Euronet Worldwide, Inc. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; unaudited. Comparisons are with the three months ended March 31, 2016, unless otherwise noted. Amounts are U.S. dollars.
Business context
Euronet provides electronic payment processing and distribution, prepaid products, and money transfer services through EFT Processing, epay, and Money Transfer. Approximately 71% of revenue was generated in currencies other than the U.S. dollar. Management noted typical first-quarter softness in money transfers and seasonality in EFT and epay activity.
Key financial results
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Revenue | $473.4 million | $437.9 million | +8% |
| Operating income | $41.3 million | $41.9 million | -1% |
| Operating margin | 8.7% | 9.6% | Down 0.9 percentage points |
| Net income attributable to Euronet | $28.1 million | $29.1 million | -3% |
| Diluted EPS | $0.51 | $0.53 | -4% |
| Operating cash flow | $50.8 million | $104.6 million | Down $53.8 million |
| Capital expenditures, including capital leases | $25.1 million | Not clearly stated for this measure | — |
Revenue growth was led by Money Transfer and EFT Processing, while epay revenue declined. Other expense, net was $4.2 million, including $7.1 million of interest expense; the effective tax rate was 24.2%. Comprehensive income attributable to Euronet was $47.5 million, including a $19.4 million foreign-currency translation gain.
Segment performance and material changes
- EFT Processing: Revenue rose 22% to $105.8 million, but operating income fell 17% to $11.0 million. ATM network expansion and the YourCash acquisition contributed to growth and costs; lower-margin Indian ATM activity and cash shortages following demonetization pressured returns. The segment managed 35,145 ATMs, up 42% year over year.
- epay: Revenue decreased 3% to $164.2 million and operating income decreased 12% to $13.9 million. Competitive pressure reduced prepaid mobile transactions in the U.S. and U.K.; non-mobile product growth partly offset the decline. Foreign exchange reduced reported revenue by about $3.9 million.
- Money Transfer: Revenue increased 12% to $204.0 million and operating income increased 21% to $26.1 million, driven by transaction growth, including Walmart-2-Walmart and organic growth. The Walmart product carries lower gross profit per transaction than traditional transfers.
Management estimated that currency movements reduced reported consolidated revenue and operating income by approximately 2% versus Q1 2016. Consolidated net income declined mainly due to lower operating income, lower foreign-exchange gains, and higher interest expense.
Cash, debt, and liquidity
- Cash and cash equivalents were $763.6 million at March 31, 2017, versus $734.4 million at year-end; restricted cash was $100.0 million. Of cash and cash equivalents, $651.7 million was held outside the U.S. and expected to remain invested in foreign operations.
- Working capital was $437.8 million and the current ratio was 1.43, compared with $405.9 million and 1.34 at December 31, 2016.
- Total debt obligations were $600.1 million, including $402.5 million principal amount of 1.5% convertible notes due 2044; carrying value of debt was $592.4 million. The convertible notes’ estimated fair value was $526.6 million.
- The $675 million senior secured credit facility matures April 2019. At quarter-end, $159.5 million was drawn on the revolving facility, $46.3 million of letters of credit was outstanding, and $394.2 million was available. Term-loan borrowings were $58.1 million.
- Operating cash flow fell primarily because of working-capital timing, including settlements with epay content providers and money-transfer correspondents. Investing cash outflow was $23.9 million, chiefly reflecting $22.7 million of property and equipment purchases. Financing cash outflow was $6.4 million.
Outlook, commentary, and risks
- Management estimated 2017 capital expenditures of approximately $90 million to $100 million and said operating cash flow, cash on hand, and available financing were expected to cover debt, leasing, and capital expenditure needs. No earnings or revenue guidance was provided.
- Management cited a proposed MoneyGram acquisition as a principal reason corporate SG&A increased; the filing gives no acquisition outcome in this report.
- Foreign-exchange sensitivity is significant: management estimated a 10% currency move could affect annualized reported net income and working capital by approximately $75 million to $80 million, and non-cash comprehensive income by approximately $95 million to $100 million. A stronger U.S. dollar would generally be adverse.
- Other key exposures include Indian demonetization-related cash shortages, competitive and pricing pressure, working-capital needs, technology and cybersecurity incidents, regulatory and anti-money-laundering compliance, contract renewals, and economic, political, and immigration developments. The filing reported no material change to previously disclosed risk factors and no legal or regulatory matter management believed would materially adversely affect results or financial condition.
- Commitments include $72.4 million of standby letters of credit/bank guarantees, $15.4 million of ATM cash-supply guarantees, and approximately $21.1 million of performance guarantees. No liabilities were recorded for these guarantee arrangements at quarter-end.
- Adoption of stock-compensation accounting guidance increased opening retained earnings by a net $1.3 million after recording a $40.2 million deferred tax asset and a $38.9 million valuation allowance. Management did not expect the new revenue standard, effective for Euronet in 2018, to materially affect revenue timing, but was still assessing possible presentation effects.
Important facts for investors to verify
- Whether revenue growth can translate into improved operating margins, particularly as ATM networks expand and lower-margin activity grows.
- Whether the India cash-shortage effects and epay mobile transaction declines persist, and the extent to which currency movements continue to affect reported results.
- Working-capital trends and the timing of settlements, given the sharp year-over-year decline in operating cash flow.
- Capital spending against the $90 million to $100 million estimate, and remaining credit-facility capacity and refinancing needs ahead of the April 2019 maturity.
- Developments in the proposed MoneyGram acquisition and related costs, as well as any changes in the disclosed legal, regulatory, guarantee, or other contingent exposures.