Euronet Worldwide, Inc. — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016. Unaudited U.S. GAAP consolidated results. Euronet provides electronic payment processing, prepaid product distribution and money transfer services through EFT Processing, epay and Money Transfer segments.
Financial performance
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Revenue | $437.9 million | $395.2 million | +11% |
| Operating income | $41.9 million | $32.2 million | +30% |
| Operating margin | 9.6% | 8.1% | +1.5 percentage points |
| Net income attributable to Euronet | $29.1 million | $7.2 million | +$21.9 million |
| Diluted EPS | $0.53 | $0.13 | +$0.40 |
| Operating cash flow | $104.6 million | $54.5 million | +$50.1 million |
| Capital expenditures, cash purchases | $17.4 million | $13.4 million | +$4.0 million |
Net income improved partly because the foreign-currency line shifted from a $13.0 million loss to a $2.2 million gain. The resulting $15.1 million year-over-year improvement in foreign-currency gains/losses, alongside higher operating income, was a major contributor to the earnings increase. Effective tax rate was 23.9%, compared with 49.5% in Q1 2015; the prior-year rate was elevated by largely nondeductible currency losses.
Segments
| Segment | Revenue | Year-over-year | Operating income | Year-over-year |
|---|---|---|---|---|
| EFT Processing | $86.6 million | +16% | $13.3 million | +17% |
| epay | $170.1 million | -3% | $15.8 million | +2% |
| Money Transfer | $181.6 million | +25% | $21.5 million | +56% |
Money Transfer growth reflected higher transaction volumes, including contributions from the 2015 IME and XE acquisitions and Walmart-2-Walmart. Its gross margin eased to 47.6% from 48.1%, partly because Walmart transfers generate lower margins. EFT growth reflected more managed ATMs, DCC and POS activity; its gross margin declined to 46.0% from 47.6%, with first-quarter seasonality and network expansion costs contributing. epay revenue was pressured by currency translation and lower U.S. and U.K. prepaid mobile activity; gross margin improved to 23.5% from 22.0%, supported by non-mobile products.
Financial position and liquidity
- Cash and cash equivalents were $548.5 million at March 31, 2016, up from $457.5 million at year-end. The company reported $91.0 million of cash growth during the quarter.
- Working capital was $261.9 million; the current ratio was 1.30. Operating cash flow was $104.6 million, investing cash outflow $18.9 million and financing cash outflow $5.3 million.
- Total debt obligations were $500.6 million before unamortized issuance costs; carrying value was $490.3 million. Cash exceeded reported debt obligations by approximately $47.9 million, although cash availability is affected by operating needs and geographic restrictions.
- Debt included $402.5 million principal amount of 1.5% convertible notes due 2044 and credit-facility borrowings. $474.0 million remained available under the revolving facility at quarter-end. Facility maturities are in 2019; the notes include holder put dates beginning in 2020.
- $465.6 million of cash was held outside the United States and expected to remain indefinitely invested in foreign operations; repatriation could have adverse tax consequences. The company also reported approximately $167 million of its own cash in use or designated for ATM networks.
Changes, outlook and risks
- In January, the board authorized repurchases of up to $100 million or 5.0 million shares through December 10, 2017. Euronet repurchased 1.15 million shares for $75.6 million in Q1 at a weighted average $65.74 per share. Management said revolving borrowings helped fund the repurchase and ATM-network cash needs.
- Management estimated 2016 capital expenditures of approximately $85–$95 million. It expected operating cash, cash on hand and available credit to cover debt, lease and capital-expenditure needs, while noting refinancing or equity issuance could be needed if resources proved insufficient. No specific earnings or revenue guidance was provided.
- Approximately 70% of revenue was generated in non-U.S. dollar currencies. Management estimated a 10% currency-rate fluctuation could affect annualized reported net income and working capital by approximately $60–$65 million, and comprehensive income by approximately $90–$95 million. A stronger U.S. dollar is generally adverse.
- Seasonality affects the businesses: money-transfer activity is generally lowest in Q1, while EFT and epay are affected by post-holiday seasonality. Management said Q1 2016 consolidated operating income was about 3% lower due to currency movements.
- Key risks include currency and interest-rate movements, competition, regulatory and anti-money-laundering compliance, cybersecurity and transaction fraud, renewal of profitable contracts, agent/correspondent and banking relationships, and execution or integration of acquisitions. The company reported no material change to previously disclosed risk factors and no proceedings management believed would materially adversely affect results or financial condition.
- Commitments include $72.4 million of standby letters of credit/bank guarantees, $15.9 million of ATM-network cash guarantees and approximately $24.6 million of customer performance guarantees. The company reported no significant claims and recorded no liabilities for these guarantees.
Important facts for investors to verify
- How much of earnings growth is sustainable operating improvement versus the favorable foreign-currency comparison and lower tax rate.
- Whether Money Transfer volume and margins remain resilient as lower-margin Walmart transfers and acquired businesses contribute more revenue.
- epay trends in prepaid mobile markets, non-mobile product growth, bad debt and inventory write-downs.
- Cash accessibility and working-capital requirements, particularly funds held overseas and cash supporting ATM and money-transfer operations.
- Debt and capital allocation after the substantial Q1 repurchase, including remaining authorization, revolving-credit usage and the stated capital-expenditure range.
- Exposure to currency movements, derivative counterparties, cybersecurity incidents, regulatory requirements and contingent guarantees.