Euronet Worldwide Inc (EEFT) 2012 Q3 法說會逐字稿

Greetings, and welcome to the Euronet Worldwide third quarter 2012 earnings conference call. At this time, all participants in a listen-only mode. Later we'll conduct a question and answer session, and instructions will be given at that time. (Operator Instructions). As a reminder, this conference call is being recorded. It is now my pleasure to introduce your host, Mr. Jeff Newman, Executive Vice President and General Counsel for Euronet Worldwide. Thank you. Mr. Newman, you may begin.

Thank you, Saeed.

Good morning, and welcome everyone, to Euronet's quarterly results conference call. On this call we'll present our results for third quarter 2012. We have Mike Brown, Rick Weller, and Kevin Caponecchi on the call.

Before we begin, I would like to make a disclaimer concerning forward-looking statements. Statements made on this call that concern Euronet's or its 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, general economic conditions, technological development affecting the market for the Company's products or services, foreign exchange fluctuations, the Company's ability to renew existing contracts at profitable rates, changes in ATM and other transaction fees, and changes in laws and regulations effecting the Company's business, including immigration laws.

These risks and other risks are described in the Company's filings with the Securities and Exchange Commission, including on 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 via the SEC's 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'll turn the call over to Rick.

Thank you, Jeff, and welcome everyone. I'll begin with the third quarter financial results on slide five.

In the third quarter 2012, Euronet delivered revenue of $316 million, operating income of $24 million and adjusted EBITDA of $42.6 million. Our cash earnings per share was $0.42 aided by about $0.01 of tailwind from foreign exchange rates since we last provided guidance. I might also point out that the reported 14% growth in cash earnings per share would have been approximately 22% growth had foreign currency exchange rates remained the same year-over-year. While I might be a bit biased, I'd say these are some outstanding results. I will discuss the segment results in more detail when I get to segment reporting in a few slides.

Let's move to slide six, please. On slide six you can see the three-year trend in transactions for all three segments. The EFT segment continued to show strong transaction growth of 22% in the quarter, with expansion across virtually all markets. Poland, Romania, India, Middle East, and our cross-border acquiring business achieved the largest growth. While we have seen nice transaction growth from our cross-border acquiring business, we are still working to get the second customer. The epay segment saw a modest 2% transaction growth in the quarter. This increase was largely attributable to expansion in North America and Germany, offset by declines in Brazil, Australia, and Spain -- old news, but still impacting our year over year comparison.

Finally, Ria continued to see strong growth, with total transactions increasing 25% during the quarter. This transaction growth was driven by increases by both money transfers and non-money transfers. Money transfers increased 14% in the quarter, driven by a 19% increase in US-initiated transfers. US growth included an 18% increase in transfers to Mexico, marking the fourth straight quarter we have seen double-digit growth in transfers sent to our largest corridor. Transfers initiated outside of the US increased 7%, despite the challenging economic climate in Europe.

Consistent with previous quarters, we continue to gain traction with our non-money transfer volumes such as mobile top-up, check cashing, and bill payment, achieving 86% growth over the prior year, and you may recall, the non-money transfer transactions earn significantly lower revenue per transaction than money transfers.

On slide seven, we present our segments reported results for the third quarter. On a year-over-year, basis foreign exchange rates had a significant impact. For example, the average euro in the third quarter last year was valued at $1.41 compared to this year's quarter where it was valued at $1.25, or an 11% decrease. We saw similar declines in the Polish zloty, Brazilian real, and Indian rupee. In order to present a more clear picture of the business results, on the next slide we have presented our earnings adjusted for currency changes.

Let's move to the next slide, where I will focus on the constant currency results. I'm now on slide eight.

In the quarter, the EFT segment constant currency revenue, operating income, and adjusted EBITDA increased 47%, 80%, and 65% respectively. It's hard not to get too excited about results like this. Growth was driven by a 37% increase in ATMs under management, transaction growth in virtually every market, and increased value-added sales. This quarter's growth really underscores the contribution of the network and product expansion that we've been telling you about, where you can see that revenues outgrew both ATM and transactions. This is the result of value-added services, together with occurring revenues paid by banks to access our ATMs. Value-added service revenue is seasonally higher in the third quarter, which is consistent with peak tourism pattern. We also saw a nice contribution from two acquisitions we made in the fourth quarter last year, ATMs from the CASH4U network in Poland and PayNet in Romania, which Mike will talk more about in a few minutes. While we did incur additional costs related to the deployment of these new ATMs, operating margins expanded nicely both sequentially and year-over-year.

Our epay segment saw revenue growth of 6%, while operating income and adjusted EBITDA decreased 22% and 10% respectively. Revenue growth was from our September 2011 acquisition of cadooz, where voucher revenues are recognized at face value. The year over year story for epay remains largely unchanged from the second quarter. The decline in operating income stems from continued pressured relate to the three matters previously announced -- that is, the change in a mobile operators' distribution strategy in Brazil, the struggling Spanish economy, and the full-quarter impact of certain retailers going direct to mobile operators during the third quarter last year.

However, on the brighter side while the year-over-year story remained unchanged, the sequential story shows some improvement. We saw modest growth in Brazil and we anniversaried the Australian matter, all resulting in the third quarter epay constant currency revenue and operating income being up 4% and 1% respectively. Moreover, revenues per transaction, gross profit per transaction, and operating income per transaction expanded over the second quarter. While we are not where we want to be, we can see the promising sign of our refocused efforts.

In the money transfer segment, constant currency revenue grew 13%, operating income grew 38%, and adjusted EBITDA adjusted 16%, continuing the double digit constant currency growth we have seen in the three previous quarters. This growth is driven by 25% total transaction growth resulting from an increase in network locations and in product sales. Gross margins came in a bit, due to heavier growth in transfers to Mexico, but more than offset in EBITDA and operating margin expansion year-over-year, another strong quarter for our money transfer segment.

Let's move now to slide nine. On slide nine, we present a few highlights for the balance sheet for the quarter. Cash increased as a result of cash flows generated from operations and from temporary working capital changes related to settlements in the epay segment. These increases were offset by $61 million in payments on the revolving credit facility. As we expected, on October 15 we repurchased substantially all of the $171 million principal amount of the convertible bonds using cash and availability on our revolving line of credit. Additionally, earlier this month we announced we have exercised the right to increase the borrowing capacity on our revolving credit facility from $275 million to $400 million, retaining our liquidity flexibility. While we don't have any immediate plans for the use of the increased capacity, it will provide additional liquidity as we consider further opportunities for growth.

After the October 15 repurchase of our convertible bonds, our total debt position of approximately -- total debt position stands at approximately $260 million. And it's approximately $60 million less than it was a year ago, reflecting a consistent trend of deleveraging. Moreover, after the convertible repurchase, we have approximately $180 million of availability on our revolving line of credit, after subtracting borrowing and open letters of credit. I would also like to update you on our share repurchase activity. You will see in our Q that during the quarter we repurchased approximately $1.3 million worth of shares under the board authorization were last year. Going forward we will continue to consider repurchases in light of the share price and liquidity flexibility.

Before I wrap up, I want to provide a bit more color around our EPS guidance. As you likely noted in our press release we said that our cash EPS would be $0.47 per share before a non-recurring tax charge of up to potentially $0.04 per share as a result of federal alternative minimum tax and state income tax expense related to the fourth quarter repurchase of our convertible bonds. Here's what is going on -- the convertible bonds were issued seven years ago, including a feature whereby under the tax code, we were required to take a non-cash interest tax deduction for the difference between the coupon and a higher interest rate.

Then, upon conversion of the bonds into shares, the non-cash interest expense tax deductions would be realized to the extent the market value of the shares at the date of the conversion would exceed the conversion price. Any amounts not realized upon conversion would then be reversed in the period of conversion or redemption. But because we do not generate net-positive taxable income in the US, the additional non-cash interest expense deductions were merely added to our net operating loss carry forward. Since the market price of our stock was lower than the conversion price, the bonds were put to us, and we repurchased or redeemed them.

We will, therefore, be required to reverse the previously deducted non-cash interest expense tax deductions. This essentially reduces taxable income, which would be produced as taxable income, which would be entirely offset by utilization of the NOLs that were created over the past seven years through the non-cash interest tax deductions, which should mean no tax.

Now here's where the rub comes. In the alternative minimum tax calculations, the use of NOL carry forwards is limited, and accordingly, results in a tax payable stemming from non-cash tax items. To make matters a bit more complicated, one of the larger states where we operate has in the past enacted limitations on NOL utilizations for state tax returns in an effort to solve part of that state's budget deficit. While that state has not yet enacted a similar NOL limitation this year, we anticipate it may well happen, given the state continues to have significant budget deficits.

In summary, then, we then want to give you a good picture of how our fundamental business is expected to perform in the fourth quarter, and I think you will see that $0.47 is a strong showing. But at the same time, we want to be forthcoming or fully transparent as to what may develop as one-time, non-recurring, highly usual tax item.

With that I conclude my comments and I hand it over to Mike.

Thank you, Rick, and welcome everybody to the call.

I'm very pleased with the earnings growth from our EFT and money transfer segment. Both teams have worked hard to expand their network and leverage that growth, offsetting the softness that we have within the epay segment. I'll get into more detail in the next few slides but I believe we have the right strategy and we're well positioned to deliver strong earnings as we finish out this year.

Let's move on to slide number 12 and we can talk about the EFT segment, the legacy segment that we started the Company with 18 years ago. Here on slide 12, we presented our second quarter financial highlights for the EFT segment. Our EFT team continued their trend of delivering exceptional results, with 80% operating income growth in the quarter on a constant dollar basis. For the last several quarters we have been telling you about the expansion of our networks and our product portfolio to include additional ATMs and value-added services. Our success with this strategy has been stunning.

As Rick mentioned we've seen a seasonal lift in the revenue from value-added services in the third quarter, so we expect to see strong growth as a result of network expansion in the fourth quarter of EFT. The benefit from the seasonality in the third quarter, though, will make it hard to keep up with the third quarter growth rates.

Now let's move on to slide 13, and we can talk about our specific EFT highlights for the quarter. There are a lot of words on the slide. I apologize, but I'll go over some of the high points. You can see that we signed and launched a number of agreements during the quarter. We deployed three new IAD networks (for those who don't remember, IAD is the industry term for independent ATM deployed), one in each Spain, Italy, and Hungary. This adds to eight the existing countries where we operate independent ATM networks bringing our total IAD presence to 11 countries in Europe.

As Rick mentioned in his comments, we've also seen good contributions from our two acquisitions that we made in the fourth quarter of last year. We acquired ATMs for the CASH4U network in Poland, which has been very profitable for us. We also acquired PayNet which, you may remember, provided similar ATM and POS outsourcing services to our existing business in Romania.

During the quarter, we renewed outsourcing agreements with four existing PayNet customers. Two of those banks, Nextebank and Credit Agricole, also extended their outsourcing agreements to include value-added services. Additionally, we were able to sign network participation agreements with Nextebank and Libra Bank for participation in our Euronet-owned IAD network in Romania. As you can see, we have really been able to utilize the synergies between these two businesses to create value for our bank partners and our business.

We also launched the kiosk project through our joint venture in the United Arab Emirates to provide bill payment and money transfer services. Euronet is now integrated within about 90% of the billers within the UAE. We currently have 230 kiosks live, making us the largest driver in the UAE. Our software team has also renewed agreements with eight banks. These are long-term maintenance agreements that provide very nice profits to our business.

Let's move on to slide number 14. On slide 14, you can see that we continue to have success with our value-added services. During the quarter, we launched these services to our customers in ATMs and POS networks in Greece, Serbia, and Montenegro. We continue to see strong demand for value-added services. This is evidenced by the new agreements we signed to provide these products on our customers' ATM and POS networks in five countries.

During the quarter, we deployed 320 ATMs bringing the total ATMs that we operate to 17,370. We currently have an outsourcing backlog of 339 ATMs. And as a reminder, this backlog total excludes ATMs we plan to deploy through our own IADs and India's brown-label deployments.

Before I can conclude my comments on EFT I would like to give you an update on our ATM deployments in India. During the year, we have deployed almost 1400 brown-label ATMs, bringing the total for us just over 1800. The ramp up of transactions on these ATMs has been slower and more uneven than expected. We continue to evaluate site selection in order to improve the profitability of these ATMs, and expect these ATMs to contribute to our financial growth in the coming quarters. Thank you to our EFT team for your hard work and delivering exceptional results for this quarter.

Now let's move on to slide number 16, and we can talk about the epay segment.

On slide 16 we've got the epay results on an as-reported basis. While the story for epay is not as good as we would like, we're starting to gain some traction. As Rick mentioned earlier, we lacked the impact of certain retailers in Australia going direct with the mobile operators since September of last year. We also saw sequential constant currency revenue and operating income growth when compared to the second quarter of this year. While this is not a success yet, we're optimistic that our tactical plans are taking hold and we're starting to gain momentum.

The good news in epay is we continue to see nice contributions from two of our biggest markets, the US and Germany. In addition, we've got non-mobile growth, with an increase in contributions of 24% year over year, excluding cadooz. I'm confidence that as we lap the negative events, and continue to introduce additional non-mobile content and other value-added product, the epay segment will achieve solid earnings growth in the future.

Now let's move to slide number 17, and we'll present the highlights from our mobile business. As you may recall in December of last year, we launched the last gift card mall in Brazil with GPA, the country's largest grocery retailer. This quarter we expanded the content sold in GPA locations to include Terra, the largest online media company in Latin America. Also in the third quarter, we signed an agreement to sell mobile top-up in GPA locations. Our launch with GPA will be the first time that top-up has been sold in large chain retail stores in Brazil. We have seen many of our prepaid markets in other countries make the transition from top-up being sold exclusively to independent retailers to being offered in larger retailers, and we're excited about this opportunity in Brazil.

We also signed a processing agreement for distribution with Mobitel, a mobile operator in Egypt, through our ATX subsidiary, and when this agreement goes live it will add another country to our prepaid markets. In Spain we signed agreements with two retailers that add MVNO brands to their stores and we'll add eight MVNO brands to Telandcom to 13 MVNO brands to Carrefour locations.

Now move on to the next slide, please. On slide number 18 we present selected highlights from our non-mobile business. During the quarter, we launched Facebook gift cards at 31 retailers across nine countries. We also brought Xbox LIVE to Australia, the third country we're now distributing this product into. Last quarter, I talked to you about the opportunities we saw with software distribution. We continue to see this as a significant opportunity, and this quarter we extended our agreement with Adobe to include exclusive retail distribution in Australia and New Zealand. We expect this distribution to begin in the fourth quarter.

Additionally, we signed global distribution agreements with Kobo, a digital book content provider to Amazon. With this agreement, we will distribute Kobo gift cards in Europe, Australia, and New Zealand. Finally, we inked a deal with Autogrill, the world's largest travel dining company, serving airports and motor ways. Through this agreement we will distribute iTunes and other non-mobile content in their retail stores.

While I'm not pleased with our third quarter epay financial results, I'm encouraged by our sequential quarterly growth. I see a lot of positive things happening within our epay segment, and we continue to refocus our sales initiatives and additional non-mobile content, and roll out additional value-added services, and I feel confident that we'll see good growth return to this segment.

Now let's move to slide number 20 where we'll about our money transfer segment.

On slide 20 we present the reported financial highlights for the money transfer segment for this quarter. I mentioned to you in last quarter's call that we were seeing positive developments in the US market, and my view of the market and the industry certainly has not changed. Money transfers from the US grew 19%, including 18% transaction growth from the US to Mexico. However, this quarter, the growth in the US was not just to Mexico. Nine of our top ten US send corridors saw transaction growth of at least 10% over the prior year. The numbers tell a very good story, one that has been building for several quarters now. We have delivered another very strong quarter, with solid leverage to the bottom line.

But in this quarter I'm sure that the numbers tell the entire story. There are many factors that support the four straight quarters of double-digit growth Rick mentioned earlier. However, the performance can largely be attributed to one factor, and that is execution. The US team has done an outstanding job over the past year of cultivating its agent relationships, diversifying and growing its agents base, and working with its corresponding payout agents that offer incentives that are attractive to our customers and provide residual benefits to both Ria and its partners. As a result, our US team has positioned themselves to convert opportunities into results, and the results that you see here are quite simply the bounty of all the hard work invested over the last two years.

Let's move onto the next slide. Slide 21, year-over-year our total network grew by 21%. Key drivers for this quarter's network growth were the 21 new correspondents that we launched, which combined with new locations launched with existing correspondents, added approximately 11,000 locations to our network. We continue to strengthen our position in top remittance market such as India, Pakistan and Nepal. In Pakistan last quarter, we mentioned the launch of the National Bank of Pakistan. This quarter, we're glad to have Muslim Commercial Bank as our new partner with over 1000 locations already launched. This agreement with MCB, by the way, is a direct result of the synergies of our EFT and money transfer businesses, where our EFT relationship with this bank led directly to the corresponding payout agreement.

In Nepal we launched nearly 1,000 new payout locations with International Money Express, and we signed a new country agreement with Panos Remit, which includes more than 100 locations across the country. Panos Remit is an important partner because it allows us to do home delivery in that market. This country is a key market for our businesses in the US and UK, considering that these are important emigration destination countries for the more than 900,000 Nepalese living abroad. In addition to these launches, we signed 10 new correspondents in eight countries during the quarter that will be launched in the upcoming periods, and I will tell you about those when they come.

African markets continue to be very important for our business in Europe, so we continue to focus efforts on developing a stronger footprint in the region. As an example, we signed new agreements with Wafacash in Morocco and in First African Savings and Loan in Ghana. We've had great success in those two markets. Morocco, by the way, is the third largest remittance market in Africa and receives over $6 billion worth of remittances annually. To put this in proper perspective for you, the Moroccan market for transfers is about a quarter of the size of the huge Mexican market.

Next slide, please. Here on slide number 22 we covered the growth in money transfers from the previous slide, maybe we can focus on the graph to the right. On our non-money transfer transactions, we continue to deliver strong growth as a result of our continued efforts to add additional products to our core money transfer capabilities. This quarter, our non-money transfer transactions posted an 86% growth over the same quarter last year.

The bulk of the growth is from our success in cross-selling mobile top-ups through Ria agents in Europe and the US, with particular mention of the growth in our transactions from Italy. Additionally we saw a nice 27% growth in bill payments and check cashing transactions, which increased 55% in the US and Canada. As you can see the money transfer team delivered another very strong quarter. I look forward to a strong finish to 2012 from our Ria team.

And then we'll move on to slide number 23 to wrap up the quarter. So very briefly here on slide number 23 in our summary and outlook you can see that our cash EPS is $0.42, including about $0.01 of tailwind from FX. EFT benefited from ATM expansion transaction growth in virtually all markets and very strong value-added services growth. epay begins to pare down its losses with emerging sequential growth. Money transfer realizes earnings transactions from strong transaction growth and great execution. On October 15th we repurchased substantially all of the remaining $171 million of convertible bonds.

We maintain our strong liquidity position by increasing our revolver borrowing capacity from $275 million to $400 million in October. Finally we expect the fourth quarter adjusted cash EPS to be approximately for $0.47 assuming consistent foreign exchange rates with the potential caveat Rick explained earlier.

With that I conclude my comments, and I'm happy to take questions. Operator, will you please assist us.

Thank you. (Operator Instructions). Our first question comes from Mike Grondahl from Piper Jaffray.

Hi guys, and congratulations on the quarter. Mike, could you talk a little bit about the EFT backlog by region and how you think that will play out over the next year? And then maybe secondly, attached to EFT, what type of drag were the India ATMs and how do you see that ramping up?

So where we see the growth -- first of all, let's break down where our two or three areas that we see ATM expansion in. So you know, we could say Europe. We could break that down in both western Europe and central Europe, and then also India. Those are the three areas of growth for ATMs for the last year and probably coming up in the coming year.

With respect to India, as Rick said, we've got a lot of ATMs in India. We've got kind of uneven results. I mentioned that on prior calls before as well. We're still assessing that or relocating a few ATMs. We're making sure that we find the secret sauce that matches site selection for India, just like we have in all the other markets where we have IADs. For the time being, you're not going to see a lot of ATMs growing in the coming quarter. We're assessing, relocating, and then figuring this all out. Then we could see some additional growth once we see this all figured out because we've got some really interesting and exciting projections for that market.

You asked about the drag on it -- before I get to Europe, you asked about the drag on it. You know, we've got 1800 ATMs in India, and they're ramping up in their transactions, and so therefore you don't make money on the outset. We're losing right now $600,000 to $700,000 per quarter on that drag. As you look at our EFT results, had we not made the investments that we're excited about in India that would have brought down near $0.01 per share to us this year and would have improved those results in the EFT segment even. So I'm sorry, that's $600,000 to $700,000 per quarter, because if you multiply by four, that's $2 million to $3 million per year.

Now let's go to Europe. We started in central Europe. Everybody knows that. We continue to add to our IADs across central Europe, both the ones that we own and also doing outsourcing agreements and other kinds of deals with banks in central Europe. That continues to be a strong market for us. You know, we kind of dominate several markets or we're getting to the domination stage. I kind of like that, where we have a really strong presence. We don't dominate, but in Poland we have 18% of the ATMs as an example. That is a really strong showing amongst us and the other banks. So we'll continue to make investments in these central European markets as we see them being profitable.

What has changed, though, over the last year or so, maybe two years is the crisis. And in this segment I keep saying "Crisis, what crisis?" Because the crisis is causing the banks to take a hard look at their expenses and their balance sheets and their assets that don't produce revenue for them. And an ATM -- a group of ATMs and ATM network for a bank is a non-revenue producing asset mostly. So what we've done is we've gone to these banks, we are closing deals, and discussing deals to operate those ATMs for them, to do outsourcing for them, to sell them value-added services, etc.

So we will see probably more growth in western Europe with new deals over the next year or two than we've probably seen in our history. That's exciting because know now we've kind of unlocked two-thirds of -- two-thirds of the ATMs in Europe. We're also finding that we can outsource other services to banks, and not necessarily have to operate are their ATMs for them. We can give them access to a number of value-added services. This innovation that we do here has been profitable for us over the last couple of quarters, and we'll continue to be moving forward. Probably when it really comes to our P&L, Mike, Europe, central Europe and western Europe will be the primary growth drivers for EFT as we move forward over the next 12 to 18 months.

Great, thanks -- just really quickly, the buyback that you talked about, was that 1.3 million shares in the September quarter or was that a cumulative number?

That was $1.3 million. It was a weeny amount, but we picked them up where we saw a good buy, and we will continue to be selective and take advantage of the market opportunity for the buyback of stock. We were authorized to buy back up to $80 million -- I'm sorry, Rick corrected me. We bought back $17 million worth of the $100 million the board authorized us to do a year ago.

Thank you.

Sure.

Thank you. Now our next question comes from John Craft from DA Davidson.

John?

Yes, good morning.

Good morning.

I wanted to circle back on a couple of issues -- one, specifically into the US to Mexico corridor at 18%. It looks to me that might be your strongest ever, at least I've seen for a while. And Mike you suggested that execution was the rationale there for the success. But I'm assuming here that there are also some share gains from your larger vendor competitors, and is it also fair to say that there is an improving industry outlook overall, maybe related to housing?

I can't tell you exactly where the new money is coming from, but certainly, I think with our kind of slightly recovering economy here, the first people that most businesses sign on are temporary workers whether, that is in construction or production or whatever. Immigrants are classically kind of temporary workers. You tend to see your economic recovery first in our neck of the woods before you see it in the full-time guys. Execution, when we talk about execution, we point out that we've actually been cultivating new and stronger relationships with lots new agents over the last two years. Then as the economy started to turn, we were able to capitalize on that.

With respect to market share gains from our competitors, I don't have their data versus my data right now. You'll have to see how they all come out, but obviously having an 18% gain, which is the largest gain we've ever had to Mexico, means it had to come from some place. I don't think that the number of transactions to Mexico, although we haven't seen Bank of Mexico's numbers yet, grew anywhere near 18%.

While that 18% is the largest we've had since we have owned Ria. Ria in its past has had numbers like that, representing that the market is available out there.

Right. Got you. That's helpful. One more if I could, going to some of the struggling epay areas. It doesn't appear that the changing strategy of some of the vendors in Brazil or the go direct strategy in Australia has spread to other, you know, other markets or other vendors within those markets. Is it fair to put those issues behind us?

I think so. I would -- I would have to say that, you know, we don't really have time on this call to go into it in detail, but I have a number of times. You hate to promise that something like that could never occur again, but I would tell you that the models chosen and for sure in Brazil, and maybe even in Australia, are a bit counter-intuitive and don't match anything that we've ever seen before. And I think for that reason now that you've seen it for a year, everybody has seen it for a year, and nobody is doing anything like that.

In Brazil in particular every operator that we know in every single other market is moving away from small distributors to large distributors because they don't want to get stuck with a receivable from a bunch of little fly by night companies. They like the fact that you have a larger company with balance sheets and transparent financials, because don't forget we only get paid call it 7% or 6.5% commission, but we have to about give the rest, the whole face value less that, to the mobile operator. So the receivable that we have -- that they have on their books is considerably higher than the amount of profit we make per transaction. Sometimes and we've seen this happen time and time, market after market, some of these guys just basically take the money and run.

John, I would add just a couple of other observations to that is that the challenge that we do talk about from time to time is that we're in so many different markets, and it's a little harder to understand our business because we're not just an US-type of base business. That's also the beauty of our business is that we're diversified across a number of markets. We have not seen things like that, trends or activities like that, marketing approaches, spread from market to market or even within the same mobile operator ownership group that may operate in different markets because they just are different culturally -- cultural approaches to their marketing and consumer usage patterns and things like that.

The only thing that we do see that is consistent from market to market is the efficiency of the use of electronic top-up. We obviously take advantage of that, and then we'll continue to deploy as again we've seen consistently market to market is the interest in the non-mobile product so that we leverage each one of those points of sale. Again, I would just say that the diversity is what we benefit from, and we do not see those kinds of things hop from market to market.

Great. That's helpful, and nice work.

Thank you very much. Next question, please, operator.

Thank you. Our next question comes from Chris Shutler from William Blair.

Hey guys. Good morning.

Good morning, Chris.

Let's start in EFTs. So you added Spain and Italy to your IAD network in Q3 and that's your first ATM presence, I think, in those two countries.

That's true.

Can you talk about the opportunity there in terms of looking out a couple of years, how many machines you think you might be able to install there, and just what the competitive environment looks like?

Well, first of all we've only got about five or so ATMs in each because we went live just last month. We don't have many in there right now, so it didn't change our numbers. But the fact is we were able to take advantage of PSD license, and acquiring license to go into these two markets, bringing our number of markets up to 11. Spain and Italy are two huge markets. When you look at what is happening, the number of ATMs in Spain has gone down 5% or 6% over the last two years because banks are removing, closing down branches and closing down ATMs. What we have recognized is that there are opportunities across several countries in Europe to take advantage of the fact that the bank is weak, and there are opportunities to have ATMs in well-placed locations and give consumers a good and transparent -- or a good experience and ubiquity for where they are.

I can't tell you how many, but you know, I mean, you would think there would be a couple hundred in each market, and maybe more. We'll see. What we do in every market is we keep adding ATMs until we realize we're getting to a profit saturation point between all the different kinds of transactions that we sell in our ATMs. What is interesting that number keeps getting bigger and bigger because we offer more and more services to those customers and more and more revenue streams to ourselves.

Okay. Thanks, Mike. And then couple of questions on epay. I guess there are a lot of moving pieces right now in that segment. If you strip out the areas that aren't performing so well, Brazil, Australia, and Spain, can you walk us through what the -- kind of what the basic growth rate is in the other countries, the other big countries in the segment whether it's US, Germany, etc., just so we have some idea what we should be looking at as a normalized growth rate when you do come out of these issues?

Yes, well, Chris, for competitive reasons, we will not give you numbers on each one of those markets. But as Mike said in the value-added services, we saw good strong, very strong double-digit, like 24%, kind of growth year-over-year on non-mobile product. That's an overarching observation. So that's obviously good. Also, recognize that, or I'll just point out, that the change that we saw in -- the change that we saw in Australia and Brazil was pretty substantial. Recovering off of those takes a fair bit of work. But I think it's fair to say in the US market, we've seen good double-digit transaction growth.

In the Germany market, it's been one of the key fuelers of the non-mobile product, so seeing good double-digit growth in those numbers year-over-year you can anticipate Germany again was a good, strong-growing country. We've got a couple of other smaller countries that are continuing to contribute to the growth cycle, places like Italy where we're still a distant third player in a very big mobile top-up market. We're continuing to make inroads. As Mike mentioned, one of these large customers that we signed up here was in Italy. We'll continue to that. I think if you take a look at those other markets kind of on balance we would probably see something like mid to upper single digit growth rates coming out of those kind of markets with a bit of an advantage tilted towards non-mobile.

Mid to upper single digits you're talking profitability.

Yes, yes.

Okay, and then the last one is on the -- you didn't talk, I don't think, about the Sydney Transport deal at all in the call. Can you give us --

Yes, the update on that is I think we go live here in the fourth quarter.

With the pilot.

With the pilot, but the pilot doesn't mean that it's not going to go live. The pilot means we got to work all the kinks out of the system. After we do that, we'll start to roll that out across next year. Which quarters -- oh, go ahead, Kevin, you've got the updates.

Chris, the Sydney project actually involves three phases. The first phase is ferry boats. The second phase is trains. And the third phase is buses. That roll out is over a long period of time, over three years. The first phase is ferries, so we'll be doing a pilot going live in December with one of the ferry boats. If that goes well, gains traction, they'll expand it to more ferries in 2013. At the end of 2013 we'll start a pilot with trains, and it will go like that.

Okay, thanks a lot, guys, I appreciate it.

If we could just like to get them to add airplanes in there, and then we would have those --

Planes, trains, and automobiles, and ferries.

Thanks, guys.

Thank you. Our next question comes from Jason Nacca from Sidoti.

Hey, Jason.

Hey you guys, how are you doing? Just a quick question on cadooz -- now that you've had it for over a year, I think you should have some better visibility. Can you provide some insight on what you guys are seeing on the conditions on the corporate side particularly in Germany and other countries alike?

cadooz.

Oh, cadooz. We're cautiously excited about what they have on their plans for the fourth quarter. It's a funny game there because a lot of these corporations use them as kind of Christmastime incentives to their employees or to gather new customers. So it's one of those things where everybody crams everything in in the last quarter. That's a big quarter for us, and we see those revenues realized over Q4 and Q1. We're cautiously optimistic that we're going to have a record-breaking quarter for cadooz in Q4, and we'll let you know at the end of the year on our next call.

There are two other things I would add to that, Mike, and that is Germany is one of the strongest and certainly biggest economies in Europe. As we see that economy being strong, corporations being strong, the corporations are continuing to do things to promote their products, and things like that. So that has been helpful to us. Even as we reflect backwards, we've seen some really nice winds on the cadooz side coming out of the corporate sector there. Good, strong economy, a big economy in Germany, and all that plays to our favor.

The second thing, Germany is one of these countries where they offer companies nice tax incentives to pay for things like meals or other types of things for employees that get worked into these voucher programs that cadooz offers. So there are a couple of things that kind of go really well for us here in terms of macro-trends here -- the strength of the business environment in Germany together with the added incentives for things like being stimulated by the tax structures. That's a good piece of business.

The final thing I would say, Rick, is that we're somewhere to the other businesses we're constantly evolving and creating new products, and the cadooz business has produced three or four new products that seem to be gaining traction in the market. So we're pretty happy with that business.

Okay. And just one more question. Last quarter we talked about some cash payout locations in Thailand, about 1700 that you added. Can you provide me with some color on this expansion which you're seeing in Thailand, whether you're getting any traction, and some other Southeast Asian region?

We mentioned a few here for Asia. We mentioned the ones around India, Pakistan, Nepal, etc. Of course, Malaysia we're focusing -- we're always focusing on places like the Philippines. I don't have any specific information for you other than that's just our focus. We'll just keep adding more and more payouts in more and more countries -- and better ubiquity, because you got to have a payout close to where the family member lives of the guy who is sending back money. So if we, when you have twice as many payout locations and twice the ubiquity, you can get more and more customers. That's just an ongoing mantra. You'll hear me talk about that every quarter until I croak. So nothing specific, other than we'll just continue to work it.

Okay, great. I think that's it.

Okay, thank you. Operator, I think we're pretty close to the top of the hour. I can allow one more question, and then we'll sign off.

I'm show nothing questions at this time, sir.

Okay, good. Well, I thank you one and all for taking an hour with me, and I look forward to talking to you again in another quarter. Bye bye.

Ladies and gentlemen, thank you for participating in today's conference. This concludes our conference for today. You may all disconnect and have a wonderful day.