Euronet Worldwide, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; unaudited. Euronet provides electronic payment processing, prepaid products and money transfer services through its EFT Processing, epay and Money Transfer segments.
Financial performance
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Revenue | $577.5 million | $550.5 million | +4.9% |
| Operating income | $56.1 million | $45.5 million | +23% |
| Net income attributable to Euronet | $34.5 million | $26.4 million | +31% |
| Diluted EPS | $0.62 | $0.49 | +27% |
| Operating cash flow | $13.0 million | $27.8 million | Down $14.9 million |
| Capital expenditures | $31.4 million of property and equipment purchases | $24.4 million | Higher investment |
Segment operating income increased in EFT Processing to $16.8 million (+45%), epay to $18.0 million (+7%), and Money Transfer to $30.8 million (+16%). Segment operating margins were 11.5%, 10.2% and 12.0%, respectively. EFT gross margin rose to 42.5% from 39.7%; epay gross margin rose to 24.2% from 23.7%; Money Transfer gross margin was 46.4% versus 46.6%.
Liquidity, debt and cash flow
At March 31, cash and cash equivalents were $1.216 billion and restricted cash was $74.9 million. Working capital was $491.1 million, down from $709.2 million at year-end; the current ratio declined to 1.28 from 1.51, partly reflecting the reclassification of existing convertible notes and recognition of lease liabilities as current obligations. Approximately $882 million of cash was held outside the U.S. and management expected it to remain invested in foreign operations.
Total debt obligations were $786.7 million ($773.2 million carrying value after issuance costs), including $360.4 million classified as current. The company issued $525 million of 0.75% convertible notes due 2049 in March, used proceeds in part to repay revolving borrowings and repurchase $49 million principal of existing notes, and had no borrowings outstanding under its $1.0 billion revolving credit facility at quarter-end. After $46.2 million of facility-backed letters of credit, $953.8 million remained available, subject to borrowing-base and covenant conditions. The company planned to redeem the remaining $352.5 million principal of 1.5% notes on May 28, 2019.
Operating cash flow fell mainly because of working-capital timing, including settlement processes in epay and Money Transfer, despite improved earnings. Investing cash outflow was $33.0 million. Financing cash inflow was $192.7 million, primarily reflecting debt issuance and related financing activity.
Material changes and management commentary
- Revenue growth came mainly from higher Money Transfer volumes and EFT Processing growth, including more ATMs under management and increased value-added transactions. epay revenue was broadly flat; growth in digital media and processed transactions was offset by foreign-exchange effects and a mix shift toward high-volume, lower-margin transactions in India.
- Management estimated currency movements reduced reported Q1 2019 operating income by 5% versus the comparable period. About 70% of revenue is denominated in currencies other than the U.S. dollar.
- Management estimated 2019 capital expenditures of approximately $130–$140 million and said operating cash flow, cash on hand and available financing were expected to cover debt, lease and capital expenditure needs, while noting there was no assurance of favorable refinancing or equity-issuance terms if needed.
- Adoption of the new lease standard on January 1, 2019 added approximately $296.9 million of operating lease assets and liabilities at adoption. At quarter-end, the balance sheet reported $351.2 million of operating right-of-use assets and $339.7 million of lease liabilities.
Outlook, risks and contingencies
The filing provides no specific earnings or revenue guidance. Q1 is typically seasonally weak for Money Transfer; EFT Processing demand is generally strongest in Q3, while epay has holiday-related seasonality in Q4 and lower activity after the holidays in Q1.
Key risks include foreign-exchange movements; competition and pricing pressure; reliance on banking, agent, correspondent and retail networks; regulatory and licensing requirements; cybersecurity, fraud and service interruptions; and changes to card-network rules that may constrain ATM fees or dynamic currency conversion. Visa’s announced rule changes included a July 2019 restriction on direct access fees for euro-denominated cards in the eurozone. Management estimated a 10% currency-rate fluctuation could affect reported net income and working capital by approximately $120–$125 million on an annualized basis, and could affect comprehensive income by approximately $132–$137 million through translation of non-U.S. assets and liabilities.
The company reported no legal or regulatory proceedings management believed would have a material adverse effect and no material changes to previously disclosed risk factors, except for the card-network rule disclosure. It also disclosed $76.7 million of standby letters of credit and bank guarantees, $12.3 million of ATM cash-supply guarantees and approximately $54.6 million of performance guarantees. No liabilities were recorded for these guarantees or indemnities because management was unaware of significant claims.
Important facts for investors to verify
- Whether operating cash flow recovers as settlement timing and working capital normalize, and how it compares with capital spending.
- Execution and funding of the May 28, 2019 redemption of the remaining existing convertible notes, including any share settlement.
- Progress against the $130–$140 million 2019 capital expenditure estimate and continued availability under the credit facility and its covenants.
- Actual effects of currency movements and Visa/card-network rule changes on reported results, ATM economics and DCC activity.
- Whether transaction growth in each segment supports margins, particularly epay’s exposure to lower-margin transaction mix and Money Transfer’s seasonal pattern.