Euronet Worldwide, Inc. — Q3 2016 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2016; unaudited. Comparisons are with the corresponding 2015 periods. Euronet provides electronic payment processing, prepaid products and money transfer services through EFT Processing, epay and Money Transfer segments.
Financial performance
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Revenue | $524.0 million | $481.4 million | $1,438.8 million | $1,301.7 million |
| Operating income | $90.5 million | $70.3 million | $191.7 million | $149.6 million |
| Net income attributable to Euronet | $60.7 million | $31.3 million | $145.5 million | $65.3 million |
| Diluted EPS | $1.11 | $0.57 | $2.66 | $1.21 |
| Operating margin | 17.3% | 14.6% | 13.3% | 11.5% |
Revenue increased 9% in Q3 and 11% for the nine-month period; operating income rose 29% and 28%, respectively. Net income growth also benefited from substantially lower foreign-exchange losses than in 2015. The nine-month 2016 results included a $19.4 million gain on the Visa Europe sale. Effective tax rates were 25.5% for Q3 and 23.7% year to date, versus 34.8% and 34.4% in 2015, when nondeductible foreign-exchange losses raised the rates.
Segment results and notable changes
- EFT Processing: Q3 revenue rose 28% to $152.6 million and operating income rose 47% to $59.4 million. Growth reflected more ATMs under management, higher transaction volumes and DCC activity. The segment operated 29,276 ATMs at quarter-end, up 39% year over year. Q3 operating margin improved to 39.0% from 33.9%.
- epay: Q3 revenue fell 4% to $167.2 million; operating income was nearly flat at $14.8 million. Lower prepaid mobile activity in the U.S. and U.K., competition and currency translation weighed on revenue; non-mobile product growth and lower costs partly offset the decline. Transactions fell 7% in Q3.
- Money Transfer: Q3 revenue increased 9% to $204.6 million and operating income rose 6% to $25.2 million. Transaction growth, including Walmart-2-Walmart, supported results, while the higher share of lower-margin Walmart transfers reduced gross margin. Q3 transactions increased 12% to 21.3 million.
Approximately 72% of revenue was denominated in currencies other than the U.S. dollar. Management said currency movements did not significantly affect consolidated operating income versus the prior-year periods, although currency translation reduced revenue in certain segments.
Cash flow, balance sheet and liquidity
- Nine-month operating cash flow was $217.5 million, versus $231.5 million in 2015. Investing cash outflow was $55.6 million, compared with $173.1 million, largely reflecting prior-year acquisitions and 2016 Visa sale proceeds. Capital expenditures were $61.6 million; the company estimated 2016 capital expenditures of approximately $85–$95 million.
- Cash and cash equivalents were $661.3 million at September 30, 2016, up from $457.5 million at year-end 2015. Working capital was $409.6 million and the current ratio was 1.44, compared with $227.1 million and 1.25 at year-end.
- Total debt obligations were $540.0 million, including $402.5 million principal of 1.5% convertible notes due 2044 and borrowings under the credit facility. Cash exceeded reported total debt obligations by approximately $121.3 million. The credit facility matures in 2019; $439.0 million remained available under the revolving facility after borrowings and letters of credit.
- Financing cash flow was $31.2 million. The company repurchased $75.6 million of shares during the nine months and reported net borrowings, in part to fund ATM network working capital and repurchases.
- Management expected operating cash flow, cash on hand and available credit to be sufficient for debt, lease and capital expenditure obligations, while noting refinancing or equity issuance could be pursued if resources prove insufficient.
Outlook, risks and unusual items
- Management cited opportunities to expand ATM and POS networks, value-added services, digital content and money transfer products. No specific earnings or revenue guidance was provided in the filing.
- Seasonality affects results: EFT Processing’s DCC demand is typically highest in Q3, while epay and EFT activity can rise in Q4 holiday periods; Money Transfer patterns vary by region.
- Foreign-exchange sensitivity is significant. Management estimated that a 10% currency fluctuation could affect annualized reported net income and working capital by approximately $80–$85 million, and noncash comprehensive income by approximately $90–$95 million. These estimates have stated limitations.
- Key risks include foreign-exchange movements, economic and political conditions (including Brexit-related effects), competition and pricing, regulatory and anti-money-laundering compliance, cybersecurity and fraud, agent and correspondent relationships, and dependence on contracts and banking partners.
- ATM-related obligations include responsibility for approximately $524 million of cash used in ATM networks, as well as potential theft, system breach and indemnification exposures. The company reported no significant known claims and no related liabilities recorded. Management said current legal or regulatory proceedings were not expected to have a material adverse effect.
- On October 3, 2016, after quarter-end, Euronet acquired YourCash Europe Limited for approximately $65 million, including $3.2 million of deferred consideration. Purchase price allocation was not finalized.
Important facts for investors to verify
- Whether operating and earnings growth persists after separating recurring operations from the $19.4 million Visa Europe gain and the prior-year currency-loss comparison.
- How ATM network expansion, DCC activity and the lower-margin Walmart transfer mix affect segment margins and cash requirements.
- Actual capital spending against the $85–$95 million estimate, and the extent to which revolver borrowing and repurchases influence debt and liquidity.
- Exposure to foreign currencies, derivative positions and the stated sensitivity estimates; also note most revenue is outside the U.S. dollar.
- Integration and valuation outcomes for the YourCash acquisition, and the company’s ability to meet its commitments and manage ATM cash, cybersecurity and regulatory risks.