Euronet Worldwide Inc (EEFT) 2010 Q2 法說會逐字稿

Greetings and welcome to the Euronet Worldwide second quarter 2010 earnings conference call. At this time all participant lines are in a listen-only mode. We will conduct a question-and-answer session, and instructions will be given at that time. (Operator Instructions). It is now my pleasure to introduced 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 will present our results for the second quarter 2010 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. Those statements are forward-looking statements.

Euronet's actual results may vary materially from those predicted or anticipated in such forward-looking statements as a results of a number of factors including competition, technological development affecting the markets for the Company's products and services, foreign exchange fluctuation, 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 and our Form 10-Q for the period ended March 31, 2010. Copies of those filings and our other public filings of at 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 updates.

Now I'll turn the call over to Rick Weller, our CFO.

Thank you, Jeff. And welcome to everyone who's joined us this morning or around the world.

We'll begin on slide five. For the second quarter 2010, the company delivered revenue of $244.2 million, operating income of $16.5 million, adjusted EBITDA of $32.6 million and cash earnings-per-share of $0.30. Our cash earnings-per-share came in at $0.30 per share and would have been equal to our guidance for the quarter had the FX rates not declined. Moreover, FX had a similar impact on reported revenue. Foreign currencies relative to the US dollar weakened since we provided guidance this past April. I will discuss the financial results in further detail when I get to the segment reporting, where I think it will make more sense to discuss those results and address the changes on a segment by segment basis. If we now more to slide number six.

On slide six, we can see quarter over quarter transaction growth. All segments posted transaction growth this quarter. Transactions increased in the EFT and epay segments by 13% and 5% respectively. The EFT segment continues to releases good transaction growth from its ATM management business together with very strong performance from its Indian Cashnet network. Now to slide seven.

Slide seven provides a perspective on RIA's many transfer volumes. In the second quarter we have processed approximately 4.7 million transfers. This represents transaction growth of approximately 4% year-over-year. We can also see in the 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, please.

Slide eight includes a view of our segment's second quarter results as reported compared to last year. While FX rates fluctuated significantly in the second quarter versus the sequential quarter, on a net basis FX rates were relatively constant when compared to the prior year same quarter. Because there was not much year-over-year FX difference I will speak to the segment results as reported on this slide and skip over the following slide with FX adjusted results which have been provided for informational purposes. You can see on slide 9 that the differences were not material.

In EFT segment revenues increased by 2%, operating income and EBITDA increased by 16% and 11% respectively. These margin declines were principally driven by the negative rate impact of the Visa/MasterCard interchange fee reduction in Poland announced in April. Epay revenues declined by 35%, operating income and adjusted EBITDA declined by 21% and 15% respectively. The decline in revenue was due to mobile operator rate decreases in certain markets, most of which were passed through the retailers and the impact of sluggish economies driving volume declines in the UK, Australia, and Spain, partially offset by growth in Germany and Italy. While epay revenues were lower year-over-year, the gross margins of the epay segment expanded in the second quarter 2010 and total gross margin dollars remained relatively constant year-over-year.

We've noticed mobile operators have been offering incentives or other promotions that give customers more airtime in each top-up there by leading to fewer top-up transactions. While we work through the challenges presented by the economy, we have been successful in improving the gross margin and maintaining the absolute amount of gross margin dollars. This margin improvement has been the result of favorable country mix and new non-mobile products.

The decrease in operating income and adjusted EBITDA was primarily due to an increase of approximately $2.3 million in operating costs related to professional fees and costs to support initiatives in growth markets. Approximately $1 million of this increase will not be incurred in the third quarter.

Money transfer -- revenue grew by 4%, operating income and EBITDA increased by 56% and 18% respectively. The Money Transfer Segment benefited from RIA's global expansion in new markets and payout corridors. We continue to record solid recurring profits from geographic and product diversification within this segment.

Let's now move on for a few comments on the balance sheet -- slide 10, please. From a sequential quarter perspective, the balance sheet remained relatively constant with the first quarter. The cash increase largely resulted from generating positive free cash flows. You may recall there are no debt obligations coming due in the near term. However, revolver term runs through April of 2012, the $128 million term loan has an April 2014 mature tee date and the first put date on the $175 million convertible is October 2012. Accordingly, we have no debt payment obligations of significance for two years.

Additionally, we received some positive news recently when Moody's announced an upgrade to our credit ratings on the basis of the company's track record of steady debt reduction, EBITDA growth and stable free cash flow generation. The company's corporate family rating was upgraded to Ba3 while the rating for the secured senior credit facility was improved to Ba1.

Thank you and now I'll turn it over to Mike. Slide 11, please.

Thank you, Rick. And I too extend my welcome to all of those who have joined us on the call or over the web.

While these quarterly update calls are always important, the second quarter call is particularly significant, given the volatility we have seen in the FX market. As we are all so keenly aware, the economies in both the US and around with the world continue to be stressed and fragile. As you have seen in our press release and our results Rick just reviewed, we did have more than $0.01 per share impact from FX in the weeks of the quarter following our guidance on April 27, thus causing us to be within one penny of our $0.31 guidance. You may also recall that $0.01 per share is worth approximately $0.5 million. So while at Euronet all of us are disappointed that we is missed our guidance by a penny due to FX, we are pleased to know that without the impacts of FX in May and June, we would have again met our guidance.

Finally, with regard to FX, as Rick pointed out earlier when compared to last year's second quarter there's not a lot of difference between our reported results, and the same results adjusted for FX-driven variances. Given there were minimal differences, I will only reference our reported results in the next several slides, but recall that you can always make reference back to slide number 9 for the constant dollar results. With that said let's get started and we can kind of move on to slide number 13.

Let's talk about EFT first. In our EFT segment, revenues increased 2%, adjusted op income and EBITDA declined year-over-year by 16% and 11% respectively. The small growth in revenue and the decline in op income was for the most part due to the decreased Poland fees we announced last quarter and discussed extensively in the first quarter earnings call. The EFT segment continued to benefit from the federal German ATM fees which, I might add, are expected to continue. Excellent transaction growth from Cashnet in India was also quite helpful, and good management attention to operating costs. Next slide, please.

On slide number 14, similar to prior reviews, we present a number of our highlights from the EFT segment. The EFT team continued to focus on expanding outsourcing services for ATM, POS, and card networks, as evidenced by a five year service agreement with HBP in Montenegro, a dual-branding agreement on Euronet ATMs with Citibank in Poland, a network upgrade with Getin Bank in Poland, an exclusive ATM outsourcing contract with Deutsche Bank in India, an agreement with the Development Bank of Singapore for ATM driving, switching, and card management services in India. In addition to new agreements the team has been successful in expanding and/or renewing agreements in Serbia, India and the UAE. Now we'll go on to slide number 15.

In the second quarter, we initiated the rollout of Serbia and Germany for OMV's cross-border inquiring, which we expect to be completed by the end of this -- this quarter, third quarter. Once we complete Germany and Serbia we will be 90 plus percent complete with the rollout for OMV. We have two more small countries and we will wrap up the rollout in late 2010 or early 2011, positioning us for a full year benefit in 2011 for the OMV agreement.

With the full year of revenue benefit we have reduced our annual operating losses from a couple of years back from about $7 million to approximately $1 million to $1.5million dollars next year.

In India our Cashnet network continued its excellent growth, as evidenced by the 21% annual growth and the 8% quarterly sequential growth in transactions. Beyond growth in the Cashnet network, our team in India rolled out 88 ATMs from backlog and replaced them with 94 in the backlog, which we intend to rollout in the coming months.

In China we installed 23 ATM, bringing our total count in China to just under 800 machines under management. While the deployments have been slow for the last two years, we expect to hit the 1000 ATM mark by the end of this year.

With regards to the ATM backlog you will note that it was reported at approximately 950 ATMs. This compares to 1475 at the end of March. We installed approximately 125 ATMs and added another 100 to the backlog, but we removed from the backlog count approximately 500 ATMs. While we have signed agreements with banks to deploy these ATMs we have learned from the banks that they have postponed deployment plans pending more favorable economic prospects. Accordingly, we felt it most appropriate to remove these ATMs from our backlog until we have better visibility. We are, however, encouraged with the status of certain outsourcing prospects and anticipate sharing with you more ATM contracts next quarter being quarter 3.

Turning mow to slide number 16, I will conclude my EFT comments. Slide 16. So in addition to signing new and renewing contracts, the EFT team has done a very good job expanding the breadth of our product offering. During the quarter we introduced a number of new solutions, including dynamic currency conversion, an enhanced ATM advertising module and CRM, customer relationship management, functionality. The customer response to these offerings is strong, resulting in an expanded agreement with Raiffeisen in Romania for additional services on both the ATM and the POS terminal. We rolled out DCC in Poland. We launched a customer CRM pilot with Citibank in Poland. We added new functionality for our cash deposit machine for Standard Chartered Bank in China and we rolled out our prepaid payroll card processing in the UAE.

And finally our software team has signed up new clients and expanded our services with existing customers, some of which are mentioned here on this slide.

So in summary, I conclude that we're disappointed by the unilateral decision by the card schemes to reduce interchange fees in Poland, but I am optimistic that we will experience continued growth within the EFT segment from existing and potential new agreements, several of which could sign in Q3.

With that said, let's go onto slide number 18 and talk about the epay segment. Here at epay, revenues, operating income and adjusted EBITDA declined by 5%, 21%, and 15% respectively year-over-year. I think Rick sufficiently summarized the drivers behind the numbers earlier, so I won't be repetitive here. But I would like to points out, however, that while we're seeing the impacts of a soft economy in certain of our more mature markets I'm quite pleased to see that our gross margins are improving as a result of both selling in countries where we enjoy better margins and -- in the contributions of non-mobile products. Both of these attributes are central to our plan to grow in the epay segment more markets and more products, and the expansion in gross margin serves to validate this thesis.

Here on slide -- we'll move to slide number 19. On slide number 19, you can see in the second quarter we rolled out top-ups to Best Buy in the UK, had several successes in Italy by signing up 840 new independent retailers, and added several multi-store retailers. Remember, Italy is the largest prepaid mobile market in Europe with a substantial volume of scratch cards still in circulation and an open playing field for the multi-store, multi-lane retailers. I expect to see more success in Italy as the year unfolds. In Spain there are a couple of important agreements with large retailers one with Dia, a supermarket chain of 3,000 POS terminals, and Shell, the petrol chain, with 170 POS terminals.

Now if we would move on to slide number 20, we will give you and overview of some of the productivity initiatives in both telco and non-telco related products. In the telco product category, we signed an agreement with a leading UK benefits company to provide mobile top-ups. In India we enabled mobile top-up though the internet bank for Axis Bank. In Poland we signed an agreement with ASEC a distribute top-up though ticking vending machines. On the non-telco product front, we signed agreements to distribute a number of important products including transportation, software, gaming, broadband services and even vacation packages.

Aside from the name, where you will immediately recognize the value opportunity, like Microsoft software and,, Sony PlayStation games, let me tell you a little bit more about the transportation agreement we signed in Sydney and the prepaid experiences we had in Spain.

In the Sydney transportation agreement, we will have the opportunity to offer our retail customers a highly sought-after product that produces both footfall and incremental products both of which our retailers highly value. We will be the exclusive over-the-counter processor for this new payment method in a very substantial market. For those of you that are familiar with London's public transportation system, this product will be similar to the Oyster card. The residents of the greater Sidney region make about 600 million trips per year and spend about $1.2 billion annually. The new transport ticketing system is expected to go live in 2012 and launch in 2013.

In the case of the prepaid vacation experience packages, this is a unique idea that has taken hold in Europe whereby a promoter packages airfare, hotel and experiences such as excursions, spa, golf, dinner, et cetera and sells the experience packages in retail outlets. We are able to facilitate the sale of these packages by collecting the payment and validating the purchase when the customer shows up for the package experience, a novel idea for another product sale enabled through our extensive cash collection network. We continue to focus on non-telco related products and look forward for the second quarter sharing more successes with you next quarter.

Now if you'll just jump to slide number 25 and we'll talk about money transfer. Sorry. 22. Excuse me. Slide number 22.

In the Money Transfer segment, revenues, op income and adjusted EBITDA increased by 4%, 56% and 18% respectively. I'm pleased to see the benefit this quarter of our expansion efforts outside the United States. These results were all made possible by more markets, more agents and more payout locations as well as more payout corridors. So while we continue to feel the downdraft of the economy on transfers to Mexico, we are overcoming the economic challenges outside the US by expanding our reach and getting more and more customers exposed the to the quality of RIA money transfers.

Let's flip now to slide number 23. Our non-US transfers grew 18% year-over-year but, unfortunately, we continue to see Mexican transactions decline 10% year-over-year. This 10% decline was yet another sequential quarterly improvement over the first quarter's 14% decline but we're still not yet to break even. On the heels of the first quarter I was more encouraged that we could possibly cross year the year-over-year losses in the second quarter with respect to Mexico, but to my dismay, the quarter experienced more of a roller coaster effect. As we enter the third quarter, I'm encouraged that the trends continues to improve. So as it relates to Mexico I guess I could say that I'm cautiously optimistic that the third quarter will show a sequential improvement over the second quarter.

You also note on this slide that we ranched money transfers from four new EU countries, the Netherlands, Finland, Luxembourg, and Cyprus, all via the new payment services directive. We continue to expand in attractive send markets under this very helpful legislation.

Moving on to slide number 24. Here we provide you a view of where our non-Latin American transfers are going, their rates of growth and the mix of those transfers. As we said before, Eastern Europe, China and India are all very large receive markets and are large or larger than Mexico and we're actively working on building out our payout network there. We see good growth rates to these markets and we expect that they will continue as our agents both expand and mature.

Now we'll move onto slide number 25 for our highlights in the Money Transfer segment. In Money Transfer, we saw growth in all markets quarter over quarter other than the US. While money transfers from the US declined year-over-year transactions other than money transfers enabled the US operation to post-transaction growth year-over-year. While we are still in the early stages of adding additional products to our core money transfer capabilities, similar to what we're doing in epay with non-telco products, we can see that there is definitely a ready market to sell into.

With regards to our payout network, it now stands at over 100,000 locations to 120 countries. This represents 100% increase since acquiring I guess RIA -- and remember, we've always said that we first need a larger payout network to generate more and more transfers. In the second quarter we also enhanced our payout in 13 countries and signed contracts with partners in 12 more countries that are expected to go live in the third quarter. In total we have about 5,000 new locations in 50 countries that are pending launch as we speak today. All in all I think you can see how more countries, more agents and more payouts and more corridors all distribute to RIA being successful.

For money transfer, the quarter was a bit better than expected but one we knew the team could deliver. They did a very fine job.

And one last point that I wasn't able to get into these slides because late last night our money transfer division signed a seven year exclusive distribution agreement with Cash Store Financial in Canada. Cash Store Financial has 523 branches and was a very large money transfer account in Canada for one of our competitors. This is a great deal for RIA and it demonstrates the strides that RIA has made around the world in being able to attract such high quality partners.

With that then let's move onto slide number 26 for some summary remarks on the quarter. For the second quarter we delivered $0.30 in cash earnings-per-share, a $0.01 FX impacted differs to our guidance. Money transfer produced commendable results as they continue to add more -- that means more countries, more abilities and more payout locations and more corridors. EFT launched a number of new value added services that were well received by our customers and we continue with more solutions throughout the coming months. The economic headwinds were stronger than we expected in the epay business, but we expect the group's operating margins to return to 8% or better levels in the third quarter. Moody's improved our credit rating in recognition of debt reduction, profit expansion, free cash flow generations and this happened all in a particularly difficult economy. And finally we expect our third quarter cash EPS to be $0.33 a share, assuming FX rates remain relatively stable throughout the quarter.

This concludes our presentation portion of the call and now we'll be glad to take questions. Operator, could you assist?

Thank you. (Operator Instructions). Please stand by for the first question. Our first question is from Robert Napoli with Piper Jaffray. Go ahead, please.

Good morning.

Good morning, Bob.

Pretty interesting numbers out of the money transfer business. I was hoping to maybe get a little more color. I mean the margins were -- were excellent on a trend basis. The transactions were actually less than what we were looking for so I guess the western union in the US their price cut must really be -- be a problem for you guys.

But I was wondering obviously the larger International growth and the margin expansion -- what type of margin do you think you can get out of that business? And do you expect for the second quarter see -- I mean I think you had felt that Mexico was flattening out but obviously it hasn't, so what kind of revenue growth and operating margin do you think you can get through the balance of this year, in 2011 and 2012?

Well I think you will probably see our margins improve if trends continue for -- throughout those ten quarters you just described, the last two of this year and the next two years. One thing that you have witnessed and it's really starting to bear itself out is we're getting a whole lot our transactions outside the US and outside the US the markets are less competitive, pricing is much better, we make, you know, two times as much, sometimes maybe even three times as much depending on the countries you're comparing on a per transaction gross margin basis for the transactions that we do outside the US versus inside the US.

We currently have as an aggregate about 15% EBITDA margins. Even you can see that some of our competitors who have larger volumes than us and -- and who originally were a lot stronger International before we were -- post margins in the neighborhood of mid 20s to a little bit higher. So I would expect that as our volume increases and our share of the International market continues to grow, you will see our EBITDA margins continue to improve every single quarter. We have made a whole lot of over the last two years. We've been talking to you about them. And now you can really see how those number is are starting to bear out in our financials. I mean the -- the RIA financial results for the quarter as an entity, as a division, were excellent. So this is one of the most exciting divisions that we have.

And you can also see that the -- that RIA has matured. When we bought RIA back three years ago, it was -- its business was primarily to Latin America and it was primarily from the US to Latin America. But you can see that we have now continued to grow that business and grow our corridors outside the Latin American destination which has allow you had us to be successful in Europe and Australia. So I think that this -- you look at this new account that we just hired which was a huge win for us in Canada. That just demonstrates the confidence that everybody now sees in really the new RIA that Juan Bianchi and his team have built over the last three years.

Thank you. Just a follow-up question on the ATM processing business.

How do we -- what's going on in Germany and how do we track -- as you well pointed out and continue to points out that you're getting very attractive margins in pricing there adjusted and is likely over the long run not sustainable. I mean what is your feel?When do you think that gets adjust and what effect -- do you have a clear effect on earnings-per-share if that were to be adjusted? Back to (inaudible) levels or lower?

Well, we -- Rick has given in the prior quarters an indication on the impact on us if the rate drops to where it was for say 14 of the last 15 years and that was at about EUR5 of transaction. And if we lose that you know that's going to cost us about $0.02 or so a quarter. Or two -- Rick is pointing to me maybe $0.025 maybe a little bit more than that per quarter. That's if we drop from the current to EUR9.85 to EUR5.

However, people have been talking about changing this price now for over four years. So there is not an impetus for change. I mean the change aren't necessarily going to happen tomorrow based on facts that it's now summer time and -- in Germany I think we're probably clear through the end of Q3 and maybe even through -- clear through the end of the year because I'm sure they will give some notice before any of this happens.

The interesting thing is, and as we've found more and more, as we've dug more and more into this, we found the majority of the banks do not want this to change. It's the banks who have no Infrastructure who would like to have the big banks is basically subsidize them that are pushing for this. And so the banks don't want it to change. This is not in Visa or MasterCard's hands. This is up to the banks to decide and so I don't know. I don't know what to tell you. I can only quantify if it would change what that impact would be.

I would also say that the majority of the banks right now look at EUR10 as the cutoff point before they start to charge their customers for this service and that's another points that all of us Americans have to kind of get through our head. This is not a surcharge. You don't walk up to the ATM amount the AT his say we're going to whack you for EUR9.85 do you wants to do this transaction or not. This is really and agreements between the banks it's a bank interchange fee and the customers in most cases don't even see it so the banks right now if this was egregious if we discharged 20 instead of10 the banks would pass that on -- many of the banks would pass that on to their customers but currently they are not. So that's kind of -- you know now what I know and so we're just happy to be printing some cash in the mean time.

Thank you.

Okay.

Thank you. Our next question is from Robert Dodd with Morgan Keegan. Go ahead, please.

Hi guys. One on Germany and then two others on the ATM business.

Just following up on that what do you think is the risk that the fee could come down below EUR5? While it is up to the banks to a degree, the cartel committee came out I guess last month or whatever and said EUR5 was too high. I think they are thinking of maybe infrastructure-based banks. But I mean what's the potential for actual regulatory action rather than the banks negotiating it between each other?

I mean our feeling is that --

Here's and interesting fact -- 40% of the ATMs in the market are owned by what's called cooperative banks. Cooperative banks are banks owned by local authorities like the small town you might come from or the big town you might come from, local groups. Each of those groups have members in congress, okay? Or their equivalent of congress. So 40% of the ATMs aren't owned by a Deutsche Bank kind of thing. It's owned by these little guys who all are demonstrating forcefully within their congress to keep something like that from happening because it's not in their best interests.

So even though there's a little bit of to and fro, there's been to and fro between the banks and this cartel l organization now for four years. So I think -- I think the cartel organization kind of wishes it wasn't in the middle, you know what they might do is split the baby, I don't know or they might just leave it where it is. One other thing that is in play, too is the banks are significant if you're going to do if you're going to force me with any kind of an interchange then you need to allow me to do surcharge. So rights now surcharge is not allowed in that market like it is in the UK and the US, and if we ended up with a surcharge model, then we're back to kind of where we were before all this thing happened and surcharge certainly gives us a lot more air cover with respect to our numbers.

So I'm not losing sleep over this. You know, something could happen, but it may not. I mean we may be talking about this for eight more quarters. I don't know.

Just following up on that one and the question -- what's the chance of a surcharge being implemented in Poland?

Actually that -- it's interesting because what you have right now is something the EU does not like and that's called disharmonization.

Surcharge is allowed in the UK and it looks like it could be allowed in Germany and to not allow it in other EU countries is not consistent with EU financial regulation. I think what will happen over time is it will be just like the US. There will be -- surcharge will be allowed in every EU country. It's just got to happen.

So for us as and ATM deployer, that's the reason why the number of ATMs per capita in Europe, continental Europe are not nearly what they are in England or the US and it's because they don't have surcharge because surcharge gives and economic incentive for people to fill out the places where you don't have branches of banks.

Okay.

So as I look kind of down the road two or three years, you know, we would expect to probably see the surcharge come. We continue to focus our networks on great locations which when a surcharge comes could make even more money.

Okay. Got it. Thank you.

Just last one on the ATM business. If I go back a long time -- I mean the last time we went through your business went through recession was nearly 2000 and it was a very different business back then. But when he look at that kind ever period -- obviously also had Y2K and the Euro conversion at the same time -- there was a distinct slow patch of ATM deployments for a couple of years after the recovery was on the way. I mean once you come from -- you talked about pulling some of these ATMs out of the backlog because it looks like they've been -- the deployment has been suspended, once you come from how long those suspensions could be out there? Looking at 2000, the ramp up really occurred at 2004, obviously a couple of years after the recovery.

This is a little bit of a qualitative question, Robert. Let me let Kevin Caponecchi answer this because he's been spending a lot of time over therein Europe and in Asia here just recently so I will let him answer.

Hey Robert. Kevin.

So I think there's two things happening. One is because the banks are stressed -- we just saw the report from the EU regarding the stress test -- because the banks are stressed they need to find ways to get cost out. So on one hand you have the banks aggressively looking at outsourcing. On the other hand because of the chaos within each of the banks there's delays that have been happening with respect to decision making. I don't know what will happen, but we remain cautiously optimistic. Our pipeline for new outsourcing deals is as rich as it's been in a long time and we just got to get them closed. And we remain optimistic.

Thank you.

And you can see you know to back that up, you saw the -- I gave you five or six or seven extensions of contracts, new contracts, new products on under current contract that we just announced this quarter. So banks are signing these things and banks are trying to save money with them.

And one more item would be the value added services. There's a real conscious effort within the business today to expand the breadth of our services within the ATM business, both for incremental revenue but also for differentiation and to give banks one more reason to move towards outsourcing. So we are investing in the business and you're seeing it in these early successes with some extensions of our contracts under these new products.

Okay. Thanks, guys.

Thank you. Our next question is from with Chris Shutler with William Blair & Company. Go ahead, please.

Hi guys. Good morning.

Hi Chris.

Just a couple of quick questions here. First on the -- in Poland on the EFT side. Last quarter you talked about a $1.35 million impact on EBITDA in the second quarter and then 5.6 and 5 for fiscal 2010 and fiscal 2011 photograph respectively. Are those still pretty good numbers to use or are you seeing those come in better or worse than expected?

I think it's pretty much right on top what we -- what we told you.

Okay. Great.

And then maybe in the epay segment also just kind of a more technical question here. But could you give us a little bit more color on the $2.3 million of incremental professional fees within that bucket? And then the $1 million that's non-recurring maybe you could touch on that a little bit. And then also on the $2.3 million number -- is that incremental versus Q1 or year-over-year?

Yes. It was year-over-year and the whole $2.3 million was not in professional fees. You know, probably $700,000 to $800,000 of that was professional fees. Those fees ranged anywhere legal type of stuff to some recruiting fees to some things that we've done on some, let's call it licensing/legislative kind of fronts, stuff like that. And the other part of that was really kind of market expansion costs behind some of our growth markets.

You know, I think it's fair to say that -- that more of the non-recurring part of that million that we put in there is really more from the professional fee stuff. Those are kind of things that are not really kind of recurring operational aspects of our business. We found a need and a purpose to incur those in the second quarter and that same type of need or purpose doesn't recur in the third.

So I think once you kind of separate those non-recurring pieces out of there we really focus on what we're seeing in terms of increased spend, whether it's salespeople, some advertising money, et cetera behind some of these markets that -- that we do see good expansion opportunities in. And that really kind of ranges from the Italys to the -- to the US to the -- to Germany and, you know, we continue to be careful with what we spend there, but we also want to make sure that we're successful in these growth markets and we put the right efforts behind our non-mobile pop up products as well.

Okay. And then just a final question, probably for you, Rick. In both the epay segment and the Money Transfer segment for modelling purposes -- is it fair to think that adjusted EBITDA should increase sequentially I think each of the last two quarters of the year?

Yes. I don't see -- I mean as Mike said and we certainly will see that in the epay segment here.

Yes.

And you know I'm confident that we're seeing a good transaction improvement in our other markets in the Money Transfer segment. So I don't see a reason at this point to believe that we would go backwards in those.

Okay. Thanks, guys.

Thank you. Our next question is from Tim Willi with Wells Fargo. Go ahead, please.

Hey thanks. Good morning. A couple questions, if I could just follow-up on that last question.

In terms of 3Q guidance, can you clarify a bit more just in terms of the drivers of the sequential EBITDA. Do you view that more as some pick up in top line from the seasonal perspective in expansion efforts more so than any kind of expense management which, I think most people would agree, was very helpful this quarter? Just to sort of feet a feel for how the story progresses as we move forward from this point.

You know, Tim, I think across each of our businesses we'll see fundamental business or volume expansion. You know, Mike commented on a number of the ATM kind of things that we signed. We'll see -- we certainly expect to see our ATM counts improve. We've got some non-ATM kind of let as call it product in there whether it's a CRM or other things that we will see add to that. We expect that we'll continue to have some -- our team will do a good job on managing expenses there.

On the epay business, I think a little bit more of that expansion will come through cost management. We need to see some of our non-telco products pick up. We did see a little bit of what we thought were some one time pressures in the second quarter, principally out of our US market where some mobile operators were light on handsets and some impacts of some of the debit card regulations that took effect in second quarter. We shouldn't see that recur. So I expect to see little better volumes come out of our pre-pay business.

The only difference on Money Transfer just on a sequential basis, keep in mind that the second quarter is always generally the best quarter in money transfer because of Mother's Day, we'll go through the quarter where there -- you know, there's good expansion, especially again in the non-US markets, but don't forget that Mother's Day is in that money transfer business in the second quarter.

So I think -- I don't think that our number coming in the third quarter is going to come from cutting expenses. It's going to come from managing -- again, managing effective growth in really all three of our segments.

Okay. And then a question just around epay. Could you talk a bit more about Sydney? I just want too make sure that I heard the description and the timeline of that correctly. You had mentioned I think more like 2012. Was that a year you threw out there?

Yes. 2012 is when the pilot begins and then the full implementation is by 2013. This is a huge deal for -- it's just a huge win for us and for partner Cubic there who actually happens to be the same people who run the London system, but they won the government bid down in the Sydney area. We are their exclusive provider or exclusive partner for cash pickup and actually it was our cash pickup locations that they believe gave them a real leg up to win the deal because they could offer not just a technological solution but a cash collection solution as well.

Yes. And do you envision anything around expenses that we should think about, you no everything during the 2011, 2012 time frames? I mean I know that's still a bit out -- out there but just sort of think about a contract of this size. What's your --

Yes, Tim. This is Kevin. We will get paid set up fees through now and 2012. Those set up fees won't be significant in terms of making a big difference in the earnings number, but it'll cover any expense related to the project.

Okay. So we're not going to have to worry about anything in 2011 related to margin pressure from ramping things up or anything like that?

No.

You know, Tim, they're just like any of the probably 300 content providers that we have right now. So it's really a wire in and that's it.

Okay. Could you talk maybe just a bit broadly about transportation. I mean it seems to be one of sort of the very identifiable areas that you've taken prepaid or easy pay to beyond telephony. Just sort of what's the pipeline activity look like? I mean does it seem like this would be a big credible win for you around transport on top of everything else you've done. And how does that look like and maybe just, Kevin, an update on other pipeline activity around the cross-border merchants platform now that you have sort of got OMV pretty well handled.

Sure. First question trust like -- just like what we saw happen in mobile telephony. Transit agencies around are looking at how to digitize tickets and to digitize a ticket and to turn it into a cards like similar to what you see in London with the Oyster card. There's got to be some way to put value on that card. And in these cash-based economies where somebody may not have a card to -- a credit card to link to the transportation card you've got to have some way to put value on it.

And that's where epay comes in with our vast network of cash collection networks. We can use those retail locations to put value on to the card. And that's what we've done in Sydney, and it's what we've also done in some other key markets. This is becoming a significant sector for us. We're working on several opportunities, and we remain optimistic about there becoming a bigger piece of our business.

With respect to OMV we are -- as Mike said we're going to finish the deployment in the third quarter and we're ramping up our activities as we speak around how we're going to approach new merchants. And that's just, Tim, to be honest just starting.

Okay. Sounds great. Thanks a lot.

Thank you. Our next question comes from Gil Luria with Wedbush Securities. Go ahead, please.

Yes, good morning.

First on money transfer it seems like the rate that you've been able to add countries recently both on the send and receive side has accelerated because of a little bit better regulatory environment. Does that mean that those very fast growth rates that you have in those international transfers can even accelerate from here as you absorb those new countries?

That's a good point.

Well, first of all, it may be a little bit of a misconception.

We've been adding -- over doubled our say points of presence for payout and pickup of cash with Money Transfer since we acquired RIA a little over three years ago. The interesting thing in this business is, you know, success breeds more success. As we become more of and international company, more successes in more corridors allows us to get more agents, more agents allows us to gets more corridor, and we've got a very good team that is out there opening up new corridors for us all the time.

Now, you are right that once you ever the corridors now it's time to go market those products now to the agents. So if we open up a brand new corridor like we recently signed a deal in Serbia, we had basically Serbia was shut down to us. We now have Serbia opened up to us so now as we bring that live this quarter -- I think it is we're bringing it live this quarter -- we need to do that commensurate with marketing and then we'll start to grow those transactions because we'll see them peel off our competitors and come to us because we've got a very good value proposition.

So you're right. As we -- as we grow you get a little bit of an acceleration there and I think you can see that we're -- we're kind of over the hump here and really have a nice critical mass outside the US to complement our US business.

Great. And then on EFT and I apologize for going back to it, but it's such a big swing factor. If you were to think about exiting 2011, at the end of 2011 when you are planning for that business what do you expect that fee to be when you are exiting 2011?

Well, just like we said before, I mean right now, I'm expecting it to be the same as it is today because I don't have any information to the contrary. I would, you know, it could change. As soon as it does, we will communicate that to you. We have been very, very transparent with this from the get go. So, I'm not sure what it would be and I -- but, you know, what at the end of the day when you own a network of ATMs, it is all the key to life is having great locations and we continue to expand our network and continue to acquire great locations whether they be at EUR9 or EUR5 or EUR5 plus the surcharge or, however, the situation may end up.

I think in the past you talked about this as being more a when than an if. Just to be clear. If -- when planning for in business for next year, you are saying there is a higher likelihood that exiting 2011 the rate will be EUR10 Euro than it will be EUR7 or EUR5.

To tell you the truth I can't tell you where the likelihood is. All I know is they have been in discussions of trying to come up with a more thoughtful approach to this market, the regulators and the banks for four years now. And they have bantered around banks by changing the interchange fee, limiting the interchange fee, and adding surcharge and so forth. Kevin was just over there a half week so he can add a little.

This is Kevin. I went over there two weeks ago and I spent -- I don't normally do this, I normally go to all different countries. I spent nearly a full week just in Germany speaking to banks, speaking to customers trying to figure out -- speaking to regulators trying to figure out where this is going because I knew you guys were all going to ask this question. And my conclusion is nobody knows. It truly is one of those situations where there is so many different parties with so many different agendas all wanting different things that we just can't handicap this. We didn't know where it's going.

And I think because there are so many, that is the reason why nothing's changed. I mean what you have got is a lot -- you have got kind of a disarray of nobody with enough political clout to cause things to happen absolutely one way or another other than right now it is status quo.

The only other thing I would add to that is that any time you go through some type of a significant dynamic change and let's just assume that this rate could be a significant dynamic change it then presents a whole new opportunity to deal with other banks in terms of how we might utilize our network of 600 ATMs. As Mike said, our ATMs are some of the best positioned ATMs outside of the branch network. We know that banks very highly value those. When you are in a proposition of something like EUR10, the dynamics are quite different than if you are at a lower per transaction proposition. There is a number of other alternatives that will present themselves if there is a change in the rate structure such that we could more effectively utilize this network of ATMs that we have.

So, I think kind of answering that question in a kind of a sterile environment is a bit difficult because you have to take into account the other types of things happening there. And clearly as we learn more about this and no more about being able to see exactly what happens in the market, you know, we will let you know. I reflect on this now and it has been about a year since we have been talking about this. So, we have taken a fairly conservative approach to make sure that we let people know what, you know, is out there. And, you know, a year ago, we started talking about it. Well, it as year later and we are still talking about it. And as Mike said, you know, there is nothing that is imminent. We will have to see, it might be a year from now and we are still talking about it. But again, the dynamics of the market I think will change sufficiently if there is a rate change to that magnitude that will present us with yet some more interesting opportunities

Got it. And then finally on epay, you are talking about the economic impact and I'm trying to understand what the mechanism is for a slow recovery in a country like Australia on the activity, on the revenue there? I understand one of the things you talked about is phone providers being more aggressive but isn't that more a sign of competition in a crowding marketplace than it is of a slow economy? How is the slow economy mechanically translating these low revenue rates?

When you have a slow economy, actually the mobile operators get a little more competitive. And there has also been a few regulatory changes in Europe on top of this and it is just causing these operators to offer better deals, basically more talking per dollar. And, what that -- and there is only a certain amount of hours you can yak on the phone a day and if you end up getting those hours for less money than you are used to on average your ARPU goes down and we get less money.

I would like to add as we look at this more medium to long-term, the big changes really happened in mobile telephony over the last year has been the advent of these data phones at a very low price point. This has certainly shook the ARPU numbers in the US much to our benefit. The average ARPU is going up every single month in prepay in the US and it is because of these all you can eat data plans that are being offered now to customers who can afford a data phone when you remember when BlackBerrys and iPhones and all those guys -- when they first came out, they were $400 or $500 or $600 a pop. If you are a prepay customer you probably don't have $600 in your pocket. Now, if you can buy a data phone for $150 or $200 a that means anybody can afford them. What the mobile operators here have done and you have seen it with MetroPCS, with Cricket, with Boost and now with others now trying to clone this is they now all have the $50 all you can eat plan. That same customer used to be a text only guy and was spending maybe $30 in ARPU. Well, now he's happy to pay $50 using more of his wallet share on the phone because he has a phone that acts as the internet, gives all his baseball scores and all of the other information he has. And so that now has translated into big wins for us in this market and will for others as well.

While we see the client economy causing voice to be more competitive, I think as the mobile operators realize where this -- where data is going and these things are becoming available overseas with all the Android phones and so forth we could see our ARPUs turn back around.

I got it.

Probably needed to take another one or so calls and then we will need to break for the day because we are getting close to the top of the hour and I appreciate everybody's help. Operator?

Our next question is Greg Smith with Duncan Williams. Go ahead, please.

Yes, hi, guys. The ATMs that came out of the pipeline. Can you give us color how that was spread geographically and the number of banks involved?

It was about two thirds in India and a third in eastern Europe. And number of banks I would put in, you know, kind of the category of three or four.

Okay. Thank you. And then OMV did a deal with Western Union on the money transfer side. Seems like you guys might have been a logical partner there. Any color on that -- why that might have been a missed opportunity for you guys?

Yes. I mean the fact of the matter is at this point in time to the countries when you see where those countries are, a lot of them surround Turkey we don't yet have Turkey as a payout corridor for us. That is probably kind of our missing link last in our RIA offering. And so they reluctantly went with a competitor they told us to do money transfer for them. But they have also added for us that this is a non-exclusive agreement. So we -- as we continue to build our payout networks, you know, we will go back to them. We are connected to every one of their POS terminals as we speak and providing them a lot of good services so who knows what may happen in the future.

Okay, good. Rick, just the guidance. That is based on FX rates essentially as of today, right? I just want to be clear on that.

That's correct. That's how we work it.

Okay.

Technically it might have been a few days ago.

Yes, okay. So you weren't up late last night.

No. Well, I was the night before last, if you really want to get down to it.

Got it. Then just one last one. What percentage of the EFT revenues or profits are coming from India today?

The percentage of EFT profits coming from India today or all of Asia?

Or revenues -- just some way to --

Profit is 15%.

Okay. And then obviously you have Cashnet plus you are doing additional ATM outsourcing.

Absolutely.

Above and beyond --

500 ATMs or so, between 2,000 and 2500 ATMs in India that we outsource for banks.

Perfect. That's all I had. Thank you.

Thank you.

Operator, we are probably out of time so I would like to thank everyone for taking your time on the call today. We appreciate your interest and look forward to talking to you in about 90 days. Thank you very much.

Ladies and gentlemen, thank you for your participation. That concludes the conference. You may disconnect. And have a wonderful day.