Euronet Worldwide Inc (EEFT) 2008 Q3 法說會逐字稿

Greetings and welcome to the Euronet Worldwide third-quarter 2008 earnings conference call.

(Operator Instructions).

As a reminder, this conference is being recorded.

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

Jeff Newman, Executive Vice President and General Counsel for Euronet Worldwide.

You may begin.

Good morning and welcome, everyone, to Euronet Worldwide's quarterly results conference call.

We will present our results for the third quarter of 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 its Form 10-K for the period ended December 31, 2007, and our 10-Q for the period ending June 30, 2008.

Copies of these 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 will turn over the call to Rick Weller, our CFO.

Thank you and welcome, everyone.

For the third quarter of 2008, the Company reported $280.7 million, operating income of $18.8 million, adjusted EBITDA of $35.3 million, and cash earnings per share from continuing operations of $0.30.

As you may have read in our October 17 press release, we revised our third-quarter expectations from $0.33 to $0.30, given the economic pressures we are seeing on transfers to Mexico and foreign currencies, together with increased tax expense resulting from profit shifts in country mix.

For your information, a little more than one-third of the change was from currency translation, while tax and transfers to Mexico pretty much split the difference.

Let's move to slide number six and we will continue.

Here on slide number six, you can see the last two years of revenue and third -- of the third quarter, and how the yearly improvement trend continues.

Let's move to slide number seven.

Year-over-year transactions grew in all three segments, with strong transaction growth coming from Australia and Germany in our prepaid segment, and from India and China in the EFT segment.

On the next slide, you can see in the third quarter, our Money Transfer transactions grew 8% year-over-year.

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

While pressures in Mexico persist, the non-US business continues to experience significant growth rates, 34% this quarter.

Net net, year-over-year we have seen good fundamental transaction growth in all of our business segments.

Let's turn to slide nine.

Slide nine includes a review of our segment third-quarter results compared to last year.

The EFT segment revenues grow year-over-year by 25%.

Operating income declined by $1.1 million, or 12%.

Consistent with what we communicated in the first and second quarters, the development of our Cross-Border product is requiring a substantial level of effort that we did not incur in the third quarter last year.

To help better understand the fundamental state of the business without the Cross-Border costs, we provided a pro forma view of the EFT business.

Accordingly, you can see that, excluding the Cross-Border costs, operating income would have improved 15%.

In the prepaid segment, we grew our revenues year-over-year by 15%, and op income increased by 21%.

The revenue improvements came largely in Australia, Germany, Poland, and the US, and our operating margin expansion was attributable to the favorable leveraging of expense as we brought on incremental transactions.

This was the second sequential quarter our prepaid group delivered expanded margins.

A good job.

Our Money Transfer segment grew quarterly revenues, year-over-year, by 11%.

As I mentioned earlier, transfers to Mexico continued to pressure our Money Transfer results.

Transfers to Mexico declined year-over-year by 10%.

However, in the third quarter, we continued to see the benefits of expanding outside the United States, delivering again 34% year-over-year growth.

While we could do little to change the fundamental economic drivers behind the Mexico volume pressures, our Money Transfer team did an excellent job in managing pricing and margins.

Their efforts are clearly demonstrated in our 19% growth in gross profits.

On a year-over-year basis, operating income came in at $3.1 million, compared to $3.4 million last year.

This decline in operating income was related to the increased costs we directed toward expanding outside the US.

Those expansion costs are doing exactly what we expected them to do and can be seen in the growth rates of the non-US transfers.

Overall, the Money Transfer business did a pretty decent job battling the headwinds of a tightening US economy.

And the Money Transfer team is not satisfied with just the improvements in gross margin.

They are, as well, focused on some of the US cost structures.

Mike will talk about that more when he chats later.

Finally, corporate and other expenses decreased by about $400,000, largely due to the lower FAS 123R stock-based comp expense.

Again, Mike will make additional comments regarding all segments in a few minutes.

On slide 10, you can see some observations regarding foreign exchange.

As many of you know, most of our revenue is US dollar-denominated -- is non-US dollar-denominated, roughly 75%.

Of that 75% revenue, most of it comes from a basket of currencies, specifically the Euro, British pound, Polish zloty, and Australian dollar.

As you know, these currencies have weakened against the US dollar.

For example, on June 30, 2008, the US dollar to the Euro was 1.57, and the Australian dollar was 0.96 to the US dollar.

Just yesterday, the exchange rates for the Euro were 1.25 and the Australian dollar, 0.61, a 20% and 36% decline, respectively.

I could give you other examples, but I think you get the point.

Many of you follow the exchange rates, and you know that we started to see slippage in August.

But that was in or around the 5% range, and it remained fairly stable through the end of the quarter there.

Then, from the end of that quarter through yesterday, the rate of decline really accelerated.

To help gauge the impact of currencies, if we see a weakness of approximately 5% across the basket of currencies where we operate, our quarterly cash EPS would be impacted by about $0.01 a share.

You can largely see that in the third quarter results versus expectations.

Keep in mind that this is an extremely simple view, and there are a lot of moving parts in the actual detailed math.

I do want to help make some sense out of this for you, but at the same time, I don't want to mislead you and I emphasize that the devil really is in the detail of the rates, the mix, and the timing.

But I hope this helps to somewhat gain an understanding of the impact.

Let's move on to a few comments about the balance sheet.

Since last quarter, our big changes came in the form of debt reduction.

As you know from our press release a couple weeks back, we purchased $55 million of our 1.625% convertible bonds.

These bonds have a common stock exchange rate of 3363 per share, and have a first call first put date of December '09.

Given the recent market turmoil, we found that our bonds were trading at a discount to par.

After considering the very attractive yield to maturity, and knowing the likelihood of the bonds being put to us in 14 months, we agreed to repurchase the $55 million par at a discount of almost 10%.

This repurchase also helps us demonstrate to our lenders and our shareholders that we have the ability and liquidity to meet a put in December of 2009.

If we move to slide 12, I'll finish my comments with a few other quick observations regarding liquidity.

We have a strong cash position of $174 million.

We have a risk-averse strategy with regard to our cash, and we do not speculate or take hedge positions beyond a few days required to collect from our non-US Money Transfer agents.

Beyond our cash position, we have approximately $60 million available under our line of credit.

We have minimum debt principal payment requirements of $2.4 million, along with lease payments of approximately $6 million between now and December of 2009, when the remaining $85 million in 1.625% convertible bonds could be put to us.

Finally, even with the decline in foreign currency exchange rates, we will generate about $50 million a year in free cash flow, or roughly another $65 million of free cash between now and December of '09.

We believe that this strong cash and liquidity position will serve us well as we go through these difficult economic and capital market times.

Now, to Mike.

Next slide, please.

Let's move on to discuss the EFT processing segment.

Jump to, please, slide number 15.

Slide 15 gives a snapshot of our EFT financial results for the third-quarter 2008.

Our revenues, strong again, increasing by 25%.

Operating income and adjusted EBITDA decreased by 12% and 1%, respectively.

As Rick discussed a few slides ago, it's helpful to see what's happening with our EFT business by excluding our operating costs in the Cross-Border product.

Excluding these losses, the EFT segment's third-quarter 2008 operating income and adjusted EBITDA would have improved by 15% and 16%, respectively, over prior-year results, clearly illustrating growth from the rest of the EFT business.

We will no longer highlight the impact of the expired UK ATM contract in our EFT financial results.

Moving on to slide number 16.

Transactions on our ATM and POS networks increased by 8% sequentially over prior quarter, pointing to the continued growth in ATM use and electronic card payments used in emerging markets.

In addition, we continue to expand our network of outsourced and managed ATMs.

We signed Alior Bank in Poland to provide ATM deployment and outsourcing services for 200 new ATMs, Getin Bank in Poland to provide outsourcing and network participation services for their existing network of 56 ATMs and for 50 new ones.

We secured an ATM and card outsourcing agreement for LHB Bank in Serbia.

LHB Bank merged with our existing customer, Continental Bank in Serbia, further strengthening our relationship with (technical difficulty).

Moving now, please, to slide number 17 for an update on our OMV Cross-Border agreement.

To date, we have successfully migrated OMV's petrol stations in five countries to our SEPA-compliant Cross-Border processing platform.

We have seen a steady increase in transactions processed on our platform from existing live countries, as we prepare to migrate the remaining contracted countries.

We signed and went live with 340 ATMs of Kotak Bank on our Cashnet network, the largest shared ATM network in India.

Transactions processed on Cashnet continue to grow at a very impressive rate, increasing approximately 150% year-over-year.

While we are working on a dynamic and competitive environment.

After having traveled through Europe last week, I know that the banks are being forced to look for improvements in costs and return on capital.

It appears as we -- as this environment has gotten tougher, it's gotten tougher on the banks and that's certainly to our advantage.

This has and will open doors previously closed to outsourcing.

While we must be cautious during these unprecedented times, I believe we will find opportunities where they previously did not exist.

We will work with each of our customers to expand and extend our business.

And that's what we're doing right now.

Move on, please, to slide number 19.

We continue to see strong operating and financial performance in our prepaid segment.

Our third-quarter 2008 prepaid revenues increased by 15% over the same quarter last year, while operating income and adjusted EBITDA increased by 21% and 15%, respectively, for the same period.

Nice leverage there.

Similar to last quarter, our prepaid segment's bottom-line performance outpaced impressive revenue growth.

Australia was a big contributor to this growth.

As many of you know, our competitor in Australia fell under the pressure of its debt obligations, inefficient organizational structure, and irrationally competitive offers to win accounts from us in the marketplace.

Our team there was able to meet customer needs and keep the top up [to flow] into the mobile operators after the demise of our competitor.

Moreover, our team's [closed system] cost containment and operating discipline throughout all of our prepaid markets.

Moving on to a few business highlights, on slide number 20, for prepaid.

Once again, despite the economic challenges consumers and certain mobile operators face today, we continue to see a positive consumer response towards new prepaid product and mobile airtime usage.

Year-over-year transaction growth increased 11%, while sequential transaction growth over the prior quarter in the prepaid segment increased by 6%.

In the third quarter, we leveraged our presence in Greece with our EFT operations, and launched prepaid operations by signing all three mobile operators in the country and signing our first retailer to offer [tod love] at 300 stores.

Currently, there are about 10 million prepaid subscribers in Greece, of which approximately 10% top up their electronic distribution.

In Australia, we signed and rolled out 840 stores for the Coles Group, one of Australia's largest retailers, and 800 more stores for the United Convenience Buyers, a leading independent fuel retailer.

In the US, we rolled out prepaid in 3,000 Radio Shack corporate stores.

Moving on slide number 21.

We signed other major retailers -- UniEuro and Dimar in Italy for a combined total of 200 stores, and Crazy John's in Australia for 110 stores.

Additionally, we expanded our independent retail channel by signing approximately 7,400 stores in Australia last quarter, and 2,000 stores in Italy.

We continue to expand our product suite beyond mobile top-up on our network terminals.

We're pleased to announce that Transport for London has awarded our e-pay UK subsidiary a five-year contract to offer London Congestion Charge payments on our extensive network of e-pay terminals, both in London and nationwide, beginning October of next year.

We also launched gift-card products in Italy and Australia, calling-card products in Italy, and international wireless top-up and bill-payment products in the US.

Overall, a great quarter.

A lot of work in most all our countries.

Congratulations to our prepaid team.

We will now move on to our Money Transfer discussions on slide number 23.

The Money Transfer segment reported revenues of almost $60 million, operating income of $3.1 million, and adjusted EBITDA of $7.9 million.

Moving to slide number 24, you can see that sequential transaction growth in the Money Transfer business was flat, reflecting the higher seasonal trend in the second quarter, driven by Mother's Day in May.

The Mother's Day week is our strongest week of the year.

On a year-over-year basis, our total transfers increased by 8%.

The 8% increase in total transfers was driven by a 34% increase in non-US-originated transfers.

The weak US economy continued to impact our US-originated transfers in the third quarter, which declined 1% year-over-year.

In particular, we continue to face pressure on our US-originated Money Transfers to Mexico, resulting in a 10% decline in transfers to Mexico year-over-year.

Total revenues increased by 11% year-over-year, slightly higher than transaction growth.

Here again, the 42% increase in non-US revenues contributed to the segment's revenue growth.

While we can't do much right now about the US economic situation and its impact, we have tried to manage our margins.

As Rick mentioned, our gross profit increased 19% year-over-year at a faster rate than revenue.

And this improvement was a result of not engaging in irrational pricing wars, to drive volume growth by focusing on improving our cost structure, by maintaining customer fees and foreign exchange spreads, and focusing on increasing our volumes in corridors with wider margins.

Next slide, please.

We also took action to reduce our cost in the Money Transfer segment.

We focused on consolidating certain operating functions to support both our prepaid and Money Transfer segments.

Specifically, in Spain, we consolidated our Money Transfer and prepaid call centers.

We migrated our US Money Transfer call center facility to El Salvador, and this call center now supports our US prepaid operations, as well.

In addition, we reduced our US operating expenses in light of the current economic situation, which will result in approximately $3 million-plus in savings next year.

In the third quarter, we expanded our correspondent network by launching approximately 1,600 payout locations from our contracted backlog.

And we also signed about 15,700 new locations with payouts to India, Indonesia, and other countries.

Now onto a few summary comments on the quarter, and then we will take questions.

In summary, you can see that we posted cash earnings per share of $0.30 in the third quarter of 2008 from continuing operations.

We saw continued growth and momentum in our key prepaid markets.

While we face competition in these markets, the strength of our balance sheet and the quality of our product offering are proving to be clear differentiators from the competition.

The Australian market success is a key example.

Our non-US-originated Money Transfers continue to grow at a very nice pace.

We believe our diversity across products and countries has enabled Euronet to emerge a stronger company, better suited to weather economic downturns such as the current one.

And we are well-positioned for the eventual upturn.

We have a strong liquidity position and we continue to reduce our debt.

On October 17, 2008, we revised our fourth-quarter 2008 adjusted cash earnings per share outlook to $0.33 per share, primarily due to the weakening of some of our operating currencies to the dollar.

As Rick already mentioned, since then -- just in the last couple of weeks, we have seen a lot of volatility in currencies that has resulted in an additional 10% to 13% decline in a number of our key currencies against the US dollar.

Consequently, we now expect our fourth quarter 2008 adjusted cash earnings per share from continuing operations to be approximately $0.31, assuming currencies remain stable through the end of the year.

And here is just kind of a quick look back.

As I look back to June, absent these dramatic foreign exchange changes, we would have operationally met the projections that we had internally and the projections that we used to derive our guidance for the street and the market.

We would have met the last half of the year projections.

This concludes our presentation portion of the call.

We will be glad to answer questions.

Operator, will you please assist?

(Operator Instructions).

Anurag Rana, KeyBanc Capital Markets.

Good morning, gentlemen.

Just wanted to get an idea about increased expenses for the EFT division.

Do you have any timeline as to when we should stop seeing these -- about a $2.5 million per quarter [drop], that we saw in the current quarter related to the Cross-Border initiatives?

I'm sorry, I pushed the wrong button.

With respect to our investments, our investments Q3 over Q2, really -- there was no increase.

We have a large endeavor with our Cross-Border product, and that -- we have been talking about that all year.

So it's an increase over prior year, because last year we hadn't ramped up, we didn't have the five countries live that we have now, we didn't have all the infrastructure in place.

So from a year-over-year perspective, it's an increase.

But from a quarter-sequential perspective, it is not.

We would expect probably that this will continue throughout next year as we continue to ramp up new countries.

Also, Kevin might have a couple of other extra comments.

So the Cross-Border program will go with [home vaith] to the end of next year.

Expenses will come down slightly next year, but this is still very significant spend through all of next year.

Then it will end in the fourth quarter of next year.

But I think one of the questions, Kevin, is do we see it going up next year?

No, we're -- it will not go up next year or quarter.

It will be -- still be flat.

Fourth quarter will be flat to current, and then it will start to ramp down slightly through next year.

Are there any other investments lined up in this division that might actually have an impact on operating margins, either positive or negative?

Not at this time.

Thank you.

Any other color on Money Transfer?

Any other cost controls over there that we can expect margins to go up in that area as well?

I mentioned we will -- we weren't just sitting around, watching the Mexican traffic dry up on us.

We, over the last quarter, have initiated a number of cost-containment measures, which will start to bear fruit towards the last month of this quarter and all through next year.

We have eliminated in excess of $3 million in expense for the Money Transfer division, primarily the US one, where we have our weakness in numbers of transactions and growth rates.

We have not curtailed our investment in Europe and Australia, for the simple reason that Europe and Australia are growing like banshees.

So we're basically -- you just can't go along and keep your same expense line when you've got a drop in transactions like we have over the last year and a half.

So we were able to make adjustments.

I'll just add to that a little bit, in that our -- as we said, our team has done a very nice job on managing mix transactions where we have higher margins, and in the spreads on the FX.

And they've continued to do that, and so, that should help us in addition to just the cost containment.

Thank you.

Robert Dodd, Morgan Keegan.

What about currency and guidance, and then I'll get into other issues.

Looking at Q4, I know you're not giving revenue guidance.

But to just give a rough idea -- given the headwind Q3 to Q4 that I think we're all well aware of, I mean, are we looking at essentially flat revenues year-over-year for Q4?

Is that in the ballpark?

I'd have to go back and recall.

I don't happen to have my forecast right here in front of me.

But, on a year-over-year basis, we have seen our -- we have seen the currencies come down by, probably, 20% to 25%.

And on the positive note, we have seen our revenues on a year-over-year basis, if we just take a look at the third quarter, grow by 25% in the EFT segment, by 15%-plus in the prepaid, and by a good double-digit in Money Transfer.

So I think it would be probably a little bit -- a little bit of growth on a year-over-year basis.

But not much just because of the exchange factor.

A couple questions about pipeline now.

On the prepaid side, honestly, the London congestion charge payment, that's a -- I know you do some other products in the UK, like iTunes and things like that.

But this seems to be a fairly highly visible product.

Can you give us a little bit more detail about what the pipeline is for other non-mobile products you've got there?

We have a number of products that we're planning.

I kind of would prefer not to tell you what they all are, not that I don't love you, Robert, but our competitive situation is that we're able to launch new products, it appears, quicker than our competition.

The London congestion charge was -- and that was a tender bid that was actually stolen from a competitor.

And -- because we basically were the best -- we're the best guys for that job.

What you're seeing is a major shift in the terms of the way we think about our prepaid business.

We're really trying to transform it from being a predominant prepaid mobile airtime top-up business to really a payments business where we conduct all sorts of different transactions on those terminals.

So, over the next several quarters, you're going to see us hopefully announcing more and more deals like the one that you're seeing today, where we're providing other services on those terminals.

And that London congestion charge is probably the most high-profile non-prepaid cellular deal you could get in the UK.

Nobody's driving into central London at the moment because it is closed.

But other than that, and the BBC's [on fire], obviously.

Just onto EFT.

On the OMV side, obviously, I mean, a major motivation for OMV was saving money on Interchange or [AcquiresFed] or whatever we want to call it.

Given the pressures that retailers are looking to be facing next year, I mean hence, I know you had a pipeline and I know you had discussions with other retailers.

But are you seeing a meaningful change or increase in interest from some of the retailers over in Europe?

I just had a meeting with the head of the business segment who runs the OMV deal -- project on the other side.

And he has become a very happy man here lately.

We are late with our delivery, about six months, but his -- the numbers of transactions that he sees across these terminals are higher than were in his original expectations.

He is happy with our performance, he says that he is getting a number of inquiries from large companies, as are we.

We've told our people -- deliver OMV first, let's make sure we've got our five, six, seven countries under the belt and we're doing everything right before we start focusing a lot of effort on the next one.

Because I want to make sure that we have -- and I told this guy, I said I want make sure that we have a glowing recommendation from you.

And so, I would say that the market for this is still there.

The economics that drive you to these retailers are obvious.

He is going to save about 1% of revenue on each of these card-based transactions.

That's an enormous amount when you look at the margins of a petrol chain.

So, economics are there to drive them, what we need to do is finish his rollout or, at least, get a little bit further, balance his rollout, and then he will -- he promised to recommend and we will go chase some more deals.

But I would imagine those deals we're going to start chasing in earnest right after the first of the year.

The good news with respect to OMV is a lot of the heavy lifting with respect to deploying -- developing the solution is now complete.

We're now in the rollout phase.

We've completed five countries.

By the end of next year, we will be at 12.

Thank you.

Franco Turrinelli, William Blair.

Lots of questions, if I may.

I'll get through a couple and then maybe get back into queue.

So this one is really for Rick.

Thanks for the help on currency.

Rick, the one thing that I really still am having a hard time modeling or thinking through is the currency exposure of expenses.

And I guess I -- maybe it would be helpful to us if you could remind us where your major expense categories are located, and how things have been moving from an expense point of view on the currency.

It's probably a little bit simpler for us than maybe others, because we are pretty much matched up in terms of our expenses to our revenue production.

So in each of our respective countries, whether they be currencies -- related to currencies that are the pound, or the Aussie dollar, or the Euro, those expenses are matched up in the revenue streams there.

So there's only -- there really are only two countries where I would tell you we have a bit of a disproportionate amount of expenses versus revenue.

And that would be in Hungary, where we have our processing center.

And clearly, when we have -- in Hungary, we would be a net expense generator.

So when we have the Hungarian forint weaken to the dollar, that flows through -- it helps us on our -- the numbers.

And then, in the United States, where we have our corporate expense, the corporate and our interest expense and not even all of our interest expense.

I would say about 70% of whatever is, kind of, is in that US, and you know what that is fixed from the convertible bonds, et cetera.

But it's the interest expense and the corporate overhead that's in the US that's not necessarily matched up to those same revenue streams.

Other than that, all of our other expenses are directly matched to the currency in the country that they are generated in.

Is the UK pound a little heavy because of [failure due] Australia out of the UK for prepaid and stuff?

It is a little bit, but it's -- we're talking about customer service type of people.

So, on an effective headcount basis, it might be 25 or 30 headcount.

And it's also -- what we do there is we manage that around the clock because of time zone differences, but it's not a very big amount of different expense in the UK versus Australia.

Thank you.

That's very helpful.

Maybe going back to Kevin for this one.

I am still not exactly sure that I understand your answer on the EFT expenses related to OMV.

So, should we think of this as an infrastructure increase in expenses, so it's sort of permanent but will ultimately get levered by revenue, or is this really sort of an implementation and deployment expense, which ultimately will actually go away, and so expenses will actually go down?

I'm sorry, it's the latter.

So the additional expense -- there will be some additional expense in the business on an ongoing basis.

It's not worth modeling.

The rise in expense is associated with the implementation, so the heaviest component of that cost is in 2008.

What I was trying to say is it will extend also into 2009, at a slightly lower rate than the current rate.

And then it will go away unless we win another project at the end of 2009.

Hopefully, then the expenses will be prove permanent.

So the expense will drop off the end of 2009.

I have said in some previous calls that we're modeling it at about an 85% reusability, so if we do a second project, the goal would be that that second project would be obviously a fraction of the implementation costs of the first one.

I had one more and I'll get back into queue to let other people jump in.

Mike, this one is for you, I think.

It just seems like there was a tremendous pick-up in activity in prepaid.

Is this really an endmarket development, or is this just really more focused on more execution on your end?

Well, I mean, the biggest pick-up in -- do you mean with respect to just our numbers for Q3?

Just in terms of new markets, new (multiple speakers)

I will tell you, we've got -- since the very beginning of this year, Kevin has focused his prepaid division on new products and basically changing this division, you might say, from a quote prepaid division to a quote payments division.

And so, because of this focus on new products and new ways to make money across the same infrastructure, there is a lot of action going on in virtually every single country.

And you're right to discern that.

And I think -- but then, you couple that with the fact that we saw an operational benefit of the fact that in Australia, we watched Bill Express go belly up.

So we were able to suck in most all of their business across less terminals than they even did it across, so we're more cost effective than they are.

And we own a large segment of that business.

Now that market, just like every other market, we're going to continue to put out new products.

So you are kind of right.

We're focusing on both sides of that coin.

Because long term, you're not going to get a Bill Express going belly up every day.

And so, long term we have to succeed by adding additional products, and wouldn't it be nice if prepaid cellular is only half of our total revenues?

That would be a goal for many years out, but that would just be wonderful.

That would be nice.

And what that implies is a basically almost 100% growth rate in new products from now.

The margin on any incremental product we've put on that network is very, very lucrative, obviously.

Because the cost of that terminal is paid for by the cellular mobile top-up.

Yes, absolutely.

Let me let some (technical difficulty) other people jump in and I'll come back with some more.

Thanks.

David Parker, Merrill Lynch.

Good morning, everyone.

Just to clarify, your assumptions for the foreign exchange is that things do not change and you haven't baked in any cushion.

So if we continue to see the dollar strengthen, for example, that $1.25 US dollar to Euro goes down another 5%, then we're going to have to readjust our estimates again, right?

Absolutely.

We just -- much like has been proven here in the last few weeks, I don't think that we have a great ability to try to forecast what that FX is.

And so, we don't try to out-guess it.

Now, it is important, though, that you keep an eye on more than just one currency.

That's why I point out that these four that, certainly, play a big part -- that we play a big part of our business, and so, while I can't out-guess what I think is going to happen with currency in the future, I guess I said -- I could guess what it's going to be.

I probably would only be wrong.

But we nevertheless -- nevertheless, we did say -- we do know what we know today.

And on that basis, we thought it appropriate to go ahead and give you better clarity in terms of what our earnings numbers would be.

That's not inconsistent with every single projection that we've given you on a quarterly number for the last six years as we make the -- we basically do that projection based upon current FX rates.

And have you ever considered hedging your exposure to (multiple speakers)?

Absolutely.

We have -- we actually had a little bit of a sordid history with that, briefly, six or eight years ago.

But the reality is the cost of hedging of volume or revenues that we have right now far exceeds the amount of positives.

Now, we have -- when you look at it, a typical year for us, we might see currency move a total of 5% or 6% in a year.

We've never, ever -- and people will tell you this, nobody has seen the drop that we have seen or the strength that -- the market crash kind of that we've watched over the last several weeks.

The other thing, David, it's, again, a bit of a built-in hedge on how we manage our business, because, generally speaking, we would deploy the excess profits we generate in these countries back into those same theaters.

And so, if we generate revenues in Euros, or profits in Euros, and we acquire businesses and invest in our infrastructure in Euros, then essentially that's self-hedged.

And like Mike said, we've just never found it to be particularly helpful to try to buy insurance, if you will, on profit generation for the future.

Because we don't necessarily know where that profit would get deployed.

So, if I knew that, for example, I'm using it to pay for airline fuel or something like that, then I could have a little better view on how I would want to hedge that.

But instead, we would have generated excess profits, and then we use it to, let's say, acquire something or invest in ATMs that are in Euro type of currencies.

We would then just have actually defeated the whole purpose of the hedge.

So it gets to be a little difficult to outguess what might happen there.

Thank you for that.

Just moving to the EFT business, looking at your pro forma results that you provided, ex the Cross-Border investments, it looks like that the EBITDA margins still decreased on a year-over-year basis by about 200 basis points.

Is that from additional investments?

Is it from the loss of the UK contract?

I was always under the assumption that this was a scalable business and that we were going to see improving margins as you get more transactions.

It was absolutely the UK matter, as you pointed out.

To our credit, if we were to put that one back in there, we would've seen even more expansion in the op income line.

Like Mike said, we just chose to stop whining about that when we took it out of -- we took it out of the discussion this time, but the UK agreement more than made up for that.

And we're, in fact, back on track as that number grows.

Okay.

And then, just as this global slowdown spreads, and we start to see some economic problems in some of these Eastern European countries, if conditions continue -- or start to deteriorate in those countries, is there any risk to you guys if one of these Eastern European countries goes bankrupt or defaults on their debt?

I think we would have to know the exact -- the exact circumstance.

But the nice thing is, each of these banks within these countries, almost every one of them are owned by large Western banks somewhere.

And the banks themselves, as it turns out, I just made a trip last week, I was in Romania, Serbia, Ukraine, Poland.

Each of the banks in these countries -- and they're pretty Central/Eastern European kinds of countries -- they are financially in pretty darn good shape.

Actually, in better shape than their parents, in most cases.

And so, what you might see is that there is some challenge within the country itself if the IMF or somebody doesn't come in to help them, these things will still continue to operate, they're still generating profits in their own currencies, and it does offer opportunities for us.

I'll tell you this.

I mentioned it in my kind of prepared comments, but without an exception, as I was talking to a number of CEOs last week, I probably talked to 10 of them.

Every single one of them said that the mothership back on the West who owns them, whether this be a bank in Germany or Austria or Italy or wherever it might be, these guys have domestic challenges with their big banks in their own -- their original locale.

So they don't have the capital to deploy -- to help out, or to help the expansion of their satellite countries.

And so, this offers to us an excellent opportunity there.

Cost-cutting is on people's minds like it hasn't been in three or four or five years.

I love that.

We can save these banks money, but don't forget, [hard] working deals there.

It's very lucrative, as Rick pointed out.

If you lose one, it hurts you.

But if you get one, it really helps you.

These are long, close cycles.

They're unpopular within the banks, to get one of these closed, but the nice thing is cost-cutting and financial prudence is driving more opportunities our way.

I would follow with just two observations, principally as it relates to the balance sheet, and then to their customers.

One is we don't carry any significant assets on our balance sheet in terms of receivables and stuff like that.

So we shouldn't have any kind of a haircut like that.

And again, it's as Mike said, each circumstance you have to evaluate it and understand it.

But in all of these countries, remember that the ATM penetrations are at very substandard levels.

And if a bank were to go down, the customers still have money in there and the customers still want to get it out.

And so, the likelihood of shutting down the ATM network is probably not real high.

They'd probably continue to keep that network functioning, and then if the asset were -- the bank were such that it was -- had fallen into receivership or something like that, then again, there's lots of people looking to pick up the properties in these markets because their customer networks and banking operations are just not very well-established.

So it doesn't really appear to us as if your bank would just really fall off the map.

We may have to work through some transition things and stuff like that, but it's a little different story if you were overpopulated.

And these markets, these are, again, very underpopulated in terms of service on ATMs.

Just my last question is on the prepaid side.

As you continue to expand that product suite, is that going to require some incremental investments?

And specifically, you won this London congestion contract.

Is that going to require some investments before it ramps up next year, late next year?

It will, but not beyond what's currently in the business.

Or not appreciably more than what's in the business today.

We're always adding these new products, so there is an amount of our expense line right now dedicated to R&D, and development and rollout of new products.

So nothing will change.

You should be able to sustain that 10% EBITDA margin.

This is not like a brand-new product endeavor, like that OMV thing.

It's unlike it.

Thank you.

(Operator Instructions).

Robert Napoli, Piper Jaffray.

The prepaid -- of the prepaid business, what percentage of that right now is prepaid cell?

(multiple speakers)

Probably 90%.

Maybe a little bit more.

Okay.

And which products do you feel have the most potential in which markets?

I'm not telling you.

It isn't though I don't love you, but that's competitive information and it allows me to whip those boys (multiple speakers)

That's correct, but generically, it's iTunes, it's gift cards, it's prepaid (multiple speakers)

It's the things we mentioned before.

It's the cards that, obviously, we're targeting those for certain markets based on what we think have got the greatest potential.

And obviously, we don't want to share that on this call.

Now, I mean you guys have been in the prepaid business quite a while, and there has been a pretty sizable prepaid business that has grown up in your backyard.

Even in Kansas.

But most of your business is in Europe, and I do appreciate that you signed up to Radio Shack.

But there is a big opportunity for you in the US, and why haven't you attacked the US market for prepaid?

We were one of the last entrants into the US market.

We actually consolidated our position by buying five little tiny companies and putting all their back offices together and then growing organically.

By the time we got here to the US, there was already a very strong number one and number two who, consequently, ended up combining to be an even stronger number one.

But we do see a lot of advantages here.

We're doing some very interesting cross-sell products with RIA, so (multiple speakers) we're positioned well.

We've got a strong balance sheet.

We've noticed here in the US that a whole bunch of our competitors have financial difficulties right now.

And that's wonderful for us because at end of the day, these mobile operators do want to collect on their receivable.

What continues to excite me is the fact that still, when you look at Europe and you look at the prepaid market in Europe, beyond the UK, which has transitioned to electronic, a lot of Europe is still scratch cards.

So, although the market isn't necessarily growing with respect to prepaid, there is still a huge opportunity for us as individual markets transition from scratch or paper to electronic.

And that's where we see some of our organic growth with respect to prepaid mobile top-up in Europe.

Okay.

With regards to the Money Transfer business in the non-US and non-Mexico portions, what growth trends did you evidence through, say, in September, and seeing this month in October?

I mean, Western Union talked about a slowdown in -- obviously, currency affects them as well as it does you, but what are you seeing outside of the North American market?

We have understood that there is a slowdown in money transfers out of Spain in particular.

A little bit in the UK, but Spain in particular because there is a lot of construction going on there.

Although -- the Banco Despain numbers suggest a flat market there for numbers of transfers, we're up about 25% in our transfers.

So we're really happy with our management group.

They're in Spain and in Europe.

We're a strong player, have a great reputation, and we've continued to expand in other markets there.

So, I'd say we haven't really seen much except for Spain, and the nice thing is we've got a real good group of managers overseas, and they continue to grow this very, very quickly in these much more profitable markets.

A question on foreign exchange, and -- we've beat up a little bit.

But in your -- you took a $19 million loss in the income statement.

I'm assuming that's related to some sort of hedging.

But I don't understand, theoretically -- and you talked about not doing much hedging, so I'm not sure I understand that the loss you took through the income statement and it looked like a pretty big -- unrealized loss in shareholders equity.

If you don't do any hedging, what are -- what is running through these?

Most of that number relates to our intercompany loan transactions where we have to -- we have to, obviously, account for the translation change.

We -- as I've said, we do some hedges, but they are all very short-term hedges.

Just only a few days to account for the time that it takes from a customer putting money down at a counter and by the time we sweep it in through our banking systems, because remember, we will pay that or have that money available for immediate payout upon the customer putting it down on the counter.

So those are the only ones we do, and that's -- and so, we don't have losses on those kinds of hedge transactions.

So that FX gain or loss is just simply from our balance sheet conversion of intercompany loans.

There could be a little bit of other stuff in there on actually executed transactions on some currency and things like that, but for the most part, it's all on the intercompany loans side.

The only reason you notice it now is the reality of an enormous change in the FX rates, where those same intercompany loans -- you might say, true up, that we report every quarter just hasn't been enough to -- catch your attention maybe before now.

The way that works, for example, if we have a loan from parent to sub that's a Euro-based loan, it's going to come back to us in Euro as the dollar strengthens.

Obviously, we're going to have a weakness there.

A loss.

You can see that in periods when the dollar weakens, it went the other way.

And again, those are inter-company transactions.

Okay, that's very helpful.

Just a follow-up question, I know this has been beat to death.

A Cross-Border merchant acquiring business in the amount that you're spending, or -- you must be way above -- the spending you're doing must be a lot more than you thought you were going to do, and I guess, since 85% of it is reusable, as you put it, it would seem that it would be much easier to get that second customer, which hasn't come through yet.

I don't think that's a -- that's probably not a viable business on one customer.

No, no.

In fact, from the very beginning, we said that we needed more than one customer.

Our expectation is our current customer will cover about 40% of those costs, and so we basically need another customer and a half to kind of break even, and that's [of these size].

How close are you, what is the pipeline (multiple speakers)

As I mentioned earlier, there's a lot of interest.

We're focusing through the end of the year on bringing a couple more countries live.

The reality of sales is if I don't have a good -- an excellent recommendation from OMV, the next guy isn't going to buy from me.

And so, I am doing all I can to meet his expectations and make sure that he is an aggressive supporter for our next deal.

And we're doing that through the end of the year.

And then we'll start to jump on these opportunities beginning in the next year.

I think another thing we just have to keep in mind is that stuff that isn't a finalized standard yet in Europe, we have -- we have been ahead of the pack in that, we had a customer, and we had arrangement with a couple other parties to be able to pull off -- I guess what we would call (multiple speakers) SEPA-like transactions.

We've worked with -- we talked before about working with [Airsay] on this.

These guys are a leading player in this, in this SEPA in Denver over there, and so we've got that process fairly worked out.

But nonetheless, a retailer has to be committed to want to do it, like OMV was.

And it was obviously quite economically beneficial to them, and they saw the opportunity and were willing to be a first mover in that circumstance.

It also happened to be that there was a pretty consistent matchup between the countries where they operated in and Airsay, and so we could kind of make it happened before SEPA became a requirement.

And had all the details worked out.

So we have to also just be a little bit patient in terms of the retailers that come forward and want to do something before that -- this final requirement is nailed down.

Thank you very much.

We will take one last question because we're at the top of the hour, if there is one.

Franco Turrinelli, William Blair.

Just back in to get some love from you, Mike, because you haven't given me any in a long time.

Leave me alone.

I'll keep this quick.

How many -- can you update us on the total number of payout locations that we now have for money transfer?

We have, right now, about 73,000 combined.

So that's send and receive.

Send and receive?

Right.

We used to do just the received side, and then -- but -- because our system can't allow you to go both ways and because that's the way the largest player in the market does it, we decided to use their nomenclature.

When you tell us on slide 25 that you have added almost 16,000 new -- I'm sorry, signed 16,000 new locations, I am assuming that's not included in that number that you just cited.

That's correct.

That's almost -- .

It's big.

And I'll tell you what's really big, there's a nuance in there, that if we can rough -- if we can make these guys productive, and make sure we can train them and it all works, which is always a challenge when you add a new line, that's going to bring us India, and we're very excited about that.

These are primarily receive locations, I'm assuming.

Yes, I'm sorry.

Yes, almost all receive.

So when you say training, what you're saying is you need to train the people in the send countries, not the people at these receive locations.

No, no, no, actually it's the people in the banks that we've signed up on the payout side to make sure they know how to operate our system, to payout when somebody walks in.

We don't want a bad experience when someone walks in asking for money because they've never given out a RIA payout.

(multiple speakers) Or they don't know how, because when that word-of-mouth gets around, then you don't get that second one.

In the Mexican market, that process is very well-oiled.

The banks are all fairly consistent, standardized.

And they know how to do it.

And it -- yes, they know.

Other markets, you don't find the same consistency, and so, we want to make sure that our customers have a good experience, because it's very important that the customer, when they put money down at the agent, that they have a high level of confidence that Mom or whoever it is is going to pick up that money, has it, and doesn't have a problem, doesn't get taken through a rat race and all that type of stuff.

So that's why Mike said we want to make sure that we are appropriately prepared and that our payout agents in those countries are trained and know how to -- act -- efficiently execute the transaction so that we don't disrupt that customer reaction on the send side.

And as I mentioned, the reason we're excited about India is from the UK.

I mean, that's really the primary send country.

We have strong send in the UK, if we can get payout.

Mike, I was surprised to hear you mention Australia in your money transfer comments.

I guess I wasn't paying attention.

We have a small operation in Australia that's growing.

It's been there since we acquired the entity, and actually had us working on a little bit more closely, too, with our large prepaid operation down there so that we can get some economies of scale.

And a lot of it stemmed from Australia, again, as to Asia, and as we build up payout in Asia, Australia becomes more and more important.

It's Philippines, Indonesia, the Highland, Bangladesh.

[Badesh].

Can I sneak one last in?

China post-update?

Kevin?

Kevin was just there last week.

I was just there last week.

The freeze through the Olympics is over.

They just finished the Paralympics, was just finished last month.

We're excited.

We're going to be rolling out quite a few ATMs here in the fourth quarter.

Not all the backlog, but a good chunk of the backlog, and we're talking about -- we had some good discussions with China Postal about further expansion beyond the current backlog.

So, although we have had sort of a six-month hiatus, we're excited about the next quarter and the quarters beyond.

Thank you.

Thank you, Franco, and on behalf of Rick and Kevin, I thank everyone who's listened in on the call.

This concludes today's teleconference.

You may disconnect your lines at this time.

Thank you for your participation.