Euronet Worldwide Inc (EEFT) 2011 Q3 法說會逐字稿

Good morning. My name is Anisa, and I will be your conference operator today. At this time, I would like to welcome everyone to the Euronet Worldwide third quarter 2011 earnings conference call, all lines are placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions). Please note that today's call is being recorded. Thank you.

I will now like to turn the call over to Mr. Jeff Newman, Executive Vice President and General Counsel.

Thank you. Good morning, and welcome everyone to Euronet Worldwide's third quarter results call. We have Mike Brown, our CEO, Rick Weller, our CFO, and Kevin Caponecchi, the President of Euronet Worldwide on the call.

Before we begin, I would like to make a disclaimer about forward-looking statements. Statements contained in this presentation that concern Euronet or it's Management's intentions, expectations, or predictions of future performance are forward-looking statements. Euronet's actual results may vary materially from those anticipated in such forward-looking statements, as a result of a number of factors, including conditions in world financial markets and general economic conditions, technological developments affecting the markets or the Company's products and services, foreign currency exchange fluctuations, the Company's ability to renew existing contracts at profitable rates, changes in fees payable for transactions performed for cards bearing international logos, or over switching networks such as card transactions on ATMs, and changes in laws and regulations affecting the Company's business, including immigration laws.

These risks and other risks are described in the Company's filings with the Securities & Exchange Commission, including our Annual Report on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K. Copies of these filings may be obtained through the SEC Edgar website, or by contacting the Company or the SEC. Euronet does not intend to update these forward-looking statements and undertakes no duty to any person to provide any such update under any circumstances. The Company regularly posts important information to the Investor Relations section of its website.

Now I will turn the call over to Rick Weller, our CFO, Rick?

Thank you, and I echo Jeff's welcome to everyone. I will begin with the third quarter resultson slide five. For the third quarter 2011, Euronet delivered with a little rounding revenue of $300 million, operating income of $20 income, and adjusted EBITDA of $38 million. Our cash EPS of $0.37 was in line with our guidance. Favorable tax expense of just over a penny was offset by foreign currency headwinds against the US dollar. In a few slides, I will discuss the business results on a constant currency basis.

Let's move to slide six please. On slide six, you can see a quarter-over-quarter three-year trend of transaction growth for EFT and e-pay segments. The business continues to see strong transaction growth across all segments. EFT segment transactions grew by 24%. This growth was largely driven by our OMV cross border solution, together with operations in Poland, India, and Pakistan.

Transactions in the epay segment grew by 19%. This growth is attributable to double-digit contributions from Spain, Germany, Italy, India, Middle East, and Poland. Additionally, we received the benefit of the full quarter of last year's Brazilian acquisition and one month of transactions from our September 2011 purchase of cadooz. Offsetting these strong growth rates were transactions declines in the UK and Australia, where we continue to face competitive and economic challenges.

Now to slide seven, please. We show quarterly trends in Money Transfers transactions, as well as the mix of US and international originated transactions over the last three years. In the third quarter, [Ria pote] processed 6.1 million transactions, which is a 13% increase, compared to the same quarter last year. Nonmoney transfer transactions, which include bill payment, check cashing, foreign exchange conversion, and mobile recharge, account for 13% of the total Ria transactions, and grew by 39% over the same quarter last year.

International money transfers grew 15% in the third quarter this year, versus the prior year. We continue to see increased transactions from the US originated money transfers, with a 2% increase in the US to Mexico corridor. This is the first quarter since 2007, that the US to Mexico transactions have increased year-over-year. I wouldn't characterize this as victory yet, but reporting a 2% year-over-year growth to Mexico sure beats whining about negative numbers year-over-year.

Let's move to the next slide, please. On slide eight we present our segments reported third quarter results compared to last year. As has been the case over the last couple of years, foreign currency fluctuations played a significant role in comparison to the third quarter results of the prior year. The results of all three segments were favorably affected by these fluctuations. On the next slide we will include the results adjusted for FX rate changes, which provide a more clear picture of the changes in the business, compared to the prior year. As such, I will focus my discussion on the constant currency results.

Let's move to slide nine, please. Here on slide nine, I will cover the segment constant currency financial highlights, starting with EFT. In EFT, revenues decreased 3%, operating income decreased 20%, and adjusted EBITDA decreased 14%. Year-over-year decrease in operating income is fully attributable to the reduced German ATM fees we have discussed in the first and second quarters. If not for the German ATM fee decrease, EFT's operating income would have grown approximately 8% year-over-year. Value-added services, additional ATMs under management, and expansion of markets have all contributed to recovering the margin impact of the German ATM fees. Mike will discuss in more detail the number of initiatives under way in EFT to not only regain the lost margin, but position us well for future margin expansion.

Now shifting to epay. But before I get into the numbers, I would like to spend a minute discussing the P&L dynamics of our recent cadooz acquisition. As most of you know, in our epay segment we generally earn a commission on the distribution and sale of mobile top-up products. On average, for example, we earn a commission of about 7% on the gross top-up value, and we in turn pay on average to our retail distribution partner about 80% of that commission. So on a $10.00 top-up, our revenue per transaction would be about $0.70, and our gross profit would be about $0.14 per transaction, which calculates to a 20% gross margin. We recognize revenue only for the commission, and not the gross value of the top-up, because we are not responsible for structuring the product or setting the price.

In contrast, for cadooz, we need to recognize revenue for the gross value of the vouchers sold, because we control the structuring, packaging, and pricing of the product. Accordingly, for a similar $10.00 voucher sold by cadooz, we recognize revenue as $10.00. However, we can earn well more gross profit from vouchers because we manage the product. Which in turn, turns out to be a about a $1.40 per voucher sold, compared to $0.14 per top-up sold. But because we report revenue for the gross value of the voucher,our gross margin is calculated to about 14% compared to about 20% for top-up.

So on a similarly sized transaction, our gross profit is about ten times as much, but as presented in our P&L it appears we earn only two-thirds as much. Falsely implying that the voucher business is a lower quality business than the top-up business. As you can see from this example, the voucher transactions are margin-rich compared to top-up. As you go down the P&L similar math will be seen as you calculate EBITDA margins which would show that cadooz business would produce an EBITDA margin of about half of the epay segment. So with that said, let me move on to the results.

For the epay segment, revenues grew 9%, operating income grew 3%, and adjusted EBITDA grew by 2%,again all constant currency numbers. Revenue growth was largely attributable to the cadooz acquisition, however, operating results offset by deal fees resulted in cadooz having a small drag on the segment 's third quarter operating income. The segment's operating income was largely the result of nonmobile growth, a full quarter of operations this year from last year's September Brazilian acquisition, and the relief of certain fully-amortized intangible assets, offsetting these increases were declines in the Australian market related to a couple of key retailers going direct with mobile operators, and general transaction declined in the market.

For Money Transfer revenue increased 13%, operating income increased by 16%, and adjusted EBITDA increased by 5%. Our results reflect the volume growth in the European and US markets, and the benefit of full amortization of intangible assets of our Spanish operations. These were offset by increased operating costs, related to agent and store expansion.

Now let's move to slide 10 please. On slide 10, we provide our balance sheet highlights. You can see that our restricted cash decrease by $45 million. The net change is from the cash used to purchase cadooz and repurchase shares, offset by operating free cash flows. Our total assets were $62 million lower compared to the prior quarter,most of which is attributable to foreign exchange fluctuations.

As you may know, accounting guidelines require that we value our balance sheet using foreign exchange rates on the last day of the quarter, while the income statement is determined using the average of the foreign exchange rates throughout the quarter. Given the weakening foreign currencies against the US dollar, net assets were valued on our balance sheet with rates lower at September 30, compared to June 30.

Finally, you may recall in August that we announced the amendment and extension of our credit facility to a five-year $355 million senior-secured facility. The facility includes $275 million revolver capacity, and a term loan of $80 million. This expanded credit facility provides us with greater capital and operating flexibilities. Our cash, together with future cash flows and the revolving credit facility we have in place, gives us sufficient liquidity to repay the remaining bonds we expect will be put to us in October 2012.

Included among the items, giving us more flexibility is the repurchase of shares and bonds. To this end, during the third quarter we repurchased approximately 800,000 shares, at an average per share price of $15.73. And $3.6 million in convertible bonds at less than par. We will opportunistically repurchase either shares or bonds, but I wouldn't expect to see a significant repurchase of either at current prices.

With that, I conclude my comments on our financial results for the third quarter, and will now hand it over to Mike to further discuss specific segment details.

Thank you Rick, and thank you to everyone who has joined us on the call or over the web. First, I am pleased with the sequential growth in our cash EPS this year, starting at $0.30 in Q1, $0.35 inQ2, and now $0.37 in Q3 in the face of a challenging worldwide economic environment.

As you saw in the financial highlights, foreign exchange volatility has a significant impact on our business, and I am proud of our teams for staying focused, and continuing to deliver exciting opportunities, which I will discuss with you in the next few slides. I am also pleased with the third quarter results, as all business lines continue to deliver on our strategy to expand our geographical presence, expand our product offerings, and expand our opportunities in order to grow profit. I will now walk you throughout highlights for each of the segments, so we can move on to slide 13.

Slide 13 presents the financial highlights of the EFT division on an as-reported basis. Rick took you through these results a few minutes ago, so I will not repeat those comments here. During this third quarter we continued to expand our value-added services which provide greater flexibility in growth opportunities for our customers. We also continued to expand our ATM network. As of September 30, 2011 we saw a 20% increase in ATMs over the prior year. We also saw transaction growth of 24% over the prior year, primarily attributed to our OMV cross-border acquiring business, combined with growth in India, Poland, and Pakistan.

Now let's move on to slide number 14. Here we present a number of accomplishments to expand our presence, our products and our opportunities within our European markets. During the third quarter, we received payment services directive acquiring licenses in the UK and Germany, which allow for ATM acquiring throughout the EU, and on POS terminals in Germany. Commensurate with these licenses we have applied for and received direct certification with the major card schemes in five European countries so far, making us one of the few non financial institutions with the ability to directly acquire transactions on ATMs.

Let me pause and reflect on this for a moment, because I want to emphasize the significance of these events that I just spoke of. Since I started this business in 1994, any time we entered a new market, we had to engage in lengthy negotiations to secure a Mastercard or Visa sponsor bank, these negotiations took a minimum of nine months, sometimes two years. Now with these licenses and direct card scheme memberships, we are no longer required to use sponsor banks. I am sure you can well see that this provides with us increased flexibility in product development, it reduces the barriers of entry into new markets for us, and it gives us the ability to expand on cross opportunities between the different segments.

I would now like to refocus your attention on other developments in our core business. In Europe we signed long-term outsourcing and network participation agreements with Idea Bank in Poland, as well as a network participation agreement with RBS, that is Royal Bank of Scotland, and Romania. In addition to the new agreements we signed a long-term card issuing and ATM and POS acquiring renewal with AIK Bank in Serbia, which covers 106 ATMs, 500 POS terminals, and 150,000 cards, and we also signed card issuing contracts and extensions with two banks in Montenegro.

Now onto slide 15, we can note to progress of our Asia Pac team during this quarter. We signed several agreements in India, including a long-term contract with Development Credit Bank to deploy 1,000 brown label ATMs and a long-term agreement with Citibank to provide ATM outsourcing services. The brown label model continues to show promise in expanding our presence in this growing market. The India team also won an outsourcing agreement with FirstRand Bank, a South African bank starting retail operations in India. With this win, Euronet India continues to lead the market in providing outsourcing services for the multi-national banks in India. Our software business signed a new agreement with Poli Bank in Oman who bought our IPM product.

Now onto slide 16, I will highlight our continued success in launching and signing value-added services in this segment. During this quarter, we successfully launched new or additional value-added services on our independent networks and for customer banks in Poland, Romania, Ukraine, Czech Republic, Greece, Serbia, Croatia, and Hungary. Highlights of these added services include enabling Citibank customer deposits on our shared ATM network in Poland, and migrating the credit cards of National Bank of Greece in Cyprus and Albania over to our platform.

To wrap it up for the EFT division, I think it is significant to note that we added 610 ATMs during Q3 2011, bringing our total managed ATMs up to 12,668. This represents an increase of 20% versus the same quarter last year. Our current ATM backlog stands at 525, not including the 1,000 brown label ATMs we expect to deploy with Development Credit Bank in India. While the reduction in German interchange fees has had an impact on the segment's overall results I am encouraged by the headway our team is making to develop these opportunities for future growth.

So now let's move onto slide number 18 where we can look a bit at epay. Here on 18 we include the epay financial results on an as-reported basis for the quarter. Revenue up 18%. Operating income up 12%, and adjusted EBITDA was up 10% compared with the same quarter last year. Rick has talked about the financial slides in detail, so I will move on to the business highlights.

Please check Slide Number 19. Our epay team continues to expand our mobile operations across multiple channels. During the third quarter the epay US team had a key win by signing an agreement with the Sprint prepaid group, which includes Boost, Virgin Mobile and Assurance Wireless. Sprint's prepaid portfolio is a leading player in the US prepaid market. This contract allows us the exclusive right to distribute their mobile products through the independent retail channel in the United States. We won this agreement through a competitive bid process, where we demonstrated the superior value proposition from epay, by providing insightful tools to help manage retailers in addition to our prepaid processing capabilities. This win positions epay as a market leader for mobile top-up processing in the US.

Our epay UK team renewed two key contracts, one with the Post Office, and the second with Asda, a Wal-Mart subsidiary, to sell mobile top-up services in their retail stores. These contracts span more than 41,000 points of sale throughout the UK. The UK also launched mobile top-up with BP Oil, and the retail store, The Factory Shop, these two launches reach another combined 750 terminals. Finally the team in Australian launched top-up services for a new MVNO called Red Bull Mobile.

Now we can move on to Slide Number 20, where we can discuss the nonmobile product expansion during the quarter. Here on slide number 20, we list a number of bullets, representing the launch or signing of additional nonmobile content. I talk a lot about that both in person and on these calls. I won't get into the details for each item on this slide, but the more significant launches on the list include Zynga, which is responsible for seven of the 10 most popular FaceBook games. Additionally we launched a new lottery product in the UK, across more than 13,500 POS terminals. We continued the launch iTunes and Smart Box in Germany, and launched the distribution of Sony and Microsoft products in the 7-Eleven stores in Australia. I want to emphasize the importance of nonmobile product in the epay segment. And set our expectations on the contribution of these products in the future.

We have been successful in signing and launching a wide variety of nonmobile products. With the additional of cadooz, nonmobile now represents 19% of epay's total gross profits. We must now ensure these products make their way into their global retail distribution network, and we must also raise consumer awareness about these products in each of these markets. While the impact of these new nonmobile products may not be immediately evident, I would like to reiterate that these products generally have a higher margin than mobile top-up, and therefore over the course of time I do expect them to make a significant impact to our operating income.

If you move on please to slide 21, we can review epay's acquisition and investment activity. In 2011 we acquired cadooz, a leading German voucher and physical gift fulfillment company. cadooz provides vouchers, innovative merchandise, and incentive solutions to more than 3,000 corporate customers across Germany, Austria, and Poland. With Germany already being our biggest and fastest-growing prepaid market, we feel that cadooz compliments our core prepaid business, and significantly expands our nonmobile portfolio, as all of cadooz's products are nonmobile. This acquisition gives us the opportunity to utilize our strong base of retailers and merchants to sell cadooz vouchers, rewards, and incentive products. We plan to leverage cadooz's expertise in marketing and promotions, to value-add our retail relationships.

In addition, we plan to utilize cadooz's B-to-B marketing experience to enter new product space, and leverage and cross-sell opportunities to other divisions to accelerate growth. Finally, we expect the acquisition to contribute $0.03 to $0.04 in annual cash EPS in the first year. As Rick mentioned earlier, the revenue profile differs from our standard prepaid product, in that it is recognized at the face product of the product sold, rather than the commission received from the content provider. It is also important to mention that cadooz's business is more cyclical than any of our other existing businesses, and we expect to see the biggest contributions during the fourth quarter of the year.

Also during the third quarter, we entered into a commercial processing relationship with, and made a small investment in Wipit, a mobile wallet company, Wipit provides cash-preferred consumers flexibility and convenience through mobile payment options. Wipit will utilize epay's extensive retail networks to provide convenience to customers when they are adding funds to the mobile wallet. As you can see, it was an exciting quarter in the epay segment as we continued to grow and expand our footprint, and create great opportunities for future growth.

Move on to slide number 23, where we can start to talk about Money Transfer. During the quarter, third quarter, the money transfer segment continued the growth I have been telling you about, expanding our send and pay-out networks, and expanding our nonmoney transfer product portfolio. This quarter we executed in each of these areas, so let's go onto the next two slides and I will talk about it. On slide number 24, we review the highlights of our send payout network. Our money transfer payout network now reaches 136 countries, and has approximately 140,000 total network locations,which represent an increase of 35% versus Q3 2010. We added Mozambique, Slovenia, and Sudan as new receive countries, and we introduced New Zealand as a new send country during the quarter, we leveraged our existing relationship in Canada, to launch 81 locations of Cash Store Financial Services in Australia.

As you may recall, we signed a long-term agreement with Cash Store Financial in the third quarter of last year to provide money transfer services in their Canadian locations, and have now been able to extend this agreement to Australia. We launched 15 new correspondents in 14 countries,with approximately 5,000 locations. The more prominent of these were Nova Bank in Hungary, Habib Bank in Pakistan, and La Posta de Togo in Africa.

In addition to the launches we also signed agreements that we will launch here shortly, with 17 new correspondents that operate in 12 countries, with a combined network of another 2,700 locations. The most significant of these, I would like to add were with Muslim Commercial Bank in Pakistan , and VakifBank in Turkey. The agreement with VakifBank Bank includes 550 locations, and is our first entry into the Turkish market.

Okay, move on please to slide number 25. Here I will speak about the transitions growth of the Money Transfer segment. This quarter we saw a 13% growth in total transactions. We continued to realize impressive non-US transfer growth, with a 15% increase in the third quarter, compared to the same quarter last year. We also are starting to see more positive growth in the US transfers, with an 8% growth this quarter compared to the same quarter last year. This increase includes a 2% increase in transfers from the US to Mexico. The first time we have been able to report growth to this corridor in three years.

In addition to the growth in Money Transfers we saw a significant increase in non-money transfer transactions of 39%, mostly in our US market. As I have mentioned before, these non-core products include check cashing, bill payment, over the counter foreign exchange, and mobile recharge. Our value-added services provide retailers a diversified product offering, fueling this growth. I am encouraged by this sustained volume growth that we are seeing in the Money Transfer business across most all of our markets, and I am particularly pleased with the results of our US markets.

On slide number 26, we can kind of recap what happened in this last quarter. First, we posted cash earnings per share of $0.37 in the third quarter 2011despite currency headwinds. We saw significant transaction growth across all three segments. EFT continued the growth momentum through an expanded ATM network and value-added services portfolio. We received PSD acquiring licenses in the UK and Germany, and direct membership with Visa and Mastercard. Epay won an exclusive deal with the Sprint prepaid group in the US for the independent channel. We acquired cadooz. Money Transfer posted good growth in both European and US markets. We amended and expanded our credit facility, and finally, we expect our fourth quarter adjusted cash EPS to be approximately $0.41, assuming constant foreign exchange rates.

This concludes our presentation, all of us here would be happy to answer questions. Operator, can you please assist?

(Operator Instructions), We will pause for a moment to compile the Q&A roster. And your first question comes from the line of Tim Willi with Wells Fargo.

Thank you.

Good morning.

Good morning. Two questions. One was a clarification. Mike, when you talked about cadooz you used the word cyclical, did you mean seasonal when you talked about that business?

I think your English is better than mine. Yes. Strong Q4, a lot of their promotions are kind of Christmas-ish promotions, et cetera.

Perfect. Second, just thinking about the portfolio of businesses, and I think, historically, everybody would agree that some of businesses seem to fire well, and one of them has an issue. We have dealt with EFT being a bit of a weight around the neck over the last couple of years. It seems as if there are no rumblings or rumors or developments that sit out there in front of the businesses from a regulatory or customer perspective that would be a big issue in 2012.

Without asking for per se comments on guidance, but if you think about the portfolio, and every quarter we have slides of new business and new agreements across all of the different divisions, does it look to you that 2012 might be a story of all of the businesses actually growing in concert? I mean they all might have varying degrees of growth. But is it a situation where you think that barring something you are absolutely not at all remotely aware of, that all three businesses would be in a position to show positive, constant currency EBITDA growth next year?

I think so. Actually even if you look at this year, with the exception of the regulatory change in Germany, we would have been able to say that for sure as we go into next year. I can't think of anything right now that could really blow us up. When we had the two most substantial ATM networks, that is where the two regulatory changes happened over the last 16 months, that is Poland and Germany. So really that torpedo can't hit us again.

So we are really excited about nextyear. And you can see that just by the growth we've had this year despite some of these headwinds. You know? We have had some currency headwinds, we have had the German deal, and so forth. We are getting pretty excited about the opportunities for us to hit on all cylinders next year.

Let me just sneak two more in real quick. Could we get an update on 7-Eleven, and also for Kevin, can we talk about sales pipelines around ATM? And then if there's anything to talk about around the cross border platform, in terms of interest levels or being a little more active about going out and trying to solicit new merchants to put on that platform? You guys were sort of in a holding pattern for a while, as you got OMV up and running. Where are we at with that?

Well, first of all, on 7-Eleven, with respect to impacting our bottom line, we have never said it would be a barn burner right out of the gate. This is a brand-new channel for us. It is exciting because it uses some unique technology of us and 7-Eleven to be able to do this at a retail cash register, as opposed to the typical kind of agent for any kind of money transfer. It grows every month. 7-Eleven has been pleased with the results.

I am an impatient son of a gun, so I want it to go faster. Everybody tells me, be calm, everything is going okay. So, I don't think we will see 7-Eleven add significantly to the bottom line of next year. But it is exactly the kind of technology that we believe we could deploy in other markets as well, and in fact we are in a number of other discussions with that. That is all exciting for us.

Okay.

With respect to the other thing, I am trying to remember all of that.

ATM pipelines, and the acquiring? [multiple speakers].

Oh yes, yes. And acquiring, and OMV in particular, OMV really has taken a turn for the best. We continue to have very strong growth. And we are bidding on other opportunities. OMV is in discussions with us. Kevin, have we signed the contract for the field card yet?

Yes.

Yes. So we are now, remember we mentioned in the last call that OMV has now purchased 95% or 96% of that large gas station change in Turkey, and we have signed an agreement with those guys to do the fuel card stuff.

Fuel cards.

Right. So immediately, we are adding those transactions, the projections for number of card transactions at the pump, and in the little stores, that OMV across our current markets are in excess of what everybody projected. You add all of this with some other bright things that our leadership has done in Europe, and next year OMV should be profitable for us, that plus we are bidding on new deals, and so, it is no longer kind of a blight against us.

With respect to the ATM deals, the brown label is a big deal. This is the deal we put out ATMs kind of under our dime, but it is under the brand of the bank who is our sponsor. And so this offers us an opportunity because a lot of the banks in India just really haven't really gotten into the kind of off branch and great locations ATMs. A lot of ATMs just at their branches, or just at the kind of, you might say the political places that they are forced to put in ATMs, as opposed to ones that can make money.

We like this, we like our IAD expansion that we have done in multiple markets, and I think we mentioned, I could go back to that slide, but we signed an agreement this quarter with banks in about six or seven different countries. You have never heard us say that. We usually have a handful of agreements. But we are just signing agreements like crazy right now, which is very exciting for the EFT division. I mentioned that a year ago, I said we are negotiating a lot, it should be exciting in 2011, well we are bringing them home.

Wonderful. Thank you very much.

Also, I would like to add one more thing too. We are also, one of the reasons we are doing this, is because we are doing more than a cash withdrawal for a local bank. We are offering them value-added services, of advertising, of CRM, of DCC, of top-up of your mobile phone at ATM. We are giving these banks new ways that they can market, and actually make money using this big investment of theirs, called their ATM channel. That is what is really driving it.

For a long time the banks were a little too cocky to deal with us, when you want to do just ATM outsourcing, that is a bad word in all languages, and a lot of people weren't that inclined to fire people, or to do outsourcing, or to deal with all of the budget issues. Now when you offer the new-found revenue they are a lot more excited. In fact, you are not talking the IT folks anymore, you are talking to the marketing folks.

Next question, operator?

Your next question will come from the line of Robert Dodd with Morgan Keegan.

Hi, guys. A couple of detail questions about some of the trends in the quarter. If we look at money transfer, and don't get me wrong, I mean 15% on the international side on a transaction basis is still very good, but it slowed fairly sharply from Q2 which was up 22%, was there a lapping of a new corridor, or a new product that was launched a year ago that you have lapped? Or could you give us a bit more color on what drove that slowdown, or if it was a one-time blip-blap, or whatever it was?

I don't think there was anything that we lapped. We have been talking about plus-20% growth in the European market now for almost three years running. And I think what we have got right now, finally we have got a little bit of the law of large numbers working against us. But we still have a lot of opportunities that we are looking at in that marketplace. We also had in September, we had less transactions than were in our forecast, and that was because we saw those huge fluctuations in foreign currency.

When this happens, this is really interesting, you don't just make less money when translated to dollars on per-transitions basis, but these immigrants notice that their Euro buys a lot less of their local currency. And in the last two weeks of September everybody just like stayed home, and said I am going to wait this out, because my Euro isn't buying as many pesos, or whatever the currency might be, or Romanian leis, or whatever, and so they just didn't do transactions. And then we watched that now that the foreign currency come back a bit, a third of where it had lost, we are seeing everybody kind of coming back to do those transactions in October.

Great. Very helpful. Looking at Australia, one of the notes in the press release, a couple of retailers have gone, or there are some direct relationships now between some retailers and the mobile, I mean is that do you think, a trend that could spread because obviously large retailers. and you renewed a couple in the UK, but you have others, is that a thing that you are worried about becoming more of a global issue, and less concentrated in Australia? How does that play into the fact you keep adding all of these other products but these aren't large retailers, obviously mobile is arguably the only thing they care about, if they are more focused on that and not the other value and the other nonmobile products you offer?

So that is a really good question. We thought that question might be asked. First of all, the way we have always been paid in Australia has been totally different than any of our other markets. And the relationships we have had with the retailers and the mobile operators and kind of a three-way agreement, was different than we have as a distributor in virtually every one of our other markets. Structurally it is different, and probably can't jump the water.

We also didn't lose these retailers with all of our products, we just lost them with one or two of them of the mobile operators, not all of them. So what we are now doing is using things like the technologies that helped us win our Sprint deal, and so forth, to go back to these mobile operators and show them that we can actually do a better job to manage their retail distribution channel than what they can today. So, it is kind of a very unique situation there. We don't expect it to jump or really to expand past this. In fact, we have got a few tricks up our sleeve to try to get some of this back anyway. In the meantime, value-added services are just punching real hard with those same retailers, which we haven't lost for the value-added services.

Great. On the acquiring side, with your direct PSD licenses, first a simple question, since PSD covers all of the markets why go for a license in the UK and Germany?

Okay. We kind of asked that internally. I won't go into all of the gory detail of it, but when we first were looking at this, the regulator, the regulators in Germany, which is our largest epay market, and a good EFT market to us, are extremely tough regulators. They gave us the impression that it would be better to have a license in that country, than maybe just exporting a license to them, even though exporting should work just fine.

We used a regulator in UK, which has the most experience in all of Europe, they are called FSA. And we will use them across all of the markets, and we might even expand that to Germany in the future. It just made more sense, it cost us a little bit more to have two, but now we have ultimate flexibility to use either of those licenses to passport all of our services across the rest of Europe.

Okay. Got it. And talking about that passporting. I mean, obviously, Germany, you have had incremental expense because you had to have for your own ATM networks, and have had to have a bank run the transactions through them, rather than running them through Budapest. Is that going to change now with the PSD license and a direct acquiring relationship? [multiple speakers].

You started to mix apples and oranges there. Okay. Processing and sponsoring and licensing are two different things, Robert. We still process, and actually some of our German translations are partially processed in part of the transaction in Budapest and part in Germany, and we do the same in other markets. Where it is processed is irrelevant. Where your sponsor bank is or where your license is relevant, because you have got a sponsor bank, they are going to want a piece of the action. So we are now, very excited about the possibility of decreased costs over time, and just ultimate flexibility to get into new markets really quick.

Okay. Got it. Last one, PSD, how is that going to interact with your OMV deal, which is obviously cross-border you have got Erste Bank in there? One of the complications there, correct me if I am wrong, which is probably the case here, OMV is active in Bosnia, for example, which is not a PSD market.

Where we don't have, say the former Yugoslavian countries are not in the EU, most of them aren't, we still have to have a sponsor bank, or we have to have, like we use Erste Bank right now in those countries, and we will continue to do so, with respect to OMV across the EU, this gives us more flexibility. I think it will offer OMV more opportunities to save money, and will bring more value to them because it is us who has that license.

Okay. Great, thank you.

We, all of a sudden, are kind of the equivalent of the bank.

Thanks.

Okay.

Your next question will come from the line of Chris Shutler, William Blair.

Good morning. I guess, first of all, I was hoping you could give us an update on the ATM transactions in Germany, and just what kind of fee compression, if any you have seen relative to your expectations earlier this year?And then, the 8% increase that Rick referred to ex-Germany in the EFT segment, just wondering if that is on a constant currency basis or reported?

Chris, I will take both of those. It is on a constant currency basis.

Okay. Great.

The second is, our rate per transaction, it actually has turned out to be just a little bit higher than we had originally estimated. So that it is right in line with what we expected there. And the only thing is that we have seen just a little lighter trend of transactions than what we originally expected there, Chris. But kind of on balance there, if you take a look at both our estimate on the rate side and on the volume side, we are grenade math close to what we expected at the beginning of the year.

Okay. Good to hear. On cadooz, I am assuming that it sounds like Q4 is seasonally the strong quarter there, of the $0.03 to $0.04 of annual EPS accretion is I think what you outlined in your press release a month or two ago, how much of that should we expect to hit in Q4?

I wouldn't give you a precise number, Chris, it is obviously more weighted to Q4. That business looks a little bit more like if you think of it, a little bit more like a third/a third/a third, with a third of their business coming in the first half of the year, a third coming in the third quarter, and a third coming in the fourth quarter. And is actually just a little bit heavier in the fourth quarter than that third. That kind of gives you an idea. It is not a penny a quarter, it is a little heavier in the fourth quarter. That should give you a good idea. It is not all in the fourth quarter, though.

Okay. That is helpful. Then finally, within money transfer, you have obviously been expanding there pretty rapidly, but if you were to slow down that location expansion, and just look at the business on more of a steady state, where could the margins in that business be today?

Well we are spending a lot on that expansion. Particularly in France and Germany,and some of these other European countries, where the margins are really wide. Do you know what I mean? Where you make a lot of money per transaction, maybe two or three times as much per transaction as we might make in Spain or Italy. I would say we are as far as where could we be? If you stop where you were and just let it grow? I don't know, what would you say?

Today, we are at about 13% EBITDA margin in the EFT, in the [Aria] business. If we were to slow down on some of that expansion there, I think it is reasonable, we have looked at different numbers and models and that we could be in the upper teens kind of number on an EBITDA margin basis. We certainly can see that coming through the margin and what kind of expense structure it takes to support the business.

But on the other hand, given that we are not in as many markets around the world, and we see that this is such a big opportunity, there are other yet even bigger markets. Like the India and the China markets that we don't have a strong presence in, that we just believe that at the current numbers we are getting, they are not disrespect able at all, and making that kind of investment today is in our best interest for the long-term. So yes, we could kind of slow that expansion down, and kind of reap the profits from that, we see that there is a lot of territory out there, Chris.

And what us as Americans don't realize sometimes, we think about our own immigrants and we think about our large Hispanic population of immigrants here in this US, we kind of get, look just through our glasses. The reality is there are more immigrants, and it will be a bigger market for immigrants for a long time in the EU. Because the EU is 27 think countries, and about eight of them have money, although that is being discussed every day, maybe less than eight. What you have got here is another 19 countries worth of citizens who recognize that all they have got to do is cross a border, just drive down the block a bit, and they can get paid more than they get paid at their current country to move to a new country. So this idea of more immigrants coming across borders, in a much larger market than the US to start with, this is the market to own in the world, and we intend to do so.

Okay. If you don't mind, I will sneak one more in here.

Go ahead.

In terms of looking out to 2012, I think that's what everybody is focused on and really trying to get the sense of what the normalized growth rate would look in the business, looking at the three segments, even if you can't give any kind of specific guidance at this point, what segment would you expect to grow EBITDA the fastest in 2012? If you exclude the impacts of acquisitions?

I think without a discussion, it is EFT.

Okay.

I mean EFT, just look at their numbers after the German step-down, which was a significant amount of margin that just went out the door, due to regulatory change, and look at where they are right now, and their ramp of new products, and new markets and new agreements, these guys are on a terror. Now I would tell you, it is a smaller number, but maybe growing in similar, you asked specifically where will the most EBITDA occur? It is EFT. Or the highest percentages go? It probably is EFT, with money transfer maybe close behind.

Yes.

Okay.

Because you are working from a smaller base there.

Right. Thank you, guys.

Your next question from the line of Gil Luria, with Wedbush Securities.

Hi, Gil.

Hi. How are you?

I am fine. I am fine. What can we do?

India. What is the timeline for rolling out the 1,000 ATMs. What kind of ATMs are these that you are rolling out? Are these the $10,000 variety, the $20,000 variety? How much are you going to have to put on the ground to roll those out?

Well, the roll out here will be over probably the next 12-ish kind of months here. We have got to select the sites. You have got to make sure that you have got bank buy into it. Stuff like that. This in this brown label model, because we don't control the branding and all of that, we have got to work with our partner to do that. So while we would like to go quicker, we have to be respectful of their involvement.

It is not the high-end ATM kind of a number, closer to the 10k kind of a number you are talking about. In terms of money going into it, what we have done in India, we have worked out what I would characterize as being kind of like a cross between a capital lease and an operating lease, it has been structured that it turns out to be operating lease in nature, so we don't end up with CapEx into it, we don't have to go out and get money to fund these. So it is not a big CapEx driver for us. We factored that into our return expectations, and so we shouldn't see much there in terms of capital that has to go behind those 1,000 ATMs.

Got it. And I want to get back to the acquiring license that you have. What is the timeline for recognizing these higher margins? What is the cut that you are currently giving your sponsor banks? Which countries is it that you are using a sponsor bank for acquiring transactions?

Okay. So first of all, we used a sponsor bank in every single country,because we don't have a license. So in every country that we have our own ATMs and some cases, our partners like an OMV uses a third party for their sponsor bank, all of these now can be done by us directly. And then how fast we make that change,it depends on the markets. We pay for that anywhere from, call it 5% to 20% of our revenue.

Of our interchange.

Yes. Of our interchange revenues, which is significant. How fast we will make those changes,it is reallya market-by-market thing. We will focus on where we can make the most money the quickest, in some cases depending on if we are at the lower end of that range, we might not change, because we still need certain other things from banks. We might need cash supply, we might have other strategic relationships with them for other products.

So basically now that we have got the licenses, that just came in just a week or two ago, we can start to make the changes. It gives us more leverage over them. Maybe even to keep them as sponsors, but with better pricing. I mean it is just ultimate in flexibility, because basically, it potentially takes the money off the table. Out of somebody else's hands and puts it in our hands.

What percentage of your revenue in those countries, Germany, Czech, Poland, Hungary, is from interchange?

Shoot. All of it, no, no. Sorry. All of our own ATMs are from interchange. Remember of the 12,600 ATMs, probably about 3,000 of those are ours. The remaining ones are outsourcing agreements from banks so there is no change on those. But it would change on the ones that we own. Or maybe the deals that we do with people like OMV.

And then we have other kinds of agreements, like for example in Poland, where we have host-to-host agreements with banks that wouldn't necessarily go through that sponsor bank on an interchange basis. So those kinds of things, those types of transactions are not subject to that type of interchange fee.

The way I would look at it, Chris , is that in Czech, where we own only about 100, 125 or 130 machines, those are largely going to be subject to a fee arrangement with interchange, with the split in interchange. Germany, would largely all falling in that category. Poland, it probably turns out that maybe, kind of on macro terms maybe a third of our Polish business, because we do outsourcing, we do these network participations agreements, and then we do interchange. Probably about a third. That gives you some perspective.

Got it. A good way to get back some of the losses in Germany and Poland over the last year?

Right, right. I mean, every little bit helps. Even without this, we have made a lot of progress.

Then --

[multiple speakers]Aside from the, it does give us a chance to have a little bit more leverage and flexibility on managing those relationships in the countries we are in today. But I think the bigger picture story is that it doesn't, it gives us more flexibility on expanding our business throughout the European market, where it is like Mike said, it has taken nine months to two years to get these agreements in place. That issue has now been taken care of for us. And it just gives us the ability to more efficiently and effectively move in those markets.

Thanks.

Gil, I think operator, we are running past our time. I guess we could take one more quick question. Because I didn't give everybody a chance. Then we will have to end because it is on the hour.

Your next question from the line of Greg Smith, Sterne Agee.

Hey guys, I am sorry if you gave it already. What were cadooz's revenues in Q3?

We didn't give you that, Greg. I did say that it largely represented the increase in the epay division. I am sure that a guy could kind of figure that out.

Even though the revenues were up, because of the expense of doing the acquisition, in our results it probably cost us around $200K.

It dragged a little.

I understand it didn't go to the bottom line. What about the Brazil contribution in epay in the quarter?

We clearly had a little bit of Brazilian contribution in there. As we said in there, some of those things that came into the picture, now it is also a little bit kind of, let's call it a little bit of apples and oranges on the revenue side, because as we said before, there may be mobile operator rate decreases that we just passed through to the retailers. And I know some of that happened in, again in markets like UK, et cetera. We did get some benefit there. Then we had a little headwind from places like Australia and the UK on a year-over-year basis.

Yes. I guess that is kind of what I am trying to get at. Help us think about the core mobile top-up business. I understand you are adding more value-added services with a number of these retailers. Just the core mobile top-up business, globally, how should we think about that business? Maybe a little bit more pressure than was overall anticipated. A good growth opportunity here, or is it more about the value-added services at this point?

Well I would say, primarily long-term, it is value-added services. Because at some point in time, everybody who is going to have a mobile phone gets a mobile phone. You end up with kind of a flat amount of users. Now things like the iPhones, and now all of these cheap data phones have done, is they have been able to work the ARPU up. Our average ARPU in the US, thanks to Sprint, and some of these other guys who offer these all-you-can-eat plans, our ARPU is up 30% or 40% over where it was two years ago. So as these all-you-can-eat plans jump the water, and more people use more data, and more of their wallet share, ends up being used with the mobile operator, because we get paid a commission, our numbers go up.

So it isn't that we are stagnant but we are in this kind of lull period here, where as the mobile operators around the world start to grasp how they can sell data to their customers cost effectively. The US has figured it out, for once they actually beat everybody else to the punch. We would expect larger ARPU growing over the future, and when that happens, we are going to just make more money. In the meantime we are not sitting around waiting, we are going to use the value-added services to make more money.

Great. Lastly, Rick, on cadooz, I mean it is going to add something on, a penny or two of EPS in the fourth quarter, there are no other expenses that go against it? Is that a good way to think about it?

Yes, that is fair.

Okay.

Also, from where we talked 90 days ago, we have got a couple of pennies of headwind with respect to foreign exchange. So maybe two to three pennies, we will see what happens with foreign exchange. Say that we would do $0.41 isa better proposition than we were looking at 90 days ago.

Good point. That is all I have, thank you.

Thank you. Once again, operator, thank you for your help. Everybody who is on the call, thank you for spending the time with us. We will look forward to talking to you again in about 90 days.

Thank you for your participation. This does conclude today's conference call. You may now disconnect.