Euronet Worldwide Inc (EEFT) 2010 Q3 法說會逐字稿

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Later we'll conduct a Question and Answer Session, and instructions will be given at that time.

(Operator Instructions)

As a reminder, this conference is being recorded.

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

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

Thank you, Mr.

Newman, you may begin.

Thank you.

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

We'll present our results for the third 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.

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, and our 10-Q for the period ended June 30, 2010.

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 updates.

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

Yes, Jeff, thank you, and welcome, everyone.

For the third quarter of 2010, the Company delivered revenue of $260 million, operating income of $20.3 million, and adjusted EBITDA of $37 million.

Our cash EPS came in at $0.34 a share, which exceeded our guidance of $0.33 a share.

As many of you know, in the closing days of the quarter, several of the foreign currencies began to strengthen against the US Dollar, but very little of that strength showed-up in the results, because the FX rates for the P&L are based on averages for the quarter rather than the end of the period.

Net-net, when compared to our guidance of $0.33 provided in late July, FX rates contributed less than $0.005.

Moreover, in the third quarter, we recorded additional tax expense related to Greece's announced tax programs; this amounted to about $0.005 as well, in essence, cancelling the benefit of the FX rates.

Netting these two impacts, you can see then that we produced better-than-expected operating results.

I will discuss the financial results in further detail as I get to the segment reporting.

If we now move to slide number six, on slide six, you can see quarter-over-quarter transaction growth.

All segments posted transaction growth over the same period last year.

Transactions increased in the EFT and Epay segments by 6% and 17%, respectively.

The EFT segment realized significant growth in transactions from India and the expanded OMV rollout this past year.

Epay transaction growth was driven by increased mobile pop-up processing in the Middle East and India, solid growth in Germany, and the September 1 Brazilian prepaid acquisition, hereinafter referred to as Epay Brazil.

Now, to slide seven.

In the third quarter, we had processed approximately 4.8 million transfers.

This represents transaction growth of approximately 7% year-over-year.

This growth is largely attributable to increased transfers originating outside the US.

That being said, we also experienced transaction growth in every market over the prior-year same quarter, further illustrating the positive momentum generated across the entire Money Transfer segment, including the United States.

It's encouraging to see the momentum turn in our favor.

Let's turn to slide eight.

Slide eight includes a review of the segment's third quarter results compared -- reported third quarter results compared to last year.

For the third quarter comparison to the prior-year, FX rate fluctuations had a pretty sizable impact on consolidated results.

The impact was more concentrated in the EFT segment, with marginal net impact on the Epay and Money Transfer segments.

We have included, on the next slide, the results adjusted for FX rate changes, which provide a better picture of the business changes period-over-period.

As such, we will focus our discussion of segment results relative to FX-adjusted amounts on the next slide.

Next slide, slide nine, please.

As you can see here on slide nine, when comparing to reported results on the previous slide, FX-adjusted results for the third quarter 2010 were favorable to corresponding reported amounts.

This favorability is due to weaker foreign currencies during the third quarter 2010, versus the prior year on a weighted-average basis.

As I mentioned earlier, we feel an FX-adjusted comparison of our results provides a better picture of the changes in our business.

So now, let me hit the highlights for each segment.

EFT revenues increased by 2%; operating income and adjusted EBITDA decreased by 7% and 2%, respectively.

These margin declines were principally driven by the negative rate impact of the interchange fee reduction in Poland, announced in April.

Excluding the impact of the reduced interchange fees, the EFT segments op-income and EBITDA growth rates would have been consistent with the prior -- with the year-over-year revenue growth rate.

Moreover, the EFT segment's operating margin this quarter came in at 22%, which compares quite favorably to the second quarter operating margins of 18%, a nice sequential improvement.

The EFT team did this by managing costs, installing more ATMs, signing new agreements, and providing more value-added services to our customers or through our ATMs.

Epay revenues declined by 3%; operating income and adjusted EBITDA declined by 11% and 6%, respectively.

The decrease in revenue is primarily due to lower volumes in the UK, offset by growth in Germany.

The significant growth in Epay transactions I referred to earlier contributed to increased gross profit, but not to -- but did not translate into higher revenue per transaction, as the majority of transaction growth occurred in markets where we receive a transaction processing fee, rather than a distribution commission, such as the Middle East and India.

The Epay segment increased both its gross profits and gross margins year-over-year, as a result of both mobile and non-mobile contributions.

Operating income declined year-over-year as a result of increased SG&A expense; most notably, bad debt, professional fees, and sales and marketing costs to support growth markets.

Despite the year-over-year increased SG&A cost; sequentially, the Epay segment's operating margins expanded from approximately 7% to approximately 8%.

Briefly, I also point out that we did have one month of results in the third quarter from our September 1 acquisition of Epay Brazil, but the operating benefits of this acquisition were offset by the recognition this quarter of deal-related costs, which you might recall effective January 1 of 2009, GAAP now requires current period expensing of deal costs rather than capitalizing it with the purchase price.

We disclosed in our announcement of the Brazilian acquisition that we expected cash EPS to benefit by approximately $0.06 annually, which we continue to believe.

Mike will provide additional comments on our Brazilian market entry in a few minutes.

Money Transfer; revenues grew by 9%, operating income and EBITDA increased by 46% and 15%, respectively.

The Money Transfer segment benefited from RIA's global expansion in new markets and payout corridors.

We continued to record solid recurring profits from geographic and product diversification, within the segment.

Money Transfer's gross margins remained relatively constant, both year-over-year and sequentially.

Operating margin improved nicely year-over-year from approximately 4% to approximately 6%, with similar increases in EBITDA margins.

Sequentially, operating margins relaxed from approximately -- sequentially, operating margins relaxed from approximately 7% to approximately 6%, reflecting the seasonal Q2 Mother's Day traffic and expenses supporting [growth] markets.

I think this quarter illustrates the benefits of good blocking and tackling of our Money Transfer team over the last 12 to 18 months in this difficult economy.

Now, let's move to a few comments regarding our balance sheet on slide number 10.

From a sequential quarter perspective, the significant changes in the balance sheet were primarily attributable to the acquisition of Epay Brazil.

This acquisition was financed using cash on the balance sheet, at the time of acquisition.

As referred to in previous calls, there are no debt obligations coming due in the near term.

Our revolver term runs through April of 2012.

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

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

One final comment before I hand it over to Mike.

As you may have noticed in our income statement, we reported a gain on the settlement of a dispute.

This dispute related to a prior-year acquisition.

When we recorded the original amounts, we included these estimates in the purchase accounting.

Now, new accounting -- under new accounting, when you settle such acquisition estimates, you have to take any favorable or unfavorable difference to the P&L, which is what we did.

It should be noted that this settlement was a non-cash gain.

So while it is in our cash EPS calculation -- it is in our GAAP EPS calculation, we did not include it in our cash EPS calculation.

That concludes my remarks.

I'll turn it over to Mike.

Thank you for your time.

Thank you, Rick.

I'd like to welcome all of you out there who have joined us either on this call directly or over the Web.

As have you seen in our press release, and the results Rick just reviewed, we exceeded our guidance of $0.33 on a reported and FX-adjusted basis.

I am pleased with our third quarter results, particularly the improvement in the Money Transfer business over the prior year, as well as the efforts of the EFT segment to minimize the impact of the reduced interchange fees in Poland.

While I'm disappointed in the declines of the Epay segment op-income line, I am encouraged by the increased gross profits, expanded sequential operating margins, and by the growth prospects for the segment from the new agreements reached for mobile and non-mobile products, as well of course, as the entrance into our new high-growth market through the acquisition of Epay Brazil.

As I believe the FX-adjusted results provide a clearer picture of business changes, I will be referring to the FX-adjusted results when discussing each segment's third quarter results as compared to prior-year.

With that said, let's get started with our highlights on slide number 13.

Here we are in our EFT Processing segment.

The FX-adjusted revenues increased 2%, adjusted op-income and adjusted EBITDA declined year-over-year by 7% and 2%, respectively.

The decline in revenue and op-profit was, for the most part, due to the decreased Poland interchange fees we announced last April, and Rick talked about here previously.

This impact was partially offset by value-added services introduced, or expanded in various countries.

Further, as Rick mentioned previously, if not for the interchange reduction, the EFT segment's operating income would have improved year-over-year, consistent with the revenue growth.

Move on please to slide number 14.

Here on slide 14, we present a number of our highlights from the EFT segment.

The EFT team was successful in expanding and extending network participation agreements as evidenced by our first NCA with Citibank in Romania, and we've also renewed network participation agreements with Polbank and LUKAS banks in Poland; these renewed agreements are two of the larger banks in Poland and represent a sign of our continued strong value offering in Poland.

Additionally, we signed agreements with Development Credit Bank and Barclays in India to outsource a total of an additional 155 more ATMs.

If we move now, please, to slide number 15.

In the third quarter, we completed the OMV rollout of Germany, and are in the midst of rolling out Serbia and Romania, leaving two small countries, Slovakia and Bulgaria, to be rolled-out.

As of September 30, the project is about 90% complete in terms of locations rolled-out.

We continue to explore several opportunities to generate profits in this arrangement.

As you may have read, OMV increased their share in Petrol Ofisi, a leading petrol chain in Turkey to 95.75%, and thereby taking full control of that company.

Petrol Ofisi has over 2,500 filling stations in Turkey, and an additional 445 in Austria, which will more than double OMV's existing locations.

Based on our discussions with OMV, we expect them to continue their cross-border strategy.

This is a nice opportunity for us to provide OMV additional value-added services through a single platform, and we would expect it to take about 12 to 18 months to sort through the requirements before we bring this opportunity live.

We continue to benefit from the higher German transaction fee on national debit cards in the third quarter and expect that fee to remain unchanged in the fourth quarter.

However, you may recall that we have cautioned in previous calls that we expected that this benefit may end at some point.

It appears likely now that in the first quarter of 2011, the current InterBank charge structure will shift to an uncapped market-driven surcharge structure, much like the US.

Under this scheme, we anticipate surcharge rates considerably lower than our current InterBank rates, and accordingly, we anticipate that the EFT segment's revenue and op-income will be reduced by approximately $2.5 million per quarter, which will result in an after-tax impact of approximately $1.7 million, or $0.03 per share per quarter, which is consistent with the numbers that we have disclosed previously.

In India, we continued to expand our ATM footprint by rolling out 138 ATMs in the third quarter, which is an increase of nearly 400 ATMs since last year.

The ATM backlog remained relatively constant.

So now, let's move on to slide number 16, and I'll continue my comments.

In addition to signing new agreements and renewing agreements with our core offering, the EFT team has identified exciting growth opportunities through value-added services and other product offerings.

Third quarter highlights include agreements for value-added services with Pekao in Poland, [Bal] Bank in Germany, and GE Money Bank in the Czech Republic.

We also entered into an agreement with BCR.

This is Erste Bank in Romania, for 17,000 POS terminals for mobile pop-up, which is an arrangement that will benefit both our EFT and Epay segments.

In China, we completed the [Cartelis] bill payment project and cash recycling modifications for China Postal.

Finally, our Software team has signed-up new clients and expanded services with existing customers, some of which are mentioned here on slide number 16, including a pilot of Euronet's next generation mobile banking solution.

In closing, I would like to point out the solid effort by the EFT team to take action to overcome some of the formidable challenges; good job by the EFT team, thank you.

With that said, let's move on to slide number 18 and talk about Epay.

For the Epay segment, FX-adjusted revenues, operating income, and adjusted EBITDA declined by 3%, 11%, and 6% respectively, year-over-year.

As mentioned earlier, the FX-adjusted results for the Epay and Money Transfer segments were not significantly different than the reported results on a net basis.

I think Rick sufficiently explained the financial results earlier, so with that being said, I'll start with the highlights on the following slide.

Here on slide number 19, I'd like to begin by highlighting the acquisition of Epay Brazil completed on September 1.

This acquisition provides us entry into the high-growth Brazilian market, which happens to be the largest market in South America.

We currently provide mobile prepaid products and have agreements with all mobile operators in Brazil, and we are also exploring opportunities to expand into non-mobile products.

In addition to our Brazilian entry, we have continued to strengthen our mobile prepaid offering as evidenced by the expanded locations, through agreements with two large retailers, one in Italy, one in Spain.

And in addition, we have made processing agreements for top-up with two mobile virtual network operators, MVNOs in Australia, and the second one in Spain.

Please move on now to slide number 20.

As I have mentioned before, expansion of our non-mobile Prepaid portfolio is an area of focus and growing the Epay segment.

Here on slide 20, you will see an overview of the third quarter highlights in this area.

I won't go extensively into each of these, but I'll hit a few highlights for you.

In Australia, we obtained distribution agreements with Microsoft to provide MS Office and Xbox.

We also obtained an exclusive agreement with Jamster, a mobile entertainment provider.

In France, we expanded our Prepaid portfolio with Carrefour, the large retailer beyond mobile pop-up, to include closed-loop gift cards and other prepaid products.

We obtained a three-year extension of an exclusive 14 country agreement with Media-Saturn-Holding, the largest electronics retailer in Europe to provide iTunes and mobile pop-up.

Here in the US, we have launched an Epay-branded open-loop gift card, and we've also signed agreements with four gift box providers in Italy and three gift box providers in Germany.

You may recall from the second quarter call that I mentioned this unique idea taking-hold in Europe regarding prepaid experience packages, which they call gift boxes.

In summary, I am encouraged by the opportunities in the Epay segment through our entry into Brazil, as well as the expansion of the non-mobile portfolio from both a distribution and point-of-sale standpoint.

Now, let's flip through slide number 22, and we'll talk about Money Transfer for a few minutes.

In the Money Transfer segment, FX-adjusted revenues, op- income, and adjusted EBITDA increased by 9%, 46%, and 15%, respectively.

I'm very pleased by the continued progress being made in the Money Transfer business, largely attributable to the momentum from our expansion efforts of more agents, more payout locations, and more markets.

Please move on to slide number 23.

I was also pleased to see the growth in transactions across all markets here in Money Transfer for the third quarter, compared to the prior year.

We continued the expansion of our network internationally on the send side, via EU's payment services directive.

You'll also note our network expanded by 29% over the prior year to approximately 105,000 locations representing 130 payout countries.

In the third quarter of 2010, we launched enhanced payout services in key countries, including Jamaica, Ukraine, Bosnia, Senegal, and Guatemala.

Additionally, we have 23 new pay correspondents in 47 countries with 5,800 locations that are pending additions to our network, and anticipated to be brought live in the fourth quarter.

While we have continued to see declines in overall transfers to Mexico over prior-year, we have seen improvement over the last four sequential quarters with this corridor.

If you'll move on now to slide number 24, you can see that we've signed agreements with two large retailers in the third quarter, which will greatly expand our network on the send side.

RIA signed a long-term agreement with 7-Eleven to offer money transfer and bill payment services through an integrated point-of-sale solution from approximately 6,000 conveniently-located 7-Eleven stores in the US.

This agreement nearly doubles RIA's US distribution network and provides RIA with a globally-recognized retail brand to nationally promote RIA's services throughout the US.

Services under this agreement are expected to be rolled-out in the first quarter of 2011.

We also signed a long-term agreement with Cash Store Financial, to supply money transfer services in Canada, and we have already begun facilitating transfers during the quarter.

This partnership with Cash Store Financial and RIA will enable both of us to accelerate the expansion of our Money Transfer customer base and grow related revenues by providing access to Canadian markets, which were restricted under Cash Store Financial's previous processor.

As you can see, we have been successful in expanding our network on both the send and receive side, and in new countries, which I believe has contributed to the significant growth you've seen in the Money Transfer segment this quarter.

I am highly encouraged by the growth trajectory of the Money Transfer segment, as our existing network becomes more established in its markets.

Combined with the expected impact from the new long-term agreements and pending launches of additional correspondent locations, I'm very excited.

Let's go to slide number 25 for some summary remarks on the quarter.

For the third quarter, adjusted cash EPS of $0.34, that beat the guidance of $0.33 that we gave you last quarter.

We were pleased to see transaction growth across all segments.

Money Transfer did a great job delivering solid results again this quarter with exciting growth prospects for the future from recent agreements signed with large retailers, as well as pending launches with correspondents.

The EFT segment has shown strong leadership in attaining growth from value-added services across various markets, as well as renewing and adding key network participation agreements for our core ATM business.

We continue to expect higher German exchange fees on debit card transactions through the fourth quarter of 2010; however, we expect reductions looking out into the first quarter.

We are excited by the growth prospects of Epay Brazil, which positions us very well to deliver a variety of Euronet's products in Brazil's very high-growth market.

Additionally, we continue to focus on diversifying our Prepaid product portfolio as a growth strategy for the Epay segment.

We expect our fourth quarter cash EPS to be $0.39 a share, assuming foreign exchange rates remain relatively constant throughout the quarter.

This concludes our presentation, and now we'd be happy to take questions.

Operator, would you please assist.

(Operator Instructions) Our first question is from Greg Smith with Duncan Williams.

Your question, please?

Yes, hi, good morning, guys.

Good morning, Greg.

Can you, I guess, Rick, first, can you -- what's the positive FX impact to the 4Q guidance relative to 3Q?

You typically have been able to quantify that.

Is that something that you can give?

It's in the couple penny range.

Couple pennies?

Okay.

And then what about the tax rate assumption for 4Q?

I think it would largely remain the same.

I mean, in that kind of 30% range.

Okay.

Perfect.

And then, it looked like cash net in India, the transactions didn't grow much year-over-year sequentially.

What is going on with cash net from a transaction standpoint?

I think we've had several big jump-ups in the transaction rates over the last couple of years, but it did remain relatively stable quarter-to-quarter, and since last year this time.

You know, we're still working on trying to add more banks to this, and of course, the big benefit that we will see with cash net is the fact that the number of ATM's in those markets continues to expand at a break-neck pace.

I mean depending on who you believe and what you read, I mean, Kevin has probably got the numbers directly, but it is like the markets are expecting, over the next three or four years, to double the number of ATMs in India.

So, if we just kind of hang on to the current customers that we have, we're kind of looking forward to some growth markets.

You saw some jump-ups over the last couple of years for a couple of reasons.

One, is adding a new bank here and there.

And the second, is some of the positive regulatory changes that Reserve Bank of India has done.

So you saw more of a step function.

But I think what you will see now, unless we nail another new bank, is more of a gradual increase as the number of ATM's and, therefore, the number of transactions improve.

Okay.

And then in Germany, I guess before, you've talked about the potential for transactions to increase at your ATMs, depending on kind of how the market structure played out.

So given that, it seems like have you more visibility on how it plays out.

Is there any opportunity to sort of do better -- you're obviously saying, you know, it is going to hit you maybe $0.12 in 2011, but is there any potential upside depending on things you can do, or new agreements, anything along those lines?

We actually do have -- still, we have an aggressive expansion plan for Germany.

When we made these -- this estimate for the first quarter, which will go into the other quarters next year, we assumed similar quantities of transactions at a different price.

Using the surcharge model.

Because that is all we really can do, to be kind of conservative and thoughtful at this point.

What we are doing though is we are finding new locations that are underserved in that market.

This is a market where it is a really unique market, when you think of a market as well developed as Germany, with so many debit cards and credit cards, the reality is there are very few off branch ATMs located in convenient locations.

So, we just see the market for what we offer in our solution there to -- to still offer us more opportunities, so we will grow our network as time goes on.

And, that will get our transactions up, obviously.

And, where do you get the visibility as to where you think the surcharge rates will be?

Well, to be frank, that is a little bit of a guess, but our expectation is, for the longest time, until the recent high interchange fees over the last 18 months, it was at an interchange fee at around EUR4 to EUR5.

So, what we are kind of looking at is we kind of made that assumption as we go forward, and we will kind of see how things go.

The nice thing is, I think, we can modify what we charge based upon the quality of the location.

And so, we've got a lot more flexibility than say a typical bank.

Kevin, do you have something to add?

You were just over there.

Some of the banking groups have already announced what they're going to do, and that's given us some guidance about where we're going to be positioned.

So, we at this point, we feel pretty confident about what our strategy is going to be, which we haven't announced to the market, with some degree of confidence that it will be -- we will be able to hold that.

Great, Thanks, guys.

Thank you.

Our next question is from Robert Napoli with Piper Jaffray.

Your question, please.

Good morning.

Good morning, Bob.

How are you guys?

Good.

A question on the $0.39 in the fourth quarter, just to follow up on that, so the $0.34 this quarter, $0.39 next quarter, and you get a full quarter from Brazil, so maybe that is a penny, versus the third quarter, you get about $0.02 from currency, is that about right?

And then $0.02 from operating improvement?

Yes, I wouldn't be as strong as the penny on Brazil, that business is growing, but I think you're directionally correct.

Remember, Bob, what we said is -- we said $0.06 for next year in Brazil.

Right.

So then, what is the difference?

The difference is where are you getting -- I mean that is a pretty strong number for the fourth quarter.

Obviously, you're going to be hit by Germany in the first quarter, but is there anything unusual in that $0.39?

No, I don't think -- there is nothing unusual in there, Bob.

But do recall that our fourth quarter is typically our stronger quarter.

Right.

And so you know, we get a little bit of seasonal lift from either increased transactions, in really kind of all three of our businesses, in EFT, prepaid, and money transfers.

So you know, it is -- let's just say good solid performance together with some lift of seasonality.

We've got a good strong base of business, Bob.

And, it just is growing quarter-over-quarter.

You know, on a sequential basis.

The only thing that slowed us down this year was Poland interchange issue.

Are there any other significant pricing risks in your model?

I mean obviously Poland and Germany were two major moves and you've had some pricing pressures broadly I think in your e-pay segment, but --

We certainly don't have anything to the extent of those two.

Those two are the -- are probably our largest potential negatives, and unfortunately, they both hit in the same year.

So you know, we're down to there is always things out there, but none to the level of these guys.

And I think, Bob, as we've said before, we believe that generally this business, as well as most businesses, have always to be managing, the pricing world, the margin world.

Because that's just part of the competitive game.

And so you know, I suspect that there will be some matters like that, that we will deal with, just like we have over the past year.

But you can see from our business, particularly let's just point out EFT here, where it was a fairly substantial change on the price front, but yet our EFT team was pretty -- was pretty good at finding other ways to make up for that.

Thanks.

It is just great to have the geographical and product diversification that we've got, because you know, we don't have any more $0.03 a share quarter kind of issues.

I mean, we don't even have those kind of revenues out there any more in a concentrated form.

Just, the last question.

You haven't talked much about China.

You've added some ATMs.

What is going on in that market?

Is that still -- is that still a good opportunity for you?

Or are you finding it more challenging as a nondomestic-based company to make a lot of hay in that market?

This is Kevin.

It has been disappointing.

We had higher expectations.

It has been slow.

On a positive point, is our strategy to focus at the province level, it is starting to produce some fruit and some movement.

I was, frankly, expecting more deployments in the third quarter than we achieved, which was a little bit disappointing, but the pipeline continues to grow and look good.

It is just very, very difficult to get things closed there.

I guess the other development that started to happen here, this past quarter, is while our concentration is primarily only been China postal, for the last couple of years; we are finding some interest of some other potential partners and some other pieces of business.

The early stages, at this point in time, but we are trying to figure out how to diversify beyond postal.

Thank you.

Thank you.

Our next question is from Tim Willi with Wells Fargo.

Your question, please.

Thank you.

And good morning.

A couple of questions.

First, just going back to your comments about OMV, two things.

Number one, where do you think, with the contract as it currently, stands the likelihood of maybe moving it closer to break-even exists?

Are you finding, in terms of the cross-selling opportunities, or operationally, that you are actually maybe able to move that closer to break-even than you might have thought, even a couple of quarters ago.

Well, this is Kevin.

I will take a shot at it and I will let Rick comment, additionally.

Right now, it is forecasted with a loss going into next year.

As we've said, over and over again, we need another contract to really pass through the break-even point.

We are working the cost side of things, to try to figure out if we can renegotiate some of the contracts, subcontracts that we have, to be at a break-even point.

But at this point in time, it is not forecasted in that way.

And the second thing, is we're now out actively talking -- historically, I've told you that all of our focus has been on delivering OMV.

This last quarter, we have started to venture out and start to talk to other potential players in the market that might be interested in a similar solution.

Okay.

And my second question, around OMV was what Mike had talked about with their effective takeover of another petroleum company.

You know, when you think about the comment you made around the second customer needed to get through break-even, it would seem that this would essentially accomplish that, even though it might be 12 to 18 months.

I guess, I just wanted to gauge confidence that --

That's correct.

So, even if we're not successful in selling brand new logos, you have a reasonably high level of confidence that this merger with OMV and the Turkish petroleum chain.

You're going to end up getting the POS sort of cross-border infrastructure play, that will move this operation into the black, eventually?

Correct.

And even better than into -- into the black kind of sounds like we barely made it, you know.

The reality is we're not so far off right now.

Where we're looking at next year, we haven't got the extra cost savings in there but looking at losing about $1 million kind of pre-tax on that a year, right now.

But I tell you that the Turkish deal, if it was rolled out commensurate with the financials of our current ones, I mean that is going to throw us way into the black.

So --

It is a big enough deal.

And the OMV model is just like all the rest of our business.

It is a high fixed cost, and as soon as you get that next deal, the profitability looks good.

So, to recap what Mike said, pre-tax (inaudible), we were forecasting about $1 million loss next year.

If we can roll out Turkey, it will significantly change those economics.

Okay.

Will there be any kind of interim period during that kind of conversion where we would actually see expenses ramp up and maybe margins come under a bit of pressure?

Give me -- let me delay that.

Let me give you more into it -- I will give you some feel for it, but I'm not far enough into it to be able to give you -- but it wouldn't be appreciable.

Especially given that it is OMV and it is on the same platform.

Whatever expense would be associated with it would be minimal.

Okay.

And then the last question I had, and I will get back in queue, was just on money transfer.

First of all, was the 7-11 -- I'm assuming that was a competitive take-away?

I can't imagine that they have not been offering money transfer services in the US?

Actually, it wasn't exactly.

Not exactly, Tim.

Some of the stores had some different flavors out there of money transfer that has processed with them previously.

I think it is fair to say that as a 7-11 entity, they weren't pleased with what they saw in terms of execution of whatever those other flavors were.

And we provided them with a different approach, and a different way of trying to process money transfers through the convenience channel.

Okay.

And then, last question on money transfer, given sort of the trends that are emerging around transaction growth, sort of how you're managing the G&A expense structure.

If we were to have transaction growth metrics sort of continue to progress as they are, is it a logical assumption that we would expect to see continued margin expansion in this business?

Is there any reason not to think that could happen over the next several quarters as we're thinking about our models and transaction growth rates?

Tim, I would say absolutely on a dollar amount, absolute dollar amount, on a percentage of revenue amount, you know, that may be a little bit like -- for example, in this quarter here, on a sequential quarter, we went down a little bit.

As I explained.

Because of one, the seasonal impacts of Mother's Day, together with some expansion costs, in some of those markets.

But again, in absolute dollars, those numbers increased and on a year-over-year basis our margins increased.

So, I do expect to see those profits expand as we continue to add more business and leverage our cost structure.

Excellent.

And you know, when Rick, just to clarify, Mother's Day is the busiest week of the year for any money transfer company.

So, quantities go way up.

Fixed costs stay the same.

So that -- and that's why the margins for Q2 were just marginally better than Q3.

So, you would imagine that if the economy starts to get a little bit better on track, and we start to see some of these numbers change, like we're starting to see around the world, that is going to -- as you describe, pretty much fall straight to that margin line.

Okay.

Great.

Thank you.

Thank you.

Our next question is from Chris Shutler with William Blair and Company.

Your question, please?

Hi, guys.

Good morning.

Hi, Chris.

So on Poland, I just wanted to come back to this.

With the change in the interchange that happened back in April, can you maybe give us a quick update on what you're seeing from a bank outsourcing appetite perspective?

And then, maybe you could just generally talk about the competitive environment with some of your competitors that earn most of their revenue from interchange in that market, just what you're seeing from those folks.

With respect to outsourcing, because of this change in inter -- this interchange change, the banks were really hit by this, not just us.

So the larger banks got really whacked by the same -- I mean we were -- we did a rough back of the envelope calculation, and assume that $70 million to $80 million worth of interchange revenue to the large deployers evaporated overnight.

So, this caused these banks to do two things.

One, it kind of made them nervous to do anything.

But, at the second time they did start, they are having conversations with us to now try to figure out how to get them out of the hole.

We haven't closed any yet, other than the agreement that we did do with our network participation agreements.

We continue to look for them.

With respect to our competitors, we really only have kind of like one tiny competitor in the marketplace.

And now, that company is up for sale because it's financially upside down.

It was just barely hanging in there before, and then when you whack the exchange rate, or the interchange rates as much, I mean these guys got to be just bleeding really bad, and that's to our advantage.

So, we're just attacking them while they're down.

Okay.

And then maybe a follow-on question then, just what is your update, what is your appetite for acquisitions at this point, given that you just completed the TV deal?

Well, that TV deal was a creative deal right out of the blocks.

And we've got a lot of cash on the balance sheet and we're throwing off $60 million, $70 million of the cash a year, and we're going to keep doing them, as long as we can, we can get a fast ROI to our shareholder, like we did with that last one.

Okay.

Thanks.

Unfortunately, Chris, that is the first darn acquisition we've done of any size in like three years.

So, it isn't like -- you know, it is like all I can do is frigging window shop because nobody will open the door for us to let us get in to buy anything.

I mean -- everything is either not for sale or too high priced to make sense for us, and we're kind of cheap, so we're careful.

Okay.

And then Mike, could you just kind of -- this is the first time we've spoke in a public forum about -- since the TV deal, could you maybe, just quickly go over the strategy for that rollout over the next several years.

And then as we look at 2011, obviously, you laid out the $0.06 cash EPS benefit but what should we be looking from a revenue gross standpoint for that business in 2011?

When you look at Brazil, you got to get a smile on your face.

I mean, that is one of the fastest growing economies in the whole world.

It is one of the largest population centers in the whole world.

And they haven't even got to 100% electronic yet.

They're still doing some scratch cards.

Some electronics.

About a third of it is still scratch cards.

As far as their market down there, it is generally a relatively poor country, so 80% of their mobile phones are pre-paid phones.

It has grown its transactions over the last several years in excess of 20%, 20% compounded.

The face value of that market is $9 billion.

That's the same size as the US, today.

And slightly bigger than the UK.

One of our largest markets.

So being in -- and the company that we bought was capital constrained.

So actually, they didn't grow as fast as they could have, had they had just a little bit of cash to spend on terminals and expansion.

So we kind of look at it as we're in the right place at the right time with the right product and the right balance sheet.

I would add to that, we do see Brazil as being an important gateway to South America.

There are -- South America, as a whole, is predominantly a pre-paid market.

And, you asked about acquisitions.

I mean, we've seen things down there over the years, it is just a matter of having the right fit.

But getting through the front door of Brazil is probably an important move.

And you've got the World Cup coming in 2014.

And the Olympics in 2016.

So you got some major events that are going to happen.

And you asked about long term, and you have some major, major events being held in Brazil, and the business we bought has almost no nonmobile content in it.

So the idea is to take our nonmobile content, some of our key contracts that we've got.

All of those product companies want to expand in South America, so it is a launching point for us to expand our nonmobile products, not only in Brazil but across South America.

Okay.

And then just could you address the $0.06 cash EPS impact.

What is the corresponding revenue number?

We haven't disclosed that.

Fair to think that that growth rate that business has seen in the last couple of years will continue?

We would expect that to have a good strong growth rate, yes.

Okay.

Thank you.

Thank you.

Our next question is from Robert Dodd with Morgan Keegan.

Your question, please.

Going back to the -- (Inaudible)

Hey, Robert, you're cutting out a little bit.

Can you get a little closer to the --

Sorry, can you hear me now?

Yes.

I feel like a Verizon commercial.

If we can go back to the seasonality of earnings, $0.39 in the fourth quarter.

In prior years, you have seen -- I'm just trying to get some color here, $0.03 to $0.04 seasonal uptick in the fourth quarter versus the third.

And then if you get a penny or two from currency, that is kind of the $0.04 to $0.06, and you're basically guiding to a $0.05 increase.

Is that kind of the right direction, the right way to look at it?

Normal seasonality plus currency?

Nothing funny going on?

Well they're the exactly the same thing that I said to Mr.

Napoli.

Nothing unusual in it.

I think your math is directionally consistent with his.

Just, the seasonal numbers in Poland are now damperred a bit by the smaller interchange.

So you don't get quite -- we won't see quite the revenue improvement in a cents basis this year as we did last year just because of the Poland interchange change.

Exactly, and that was kind of the second part of the question.

In future periods, obviously Q4 to Q1, Germany comes out.

So, we should see a steeper than normal seasonal decline.

Would you say, it be fair to say future Q3 to Q4's you will have a more shallow seasonal uptick.

And I know you don't want to give guidance for Q3 to Q4 '11 yet, but we should be looking at all other things being equal, the 3 to 4, it should be something less than that in the future?

Yes, well Robert, we're getting pretty fine with the math because remember a penny a share is about $0.5 million So, it is probably a little early to say exactly kind of how that might shallow out a little bit, in the Poland -- we will have to see the transactions here.

We've got other things going on in our business, such as Mike seeing some new NPA agreements that we signed and things.

So I guess my reaction now would be that I wouldn't expect the future to be significantly different than what we've seen in the past, in that front.

Okay.

Got it.

And secondly, on Brazil, kind of following on, you mentioned some nonprepaid products, are we talking -- or sorry, nonmobile.

Are we talking beyond just prepaid, or are you also looking, and I think we had this conversation before, at expanding other initiatives in Brazil?

You're looking to become an acquirer or are you looking to drive ATM's in Brazil?

If you are what --

Those are things we've kind of looked at.

But, we're primarily referring to right now, is our core line business.

All we do is mobile top up down there in Brazil.

We're looking at things like transport, iTunes, gaming, post-activated software like the Microsoft deal, we just signed, an X box deal and prepaid debit, all that kind of stuff.

And merchant acquiring could come.

But we're evaluating it right now.

Gaming cards.

There is just a lot of stuff.

Right now, about 12.5%, 13% of our whole e-pay revenues are nonmobile.

But in Brazil, it is zero.

So, we kind of look at that is we should get some lift just from bringing nonmobile products to that market over the next year.

And that is just on top of the fact that they were growing it in excess of 20% compounded over the last several years.

Got it.

I mean when we look at what your -- what's your frame of mind when it would come to those other opportunities beyond that, though?

If we were to look at ATM's for example?

Obviously, you had a great --

So, we've looked at ATMs, and I would say we don't quite know yet.

I think it is too early to tell.

And there are monopolies set up in Brazil to do POS acquiring by two companies before.

That monopoly was just busted last year.

And so, we have to evaluate what kind of opportunities there might be now for a player other than those two companies.

And with respect to ATMs, they're well ATMed in that country.

They've got -- I mean some of these banks have in excess of 20,000 ATMs each.

So, there might be some, but it is still -- it is a market that we've got to kind of dig into and see where that is.

So, I would say we've got a base of operations now, but we're a long way from me saying that I'm going to nail an ATM deal next year.

Got it.

Just looking at the prepaid outside of Brazil for a second, on the margin in the quarter, the margin was up sequentially from Q2, but Q2 was distorted by very substantial professional fees, and obviously, you had a deal cost in this quarter.

If you kind of normalize for that effect, can you give us some color on what the margins looked like on a clean nonprofessional fee, nondeal cost basis?

I would expect it to remain stable to improving, going forward.

We think that there were a little heavier expenses, like for example in bad debt this quarter, we -- so I would tell you that I would expect that number to be consistent to improving over the next few quarters.

Okay.

Got it.

And then last question, from me, on the gift box, the experience box, or whatever I'm supposed to call it.

Can you give us an idea on how that differs from mobile in terms of average purchase price?

I mean I assume it's about $15, or EUR15.

These are like $200 -- you know, EUR100, EUR200 kind of deals.

So there is -- you don't sell as many of them.

A lot less transactions.

But you know, much higher profit per transaction.

I mean that is -- I mean is the commission rate comparable to mobile?

Actually, it is better than mobile, for sure.

It is in the line of iTunes and other kinds of things.

You just don't see as many transactions, obviously.

Got it.

Okay.

Good.

Great.

Thanks, guys.

Thank you.

Our final question is from Gil Luria with Wedbush Securities.

Your question, please.

Yes, thank you for taking my question.

To follow up on Brazil, how much revenue from Brazil was in the quarter?

And then can you tell us what you paid for it, or shall we wait for the Q to come out?

You can kind of see by looking at our cash movement and we're just making sure that our disclosures are put together, so I would wait for the Q.

And how much revenue was in September from that Brazil business?

We didn't disclose what that is, and we won't put that in our Q.

Okay.

And then in terms of your pre-paid business, when did you get the operator rate reduction in Australia?

That seems to be a new disclosure.

Well, I think as we've said before, we've had some rate reductions that have been managed through the process of back to the retailer, and offsets in other parts.

I think the first effective date of some of that was in the first quarter.

Got it.

And then for the backlog for EFT, that went down a little bit in the quarter.

But I think you said the pipeline was good.

How would the pipeline today compared to the pipeline you had in the EFT a year ago, two years ago, three years ago?

A year ago, two years ago, I think if you recall, we were kind of right on the heels of the financial crisis, and things like that.

And I think we saw that the pipeline was a little thinner here.

I think that as Mike said, especially in places like Poland, we've seen a little resilience in that, where the banks are looking for some ways to improve the picture, to recover some of those margins that they've lost.

We've also got some new very strong management in Europe now that has been able to dig up more deals and push more ideas, and so this is helping our backlog.

We look at the business now, and this is Kevin, in two ways, as opposed to the way we traditionally we always looked at it.

We look at it from the standpoint of an ATM backlog but we're also looking at it from the standpoint of value-added services and how many value-added services contract does we have in the pipeline to be able to push out.

So similar to e-pay, where we're introducing more nonmobile content, on the EFT segment, we're aggressively looking at how to expand revenues by adding additional services that we maybe haven't traditionally done.

Got it.

Thank you very much.

All right.

With that, I think that was the last question for the day.

I would like to thank everybody for taking time on the call.

And I look forward to talking to everybody in about 90 days.

Thank you very much, operator.

You can sign us off.

(Operator Instructions)