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In its third-quarter 2016 report issued on Oct. 20, electronic payments provider Euronet Worldwide, Inc. (EEFT 0.81%) posted revenue growth slightly below the pace set in the first two quarters of the year. Yet in comparison, the company achieved a considerably higher operating margin. Let's examine both the revenue moderation and the drivers behind Euronet's margin expansion, beginning with a review of key highlights from the company's filing:
Euronet: The raw numbers
| Metric | Q3 2016 Actual | Q3 2015 Actual | Growth (YOY) |
|---|---|---|---|
| Revenue | $524 million | $481 million | 8.9% |
| Net income attributable to Euronet Worldwide | $61 million | $31 million | 97% |
| Diluted earnings per share | $1.11 | $0.57 | 95% |
Data source: Euronet Worldwide, Inc. 8K-filing, Oct. 20, 2016. YOY = year over year.
What happened with Euronet this quarter?
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Euronet's EFT processing segment recorded brisk revenue growth of 28%, to $152.6 million. EFT processing benefited from a larger ATM network, which has expanded by more than 8,000 ATMs in Europe and India versus the end of Q3 2015.
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EFT processing will net further top-line gains in the coming quarters. Earlier this month, on Oct.10, Euronet completed the acquisition of U.K. ATM network operator YourCash Europe LTD. With this purchase, Euronet will add 5,000 ATMs across the U.K., Ireland, Belgium, and the Netherlands to its arsenal.
- Surprisingly, the YourCash ATMs generate less than half the operating margin of Euronet's existing European network. These ATMs will appear on Euronet's financials beginning in the fourth quarter, and management has signaled that it will move quickly to add value to the YourCash transaction stream.
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Following a trend in recent quarters, Euronet's epay segment experienced a marginal revenue decline of 4%, to $167.2 million. Revenue from epay may remain lackluster for a few quarters as management works to effect a shift from declining mobile airtime top-up services to more lucrative digital services, which include the sale of content and gaming products via retail locations.
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The company's third segment, money transfer, achieved revenue improvement of 9%, a considerable deceleration from the revenue growth seen in both Q1 2016 (25% increase over the prior year) and Q2 2016 (22% increase over the prior year). While Euronet's RIA subsidiary is still posting double-digit growth through its remittance partnership with Wal-Mart (WMT +0.90%), the segment's foreign exchange subsidiary, HiFx, was held to single-digit growth during the quarter, as forex trading volumes of the British pound have been subdued following the U.K.'s Brexit vote.
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Also in money transfer, executives noted that currency subsidiary XE will migrate its processing from a competitor to HiFx's platform in November, which should improve operating margins in the segment.
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Overall, though Euronet's revenue improvement slowed relative to the first half of the year, operating income margin increased handsomely, by roughly 270 basis points, to 17.3%. This is partly attributable to an annual effect: In the third quarter, peak European tourism brings higher margin traffic and transactions to the company's continental ATM network, pushing EFT processing profits higher.
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In addition, management cited a focus within epay on transactions with more lucrative margins, if lower volume, during the third quarter, thus benefiting total operating income.
What management had to say
For those following Euronet from quarter to quarter, it's clear that epay remains the segment with the most long-term revenue uncertainty. During Euronet's post-earnings conference call, executives discussed in detail various initiatives to replace mobile airtime top-up transactions with newer services. The following is a description of the current efforts, provided by CEO Mike Brown:
"Our epay team continues to focus on expanding its non-mobile content presence. As we told you last quarter, our gaming partners are focused on rolling out more gaming content across our retail partner base. During the quarter, we experienced a 65% year-over-year growth in gross profit in the gaming category and we have excellent momentum as we enter the fourth quarter where we will see seasonally stronger sales of the non-mobile products. We have also maintained our focus on expanding our digital content distribution. In the US we launched Apple music sales through PayPal and eBay. The new Apple music codes are sold as a subscription base gift cards similar to that of the Netflix digital codes that we launched last year.
We also signed agreements to distribute digital gift codes for Blizzard, the publisher of games such as World of Warcraft and StarCraft across Europe. And we expanded our relationship with Netflix for digital code distribution across the US and more of Europe. In India, we signed an agreement with Google to digitally distribute Google Play codes, this is Google's first digital distribution agreement in India and we are pleased to add this to product portfolio."
Data source: Seeking Alpha transcript, Oct. 21, 2016.
Moving forward
Euronet's fourth quarter will be characterized by operational execution. The company will both absorb its YourCash acquisition and complete the XE processing migration to HiFx. In this workhorse context, executives have targeted fourth-quarter adjusted earnings per share at $1.07, which would translate to a decent 16% leap over Q4 2015. While shareholders shouldn't expect a huge variation from this earnings target, it's conceivable that revenue could resume the faster growth trend seen in the front half of the year, boding well for the coming quarters as we head into 2017.
