Euronet Worldwide Inc (EEFT) 2010 Q1 法說會逐字稿

Greetings and welcome to the Euronet Worldwide first quarter 2010 earnings conference call.

At this time, all participants are on a listen only mode.

Later we will conduct a question-and-answer session, and instructions will be given at that time.

(Operator Instructions).

And as a reminder this program is being recorded.

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

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

Thank you, Mr.

Newman.

You may begin.

Thank you.

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

We'll present our results for the first quarter 2010 on this call.

We have Mike Brown, Euronet's 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 and 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 our Form 10-K for the period ended December 31, 2009.

Copies of those filings and 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.

Jeff, thank you, and welcome, everyone.

Before I begin, I'd like to note that in the business overview section of this presentation, Mike will separately address the press release we issued yesterday morning regarding Visa's decision to lower the Polish domestic ATM interchange fees.

In that the announced rate change had no impact on the first quarter, I will hit the first quarter financial highlights and then hand it over to Mike to comment further on the interchange matter.

So, to jump into our first quarter highlights, for the first quarter 2010, the Company delivered revenue of $250 million, operating income of $18.2 million, adjusted EBITDA of $34.6 million and cash earnings per share of $0.32.

Our cash EPS of $0.32 was in line with our guidance.

In an attempt to clarify the quarter's results, we've also pointed out certain nonrecurring items and the impacts of FX changes.

The items excluded from the first quarter 2009 results in arriving at adjusted operating income were the $9.9 million in additional noncash charges related to the intangible assets, and $4.4 million in cancellation fees recorded as income in the first quarter 2009.

I won't discuss the impacts of these items until I get to the segment results, where I think it will make more sense to view the changes on a segment by segment basis.

As I continue with my comments on the quarter, I would like to call to your attention our re-naming of the Prepaid segment to the epay segment.

As noted in our press release, our Prepaid business continues to expand into nonmobile-related products.

To this end, we felt that our epay brand name better reflected the nature of the segment.

Accordingly, our re-naming of the segment to epay.

We now move to slide number six.

On slide six, we can see quarter-over-quarter transaction growth.

Again this quarter the business posted growth in transactions in all segments.

The epay segment posted an 8% transaction growth and the EFT segment posted a very strong 22% transaction growth.

The EFT segment continues to realize nice transaction growth from its ATM management business together with very strong performance from its Indian Cashnet network.

Now to slide seven.

In the first quarter, RIA processed approximately 4.3 million transactions.

This represents transaction growth of approximately 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.

This chart clearly illustrates the continued mix shift to markets other than Mexico, which are growing faster and more profitably.

Let's turn to slide eight.

This slide includes a review of our segments' first quarter results as reported compared to last year.

Consistent with our discussion of the segment results last quarter, we included on the next slide the results adjusted for FX changes, the first quarter 2009 impairment charges and the contract termination fees recorded in the first quarter of 2009.

So let's go to the next slide, please.

Now as you can see here on slide nine, EFT revenues declined by 4%.

However, if you exclude from last year's first quarter revenues the $4.4 million nonrecurring contract termination fees, revenues would have increased by 6%.

Adjusted operated income and EBITDA increased by 17% and 13% respectively.

These double-digit margin expansions were principally driven by improved results from the Company's cross-border product, the enhanced German ATM fees and the benefits of the rapid transaction growth in our Indian Cashnet network.

epay revenues declined 6%, adjusted operating income declined 2% and adjusted EBITDA was flat.

The decline in revenue was largely the result of UK mobile operator rate decreases we discussed several quarters ago, which were passed through to retailers, resulting in virtually no impact on gross margins.

Profits of the epay segment remain flat as a net result of higher transaction volumes, mostly in Germany and India, offset by higher SG&A expenses incurred in the first quarter 2010 to reorganize certain management aspects of the segment.

Money transfer revenues grew by 2%, while adjusted operating income and EBITDA declined by 35% and 7% respectively.

The revenue growth was driven by transaction growth principally in non-US markets, while the operating margin contraction was generally the result of two things.

One, higher SG&A costs in Europe to expand the business behind the strong growth and, two, a 7% reduction in average amount sent per transaction.

Let's now move to a few comments regarding our balance sheet.

Since the 2009 year end close, our balance sheet has only one key change.

We reduced our debt from $328 million to $289 million.

Largely by paying down the year-end draw against our revolver.

This paydown in the revolver further improves our leverage statistics, which on a net debt basis is nicely below one times annualized EBITDA.

Finally, you may recall that we have no near-term debt obligations coming due.

Our revolver term runs through April 2012.

The $128 million term loan has an April 2014 maturity date, and the first put date on the $175 million convertible is October 2012.

Accordingly, we have no debt obligations of significance for two years.

Now to Mike.

Next slide, please.

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

If you'll start with slide 11 here.

Before we move into our segment discussions, I'd like to make a comment regarding foreign exchange rates.

As in the past quarters, foreign exchange rates against the US dollar have had an impact on our prior year comparisons.

This quarter our results were favorably impacted by a weaker US dollar against our primary operating currencies on a year-over-year basis.

But I'd like to further point out on a sequential basis, FX rates have not had a favorable impact on our results as the US dollar has strengthened in this last quarter compared to our primary operating currencies.

Since the fourth quarter 2009, we faced a 4% currency related headwind, and we would have expected our first quarter 2010 adjusted cash EPS to be a solid $0.33, not $0.32 a share, one cent higher, if not for these currency headwinds that we had in Q1.

With that, let's go on to slide number 13.

Slide number 13 presents our first quarter 2010 EFT financial results on an as-reported basis.

Our revenues increased by 5%, operating income decreased by 19% and adjusted EBITDA increased by 24%.

The first quarter operating income included $4.4 million of contract termination fees as Rick talked about a second ago.

So excluding these fees we would have posted strong double-digit op income growth rate of 28% year over year in the EFT segment.

The EFT segment's adjusted op income and EBITDA expansions were primarily driven by the higher transaction fees in Germany, increased transaction growth in Cashnet India, organic growth in our deployed ATMs and reduced operating losses from the Company's cross-border product.

As you can see, the EFT segment again posted impressive double-digit results and has been building some very positive momentum over the past several quarters.

Unfortunately, the excitement from this positive momentum from EFT has been dampened by the impacts stemming from the recent Visa rate change.

Before I get to the EFT business highlights on the next slide, I'd like to discuss the press release we issued yesterday announcing Visa's decision to lower the Polish ATM interchange by nearly two-thirds.

On slide number 14 we sum up the press release issued yesterday morning, but secondly and more importantly we provide some additional long-term opportunities that we feel may result from Visa's decision to reduce the Polish domestic ATM interchange fee.

In summary, this rate change will have roughly a $5 million to $5.5 million pretax impact on our EFT business.

And a note, too, there is extremely low tax rates in Poland.

So as this rolls through, this maybe hurts us even more.

While this $5-plus million impact is tough to swallow, we see some opportunities that may emerge from this rate change.

We believe the larger banks, who manage and deploy their own ATM networks, will be adversely impacted by this decision, as their costs are continuing to rise and their transactional revenue now has been reduced significantly.

The banks may be more interested in how we can improve their cost structure.

We are in a unique position to leverage our infrastructure and provide the banks a more efficient cost of service.

Additionally, we would expect that our largest non-bank independently owned ATM competitor to be hit very hard by this Visa rate decrease, as nearly all its revenue sources are derived from interchange revenue.

We are also anticipating a modest increase in ATM transaction growth as a result of lower fees banks will charge their cardholders.

Finally, I'd like to point out that at this time we do not expect to see a reduction in interchange fees in the other markets where we currently own and operate ATMs.

We only own ATMs in three countries right now; Poland, Germany and the Czech Republic.

In Germany we have about 600 ATMs, but domestic transactions are not settled through the Visa structure.

In our third market, Czech Republic, we have deployed only about 100 ATMs, and accordingly, if this market experienced any kind of interchange fee change, it would not have a significant impact on our business.

So now we can kind of move on to what happened in Q1.

So let's move to slide number 15.

If we were to neutralize the FX impact on our results, revenues would have declined by 4%.

Moreover, I'd like to point out if we were to exclude the $4.4 million we gained last year in contract termination fees in the first quarter of 2009, revenues this quarter would have actually increased by 6% year over year.

That underlying revenue growth fueled our adjusted Op income and EBITDA expansions of approximately 17% and 13% respectively.

These year-over-year improvements illustrate the underlying growth and leveragability of our core business.

With regard to our first quarter business highlights, we signed ATM and card management services agreement with the Dahabshiil Bank in Djibouti, our first direct deal in Sub-Saharan Africa.

We signed network participation agreements with Forum Bank, one of the largest Ukrainian banks, and DnB Nord Bank in Poland.

Additionally, through Citibank we signed an agreement with two mobile operators in Slovakia for POS recharge and managed services.

Moving on please to slide number 16.

In addition in the first quarter we renewed agreements with Barclay's Bank in Pakistan and BPH Bank in Poland.

We extended our ATM network participation contract with mBank, who has been a customer of ours since 2001 in Poland, when they first began to operate there.

As you may recall, last quarter we secured three separate local orders from Postal [Hefei], Shanghai and Beijing for about 250 ATMs, of which we deployed 95 this quarter.

Due to the momentum we are building in China and the success we had with Postal Shanghai, we have also secured an additional order for another 125 ATMs.

We secured that order in Q1.

The China team has worked very hard securing these orders, and we fully anticipate having the additional ATMs deployed by year end.

In other markets, our net ATM deployments totaled 329, the majority being Serbia due to our previously announced Q4 acquisition of Mellon Transaction Solutions.

In India we received an additional order from Standard Charter Bank for 100 ATMs and we plan to deploy through the second quarter.

With these changes our ATM backlog now stands at approximately 1,475.

Slide number 17, please.

Cashnet, our shared ATM network in India, continues to strengthen our value proposition amongst Indian banks and their customers.

Transactions increased 82% year over year, contributing to our profit expansion this quarter.

In line with our strategy to continually provide innovative value-added offerings, we are piloting our dynamic currency conversion services in Poland.

In our cross-border product, we continue to roll out Romania as planned, Germany and Serbia are scheduled to go live in Q2, followed by the rollout of Slovakia and Bulgaria, two smaller markets, later this year.

This will complete our 11 country OMV rollout with the anticipated terminal count just over 3,900 units.

Additionally, American Express card acceptance is scheduled to go live in Austria and Germany during the second quarter with OMV.

In summary, our EFT teams did a great job and produced solid results, both as -- on an as-reported basis and a constant dollar basis in the first quarter.

Moving on to the epay segment.

Before we get you to the highlights, I'd like to take this opportunity to reintroduce this segment to you.

As you may recall, during 2009 we rolled out a new global brand identity under the name epay.

The epay identity unites all of our prepaid subsidiaries under one brand around the world.

Not only has the name of the segment evolved, but our business focus and strategy have as well.

Over the last several years this segment has transformed from a prepaid mobile top-up provider to one of the largest cash collection networks in the world.

Through our network, we are able to virtualize cash payments for a variety of content providers and consumers.

Let's turn to the next slide for a better understanding of what this means.

On slide number 19, we show the overarching trends that have led to the transformation of this segment from a telephony-only provider to a market leading distributor and processor of electronic payment products and services.

Our retailers, service providers and mobile network operators from around the world look to epay to maximize their profits and will be able to do so by increasing the content and the product offerings.

Through our cash collection network, we are now -- we now distribute many popular products and services, including iTunes cards; Sony PlayStation network cards; electronic bill payment solutions for road tolling, ticketing, parking, and transportation; lottery bill payment; and prepaid gift and debit cards.

Our pipeline continues to grow.

Of crucial importance, these higher margin nonmobile products represent approximately 11% of the segment revenue, up from only -- pardon me, only 1% to 2% a few years ago.

Our ability to provide these products and services to retailers has improved our value proposition and creates meaningful differentiation between us and our competition.

We continue to seek and in some instances have won exclusive agreements with content providers, which in turn strengthens our retailer relationships and ultimately leads to increased market share.

Further, as we increase our market share, we're able to sign more exclusive agreements with content providers.

For several years leading up to the recent financial crisis, market share was stagnant amongst prepaid distributors.

But in recent years we have gained market share in a number of markets, enabled by new product offerings, transparent financials and a strong balance sheet.

In Australia, we have enjoyed tremendous success following the collapse of our single competitor Bill Express.

We have seen a number of competitors go out of business or shrink significantly, including ViaOne Technologies in the US and Payzone in Germany and the UK.

Another trend we are seeing in the mobile popup market in the US is an increase in ARPU, the average revenue per user.

As consumers desire additional applications and Internet access via mobile devices, they are purchasing higher priced unlimited plans from Boost, AT&T, Verizon and others.

This directly increases ARPU and our commissions.

Additionally, the unlimited plans are likely to shift consumers from more expensive post-paid plans to more economic prepaid ones.

Previously, post-paid plans were the only way for consumers to obtain cutting-edge handsets.

Now providers such as Boost, as an example, offer unlimited prepaid BlackBerry plans.

We believe this trend will continue in the US and elsewhere, ultimately leading to higher profits for our shareholders.

Now let's turn to the next slide.

On slide number 20, we demonstrate visually the virtuous cycle whereby our ability to provide retailers with new product offerings strengthens our value proposition and creates a strong differentiation between us and our competition.

This improved value proposition enables us to acquire more retailers and increase market share.

As we continue to gain market share, we enjoy stronger relationships with retailers and content providers, which in turn allows us to improve our margins.

As you can see, once momentum shifts your way, like we are starting to experience, the upside is significant.

I'd like to point out these overarching market and product shifts do not happen overnight.

Looking back over the past two years during extremely difficult economic times, on a constant currency basis, operating income increased 23% for the segment.

But as we look in the horizon for epay in the next one to three years, I believe we are in the best position we have seen in many years.

We have the strong wind of an industry in change at our back, and we've built a ship for exactly this new journey.

On to the next slide, please, slide number 21, and we'll cover the financials.

Here we provide our epay financial highlights on an as-reported basis for the quarter, with revenues increasing 8%, operating income and adjusted EBITDA showing double-digit improvements year over year, increasing by 12% and 13% respectively.

Please jump to slide number 22.

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

On a constant dollar basis, revenues and Op income declined 6% and 2% respectively, while adjusted EBITDA remained flat year over year.

As Rick has already covered in the key factors driving these changes, let's move on to the segment's business highlights.

On this slide, then on the following slide, you will notice during the first quarter we signed a number of major retailers and content providers in several markets.

Jumping now please to slide number 22 -- or 23.

We have added a number of new non-telco products.

There are a couple worth noting.

In Spain, we are piloting a mobile parking payment solution, giving customers the ability to top up the virtual account of mobile parking services, and we launched Sony PlayStation network cards across Australia.

This will be followed by a European and New Zealand rollout for the same product.

In summary, we're very excited about the future of the epay segment as we continually add more retailers, products and transactions, and in turn strengthen our market presence.

Now move on to slide number 25.

On this slide, we highlight the first quarter financials of our money transfer business on an as-reported basis.

Here we have revenues increasing by 6%, adjusted Op income and adjusted EBITDA decreasing by 25% and 3% respectively over the same year.

Adjusted for foreign currency, revenue increased 2% and adjusted Op income and EBITDA declined by 35% and 7% respectively.

As Rick discussed, the reduction in profits year over year was driven by fewer Mexico transfers and a lower average amount sent per wire, together with the increased cost to support the strong European growth opportunity.

These store and agent investments have positioned us as a key player in the European market and have allowed us to enjoy strong growth rates in excess of 20%, as I'll discuss on the next slide.

Slide number 26.

Similar to previous quarters, we've highlighted three important performance indicators of our business.

Over the first quarter of the prior year, non-US originated transactions increased by 21% and revenues adjusted for FX increased by 11%.

The impressive volume increase is due to our expanded European footprint.

However, during this quarter we did see a decrease in the revenue per transaction, which is largely the reason transaction growth outpaced revenue growth.

Although we are beginning to see improvements in the US to Mexico corridor, transactions and revenues declined by 14% and 20% respectively.

It should be noted, however, that in March, transactions were only down 7%, considerably better than the quarterly average of down 14%.

On a sequential basis, we are seeing a positive trend in this market.

As you may recall during our Q4 2009 call, we reported a quarter-over-quarter decline in transactions and revenues of 24% and 39% respectively.

So I would say that while our challenges related to Mexican transfers are not over, the trend is consistently moving in the right direction.

We continue to see transaction growth in our US to non-Mexico corridors, which increased by 11%, with a 4% increase in revenues.

Our network of agents, both send and receive, continue to expand, and we launched five new non-Mexican correspondents totaling approximately 2,500 locations.

We have approximately 3,900 additional correspondent locations in the pipeline for installation as we speak.

Now let's go to the next slide for an overall summary of the quarter.

We posted adjusted EPS of $0.32 in the first quarter of 2010, consistent with our guidance.

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

We renamed our former Prepaid segment to epay and highlighted the overarching trends that have led to the transformation of this segment from a prepaid mobile top up provider to one of the largest cash collection networks in the world.

The epay segment continues to strengthen its market share and introduce additional non-telco products.

We continue to increase our non-US originated money transfer volumes and profits due to our European expansion efforts, and we're seeing a favorable trend from Mexico transfers.

We have a strong cash position of approximately $189 million, and we continue to decrease our debt and improve our leverage statistics.

And finally, we expect our second quarter 2010 adjusted cash EPS from continuing operations to be approximately $0.31, assuming currencies remain stable through the end of the quarter.

For a bit of a perspective, had we not had the currency headwind of about a penny in this quarter, and $0.02 to $0.03 for the Poland Visa issue, we would have been discussing closer to a $0.35 per share quarter instead of $0.31.

This concludes our presentation portion of the call.

We'll be glad to take questions.

Operator, will you please assist?

Thank you.

(Operator Instructions).

Our first question comes from Robert Napoli from Piper Jaffray.

Good morning.

Two questions (inaudible).

With regards to the ATM fees in Germany, what -- how much of an improvement have you had in ATM fees?

And what is the risk -- and I understand it's not -- it doesn't go through Visa, but I understand that it is somewhat controversial, the fees in Germany.

What is the risk that we're going to get -- that you're going get hit with a reduction in those ATM fees, back to where they used to be?

Well, right now this is kind of a funny market.

The German market is totally different.

In this market, the user doesn't pay the fees directly.

They're passed on to the bank directly, kind of bank to bank.

And it's interesting, because the off-branch ATM network deployers, independent ones like ourselves, are very few in a market.

There's like a couple thousand total ATMs out of 45,000.

So we're kind of -- we kind of get lost in the noise.

And I think that -- for that reason none of the banks have paid much attention to this.

We have been able to raise our fees along with our competitors, and it's been very advantageous.

But every day I keep wondering, how long can this great news continue?

How long can I keep printing money?

If we do an analysis, however, and take a look at our current fee versus the numbers that are being bantered around a little bit within our shop and maybe some banks.

As we're looking at a reduction from our current fees to between EUR5 and EUR7 per transaction, if those fees were to occur, that would hit us by approximately $0.015 to $0.03 a quarter.

So depending on if it's EUR5 or EUR7, or if they don't do anything, then it's nothing.

So that's the potential, you might say, liability.

But we've -- so far there's absolutely nothing that's happening, and we just seem to be maybe too small to hit everybody's radar significantly.

So that's kind of where we are.

We'll keep making money there as long as it's a good market for us to make money.

Thanks.

Just one follow-up question.

You had pretty impressive growth in the ATMs.

You had 6% up -- increase quarter over quarter.

The ATMs that you added, adjusted for -- I mean, the change in Poland and the Visa fees, what -- are these revenue -- would you expect revenue per ATM to be similar to the corporate average?

Above, below?

It was pretty strong growth, and little bit surprising.

Yes, most of these have come out of the acquisition of Mellon Transaction Services in Serbia, where we have really consolidated a very strong market share there.

And their revenue per ATM, although that's probably not the best way ever to measure our business, but I would say the profit per ATM is slightly lower than our average.

And we also added, of course -- remember we added 95 in China as well.

Which is, as we mentioned, Asia is always slightly lower than Europe.

Thank you.

Our next question comes from Tim Willi from Wells Fargo.

Thank you and good morning.

Couple questions here.

First in the EFT division, Kevin, you I guess spear headed the OMV conversion.

With the second quarter, will we be -- I guess it's the sustainable margin for that business?

Or will there still be some follow through that we really won't get to the sustainable margin structure until the third quarter?

Just trying to think about that and its impact in the EFT segment.

Sure, Tim.

Six companies -- six countries have been rolled out.

Romania is partially rolled out.

Four countries to go.

We're starting Germany and Slovakia this quarter.

We're also working on Romania.

As I have said, things have settled down, but as I've said over and over again, at the end of the day we need another contract to really turn this thing around.

So, I think the short answer to your question is, it - we don't anticipate it getting any worse.

In fact it will continue to get slightly better.

But it will require another contract for us to turn this thing positive.

But in terms of just specific to OMV, by the time we close the books on the third quarter, that would be the run rate, or the operating cost would be --?

Third, fourth quarter for modelling purposes.

Okay.

Okay.

In the Prepaid division, Mike, couple questions.

One is, the POS terminal deployments continue to be quite strong.

And I'm sure there's a variety of different types of retailers and terminals being brought online.

Typically you have a sequential step-down 4Q to 1Q.

That wasn't the case here.

Can you talk about the curve that occurs as you're growing this terminal base and bringing product and content in to sort of think about how this impacts transaction and revenue growth going forward for Prepaid.

I mean those are some of the strongest deployment numbers you guys have put up on an -- (inaudible - multiple speakers).

A couple of these, of the strong -- the reason for the strong Q1 are Germany, as an example.

We signed a number of contracts last year for rollout in Q1.

These were electronic cash register integrations where we light up hundreds of terminals at a time.

And we signed them last year for being brought live in the first quarter after the termination of the current contract of our competitor, or the ex-current contract of our competitor.

So for that reason we saw us light up a lot, particularly in Germany in Q1.

So they began to produce results from us really from the get go.

Or through Q1.

So we'll see a full effect of those beginning in Q2.

Okay --

(Inaudible - multiple speakers) Mike.

I think it's also fair to recognize that we've been successful in adding terminals in a number of markets like Germany or Italy or India, where the kind of market is shifting from where it used to be predominantly served by small independent type of shops that -- and now we're getting into those markets and getting a number of the large retailers, which we really know and have great expertise in.

And so the kind of market dynamics will shift over time there, so you don't get as quick of an immediate bump on your revenue coming through.

What we get is more of a sustained growth pattern like we've seen out of the Prepaid segment over the last couple of years.

Because it relates also, Tim, to a change in consumer behavior, as Rick pointed out.

It's moving from independent to large retailer.

So while we light them up, it does also require, I know, a cultural change or a shift in consumer behavior.

Yes.

And then just back to the ATM side of the business, Mike.

I mean, given what's happened in Poland, and given that, while there's nothing going on in Germany, you're not ruling out at some point in time the economics in that market could come under a bit of pressure.

How do you think about your ATM count in those countries?

I know at points in time you've sold ATMs off for outsourcing contracts.

Just how should we think about your stance on your ATM count relative to the kind of money you might make in those markets going forward?

(Inaudible - multiple speakers).

Well, with the exception of Asia and most of the markets, we don't buy the ATM, so it isn't a CapEx expense on us.

I mean, we're out there, we continue to try to close more contracts and bring more ATMs online.

Well, I'm talking about like in Poland and ATM specific -- Poland and Germany.

If you -- I mean, do you --

Oh.

Would we continue to expand -- yes, would we continue to expand our own networks?

Or reduce the size of it?

Or reduce.

I think it all depends on where the profit economics are.

A couple of -- the nice thing is we've always been kind of cannibalistic on our own ATMs.

We have expanded ourselves, but we've also tried to rip out the ones that don't have the performance.

So we're always trying to cull the bottom 10% every year.

For that reason I think we've got some very high quality sites, which would make us a little more impervious to just reduction.

So at the -- kind of at the end of the day, we're gonna look at it on an ATM-by-ATM basis.

We kind of think though, like we mentioned in here, that there is a sea change that's occurring here in Poland.

There are going be some opportunities, so we're going kind of take, I won't say a wait and see, but we're going to do an analyze-and-see kind of perspective on that.

With respect to Germany, we're making a lot of money in Germany at EUR5, let alone EUR9, so we're not going to be reducing our -- I don't expect us to be reducing our estate there.

Great.

Thanks so much.

Our next question comes from Josh Elving from Feltl and Company.

Hi.

Good morning.

I wanted to touch base.

One last thing on the German ATM fees.

I may have missed some of the discussion.

Did you suggest that the rates per transaction could go down to EUR5, a range of EUR5 to EUR7?

Well -- we used to be, say a year and a half ago about, we were at EUR5.

And then our competitors started to eke it up.

First it went to EUR7 and then it went to EUR9.

And we followed our competitors.

So all we're saying is, if we were to go back down to the original numbers, those are the kinds of impacts we might have.

But the nice thing is the big banks have -- some of them have done the same thing.

Many of them, it's in their best interest to get these high interchange fees, too, because they made a large infrastructure investment.

So for that reason we've just kind of gone along with the tide and made some money.

Okay, so the --

And, yes, there is a possibility it could go down, I guess.

But for the time being, there is -- for the time being, we're not seeing it.

So the $0.01 to $0.03 a quarter you referenced would be if the rates went back down to the EUR5 to EUR7 range.

Yes, exactly.

Exactly.

Okay.

That makes perfect sense.

In EFT can you give a sense, maybe for the number of transactions that are driven I guess by Cashnet versus, I guess, ATM transactions because as Cashnet has been growing so rapidly, is that 20 million transactions a quarter out of that 187 or 185 I think that you reported, or --

I think we mentioned these numbers before.

About a year and a half -- a little over a year ago we were doing about 150,000 transactions a day.

In first quarter, we averaged probably about 285,000.

In April maybe 290,000.

And then in April, we're averaging right now about 300,000.

So, call it roughly 150,000 to 300,000 in a little over a year.

Okay

And that's per day.

300K per day.

All right, I can do the math on that then.

Okay.

In the China Post relationship --

Hey, Josh?

Yes.

This is Kevin.

Just to remind you some of the history there.

RBI, as we previously reported, made some changes to the fee structure.

And that resulted in the step function changes in transaction volumes.

So for the last several quarters we've been growing, but growing at a more modest pace.

So we're at about the 300,000 and it will continue at 300,000 with some modest growth going forward.

But it won't -- we don't anticipate right now another huge step function improvement in Cashnet.

Unless we can add additional banks.

And that's the key here.

And if you remember back when you did permutation theory in your MBA classes, every time you add another bank, one more guy to a group of banks of eight or nine like we have right now, you get more than that N little more improvement, you get a multiple of that.

And so that's why we're out there every day trying to sign another bank up to -- and we have been successful with that.

And we're in negotiation --

Yes, we're in negotiation with several banks, a couple very large ones, to add them to the network.

Once that happens, then you can see another step function and increase in transactions.

Okay.

That's actually very helpful color.

So are these banks that you're in discussions with, would they be state-owned banks?

We're not gonna say at this point.

Yes, we can't say at this point, although we've pretty much run out of the multinationals.

So there's your hint.

Now, what's left -- just so you understand the banking infrastructure.

In India there's kind of like two tiers.

There are the fully state-owned banks and then there's these like partially state-owned banks that have been floated.

So there's some state ownership in about everybody left.

It's just a question whether they're floated or not.

We have all the private banks.

So what's left is the full state and partial state-owned banks.

Got it.

Okay, then last question.

The relationship in China Post, or with China Post.

The 250 ATMs that you've recently signed and are in the process of deploying, are those like a field services type relationships, or what's the -- they are not full --

No, that's the full shooting match.

And just --

(Inaudible - multiple speakers) owned ATMs?

No, they aren't.

Their assets are owned by the Postal, but we do the driving and managed services related to those ATMs.

Okay.

Just for clarification, we reported 250 last quarter and another 125 this quarter.

Right.

And for the most part, the new orders I'm sure would follow the existing model.

I'm sorry, say again?

The new order, the 125 ATMs I'm guessing would follow the same previous model?

Correct.

Field services?

Correct.

Okay, great.

Correct.

And we anticipate -- and 95 of those have been deployed, and we expect everything that we've announced to be deployed by year end.

Okay, great.

I'll get back in queue.

Thank you very much.

Our next question comes from Chris Shutler from William Blair and Company.

Hi, guys.

Good morning.

Morning.

So a couple quick questions here.

In the Poland ATM interchange reduction, really was wondering if you could give us a sense, if you're looking at a pretax income reduction of $5.6 million, $5.0 million over the next couple of years, how much of a corresponding drop in revenue should we expect?

And then maybe you can give us a sense of your confidence in those numbers at this juncture.

Because the -- we get interchange, it's almost a one-to-one relationship between revenues and flow through.

A little bit off of that, right?

Yes.

Yes.

We -- yes, there's a little bit of cost, because you have to share some with your sponsor bank.

Most of that kind of blows through.

Okay.

And then in terms of confidence in those numbers?

I guess I'm just curious what went into developing those, how much time you had to think about it at this stage.

And I just want to make sure that we are not in a couple of quarters talking about numbers that are materially different from these?

I would say we are reasonably confident with it, Chris.

Okay.

Great.

And then a couple of questions on the epay segment.

Adjusted EBITDA was flat, year-over-year despite an 8% increase in transactions.

Obviously you talked about SG&A being up a little bit this quarter due to some reorganization initiatives, but really just wondering should we look at that extra expense in Q1 as being one-time, or will it flow through through the rest of the year?

One-time.

One time, okay.

And then the only other question in the epay segment just on the PlayStation agreement that you announced earlier in the quarter?

Maybe you could just talk about that agreement a little bit, what countries you are in and how big of an agreement that is.

Well, we started with Australia.

Yes.

And now we are going to move to New Zealand and Europe here shortly.

So, it is -- it is a good agreement.

It's a big mas -- this is Kevin.

It's a big master agreement.

At this point we are not going to discuss which countries in Europe for competitive reasons, but it is a master agreement with a rollout plan.

Okay.

Thanks a lot, guys.

Thank you, Chris.

And I don't know how many of everybody on the phone right now are old folks versus young folks but this Sony PlayStation stuff actually does make a difference.

Kids if they want to buy credits, if they want to do Sony live, if they want to do all these things, they need to have this credit.

And because of the -- not every kid has a credit card overseas like maybe the US, this is your basically your gate.

This is how you get in the game to play this box.

And so we are pretty excited about this master multicountry agreement.

Because all these game companies are changing their model away from a high purchase price to a lower purchase price of the game, and then it costs you money to play the game to get more further into the game or to buy more equipment or shields or tires or whatever the game is.

So the model's shifting, and we are in line with that shift.

Our next question comes from Greg Smith from Duncan Williams.

Yes, hi, guys.

Rick, can you just size those SG&A expenses, the one-time expenses in the epay segment?

$0.5 million.

$0.5 million, okay.

I guess in the EPS guidance for 2Q, I just want to be sure you guys were saying there is an incremental $0.01 sequential negative impact due to FX from 1Q to 2Q.

It's really more from kind of the perspective looking at it from the end of the year.

We had about a penny of headwinds going into the first quarter and that essentially carries over with even a little bit stronger headwind going into the second quarter, Greg.

You have been watching where the euro is.

We haven't been getting very good press on Greece here lately and the euro is our single -- one of our largest currencies.

Yes, yes, okay.

And then just with your debt ratios coming down, what is the likelihood of acquisitions?

Potential for something large, small, tuck-in, what are you guys looking at at this point?

We are always looking at tuck-in kinds of acquisitions, but still we are -- they have got to be accretive.

So we just haven't been able to find the right combination of a decent company and an accretive price so far, so -- but we're looking.

So we'll see what we can find.

Is there --

But we do have extra cash, and we do -- our interest rates on what we have outstanding are quite low, as you know.

We only pay 3.5% interest on our $175 million of the convert, and we are like two points above LIBOR, which is 2.3%, on our term loans.

So, I mean, our debt costs are very small, so we will just continue to acquire cash and then either pay down that debt, or if there is a small acquisition then we will do that.

Yes, but this is Kevin.

Just to reiterate the -- from a strategic standpoint, the things we are looking at are tuck-in size as opposed to big buys.

Yes.

And then they have to be accretive, as Mike articulated.

Yes.

And then I guess you are precluded from buybacks, I believe, from one of your covenants.

Any --

Yes, that's correct.

Actually, we can do stock swaps, although the stock we believe is undervalued now, so we won't do those, but we could if we wish.

And we cannot use cash.

We have to pay off the note before we can buy back stock.

Thanks a lot.

You bet.

Our next question comes from Gil Luria from Wedbush Securities.

Yes, thank you for taking my question.

In addition to the three countries you mentioned -- Germany, Czech and Poland -- are there other countries where your revenue depends on the ATM fee or the interchange rate?

Are there any other countries where you recognize any portion of that as revenue?

No, none.

Basically all the other countries have our original model, which is an outsourcing model, and that we just bill the bank to operate their ATMs for them on a per ATM per month basis.

There is a little bit -- there might be a hair of transaction fees this way or that, but I mean it is nothing to -- it is going to get way lost in rounding.

Got it --

Now Cash -- I -- Rick just pointed out, he said don't forget Cashnet.

Cashnet is not Visa, has nothing to do with this, but we make a transaction fee on Cashnet.

It is an interchange fee.

That we have agreed with our banks in that market.

And is currently lower than what the --

Yes, it is currently quite low.

It's kind of Indian version.

And so -- but do the bank there have a say on what that fee is, either now or upon renewal of that contract?

No, actually we agree amongst ourselves and they -- there is a larger fee between them, and then we just get a processing fee, which -- so it isn't really the interchange fee per se.

It is a processing fee for writing and settling those transactions.

And you mentioned --

And we don't own any ATMs in that market.

We are just the switch.

Where in Poland, we own the ATMs as well as we are the switch.

And as well, we would certainly enjoy making a larger portion of the interchange, we make just a few pennies off of those transactions, but it is important to point out that it is a transaction-based type of fee.

Got it.

And then in terms of the Mellon acquisition, could you parse out a little bit how many ATMs that included, what the revenue associated with that was?

Yes, I don't remember the number right off the top of my head, but it is between 250 and 300, somewhere in there, I think.

Yes.

And that was a great example, by the way, for the prior question about an excellent little tuck-in acquisition.

It has been accretive.

And it was accretive on the day we did it.

It was accretive.

I mean we are going to get more of the value as we integrate their business, so it has not been -- that business wasn't -- it was accretive to us, but just slightly accretive.

Where we will get more of the value is in the future as we integrate that into our business.

Generate synergies.

So, in the EFT business, there is obviously a lot of adjustments to make.

We take out currency, we take out the penalties, we get to 6% growth.

How much of that then is organic if you exclude the contribution from Mellon?

Virtually all of it.

Okay.

But so now if that excludes everything and there is nothing else unusual going on, you have more than anniversaried the cancellations.

Why should we not think that that is the run rate growth in this business?

Well, I think the big difference is just kind of the nature of transactions or contracts as you -- as we bring them on.

If you look back against the business, we have had a number of quarters that may have been a little bit slower growth from one another, but if you look over the more intermediate term you will see that that business has grown quite nicely from year to year.

So, we have always said that that business can be kind of lumpy, depending upon the timing and size of transactions or outsourcing agreements brought on.

So I think that instead of looking at one quarter in terms of a year-over-year movement, you have to take a look at a little bit of longer period to see what you think that fundamental business is.

Then on Poland, could you help clarify a little bit what you recognize there as revenue?

Because I think in your lease you said it is 7.5% of revenue comes from Poland, and there is a 62% to 63% reduction in fees so if we just apply those numbers, it would be --

Well, you have got to remember that the domestic interchange fees are just a small part of our revenues in Poland.

That we have a large outsourcing business in Poland.

Got it.

Got it.

Okay.

So that is just a -- but you do recognize the interchange.

You do recognize the one now, you are going to recognize PLN130 a transaction.

You recognize that entire amount as revenue.

You said that portion is going down by that amount?

Right.

Got it.

Great.

Thank you.

Our next question comes from Robert Dodd from Morgan Keegan.

Hi, guys.

A couple of -- three questions.

Is there an opportunity in Poland, obviously with the interchange rate coming down a bunch, for you to talk to the regulators about maybe the introduction of direct surcharges to consumers?

Right now it is possible.

But we are not holding our breath for that.

Okay, got it.

A couple of other housekeeping ones.

What is the average -- the interchange rate in -- the fee in Germany is quite high.

What is the average withdrawal in Germany for your ATMs?

$120.

Euros probably.

Euros.

Yes, I'm sorry.

Got it.

On -- you mentioned you have done your first deal in Sub-Saharan Africa.

What kind of -- I assume you are not going build out a data center down there, but what level of investment was required?

Did you open a sales office in that region?

I mean has there been a material increase in spend, or has it just been leveraging everything else?

We made -- I will let Kevin answer.

Yes, so we have a team in Egypt that we have had for a number of years.

The processing would be done out of India, so you are right, we won't build a processing center in India, but we will process out of India.

We are in a -- we have done a joint venture -- in the process of doing a joint venture in Pakistan, so we will have a processing center in Pakistan.

So depending on the religious orientation of the country, et cetera, we could either process those transactions in Africa from either Pakistan or India.

So, there is not a significant increase in spend in terms of going and capturing the market, it is really leveraging the assets and the people we have today.

Got it.

And the last question might be a little sensitive.

I think from your commentary you obviously think your stock is undervalued, you should -- the industry and you yourselves would value your asset at higher valuation than the market currently is, and value your cash flows at higher multiples.

Given that, I mean, do you think the industry will value higher -- value your businesses higher?

And if you do, has there been any consideration by you or the Board of exploring strategic alternatives or bluntly putting yourselves on the block?

We have had no discussions about that, Robert.

Because at the end of the day we have got -- we actually see a pretty exciting growth plan for us as a company.

And if right now the market isn't giving us that value in kind of the short-term, we have just got to work real hard and put better numbers on the page so that you guys can give us a little bit of a bump in market value.

Last year we took a lot of lumps because we had huge FX adjustments over prior years, and we took the lumps and we are going on.

And we are being a little bit more in the face on FX, but at the end of the day we have a business that has a lot of growth potential.

We are in kind of a cyclical down now in money transfer that everybody, including some of our competitors in money transfers, claiming we are coming out of.

We have been seeing it, and I think others have.

Money transfer is a funny one, too, because if we start to get a little bit more employment around the world, a little bit more construction jobs around the world, all of a sudden we are going to go from everybody's target to a genius.

And it isn't because we did anything different, it is just because there is that many more customers out there with money to spend and sent back to their families.

So I think we are just at kind of a cyclical down on that, and we are very excited about our epay segments and all the market share gains we've made there, and on our EFT segment I think we still have a lot we can do.

Got it, thank you.

Our next question comes from David Parker from Lazard Capital Markets.

Thank you.

Just kind of building off of that prior question, and understanding that you only give guidance out one quarter, and there has been a lot of fluctuality with FX and now with this interchange.

But if we do get back to a normalized environment, and just wondering if you can elaborate on how you do see the long-term growth outlook in a number of these businesses -- in each of the three businesses?

And how investors can gain or have some confidence in those numbers that you are talking about and you are optimistic about?

Well, maybe if you break this down in order of -- maybe in each of the divisions.

As we look at our money transfer division, I mean we -- I think the world's number of transfers right now are at about 70% of where they were two years ago.

So there is significant growth just by the economies getting back on their feet, and not to mention the fact that we have had huge market share gains in Europe in particular over the last -- over the last year and a half.

So we are just excited about, as the economy recovers we are going to recover and get the benefits of that.

And I reiterated a couple -- I spent a lot of time on the epay segment this time.

We have a lot of momentum, both market share and products, exclusive arrangements and so forth, so I'm really excited about that.

I think we can get strong double-digit growth in those areas.

With respect to EFT, we took a broadside hit here with respect of this interchange fee, but it is not lethal, it doesn't -- it does not hurt our value proposition for outsourcing for banks.

And in fact in many ways, it makes it a better value proposition than it was before, because a lot of these banks are going to now not have their kind of fat IT department maybe covered up by or subsidized by interchange fees, so that is going to change and allow us a better value proposition.

Sometimes it takes a sea change like that to cause an outsourcing agreement, which as you know, is a long close cycle and is a political decision as well as a business one.

So, I don't think I'm just looking at the world through rose-colored glasses.

I think there is a lot of opportunity out there for us.

Okay.

So even though this year looks like it's going to be another single digit earnings -- earning growth year, next year and the following year, do you still have confidence that you can be a double-digit earnings grower?

Oh, absolutely.

I mean if I -- if I didn't believe that, I would fire myself and sell the business, or sell the business and fire myself, one of those two.

Okay.

Just looking at the epay segment a little bit more closely.

You did talk about average revenue per user increasing.

Do you have any sense -- I assume that is just because of the proliferation of Smartphones and individuals, consumers buying more of those data packets.

But do you have any idea of what type of or what percentage of your consumers are currently using a Smartphone and where that growth opportunity is?

I don't have those numbers now, but if you will read through the industry press you will see that when Cricket, MetroPCS and Booth all came out with their unlimited plans, they stole huge amounts of market share from their competitors, and now everybody is kind of mimicking that model.

And here we had in these unlimited plans -- take Boost, as an example.

It's $49.99, so call it $50 when the ARPU before was around $30.

So things have changed significantly.

People are willing to spend that extra $20 so that they have got full access to data and their sports scores and internet and all that good fun stuff.

And now they can buy a phone that does it for $150, and they have access to it for $50 a month, all of a sudden it is affordable.

So we see this as a -- everybody is doing these all you can eat plans.

Even your post-paid guys are now offering that to you to try to compete to keep you from leaving your post-paid plans for a prepaid plan.

So we are pretty excited about this phenomenon, and we think this could hop the water, too.

Although it hasn't quite yet, it is certainly something everybody has got to be looking at.

Okay, and then just final question is, it looked like OMV signed a joint venture over in Turkey.

Is there any opportunity for you to move into that region with them as well?

Well, we have actually already been on the discussion table on that one.

We are very excited.

They own I think 51% of that joint venture.

A very large fuel chain in Turkey.

We are excited about that.

That deal alone could darn near double our business, and so they have -- we've asked them about that, and they told us they have already begun to bring this thing up at the board-level meetings.

They are getting their hands around their new acquisition.

They raised over a EUR1 billion e to do this, so we are pretty excited about that possibility.

And certainly they are not getting the levels of service and data generated from that processor as they do from us.

So I think we got a pretty good value proposition.

It is just a matter of time.

Great, thank you.

All right.

And, operator, I think we are over time now, so I think that would have had to have been our last question.

So, everybody, I would like to thank you for your time.

And if you have got any other questions, let us know.

Thank you.

Ladies and gentlemen, this does conclude today's program.

You may now disconnect.

And have a wonderful day.