Greetings and welcome to the Euronet Worldwide Third Quarter 2019 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [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, Bridget. Good morning and welcome everyone to Euronet's quarterly results conference call. We will present our results for the third quarter of 2019 on this call. We have Mike Brown, our CEO; Rick Weller, our CFO; and Kevin Caponecchi, Executive Vice President and CEO of the 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 on 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. Please also note that the reconciliation of certain non-GAAP measures to the GAAP equivalents included in the supplemental data is included as an annex to our PowerPoint presentation. Now, I'll turn the call over to our CFO, Rick Weller.

All right. Thank you, Jeff, and thank you everyone who's joined us today. I will begin my comments on slide five. We delivered third quarter revenue of $787 million, operating income of $194 million and adjusted EBITDA of $227 million. These results represent a 14% constant currency revenue growth, 34% operating income growth and adjusted EBITDA growth of 30%, all very impressive double-digit growth numbers contributing to the adjusted EPS growth rate. Our adjusted EPS for the third quarter was $2.84, a 31% year-over-year increase and the sixth consecutive quarter that we have delivered double-digit growth in adjusted EPS. This strong growth rate was driven by operating income contributions from all three segments and benefits from income taxes. About half the tax benefit was from certain non-recurring items, while the other half was from recurring items such as the recently announced lower tax rate in India. Additionally ,$0.01 of headwind from changes in foreign currency rates was offset by $0.01 of favorability from share repurchases. On slide six, we show our three-year transaction trends by segment. EFT transactions grew 13%, driven by expansion of our ATM and point-of-sale processing networks in Europe and Asia. This included growth in our local and international withdrawals and deposit transactions, as well as value-added transactions on ATMs and point-of-sale terminals, including dynamic currency conversion, domestic and international surcharge and foreign currency dispensing. epay transactions grew 40%, with continued digital media expansion and significant contributions from wallet-driven mobile top-up transactions in India, which earn a small amount of revenue per transaction compared to our more traditional commission-based revenue. Excluding these lower India revenue transactions, epay transactions would have grown at a very nice double-digit rate of 11%. Money transfers grew 5%. This growth was the result of exceptional double-digit growth from our U.S. outbound and…

Thank you, Rick, and thank you everybody who's joining us today. I'll begin my comments on slide number 11 with an update on how our leading-edge technology continues to contribute to success across all three of our business segments. In the quarter, we launched a QR code based payment app with Commercial Bank of Ceylon in Sri Lanka. The app called ComBank Q+, utilized the digital integrated payments cloud microservices architecture and open APIs to develop an end-to-end solution that included development of the QR code customer app; a merchant app with a QR code central processing engine reconciliation and settlement services for all transactions; and the associated IT infrastructure on a pay-per-use model. The app ensures a friction-free, secure and faster payment experience for customers and merchants, and allows customers of the Commercial Bank of Ceylon in Sri Lanka to have available at their fingertips a QR code based payment service that is easy and simple to use like Alipay or WeChat Pay. In India, we signed agreements with Amazon Pay and Google Pay. With Amazon Pay, we have signed a strategic agreement as a technology partner to provide a number of services Amazon wants to enable for their customers. In September, we launched the first service with a bill-pay provider BPCL. Customers can now make bill payments to BPCL using their Amazon Pay account and we expect more such services will follow in the coming months. Google Pay has signed up for various epay services and initially launched value-added services such as top-up and bill payments. We also continued the expansion of our Alipay processing to Müller and dm stores in Austria and to multiple retailers in Italy. This quarter, we launched a monthly recurring subscription service for AppleCare Products at one of the largest retailers in the…

[Operator Instructions] Our first question comes from the line of Rayna Kumar with Evercore ISI. Your line is open.

Good morning Mike and Rick.

Good morning.

Good morning.

So for the third quarter, we saw some strong margin expansion. You had adjusted EBITDA margin increase 350 basis points year-over-year. Can you maybe talk a little bit about the key drivers to that expansion and how we should think about margins in the fourth quarter and then going into 2020?

Yeah Rayna the first part of your question had broken up. Can you repeat that? I -- We only got about half of it maybe.

Sure. So your adjusted EBITDA margin expanded 350 basis points in the third quarter. If you can discuss the key drivers to that growth and also your expectations for margin expansion into fourth quarter and then going into 2020?

Yeah. Well, as you know one of the big drivers in that was the addition of the additional Visa DCC that we were able to pick up in the business in our EFT segment. We continue to grow and expand our ATM deployment, so that again contributed to it. And as Mike pointed out, epay had a very good result so -- and then I can't help but to emphasize again that third quarter is our seasonally strongest quarter. And as we go into the fourth quarter, we would again get some -- on a year-over-year basis, we'll get some additional benefit from the Visa DCC expansion. And that's also when we come into our strongest quarter for the epay business, and so we expect to see some numbers nice. So on a quarter-to-quarter, yes, I think it's fair to say that our margins will come in going from third quarter to fourth quarter because of the seasonality of third. But on a year-over-year basis, we would continue to see that margin expansion be present in our business particularly in the EFT and the epay business.

That's very helpful. And then just two questions on Walmart. When exactly do you lap the Walmart ID requirements that you put into place? And second, how are your initial talks with Walmart progressing on your April 2020 contract renewal? When do we expect to hear an update on the conclusion to that?

Well, I would say -- I mean, we -- the ID requirements let's say for the most part went in, kind of, like a third quarter of last year. We started feeling some of it, but it wasn't as pronounced. We really probably saw the lion's share of the pressure come into the second quarter. So I, kind of, would expect that for the most part that that lapping would be give or take the first quarter there as we get through it, okay? And then as it relates to our discussions, I think that they're going quite well. Our product the Walmart2Walmart has performed very good and we continue to have those discussions. So I think kind of consistent with the last time we had a renewal, it went kind of into the next year, but we'll just have to see. But we continue to have a very good relationship with Walmart and would expect to wrap that up at some point here, but there's no exact time line on it Rayna, but things are going well.

I think last time around we kind of started those discussions in December. We've kind of begun those discussions. Now they've got a lot on their plate, but I imagine over the next 90 days or so we'll have a pretty good idea.

Great. That's very helpful. And just a final question for me. What progress are you making towards surcharging on European ATMs? What other countries do you expect to implement surcharging in the medium-term?

Okay. Well, we don't expect any right now, because usually these are kind of surprising to us. We know that there are good economic reasons why most of the big bricks-and-mortar banks would like to have surcharging in Europe. They're countered by the kind of consumer advocate groups who would like to have all transactions for free in the country. It's really not up to us. It's not our discussions. It really is between the banks and the regulator. So we'll just have to wait and see. They're kind of like, I guess, you could call it kind of aces up our sleeve, but we can't quite play them. So, we'll just have to wait and see.

Yeah. I mean, as we take a look at some of the countries over the last few years that have moved to surcharge you kind of get to a tipping point, where the economics for the banks just really make no sense. They continue to be pressured by alternative banking products that are living off of the investment that the banks have. And so what we've seen is in a few of these markets kind of when you get to that tipping point and the banks really go this, we can't continue to operate any longer that way, then they kind of push in that direction. So, you hear different noises around Europe and we'll have to see. But as Mike said, we don't have any kind of signals or sense of which one would be next.

We'll just continue to expand in our current markets and we're particularly excited about the new international markets that now are a potential due to the Visa change.

Understood. Thank you.

Thank you. And our next question is from Andrew Schmidt with Citi. Your line is open.

Hi, guys. Thanks for taking my question. A quick question on the EFT Processing Segment. I was wondering if you could break down the mix of transactions in the quarter and more specifically talk about DCC transactions relative to your expectations.

Well, I think with respect to DCC, it's pretty much right on target with what we expected and what we even forecasted a year ago or so, so they are -- that's all good news there. But in addition to that, I mean, let's not forget we make a lot of money off just domestic transactions. We've got a lot of surcharging now that happens across the continent. We have DAF, which is direct access fee allows us to surcharge, foreign cardholders as well. So DCC certainly is a big component of what we're doing, but we have other products too that garner us revenue.

Understood. And then the -- good to hear the comments around the Money Transfer Segment. It sounds like the underlying growth there is fairly robust. But as we move into 2020, I appreciate the commentary on getting back to double-digit growth, but I was wondering if you could talk about some of the underlying assumptions there, specifically as it related to domestic money transfer. Is there assumption -- is there an assumption embedded in there that that improves? Clearly you have the lapping, but there's some -- but that segment hasn't grown too much in the past few years. So, just curious if you could break down the assumptions that go into that double-digit growth trajectory into next year.

I think what you've got is -- we're not expecting a huge amount of growth in the Walmart2Walmart product. We do have opportunities to do -- to continue to grow our international business both with Walmart and ourselves. And that's the neat thing about this is if you really -- if you take a look at kind of the triangle of where the transactions are in domestic remittance about 70% of all transactions are done at small retailers mom-and-pops bodegas, et cetera, smaller chains of stores and so forth. And that's the sweet spot for us. I mean, we are kind of kings at that. We know how to manage both their compliance and their credit. We have about -- our 5% worldwide market share is out of that 70%. So you can say that the market is really 15 times bigger than -- or 14 times bigger than what we have today. That's why we've been in the mid-teens to higher kind of growth rates for international remittance. So we're kind of the kings there and we will continue to grow that business. That's what gives us the nice thing is the market this $700 billion market out there is really where our sweet spot is. That's why we're excited about the future.

Got it. That's helpful. And then last question just housekeeping. In the fourth quarter what's the tax rate assumption?

Well, I would tell you that we would continue to expect it to be kind of in the mid-20s to a chance that it'll be a little better than that. As I said we did see some rate improvement out of India. We got a little bit of extra benefit in the third quarter because that was a retroactive rate to the beginning of the second quarter. So I would continue to say mid-20s to potentially a little better than that.

Understood. Thank you guys. See you at the conference in a few weeks.

Okay.

And our next question is from Darrin Peller with Wolfe Research. Your line is open.

All right. Thanks, guys. Let me start off on the EFT segment. The transaction growth was stronger this quarter than last quarter, but the revenue growth about the same which I think is underscoring the questions we're getting around the mix from DCC contribution this quarter versus last. Can you just help us I guess unpack what the growth rate would have been without -- on the revenue side without the DCC contribution? And then just maybe reconfirm the $0.65 or if that's changed at all in terms of annual impact? Thanks.

No, it didn't. The one thing to bear in mind is that the additional margin or benefit we got out of the Visa DCC was not extra transactions. We were already getting those transactions. It's just that we could not offer DCC on those transactions okay? So that didn't stimulate that extra growth. The additional growth on the transactions I would tell you is right in line lockstep with the number of ATMs that we had out there. You could see that they were 13% on the ATMs, 13% on the transaction.

Right.

So it's the combination of putting out more of our own ATMs, more outsourced ATMs et cetera. It wasn't stimulated by the additional Visa DCC stuff. Now clearly...

Right. Now I guess, what I was asking is just why the mix -- if the mix changed because I saw transaction growth accelerated but revenue growth didn't accelerate. It was the same growth rate as it was last quarter. Albeit a strong growth rate it didn't go as -- it didn't accelerate with transactions.

And that would be, let's say, reasonably consistent with the second quarter also having part of that the additional benefit from the Visa DCC lift there.

Okay. I mean is there any way to break out what the actual revenue that came from the new Visa rule was this quarter and what the growth rate would have been without that in terms of revenues?

Well we didn't -- we haven't put that number out specifically. But as we've generally shared with folks is that if you kind of go backwards up and calculate on the math from the $0.60 to $0.65 that you'll get to an estimated revenue number. And we get about 45% of that number in the third quarter and we get only about 10% of it in the first quarter. And the other difference the other 45% is a little bit more biased to the second quarter than it is the fourth quarter. So with that math you can kind of get to a rough number on what it would be.

Okay. And just a quick follow-up on the Money Transfer side. The breakdown I know you're saying the cross-border side continues to do well -- mid-teens growth. Was there a change of growth? There had to be some sort of a change in growth given that the overall constant-currency growth in the segment decelerated a little bit. So was it either on the cross-border side or was it on the domestic side? And maybe just break down what you expect to -- if we anniversary that the Walmart issues or the ID issues in the beginning of next year what the full segment growth profile could look like.

Yes. Well interesting observation and it was. We happened to lose some volume from a larger very price-competitive agent in the Middle East. And that brought in those transaction numbers a little bit compared to like what we saw in the second quarter because our year-over-year difference on the domestic transactions was relatively -- was similar in third quarter as the second quarter. So the math that you observed there was really kind of out of this Middle East large agent.

Okay. And just last question guys. When I think about guidance on Q4 anything we should keep in mind in terms of tough comps or easy comps or anything just unusual or extraordinary and for modeling purposes in terms of how to think about the revenue side as well as the profitability?

Well, I think, one on the revenue side is the Money Transfer has to do with the ID requirement and that wasn't showing up as strongly yet in the fourth quarter. As I said earlier, we really saw the pronounced effect of that in the second quarter of this year. So that will still kind of have some weighting on us in the fourth quarter and that would be on the downside. On the plus side obviously is the benefit from the Visa DCC lift that we got. Those are the only couple of things that I could think of. I mean, consistent with our historical fourth quarter our epay business does better in the fourth quarter but there isn't any kind of unusual comps in there on the fourth quarter that would call out anything different in the math. So I think that would be largely it.

Okay. All right. Well, thanks guys.

Thanks.

And our next question comes from the line of Tim Willi with Wells Fargo. Your line is open.

Hi. Thanks and good morning. I had two questions. The first one was a housekeeping question. Rick, I think in your discussion around Money Transfer at the beginning of the call you made some comments about XE. And I think – I just want to make sure, I heard it correctly. Did you say that so far through this month or sort of sequentially through the quarter into the current month that there have been some improvements or bottoming out in volumes? Can you just go back to that?

Yeah. Well, as we got into October, we started seeing that the pound started improving on the – against the dollar. And I think that was kind of consistent with what the sentiment was out of the U.K. on having something positive happen with the Brexit solution. And so as that – you may recall kind of in the third quarter we saw the pound to the dollar was gosh down to about $1.20, $1.21 kind of just a few months ago. And so it had been at pretty much some all-time lows. And when we started seeing it break above the $1.28 mark, we started seeing the volume numbers tick up. So we did see that kind of in the first part of October. We're cautiously optimistic that will – that's a good sign of the return of people's trading interest, and that that will pick-up. So, we'll kind of wait and see. There were some more news out yesterday on some Brexit things that appeared. Maybe we'll get through it here. But yeah, we did see some positive movement there. So hopefully it's a good foreteller.

Great. And my second question was about epay. And obviously versus where we were a couple of years ago the product set the momentum all are obviously sharply better. Now I'm curious, when you think about the new business you're winning is there a way to think about – is it the new cloud-based technology that is getting the attention of all the mobile wallet providers you've talked about working with you and/or is it sort of this big content catalog that you've built out over the years that the wallet providers are now realizing, we want to have a robust offering within our wallet. Who can we go to that can bring us content? Is there any way to think about what is leading or if there's a network effect sort of emerging here around those two topics?

Yeah. This is Kevin. So yes you've hit on a couple different things. So I would parse it like this. First and foremost as Rick and Mike commented, earlier it's about technology having the right technology stack to enable the wallets to easily and frictionlessly deliver this content. So yes your point about having a portfolio or catalog is important. But you also have to have the easy connectivity, because the wallet providers are very different than a physical retailer. Their needs and requirements are very, very different. I mean, providing a digital code in a safe and convenient manner and then reconciling that transaction with a FinTech company is very different than distributing a plastic postcard onto a J hook and into a retail location. So, because Euronet/epay is really more technology-oriented, we've kind of become a preferred partner of these wallet companies and various FinTech players. And then the second part of the question about kind of what is the overall – I think sort of what is the overall driving momentum and what's the mix in the business it is a combination of the distribution of more digital media with things like the announcement of AppleCare where we're providing complex SaaS-based solutions to both our brand partners in this case Apple/AppleCare and our retail partner/Target.

And if I can slide in one last one on the subscription stuff you just talked about with Target. We talked about this a little bit I think maybe about a year ago Kevin is we're in a subscription-based world now, I guess in certain respects right whether it's things like Netflix or consumer goods being delivered every month. And I guess as you think about that market and what you've done here with AppleCare I mean is this a sizable end market opportunity globally or just in the U.S.? Or is the AppleCare just sort of a one-off innovative, opportunity that you saw?

No. Good observation. So the engine that was built to support AppleCare can be applied to any subscription-based offering. The unknown is going to be what percentage of consumers initiates a subscription model from a physical retail location. We're quite optimistic, that that's going to be attractive because, a physical retailer can do merchandising and tell the story in a different way than a direct sale. So, the solution built for AppleCare can apply to any of the subscription services we've talked about, Spotify, Netflix, Steam whatever. The unknown is how many consumers will adopt those subscription services from a physical retail location. But it's a large underserved market. The brands are not able to reach every consumer in a direct fashion. So there is a lot of optimism about the success of the solution globally.

Great, and thank you very much. That's all I had.

And I guess I'll make one more comment that came out in Mike's comments. The other important feature of the renewal is breaking down the price point of something that's relatively expensive, into something -- into monthly bite-size pieces. And there is a lot of an excitement and enthusiasm about how that could also be used with lots of different products.

Thank you.

Operator, next question please?

Our next question is from Peter Heckmann with D.A. Davidson. Your line is open.

Good morning, gentlemen. Curious on the integrated payment cloud, as you start to ramp up those services, how do we see it manifest in the results? Clearly we'll see revenue and likely high margin. Will it be included in the transaction count as well? And how should we interpret that? It sounds like, there's a lot of these applications in prepaid. But there may be some …

Yes.

Go ahead.

That was a little bit cut out there, Pete. But I think, yeah, you'll see in the transaction count for sure. And then your other question, I couldn't understand what the other question was. Did you Rick?

No, no.

Just the information -- essentially, we'll see, perhaps revenue per transaction fall a bit, but from the cloud-based transactions. But those will be coming through at very high margin. So we should think about that in our modeling.

Yeah. As we think about our technology, it's really going to be let's call it across three different kinds of categories, okay? One is, we're going to get service type of -- recurring service and licensing type of revenues from projects like Mozambique, okay? Those installations then are going to lead to further transactional types of revenues that we get from the other 21 banks that are involved in that particular central switching infrastructure. And then, we're also -- we're going to get more transactions. And as you say, we believe that better margins, whether it's from like connecting with the Xooms of the world, or the Finablrs of the world, or developing product like the AppleCare that we've just talked about here. So, there's going to be several different areas that we would see the revenue come in. But I would tell you that our strongest interest is to see that it is driving continuing, recurring monthly transaction type of numbers that would give us better margins per transaction. So I think that's where we'll probably see it more than anything. But as we come up with more of those products, and have more successes, we'll kind of plug you in to follow it along the way. But I think for your modelling, I would anticipate that this gives us the ability to continue to drive more transactions at a better margin.

Got it, that's helpful. And then just one housekeeping item. And I apologize, if I missed it. Did you quantify the tax benefit to EPS this quarter?

We didn't quantify it. But it's kind of in the low double-digit range. So call it $0.10 to $0.12 a share.

Great, thank you very much.

Thank you. And our next question is from Andrew Jeffrey with SunTrust. Your line is open.

Hey, Mike and Rick, good morning.

Good morning, Andrew.

So with regard to XE, what you're talking about in Brexit and how that is affecting the B2B side of your business makes a lot of sense. Obviously, we read every day in FinTech about a lot of capital being invested at high valuations in some of XE's competitors that maybe aren't as profit-oriented as Euronet generally. Can you talk a little bit about how XE positions itself competitively in the cross-border market? Is it -- what differentiates XE? And I suppose it's good to see the bounce in transactions with the strengthening of the pound. How confident are you that there isn't a competitive risk from some of these disruptors that as I said really aren't maybe as price-focused as Euronet is?

Well, that's an interesting thing. So, -- I mean for sure we do have competitors. They're out there everywhere. A lot -- they've got lots of investor money that they're blowing and giving people everything for near free. The nice thing that we have though with XE is -- I mean traditionally we were a higher-price point product. So, where these little FinTech guys work for somebody sending $3,000 or $4,000, $5,000 or $10,000 where XE's numbers were quite a bit higher. They might be $13,000 for an individual and $50,000 for a CFO of a small medium-size kind of enterprise. So, we've kind of -- we originally went upscale that way. What's interesting though is I think the FinTech competitors have shown us that there's a big market for us downscale or medium scale you might say. And since we have redone our both our website and our apps, we've been acquiring a lot more of these transactions in this middle range. So, we do see competition but we also see a larger market you might say.

And I would add to that when you ask what really attracts them is we've got a very efficient compliance process because -- and that's really one of our advantages in this business because a lot of these start-up folks are struggling and you're beginning to see more of their struggles publicly with things like compliance. All of the regulators that we deal with whether it's in the United States it's Europe wherever it is are concerned with compliance. And some of these folks that start-up, don't have the same level of attention to compliance. So, we've really worked on really making that an efficient effective process. When they come in, they go through compliance and then they find that the engine is easy to use. It's simple. It's got attractive competitive rates. And so that kind of experience is a lot better than what they've ever received before certainly at a traditional bank. I think one of our advantages against some of the other FinTech guys is our compliance and how well we've got that process honed. So, we've seen more and more subscriptions. But we'll really welcome the opportunity as we get through this Brexit thing to get the steam back at it.

Okay. Thank you. Appreciate that.

And our next question is from Mayank Tandon with Needham & Company. Your line is open.

Thank you. Good morning. Mike, on the EFT side could you talk about the time line on expanding more aggressively in Southeast Asia and LatAm and when we can expect that to start maybe contributing to revenue growth and transaction growth on the EFT side?

Okay. So, to get into a new country is a bit of a challenge, okay because you've got to in most all the countries in the world that aren't English-speaking or aren't EU countries, it's actually not allowed by the regulator to have a nonfinancial institution own and operate an ATM. So, that makes -- it's kind of slow-going at first because you've got to get in there. You've got to find a potential sponsor bank for Visa and Mastercard. And number two is then you take that sponsor bank into the regulator and you get the regulator to basically change its rules. This takes -- I mean in the current market that we're in, where we only have 60 ATMs that took two full years. And we've been working on -- we were working on them long before Visa changed its rules because we had a -- we could kind of smell that the rules would change. And so, we've been working on -- we're working on about five other markets right now. And so, whenever I can get one to bust, when the regulator says go out, then I will go into that next market. We feel rather confident that we'll get one maybe in the first quarter of next year, but we'll just have to wait and see. And in the meantime, the one that we've got working the math on it is excellent and we've only got 60 ATMs now, but plans for a big expansion throughout next year. And so where it will make -- it will actually move our needle. 60 ATMs no matter how good they do don't really move our needle because our EFT division is just darn big. But by next year we'll definitely do so.

That's helpful. And then very quickly Rick, could you comment on capital allocation especially given the stock is off its highs? Would you consider a buyback? Or is M&A still the main theme that you're looking at from a capital allocation perspective? Any thoughts around that would be very helpful.

Well, as we did in the third quarter we bought when we saw some pressure on the price. So I guess as we've said in the past, if we see some dislocation, we're prepared to do that. But we wouldn't probably state -- we don't have any specific plan or number in mind. But if opportunity presents itself, we might be buying some.

And acquisition?

And acquisition we're just -- we're always looking at them. There's several on the examination table. It's just a matter of whether or not -- we get them to the finish line. We've had some that looked quite promising and fell apart in the latter days because of issues that we found. We continue to see that there's some maybe irrational exuberance expressed in some of the valuations out there. So if we can see that the valuations line up with how we can see that we can make money, if they're fundamental growth engines we're not interested in just being what we would call Pac-Man acquisition. We're interested in growth engines to our business. So we continue to look. And at some point, I'm sure we'll be successful in finding one. But stay tuned. We'll keep the examination process going.

Thank you.

All right operator, I think that should probably be the last question because we're at the top of the hour. And I'd like to thank everybody who joined us today. And I look forward to communicating some of our good stuff, we've got in the hopper over the next several weeks. Thank you.

Ladies and gentlemen this concludes today's conference call. Thank you for participating. You may now disconnect.