Euronet Worldwide, Inc. — Q2 2017 Form 10-Q
Reporting period: Three and six months ended June 30, 2017; unaudited. Amounts are in U.S. dollars unless otherwise noted. Euronet provides electronic payment processing and distribution, prepaid products, and money transfer services through EFT Processing, epay, and Money Transfer segments.
Financial performance
| Metric | Q2 2017 | Q2 2016 | First half 2017 | First half 2016 |
|---|---|---|---|---|
| Revenue | $536.6 million | $476.9 million | $1,009.9 million | $914.8 million |
| Operating income | $66.7 million | $59.3 million | $108.0 million | $101.2 million |
| Net income attributable to Euronet | $51.4 million | $55.7 million | $79.5 million | $84.8 million |
| Diluted EPS | $0.93 | $1.04 | $1.44 | $1.57 |
| Operating cash flow | Not separately provided for the quarter | $92.7 million | $134.5 million |
Q2 revenue increased 13% and operating income increased 12% year over year; first-half revenue increased 10% and operating income 7%. Approximate consolidated operating margin was 12.4% in Q2 (versus 12.4%) and 10.7% for the first half (versus 11.1%). Net income and diluted EPS declined in both comparisons. The first-half comparison includes a $19.4 million Visa Europe investment gain in 2016 that did not recur.
Q2 foreign-currency exchange gains were $11.1 million, compared with a $1.9 million loss in Q2 2016; first-half gains were $12.9 million versus $0.2 million. The effective tax rate rose to 26.6% for Q2 and 25.8% for the first half, from 21.5% and 22.3%, respectively.
Segments and material changes
- EFT Processing: Q2 revenue rose 35% to $156.0 million and operating income rose 41% to $39.3 million. First-half revenue rose 30% to $261.7 million and operating income rose 22% to $50.3 million. Growth reflected more managed ATMs, the YourCash acquisition, and higher DCC activity; India’s cash shortage and lower-margin Indian ATMs weighed on revenue per ATM and first-half margins. A $2.3 million noncash intangible-asset impairment related to closing the Pure Commerce office in South Korea was recorded.
- epay: Q2 revenue increased 2% to $164.1 million, while operating income fell 8% to $14.8 million. First-half revenue declined 1% to $328.3 million and operating income fell 10% to $28.7 million. Prepaid mobile transaction weakness, competition, currency translation, and higher selling and administrative costs affected results; growth in non-mobile products partly offset these pressures.
- Money Transfer: Q2 revenue increased 8% to $217.1 million, while operating income decreased 4% to $24.9 million. First-half revenue rose 10% to $421.1 million and operating income rose 8% to $51.0 million. Transaction growth was partly offset by lower Walmart-2-Walmart pricing and margins, currency effects, and lower HiFX activity versus the Brexit-related prior-year period.
Cash, debt, liquidity, and outlook
- Cash and cash equivalents were $1,065.3 million at June 30, 2017, up from $734.4 million at year-end; restricted cash was a further $94.4 million. First-half operating cash flow was $92.7 million, investing cash outflow $50.6 million, and financing cash inflow $253.6 million. The cash increase also included $35.2 million from exchange-rate changes.
- Working capital was $654.0 million and the current ratio was 1.56, versus $405.9 million and 1.34 at December 31, 2016. Management said cash from operations, cash on hand, and available financing were expected to meet debt, lease, and capital expenditure needs.
- Total debt obligations were $862.6 million, including $855.5 million carrying value after debt issuance costs. This included $402.5 million principal of 1.5% convertible notes due 2044, $322.8 million of revolving borrowings, and a new $100 million short-term ATM facility expiring November 30, 2017. The facility’s stated rate is Overnight LIBOR plus 2%. The company reported $229.4 million remaining available under the revolving credit facility after borrowings and letters of credit.
- First-half property and equipment purchases were $47.9 million; 2017 capital expenditures were estimated at approximately $95–$105 million. No specific revenue or earnings guidance was provided in the filing.
- Approximately 72% of revenue was generated in currencies other than the U.S. dollar. Management estimated that a 10% currency-rate fluctuation could affect annualized reported net income and working capital by approximately $110–$115 million, and noncash comprehensive income by approximately $100–$105 million.
Management commentary, risks, and contingencies
Management cited working-capital settlement timing as the main reason first-half operating cash flow declined year over year, partly offset by improved operating results. ATM expansion drove higher capital spending and seasonal funding needs. The filing notes seasonality in tourism-related DCC demand, holiday-driven epay and EFT activity, and money transfers.
Key disclosed risks include foreign exchange movements, India’s demonetization-related cash shortage, competition and pricing pressure, cybersecurity incidents and service interruptions, regulatory and compliance requirements, and the ability to renew contracts profitably. The company reported no legal or regulatory proceeding that management believed would have a material adverse effect. It had $73.1 million of standby letters of credit and bank guarantees, plus ATM cash and performance guarantees; no related liabilities were recorded. Management reported disclosure controls effective as of June 30, 2017.
The company was assessing adoption of the new revenue-recognition standard, effective for it January 1, 2018. It did not expect a material timing impact but said principal-versus-agent guidance could change revenue presentation for some arrangements. A $1.3 million net increase to beginning retained earnings resulted from adopting the stock-compensation accounting standard.
Important facts for investors to verify
- Whether ATM growth, DCC activity, and the YourCash contribution can sustain EFT Processing growth while improving India-related unit economics and margins.
- Whether epay transaction trends and operating margins stabilize amid prepaid mobile competition and rising selling and administrative costs.
- How the lower-margin Walmart-2-Walmart business and HiFX volumes affect Money Transfer profitability and revenue per transaction.
- Whether seasonal ATM cash needs, capital expenditure plans, and debt balances remain manageable; note that much of reported cash was held outside the United States and expected to remain invested abroad.
- Progress and final financial-statement effects of revenue-recognition adoption, and any further impairment or material developments related to the proposed MoneyGram acquisition noted in corporate expenses.