Euronet Worldwide, Inc. — Q2 2016 Form 10-Q
Business context and period. The filing covers the quarter and six months ended June 30, 2016. Euronet provides electronic payment processing and distribution through EFT Processing, epay, and Money Transfer. Results are unaudited; the company notes that interim results are not necessarily indicative of full-year performance.
Financial performance
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Revenue | $476.9M (+12%) | $425.1M | $914.8M (+12%) | $820.3M |
| Operating income | $59.3M (+26%) | $47.2M | $101.2M (+28%) | $79.3M |
| Net income attributable to Euronet | $55.7M | $26.8M | $84.8M | $34.0M |
| Diluted EPS | $1.04 | $0.50 | $1.57 | $0.64 |
| Operating cash flow | Not separately reported | Not separately reported | $134.5M | $156.9M |
| Capital expenditures | Not separately reported | Not separately reported | $43.4M, including capital leases | Not separately reported |
Q2 operating margin was approximately 12.4%, versus 11.1% a year earlier; first-half margin was approximately 11.1%, versus 9.7%. Q2 gross margin was approximately 40.8%, versus 39.3%. First-half net income includes a $19.4M gain on the sale of the company’s Visa Europe investment and a substantial improvement in foreign-exchange results versus 2015.
Segment results
- EFT Processing: Q2 revenue rose 24% to $115.1M and operating income rose 27% to $27.9M. Growth reflected a larger ATM network and more transactions, including DCC; costs grew faster than revenue in some areas, and gross margin declined year over year.
- epay: Q2 revenue fell 4% to $160.6M and operating income was essentially flat at $16.1M. Lower prepaid mobile activity in the U.S. and U.K. and currency translation weighed on revenue; non-mobile product growth partly offset the decline.
- Money Transfer: Q2 revenue rose 22% to $201.5M and operating income rose 46% to $25.9M. Higher transaction volumes, acquisitions, organic growth and increased HiFX activity contributed; Walmart-2-Walmart transactions carry lower revenue per transfer.
Liquidity, debt and cash flow
- Cash and cash equivalents were $680.1M at June 30, 2016, up from $457.5M at year-end. Working capital was $425.7M and the current ratio was 1.47.
- First-half operating cash flow was $134.5M, down from $156.9M, primarily due to working-capital timing. Investing used $34.9M; financing provided $118.9M, including net borrowing and share repurchases.
- Total debt obligations were $626.2M before unamortized issuance costs; carrying value was $616.6M. This included $402.5M principal of 1.5% convertible notes due 2044 and $262.7M under the credit facility. Revolver borrowings were $199.0M, with $355.7M available after outstanding letters of credit.
- The company repurchased 1.1M shares for $75.6M during the first half. It estimated 2016 capital expenditures of $90M–$100M.
- Of cash on hand, $594.9M was held outside the U.S. and expected to remain invested in foreign operations; repatriation could have negative tax consequences.
Outlook, risks and unusual items
- Management said existing cash, operating cash flow and available borrowing capacity were expected to fund working capital, debt, lease and capital expenditure needs. The filing provides no earnings or revenue guidance.
- The $19.4M Visa Europe investment gain was associated with the June 2016 sale; consideration included $11.9M cash, preferred shares valued at approximately $6.4M and a long-term receivable of approximately $1.1M.
- Foreign currency exposure is significant: approximately 71% of first-half revenue was generated outside the U.S. Management estimated that a 10% currency fluctuation could affect annualized reported net income and working capital by approximately $65M–$70M, and comprehensive income by approximately $90M–$95M. A stronger U.S. dollar generally hurts reported results.
- Brexit could increase currency volatility and regulatory complexity; the company’s U.K. payment-institution licenses had been passported across the EU. Other highlighted risks include cybersecurity and fraud, competition, regulatory compliance, dependence on partners and agents, and the execution and integration of growth initiatives.
- The company reported no legal or regulatory proceedings it believed would materially adversely affect its financial condition or results. It had $69.6M of standby letters of credit/bank guarantees and disclosed ATM cash and indemnification exposures; no related liabilities were recorded.
Most important facts for investors to verify
- How much of earnings growth is attributable to recurring operations versus the Visa gain and improved foreign-exchange results.
- Whether Money Transfer transaction growth and improved margins persist, including the contribution of acquisitions and lower-margin Walmart transfers.
- Whether epay can stabilize mobile activity and sustain growth in non-mobile products.
- Working-capital needs, cash availability and the effect of foreign-held cash, debt levels and share repurchases on financial flexibility.
- Actual capital spending versus the $90M–$100M estimate, and developments in currency, Brexit, cybersecurity and regulatory risks.