Euronet Worldwide, Inc. — Q3 2015 Form 10-Q
Reporting period: Three and nine months ended September 30, 2015. Figures are unaudited; dollar amounts below are in millions unless otherwise noted. Euronet provides electronic payments, EFT processing, prepaid products and global money transfers through EFT Processing, epay and Money Transfer segments.
Financial performance
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Revenue | $481.4 | $453.4 | $1,301.7 | $1,202.2 |
| Operating income | $70.3 | $50.7 | $149.6 | $109.2 |
| Net income attributable to Euronet | $31.3 | $35.0 | $65.3 | $71.6 |
| Diluted EPS | $0.57 | $0.64 | $1.21 | $1.33 |
| Operating margin | 14.6% | 11.2% | 11.5% | 9.1% |
Revenue increased 6% in Q3 and 8% year to date; operating income rose 39% and 37%, respectively. Net income attributable to Euronet fell 11% in both comparisons, principally reflecting substantially higher foreign-exchange losses, interest expense and tax expense. Net foreign-exchange losses were $16.0 million in Q3 and $34.1 million year to date, versus $0.7 million and $5.1 million in 2014. Effective tax rates were 34.8% and 34.4%, versus 26.9% and 27.7%.
- EFT Processing: Q3 revenue rose 11% to $118.9 million and operating income rose 18% to $40.3 million. Nine-month revenue increased 6% to $286.7 million and operating income 8% to $73.7 million. ATM growth and dynamic currency conversion supported results; currency translation and lower rates on certain card services were offsets.
- epay: Q3 revenue declined 11% to $174.5 million, while operating income increased 17% to $14.6 million. Nine-month revenue fell 8% to $517.3 million, while operating income rose 12% to $46.4 million. Revenue pressure included foreign exchange, lower prepaid mobile volumes in Brazil and the U.K., and lower U.S. transaction rates; transaction growth and cost management supported operating income.
- Money Transfer: Q3 revenue increased 24% to $188.2 million and operating income 89% to $23.8 million. Nine-month revenue increased 35% to $498.7 million and operating income 102% to $55.3 million. Volume growth, Walmart-2-Walmart, and acquisitions contributed; the segment also benefited in Q3 from a currency-market dislocation. Walmart transfers have lower margins than other services.
Cash, liquidity and debt
- Cash and cash equivalents were $528.8 million at September 30, 2015, up from $468.0 million at year-end; $471.5 million was held outside the U.S. and expected to remain invested in foreign operations.
- Nine-month operating cash flow was $231.5 million, compared with $224.6 million. Investing cash outflow was $173.1 million, including $114.0 million for acquisitions and $55.3 million for property and equipment. Financing cash inflow was $31.3 million.
- Working capital was $236.3 million, versus $257.0 million at December 31, 2014; the current ratio was 1.28, versus 1.30.
- Total debt obligations, including capital leases, were $467.5 million. The $675 million senior secured credit facility matures in April 2019; $515.9 million of revolving capacity was available after borrowings and letters of credit. Convertible notes carry a 1.5% cash coupon; their carrying value was $345.4 million and disclosed fair value was $495.2 million.
- Management estimated 2015 capital expenditures of $75–$85 million and expected operating cash flow, cash on hand and available credit to cover debt, leasing and capital expenditure needs. This is not earnings guidance.
Changes, outlook and risks
- IME, a Malaysian money transfer provider, was acquired in June for $76.7 million cash and shares valued at $3.0 million. XE Corporation, a currency-information and international-payments business, was acquired in July for $79.9 million cash and shares valued at $40.1 million. Purchase-price allocations remained preliminary; the acquisitions expanded Money Transfer operations and increased goodwill.
- Management estimated stronger U.S. dollar translation reduced reported operating income by 16% in Q3 and 15% year to date versus 2014. About 70% of revenue is generated outside the U.S. A 10% currency-rate movement was estimated to affect annualized net income and working capital by approximately $60–$65 million and comprehensive income by approximately $80–$85 million; a stronger dollar is adverse.
- Greek capital controls and reduced tourism constrained ATM cash access and transactions; management said these effects could continue in the near term. A potential future Greek exit from the EU and related currency-conversion exposure remained uncertain.
- epay Q3 results included unusually high promotional transactions from a content partner, which management said may not recur. Euronet also reported deferred-cost write-downs in epay.
- Management cited competition, contract renewals and pricing, regulation and licensing, cybersecurity and fraud, agent and correspondent recovery, technology, acquisition integration and access to banking relationships as material business risks. Derivative contracts are economic hedges but are not designated as accounting hedges.
- The company disclosed $68.2 million of standby letters of credit and bank guarantees, $15.0 million of ATM cash guarantees and approximately $24.3 million of performance guarantees. It reported no material legal proceeding or recorded material liability for these guarantees; Delaware unclaimed-property matters were settled for a non-material amount.
- Seasonality affects EFT and epay transaction patterns and money transfer volumes. No specific earnings or revenue forecast was provided. Management stated disclosure controls were effective and reported no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether the segment profit gains persist after excluding acquisition contributions, currency effects and the unusual Q3 money-transfer currency-margin benefit.
- How foreign-exchange movements and related remeasurement losses affect future earnings, liquidity and reported equity.
- The final purchase-price allocations and integration performance for IME and XE, including the substantial goodwill recorded.
- epay’s ability to stabilize revenue and whether promotional transaction volumes recur; also monitor Brazil and U.K. mobile trends.
- Available revolving capacity, foreign-held cash accessibility, capital spending and working-capital demands as money-transfer volumes grow.
- Exposure to Greek operations, ATM network cash and guarantees, cybersecurity, regulatory requirements, and the stated currency-sensitivity estimates.