Euronet Worldwide, Inc. — Q3 2017 Form 10-Q
Reporting period: Three and nine months ended September 30, 2017. Unaudited results are compared with the same periods in 2016. Euronet provides electronic payments, ATM and POS processing, prepaid electronic payment distribution, and money transfer services through EFT Processing, epay, and Money Transfer segments.
Key financial results
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | $637.8m | $524.0m | $1,647.8m | $1,438.8m |
| Operating income | $116.9m | $90.5m | $224.9m | $191.7m |
| Net income attributable to Euronet | $100.3m | $60.7m | $179.8m | $145.5m |
| Diluted EPS | $1.80 | $1.11 | $3.23 | $2.66 |
| Cash from operating activities | Not stated for quarter | Not stated for quarter | $230.5m | $217.5m |
- Q3 revenue rose 22%; operating income increased 29%, and attributable net income increased approximately 65%. For the first nine months, revenue rose 15%, operating income 17%, and attributable net income 24%.
- Consolidated operating margin was approximately 18.3% in Q3 and 13.7% year to date, versus 17.3% and 13.3%, respectively, in 2016.
- Nine-month investing cash outflow was $74.0m, chiefly reflecting $70.9m of property and equipment purchases. Financing provided $126.6m. Cash and cash equivalents increased $327.8m to $1,062.2m; this increase included $44.7m from exchange-rate effects.
- At September 30, cash and cash equivalents were $1,062.2m and total debt obligations were $736.3m before $6.5m of unamortized issuance costs. Restricted cash was $113.6m. Working capital was $626.1m and the current ratio was 1.48. Of cash and cash equivalents, $939.1m was held outside the U.S. and expected to remain invested in foreign operations; repatriation could have negative tax consequences.
Segment performance and period-over-period changes
- EFT Processing: Q3 revenue increased 48% to $226.3m and operating income rose 46% to $86.8m. Nine-month revenue grew 38% to $488.0m and operating income rose 36% to $137.1m. Growth reflected more ATMs under management, YourCash, and higher DCC activity; the India cash shortage affected year-to-date results. Segment gross margin declined, reflecting network expansion, lower-margin activity in India and YourCash, and Q3 POS device sales in Greece.
- epay: Q3 revenue increased 10% to $184.2m and operating income increased 6% to $15.7m. Nine-month revenue grew 3% to $512.5m, while operating income fell 5% to $44.4m. Non-mobile transactions and vouchers supported revenue, while prepaid mobile transaction volumes declined amid competitive pressure. Nine-month operating margin fell to 8.7% from 9.4%.
- Money Transfer: Q3 revenue increased 11% to $228.1m, but operating income declined 3% to $24.4m. Nine-month revenue rose 10% to $649.2m and operating income 4% to $75.4m. Transaction growth was partly offset by lower Walmart-2-Walmart rates and margins, higher support costs, and Q3 hurricane impacts in Texas, Florida, and Puerto Rico. Nine-month operating margin fell to 11.6% from 12.4%.
Liquidity, debt, outlook, and risks
- The $675m senior secured credit facility matures April 2019. At quarter-end, $191.6m was drawn on the revolver, $45.1m of letters of credit were outstanding, and $363.3m remained available; the term loan balance was $53.4m. The company said the facility was expected to cover projected working capital needs.
- The $402.5m principal amount of 1.5% convertible notes became convertible at holders’ option for Q4 2017 after the conversion threshold was met. Management said conversion was considered unlikely because the notes’ $550.5m fair value exceeded their $528.5m conversion value, and stated resources were sufficient if holders converted. Notes also have specified future put dates, beginning October 2020.
- A separate $100m ATM credit facility, used to fund the ATM network, was due to expire November 30, 2017. Management estimated 2017 capital expenditures of approximately $105m–$115m; $76.8m had been incurred through the first nine months, including capital lease expenditures.
- Management expected cash generated from operations, cash on hand, and available financing to meet debt, lease, and capital expenditure needs, while noting refinancing or new equity could be needed if resources proved insufficient. No specific earnings or revenue guidance was provided in the filing.
- Approximately 74% of revenue was generated in non-U.S. dollar currencies. Management estimated that a 10% currency-rate fluctuation could affect annualized reported net income and working capital by approximately $140m–$145m, and comprehensive income by approximately $100m–$105m; a stronger U.S. dollar would generally be adverse. Other identified risks include cybersecurity or service interruptions, regulation and compliance, competition, contract renewals, economic and political conditions, and technology changes.
- Revenue guidance under Topic 606 was scheduled to take effect January 1, 2018. The company did not expect a material effect on revenue-recognition timing, but estimated 2016 revenue would have been approximately $125m–$200m higher under the new principal-versus-agent presentation for certain arrangements.
Unusual items and contingencies
- A $16.3m release of a valuation allowance against certain foreign deferred tax assets contributed to lower 2017 effective tax rates: 13.4% for Q3 and 19.3% year to date, compared with 25.5% and 23.7% in 2016. The company continued to maintain a valuation allowance on U.S. deferred tax assets.
- Year-to-date results included a $2.3m non-cash impairment of customer relationships following closure of the Pure Commerce office in South Korea. The 2016 comparison included a $19.4m gain on sale of the Visa Europe investment, which did not recur.
- Foreign currency exchange gains were $8.2m in Q3 and $21.0m year to date, compared with a Q3 loss of $1.5m and a year-to-date loss of $1.3m in 2016. Q3 also coincided with the EFT segment’s seasonal peak in tourism-related DCC demand.
- The company reported $73.6m of standby letters of credit and bank guarantees, $16.9m of ATM cash supply guarantees, and approximately $21.8m of performance guarantees. It reported no known significant claims under guarantees or indemnifications and no legal or regulatory proceedings management believed would materially adversely affect results.
Important facts for investors to verify
- Whether EFT Processing growth and margins persist as the ATM network expands, including performance in India and the contribution of YourCash.
- Whether epay can stabilize transaction volumes and margins amid prepaid mobile competition and continued growth in non-mobile products.
- The profitability and transaction economics of the renewed Walmart-2-Walmart service, and the effects of lower pricing and hurricane disruption on Money Transfer.
- Q4 2017 convertible-note holder decisions, the November 2017 ATM facility expiry or replacement, and refinancing needs ahead of the April 2019 credit-facility maturity.
- The ongoing impact of foreign exchange movements, the realizability of deferred tax assets, and the final revenue-presentation effects of Topic 606.