Euronet Worldwide, Inc. — Q3 2019 Form 10-Q
Reporting period: Three and nine months ended September 30, 2019. Unaudited consolidated results. Euronet provides electronic payments and transaction processing through EFT Processing, epay and Money Transfer.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $787.0 million | $714.5 million | $2,056.4 million | $1,887.2 million |
| Operating income | $194.0 million | $150.9 million | $368.0 million | $286.8 million |
| Net income attributable to Euronet | $137.6 million | $102.7 million | $240.3 million | $172.9 million |
| Diluted EPS | $2.46 | $1.89 | $4.40 | $3.17 |
- Year-over-year revenue increased 10% in Q3 and 9% for the nine-month period; operating income rose 29% and 28%, respectively. Net income attributable to Euronet rose 34% and 39%.
- Operating margin was approximately 24.7% in Q3 and 17.9% for the first nine months, versus 21.1% and 15.2% a year earlier. Diluted EPS also benefited from earnings growth; weighted-average diluted shares were higher in Q3 but lower year to date.
- Cash flow: Nine-month operating cash flow was $364.4 million, versus $192.6 million. Investing activities used $104.4 million, including $100.4 million of property and equipment purchases. Financing activities provided $461.6 million. Cash and restricted cash ended at $1,794.8 million.
- Liquidity: Cash and cash equivalents were $1,730.9 million; working capital was $1,283 million and the current ratio was 1.88. About $1,288 million of cash was held outside the U.S. and expected to remain invested in foreign operations; repatriation could have adverse tax consequences.
- Debt: Debt obligations totaled $1,106.8 million before unamortized issuance costs and $1,086.3 million carrying value. Debt increased from $634.1 million at year-end 2018, largely following issuance of $525 million of 0.75% convertible notes and €600 million of 1.375% senior notes. The company reported compliance with debt covenants and $950.1 million available under its $1.0 billion revolving facility, subject to borrowing-base and covenant conditions.
Segments and changes versus prior period
- EFT Processing: Q3 revenue rose 21% to $316.2 million and operating income rose 37% to $150.9 million. Growth reflected a larger ATM network and more transactions, including DCC, surcharge and foreign-currency dispensing activity. Visa’s rule change enabled DCC on Euronet ATMs beginning in Q2 2019. The segment operated 47,209 ATMs, up 13% year over year.
- epay: Q3 revenue increased 3% to $191.1 million and operating income increased 22% to $20.1 million. Higher digital-media activity and promotional transactions supported results; high-volume, lower-value transactions in India reduced revenue per transaction.
- Money Transfer: Q3 revenue increased 5% to $280.8 million and operating income increased 4% to $35.6 million. Transfer volume grew 5%, while revenue per transaction declined slightly. Management cited double-digit growth in U.S. outbound and internationally originated remittances, partly offset by limited xe growth amid Brexit uncertainty and lower U.S. domestic transfers following additional identification requirements.
- For the first nine months, all three segments increased revenue and operating income. EFT Processing was the largest contributor to operating-income growth.
Outlook, commentary and risks
- Management estimated 2019 capital expenditures of approximately $135–$140 million; $105.6 million had been incurred through September. It expected operating cash flow, cash on hand and available financing to cover debt, lease and capital-expenditure needs, while noting refinancing or equity issuance could be needed if resources prove insufficient.
- Foreign currency translation was a material headwind: management estimated reported operating income was about 4% lower in Q3 and 5% lower year to date than it otherwise would have been due to exchange-rate movements. Approximately 74% of revenue was generated in non-U.S. dollar currencies.
- Market risks include foreign-exchange movements, payment and privacy regulation, anti-money-laundering compliance, cybersecurity incidents and service interruptions, competition, contract renewals, card-network rules and fees, economic conditions, and Brexit-related uncertainty. Management estimated a 10% currency-rate fluctuation could affect annualized reported net income and working capital by approximately $120–$125 million, and comprehensive income by approximately $135–$140 million from translation of non-current assets and liabilities.
- An early retirement and conversion of the prior convertible notes resulted in a $9.8 million debt-retirement loss during the first nine months. The replacement convertible notes include a substantial noncash debt discount; related accretion contributed to interest expense.
- Adoption of the new lease standard in January 2019 added approximately $296.9 million of right-of-use assets and lease liabilities at transition. At September 30, operating lease liabilities were $352.6 million.
- The company reported no legal or regulatory proceedings believed likely to have a material adverse effect, and no material changes to previously disclosed risk factors. It disclosed contingent operational exposures, including responsibility for approximately $461 million of cash in ATM networks, for which it maintains insurance.
Important facts for investors to verify
- Whether strong EFT Processing growth, including the benefit from ATM DCC rule changes, is sustainable and how it develops across markets.
- How currency movements, particularly the strong U.S. dollar, affect reported growth, earnings and the euro-denominated senior notes.
- The uses of proceeds from the 2019 debt offerings, debt-service capacity and continued compliance with credit-facility covenants.
- Whether operating cash flow remains robust after working-capital timing effects and elevated ATM and network investment.
- Developments in xe and U.S. domestic transfer volumes, the Walmart agreement (then effective through April 2020, subject to renewal), and relevant regulatory or identification requirements.
- Actual capital expenditures against the stated range, and the evolution of lease obligations, ATM cash exposure and other guarantees.