Euronet Worldwide Inc (EEFT) 2009 Q4 法說會逐字稿

Greetings, and welcome to the Euronet Worldwide full year and fourth quarter 2009 earnings conference call.

Today's call is being recorded.

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

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

Mr.

Newman, you may begin.

Thank you.

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

We will present our results for the fourth quarter and the full year 2009 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 or other factors affecting the Company's results are set forth from time to time in Euronet's periodic reports filed with the U.S.

Securities and Exchange Commission including but not limited to our Form 10-K for the period ended December 31, 2008 and our 10-Q for the period ended September 30, 2009.

Copies of these filings and our other periodic 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.

Rick?

Thank you, Jeff, and welcome, everyone.

Let me get started here, full year 2009 revenues were a little over a billion dollars.

Operating income was $72.3 million, and adjusted operating income was $77.8 million, compared to 2008's adjusted operating income of $74.1 million.

Adjusted EBITDA was $141.6 million compared to 2008's adjusted EBITDA of $139 million.

Full year cash earnings per share came in at $1.31, a 3% increase over 2008's cash EPS.

Let me pause and reflect on these numbers a bit.

As we said in our press release, there are four unusual or non-recurring items included in the Company's results throughout these two years that make it more challenging to understand the fundamental state of the business.

These four items include foreign currency fluctuations, certain contract termination fees in the first quarter of 2009, goodwill charges recorded in the fourth quarter 2008 and first quarter 2009, and charges in 2008 related to our efforts to acquire MoneyGram.

In summary, on a constant currency basis revenues increased 7% and adjusted operating income increased 18% year-over-year.

Considering the challenging global economy, we think our teams around the world did a pretty remarkable job in 2009 delivering double-digit operating income expansion.

Let's move to slide six.

On slide six you can see that in 2009 we continued to post substantial improvements in transaction growth.

This represents a 7% increase in transactions processed over 2008 with similar improvements coming from each of the EFT and Prepaid segments.

Next slide, please.

Slide seven.

For the full year, we have processed 17.6 million money transfers.

This represents a transaction growth of 5% year-over-year.

You can also see that our transactions originated outside the U.S.

grew 22% year-over-year, and you can see that our dependency on Mexican transactions continues to decline with strong growth from non-U.S.

originations.

Transfers from non-U.S.

originations made up 37% of total transfers compared to just 25% two years ago.

Now let's go to a discussion on operating income.

Next slide, please.

This slide, slide eight, reflects our business segment results as reported.

On the next slide, you can see that we have presented the results on a constant dollar basis.

So let's go to slide 9.

Here on slide 9, you can see our segment results presented net of the unusual or non-recurring items I previously mentioned.

Briefly, this FX-adjusted schedule adjusts the reported numbers for the contract termination fees, impairment charges, charges related to MoneyGram, and importantly, the impacts of changes in foreign currency exchange rates.

I won't cover the numbers of each of these items, given that we've clearly provided them in the press release and the attached detailed schedules which reconcile GAAP [Op] income to the adjusted [Op] income numbers.

So first the EFT segment.

You can see that revenues grew 11%, adjusted operating income increased 29% and EBITDA grew 23%.

The year-over-year revenue improvements were the result of expansions in Central and Eastern Europe, and Asia-Pacific, and growth in the number of ATMs owned or operated under contracts with banks.

Transaction fee increases in Germany reduced operating losses from the Company's cross border acquiring product, and increased transaction levels on Euronet's shared network in India.

You will likely recall that this time last year we informed you that certain contracts terminated, and that we would lose a number of ATMs and the related revenues and profits.

Well, throughout 2009, the EFT team did an outstanding job replacing the profits and then some.

A strong year for the EFT team.

In the Prepaid segment, you can see revenues grew 8%, adjusted operating income grew 16%, and EBITDA grew 12%.

Our Prepaid group continues to benefit from growth in several key markets such as Australia, Germany and the U.S.

The group has expanded its product offering, taken advantage of competitor weaknesses and expanded its operating margins.

And finally, in the Money Transfer segment revenues grew 4% year-over-year with adjusted operating income and EBITDA declining by 20% and 2% respectively.

While Mexico transfers were down year-over-year, the business in Europe continues to grow quite nicely, more than offsetting the Mexico declines.

The difference in [Op] income expansion and revenue was largely due to depreciation expense for the continued expansion of Company-owned stores in Europe and select locations in the U.S., as well as increased professional fees.

In summary, year-over-year revenue growth of 7% and adjusted operating income expansion of 18% speaks quite favorably to the benefits of Euronet's global product and geographical diversity as we all manage through this current economic down cycle.

Let's now go to slide 10 for some comments on the quarter.

For the fourth quarter 2009, the Company delivered revenues of $285.6 million, operating income and adjusted operating income of $22.5 million, adjusted EBITDA of $39.6 million, and cash earnings per share of $0.37, in line with our guidance of $0.37.

Consistent with my comments on the annual results, the fourth quarter results of 2008 had two of the unusual or non-recurring items, the impairment charge and the foreign currency fluctuations.

Rather than commenting on each of these, the slide I discuss later in the presentation where we set out the adjusted [Op] income numbers I'll cover the effects there.

Moreover, I will point out in a couple of slides forward our Prepaid segment recorded some charges related to the resolution of certain aged reconciliation items, and we recorded lower tax expense in the fourth quarter because we determined at year-end that we would not incur certain AMT, or Alternative Minimum Tax taxes, and we found that one of our foreign tax jurisdictions was within a reasonable debt-to-total capital ratio resulting in us deducting more local interest expense.

Let's move to slide 11.

Here we illustrate quarter-over-quarter transaction growth.

We continue to see transactions grow in both EFT and the Prepaid Processing segments.

Slide 12, please.

Similar to the full year slide I discussed a few minutes ago, you can see how on a quarterly basis our mix in the non-U.S.

generated transactions continues to grow.

Whereas, for the full year, non-U.S.-originated transactions made up 37% of total transactions.

In the fourth quarter, that mix shift continued and now stands at 40% and Mexico transactions are now 21% of the total mix.

Let's go to slide 13.

Here on slide 13, we present the segments quarterly results as reported.

Similar to the full year review, let's go to the next slide, slide 14, to look at the numbers on a constant currency basis.

As you can see here on slide 14, we presented the numbers on a pro forma basis.

The fourth quarter results -- reported results -- have been adjusted for this schedule to exclude impacts of the impairment charges of last year, and importantly, FX fluctuations.

Remember, at the back of this presentation, we provide a detailed reconciliation from the reported numbers to the pro forma numbers.

Now I'll briefly hit each segment.

EFT.

Revenues, adjusted operating income and EBITDA grew by 4%, 23%, and 20% respectively.

The same contributing factors I mentioned in the full year results apply to the fourth quarter results; AMTs under management, lower cost from cross border acquiring, better fees from German transactions, and more transactions in India on our Cashnet network.

Prepaid.

Revenues increased 1%, adjusted operating income and EBITDA declined by 8% and 6% respectively.

Transactions grew 4% year-over-year.

The difference in the revenue growth versus the transaction growth was the result of certain mobile operator rate decreases which were passed through to retailers, having negligible impact on margins.

The difference in the operating income compared to the revenue decline was due to certain adjustments we recorded in the fourth quarter this year to resolve some aged reconciliation issues in one of our Prepaid operating units.

Excluding these aged reconciliation issues, the Prepaid segment's fourth quarter operating margins would have been consistent with the third quarter 2009 margins of 8.8%.

Money Transfer.

Revenues, adjusted operating income and EBITDA declined by 3%, 59%, and 24% respectively.

Revenues were primarily impacted by the continued decline in transfers to Mexico.

The decrease in adjusted operating income was less to do with this year's performance, but rather more to do with last year's.

Last year when the foreign currency markets were experiencing significant turbulence, particularly the Mexican peso, our team opportunistically picked up an additional spread of about $2.5 million over normal spreads.

This year, we did not see abnormal market swings, and accordingly did not have the opportunity to replicate last year's benefit.

Accordingly, on the surface, a 59% decline in [Op] income for the Money Transfer certainly doesn't look good.

But after excluding the $2.5 million opportunistic benefit from last year's fourth quarter operating income, Money Transfer's year-over-year results would have been virtually flat, consistent with the revenue change.

Now let's move to a few comments regarding our balance sheet.

Let's go to slide 15.

Since the close of last year, we've only had one key movement on our balance sheet, less debt.

We generated about $60 million in free cash flow and we used about $50 million of it to pay down debt.

On, our leveraged statistics continue to improve.

We are carrying about two times total debt to EBITDA, and on a net debt basis, less than one times.

We have no required debt amortization aside from a couple of million dollars a year throughout the next 27 months, at which time our revolving line of credit must be renewed.

With cash on hand, together with the annual generation of more than $60 million in free cash flows, we should be well prepared to meet any potential obligations, almost two and a half years from now.

Thank you for your time.

Next, now to Mike.

Hello, and thank you, everybody, for joining us on the call and the Web today.

First, before I get into the segment discussions, I would like to make a few comments about the overall year.

To describe the last two years as difficult would be an understatement for any business, economy, or government.

Despite this extremely difficult environment, I'm pleased to note that Euronet posted record cash earnings per share in 2009, which also marked our 15 years of being in business.

I wanted to thank all of our 2,700-plus employees across 28 countries who work tirelessly to deliver these strong results.

Now let's jump to slide 18 and we can get on with the presentation.

Slide 18, we highlight our strengths in the EFT segment.

This is our legacy business which we established 15 years ago.

We entered 2009 with four contract terminations when the financial crisis was at its peak.

However, we stayed determined, as Rick said before, we stayed focused, and we found ways to replace that lost revenue and profit, and I'll discuss that in the following slides.

Move on, please, to slide number 19, where we present our 2009 EFT financial results on an as-reported basis.

Our revenues decreased by 4%, operating income grew by 26% to $48.3 million, and adjusted EBITDA improved by 9%.

Our 2009 full year [Op] income included $4.4 million of contract termination fees.

So if we exclude these fees, we still would have posted strong double-digit [Op] income growth of 15% year-over-year.

The EFT segment generated improvements in [Op] income and adjusted EBITDA throughout organic growth in our deployed ATMs, higher transaction fees in Germany, and increased transaction growth on Cashnet in India as well as cost containment.

Additionally, as Rick pointed out earlier, on a full year basis, our results were unfavorably impacted by a stronger U.S.

dollar against our primary operating currencies in 2009.

If we were to neutralize the FX impact on our results, the EFT revenues, adjusted [Op] income, and adjusted EBITDA, would have improved by approximately 11%, 29%, and 23% respectively over the prior year.

Please move to slide 20.

Now turning to the quarterly results, EFT's bottom line performance continued to outpace its solid revenue growth, showing operating leverage in this business.

Revenues increased by 9% while [Op] income and adjusted EBITDA increased by 31% and 27% respectively over last year's same-quarter results.

Unlike the full year trend where our results were unfavorably impacted by a stronger U.S.

dollar, relative to 2008, our fourth quarter results benefited a little bit from a weaker U.S.

dollar on a year-over-year basis, as you can see on the next slide.

So now I'll move to slide 21.

Similar to our comparisons of full year results, if we neutralized for FX, the EFT's fourth quarter 2009 revenue, adjusted [Op] income and EBITDA would have still grown by an impressive rate of 4%, 23%, and 20% respectively on a year-over-year basis, clearly illustrating the underlying growth in our business.

We were able to achieve these constant dollar growth rates for the same reasons I described under the full year results.

The key drivers behind our growth have not changed.

We possess a great product portfolio, we have diversified market presence, and we offer a strong value proposition as noted in our business development efforts that I will highlight on this slide, number 21, and also slides 22 and 23.

Touching on a few of our Q4 business highlights.

In the fourth quarter, we signed new ATM, POS and Card network management agreements with Volksbank International in Hungary, Citibank in Romania, and MCB, that's a Muslim commercial bank in Pakistan.

We renewed and/or extended several agreements in a number of markets including India, Hungary, and Greece.

We also acquired a small processor in Serbia, if you move on to slide number 22, called Mellon Transaction Solutions.

It is not a large transaction for us, but MTS has an attractive customer base and complements our product portfolio and strengths in our market presence in Serbia.

As Kevin has shared in the past, we've added some ongoing challenges with the local deployment of the previously headquarter-contracted ATMs for China Postal Bank, and there have been certain structural and organizational changes within China Postal since we originally announced that deal.

As a result, we've shifted our strategy from trying to secure deployment commitments at the headquarter level to working directly with the management at the local province level.

I think I mentioned this to you last quarter in Q3.

To that end, I'm pleased to announce that in the fourth quarter, we secured three separate local orders, from to three separate provinces, Postal Hebei, Postal Shanghai and Postal Beijing for approximately 250 ATMs.

As it relates to our backlog of contracted ATMs, we believe it is more realistic to remove the 500 headquarter-related China ATMs that we had recently -- that we had, and add the recently secured new local orders approximating about 250 ATMs.

As of February 5th, we have deployed 60 of the 250 ATMs and a majority of these deployments are in Shanghai as the city gears up for the World Expo, which commences on May 1, 2010.

With these changes, our ATM backlog stands at approximately 1,100.

Slide number 23, please.

We continue to see strong transaction growth on our Cashnet shared ATM network.

Transactions increased 53% year-over-year, contributing to our expansion in the fourth quarter.

Our ITM software team successfully expanded our service offering to a number of existing customers, as named above, and in summary as I kind of look at the EFT segment against very unfavorable odds, our EFT teams performed very strongly and produced extraordinary results both on an as-reported and a constant dollar basis for the full year and the fourth quarter.

We definitely were hitting with all cylinders on this segment.

Now let's move on to Prepaid, slide number 25.

Our Prepaid business began to accelerate its growth in 2008 as you remember, and its successful run continued through 2009.

Our teams have worked hard to exploit competitor weaknesses, we've tried to cause a few of those, and win new clients.

They have rolled out new innovative non-telco products in mid-2009, and we've also rolled out a new global brand identity for our division under the name epay.

We now process transactions for approximately 200 mobile operators in 23 countries.

Our Prepaid segment has grown from being one of the largest international distributors of prepaid mobile air time to becoming a leading provider of payment services and technology.

Now let's go to the next slide, number 26, and we will review our financials.

Here we look at our financial highlights on an as-reported basis for the full year of 2009.

Revenues decreased 1%, adjusted [Op] income, and EBITDA, increased by 7% and 3% respectively over prior year.

Similar to our EFT segment, on a full year basis, our Prepaid business was unfavorably impacted by fluctuations in foreign exchange rates.

Accordingly, with FX neutralized, revenues, adjusted [Op] income, and adjusted EBITDA would have posted year-over-year improvements of 8%, 16%, and 12% respectively.

These constant dollar results reflect a strong bottom line growth in our Prepaid business as a result of continued sales momentum and strong geographic market presence.

Slide number 27.

Our Prepaid segment's fourth quarter financials on an as-reported basis benefited from a favorable FX environment unlike the full year results.

As you can see, revenues and adjusted [Op] income showed double-digit improvements year-over-year, and adjusted EBITDA fell just short of the double-digit mark at 9%.

Please move on to slide number 28.

Consistent with our reporting, we present here our fourth quarter results adjusted for foreign currency fluctuations.

On a constant dollar basis, revenues improved 1% while adjusted operating income and EBITDA declined by 8% and 6% respectively year-over-year, that's Q4 over prior year's Q4.

On the surface here in Q4, you might question why the 1% revenue growth was less than the 4% transaction growth.

You may recall in our third quarter conference call we reported that certain mobile operators had decreased their commission rates, which is basically our revenue, which we largely passed on to the retailers, having no significant impact on gross margins.

This is an important nuance in this business.

A drop in revenues under this scenario does not necessarily mean a drop in profit.

The decline in our fourth quarter profits was not related to margin pressures, but instead to the resolution of certain aged reconciliation issues in one of our Prepaid markets.

Excluding the reconciliation issues, the segment's fourth quarter operating margins would have been consistent with third quarter 2009 operating margins of 8.8%.

As noted on slides number 28 and 29, our Prepaid teams had a busy quarter on the business development and product rollout front.

I'll hit a few highlights for you before we move on to Money Transfer.

In the fourth quarter, we signed a number of major retailers for approximately 1,800 more stores across Italy, Poland, Germany, the U.S.

and India, as well as renewed our Muller Drugstore chain in Germany, that contract.

These additions, together with other successes noted on slide 29, strengthen our market share in each of these markets and position us for continued future growth.

Now let's go on to slide 30, and we'll review some successes in some of our non-telco product additions.

Slide 30.

We completed the rollout of London Congestion Charge payment solution, and we also signed up British Petroleum petrol stations for Congestion Charge processing.

I'm pleased to note in just one year, we have launched transport solutions in Australia, Poland, and the UK.

We signed exclusive agreements with People’s Postcode lottery in [NAPs] during the UK, and we continue to see successes with our iTunes product volumes for the Christmas period this past year, and for the full year nearly doubled year-over-year.

In summary, the division continues to add more stores, products, and transactions, while continuing to gain market share from weaker competitors.

As well, we are seeing increased contribution from non-telco products, which as I mentioned before, is highly marginal.

Okay.

Now let's move on, please, to slide number 32 for the Money Transfer highlights.

Slide number 32.

We highlight some key facts about Money Transfer, similar to EFT and Prepaid, you can revisit this slide later as we see the itemized highlights.

Our Money Transfer team continued to face headwinds in the U.S.

to Mexico corridor, however, as with each quarter they stayed focused and worked hard to grow our non-U.S.

markets, particularly Europe, and our correspondent network as well.

We continue to see double-digit growth in volumes and profits from non-U.S.

markets.

It's important to note that 40% of our total transfers in the fourth quarter originated from non-U.S.

markets, and they now account for almost 60% of our total gross profits.

Excluding Mexico, it's worth mentioning, our Money Transfer teams have focused on the opportunities presented by the payment services directive in Europe.

We have also worked on making enhancements to our Money Transfer systems and technology.

We launched non-money transfer products in the U.S.

and expanded our correspondent network in specific fast-growing corridors outside of Latin America.

Move on, please, to slide number 33.

Now onto the discussion of our full year results for Money Transfer.

On an as-reported basis, Money Transfer revenues increased by 1% while adjusted [Op] income and EBITDA decreased by 22% and 4% respectively from prior year.

As it relates to FX, if you neutralize it's impact, revenues would have grown by 4%, adjusted [Op] income and adjusted EBITDA would have decreased by 20% and 2% respectively.

As mentioned earlier, the difference between [Op] income and adjusted EBITDA is due to the depreciation expense related to the addition of Company-owned stores in Europe and in select U.S.

locations.

Please move on to slide 34.

Here we highlight the fourth quarter financials for our Money Transfer business on an as-reported basis.

Revenues increased 3%, adjusted [Op] income and adjusted EBITDA decreased by 50% and 16% respectively over the fourth quarter 2008 results.

Adjusted for FX, our fourth quarter 2009 Money Transfer results saw revenues and adjusted operating income and adjusted EBITDA decrease by 3%, 59%, and 24% respectively over the same period last year.

As Rick discussed, the reduction in profits year-over-year was a result of continued weakness, this is in Q4, in the Mexico corridor, [stored] agent investments to expand our presence in Europe, and leveraging our success in this region, and the significant benefit that we recorded in fourth quarter 2008 related to the opportunistic management of exchange rate spreads that was not available to us this year.

As mentioned earlier, if the $2.5 million benefit realized in fourth quarter 2008 was not in the results, the change in fourth quarter's operating income and adjusted EBITDA would have been basically flat with last year, consistent with the change in revenue.

Move on, please, to slide number 35.

Similar to the last few quarters, we have highlighted three important performance indicators for our business.

For the fourth quarter, non-U.S.-originated transactions increased by 25% over prior year, and revenues adjusted for FX by 14%.

This growth is indicative of the continued success of our non-U.S.

markets.

As expected, we continue to experience challenges in the U.S.

to Mexico corridor, here transactions and revenues declined by 24% and 39% respectively year-over-year.

We continue to see transaction growth in our U.S.

to non-Mexico corridors, which increased by 12% with a 5% increase in revenues.

Our network of agents, both send and receive, continue to expand.

We launched 12 new non-Mexican correspondents in 14 countries, and we have approximately 4,000 correspondent locations in the pipeline now for installation.

Now let's move on to slide number 36 for a summary.

As we look back, you can see here that we posted adjusted cash EPS of $0.37 in the fourth quarter of 2009, and $1.31 for the year, our highest cash EPS to date and consistent with our guidance.

Our teams worldwide acted opportunistically and strengthened our position in a number of markets including Germany and the U.S.

for Prepaid; India, Poland and Serbia for EFT; and Europe on the Money Transfer front.

For the quarter, we posted double-digit profit growth in EFT both on an as-reported and a a constant dollar basis.

Our Prepaid segment continued to strengthen it's market share and add additional products.

We continued to reduce our debt and we have no significant debt payment obligations or maturities for over two years.

We have a strong cash position of approximately $180 million, and we are generating more than $60 million in free cash flows annually.

And, finally, we expect our first quarter 2010 adjusted cash earnings per share from continuing operations to be approximately $0.32 assuming currencies remain stable through the end of this quarter.

This guidance reflects our traditional seasonality of the business in the first quarter, and, also the impacts of the lower FX rates that we have seen since the first of this year.

This concludes our presentation portion of the call.

We'll be glad to take questions as you buzz in.

Thank you.

The question-and-answer session will be conducted electronically.

(Operator Instructions) We'll go first to Tim Willi with Wells Fargo.

Thanks, and good morning.

Good morning.

A couple of questions.

First just a housekeeping one.

Rick, as I sort of back into your segments about the Prepaid margins in 4Q looking more like the third quarter, excluding the issue you talked about, would that gets me to around $2 million, is that generally accurate?

Good math, Tim.

Okay.

Is that going to fall into direct cost of processing, or where would I sort of think about that in the income statement in the quarter?

It's largely SG&A.

Okay.

Great.

And then just getting to the -- to the business.

One question on Prepaid, one on EFT.

So first on the EFT, you guys obviously took margins up pretty substantially despite shrinking revenue base, and just thinking about going forward and the scalability of that business when we actually get into a positive revenue environment, what are your sort of thoughts around the incremental scalability of that business with the give and takes of contract renegotiations, but obviously getting back into a positive revenue growth environment.

Do you think margins still march higher over the next couple of years?

I would say so, Tim.

I mean at the end of the day, you can't forget that that next new contract that we sign is at virtually 100% margin.

So we're at 19%, 20% margins kind of now, so on a weighted cost average, every time you add a new ATM, it helps us a little bit, right?

So, yes, we do have contract renegotiations, and sometimes those things, we have to, because they've grown there, don't forget, on average these banks up until this crisis of this last year, have grown their ATM accounts by about 14% per year.

So by the time a five-year contract comes due, they have pretty much doubled their number of ATMs, so we do give up a little bit on margin when they come due.

But still, even despite all that, we think that the transactions -- I mean that the -- that our margins could expand.

And let's not also forget our Cashnet asset in India, and with that asset, that just continues to grow more and more transactions at all 100% margins and no margin reduction.

We done have to give up anything there.

So we have several contributing factors to the -- to the fact that we -- that EFT really hit the cover off the ball here last year and in Q4.

Okay.

And then let me just turn then kind of the same sort of questioning around the Prepaid business.

Especially around the non sort of telephony products.

Could you maybe talk about two things?

One, which of the non-telephony products you think has the most opportunity in the next couple of years.

You highlighted transport where you put three new contracts on the platform.

You highlighted things like Internet content like iTunes, and then, I can understand that it seems like that is tremendous margin sort of in a direct operating sense.

But from the perspective of R&D and sort of rolling out and putting that product onto the POS terminals, is there any sort of suppression of that incremental margin for a period of time before we see it flow through, if that makes sense?

No, I mean basically our R&D teams are basically the same R&D teams we had a year ago, we've added a couple of people.

So, I mean, that's part of our SG&A in that segment, and they've -- and our R&D teams have done a very adept job of being able to just use the people that they have to implement these new -- this new content across the POS terminals, so that's why the margins are so steep.

Yes, okay, wonderful.

I'll hop back in the queue.

Thanks.

Uh-huh.

And we'll go next to Chris Shutler with William Blair & Company.

Hi, guys, good morning.

Good morning, Chris.

So first question, or actually a couple of questions on the EFT segment in the German market.

First maybe you could just tell us, have you sign any kind of impact on the business from the software bug that hit the German cards in Q1?

I'm assuming you haven't, but maybe you can speak to that?

And then, second, maybe you can just talk about pricing in the German ATM market, what kind of magnitude of impact that's had on adjusted EBITDA, and how confident you are that you'll continue to get those rates over the next to couple of quarters?

Well, that's -- I would say, you had a couple of questions.

First, the software glitch that they have hasn't affected us or the ATM business at all.

Okay, good.

It then only thing that we've seen, of course, and as we kind of look forward, is Q1 tends to be a much weaker quarter seasonally for ATM transactions.

That's why our -- we're always challenged in Q1 year after year after year because everybody is out there Christmas shopping and they're getting cash as they're Christmas shopping, so the volumes are up quite a bit.

That's one of the reasons why you always see a step down in what we expect in Q1 over Q4.

With respect to your question of how long do you think we can have these nice margins there in Germany?

Uh-huh.

I think your guess is as good as mine.

The banks are kind of weird in Germany.

They don't necessarily pass these fees on to their customers directly.

There's not really a surcharge model, as we see it in the U.S.

where you hit a button and it whacks you for that charge.

Basically whatever the charge is goes straight to your bank, and your bank can choose to either charge you or not charge you, or pass it all on, or part of it on, or whatever.

And I think all of the banks there are just trying to decide what they want to do.

The nice thing is, the number of our ATMs, and we have 600 ATMs and maybe all of our other off-branch kind of competitors maybe add up to a couple of thousand.

That's a couple of thousand ATMs out of around 45,000 ATMs.

So in some ways even though we're enjoying it and we expect -- we can't tell you for sure when the banks might want to stop paying for it, it might just be a blip on their radar screen and last a little longer than we think.

Okay.

So far we kind of expected as we moved into Q1 that we'd start to see the tail-off in Q1 but we haven't seen it yet.

I would also add, we're really kind of a small player in the ultimate market decision here, because the banks out there are -- this charge is being led by the bigger banks because small non-facility-based type of start-up banks are in the market, and they're trying to do it on the cheap without putting ATMs out, and these big banks are realizing that they're basically paying for these competitors to get into the market at a very low economic entry point.

And their customers, on the other hand, are standing in line more and not getting the service they want.

So these banks are saying, look, we're not going to put out more and more ATMs for a facility-less type of bank to come into the market and take our customers.

So we certainly benefit from it.

As Mike says, it's anybody's guess as to how long that will go on, but there is a real direct economic incentive and customer impact matter going on with the bigger banks that are leading and driving this.

And so we'll enjoy it as long as they continue to say they want to make sure that the economics are right between them and their competitors.

Okay.

Thanks for that.

And then second question on China, obviously, it's good to hear the momentum there is reaccelerating.

Maybe, Mike, you know can just talk about the new provincial level strategy.

What your expectation is for ATM rollouts in China for the next -- let's call it 12 to 24 months, if you'll be able to continue the momentum.

I think you currently have 600 or 700 ATMs there now.

Could you see two or three times that number in a year or two, or what are you thinking about from that perspective?

I think, Kevin Caponecchi was just in Asia not long ago, so maybe he can give you the latest and the greatest.

Yes.

So as Mike and Rick spoke about in the presentation, we're going to [rebaseline] the backlog from 500 ATMs that we've been previously carrying in the backlog to 250, which are the actual new orders, and there's quite a bit of momentum in the market.

I would guess that we'll do probably three times the 250 that you see today, in 2010.

Okay.

That's good to hear.

Let's just keep our fingers crossed.

Sure.

Okay.

And then final question, maybe within international Money Transfer, can you help us -- can you maybe break down transaction growth a little bit, how much is coming from new stores versus existing stores, and what does pricing look like in international?

I mean, are you getting -- are you seeing any pricing pressure, or are you getting more price there?

No, I would say that -- I mean across Europe we get better pricing than we do in the United States.

Right.

You know, we -- from time to time see pockets of price pressure, but I wouldn't say that there's any kind of consistent theme or trend going there.

And with respect to the volumes at new stores, others, we've had a nice complement of lift in both existing stores and agents, as far as putting on new ones.

So I wouldn't say it's coming from just a particular new addition.

It's -- our brand continues to build there.

People continue to have confidences with the product that we're sending.

People continue to find that we've got good and growing and better payout in those markets, and so we think all of those activities are lifting our transactions both across existing agents, as well as new agents.

And in summary, we're not seeing any particular price pressure across Europe at this point.

And in Europe, I mean, you've got to understand, some of the countries that we're growing 20-plus percent in, are markets where the actual transactions, money transfer transactions total in the market are down 20%.

So I mean its even more of a testament to very good product and management skills that we have in our European division, because we are bucking the trend, and what that means we are taking market share from others, it's got to come from somewhere, when you've got a down market, and we're increasing our transactions by 20% plus.

That's all good news because as the economies in Europe do get more on their feet, that's going to be certainly very beneficial to us.

Sure.

Okay.

Thanks a lot, guys.

I appreciate it.

Yes.

And we'll go next to Robert Napoli with Piper Jaffray.

Thank you.

Good morning.

Good morning, Bob.

The Prepaid business, I was wondering if you could maybe give a little bit more color on the growth and outlook for the Prepaid business and additional products and maybe a little bit more on what you're doing in the United States, which the market seems to be relatively more dynamic here at the moment maybe than in Europe?

Well, I mean, I think ex-that one adjustment that we had in Q4, we had a bang-up year in Prepaid through 2009, coming right on the heels of a bang-up year in 2008.

And the reason is not any one market.

Certainly, the U.S.

has got a lot of flux going on, but actually Germany has to over the last couple of years because of the weakness of our single competitor there.

But we have watched competitors fail in both markets, and it's been wonderful for us, because we just -- we keep cutting good deals, and we keep increasing our market share and our products and our product offering, and it's been very -- those two markets have been very lucrative to us, not to mention the fact that we have an extremely lucrative market there with Australia and our successes there in Australia.

So it's not just a U.S.

thing, although there's a lot of action going on in the U.S., and I kind of like that that these guys are dropping like flies, but let's just hope more of them do.

And, Bob, I would add to that that we -- we would like to see and think that we'll see some kind of exponential lift impact of adding more and more product to the terminal for the retailer.

Because remember the retailers, this is a great revenue profit source for the retailer because they have to put no inventory on the books, they have to put no capital into it, no more square footage in their stores and things like that, and they all of a sudden have more sales and more profits.

And so as we put more and more product on to the terminal, it gives us the ability to be a stronger and better competitor and bring a better value proposition to the retailer.

So as we've added these additional products, we've seen, as Mike has said, some acceleration in the growth across these other products, which, as well, makes -- gives us an advantage over the competitor, and we'll see how that momentum carries.

But we're doing that in all markets, not just the U.S.

market.

Okay.

Thank you.

A follow-up question on the Money Transfer business.

What -- is that a business that you feel like you should be investing in long-term?

You saw one of your competitors, Global Payments, sell their business.

You guys looked to invest in it more heavily a year ago.

What are your thoughts on that business right now?

Well, we have been investing in it, and I think those investments are bearing fruit.

It's hard to compare us against Global Payments because Global Payments was primarily a U.S.

to Mexico game with the DolEx brand.

And that's been the one corridor in the world that's been hit the worst.

So they end up with that acquisition that's three quarters of their business, and it's the worst place to be.

We have leveraged our strengths in Europe and our European teams continue to do well, and let's not forget that in Europe, immigration is -- it's still going like gang busters.

We've got an EU here where there is a huge differential between the former East bloc countries and the Western countries.

This immigration will continue and it is just going to bring more and more customers to us in a market that is about 30% bigger than the U.S.

to start with.

So we have a very -- us Americans get a little bit myopic and we think we're the only guys with immigrants and we have 300 million people and we've got X-amount of immigrants.

Well, you go to Europe, and there are 400 million people and a lot more immigrants, and it's only going to continue.

The U.S.

to Mexico business is still a big business for you, declining, I guess, about 24% of your business.

You're down there a lot more than I think your big competitors.

You were down 24% transactions this quarter, Western Union was down 12%.

Why is that?

And do you see any stabilization in that business?

Actually, I can't tell you for sure, but the smell is that we may have hit the bottom of the trough here.

I mean, that's what -- kind of what December and January's numbers kind of look like.

So maybe from to this point forward, with, also other endeavors we have to win back customers and win back agents and to aggressively go find new agents, we could see a change in that trend here in 2010.

I won't say we're counting on it, but we are certainly aggressively going after it.

Thank you.

Uh-huh.

And we'll go next to Robert Dodd with Morgan Keegan.

Hi, guys.

Mr.

Dodd, how are you?

Good, good, thanks, Mike.

One detail first.

Rick, you mentioned, we have about a $2 million charge in the Prepaid.

You mentioned a tax benefit.

Could you give us a rough idea of how big that was?

Was it reversal, was it cash, non-cash, et cetera?

It was -- it was just a accrual reversal, so it wasn't cash on cash, Robert, and it was in about the million-dollar range.

Got it.

Thank you.

And then just going back to kind of the growth thing.

I know that Prepaid, 1% local currency growth partly because of the mobile operating pricing, I know that isn't your kind of target growth for that business, and you'll lap that new pricing, call it, from the mobile operators, call it Q3.

Can you reiterate what is your target growth for that business and how fast do you think you can get back to it?

Well, see, you're kind of revolving around revenues, Robert, and, like I said, we really don't care about the revenue side, as long as we produce more [Op] income on the bottom line.

And, we have strong double-digit growth expectations for this segment to continue through this year.

Okay.

Got it.

And then --

And I think -- and I think it's best -- even though I know it makes it a little bit more difficult for you analyst types, don't get all wrapped around the actual on the revenues, because when you get a change like we saw here in one of our big markets, where all of a sudden we go from 6.5% to 6% commissions, and we pass all of that thing through, then everybody looks at their numbers and everything is all messed up.

Look at the bottom line.

That's how I'm measured on, that's how the Company is measured on.

Right, right, got it.

On the same kind of general theme on Money Transfer, you changed your strategy in term offers getting at a certain corridor, U.S.

to Mexico I'm talking about here, around the second quarter of 2009 in terms of stripping out some of the low profit transaction.

You're going to lap that during the end of Q1, give or take.

How much of that down 24% in the fourth quarter do you think was the market versus your election to eliminate certain transactions?

Maybe half.

Yes, or more.

Yes.

Yes, I mean it -- the market -- at the end of the day consumers are sending less transactions back to Mexico.

You can take a look at the Mexico reporting numbers.

If you go down in Mexico, you can certainly see the effects, feel the effects of lower remittance monies coming back.

There's countless stories out there about how people have -- the flow of immigrants across the border has slowed because there's just not the jobs here.

Job markets like construction that is a big immigrant employer is down in very strong double-digit percentages on a year-over-year basis.

And so at the end of the day, transactions are down.

Mike says more than half.

We haven't tried to measure it, as you've asked the question, but our sense is that it's more market than it is discretionary or selection of transactions.

Okay.

Got it.

I've got to ask you about Greece.

I mean, you mentioned you renewed the contract with Piraeus, are you seeing any impact in, be it with your ATM contracts with the discussions with Piraeus or anything else, obviously the economic or --

Piraeus is our largest single credit card customer, and ironically with this crisis, what Piraeus did was they took an aggressive view about their customer base and credit cards, and they lowered their interest rates to their card holders, and we've seen an increase in transactions and revenues.

Okay.

Got it.

Okay?

And so this Greece, Germany macro thing is affecting the currency, euro per se, but with respect to our business, per se, within Greece is actually helping us because I imagine most people will probably try to match that, and that will just be more transactions.

It's not unusual that if you charge people less they'll buy more, or they'll use their card more.

Okay.

Got it.

Thanks, guys.

Uh-huh.

And we'll go next to Greg Smith with Duncan Williams.

Yes, hi, guys.

Hey, Rick, I was hoping you could just explain the aged reconciliation issue again in Prepaid, and how much that -- why that came about, and is it purely just one time, maybe we can start there?

Greg, it was -- it was one time.

It was -- I don't know, in some respects, it included a combination of some housekeeping and some optimism on the team's part that certain matters would be favorably resolved.

So there's not much more to say about it than that.

I think Tim sized up the amounts pretty well, and we don't expect it to happen again.

But that $2 million, there was a corresponding tax benefit so we can't take that $2 million and just tax effect it and get $0.02 of EPS benefit?

That's not a the right amount?

Well, you -- I think that math is reasonably on target, Greg.

So if you tax effect that, but then if you -- if you take a look a net-net how the quarter came out, I mentioned that we had about a [million-ish] in the benefit on the tax side, so they become pretty much offsetting amounts at the bottom line on the cash EPS calculation.

But you're right, I mean, this -- had we not had this, I mean, we would have had -- we definitely would have hit $0.38.

$0.38, yes, that's basically what I'm getting at.

Maybe a little bit more.

It's in that range, it's a penny or two in there.

Okay.

And then that begs the question, if I want to use $0.38, the drop-off to $0.32 in the first quarter of 2010, that still seems like a pretty big delta on the EPS side.

I understand the seasonality.

I just still would have thought EPS might have been a little bit higher.

Is there anything else going on, or does that just lead then to FX?

That -- yes, that $0.32 would have -- if we would have told you this on January 1, we would have told you it was $0.34.

Because FX was a penny and a half, two pennies a share in Q1.

That's how much the euro has weakened just since January 1.

So you've got -- so in Q4, you've got better FX, and then in Q1 we've got worse FX, so in reality, I guess if everything was sort of netted up maybe and we didn't have the reconciliation item it might have been $0.38 to $0.34.

Okay.

That's exactly what I was getting at, just because it seems like --

So -- the nice part after you kind of dig through all of these adjustments this way and that, the underlying business units are still kicking out and growing nicely, and the seasonality, although always pronounced in Q1, what it really comes down to the bottom line numbers within the local currencies, it's very respectable.

Yes.

I agree.

And then just last question, the -- you had the rate decreases in the UK in the third quarter.

Was there anything additional in the fourth quarter?

No, but they started about mid, if I remember correctly, Rick, about mid-Q3, these rate changes.

So we got a little bit of it in Q3 and then three full months worth of it in Q4.

Okay.

Perfect.

Thanks, guys.

And we'll take our next question from Gil Luria with Wedbush Securities.

Hi, thanks.

This is actually Nick Setyan for Gil.

Is there a operating margin target that you're aiming for, even if you can just point directionally for the Money Transfer segment in 2010?

We typically don't disclose those kind of projections.

I mean, we're clearly pointing for -- we're clearly pointing for more, but in the Money Transfer, too, I think until we -- until we kind of see exactly how the Mexico thing settles out, as Mike says, maybe we're cautiously optimistic on some of the recent trends here, but we've not ventured a number like that in the market.

An interesting thing, if you take a look at the big three players, which is ourselves, and Western Union and MoneyGram.

Western Union here is at about 27% margins, MoneyGram is kind of like 21%, 22%, we're at, what, 16%, 14%, something like that.

The reason there is such a margin differential, or one of the big reasons, it's just volume.

So as we continue to grow our volume, and as you see the transactions come back as the economies get better, it's just -- it will look like all of a sudden overnight we become geniuses on margins, when really it's the same cost base, the same compliance departments, et cetera, et cetera, and it's just more transactions going through the hopper.

At the end of the day, we -- about a third of the revenue off a transaction goes to the agent who collects the money for us, about a third goes to the bank who pays out for us, and we keep a third for the middle man for all of the systems, right?

So you could say that if you had -- as X approaches infinity, you can have 35% margins.

Great, great.

Thanks a lot.

So is that just kind of puts it all in a little bit of perspective for you.

Got it.

Thanks.

That's very helpful.

And we'll take a follow-up from Tim Willi with Wells Fargo.

Thanks.

Hey, just going back the OMV contract and the cross border merchant platform, could you talk a little bit about your focus now on maybe going out and the prospecting and the pipeline?

I know for a while, Kevin, you had sort of said we're just focused on getting this up and running and making it as good as it can be.

So just where are you at now in terms of the pipelines of interest and your thoughts about new customers coming onto that platform?

Yes, sure, sure.

So we've had a lot of positive momentum with respect to OMV and the rollout, that's obviously reflected in the results.

As you mentioned, Tim, we're now becoming more aggressive this quarter with thinking about that next customer.

We're working with epay and some of the merchants on the epay side.

We're also, have initiated some discussions with a strategic partner around how we might move forward and use a strategic partner to get the next customer.

Strategic customer.

Is that financial institution?

Strategic partner.

Or partner?

Would that be financial institution orientated, or something around technology and integration kind of partner that serves these merchants in a broader IT sense?

At this point in time, Tim, I don't think we're in a position to state, but it would be somebody that is familiar with the space, has experience doing this kind of work today.

Okay.

Sounds great.

That's all I had.

Thanks.

All right.

Operator, I think that we're over the hour, so I think Tim's question was the last one that we'll take now, but we do thank everybody for taking your time to help -- to let us help you kind of sort through the numbers.

We'll look forward to talking to you in about 70 days.

And that does conclude today's presentation.

We thank you for your participation.