Euronet Worldwide, Inc. (EEFT) Q4 2012 Earnings Report, Transcript and Summary

Greetings, and welcome to the Euronet Worldwide Fourth Quarter 2012 Earnings Conference Call. [Operator Instructions] 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, Ben. Good morning, and welcome, everyone to Euronet's quarterly results conference call. We will present our results for the fourth quarter and full year 2012 on this 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'd 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 and general economic conditions, technological developments affecting the market for 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 over the company’s network, and changes in laws and regulations affecting the company's business, including immigration loss. These risks and other risks are described in the company's filings with the Securities and 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 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. I'll now turn over the call to Rick Weller, our CFO.

Thank you, Jeff and welcome to everyone on the call. I will begin my comments with the fourth quarter results on Slide 5. After reviewing the results for the quarter, I will cover the full year. For the fourth quarter 2012, the company reported revenue of $351.2 million, an operating loss of $1.9 million and adjusted EBITDA of $45.8 million. As you saw in our press release, the operating loss included a $28.7 million impairment charge related to our Brazil goodwill. As we have mentioned over the last several quarters, a change in certain mobile operator strategy limited our ability to distribute products in certain markets within Brazil. We have cut costs and introduced nonmobile content into the market to offset the impact of these changes. However, these nonmobile products are new to Brazil and have not yet replaced the lost earnings. This is a non-cash U.S. GAAP adjustment. So to sharpen the focus on the performance of the business, we will center our discussion on adjusted operating income, which excludes the Brazil impairment. Our adjusted earnings per share for the fourth quarter was $0.47 less the $0.03 in onetime tax charges related to the repurchase of our convertible bonds, which I explained to you in the third quarter. We finished the quarter with a minimal unfavorable FX impact, less than $0.001 after tax. And we incurred about $0.01 of expense related to acquisition diligence that was not included in our $0.47 guidance. At times, during the quarter, it kind of felt like we were getting a bit of FX tailwind, but reflecting back in the quarter, you can see, for example, that the euro to the dollar dropped to about $1.27 in November and has since continued to improve. I would also like to provide an added level of…

Thank you, Rick. Wow, this is a good year. If you would start please on Slide #19, I'll continue with my presentation. Here, you can see the revenue was up 15%, and operating income up 17%. That is definitely the way to complete the year. I'll begin my comments on this slide and it was just a great year for our EFT team. We successfully executed on our strategy, we signed more contracts than ever before, we successfully increased our value-added service offerings and reach. We entered new markets and processed more than 1 billion transactions for the first time in our EFT history. As you can see on this slide, we are moving into 2013 with a strong pipeline of projects, which we expect to contribute to strong earnings in the coming year. Now let's get to the specifics. We doubled our presence in the Ukraine by signing an asset purchase and network participation agreement with a member of the French BNP Paribas Group. This agreement to add 172 ATMs was signed after a successful purchase and integration of 116 ATMs from the same bank in 2011 and is a perfect example of how we can provide banks with an opportunity to turn their costly ATM estates into profit contributors. In Poland, we expanded our offering to provide cardless ATM transactions for Deutsche Bank in Poland. This is an extension of our technology that allows Ria beneficiaries to collect funds at the ATMs in Poland without the use of a debit card. Deutsche Bank customers can now initiate a transfer to their online account and the funds can be collected by a beneficiary at any of our thousands of ATMs in Poland. We also signed a prepaid card issuing and POS driving agreement with Lamda Card Services in Cyprus.…

[Operator Instructions] Our first question comes from the line of Mike Grondahl from Piper Jaffray.

The first one just really has to do with the iTunes business. Some of the new countries you won, could you kind of talk about how that is expected to ramp up in 2013? And then secondly, if you could just talk about, now that India is profitable, how do you expect those earnings to kind of ramp in 2013 and the rollout of the 1,500 new ATMs there?

Kevin?

So this is Kevin. Regarding iTunes, the bulk of those countries are small countries that won't have a significant impact on results. But the 2 countries that we're pretty excited about are Turkey and Russia, those are both large countries from the standpoint of population, and they're very successful countries with Apple hardware. So we should expect to see some impact from those -- from all of it but, specifically, related to Turkey and Russia. Regarding India and Brown label, Rick, you want to try to take that?

Well, I think that we'll continue to see our Brown label ATMs increase. We're very excited about seeing that we produced -- we got to operating profit numbers in the fourth quarter. As Mike mentioned, we've got about 1,500 more under signature now. We would expect to see the rollout of those kind of start towards the latter part of the first quarter and then gain momentum through second and third quarter. Right now, I would say that maybe a little more than half of those 1,500-or-so, we would deploy this year. If we see a little better than expected results on some of those, we might increase that number of deployments towards the latter half of the year. But probably, like I said, a little more than half of those we'd roll out this year.

Our next question comes from the line of Chris Shutler from William Blair. Christopher Shutler - William Blair & Company L.L.C., Research Division: In Money Transfer, obviously, pretty strong results there. Just curious, if you dig into the numbers a bit, I'm curious if you're seeing outside strength in any particular geographies. And then, also, Mike, can you help us understand whether most of the growth, do you think it's being driven by existing customers doing more transactions, growth in the average transaction size or new customers? Ultimately, I'm trying to get a sense of how much of the improvement you think is more market share versus underlying improvement in the economy?

I think in Europe, you're seeing underlying improvement in the economy, particularly, in Spain and Italy, combined with new markets where there are market share gains, particularly, France, Germany, Nordics, et cetera. In the U.S., I would say, that's probably, an improvement -- probably, a combination of improvement in the economy and you've kind of seen that with some of the economic indicators here in the U.S., a little bit of construction kicking in and so forth. But combined with the fact that there has got to be some market share gains, because when you look at Bank Mexico's numbers, where they actually, they monitor the total number of transactions that come into the country, they're essentially flat, yet our numbers are up well into the double digits. So all that means is, we must be taking market share from somebody. Christopher Shutler - William Blair & Company L.L.C., Research Division: Yes. That makes sense. And on the guidance of $0.37, that's down $0.10 sequentially, due, obviously, to seasonality, but up year-over-year. But I'm just wondering if there's anything holding back the guidance at all. The last 2 years, the sequential decline from Q4 to Q1 has been between $0.08 and $0.10, if you normalize for that tax benefit last year. And you, obviously, have -- there were number of things coming online in Q1 with Pure Commerce, easy pay, some FX tailwinds and then the repurchase. So I just wanted to get a little more color there.

Yes. Well, those are good observations. One thing though, remember Rick's comment when he mentioned Q4 versus Q3. What we're finding now with our own independent deployments of ATMs, that we've got a significant growth in the fourth quarter, even more than we used to, where we used to have ATMs or we just get local guys doing lots of transactions during Christmastime. We now have the extra benefit where we're starting to put these independently deployed ATMs in a number of Western European countries, and we just get a lot more action in Q4 than kind of we have in the past. So the seasonal drop becomes a little exacerbated. And actually, I'm thrilled that we're going to do what we're going to do in Q1, just based upon the seasonality.

Chris, and I would add to that, the success in the nonmobile product has pushed a little bit more into the fourth quarter because products like Amazon and iTunes and stuff like that, have a very strong holiday sales effect. And so we're seeing a little bit more of that in the fourth quarter, and as Mike said, a little bit more on the value-added product side on the ATM.

With those gift cards, I think, the number, Kevin, you can correct me, is around 40% of the annual sales happen in the fourth quarter. So because we're doing more and more iTunes and Amazon and all of these gift cards, we just all of a sudden, across not just our EFT segment, but our epay segment and others, we just see a really strong bump up seasonal kind of way out of whack with Q1 in our business. It's good news, though, for Q4 and being able to hang on within $0.10 in Q4 and in Q1, that's really good news. Christopher Shutler - William Blair & Company L.L.C., Research Division: Yes. Okay. And then, can you just help me size the -- this revenue contribution for -- with easy pay and Pure Commerce, I guess, on an annualized basis, as we think about '13?

I don't think that we put out those. On Pure Commerce, we said that they did about $15 million in annual revenue, we didn't put out anything on easy pay. But I think the $15 million is, probably, not a bad number. I would actually expect it to be better than that as we experience growth on that side of the business.

Our next question comes from the line of Jason Nacca from Sidoti & Company. Jason Nacca - Sidoti & Company, LLC: I want to get right into it -- speaking about the outsourcing of ATMs in Europe. Given, you said in the Money Transfer business, we're seeing some improvements in economic conditions. Is that kind of changing the story for what some of these banks are thinking regarding their outsourcing strategies?

I think that the market -- what you say is interesting, particularly, with Money Transfer and with immigrants' jobs and so forth. They tend to lead the rest of the market and you'll see that well in advance of when you see the general market go up. The reality is, the crisis is still the crisis in Europe. And in fact, where people have passed stress tests, then they start to fail them now just because their economy's so weak and they can't make their operating income to cover their numbers. Now we like that. Actually, the crisis is our friend because it is causing these banks to have more conversations with us about doing innovative solutions to make their ATMs space, which are nothing but a cost center right, now into more of a profit center. Just like we did with the BNP Paribas deal in the Ukraine, we're doing other deals like that and discussing other deals across Europe. So crisis is still here in Europe, I'm loving it and we will take advantage of that. Jason Nacca - Sidoti & Company, LLC: Okay. And then my next is the DCC product, regarding the Pure Commerce as well, kind of pitching into that. Are you seeing some growth there that is more than you expected, given the Pure Commerce and the reputation that it has? Maybe find me a little color on what you're seeing now with that acquisition and if it's changing some of your outlook?

Well we have good goals for Pure Commerce, but understand, we've only had it under our belt for like less than a month. So I can't tell you that it's beaten our projections yet, because we just haven't had it long enough. But I'll tell you, there's a strong management team, very entrepreneurial, thoughtful guys who run that. They've stayed with the business since we acquired them. They've got some great plans for a continued rollout this year. We're just -- it's kind of a block and tackling here, we don't even have to sign much. We just have to kind of -- we just have to just roll out what we've got, and we're on it. We've got -- we're also leveraging some of our technical prowess that we have in our own EFT division to help them. So we'll be able to give you a little bit more color on this as the quarters go on because, like I said, we've only had them for a month. But when you think about what they do, it's a great product that could be used throughout the world. So we just need to get it into more places and bring it live with their current agreements they have signed. Jason Nacca - Sidoti & Company, LLC: Now regarding your Sydney rollout of this 3-phase program, specifically, these transportation related products, are you seeing any more interest worldwide from either governments or municipalities regarding you guys, kind of taking some market share there and seeing more interest?

Yes, so this is Kevin. So the -- let me speak to the Sydney project and then I'll speak to the global interest. On the Sydney project, as you recall, I think we said in the last update, it's a 3-phase project. We're in the pilot stage of the first phase. I'm very pleased with the technical execution on it, it went exceptionally well. In terms of measuring the demand for the product, it's still too early to predict. We're only about 6 weeks into it with a limited rollout, but we remain cautiously optimistic. Regarding interest from others, what we've done is we aren't doing that directly with transport authorities, we are using partners like, in the case of Australia with Cubic. And these partners are bidding on projects all around the world, and as they win these projects, we believe, we'll continue to be the preferred partner to provide our cardless solutions and our cashload solutions on the transport cards.

[Operator Instructions] Our next question comes from the line of Peter Heckmann from Avondale Partners.

Could you give us an update on cadooz first full year of ownership? Is there a way to break out a little bit, how to think of year-over-year growth in that entity? If there are any -- if there's an ability to enter into some new markets or particular successes that you want to point out. It seems to me that cadooz, if I remember correctly, was limited primarily to Germany and there wasn't really significant opportunity from other European countries, maybe some larger competitors. But it seems like that could be a much bigger business at some point, is that tracking with those expectations?

Pete, this is Kevin, again. So the 2012 performance of cadooz was generally in line with our expectations. We've made the decision last year, we explored some expansion opportunities and we made the decision last year to really continue to focus on Germany. If you recall, there's 2 elements of the business. There's the rewards business related to employee incentives and compensation and then there's a promotion side of the business where they do marketing promotions for companies. We had a lot of success with additional promotions. We had continued success on employee recognition but we really grew the promotion side of the business last year. Additionally, the other focus we had in 2012 was to expand the product content and we successfully did that by introducing the number of new products into the cadooz portfolio. For our 2013, your question is spot on, we are looking at expanding the cadooz model into likely 2 countries. We're not yet ready to, for competitive reasons, to say where we’re going to do that. But there's 2 countries where we're going to -- we feel are well-positioned with moderate competition and the product suite that we have, we think, is good for those markets. And so that's the plan for 2013.

Okay, great. And then Rick, in terms of long-term debt options, I may have missed it if you mentioned it, does it make sense to explore some fixed rate options for the debt at this point, or are you pretty comfortable with the amount of debt on the revolver?

Yes, Pete. I guess, I would say is that we're satisfied with where we are right now. However, as you know, the debt markets are pretty attractive. We've seen some very attractive longer-term rates. So what I would tell you is that, we keep our eye on the markets from an opportunistic standpoint. If there was something that would make sense, it would, probably, be along the line of some type of a longer-term fixed rate to take down the revolver, that would then, just a free up possible capital, if you will. But right now, we don't have any kind of urgent plans to rush to market on that.

But it is nice that S&P gave us an investment grade rating, so that's just going to make it even more attractive mathematically for us.

Right. Right. And then last question. Is there any regulatory change, pending regulatory change that could be either positive or negative that we should be keeping our eye on? It's always a little difficult, as an outsider, to kind of due diligence to all different the markets that you're in and some regulatory changes may just not be material, but anything that we should be tracking from either positive or negative standpoint for 2013?

I -- we're not tracking anything to -- there just doesn't seem like there's much out there that could affect us.

Our next question is a follow-up from the line of Mike Grondahl from Piper Jaffray.

Mike, I don't know if you commented or did you say anything quantitatively about your ATM backlog? And then if you could just handicap, maybe Euronet's chances of getting a deal in Western Europe this year, that would be helpful. Thanks.

Okay. So we've got about 300-or-so ATMs in our classic kind of backlog count methodology, but our business is evolving, so that doesn't -- it doesn't really apply as well anymore. So your question is a good one because we've always excluded the Brown label from our backlog, so we've got 1,500 of those ATMs, which we can put out all or few of those, depending on how profitable we can get. And then on top of that, we've got our own plans to expand our IADs, our Independent ATM Deployments, across Western Europe and Central Europe in a neighborhood of 500 to 1,000 ATMs. So when you kind of add it all up, I don't know, we'll see what happens in India, but there could be a couple thousand ATMs this year. We'll see, maybe 2, 500. But we're focused, particularly, in Europe, about -- I mean, sorry, in India, about -- because it took us a little bit, it took us an extra quarter or so to get profitable more than what we thought, we're going to be really careful about choosing our sites there. And then I forgot what the second question was.

Western Europe.

Oh, yes. Western Europe. We are talking with a number of banks in Western Europe. You noticed just nailing that deal with BNP Paribas, I mean, we're dealing with the Western banks, but they're making their decisions, so far, in Central Europe. We've had a number of discussions with Western banks for value-added services on ATM networks, about doing outsourcing or acquiring networks. We haven't closed a deal yet. It's kind of like always -- it's hard to predict these things until I've got their signature on a piece of paper. So but I will tell you, we are in discussions.

Our next question is a follow-up from the line of Chris Shutler of William Blair. Christopher Shutler - William Blair & Company L.L.C., Research Division: In the EFT segment, the 1,700 Brown label ATMs in India, can you help quantify how much of a drag that has been to operating income in 2012?

What? $0.03 to $0.04?

Oh, yes. It's $0.03 to $0.04, maybe a little bit more. But probably $0.03 to $0.05 a share. Christopher Shutler - William Blair & Company L.L.C., Research Division: Okay, great. And then the only other one I had is in the corporate expense in the quarter. In the release, you guys talked about higher incentive comp. Then I looked at the adjusted results, and it looks like stock based comp only increased about $100,000 year-over-year. So what am I missing and how should we think about corporate expense going forward?

The other part of that was just, in looking at a year-over-year number, Chris, on cash bonus or short-term incentive, we had a little stronger numbers in the fourth quarter because as we came throughout the year, it looked like we were headed towards achieving the lower end of the targets, and as we completed the year and finished out the numbers that came in at the higher end of the target, so it was just kind of like a bit more cumulative pick up in the fourth quarter compared to the same kind of approach in the prior year. Christopher Shutler - William Blair & Company L.L.C., Research Division: Okay. So going forward, it should normalize back down to the $7 million per quarter-ish range, somewhere in there?

Yes, I'd have to kind of -- yes, that doesn't seem to be too bad. And we do get a little bit of volatility by quarter on the stock based comp piece just because of -- substantially, all of our stock based comp is performance-based as opposed to just awarded shares. And so that performance base causes a lot of volatility in the accounting for that. But I think, your $7 million number is kind of directionally there.

And that does conclude our question-and-answer session. I would like to turn the conference back over to Mr. Michael Brown for any closing remarks.

I just want to thank everybody for taking the time on the call. We'll be around if you got any further questions. Thank you very much.

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program and you may all disconnect. Have a great rest of the day.