Greetings and welcome to Euronet Worldwide Second Quarter 2019 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [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, Sarah. Good morning and welcome everyone to Euronet's quarterly results conference call. We will present our results for the second quarter of 2019 on this call. We have; Mike Brown, our Chairman and CEO; Rick Weller our CFO; and Kevin Caponecchi, the CEO of our epay Division on the call. Before we begin, I need to call your attention to the forward-looking statements disclaimer on the first page of the PowerPoint presentation we'll be making today. Statements 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 that are listed in the first page of our presentation. 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. In addition, the PowerPoint presentation includes a reconciliation of the non-GAAP financial measures that we will use during the call to their most comparable GAAP measures. Now, I'll turn the call over to our CFO, Rick Weller. Rick?

Good morning and thank you, Jeff and thank you everyone for joining with us today. I will begin with my comments on Slide 5. We delivered second quarter revenue of $692 million, operating income of $118 million, adjusted operating income of $117 million and adjusted EBITDA of $150 million. Our adjusted EPS for the second quarter was a $1.69, a 28% year-over-year increase and in-line with the guidance we provided in April. This strong result was driven by double-digit constant currency operating income results from all three segments of our business. Versus guidance, we saw that a bit of tax favorability was offset by headwinds from changes in foreign currency rates. I'd also like to point out that our GAAP calculation of weighted average shares included about half of the total shares issued to settle the value in excess of principle of our 1.5% convertible bonds. However, you will notice that we have included all of the issued shares in our non-GAAP adjusted EPS calculation to be consistent with both the GAAP and adjusted EPS share calculation in the first quarter and the number of shares we considered in our second quarter guidance. With these shares fully included in this quarter in our adjusted EPS you will not see any further dilution from the settlement of and the redemption of the 1.5% convertible bonds on our adjusted EPS calculation in future periods. Let's go to Slide 6. Here on Slide 6, we show our three year transaction trends by segment. EFT transactions grew 11% driven by expansion of our ATM and point-of-sale network processing in Europe and Asia. epay transactions, grew 40% with continued digital media expansion and significant contributions from wallet driven mobile pop-up transactions in India and digital code server transactions in the U.S. both of which earn…

Thank you Rick and thanks everyone for joining us today. I'll begin my comments on Slide 11. I've been visiting with many of you and you've asked for concrete examples of how our technology gives us a competitive advantage for our business. So, before we jump into the segment specific highlights, I would like to share with you a few examples of how we are utilizing our technology to accelerate the growth of our business. For those of you that are new, there are three ways which we utilize our technology. First, we use the technology internally in our business across all three segments to leverage our assets to offer customers additional products, kind of cross-selling. Second, we expand our network and connections to third parties to allow them to access our broad product portfolio. And third, we sell our technology to third parties interested in creating a new payments ecosystem, which would give them all of the advantages of our technology as well as the extension of Euronet assets that they may choose. We continued to have success in all three areas. I will start with an example here on page 11 of how we have sold our technology to a third party to create a new payment ecosystem for an entire country. As you may remember earlier this year, we told you about our agreement to implement Ren with the Bank of Mozambique and SIMO the entity that owns the central banking switch in the country. What we are delivering here is a new financial ecosystem for the whole country with a full suite of digital capabilities that will make the country one of the most advanced financial systems in the world. And while you and I might not think of Mozambique very often, it's important to note…

Certainly. [Operator Instructions] Our first question comes from the line of Mike Grondahl with Northland Securities. Your line is now open.

Yes, thanks Mike and Rick. Any high level comments on how Visa DCC did kind of compare to our expectations?

Yes, pretty much right down the fairway, Mike.

Got it. And do you think there's a little bit of a ramp-up to this Visa DCC just kind of like educating the consumer? Or how do you think that plays out in kind of 3Q, 4Q?

Okay. So there won't be any ramp-up because basically we've targeted lot of our consumers are tourists, and so they don't – they're just in our country for a short while, so they just walk up and then it's right down the screen just like MasterCard has been for many years. But with – there is still a little bit more ramp-up in the third quarter for some of the pass-through agreements that we have. So we'll get a little bit more of that. The ones – these are banks who are outside of Europe, who had never done DCC on Visa needed to get recertified, so that just takes a little bit of time. But the bulk of it is coming through in Q2 starting on April 30.

Okay, great. Thanks a lot, guys.

Thank you. Our next question comes from the line of Rayna Kumar with Evercore ISI. Your line is now open.

Hi, Mike and Rick.

Good morning.

Good morning.

You mentioned a double-digit growth sustainable in Money Transfer. When can you return to the double-digit revenue growth that we've seen in the past? And how should we think about Money Transfer growth for the next few quarters?

Well, I mean, the nice thing is the bulk of our business in Money Transfer are the international remittances, both from the U.S. and from – from North America and from Europe and Asia. And that continues very, very strong. We do have a challenge here with – primarily with the additional ID requirements, but we think that will subside at some point in time. And the nice thing is the other parts of our business are growing so quickly and robustly that I think we can pass that up. I'm not sure which quarter that will happen in, but for medium to long-term, we're just looking really good because this huge, almost $690 billion market is still out there for us, and we are so well positioned for that. That's what we're really good at. That's really how Ria was born. It was attacking the independent channel around the world, and we continued to do that.

But, Rayna, we started implementing this in the latter half of last year. And so I think that it would be fair to say that we've got just a little bit more time just to get through the annualization, if you will, of that. And when we do that, I think it's fair to say we'll continue to see the robustness that we've seen in – as Mike said, in all the other parts of our business because we had – we just had absolutely impressive growth coming out of our European operations. That, as I mentioned, gave us the ability to produce a little better revenue and profit per transaction. That's what, obviously, helped give us double-digit operating income kind of growth numbers. So the strength that we're seeing out of the other parts of our business give us the ability to kind of get through this thing here. But I think it will probably – we'll probably feel a little bit of this pressure for the next couple of quarters, we'll get through that annualization, and I'd like to think that, as Mike said, on an intermediate term basis there, we'll be back into the same kind of nice double-digit numbers that you've seen in the past.

That's extremely helpful. You had a very strong epay quarter. Help us understand what the sustainable revenue growth and EBITDA growth rate is for that business.

Go ahead.

Rayna, we've been probably a little bit more cautious on epay over the last number of quarters because it's really kind of hard to exactly predict when the mobile operators will decide to stop lowering their prices. And as you know, the biggest – most of our revenue there is earned on a commission basis, which is a percentage of the top-up value of those transactions. So as Mike said, we don't want to say that we've seen the last of it, but we have seen at least one sign where a mobile operator has raised their rates and is that kind of foretelling for the future. Now – so I think that certainly we feel better about it, but we also want to continue to be mindful of the fact that there's a really competitive mobile operator market out there. Now that being said, we continue to add more and more digital content into our portfolio. And even as we point out these high volume of low-value transactions in India, we are signing up with more and more wallets that are out there. That will drive more and more value into our business. So we're feeling pretty good about the – as we said, kind of epay reinventing itself. So I don't want to go out on limb and say, hey, look, I think that we've got a good sight line to a nice double-digit growth number, but on an adjusted – once you take out those India transactions, we saw transactions grow by 9% and revenues by double-digit, and it was just this last quarter. So I think we feel pretty good about it, but I probably wouldn't throw that number into the double-digit range. We certainly have the ability to perform on the upper side of the single-digit range. And I think we'll have additional chances and opportunities to break into double-digit category. But Kevin, you may want to make other observations.

Yes, Rayna, this is Kevin. So the – probably the – as Rick said, the couple of exciting components of epay are the continued expansion of products that we carry and then the geographic expansion, specifically geographic expansion into developing markets through digital channels. And those geographic expansions typically start with one of the leading brands like a Google or an iTunes to break into the market and then other content quickly follows. And so I'm cautiously optimistic that we'll be able to sustain the current growth and, hopefully, accelerate it.

That's great detail. And just one final question from me. If you can just give us an update on your capital allocation plan, specifically your strategy in M&A?

Well, I don't think anything has changed from maybe the last quarter. We're looking at acquisitions all the time. We must be looking at five different ones right now. So that would be an opportunity. But by the time we look at these things, a lot of times they turn out to be not what they have been purported. So we don't do too many transactions, but that would be one place to use capital. If you saw some kind of dislocation in the market with respect to our stock, we could buy back our stock, but those are the two areas that we see – the two big areas that we see large uses of our cash.

Thank you.

Thank you. Our next question comes from the line of James Schneider with Goldman Sachs. Your line is now open.

Good morning and thanks for taking my question. I was wondering if you can maybe comment, Mike, on the EFT segment and, specifically, your target for ATM additions of high value. You talked about 3,500 or 4,000 this year. So maybe talk about what is the rate limiting step in that? Is it still site flexion? And whether the Visa DCC opportunity and expansion there has actually kind of widened the range of potential available ATM additions that might be profitable because of just the overall higher profitability at some marginal locations?

That's exactly true, James. So you're – when we're able to add the Visa DCC, then maybe a B-plus site becomes an A site or maybe a C-plus site becomes a B site. And so it kind of lowers the fruit of all the trees and so that's good. So that opens up more sites for us. And – but we're also seeing, as we mentioned here, we see opportunity even outside of Europe, and we've actually begun now to deploy ATMs in brand new Asian countries. So that's exciting. And I think at the end of the day, if we don't hit our 4,000 ATMs for the year, that will be surprising. It's up to our site selectors to do so. They are the gating factor between site selection and municipal approvals, et cetera, et cetera, just install kinds of things. That is always a little bit of a modulator on us, a governor. So – but we're after it and you can see we've added more in the first half of this year than we did last year. Last year, we did 3,800 ATMs total. So like I said, it would surprise me if we can't hit at least 4,000 but we'll just have to see what happens.

That’s helpful. Thanks. And then maybe on the money transfer market overall, can you maybe make any observations about what you're seeing in the overall market for international remittance? Whether that's kind of accelerating or slowing down? Any regional factors where you're seeing some changes in the margin relative to last couple of quarters? And then could you also separately address the reasons for the Brexit's impact on the XE business? And how long do you expect that to last?

I mean, the big shining part for money transfer is the international remittance market. I mean it is just screaming for us. I mean we are growing two, three, in some quarters four times faster than the markets growing depending on the corridors. We find that we were really good at this when we were little. Now that we're big and we can offer all these payout countries, you see that we've now got almost 400,000 locations to pay out. It just – you get that network effect, and that makes it even more possible for you to get to accelerate the growth of this business. So this is really exciting. This is really the Big Kahuna 2. This is $690 billion worth of remittances here. So we're accelerating, I would say, and we've been doing quite well up to this point. So that's really good. And then you asked about Brexit. You know what the deal is? There's a lot of people just been in Britain, which is about now, call it, 50%, 60% of our business in XE are sends that are originated in Britain. Everybody is being really pensive now. Nobody knows exactly where the pound is going to go. They're being conservative. We're just seeing less transactions. It’s not just with us because if you want to look at the results of our competitors, you'll see a very similar thing. So I think all this is going to get put to bed on how lean, then we'll know from that point forward how it goes. I think it's just the uncertainty that's causing people to pause.

Very good. Thank you very much.

Thank you. Our next question comes from the line of Andrew Jeffrey with SunTrust. Your line is now open.

Hey guys, good morning. Thanks for taking the question. Mike, I appreciate the detail on Ren and the digital payments cloud because I think you're right. I think investors are kind of grappling with the capabilities and exactly what it means. I wonder if you could expand a little bit on your comments. Mozambique seems like a terrific opportunity. Are there other similar markets out there where you can provide sort of all bank connectivity and infrastructure or are we going to look for deals that are maybe a little more incremental? How do you frame-up the TAM and, how should we expect that business to grow and contribute to your overall growth?

Well, if you really look at it, when we are complete with our Mozambique installation, it probably will be the most advanced financial ecosystem on the planet. So you say, well, are there, what's the TAM? Well every damn country out there is really what it comes down to. But more than that, it's the banks and it's others. I mean, we see, all the big processors are still laden with 30-year old technology and how slow it is for them to implement new things like alternative payments. And so we're getting leads from kind of all over the place, because the reality is plastic is kind of on its way out. It's not cash is on its way out. I mean plastic is on its way out faster than cash is on its way out. And so people are trying to grapple with how did we get this legacy old 30-year old technology based on ISO8583, one kilobit kind of records. How are we going to get those things connected up to all these new wallets and stuff. And we've got exactly the technology to do that. You can see that by the fast transition that we're doing and the fast implementations that are just amazing for people. So I'd say TAMs, aren’t big, I'm not quite sure how big, but I would say there isn't a financial institution or a national switch on the planet that couldn't use what we have.

And I assume, I mean that all sort of makes intuitive sense. I assume that the sales cycles are going to be probably pretty long. I just wonder how we can think about that business.

Yes. The sales cycles are long, but guess what, they accelerate as we install, as you put more and more things out there for people to go see, nobody, with financial institutions, they're conservative. Nobody really wants to be the first guy, but for sure you don't want to be the last guy. Yes. And Kevin do you have any, Kevin's actually been in the middle of a lot of these things. I'll let him speak.

Today we have about 12 of these type installations today using our legacy technology. So, one opportunity is to try to convert one of those 12 to Ren that's probably the quickest path. And then in parallel, as Mike said, nothing like having a incredible reference that generate new leads, with new markets. And there's a lot of inbound interest, into us regarding the Mozambique installation. And I think we'll start to see an acceleration of the interest as we motor through that delivering of that product.

I mean another point just in terms of timing and people will see this more and more in the future Andrew is that – is that like Mike said, in one of our rollouts, we enabled transactions, QR code based transactions within three days. We will essentially do a complete forklift change on the payment infrastructure for Mozambique in a year or less. Okay. And try to tell me what kind of a world out there can do that type of infrastructure change in that kind of period. I mean, you see people take three to five years to do this kind of stuff. So I think that, when we, when we really, put this one on more squarely on the map, people will really notice and it will make a difference in changing that cycle time.

Mainly U.S., where there's all this legacy point-of-sale terminals and card-based payments, that's one thing. But outside of the U.S. and outside of developed markets, that infrastructure doesn't exist. They're going to skip the traditional payment methods and go to all these new payment methods. And the existing infrastructure in many cases does not support, that consumer desire. So, I think we see the timings, the question in terms of when all this will happen, but the demand and the interest is there.

Okay. That helps a lot. Thank you.

And kind of our top secret plan here is the rest of our business is really motoring along, on really strong double-digit bottom line growth rate and that gives us a lot of air cover as we continue to develop this brand new segment of our business.

It's encouraging. Sure.

Thank you. Our next question comes from the line of Andrew Schmidt with Citi. Your line is now open.

Hey guys, thank you for taking my question and thank you for the comments on the technology. It just wanted to ask questions about the third quarter EPS outlook. Seems like you have a lot of momentum in the EFT processing segment, solid ATM unit additions. Could you talk about what – and it seems like that might be driving some upside there relative to initial expectations for full benefits from the Visa DCC rule change. So, maybe just talk through any potential offsets to the EFT processing segment or to the ATM growth, whether it's the UK rationalization, incremental investments, any below the line items. Just curious if you could just talk through the outlook for the third quarter, help us get a better sense for that. That'd be great.

Yes, really there is – we've actually been living through the offset because ever since LINK changed its domestic interchange fees. Then we've received less revenue on those ATMs, so we're really, we're just removing loss-making or breakeven ATMs as opposed - so that in essence that helps our P&L. So we really don't have any offsets. We – it's really, it's all upside. We're not worried about anything in the third quarter on EFT.

Okay. Is there anything, I guess Money Transfer or below the line that might be, it seems like you guys have some favorable expense and refinancing debt. Anything that you can talk through in third quarter that it might be sort of holding back the EPS outlook?

I don't think anything per se is. I think we try not to miss our numbers so we've put a number on there that we think is based upon our roll-up that we believe is achievable and we'll try to deliver that.

Understood. Yes, that's helpful. And, I wonder if you'd give us an update on just the surcharge opportunity? I know recently, Greece recently permitted surcharging. It seems like it will be a big win if Poland went that way. Any updates as to that opportunity, that would be great.

So, no new updates. We've mentioned this before, surcharges will come to every single market in Europe at some point in time. It’s just a question of when, and we don't quite know when that happens, but it's interesting just over the last six or eight months, I think, the banks really woke up in Greece and so now they allow surcharging there because they're basically, the big banks with all this expensive infrastructure and all these employees and all these branches, they said, why should people use our infrastructure for less than it cost us to produce that. So they kind of woke up. I would imagine everybody will wake up at some point. I can't tell you when, but anytime it does, it just layers on that much more profit on our installed base and it opens up also new locations for us that might be primarily domestic focus. So, we've been a beneficiary of that and I think we will continue to be, I just Greece has only got 10 million people for the locals, so, I'd love a bigger country to go to surcharge now. That'd be really wonderful.

Understood. And then, I think you mentioned you're entering one new market in Asia. Could you talk about, just the timeline for other new markets in terms of entrance and then just remind us, what the timeline is in terms of, how many ATMs you can add in your one year to the maturity curve with new markets that would be helpful?

Well, I mean, typically, what we do is we put about 25 to 50 ATMs into a market and double check all our assumptions and then we hire a whole bunch of sites like theirs to kind of blow that out as fast as we can. If all our assumptions are correct. With respect to other new potential markets, I'll let Kevin talk to that because he's kind of responsible.

Yes. So currently we've entered the one that we reported on this quarter, we have about three more that we’re in the process of working and I would expect us to be in a position to talk about that over the next, subsequent two to three quarters.

All right. Thank you very much guys. Appreciate it.

I think operator, we can take one more question because we're kind of over time. Thank you.

You're welcome. Our next question comes from the line of Chris Shutler from William Blair. Your line is now open.

Hey guys, good morning. Thanks for taking the question. So maybe just two. As we think about the Q3 guidance, given this is your first time with the incremental Visa DCC transactions in a Q3. Can you give us a sense of how you modeled that into Q3? Not looking for specific numbers obviously, but just wondering how you, if you layered any conservatism and given this is the first Q3 that you've gone through with Visa, DCC. And then Rick, if you'd give the tax rate that’s in the Q3 guide. Thanks.

Yes. We didn't, try to provide too much body English to the numbers, Chris because as Mike said, these aren't new transactions. These are simply transactions that previously were not eligible for DCC. So, we had visibility to the transactions that were coming to our ATMs. And so we could calculate our numbers off of that. So I think that's why we were, let's say right on top of our numbers here for the second quarter, because we had that visibility of what happened last year. So, we didn't try to over do or let's call it handicap the numbers too much because we had a pretty good perspective of what was there. So we expect, it to be again pretty much down the fairway and coming up with our numbers for the third quarter. So I think that's probably yes. And on the tax rate, again, we've got the mid-twenties numbers in there. And not a lot different than what we had for the second quarter.

Okay. Thank you.

Yes. And I guess we'll wrap up now. I want to thank everybody for their time on the call and I'll look forward to speaking with you again in about 90 days. Thank you.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program. You may all disconnect. Everyone have a great day.