EURONET WORLDWIDE, INC. quarterly report, Q1 FY2012

Euronet Worldwide, Inc. — Q1 2012 Form 10-Q

Reporting period: Three months ended March 31, 2012; balance-sheet figures are as of March 31, 2012, with December 31, 2011 comparisons. The company provides electronic payment processing, prepaid product distribution and consumer money transfer services through EFT Processing, epay and Money Transfer segments.

Key financial results

Metric	Q1 2012	Q1 2011	Change
Revenue	$297.6 million	$262.6 million	+13%
Operating income	$15.8 million	$17.2 million	-8%
Net income attributable to Euronet	$13.2 million	$17.3 million	-24%
Diluted EPS	$0.26	$0.33	Down $0.07
Operating cash flow	$22.8 million	$33.9 million	Down $11.1 million
Cash and cash equivalents	$180.7 million	$170.7 million at Dec. 31, 2011	Up $10.0 million

Consolidated operating margin was approximately 5.3%, versus 6.6% a year earlier. Net income included a $4.4 million gain from obtaining control of Euronet Middle East; foreign-exchange gains were $2.1 million, down from $9.3 million in Q1 2011. The reported effective tax rate was 29.1%; management’s adjusted rate excluding foreign-exchange and other gains was 44.0%.

Segments and material period changes

• EFT Processing: Revenue rose 13% to $49.9 million, while operating income slipped 2% to $6.0 million. Transactions increased 29% and ATMs under management rose 41%. Management cited growth in network scale and value-added services, offset by weaker currencies, lower revenue per ATM and transaction, and higher amortization. Segment operating margin declined to 12.1% from 13.8%.
• epay: Revenue increased 14% to $176.3 million, but operating income was nearly flat at $13.2 million. Growth reflected the cadooz acquisition and higher activity in Germany and the U.S.; competitive and economic pressures affected Australia and the U.K. Brazil revenues were expected to be negatively affected by mobile operators’ distribution changes through 2012. Segment operating margin fell to 7.5% from 8.5%.
• Money Transfer: Revenue rose 13% to $71.4 million and operating income increased 55% to $4.3 million. Transactions grew 26%, including recovery in U.S.-to-Mexico transfers and expansion of agent and correspondent networks. Segment operating margin improved to 6.0% from 4.4%.

All three segments grew revenue, but higher corporate costs—mainly share-based compensation—and currency effects contributed to lower consolidated operating income. Management estimated that exchange-rate movements reduced Q1 2012 consolidated operating income by approximately 4% versus Q1 2011. About 78% of revenue was generated in non-U.S.-dollar currencies.

Liquidity, debt and cash flow

• Current assets were $715.1 million and current liabilities were $724.7 million, leaving negative working capital of $9.6 million; the current ratio was 0.99. Restricted cash was $90.8 million.
• Total debt obligations including capital leases were $337.3 million. This included $167.1 million carrying value of convertible debentures, $85.2 million drawn under revolving facilities and $78.0 million under the term loan. The company reported $155.7 million available under its revolving credit facility.
• The $171.4 million principal amount of 3.5% convertible debentures has a holder put option on October 15, 2012. Management said it expected available cash and revolver capacity to be sufficient to fund a required repurchase, if exercised.
• Operating cash flow was $22.8 million; investing cash outflow was $13.6 million, including $9.5 million of property and equipment purchases and $2.7 million for acquisitions. Financing cash outflow was $3.2 million, primarily reflecting net debt repayments.
• Capital expenditures for full-year 2012 were estimated at approximately $40 million to $50 million. Management expected operating cash, cash on hand and borrowing capacity to cover debt, lease, acquisition and capital expenditure needs, while noting that additional financing might be sought if resources proved insufficient.

Outlook, risks and unusual items

• No specific earnings or revenue guidance was provided. Management identified potential growth from additional electronic payment products, developing markets and suitable acquisitions; the filing cautions that quarterly results are not necessarily indicative of full-year results.
• Mobile operator commission reductions and changes in distribution strategies may constrain epay results. Management was adjusting Brazil’s cost base and planned to introduce additional products; it noted possible impairment risk to Brazil-related goodwill or intangible assets if profitability did not recover over the longer term.
• A late-2011 security breach affected a European processing unit representing less than 5% of company revenue, profits and transactions. Q1 2012 breach expenses were $0.3 million, net of expected insurance recoveries of $1.5 million. Claims had not yet been asserted, and management did not expect the net impact after probable insurance recovery to be material, but could not estimate a range of loss.
• The DOJ’s antitrust investigation into possible price collusion involving Ria money transfers to the Dominican Republic remained unresolved. The company could not predict the outcome or potential losses and noted possible fines, licensing consequences, civil liability and continuing legal expenses.
• Other exposures include European sovereign-debt-related customer and economic risks, competition, regulatory and licensing requirements, and foreign exchange. Management estimated that a 10% exchange-rate fluctuation could affect annualized reported net income and working capital by approximately $35–$40 million, and total comprehensive income by approximately $50–$55 million.
• The company reported $98.5 million of standby letters of credit and bank guarantees, $17.8 million of ATM cash-supply guarantees and approximately $29.0 million of performance guarantees. No significant guarantee or indemnification claims were known, and no related liabilities were recorded.

Important facts for investors to verify

• Whether the October 2012 convertible-debenture put is exercised and the company’s resulting cash and borrowing capacity.
• Whether Brazil and other pressured epay markets stabilize, and whether planned cost and product changes restore profitability.
• Subsequent developments, claims and insurance recoveries related to the security breach, and the outcome and costs of the DOJ investigation.
• Operating cash flow and working-capital needs, particularly the timing of epay settlements and Money Transfer correspondent funding.
• Foreign-exchange sensitivity, segment margins and the potential for goodwill or intangible-asset impairment.
• Acquisition accounting remains preliminary for Euronet Middle East, including valuation of acquired intangible assets; confirm any subsequent valuation adjustments.