EURONET WORLDWIDE, INC. - Quarter Report: 2010 March (Form 10-Q)

 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number: 001-31648

EURONET WORLDWIDE, INC.

(Exact name of the registrant as specified in its charter)

Delaware (State or other jurisdiction of incorporation or organization)		74-2806888 (I.R.S. Employer Identification No.)
4601 COLLEGE BOULEVARD, SUITE 300 LEAWOOD, KANSAS (Address of principal executive offices)		66211 (Zip Code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer þ		Accelerated filer o		Non-accelerated filer o		Smaller reporting company o
				(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

The number of shares of the issuer’s common stock, $0.02 par value, outstanding as of April 30, 2010 was 50,913,136 shares.

 

 

Table of Contents

PART I—FINANCIAL INFORMATION			3
ITEM 1. FINANCIAL STATEMENTS			3
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS			15
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK			30
ITEM 4. CONTROLS AND PROCEDURES			31
PART II—OTHER INFORMATION			31
ITEM 1. LEGAL PROCEEDINGS			31
ITEM 1A. RISK FACTORS			32
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS			33
ITEM 6. EXHIBITS			34
EX-10.1
EX-10.2
EX-12.1
EX-31.1
EX-31.2
EX-32.1
EX-32.2

PART I—FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

EURONET WORLDWIDE, INC. AND SUBSIDIARIES

		As of
		March 31, 2010				December 31, 2009
		(unaudited)
ASSETS
Current assets:
Cash and cash equivalents		$	185,279			$	183,528
Restricted cash			82,470				73,148
Inventory — PINs and other			67,657				87,661
Trade accounts receivable, net of allowances for doubtful accounts of $14,027 at March 31, 2010 and $13,909 at December 31, 2009			244,756				282,905
Prepaid expenses and other current assets			32,080				31,344
Total current assets			612,242				658,586
Property and equipment, net of accumulated depreciation of $156,588 at March 31, 2010 and $153,255 at December 31, 2009			91,731				96,592
Goodwill			485,763				504,650
Acquired intangible assets, net of accumulated amortization of $91,507 at March 31, 2010 and $88,924 at December 31, 2009			103,093				112,948
Other assets, net of accumulated amortization of $17,759 at March 31, 2010 and $16,866 at December 31, 2009			39,736				39,903
Total assets		$	1,332,565			$	1,412,679
LIABILITIES AND EQUITY
Current liabilities:
Trade accounts payable		$	217,490			$	228,768
Accrued expenses and other current liabilities			215,799				225,474
Current portion of capital lease obligations			2,264				2,510
Short-term debt obligations and current maturities of long-term debt obligations			2,193				3,127
Income taxes payable			17,007				18,379
Deferred revenue			12,051				13,320
Total current liabilities			466,804				491,578
Debt obligations, net of current portion			283,084				320,283
Capital lease obligations, net of current portion			1,518				1,997
Deferred income taxes			21,761				23,854
Other long-term liabilities			8,615				8,464
Total liabilities			781,782				846,176
Equity:
Euronet Worldwide, Inc. stockholders’ equity
Preferred Stock, $0.02 par value. Authorized 10,000,000 shares; none issued			—				—
Common Stock, $0.02 par value. 90,000,000 shares authorized; 51,140,582 issued at March 31, 2010 and 51,101,833 issued at December 31, 2009			1,023				1,022
Additional paid-in-capital			743,787				740,990
Treasury stock, at cost, 239,703 shares at March 31, 2010 and 241,644 shares at December 31, 2009			(1,497	)			(1,483	)
Accumulated deficit			(200,313	)			(203,139	)
Restricted reserve			973				1,013
Accumulated other comprehensive income (loss)			(1,010	)			20,566
Total Euronet Worldwide, Inc. stockholders’ equity			542,963				558,969
Noncontrolling interests			7,820				7,534
Total equity			550,783				566,503
Total liabilities and equity		$	1,332,565			$	1,412,679

See accompanying notes to the consolidated financial statements.

EURONET WORLDWIDE, INC. AND SUBSIDIARIES

		Three Months Ended March 31,
		2010				2009
Revenues:
EFT Processing Segment		$	48,566			$	46,206
epay Segment			145,380				134,523
Money Transfer Segment			56,057				52,968
Total revenues			250,003				233,697
Operating expenses:
Direct operating costs			165,861				153,548
Salaries and benefits			32,172				28,596
Selling, general and administrative			19,193				19,068
Goodwill and acquired intagible assets impairment			—				9,884
Depreciation and amortization			14,548				12,903
Total operating expenses			231,774				223,999
Operating income			18,229				9,698
Other income (expense):
Interest income			555				969
Interest expense			(4,954	)			(7,067	)
Income from unconsolidated affiliates			554				518
Loss on early retirement of debt			—				(103	)
Foreign currency exchange loss, net			(5,082	)			(10,591	)
Other expense, net			(8,927	)			(16,274	)
Income (loss) from continuing operations before income taxes			9,302				(6,576	)
Income tax expense			(5,787	)			(5,317	)
Income (loss) from continuing operations			3,515				(11,893	)
Discontinued operations, net			—				(61	)
Net income (loss)			3,515				(11,954	)
Net income attributable to noncontrolling interests			(689	)			(344	)
Net income (loss) attributable to Euronet Worldwide, Inc.		$	2,826			$	(12,298	)
Earnings (loss) per share attributable to Euronet Worldwide, Inc. stockholders — basic:
Continuing operations		$	0.06			$	(0.24	)
Discontinued operations			—				—
Total		$	0.06			$	(0.24	)
Basic weighted average shares outstanding			50,801,170				50,292,907
Earnings (loss) per share attributable to Euronet Worldwide, Inc. stockholders — diluted:
Continuing operations		$	0.05			$	(0.24	)
Discontinued operations			—				—
Total		$	0.05			$	(0.24	)
Diluted weighted average shares outstanding			51,923,122				50,292,907

See accompanying notes to the consolidated financial statements.

EURONET WORLDWIDE, INC. AND SUBSIDIARIES

		Three Months Ended March 31,
		2010				2009
Net income (loss)		$	3,515			$	(11,954	)
Other comprehensive income (loss), net of tax:
Translation adjustment			(21,979	)			(21,613	)
Unrealized gain on interest rate swaps			—				477
Unrealized gain on investment securities			—				227
Comprehensive loss			(18,464	)			(32,863	)
Comprehensive income attributable to noncontrolling interests			(286	)			(100	)
Comprehensive loss attributable to Euronet Worldwide, Inc.		$	(18,750	)		$	(32,963	)

See accompanying notes to the consolidated financial statements.

EURONET WORLDWIDE, INC. AND SUBSIDIARIES

		Three Months Ended March 31,
		2010				2009
Net income (loss)		$	3,515			$	(11,954	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization			14,362				12,903
Share-based compensation			1,934				1,632
Unrealized foreign exchange loss, net			5,284				10,577
Non-cash impairment of goodwill and acquired intangible assets			—				9,884
Deferred income taxes			(1,988	)			(1,139	)
Income from unconsolidated affiliates			(554	)			(518	)
Accretion of convertible debentures discount and amortization of debt issuance costs			2,145				3,005
Changes in working capital, net of amounts acquired:
Income taxes payable, net			(708	)			1,463
Restricted cash			(11,279	)			23,899
Inventory — PINs and other			19,913				6,189
Trade accounts receivable			32,779				23,042
Prepaid expenses and other current assets			(1,237	)			(6,211	)
Trade accounts payable			(2,522	)			(37,569	)
Deferred revenue			(1,573	)			391
Accrued expenses and other current liabilities			(7,663	)			(10,696	)
Changes in noncurrent assets and liabilities			365				(9,788	)
Net cash provided by operating activities			52,773				15,110
Cash flows from investing activities:
Acquisitions, net of cash acquired			—				(3,300	)
Purchases of property and equipment			(5,444	)			(6,648	)
Purchases of other long-term assets			(809	)			(734	)
Other, net			107				131
Net cash used in investing activities			(6,146	)			(10,551	)
Cash flows from financing activities:
Proceeds from issuance of shares			850				373
Borrowings from revolving credit agreements classified as non-current liabilities			108,000				90,400
Repayments of revolving credit agreements classified as non-current liabilities			(146,439	)			(98,432	)
Repayments of long-term debt obligations			(1,727	)			(11,449	)
Repayments of capital lease obligations			(654	)			(1,788	)
Cash dividends paid to noncontrolling interests stockholders			—				(2,413	)
Other, net			206				562
Net cash used in financing activities			(39,764	)			(22,747	)
Effect of exchange rate changes on cash and cash equivalents			(5,112	)			(3,638	)
Increase (decrease) in cash and cash equivalents			1,751				(21,826	)
Cash and cash equivalents at beginning of period (includes cash of discontinued operations of $552 in 2009)			183,528				181,893
Cash and cash equivalents at end of period (includes cash of discontinued operations of $1,392 in 2009)		$	185,279			$	160,067
Interest paid during the period		$	1,259			$	1,505
Income taxes paid during the period			7,547				5,210

See accompanying notes to the consolidated financial statements.

EURONET WORLDWIDE, INC. AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(1) GENERAL

Organization

Euronet Worldwide, Inc. and its subsidiaries (the “Company” or “Euronet”) is an industry leader in processing secure electronic financial transactions in three principal business segments. Euronet’s epay Segment is one of the world’s largest providers of “top-up” services for prepaid products, primarily prepaid mobile airtime, distributing these products in Europe, the Middle East, Asia Pacific and the Americas. The EFT Processing Segment provides end-to-end solutions relating to operations of automated teller machine (“ATM”) and point-of-sale (“POS”) networks, and debit and credit card processing in Europe, the Middle East and Asia Pacific. The Money Transfer Segment is comprised primarily of the Company’s RIA Envia, Inc. (“RIA”) subsidiary and its operating subsidiaries, which is the third-largest global money transfer company based upon revenues and volumes. The Money Transfer Segment provides services through a sending network of agents and Company-owned stores primarily in North America and Europe, disbursing money transfers through a worldwide payer network. See Note 8, Segment Information, for additional information about the Company’s business segments.

Basis of presentation

The accompanying unaudited consolidated financial statements have been prepared from the records of the Company, in conformity with accounting principles generally accepted in the U.S. (“U.S. GAAP”) and pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). In the opinion of management, such unaudited consolidated financial statements contain all adjustments (consisting of normal interim closing procedures) necessary to present fairly the financial position of the Company as of March 31, 2010, and the results of its operations and cash flows for the three-month periods ended March 31, 2010 and 2009.

The unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements of Euronet for the year ended December 31, 2009, including the notes thereto, set forth in the Company’s 2009 Annual Report on Form 10-K.

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the unaudited consolidated financial statements and accompanying notes. Actual results could differ from those estimates. The results of operations for the three-month period ended March 31, 2010 are not necessarily indicative of the results to be expected for the full year ending December 31, 2010. Certain amounts in the prior year have been reclassified to conform to current period presentation.

(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES

Multiple-deliverable revenue arrangements

Effective January 1, 2010, the Company adopted the provisions of Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) 2009-13, Revenue Recognition (Topic 605): Multiple-Deliverable Revenue Arrangements — a consensus of the FASB Emerging Issues Task Force. ASU 2009-13 adds estimated selling price as acceptable evidence of fair value of undelivered products and services in revenue arrangements with multiple deliverables. Estimated selling price can be used if there is no vendor specific objective evidence or third-party evidence of fair value. Additionally, ASU 2009-13 eliminates the use of the residual method of allocating revenue and establishes the relative selling price method as the appropriate means to allocate revenue to each deliverable of an arrangement. The adoption of ASU 2009-13 did not materially affect the Company’s unaudited consolidated financial statements.

Money transfer settlement obligations

Money transfer settlement obligations are recorded in accrued expenses and other current liabilities on the Company’s Unaudited Consolidated Balance Sheets and consist of amounts owed by Euronet to money transfer recipients. As of March 31, 2010, the Company’s money transfer settlement obligations were $12.7 million.

(3) EARNINGS PER SHARE

Basic earnings per share has been computed by dividing earnings available to common stockholders by the weighted average number of common shares outstanding during the respective period. Diluted earnings per share has been computed by dividing earnings available to common stockholders by the weighted-average shares outstanding during the respective period, after adjusting for the potential dilution of the assumed conversion of the Company’s convertible debentures, shares issuable in connection with acquisition obligations, restricted stock and options to purchase the Company’s common stock. The following table provides the computation of diluted weighted average number of common shares outstanding:

		Three Months
		Ended March 31,
		2010
Computation of diluted weighted average shares outstanding:
Basic weighted average shares outstanding			50,801,170
Incremental shares from assumed conversion of stock options and restricted stock			1,121,952
Diluted weighted average shares outstanding			51,923,122

The table includes all stock options and restricted stock that are dilutive to Euronet’s weighted average common shares outstanding during the period. For the three-month period ended March 31, 2009, the Company incurred a net loss; therefore, diluted loss per share is the same as basic loss per share. For the three-month periods ended March 31, 2010 and 2009, the calculation of diluted earnings (loss) per share excludes approximately 2,204,000 and 4,928,000, respectively, stock options or shares of restricted stock that are anti-dilutive to the Company’s weighted average common shares outstanding.

The Company has convertible debentures that, if converted, would have a potentially dilutive effect on the Company’s stock. The 3.50% debentures are convertible into 4.3 million shares of common stock only upon the occurrence of certain conditions. The 1.625% debentures outstanding as of December 31, 2009 were repurchased in January 2010, but the associated shares, if dilutive, would be included in diluted weighted average shares outstanding for the periods the debentures were outstanding. The weighted average shares associated with the 1.625% convertible debentures were 11 thousand and 2.1 million for the three-months periods ended March 31, 2010 and 2009, respectively. As required by Accounting Standards Codification (“ASC”) Topic 260, Earnings per Share, if dilutive, the impact of the contingently issuable shares must be included in the calculation of diluted earnings per share under the “if-converted” method, regardless of whether the conditions upon which the debentures would be convertible into shares of the Company’s common stock have been met. Under the if-converted method, the assumed conversion of the 1.625% and 3.50% convertible debentures was anti-dilutive for each three-month period ended March 31, 2010 and 2009.

(4) DISCONTINUED OPERATIONS

During the fourth quarter of 2009, the Company sold Euronet Essentis Limited (“Essentis”), a U.K. software entity, in order to focus its investments and resources on its transaction processing business. Accordingly, Essentis’s results of operations are shown as discontinued operations in the Unaudited Consolidated Statements of Operations. Previously, Essentis’s results were reported in the EFT Processing Segment. The segment results in Note 8, Segment Information, also reflect the classification of Essentis’s results in discontinued operations. The following amounts related to Essentis have been segregated from continuing operations and reported as discontinued operations:

		Three Months Ended
(in thousands)		March 31, 2009
Revenues		$	1,424
Loss before income taxes		$	(93	)
Net loss		$	(61	)

(5) GOODWILL AND ACQUIRED INTANGIBLE ASSETS, NET

A summary of acquired intangible assets and goodwill activity for the three-month period ended March 31, 2010 is presented below:

		Acquired Intangible								Total Intangible
(in thousands)		Assets				Goodwill				Assets
Balance as of December 31, 2009		$	112,948			$	504,650			$	617,598
Decreases:
Amortization			(5,757	)			—				(5,757	)
Other (primarily changes in foreign currency exchange rates)			(4,098	)			(18,887	)			(22,985	)
Balance as of March 31, 2010		$	103,093			$	485,763			$	588,856

Estimated annual amortization expense on intangible assets with finite lives, before income taxes, as of March 31, 2010, is expected to total $22.9 million for 2010, $19.1 million for 2011, $16.8 million for 2012, $12.4 million for 2013, $9.7 million for 2014 and $4.6 million for 2015.

The Company’s annual goodwill impairment test is performed during the fourth quarter. The Company’s annual impairment test for the year ended December 31, 2008 resulted in the Company recording an estimated non-cash goodwill impairment charge of $219.8 million in the fourth quarter of 2008 related to its RIA money transfer business and its Spanish prepaid business. Additionally, the Company recorded a non-cash impairment charge of $0.3 million in the fourth quarter of 2008 related to certain trade names and customer relationships of the RIA money transfer business. The Company completed the impairment testing in the first quarter of 2009 and recorded an additional non-cash goodwill impairment charge of $8.8 million and a $1.1 million non-cash impairment charge related to a money transfer intangible asset in the first quarter of 2009. The annual goodwill impairment test completed in the fourth quarter of 2009 resulted in no impairment charges.

Determining the fair value of reporting units requires significant management judgment in estimating future cash flows and assessing potential market and economic conditions. It is reasonably possible that the Company’s operations will not perform as expected, or that estimates or assumptions could change, which may result in the Company recording additional material non-cash impairment charges during the year in which these changes take place.

(6) DEBT OBLIGATIONS

A summary of debt obligation activity for the three-month period ended March 31, 2010 is presented below:

		Revolving Credit				Other Debt								1.625% Convertible				3.50% Convertible
(in thousands)		Facilities				Obligations				Capital Leases				Debentures Due 2024				Debentures Due 2025				Term Loan				Total
Balance at December 31, 2009		$	39,164			$	92			$	4,507			$	1,227			$	153,927			$	129,000			$	327,917
Increases (decreases):
Net borrowings (repayments)			(38,439	)			206				(750	)			(1,227	)			—				(500	)			(40,710	)
Accretion			—				—				—				—				1,711				—				1,711
Capital lease interest			—				—				96				—				—				—				96
Foreign exchange (gain) loss			34				82				(71	)			—				—				—				45
Balance at March 31, 2010			759				380				3,782				—				155,638				128,500				289,059
Less — current maturities			—				(293	)			(2,264	)			—				—				(1,900	)			(4,457	)
Long-term obligations at March 31, 2010		$	759			$	87			$	1,518			$	—			$	155,638			$	126,600			$	284,602

In January 2010, the Company elected to redeem the remaining $1.2 million of outstanding 1.625% debentures at par. Contractual interest expense was $1 thousand and $0.3 million for the three months ended March 31, 2010 and 2009, respectively, and discount accretion was $0.9 million for the three months ended March 31, 2009. The effective interest rate was 1.625% and 7.1% for the three months ended March 31, 2010 and 2009, respectively. The carrying amount of the equity portion was $32.3 million as of December 31, 2009.

The 3.50% convertible debentures had principal amounts outstanding of $175.0 million and unamortized discounts outstanding of $19.4 million and $21.1 million as of March 31, 2010 and December 31, 2009, respectively. The discount will be amortized through October 15,

2012. Contractual interest expense was $1.5 million and discount accretion was $1.7 million and $1.6 million for the three months ended March 31, 2010 and 2009, respectively. The effective interest rate was 8.4% for the three months ended March 31, 2010 and 2009. The carrying amount of the equity portion was $45.1 million as of March 31, 2010 and December 31, 2009.

(7) DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

As of March 31, 2010, the Company had foreign currency forward contracts outstanding with a notional value of $76.0 million, primarily in euros and U.S. dollars, which had a weighted average remaining maturity of 4.0 days. Although the Company enters into foreign currency forward contracts to offset foreign currency exposure related to the notional value of money transfer transactions collected in currencies other than the U.S. dollar, they are not designated as hedges under ASC Topic 815. This is mainly due to the relatively short duration of the contracts, typically 1 to 14 days, and the frequency with which the Company enters into them.

The Company has an office lease in a foreign country that requires payment in a currency that is not the functional currency of either party to the lease or the Company’s reporting currency. Therefore, the lease contains an embedded derivative per ASC Topic 815 and its fair value is recorded in the Unaudited Consolidated Balance Sheets.

During 2007, the Company entered into interest rate swap agreements for a total notional amount of $50 million to manage interest rate exposure related to a portion of its term loan. The interest rate swap agreements were determined to be cash flow hedges and effectively converted $50 million of the term loan to a fixed interest rate of 7.3% through the May 2009 maturity date of the swap agreements. The swap agreements required no payment by either party at their maturities.

Below are the tabular disclosures required for derivative instruments:

		Consolidated				Fair Values of Derivative Instruments
		Balance Sheet				March 31, 2010				December 31, 2009
(in thousands)		Location				Asset Derivatives
Derivatives not designated as hedging instruments under ASC Topic 815
Foreign currency derivative contracts — gross gains		Cash and cash equivalents				$	39			$	138
Foreign currency derivative contracts — gross losses		Cash and cash equivalents					(224	)			(102	)
Total						$	(185	)		$	36
						Liability Derivatives
Embedded derivative in foreign lease		Other long-term liabilities				$	(157	)		$	(220	)
Total derivatives						$	(342	)		$	(184	)

		Amount of Gain Recognized in OCI on
		Derivative (Effective Portion)
		Three Months Ended March 31,
(in thousands)		2010				2009
Derivatives in ASC Topic 815 Cash Flow Hedging Relationships
Interest rate swaps related to floating rate debt		$	—			$	477

						Amount of Gain (Loss) Recognized in Income
						on Derivative
						Three Months Ended March 31,
		Location of Gain
		(Loss) Recognized
		in Income on
(in thousands)		Derivative				2010				2009
Derivatives not designated as hedging instruments under ASC Topic 815
Foreign currency derivative contracts		Foreign currency exchange gain (loss), net				$	143			$	(37	)
Embedded derivative in foreign lease		Foreign currency exchange gain (loss), net					63				(569	)
Total						$	206			$	(606	)

See Note 9, Fair Value Measurements, for the determination of the fair values of derivatives.

(8) SEGMENT INFORMATION

Euronet’s reportable operating segments have been determined in accordance with ASC Topic 280, Segment Reporting. The Company currently operates in the following three reportable operating segments:

	1)		Through the EFT Processing Segment, the Company processes transactions for a network of ATMs and POS terminals across Europe, the Middle East and Asia Pacific. The Company provides comprehensive electronic payment solutions consisting of ATM network participation, outsourced ATM and POS management solutions, credit and debit card outsourcing and electronic recharge services for prepaid mobile airtime. Through this segment, the Company also offers a suite of integrated electronic financial transaction (“EFT”) software solutions for electronic payment and transaction delivery systems.
	2)		Through the epay Segment, the Company provides distribution of prepaid mobile airtime and other electronic payment products and collection services in Europe, the Middle East, Asia Pacific and the Americas.
	3)		Through the Money Transfer Segment, the Company provides global consumer-to-consumer money transfer and bill payment services through a sending network of agents and Company-owned stores primarily in North America and Europe, disbursing money transfers through a worldwide payer network. Bill payment services are offered primarily in the U.S.

In addition, in its administrative division, “Corporate Services, Eliminations and Other,” the Company accounts for non-operating activity, share-based compensation expense, certain intersegment eliminations and the costs of providing corporate and other administrative services to the three segments. These services are not directly identifiable with the Company’s reportable operating segments.

The following tables present the segment results of the Company’s operations for the three-month periods ended March 31, 2010 and 2009:

		For the Three Months Ended March 31, 2010
														Corporate Services,
														Eliminations and
(in thousands)		EFT Processing				epay				Money Transfer				Other				Consolidated
Total revenues		$	48,566			$	145,380			$	56,057			$	—			$	250,003
Operating expenses:
Direct operating costs			23,928				115,599				26,334				—				165,861
Salaries and benefits			6,241				8,325				14,197				3,409				32,172
Selling, general and administrative			3,754				5,231				8,944				1,264				19,193
Depreciation and amortization			4,924				4,155				5,090				379				14,548
Total operating expenses			38,847				133,310				54,565				5,052				231,774
Operating income (loss)		$	9,719			$	12,070			$	1,492			$	(5,052	)		$	18,229

		For the Three Months Ended March 31, 2009
														Corporate Services,
														Eliminations and
(in thousands)		EFT Processing				epay				Money Transfer				Other				Consolidated
Total revenues		$	46,206			$	134,523			$	52,968			$	—			$	233,697
Operating expenses:
Direct operating costs			18,955				109,035				25,558				—				153,548
Salaries and benefits			7,012				6,424				11,820				3,340				28,596
Selling, general and administrative			4,147				4,542				8,815				1,564				19,068
Goodwill and acquired intangible assets impairment			—				—				9,884				—				9,884
Depreciation and amortization			4,182				3,646				4,762				313				12,903
Total operating expenses			34,296				123,647				60,839				5,217				223,999
Operating income (loss)		$	11,910			$	10,876			$	(7,871	)		$	(5,217	)		$	9,698

(9) FAIR VALUE MEASUREMENTS

The carrying amount of cash and cash equivalents, trade accounts receivable, trade accounts payable and short-term debt obligations approximates fair values, due to their short maturities. The carrying value of the Company’s term loan due 2014 and revolving credit agreements approximate fair values because interest is based on the London Inter-Bank Offered Rate (“LIBOR”) that resets at various intervals of less than one year. The following table provides the estimated fair values of the Company’s other financial instruments, based on quoted market prices or significant other observable inputs.

		As of
		March 31, 2010								December 31, 2009
(in thousands)		Carrying Value				Fair Value				Carrying Value				Fair Value
3.50% convertible debentures, unsecured, due 2025		$	(155,638	)		$	(162,094	)		$	(153,927	)		$	(162,313	)
Foreign currency derivative contracts			(185	)			(185	)			36				36
Embedded derivative in foreign lease			(157	)			(157	)			(220	)			(220	)
1.625% convertible senior debentures, unsecured, due 2024			—				—				(1,227	)			(1,224	)

The Company’s assets and liabilities recorded at fair value on a recurring basis are set forth in the following table:

		As of March 31, 2010
						Fair Value Measurements
						Using Significant Other
(in thousands)		Carrying Value				Observable Inputs
Foreign currency derivative contracts		$	(185	)		$	(185	)
Embedded derivative in foreign lease			(157	)			(157	)

The Company values foreign currency derivative contracts using foreign currency exchange quotations for similar assets and liabilities. The embedded derivative in foreign lease is valued using present value techniques and foreign currency exchange quotations.

Certain assets are measured at fair value on a non-recurring basis. During the first quarter of 2009, the Company finalized the assessment of the fair value of the goodwill related to its RIA money transfer business and its Spanish prepaid business and recorded an impairment charge of $8.8 million as discussed in Note 5, Goodwill and Acquired Intangible Assets, Net. The fair values were determined using significant unobservable inputs. The $258.8 million fair value of goodwill was determined by calculating its implied fair value as the excess of the fair value of the respective entity over the fair value of its net assets. Additionally, during the first quarter of 2009, management determined that an acquired intangible asset associated with a previous acquisition in the Money Transfer Segment had no value and, accordingly, the Company wrote off of the remaining net book value of the intangible asset of $1.1 million.

(10) GUARANTEES

As of March 31, 2010, the Company had $58.7 million of stand-by letters of credit/bank guarantees issued on its behalf, of which $10.9 million are collateralized by cash deposits held by the respective issuing banks.

Under certain circumstances, Euronet grants guarantees in support of obligations of subsidiaries. As of March 31, 2010, the Company granted off balance sheet guarantees for cash in various ATM networks amounting to $19.4 million over the terms of the cash supply agreements and performance guarantees amounting to approximately $30.7 million over the terms of the agreements with the customers.

From time to time, Euronet enters into agreements with unaffiliated parties that contain indemnification provisions, the terms and conditions of which may vary depending on the negotiated terms and conditions of each respective agreement. The amount of such potential obligations is generally not stated in the agreements. Our liability under such indemnification provisions may be mitigated by relevant insurance coverage and may be subject to time and materiality limitations, monetary caps and other conditions and defenses. Such indemnification obligations include the following:

•

In connection with contracts with financial institutions in the EFT Processing Segment, the Company is responsible for damages to ATMs and theft of ATM network cash that, generally, is not recorded on the Company’s Consolidated Balance Sheets. As of March 31, 2010, the balance of ATM network cash for which the Company was responsible was approximately $260 million. The Company maintains insurance policies to mitigate this exposure;

	•		In connection with the license of proprietary systems to customers, Euronet provides certain warranties and infringement indemnities to the licensees, which generally warrant that such systems do not infringe on intellectual property owned by third parties and that the systems will perform in accordance with their specifications;
	•		Euronet has entered into purchase and service agreements with vendors and consulting agreements with providers of consulting services, pursuant to which the Company has agreed to indemnify certain of such vendors and consultants, respectively, against third-party claims arising from the Company’s use of the vendor’s product or the services of the vendor or consultant;
	•		In connection with acquisitions and dispositions of subsidiaries, operating units and business assets, the Company has entered into agreements containing indemnification provisions, which can be generally described as follows: (i) in connection with acquisitions made by Euronet, the Company has agreed to indemnify the seller against third party claims made against the seller relating to the subject subsidiary, operating unit or asset and arising after the closing of the transaction, and (ii) in connection with dispositions made by Euronet, Euronet has agreed to indemnify the buyer against damages incurred by the buyer due to the buyer’s reliance on representations and warranties relating to the subject subsidiary, operating unit or business assets in the disposition agreement if such representations or warranties were untrue when made;
	•		Euronet has entered into agreements with certain third parties, including banks that provide fiduciary and other services to Euronet or to the Company’s benefit plans. Under such agreements, the Company has agreed to indemnify such service providers for third party claims relating to the carrying out of their respective duties under such agreements; and
	•		The Company has issued surety bonds in compliance with money transfer licensing requirements of the applicable governmental authorities.

The Company is also required to meet minimum capitalization and cash requirements of various regulatory authorities in the jurisdictions in which the Company has money transfer operations. To date, the Company is not aware of any significant claims made by the indemnified parties or third parties to guarantee agreements with the Company and, accordingly, no liabilities were recorded as of March 31, 2010 or December 31, 2009.

(11) INCOME TAXES

The Company’s effective tax rates were 62% and (81%) for the three-month periods ended March 31, 2010 and 2009, respectively. The effective tax rates were significantly influenced by the foreign currency exchange net losses for the first quarter of 2010 and 2009 and the goodwill and acquired intangible assets impairment charge for the first quarter of 2009. Excluding foreign currency exchange results and the impairment charge from pre-tax income, as well as the related tax effects for these items, the Company’s effective tax rates were 41.5% and 41.6% for the three months ended March 31, 2010 and 2009, respectively.

The increase in the effective tax rate, as adjusted, for the first quarter of 2010 compared to the applicable statutory rate of 35% is primarily related to the Company’s U.S. tax position. For the three months ended March 31, 2010, Euronet recorded a valuation allowance against its U.S. federal tax net operating losses as it is more likely than not that a tax benefit will not be realized. Accordingly, the federal income tax benefit associated with pre-tax book losses generated by the Company’s U.S. entities has not been recognized in this period. Additionally, the first quarter 2010 effective tax rate is lower due to a $0.8 million adjustment related to a foreign tax law change.

(12) CONTINGENCIES

In the second quarter of 2009, the Antitrust Division of the United States Department of Justice (the “DOJ”) served Continental Exchange Solutions, Inc. d/b/a RIA Financial Services (“CES”), an indirect, wholly-owned subsidiary of the Company, with a grand jury subpoena requesting documents from CES and its affiliates in connection with an investigation into money transmission services to the Dominican Republic during the period from January 1, 2004 to the date of the subpoena. The Company acquired all of the stock RIA Envia, Inc., the parent of CES, in April 2007. The Company and CES are fully cooperating with the DOJ in its investigation.

At this time, the Company is unable to predict whether this investigation will result in the DOJ bringing charges against CES. Accordingly, the Company is unable to predict the outcome of this investigation, the possible loss or possible range of loss, if any, associated with the resolution of any charges that may be brought against CES, or any potential effect on the Company’s business, results of operations or financial condition.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

OVERVIEW

COMPANY OVERVIEW, GEOGRAPHIC LOCATIONS AND PRINCIPAL PRODUCTS AND SERVICES

Euronet Worldwide, Inc. (“Euronet,” the “Company,” “we” or “us”) is a leading global electronic payments provider. We offer payment and transaction processing and distribution solutions to financial institutions, retailers, service providers and individual consumers. Our primary product offerings include comprehensive automated teller machine (“ATM”), point-of-sale (“POS”) and card outsourcing services; electronic distribution of prepaid mobile airtime and other prepaid products; and global consumer money transfer services. As of March 31, 2010, we operate in the following three principal business segments:

	•		The EFT Processing Segment, which processes transactions for a network of 10,283 ATMs and approximately 55,000 POS terminals across Europe, the Middle East and Asia Pacific. We provide comprehensive electronic payment solutions consisting of ATM network participation, outsourced ATM and POS management solutions, credit and debit card outsourcing and electronic recharge services for prepaid mobile airtime. Through this segment, we also offer a suite of integrated electronic financial transaction (“EFT”) software solutions for electronic payment and transaction delivery systems.
	•		The epay Segment, which provides distribution of prepaid mobile airtime and other electronic payment products and collection services for various prepaid products, cards and services. Including terminals operated by unconsolidated subsidiaries, we operate a network of approximately 510,000 POS terminals providing electronic processing of prepaid mobile airtime top-up services in Europe, the Middle East, Asia Pacific and the Americas.
	•		The Money Transfer Segment, which provides global consumer-to-consumer money transfer and bill payment services through a sending network of agents and Company-owned stores primarily in North America and Europe, disbursing money transfers through a worldwide payer network. The Money Transfer Segment originates and terminates transactions through a network of approximately 86,100 locations, which include sending agents and Company-owned stores, and an extensive payer network in more than 100 countries. Bill payment services are offered primarily in the U.S.

We have six processing centers in Europe, two in Asia Pacific and two in North America. We have 25 principal offices in Europe, seven in North America, six in Asia Pacific and one in the Middle East. Our executive offices are located in Leawood, Kansas, USA. With approximately 77% of our revenues denominated in currencies other than the U.S. dollar, any significant changes in currency exchange rates will likely have a significant impact on our growth in revenues, operating income and diluted earnings per share.

SOURCES OF REVENUES AND CASH FLOW

Euronet earns revenues and income based on ATM management fees, transaction fees and commissions, professional services, software licensing fees and software maintenance agreements. Each business segment’s sources of revenue are described below.

EFT Processing Segment – Revenues in the EFT Processing Segment, which represented approximately 20% of total consolidated revenues for the first quarter 2010, are derived from fees charged for transactions made by cardholders on our proprietary network of ATMs, as well as fixed management fees and transaction fees we charge to banks for operating ATMs and processing debit and credit cards under outsourcing agreements. Through our proprietary network, we generally charge fees for four types of ATM transactions: i) cash withdrawals, ii) balance inquiries, iii) transactions not completed because the relevant card issuer does not give authorization, and iv) prepaid telecommunication recharges. Revenues in this segment are also derived from license fees, professional services and maintenance fees for software and sales of related hardware. Software license fees are the fees we charge to license our proprietary application software to customers. Professional service fees consist of charges for customization, installation and consulting services to customers. Software maintenance revenues represent the ongoing fees charged for maintenance and support for customers’ software products. Hardware sales are derived from the sale of computer equipment necessary for the respective software solution.

MasterCard and Visa Europe recently announced reductions in fees paid for ATM interchange in Poland beginning in the second quarter of 2010. Our results are affected by these reductions both directly (because we receive the interchange fees for card transactions on our ATM networks in certain circumstances) and indirectly (because pricing established in our ATM outsourcing agreements has historically been based on the level of the interchange fee). It is difficult to predict with certainty the overall impact of these direct and indirect effects over time, but we expect these fee reductions to significantly adversely affect the EFT Processing Segment’s operating income. For 2010, the reduction to operating income of the MasterCard interchange fee reduction is expected to be approximately $1.2 million and the effect of the Visa Europe interchange fee reduction is expected to be approximately $5.6 million. The amounts are net of anticipated cost savings from renegotiated vendor service contracts and, to a lesser extent, additional ATM transactions processed as a result of lower interchange fees charged to cardholders.

epay Segment – Revenues in the epay Segment, which represented approximately 58% of total consolidated revenues for the first quarter 2010, are primarily derived from commissions or processing fees received from telecommunications service providers for the sale and distribution of prepaid mobile airtime. We also generate revenues from commissions earned from the distribution of other electronic payment products. Due to certain provisions in our mobile phone operator agreements, the operators have the ability to reduce the overall

commission paid on each top-up transaction. However, by virtue of our agreements with retailers (distributors where POS terminals are located) in certain markets, not all of these reductions are absorbed by us because we are able to pass a significant portion of the reductions to retailers. Accordingly, under certain retailer agreements, the effect is to reduce revenues and reduce our direct operating costs resulting in only a small impact on gross profit and operating income. In some markets, reductions in commissions can significantly impact our results as it may not be possible, either contractually or commercially in the concerned market, to pass a reduction in commissions to the retailers. In Australia, certain retailers negotiate directly with the mobile phone operators for their own commission rates, which also limits our ability to pass through reductions in commissions. Agreements with mobile operators are important to the success of our business. These agreements permit us to distribute prepaid mobile airtime to the mobile operators’ customers. Other products offered by this segment include prepaid long distance calling card plans, prepaid Internet plans, prepaid debit cards, prepaid gift cards, prepaid vouchers, transport payments, lottery payments, bill payment, money transfer and prepaid mobile content such as music and games.

Money Transfer Segment – Revenues in the Money Transfer Segment, which represented approximately 22% of total consolidated revenues for the first quarter 2010, are primarily derived through the charging of a transaction fee and retaining the difference between the price of foreign currency purchased at wholesale exchange rates and sold to consumers at retail exchange rates. We have an origination network in place comprised of agents and Company-owned stores primarily in North America and Europe and a worldwide network of correspondent agents, consisting primarily of financial institutions in the transfer destination countries. Origination and correspondent agents each earn fees for cash collection and distribution services. These fees are recognized as direct operating costs at the time of sale.

OPPORTUNITIES AND CHALLENGES

EFT Processing Segment - The continued expansion and development of our EFT Processing Segment business will depend on various factors including, but not necessarily limited to, the following:

	•		the impact of competition by banks and other ATM operators and service providers in our current target markets;
	•		the demand for our ATM outsourcing services in our current target markets;
	•		the ability to develop products or services to drive increases in transactions;
	•		the expansion of our various business lines in markets where we operate and in new markets;
	•		the entrance into additional card acceptance and ATM management agreements with banks;
	•		the ability to obtain required licenses in markets we intend to enter or expand services;
	•		the availability of financing for expansion;
	•		the ability to efficiently install ATMs contracted under newly awarded outsourcing agreements;
	•		the ability to renew existing contracts at profitable rates;
	•		the ability to maintain pricing and interchange fees at current levels;
	•		the ability to expand and sign additional customers for the cross-border merchant processing and acquiring business; and
	•		the continued development and implementation of our software products and their ability to interact with other leading products.

epay Segment – The continued expansion and development of the epay Segment business will depend on various factors, including, but not necessarily limited to, the following:

	•		the ability to negotiate new agreements in additional markets with mobile phone operators, agent financial institutions and retailers;
	•		the ability to use existing expertise and relationships with mobile operators and retailers to our advantage;
	•		the continued use of third-party providers such as ourselves to supply electronic processing solutions for prepaid content;
	•		the development of mobile phone networks in the markets in which we do business and the increase in the number of mobile phone users;
	•		the overall pace of growth in the prepaid mobile phone market;
	•		our market share of the retail distribution capacity;
	•		the ability to successfully brand our retail locations;
	•		the level of commission that is paid to the various intermediaries in the prepaid distribution chain;
	•		our ability to add new and differentiated prepaid products in addition to those offered by mobile operators;
	•		the ability to take advantage of cross-selling opportunities with our Money Transfer Segment, including providing money transfer services through our prepaid locations; and
	•		the availability of financing for further expansion.

Money Transfer Segment – The expansion and development of our money transfer business will depend on various factors, including, but not necessarily limited to, the following:

	•		the continued growth in worker migration and employment opportunities;
	•		the mitigation of economic and political factors that have had an adverse impact on money transfer volumes, such as changes in the economic sectors in which immigrants work and the developments in immigration policies in the U.S.;

	•		the continuation of the trend of increased use of electronic money transfer and bill payment services among immigrant workers and the unbanked population in our markets;
	•		the ability to maintain our agent and correspondent networks;
	•		the ability to offer our products and services or develop new products and services at competitive prices to drive increases in transactions;
	•		the expansion of our services in markets where we operate and in new markets;
	•		the ability to strengthen our brands;
	•		our ability to fund working capital requirements;
	•		our ability to maintain compliance with the regulatory requirements of the jurisdictions in which we operate or plan to operate;
	•		the ability to take advantage of cross-selling opportunities with our epay Segment, including providing prepaid services through RIA’s stores and agents worldwide;
	•		the ability to leverage our banking and merchant/retailer relationships to expand money transfer corridors to Europe and Asia, including high growth corridors to Central and Eastern European countries;
	•		the availability of financing for further expansion;
	•		our ability to continue to successfully integrate RIA with our other operations; and
	•		our ability to successfully expand our agent network in Europe using our Payment Services Directive license.

Corporate Services, Eliminations and Other – In addition to operating in our principal business segments described above, our “Corporate Services, Elimination and Other” division includes non-operating activity, certain inter-segment eliminations and the cost of providing corporate and other administrative services to the business segments, including share-based compensation expense related to most stock option and restricted stock grants. These services are not directly identifiable with our business segments.

SEGMENT SUMMARY RESULTS OF OPERATIONS

Revenues and operating income by segment for the three-month periods ended March 31, 2010 and 2009 are summarized in the tables below:

		Revenues for the Three																Operating Income (Loss) for the Three
		Months Ended March 31,								Year-over-Year Change								Months Ended March 31,								Year-over-Year Change
																										Increase (Decrease)				Increase (Decrease)
(dollar amounts in thousands)		2010				2009				Increase Amount				Increase Percent				2010				2009				Amount				Percent
EFT Processing		$	48,566			$	46,206			$	2,360				5	%		$	9,719			$	11,910			$	(2,191	)			(18	%)
epay			145,380				134,523				10,857				8	%			12,070				10,876				1,194				11	%
Money Transfer			56,057				52,968				3,089				6	%			1,492				(7,871	)			9,363				n/m
Total			250,003				233,697				16,306				7	%			23,281				14,915				8,366				56	%
Corporate services			—				—				—								(5,052	)			(5,217	)			165				(3	%)
Total		$	250,003			$	233,697			$	16,306				7	%		$	18,229			$	9,698			$	8,531				88	%

Impact of changes in foreign currency exchange rates

Compared to most of the currencies of the foreign countries in which we operate, the U.S. dollar was weaker during the first quarter of 2010 than it was in the first quarter of 2009. Because our revenues and local expenses are recorded in the functional currencies of our operating entities, amounts we earned for the first quarter of 2010 are positively impacted by the weaker U.S. dollar. Considering the results by country and the associated functional currency, we estimate that our operating income for the first quarter of 2010 benefitted by approximately 15% when compared to the first quarter of 2009 as a result of changes in foreign currency exchange rates. If applicable, we will refer to the impact of fluctuation in foreign currency exchange rates in our comparison of operating segment results for the three-month periods ended March 31, 2010 and 2009. To provide further perspective on the impact of foreign currency exchange rates, the following table shows the changes in values relative to the U.S. dollar from the first quarter of 2009 to the first quarter of 2010 of the currencies of the countries in which we have our most significant operations:

		Average Translation Rate
		Three Months Ended				Three Months Ended
Currency		March 31, 2010				March 31, 2009				Increase Percent
Australian dollar		$	0.9030			$	0.6650				36	%
British pound			1.5598				1.4384				8	%
euro			1.3833				1.3059				6	%
Hungarian forint			0.0052				0.0045				16	%
Indian rupee			0.0218				0.0202				8	%
Polish zloty			0.3473				0.2911				19	%

COMPARISON OF OPERATING RESULTS FOR THE THREE-MONTH PERIODS ENDED MARCH 31, 2010 AND 2009

EFT PROCESSING SEGMENT

The following table presents the results of operations for the three-month periods ended March 31, 2010 and 2009 for our EFT Processing Segment:

		Three Months Ended March 31,								Year-over-Year Change
										Increase (Decrease)				Increase (Decrease)
(dollar amounts in thousands)		2010				2009				Amount				Percent
Total revenues		$	48,566			$	46,206			$	2,360				5	%
Operating expenses:
Direct operating costs			23,928				18,955				4,973				26	%
Salaries and benefits			6,241				7,012				(771	)			(11	%)
Selling, general and administrative			3,754				4,147				(393	)			(9	%)
Depreciation and amortization			4,924				4,182				742				18	%
Total operating expenses			38,847				34,296				4,551				13	%
Operating income		$	9,719			$	11,910			$	(2,191	)			(18	%)
Transactions processed (millions)			187.4				153.3				34.1				22	%
ATMs as of March 31			10,283				9,205				1,078				12	%
Average ATMs			10,206				9,397				809				9	%

Revenues

Our revenues for the first quarter of 2010 increased compared to the first quarter of 2009 primarily due to the weaker U.S. dollar during the first quarter of 2010 compared to the first quarter of 2009 relative to most of the currencies of the countries in which we operate. Because our revenues are recorded in the functional currencies of our operating entities, amounts we earn in foreign currencies are positively impacted by the weaker U.S. dollar. Additionally, increased transaction fees in Germany, the increase in the number of ATMs operated, primarily in Poland and India, and POS terminal sales in Slovakia contributed to our revenue increase. Partly offsetting these

increases were contract termination fees totaling $4.4 million during the first quarter of 2009 and a decrease in revenues from our software business, primarily due to the sale of a significant license during the first quarter of 2009 to an entity in which Euronet has a 10% stake.

Average monthly revenue per ATM was $1,586 for the first quarter of 2010, compared to $1,639 for the first quarter of 2009 and revenues per transaction was $0.26 for the first quarter of 2010 compared to $0.30 for the first quarter of 2009. The decreases in revenue per ATM and per transaction are generally the result of the non-recurring contract termination fees in the first quarter of 2009 discussed above and the addition of ATMs in India where revenue per ATM and transaction have been historically lower than Central and Eastern Europe, generally due to lower labor costs. Partly offsetting these decreases are the impact of the weaker U.S. dollar and the increase in transaction fees in Germany which have contributed approximately $2.0 million in incremental revenues. We were able to increase transaction fees in Germany beginning in mid-2009, but we are uncertain if we will be able to maintain the current rates.

Direct operating costs

Direct operating costs consist primarily of site rental fees, cash delivery costs, cash supply costs, maintenance, insurance, telecommunications and the cost of data center operations-related personnel, as well as the processing centers’ facility related costs and other processing center related expenses. The increase in direct operating costs for the first quarter of 2010, compared to the first quarter of 2009, is mainly attributed to the increase in the number of ATMs under operation, the sale of POS terminals in Slovakia and the impact of the weaker U.S. dollar.

Gross profit

Gross profit, which is calculated as revenues less direct operating costs, decreased to $24.6 million for the first quarter of 2010 from $27.3 million for the first quarter of 2009. This decrease is mainly attributable to the contract termination fee revenues during the first quarter of 2009, partly offset by the increased ATM fees in Germany, contributions from the card and ATM processing business we acquired in Serbia during the fourth quarter of 2009 and the impact of the weaker U.S. dollar. Other than the impact of the weaker U.S. dollar, these items resulted in a decrease in gross profit as a percentage of revenues (“gross margin”) to 51% for the first quarter of 2010 compared to 59% for the first quarter of 2009.

Salaries and benefits

The decrease in salaries and benefits for the first quarter of 2010 compared to the first quarter of 2009 is primarily due to lower bonus expense, partly offset by the impact of the weaker U.S. dollar discussed above. As a percentage of revenues, these costs decreased to 13% of revenues for the first quarter of 2010 compared to 15% for the first quarter of 2009.

Selling, general and administrative

The decrease in selling, general and administrative expenses for the first quarter of 2010 compared to the first quarter of 2009 is due to general cost control measures, partly offset by the impact of the weaker U.S. dollar discussed above. As a percentage of revenues, selling, general and administrative expenses were 8% for the first quarter of 2010 compared to 9% for the first quarter of 2009.

Depreciation and amortization

The increase in depreciation and amortization expense for the first quarter of 2010 compared to the first quarter of 2009 is due primarily to the growth in the number of ATMs and the impact of the weaker U.S. dollar described above. As a percentage of revenues, depreciation and amortization expense was 10% of revenues for the first quarter of 2010 compared to 9% for the same period in 2009.

Operating income

The decrease in operating income is primarily due to the contract termination fees and greater software license revenues during the first quarter of 2009, partly offset by the increased ATMs fees in Germany and the impact of the weaker U.S. dollar. Operating income as a percentage of revenues for the first quarter of 2010 was 20%, compared to 26% for the first quarter of 2009, and operating income per transaction was $0.05 for the first quarter of 2010, compared to $0.08 per transaction for the first quarter of 2009.

EPAY SEGMENT

The following table presents the results of operations for the three-month periods ended March 31, 2010 and 2009 for our epay Segment:

		Three Months Ended March 31,								Year-over-Year Change
(dollar amounts in thousands)		2010				2009				Increase Amount				Increase Percent
Total revenues		$	145,380			$	134,523			$	10,857				8	%
Operating expenses:
Direct operating costs			115,599				109,035				6,564				6	%
Salaries and benefits			8,325				6,424				1,901				30	%
Selling, general and administrative			5,231				4,542				689				15	%
Depreciation and amortization			4,155				3,646				509				14	%
Total operating expenses			133,310				123,647				9,663				8	%
Operating income		$	12,070			$	10,876			$	1,194				11	%
Transactions processed (millions)			199.8				184.3				15.5				8	%

Revenues

The increase in revenues for the first quarter of 2010 compared to the first quarter of 2009 was primarily due to the weaker U.S. dollar in the first quarter of 2010 compared to the same period in 2009 relative to most of the currencies of the countries in which we operate, particularly the Australian dollar, and the increase in total transactions processed. Additionally, revenues also increased due to the increase, primarily in Germany, in total transactions processed. These increases were partly offset by mobile operator commission rate decreases in certain markets.

In certain more mature markets, such as the U.K., New Zealand and Spain, our revenue growth has slowed substantially or revenues have decreased because conversion from scratch cards to electronic top-up is substantially complete and certain mobile operators and retailers are driving competitive reductions in pricing and margins. We expect most of our future revenue growth in the epay Segment to be derived from: (i) additional products sold over the base of prepaid processing terminals, (ii) developing markets or markets in which there is organic growth in the prepaid sector overall, (iii) continued conversion from scratch cards to electronic top-up in less mature markets, and (iv) acquisitions, if available.

Revenues per transaction remained flat at $0.73 for both the first quarter of 2010 and 2009, reflecting the decrease in mobile operator commission rates being offset by the impact of the weaker U.S. dollar.

Direct operating costs

Direct operating costs in the epay Segment include the commissions we pay to retail merchants for the distribution and sale of prepaid mobile airtime and other prepaid products, as well as expenses required to operate POS terminals. Because of their nature, these expenditures generally fluctuate directly with revenues and processed transactions. The increase in direct operating costs is generally attributable to the impact of the weaker U.S. dollar and the increase in total transactions processed. Most of the decrease in mobile operator commission revenues discussed above was passed on to retail merchants resulting in lower commission costs which partly offset these increases.

Gross profit

Gross profit, which represents revenues less direct costs, was $29.8 million for the first quarter of 2010 compared to $25.5 million for the first quarter of 2009. Gross margin increased slightly to 20% for the first quarter of 2010 from 19% for the first quarter of 2009 and gross profit per transaction increased to $0.15 for the first quarter of 2010 from $0.14 for the same period in 2009. The primary cause of the increase in gross profit per transaction is the impact of the weaker U.S. dollar and expanded profitability in the U.S.

Salaries and benefits

The increase in salaries and benefits for first quarter of 2010 compared to the first quarter of 2009 is primarily due to additional overhead to support development in new and growing markets, certain severance costs and the impact of the weaker U.S. dollar. As a percentage of revenues, salaries and benefits increased to 5.7% for first quarter of 2010 from 4.8% for first quarter of 2009.

Selling, general and administrative

The increase in selling, general and administrative expenses for the first quarter of 2010 compared to the first quarter of 2009 is due to the impact of the weaker U.S. dollar along with additional overhead to support development in other new and growing markets. As a percentage of revenues, these expenses increased to 3.6% for first quarter of 2010 from 3.4% for the first quarter of 2009.

Depreciation and amortization

Depreciation and amortization expense primarily represents amortization of acquired intangibles and the depreciation of POS terminals we install in retail stores. Depreciation and amortization expense increased for the first quarter of 2010 compared to the first quarter of 2009 mainly due to the impact of the weaker U.S. dollar and an increase in installed POS terminals. As a percentage of revenues, these expenses increased to 2.9% for the first quarter of 2010 from 2.7% for the first quarter of 2009.

Operating income

The improvement in operating income for the first quarter of 2010 compared to the same period in 2009 is primarily due to the impact of foreign currency translations to the U.S. dollar.

Operating income as a percentage of revenues was 8.3% for the first quarter of 2010 compared to 8.1% for the first quarter of 2009. The slight increase is primarily due to the improvements in gross margin. Operating income per transaction remained flat at $0.06 for both the first quarter of 2010 and 2009 reflecting the favorable impact of the weaker U.S. dollar being offset by the growth in transactions outpacing the growth in profitability.

MONEY TRANSFER SEGMENT

The following table presents the results of operations for the three-month periods ended March 31, 2010 and 2009 for the Money Transfer Segment:

		Three Months Ended March 31,								Year-over-Year Change
										Increase (Decrease)				Increase (Decrease)
(dollar amounts in thousands)		2010				2009				Amount				Percent
Total revenues		$	56,057			$	52,968			$	3,089				6	%
Operating expenses:
Direct operating costs			26,334				25,558				776				3	%
Salaries and benefits			14,197				11,820				2,377				20	%
Selling, general and administrative			8,944				8,815				129				1	%
Goodwill and acquired intangible assets impairment			—				9,884				(9,884	)				n/m
Depreciation and amortization			5,090				4,762				328				7	%
Total operating expenses			54,565				60,839				(6,274	)			(10	%)
Operating income (loss)		$	1,492			$	(7,871	)		$	9,363					n/m
Transactions processed (millions)			4.3				4.0				0.3				8	%

Revenues

Revenues from the Money Transfer Segment include a transaction fee for each transaction as well as the difference between the price of foreign currency purchased at wholesale exchange rates and sold to customers at retail exchange rates. Revenues per transaction decreased to $11.68 for the first quarter of 2010 from $12.32 for the first quarter of 2009. The growth rate of revenues lagged the transaction growth rate largely as a result of lower average amount transferred per transaction, partly offset by the impact of the weaker U.S. dollar. The decrease in revenues per transactions was also partly offset by a strong increase in transfers from non-U.S. locations which generally have higher-than-average revenues per transaction. For the first quarter of 2010, 61% of our money transfers were initiated in the U.S., 35% in Europe and 4% in other countries, such as Canada and Australia. This compares to 65% initiated in the U.S., 32% initiated in Europe and 3% initiated in other countries for the first quarter of 2009. We expect that the U.S. will continue to represent our highest volume market; however, future growth is expected to be derived largely from non-U.S. initiated sources.

The increase in revenues for the first quarter of 2010 compared to the first quarter of 2009 is primarily due to an increase in the number of transactions processed and the favorable impact of the weaker U.S. dollar. For the first quarter of 2010, money transfers from the U.S. to Mexico, which represented 21% of total money transfers, decreased by 14% while all other transfers increased 15% when compared to the first quarter of 2009. The increase in transfers to countries other than Mexico was primarily due to the expansion of our operations. The decline in transfers to Mexico was largely the result of downturns in certain labor markets and other economic factors impacting the U.S. market as well as immigration developments in the U.S. While the transfers to Mexico continue to decline on a year-over-year basis, the decline has slowed recently. These issues have also resulted in certain competitors lowering transaction fees and foreign currency exchange spreads in certain markets where we do business in an attempt to limit the impact on money transfer volumes. We have generally maintained our pricing structure in response to these developments.

Direct operating costs

Direct operating costs in the Money Transfer Segment primarily represent commissions paid to agents that originate money transfers on our behalf and distribution agents that disburse funds to the customers’ destination beneficiary, together with less significant expenses, such as telecommunication costs and bank and other fees to collect money from originating agents. The increase in direct operating costs for the first quarter of 2010 compared to the first quarter of 2009 is almost entirely due to the impact of the weaker U.S. dollar.

Gross profit

Gross profit, which represents revenues less direct costs, was $29.7 million for the first quarter of 2010 compared to $27.4 million for the first quarter of 2009. This improvement is primarily due to the growth in money transfer transactions and the impact of the weaker U.S. dollar related to money transfers originated outside the U.S. As discussed above, certain competitors have been lowering transaction fees and foreign currency exchange spreads in the U.S. market as a result of the economic factors and immigration developments impacting the U.S. market. We have generally maintained our pricing structure in response to these developments. We cannot predict how long these issues will continue to affect the U.S. market or whether other markets will experience similar issues and we cannot predict whether we will change our pricing strategy over the short or long term in order to protect or increase market share. Gross margin was 53% for the first quarter of 2010 compared to 52% for the first quarter of 2009. The improvement primarily reflects the strong growth in transaction volume in our more profitable non-U.S. locations, partly offset by lower revenues per transaction.

Salaries and benefits

Salaries and benefits include salaries and commissions paid to employees, the cost of providing employee benefits, amounts paid to contract workers and accruals for incentive compensation. The increase in salaries and benefits for the first quarter of 2010 compared to the first quarter of 2009 was primarily due to the increased expenditures we incurred to support expansion of our operations, primarily internationally, and the impact of the weaker U.S. dollar. As a percentage of revenues, salaries and benefits increased to 25% for the first quarter of 2010 from 22% for the same period in 2009.

Selling, general and administrative

Selling, general and administrative expenses include operations support costs, such as rent, utilities, professional fees, indirect telecommunications, advertising and other miscellaneous overhead costs. The increase in selling, general and administrative expenses for the first quarter of 2010 compared to the first quarter of 2009 is primarily due to the impact of the weaker U.S. dollar. As a percentage of revenues, selling general and administrative expenses decreased slightly to 16% for the first quarter of 2010 from 17% for the same period in 2009.

Goodwill and acquired intangible assets impairment

In the fourth quarter of 2008, we recorded a non-cash impairment charge of $169.4 million related to certain goodwill and intangible assets of the RIA money transfer business. This charge was an estimate based on the assessment performed up to the filing date of our 2008 Annual Report on Form 10-K. We completed the assessment in the first quarter of 2009 and recorded an additional $9.9 million non-cash impairment charge in the first quarter of 2009.

Depreciation and amortization

Depreciation and amortization primarily represents amortization of acquired intangibles and also includes depreciation of money transfer terminals, computers and software, leasehold improvements and office equipment. The increase in depreciation and amortization for the first quarter of 2010 compared to the first quarter of 2009 was primarily due to additional computer equipment in our customer service centers and increased leasehold improvements, office equipment and computer equipment for expansion of our company stores along with greater acquisition-related amortization and the impact of the weaker U.S. dollar. As a percentage of revenues, depreciation and amortization remained flat at 9% for both the first quarter of 2010 and 2009.

Operating income (loss)

Excluding the goodwill and acquired intangible assets impairment charge, operating income for the first quarter of 2010 decreased $0.5 million compared to the first quarter of 2009. This reflects the growth in costs to expand internationally, partly offset by the increase in transactions processed, mainly those originated in non-U.S. locations, and the impact of the weaker U.S. dollar, as discussed in more detail in the sections above.

CORPORATE SERVICES

The following table presents the operating expenses for the three-month periods ended March 31, 2010 and 2009 for Corporate Services:

		Three Months Ended March 31,								Year-over-Year Change
										Increase (Decrease)				Increase (Decrease)
(dollar amounts in thousands)		2010				2009				Amount				Percent
Salaries and benefits		$	3,409			$	3,340			$	69				2	%
Selling, general and administrative			1,264				1,564				(300	)			(19	%)
Depreciation and amortization			379				313				66				21	%
Total operating expenses		$	5,052			$	5,217			$	(165	)			(3	%)

Corporate operating expenses

Operating expenses for Corporate Services decreased for the first quarter of 2010 compared to the first quarter of 2009. This was driven by a decrease in selling, general and administrative expenses that was primarily related to lower professional fees, partly offset by slight increases in salaries and benefits expense and depreciation and amortization expense.

OTHER EXPENSE, NET

		Three Months Ended March 31,								Year-over-Year Change
(dollar amounts in thousands)		2010				2009				Amount				Percent
Interest income		$	555			$	969			$	(414	)			(43	%)
Interest expense			(4,954	)			(7,067	)			2,113				(30	%)
Income from unconsolidated affiliates			554				518				36				7	%
Loss on early retirement of debt			—				(103	)			103				n/m
Foreign currency exchange loss, net			(5,082	)			(10,591	)			5,509				(52	%)
Other expense, net		$	(8,927	)		$	(16,274	)		$	7,347				(45	%)