as the acquisition related expenses.

To this end, you see the investment write down of $17.5 million as a separate line item in the income statement and the deal related fees of $3 million are included in the SG&A expenses.

Cash EPS came in at $0.29 and does not include the effects of MoneyGram charges I just mentioned.

I'll also point out that due to the GAAP net loss for the quarter resulting from the MoneyGram investment write down, approximately 4.2 million shares related to the 1.625% coupon convertibles were not included in the weighted average diluted shares because doing so would've been accretive; however, in calculating the cash EPS, the 4.2 million shares were included because in that calculation they were dilutive.

If we now move to slide number six, here on slide six you can the see last two years' revenues of the first quarter and how the trend of yearly improvements continue, again recognizing that the addition subsequent to the first quarter last year of RIA made a significant contribution to this year's first quarter revenues.

Let's move now to slide seven.

On slide seven we illustrate quarter over quarter transaction growth.

The 24% increase in transaction year over year has been consistent with revenue growth that I discussed on the previous slide.

We continue to seek transaction growth in all segments of the business.

Now to slide eight.

In the first quarter, RIA processed 3.8 million transfers.

This represents transaction growth of approximately 10% year over year.

You can also see in the chart how the business continues to grow through transactions sent to countries other than Mexico.

I think this clearly illustrates the continued mix shift to markets other than Mexico which are growing faster and more profitably.

Let's turn to slide nine.

Slide nine includes a review of our segments' first quarter results compared to last year.

The EFT segment grew year over year by 20% and op income grew by 30%.

It's important here to point out that in the first quarter last year, the EFT segment's op income included a charge of $1.2 million related to the settlement of a prior year bank sponsorship agreement.

Excluding that charge from last year's first quarter results, op income and adjusted EBITDA would've improved by 11% and 16% respectively.

The lighter expansion of these profit totals was largely the result of volume driven rate reductions as discussed throughout 2007 of an outsourcing customer, market expansion efforts in Eastern Europe, and the deployment of cross-boarder products to meet the emerging opportunities resulting from the new single European payments area.

I'll also point out that the international card fraud matter that we discussed in our fourth quarter call was resolved in the first quarter and the related losses were not significant.

In the prepaid segment, we grew our revenues year over year by 13% and op income increased by 8%.

The expansion of the operating income on a year over year basis was impacted by the addition of the acquired UK processor which had lower operating margins and the expansion costs of entering the Indian and Italian prepaid markets.

Our money transfer segment grew quarterly revenues year over year by 18%.

This is presented on a pro forma basis to help you better understand the fundamental business developments.

You can see in the operating margins and EBITDA margins that the business benefits nicely from volume expansions.

The 18% revenue growth was the result of 10% overall transaction growth which reflected a 60% plus in growth in non-US originated transactions, but a decline of 9% in transactions to Mexico.

Despite the decline in Mexico transactions, gross profit, that is revenue less payout commission costs on transactions to Mexico improved by a few percent as a result of RIA's decision to not chase certain irrational, unprofitable transactions.

Mike will comment more about this in his remarks.

Finally, corporate and other included $3 million in charges related to the abandoned MoneyGram transaction, increased FAS123R expenses of $1.1 million for share based compensation which was driven by the overall larger size of the business and charges incurred with regard to certain senior level terminations.

Mike will make additional comments with regard to all segments in a few minutes.

Since the 2007 yearend - slide ten, sorry Since the 2007 yearend close, our balance sheet changed in one key area - in the repayment of debt.

You can see that debt was reduced by about $60 million.

$10 million of that was on the term loan and the balance for the revolver.

We will continue to look to reducing our total debt.

On this slide you can see that we present a couple of debt ratios on a last quarter annualized basis.

The increase over the fourth quarter stats reflects the higher seasonal results of the fourth quarter together with the lower seasonal results of the first quarter.

As I mentioned, our leverage continues to reduce and we expect to see similar trends in future quarters.

There were no other significant changes from December 31 in the balance sheet.

Net-net, our balance sheet continues to strengthen.

Now to Mike.

Next slide, please.

Slide number 11.

Thanks, Rick.

In our previous call there was a lot of interest in our bid to acquire MoneyGram and we spent a significant amount of time on last quarter's call discussing our rationale, the synergies, and the risk-reward profile of combining Euronet and MoneyGram.

Despite the circumstances, we felt the opportunity was simply too compelling to pass up without first exploring the possibilities.

Ultimately, the terminally ill in the credit markets and the damage to MoneyGram's investment portfolio were too significant to yield a combination that we felt would be financially attractive to our shareholders.

Our initial decision to pursue MoneyGram was based upon the best information publicly available at the time.

We were confident that the combination of our two businesses could mutually benefit our shareholders and our appropriate -- assuming they were under appropriate terms.

In hindsight, give what has been disclosed regarding the severity of MoneyGram's portfolio problems, we would not have pursued the acquisition had we known then what we know now.

We will continue to look for unique opportunities to benefit our shareholders albeit, in all likelihood, not on the scale of the MoneyGram opportunity.

But rest assured that we have learned from this experience and have listened to the advice of our shareholders.

As Rick mentioned, we delivered on our first quarter 2008 earnings guidance and I'm proud of our management team who remains focused and committed to our core business during the MoneyGram endeavor.

This quarter, in addition to reviewing our current quarter business highlights, we're going to change our presentation format slightly so that we can discuss some of the opportunities we continue to see in each of our primary businesses and also to discuss some of the near-term realities we need to overcome.

Also, in order to accommodate more questions from our shareholders, we've reduced the length of this presentation to allow more time for Q&A.

On to slide 12.

We'll start here with our EFT processing segment.

As you know, this is kind of a review of our business.

We'll do the next three slides.

We'll cover our three business lines.

As you know, we are as pioneers in the ATM outsourcing concept in emerging markets.

We have built a great clientele of banks including 18 multinational banks and 80 individual bank contracts for ATM and POS outsourcing.

In our markets of Central and Eastern Europe and Asia-Pacific, including India and China, we continue to see exponential growth in new ATM deployments and the use of debit and credit cards.

We provide emerging market banks with a complete suite of payment products while our outsourcing solutions minimize our capital investment and allow them to focus on their core banking business.

While there will always be internal resistance to outsourcing, the growth in our business over the last seven to ten years is a testament to the compelling business proposition.

As well, the migration to and consolidation of multinational banks in emerging markets is creating opportunities for us to expand our operations alongside the regional and multinational banks.

Our number one focus is to sign new ATM outsourcing agreements.

Our pipeline here is more robust than ever.

Additionally, we have made significant progress and investments in the development of our step-up compliant cross-border solution for multi-country merchants.

On to the next slide, please.

Slide number 13.

Now we'll talk about prepaid a bit.

As we continue to expand our prepaid payments business, we're seeing a growing preference for prepaid payment products such at prepaid debit and gift cards, as well as prepaid cellular.

Our ability to add a wide range of products on a single terminal is benefiting our retail partners.

At the same time, we can help our product partners to expand internationally faster and more efficiently due to our global cash collections network.

Additionally, we're working on offsetting the lower growth rate challenges we face in the mature prepaid markets by expanding into promising new prepaid markets.

Most recently, we've successfully leveraged our e-pay technical platform and EFT operations to expand our prepaid operations in India, Italy, and Romania at a relatively low entry cost.

Our prepaid teams continued to track prepaid market trends and are working hard to diversify our product and market portfolio to create profit centers beyond prepaid mobile airtime.

On to slide number 14 about money transform.

The trends in global migration which fuel our business are unabating.

For instance, Europe's disappearing internal borders are resulting in a large scale movement from the former Eastern Block to Western Europe.

Our consumer focused money transfer product is a compelling product opportunity for our EFT bank and prepaid retail customers.

Our success in expanding our money transfer network in international markets since acquiring RIA has enabled us to maintain the growth momentum we are experiencing in these international markets.

In the near-term, our US to Mexico business is experiencing pressure from the prevailing US immigration policies and general weakness in the US economy.

As well, we have seen some of our competitors in the Mexico market exhibit rather irrational pricing.

RIA's thoughtful development of excellent payout in Mexico over the prior years and in Latin America as well, give us the ability to make more money despite these self-destructive smaller competitors.

We're hopeful that we will see an uplift in the Mexican corridor soon, but we cannot be sure of the timing.

Meanwhile, we continue to benefit from the phenomenal growth in our international market.

Please go on to slide number 16 and we'll talk more specifically about the quarter.

In slide number 16, you can see Rick presented the numbers earlier.

So, I won't repeat them here.

I do, however, want to talk a little bit about SEPA and our SEPA compliant cross-border initiatives.

These investments started last year and continue in 2008.

We estimate about $500 million in operating costs for this endeavor.

This new product is costing us a bit more than we expected.

With the rollout of OMV in process combined with a very strong pipeline of other multinational retailers, we believe that this investment will be a good one.

We've initiated rollout in our first country for OMV.

Our pipeline for implementation includes the rollout of four to five contracted countries planned it in conjunction with the customer over the next few quarters.

I'll note too that if not for our investments in this cross-border endeavor, our first quarter operating income would've expanded slightly faster than our revenue growth of 20% year over year.

Moving on to our first quarter EFT business highlights, we expanded our ATM network by 30% year over year.

Currently, we have almost 12,000 ATMs under management and this includes approximately 2400 Bank Machine ATMs that will no longer be in our network beginning in the second quarter of 2008.

As most of you are aware, in conjunction with the sale of our UK ATM network in 2003, we signed a five year ATM outsourcing agreement with Bank Machine Limited.

This agreement concluded in Q1 2008 and was not renewed based upon the customer's decision to take their processing in-house to their parent Company.

We have a strong backlog of approximately 1500 ATMs which are under contract, but not yet installed.

And we continue to market our ATM outsourcing services to multinational and local banks across Europe and Asia-Pacific.

In Poland, we signed Polbank to set up a host to host connection to handle customized payment card functionalities on ATM.

In China, we expanded our agreement with China Post Bank to deploy 90 additional ATMs to the 700 or so now contracted in three new provinces.

This is our third agreement with China Post.

We plan to roll out up to 200 ATMs in China prior to the Olympics blackout period starting in May and ending in August.

We continue to strengthen our relationships with multinational bank customers.

In Europe we renewed our Raiffeisenbank Kosovo agreement for ATM and POS driving and debit card management services.

While in Asia-Pac we have implemented outsourcing services in eight countries for Standard Chartered Bank within a year of signing that agreement.

Now on to slide 18.

Here you can see some of the observations I made a couple of slides back.

So, I won't really repeat them.

But I'll close EFT by observing that in the software area we signed two credit card solution agreements with banks in Egypt and Lebanon.

This brings us to the end of our EFT discussion.

Let's move on now to prepaid.

So, please jump to slide number 20.

Here we see our prepaid financial highlights for the first quarter of 2008.

Our prepaid revenues of $144.3 million in Q1 2008 increased by 13% over the same quarter last year.

Our operating income of $10.3 million and adjusted EBITDA of $14.5 million increased by 8% and 7% respectively for the same period.

Our operating income was tempered this quarter by costs to expand Italy.

Italy is an important market for us.

It is Europe's largest prepaid market.

Within just a year of entering this market we have made significant progress and I'll follow-up with more details on this next slide.

This is indicative of our disciplined approach to launching new markets.

We scope out new markets and leverage our technical expertise people and successes in established markets to recreate our winning strategy.

A ladder growth in operating income reflects our investments of approximately $400,000 to launch our prepaid operations in Italy.

If you exclude this new market investment cost, our operating income for Q1 2008 would've increased at the same rate as revenues, reflecting the strong growth from the rest of our prepaid business in other countries.

Slide number 21.

We have now signed all four Italian mobile operators.

We are currently the only Company in Italy capable of processing or distributing all mobile operator products at large retailer locations.

This is a significant achievement in a new market the size of Italy and despite the presence of long established competitors.

Great work to our team in Italy.

Move on to other prepaid business highlights for the quarter.

Our transaction processing capabilities which make us the number prepaid processor or distributor of choice for large retailers in any channel is evidenced by our wins this quarter.

We signed Aral, the largest operator of petrol chains in Germany, taking the largest German customer from our competitor.

We signed Clinton Cards, the leading greeting card retailer in the UK, and Netto Germany, a Denmark-based chain of discount supermarkets.

We have now rolled out five countries for Media Market, Europe's largest retailer of consumer electronics.

And finally, we have completed a full rollout of up to 1300 stores for Carrefour, the largest mass retailer in France.

Slide number 22.

In line with our product diversification strategy, we are focusing on adding other popular prepaid products on our global cash collections network.

We signed an exclusive partnership with a leading licensed football merchandising company in Italy to launch gift cards.

As you can read on this slide, we have continued to grow our prepaid position by adding several new products in multiple markets.

We've also expanded our network in the independent and multiple retail channels by signing 300 independent petrol chains and 250 newspaper stands for prepaid top-ups in Spain and we complete fall prepaid rollouts of Vodafone's core store network and BP by -- and the BP Buying group in Australia.

I would also point out that for the first time in several years, we're seeing the competitive landscape change almost, I'd say -- it could change significantly to benefit our prepaid segment.

We're seeing that our competitors in several markets are having some significant challenges.

So, overall, a strong quarter with good progress in Italy, our most recent market.

We'll now move on to money transfer and the discussion on slide number 23.

Actually 24.

On a pro forma basis, our money transfer revenues of $52.3 million in Q1 2008 increased by 18% over the same quarter last year on a 10% increase in transactions.

So, I want to repeat that.

Our revenues increased 18% on 10% increase in transactions.

Our operating income in Q1 2008 was $2 million.

Our adjusted EBITDA was $6.8 million which increased 74% over the same quarter last year.

As Rick mentioned earlier, the 60% plus increase in transactions from non-US locations was instrumental to the segment's revenue and adjusted EBITDA growth for the first quarter of 2008.

Slide number 25.

The continued growth from non-US markets was instrumental to our results this quarter.

Revenues from non-US markets increased by 85% while money transfer transactions increased by 61% year over year, showing strong margin expansion.

Currently, our non-US markets represent 30% of the total money transfer transactions, up from 20% a year ago.

A few slides ago, I discussed at length our near-term challenges from the prevailing US immigration policies and economic issues impacting transactions to Mexico.

But, as I mentioned before, a prudent approach, working with high quality agents and not competing with illogical pricing has seen our profit margins expand year over year despite a 9% decline in transactions to Mexico over the same period.

We continue to expand our money transfer distribution network.

This quarter we signed new correspondence in 16 countries for more than 400 locations.

We also have approximately 4000 payout locations in the pipeline, pending implementation in the next few quarters.

This Mexican issue is really challenging to us.

I hope you can see that we've tried to balance good growth with good profit.

We've been challenged in Mexico.

We focus our efforts at more favorable markets and as you can see, we've expanded our revenue and profits in doing so.

I feel encouraged to have an 18% revenue growth with the Mexican pressure we've had.

Now, to a few summary comments on the quarter and then we'll take questions.

In summary, we were within the range of our guidance, cash EPS of $0.29 a share Q1 2008.

Our primary businesses continue to expand on opportunities.

We signed prepaid agreements with several large retailers in the supermarket convenience and petrol chains across Europe, several from our competitors.

Our progress in Italy to date is commendable.

We are currently the only Company in Italy capable of offering all four mobile operators products in large retailer locations.

In EFT, we focused on signing and implementing outsourcing agreements for multinational and local banks across Europe and Asia-Pacific.

We will continue to make significant investments to build our cross-border merchant acquiring platform.

We've initiated the rollout of our first country for OMV and the rollout of additional contracted countries has been planned in conjunction with the customer.

We continue to post strong growth in the money transfer transactions from non-US locations, our non-US volume increasing by 61% year over year.

And, finally, we expect our second quarter 2008 cash earnings per share to be about $0.32.

The reasons for this $0.32 was a little bit below where we might've expected it two quarters and it's for three reasons.

Number one is the interest rates have come down and that's both on our invested income and also our float.

Second is Mexico continues to be weak for us and the third is we are investing more in our cross-border initiative than we might've anticipated two or three quarters ago.

But $0.32 is where we're looking at it for Q2.

This concludes our presentation portion of the call.

We'll be glad to take questions.

Operator, will you please assist here.

Thank you.

Ladies and gentlemen, we'll now be conducting the question and answer session.

(OPERATOR INSTRUCTIONS) Our first question today comes from the line of Anurag Rana.

Please, proceed with your question.

Good morning, everyone.

Just wanted to understand one thing.

Your ATMs at quarter end were very strong compared to last quarter.

Your year over year growth rate was around 30%.

If your average monthly revenue per ATM I think declined about 7% compared to last year.

Is this because of the mixed offer ATMs and should we expect this kind of revenue per ATM going forward as well?

Good observation.

Let me just try to clear that up for you.

There are probably two big reasons why you could see the step.

When we moved from Q4 to Q1, numbers of transaction falloff absolutely significantly due to the Christmas seasonality falloff from Q4 to Q1.

And then we also couple that with brand new ATMs in our nacive market, China.

So this is nothing to be concerned about in our mind.

It's very seasonal.

You're one of our more recent analysts, but if you kind of look back over the last five to seven years, you'll see a similar trend in Q1 as compared to Q4 prior quarter.

We also saw a little bit of margin squeeze from Bank Machine in the quarter, about $225,000 worth there.

But that differed revenue of five years ago, when we signed that agreement had fully completed its cycle.

So, that came out of the revenue.

So, it really wasn't a pricing issue.

It was just that part of the contract terminated.

Just to kind of put some perspective on here, our second largest, most profitable country is Germany.

A lot of that's generated out of our owned network of ATMs in that market and we do probably 40% of the transactions that we do in the entire year, we probably do it in the last six weeks of the year in Germany and those transactions are at about $4.00 per.

So you can see how that just -- when that falls off to Q1, it certainly affects our bottom line.

What should we expect, this number to be in what range going forward in the second and the third quarter?

Well, it would actually lift a little bit going forward because as the Bank Machine ATMs that Mike referred to in his comments to come out of the mix, those machines on average brought lighter revenue per machine.

So, we would expect to see that number go up a little bit.

That's balanced a little bit with the continued rollout in China where those machines are newer machines and we'll be seeing the transactions come up on those.

Thanks.

And just a follow-up.

This is more just to reconcile the way we calculate the cash EPS.

In your reconciliation at the back, you're taking out $5 million of foreign exchange gained net of tax and in the income statement I look at foreign exchange gain net as to be about $13 million.

Could you help me reconcile the two numbers as to why we don't need the partial FX gains over there in the reconciliation?

What we're taking out is the net of tax effect because in our GAAP numbers we calculate some tax expense on that and the numbers end up being not necessarily equal to an effective tax rate because those FX gains or losses are largely on intercompany loans and they're all in different countries.

So, in some countries you would technically get a deduction or not get a deduction or include or not include that in income.

So, that's just the net of tax effect on those FX gains or losses in our P&L.

Okay.

Thank you so much.

Our next question is coming from the line of Franco Turrinelli with William Blair.

Please, proceed with your question.

Hey, Mike.

Hey, Rick.

Hello, Franco.

Can we go back for a second to the EFT processing business?

Kind of understand a little bit more what's going on with the OMV contract and the cross-border and maybe, I'm not sure - we were scribbling as we were writing, Mike, I'm not sure I really understand the $5 million in operating costs versus the $400,000 in the quarter.

Can you just kind of go back over that for me?

Increased?

Throughout the year?

Rick, why don't you answer that and then I'll add a little bit to it.

Franco, it was $400,000 in terms of a delta difference over the prior year in this first quarter here and then that number will increase as we go throughout the year.

In total for the year, it will be about $5 million in operating cost in the business.

We'll start to generate some revenue.

It will be a smaller amount towards the end of the year, but for the most part it will be about $5 million in net operating costs to our business this year.

It'll gain - the amount will increase as we go throughout the year.

Okay.

That seems really high.

I guess I'm surprised.

Is this something that was in the plan or is this something that's increased as we've actually gone into the complexity of rolling this out?

Franco, I think in the past what we've shared in the past with everyone is that in this card arena we were spending about $2 million-ish a year in costs to this endeavor.

In essence, what we're now expecting is that it's probably going to be about $5 million-ish.

It's gone up.

But -- and again, we've generally shared that's it's in that kind of $2 million, $2.5 million range historically.

So, I guess I would say it's certainly an increase but not -- shouldn't be a surprise that we are spending a fair bit of money in this product.

One thing that kind of caught us a little bit, Franco, is that the offsetting revenues are put back about six months.

When we originally contracted with that customer, we thought we could go live with this in November.

We're only really rolling it out right now.

We've passed pilot and we're in full rollout now.

And that's due to as we got closer and closer to November, the customer wasn't quite ready and we had kind of the seasonal lock down so they were unable to kind of move forward.

We're both moving forward together now at full pace.

So, where we thought we could keep our net investment down at $2.5 million, the costs of investment have gone up a little bit plus the offsetting revenues are about six months behind us, behind the curve there.

Franco, this is Kevin.

Hi, Kevin.

On the positive side, we're finding we're seeing a lot of interest from multinational merchants on this.

Domestic acquiring is a commodity game.

But this potential solution where we're off acquiring across multiple countries is turning out to be a pretty neat and unique value proposition and our sales pipeline for this offering is rapidly growing.

We're pretty bullish about the opportunities on a go forward basis.

One other question on the EFT processing if I may and then I'll let other people jump back on.

We were familiar with the plan for the Bank Machine roll offs, that's not a surprise.

But can you just help us collectively, without getting into too much detail because I know you won't want to, but just help us a little bit to understand the impact here.

I mean, EFT is primarily ATM processing, but not exclusively.

And then I'm trying to -- my point is I don't think we should reduce our revenue forecasts by 20%.

We've got 2400 ATMs rolling off.

Can you help us scope it out a little bit better?

Franco, as Mike mentioned earlier, in the average ATM numbers we had about $225,000 in the first quarter that came out of the math.

And that number will increase another $550,000 to $600,000 in revenue and profit in the second quarter.

So, we'll have a total of about $800,000 or so per quarter come out from Bank Machine and revenue largely equals profit in that -- or operating income, because we have very little cost.

That was just really a driving agreement.

There weren't any other ancillary services with it.

You can do the math there at that roughly $800,000 per quarter level on both the top and op income line.

Thank you, Rick.

That's very helpful.

And that's obviously pre-tax on the op income line.

Okay.

Thank you, Rick.

Thanks, Mike.

Our next question is coming from the line of Tim Willi with Avondale Partners.

Please, proceed with your question.

Thanks.

Good morning.

Good morning.

Good morning.

A couple of questions here, just staying on the ATM and POS topic first.

Could you talk about, I guess -- you've sunk a lot of money into OMV or intend to over the course of the year.

Is there scalability to the money that you're spending here as you talk about these strong pipelines or is this truly a very customized solution?

No.

It's -- this is Kevin.

It's about 85% reusable.

So we expect about 15% customization with particular interfaces with new merchants and tweaks to the solution.

But the short answer to your question is it's highly scalable, highly repeatable.

Which has also given us a leg up as we pitch this to other petrol chains, because they can see that the product's ready to rock and roll and could be installed with them rather quickly and it's working right now.

So, on a petrol -- the next petrol customer will probably be even higher.

Probably over 90% reusable.

If we did a merchant like an IKEA or something else, it'll probably be 85% reusable.

Okay.

Great.

Is there any way to just sort of give us some color for the additional call it $2 million to $2.5 million that you've articulated you have to spend here, what sort of growth add incremental where it's going to be spending associated with OMV?

Yes.

Tim, it's just kind of a variety of things.

I wouldn't tell you that there's any one thing in there.

SEPA is a new requirement and also we're working through as Kevin mentioned in this petrol application and it's just making sure that you understand all of the specific nuances and requirements of this new kind of emerging practice.

And then probably the other thing, as Mike pointed out, that's significant as anything to it is the delays in accommodating the fourth quarter high seasonal traffic patterns where OMV wanted us to be -- to delay that.

We were a little slow on getting a couple things done.

So it's not one particular thing.

It's just kind of a number of things that's in -- kind of gets in -- it expands a bit when your revenue delays a bit.

This is Kevin again.

In summary, we think we have our arms around it.

It's not something that we believe is a risk going forward.

It's something that we understand and have captured and we're 100% confident we can deliver.

We are delivering.

That's the point.

It took us a little bit longer to get here and the run rate to continue to deliver those in multiple markets is higher than we anticipated a few quarters ago.

But the fact of the matter this is not an R&D project that's incomplete.

We launched our pilot about six to eight weeks ago.

It was very successful.

We're in the full rollout mode in our first country which is Czech Republic and we've got a number of other countries now slated for the coming quarters.

It's kind of like the risk is out of the equation now.

Now we just got to get down to work, finish rolling this out for OMV in other markets.

And that becomes an excellent sales tool for these other petrol chains and so forth who want to save probably on average about 1% of sales by utilizing this kind of solution via the multiple solutions that they've had to live with in multiple markets.

So, it's a value proposition they can't get away from and we're kind of the only guys with the offer on the table and we are certainly the only guys doing a deal like that.

Then just a second question.

Mexico, obviously you've laid out the case and the numbers seen to prove that very strong international growth is overriding the issues with the Mexican market.

Can you give us any thoughts around a deliberate managing of that market down, where you're at in terms of thinking through trying to maximize profitability, be rational about pricing, agent commissions?

Just trying to get a sense for what you're thinking around those lines, how much more we have here in terms of restructuring, so to speak, that operation?

I don't think we've got much restructuring, but what we did do is we decided not to play an unhealthy game and the nice thing is that RIA over the prior years has developed a network that's par excellence as far as payout goes in Mexico and Latin America.

Because we've got - our network is no worse than, probably no better than the top two guys, so all three of us have equal payout.

But as you go below us, payouts start to get more spotty.

So, we've been able to take advantage of our good reputation, our excellent payout, and solidify our pricing and basically stick to it.

A few transactions did fall off, but our net profit ended up a few percentage points higher.

I think we've kind of done out -- we're going to continue what we're doing.

It seems to work well.

We're continuing to grow our profits and we'll do that even in a tough market.

Thanks a lot.

(OPERATOR INSTRUCTIONS) Our next question is coming from the line of Robert Dodd with Morgan Keegan and Company.

Please, proceed with your question.

Hi, guys.

A couple of housekeeping ones first and then a couple more complicated ones.

Corporate expense, what's the run rate going to be?

Once we take out the $3 million for the MoneyGram issue, how much was related to non-recurring severance or catch-ups versus what's the run rate number for that figure?

Right at $800,000 to $900,000 in non-recurring charges.

That's kind of split between stock based comp and SG&A.

Probably salary.

Salary and stock based comp.

And there was even a little bit of SG&A in there.

$800,000 to $900,000 in that total category, Robert.

Okay.

Got it.

I'm going skip on, going back to the OMV issue, you've been spending money on this product and this product development for over a year.

Not going to generate revenues for another six months.

How do you feel on the IRR of this investment and in particular how many OMVs or IKEAs, to use one of your own names, do you need to turn this product into a profit center in the near-term and to justify the IRR in the long-term.

We would estimate that it'll take between two and three -- certainly, as you get into your third merchant, you're starting to print money.

We can make money on OMV but it takes time with the transaction growth.

Our goal is to accelerate that payback period by bringing on two to three new customers so that we can start to have positive results next year.

But, Robert, to get to our targeted internal ROIs on it, as Mike said, we could be making money at two to three.

We need to probably be between three and four to get our achieved ROI.

So, you can tell from that that this isn't an insurmountable kind of challenge, to try to pick up customers and with the sea change in this payment processing area across Europe and as Kevin mentioned, what we're seeing in the pipeline opportunities, it certainly looks like a reasonable goal to achieve in that three to four to get to our desired ROI.

And this is the kind of product that if we start going above that, we could be doing well better than our ROI there.

And also I know that there's a lot of focus here on OMV and it is any investment for us, but let's not forget the rest of our EFT business.

The rest of our EFT business grew its revenues handsomely and ex the investments in OMV have profit margins went commensurate with that, actually slightly higher.

So, we're not -- you don't see that result.

You can worry about margin pressure and this and that but this last quarter's results do not bear that out.

We're seeing lots of growth in these emerging markets for just good, old-fashioned ATM and POS outsourcing.

That's going to continue to be, especially with these new contracts that we're getting in Asia and the pipeline that we see really across the board.

So, we're pretty excited.

Actually, the pipeline right now, just to tell you from a qualitative position is unbelievable.

I've never seen a pipeline of real live deals that could close in the next year even half as big as what we're looking at today.

The numbers are kind of off the charts.

I think we've finally become absolutely the industry leader in these markets.

Everybody acknowledges that.

And we're just seeing kind of strength pushing strength.

We hope that will continue to grow while we're growing our cross-border initiatives.

Okay.

Thanks.

And one last one.

Going back to the tax issue.

I mean, 51% effective tax rate in the first quarter.

Is that kind of level going to continue in the second quarter?

Is that one of the things that's affecting the earnings guidance as well?

And if I can make a recommendation, I think it would be helpful for all of us analysts if you could give maybe a somewhat different reconciliation to cash EPS, maybe starting from pre-tax numbers and then potentially using even a long-term tax rate to figure out a cash EPS number.

Because the volatility in the effective tax rate quarter to quarter and the adjustments that we have to factor in make projecting that cash EPS even more difficult than it normally is.

Yes, Robert.

I sympathize with you.

I also wish it wasn't that way for the purposes of our auditor's tax bill, what we pay in fees for accountants.

But at any rate, the 51% is largely driven by that large gain on the gain on foreign exchange.

We don't project what that number may be.

It's kind of hard to out guess that number there.

But to make it a little bit more simple, let's call it on a cash EPS basis, we were just under 30% on an effective tax rate for our cash EPS.

We have assumed as we go throughout the year that we'll be a little bit higher on the tax rate, because we're seeing great production in transaction growth out of our RIA international businesses and the likes of the Italy, the Frances, the Spains, where there are higher tax rates.

But, nonetheless, kind of to get a little bit more simple, kind of in that 30% zip code for cash effective tax rate.

Thank you.

Our next question is coming from the line of Robert Napoli with Piper Jaffray and Company.

Please, proceed with your question.

Thank you.

And good morning.

Couple questions, I guess.

One suggestion.

I think you guys ought to focus a lot more time and effort getting more contracts like the Bank Machine's contract with 100% margins.

That would mitigate the need for a lot of the other --

The reality is our next contract, whatever that is, in ATMs which is why I'm excited about the pipeline of potential deals, if we're in the current -- in any of our current countries, it is a deal like that.

It's -- you know.

It's 85%, 90% kind of flow through.

So, that's the magic of our business.

That's why these contracts are a challenge to close because nobody likes to outsource.

Outsourcing is a bad word in all languages.

But once you get them, they're very highly productive with very high flow throughs.

I would add one maybe alternative comment to that.

They are very -- in this Bank Machine it is a very high flow through contract, but this is our only contract where we really only do driving only.

One of our real values and I think one of the real stickinesses to a lot of our other contracts is that we provide end to end in mostly the other contracts, kind of an end to end ATM outsourcing solution which is not just the IT outsourcing part, but it includes the cash fill, the maintenance, the placement of the machine, the managing of even the retailer relationships and things like that.

And that makes it incredibly more difficult for someone just to decide to want to in source something like they did in this situation here.

So, I appreciate what you're saying.

Clearly, revenues that all drop into the bottom line are great for us.

But when you have a customer relationship where you have fewer elements of that decision, that managed service delivery, it's just a little easier for them to move.

We would rather see those customers that we sign up have full end to end agreements where it's very hard for them to want to in source that then.

And we might add too, this is the first contract loss we've had in 14 years.

It's for the reason that Rick mentioned.

Interesting.

Thank you for that answer.

It's very helpful to a question that was half in jest.

But a question on the Italian prepaid market.

I just wondered if you could try to quantify, size up the opportunity, and try to quantify when you would expect, when you would hope to see results that could be material through the P&L.

We're rolling out in this quarter and so when you say "material", I would say it would be towards the end of this year.

Towards the end -- because you know we've got to roll them out.

We've got to get the -- and transactions have to grow and that kind of thing.

But I say for sure by the fourth quarter this year.

Third, fourth quarter.

Third or fourth.

Can you kind of size up what you feel like the revenue opportunity is for you in that market over the next several years?

Well, I think that we'll -- let me just paint for you the Italian position.

It's very interesting.

There's one player out there right now that virtually has all the electronic top-up and that company is Lottomatica.

They're the lottery company there.

They do all the transactions at kind of small convenience stores, tobacco shops, and so forth.

They do about 70% of all the top-up in the Italian market.

The other 30% is still done with scratch off cards at the large retailers.

The mobile operators there in Italy did not feel like it was in their best interest to give Lottomatica virtually 100% of the business.

So, they've locked them out of the large retailers.

So, we've kind of swooped in here, we actually are -- the guy who used to run Lottomatica's prepaid business now works for us.

He's a very talented individual.

And he's gone in now to the -- he's gone into these large retailers to sell our services and he's been very successful.

He's got all the mobile operators.

He's selling these deals and we're starting to roll them out now.

So, I guess you could say that if we've got all the large retailers who are dying for an electronic solution but don't have one, we've probably got a 70% - I'm sorry, a 30% market share potential.

But our experience in the UK and Germany show that these large retailers actually have larger potential and you'll see a shift from the little guys to the big guys.

There are 50 million users in Italy alone, the largest prepaid market in all of Europe and 90% of them -- 90% of all the users in that market are prepaid as opposed to postpaid.

So it's the market to win in and with the large retailers that we're starting to sign up, it's very exciting for us.

Do you have idea what revenue Lottomatica generates from prepaid in Italy?

We've looked at that revenue under nondisclosure in the past.

So, I'm not at liberty.

Okay.

Just a question on the segment trends.

I understand the seasonality in the first quarter.

But looking back through the fourth quarter, first quarter, '05, '06, '06, '07, and then '07, '08, it does look like we had slower sequential growth.

And I'm not sure -- I know there's been some little acquisitions sprinkled in here and there in EFT and prepaid in particular.

But what I just wondered is, why it seems that way?

Also currency changes could diminish the effectiveness of that analysis.

Is there some slower market growth?

Is there some economic effects?

We see, just on ATM transactions and you can see a similar thing in prepaid as well.

But you'll watch from December to January, transactions will fall off 15%, maybe even 20%.

And then you'll see them come back when they're only down -- or they might come back 5% but they're still 10% or 15% off of December in February and by March you start to get your feet back under you.

The reality is people don't even go to the ATM in January because they know they have no money there.

It's that kind of seasonality.

And when you're doing -- on the prepaid business, lots of people buy new phones for their kids and their siblings and their wives and whoever it is in the fourth quarter and with that, they give them a prepaid card.

They buy GBP 50.00 or EUR 50.00 worth of prepaid top-ups.

So, as they go and they burn through that through January and it's February before they start topping up again.

Those are the reasons, the kind of qualitative reasons behind the seasonality and it all makes sense.

And when it comes to money transfer which is new to us and you can't really look three or four, five years back because it doesn't make sense, but the reality is much of this immigrant labor is used for farming and construction and it just doesn't happen in the cold months.

Okay.

I guess on the money transfer business I guess the -- while your acquisition of MoneyGram didn't go well and you wouldn't do it if you knew what you knew today -- the logic behind it does seem to hold.

And Western Union talking about US to Mexico, they also pointed out that Canada to Mexico was up 70% year over year.

So people are still immigrating.

They just move further north.

I just --

They're a little bit more well treated up there.

Yes.

They are.

Down here, let's face it.

We've got guys trying to shoot them at the border.

It just doesn't make them feel real comfy.

They still have to get from --

That's the one thing about the Mexican immigrant is we picture them like coming over the border and staying here.

It's a very fluid populous.

They'll go back and forth multiple times in the year, stay there during the winter months, go back for holidays, that kind of thing.

It's a more fluid group than say the South and Central Americans where it's just a longer trek.

I understand.

My point strategically is, are there other opportunities to expand countries because having - being in more countries as immigration shifts around is a major advantage.

Absolutely.

And if you -- if Juan was here, Juan Bianchi who runs our money transfer unit, he'd tell you how excited he is about the growth in Canada.

It's one of our burgeoning markets as an example.

We're following Western Union's trend if they have one.

I think I'd just add to that is that as we take a look at the growth that we're seeing in the non-US markets, that's where we're focused on with the RIA business.

We're seeing good success coming our of our European originations and a lot of that traffic is because of what Mike said, immigration patterns moving from the Eastern side to the Western side of Europe.

There's virtually no restrictions on many of those country movements there and we have continued to build out those payout networks going into those Eastern European countries.

We, in addition, are working on other payout corridors and enhancing those corridors, whether it's to the Northern Africa kind of markets or to the Indian markets or other Asian-Pacific type of markets where you as well see a fairly strong immigration pattern.

So, we're not just focused on North American activity.

We've benefited as well from improvements in the Canadian traffic, as Mike said, but we've got our eyes set on many of these other non-Mexican markets that are equally as big.

If you take a look at the statistics, Eastern European transactions are about the same size as US to Mexico.

India and China are each again about the size of Mexico.

There are four big markets out there; Mexico, China, India, and Eastern Europe.

We're looking at all of them.

And we get kind of myopic, being Americans here, sitting here.

The reality is there are more immigrants in Western Europe than there are in America.

So we don't have -- right now, theoretically if we got our fair share or our big competitors got their fair share, we would all be doing over half our business in Europe.

And that's why we bought RIA.

Because we have that great European presence and we continue to leverage that and grow our business.

So it would not surprise me that in the future we'll do more transactions Europe, let's say non-US originated than we will US originated.

Thank you.

Our next question is coming from the line of Wayne Johnson with Raymond James and Associates.

Please, proceed with your question.

Good morning.

Jason Boozer in for Wayne.

How are you?

Hi, Jason.

Hi.

My questions are in regard to the prepaid segment.

It seems like the retail locations were sequentially -- licenses were actually down.

Was there any reason for this?

That's a good observation.

We wondered which one of you guys was going to be awake enough to notice that.

In our computer systems, the way we work is we get a count of the POS terminals that are actually doing business in a given quarter and when we sign up these large retailers, as I mentioned before, the reality is in Q4 and the Christmas season, people like Tesco and Wal-Mart and so forth just open up more lanes.

And so that POS, the ID number on that lane lights up in our computer system.

It's just a Q4 seasonality of having more lanes open across basically the same number of retailers.

Okay.

That's helpful.

Also, was there any negative impacts on pricing in prepaid or just the usual?

There's nothing -- nothing of instance at all.

Yes.

Alright.

That's great.

Thank you.

And you saw, actually, ex the little Italian investment, we had strong numbers in prepaid both margin -- you didn't see comprehensions of margin.

Do you have one more question?

Yes.

Did you quantify the Italian investment?

Yes.

$400,000 in this quarter.

And we've got time, I think now, operator, for one more question.

That is correct, sir.

Our next question will be coming from the line of David Parker with Merrill Lynch.

Please, proceed with your question.

Good morning, everyone.

Good morning, David.

Could you just remind us of the 1500 ATMs in the pipeline, how many of them belong to the China Post Bank and also just talk about the timing of the rollout beyond the 200 ATMs that are coming out soon?

And then just provide some color around the blackout period that you mentioned?

China Post Bank must have -- let's say.

I'm looking at the numbers.

700?

Yes.

About 700 for China Post because we added a new contract this last quarter.

And you asked about the blackout in China?

Basically, China Inc., the government say no construction, don't mess with the system May through August.

And so we are -- end of May, I guess, through August.

And so we're trying like the devil to get in a couple hundred ATMs this quarter before the curtain falls on us and then it opens up again after the Olympics are over.

And you anticipate getting those final 500 rolled out by the end of the year?

Between August and the end of the year?

I'd say we've got a pretty good shot at that.

That's our goal, certainly.

Okay.

And then just can you talk about your unrestricted cash position?

Just you mentioned one of the reasons why 2Q was a little bit lower was because of rising -- or interest rates coming down.

Is that any impetus for you to put that cash to work?

I'll let Rick answer some of this.

There's no way we're going to put the cash -- when you say "cash to work" there's only two places we can do it and that's some kind of an acquisition or paying down debt.

Yes.

I would say with the interest rates lower, there might be a little more impetus to pay down debt quicker.

But as far as acquisitions, we can't time them.

If it's a good, accretive, very accretive acquisition, we'll do it when it's there but I can't time those.

The only other thing I would add to that, David, is from time to time I may ask whether we would consider or have considered repurchasing our shares, especially at the current price level and the short answer is "You bet.

Yes, we would".

The difficult answer is under our bank agreements, the bankers want to get all their debt paid off before we would acquire any kind of shares.

So unfortunately, we have limitations, not limitation -- outright restriction on repurchasing our shares or we would consider doing something like that.

So, as Mike said, it's either good accretive opportunities or whether we want to put more down to take down debt.

Okay.

And then just final question is First Data announced the acquisition of your largest competitor in the US prepaid business, InComm.

Any comments on that?

Or any thoughts?

We would expect probably kind of no change, similar environment than to what we see right now.

The US is the only market where we don't have a pretty dominant position.

But we still continue to make good money here because we're focusing on a different market segment than they are.

And now, actually that First Data's taken them over which has a penchant for larger merchant, card processing and so fort, they may actually stay out of our sandbox a little bit more than they have in the past.

We'll see what happens.

I would say in general, I don't expect much to change there.

Alright.

Thanks, guys.

Alright.

I want to thank everybody for taking your time with us today and we'll look forward to talking to everybody next quarter.

This concludes today's teleconference.

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Thank you for your participation.