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Euronet Worldwide's ATM Network Again Provides the Catalyst for Earnings Growth

By Asit Sharma - Oct 20, 2017 at 4:05PM

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The company's EFT processing segment delivers the lion's share of profit expansion for the second consecutive quarter, while a former star segment stumbles.

Electronic payments provider Euronet Worldwide (EEFT -1.69%) posted double-digit revenue expansion for the second straight quarter, as its third-quarter 2017 earnings report, filed late Thursday evening, revealed. And similar to the second quarter, outsize growth in the EFT (electronic fund transfer) processing segment propelled Euronet's overall success. 

Euronet earnings: The raw numbers

Metric Q3 2017 Q3 2016 Year-Over-Year Growth
Revenue $637.8 million $524.0 million 21.7%
Net income $100.3 million $60.7 million 65.2%
Diluted earnings per share $1.80 $1.11 62.2%

Data source: Euronet Worldwide.  

What happened with Euronet this quarter?

  • After reporting a 36% revenue increase in its last sequential quarter (Q2 2017), Euronet's EFT processing segment turned in even better performance in its most recent three months, raising its top line by 48% over the prior-year period, to $226.3 million. The segment's operating income rose 46% to $86.8 million. 

  • Notably, EFT processing's revenue comprised roughly 35% of total company revenue, and nearly 75% of Euronet's total operating income of $116.9 million for the quarter.

  • Management attributed the division's strong results to a 30% year-over-year bump in the total number of ATMs deployed, and a 26% increase in transactions. At quarter's end, EFT processing's ATM count stood at 38,105.

  • Both the increase in machines and transactions occurred primarily in the two markets EFT focuses most closely on: Europe and India. While the division picked up nearly 5,000 ATMs when it acquired U.K.-based YourCash in October 2016, it's also organically added nearly 2,200 high-value ATMs between Europe and India in the first three quarters of 2017. 

  • For the first time in several quarters, The epay segment amplified both its top and bottom lines. Epay's primary revenue stream of providing prepaid mobile "top-up" services has declined over the last few years, and management has compensated by investing in non-mobile services such as digital distribution of content, games, and software in Europe, including products like Xbox, McAfee software, and Microsoft Office. The segment notched a 10% increase in revenue to $184.2 million, and a 6% increase in operating income to $15.7 million.

  • Euronet's money-transfer segment posted a revenue increase of 11% to $228 million, yet reported an uncharacteristic operating income decrease of 4%. After several quarters of robust revenue and earnings expansion, the segment's growth appears to have curbed in the last two quarters. Overall, money remittances and foreign-exchange transactions remain robust. However, the division's Ria subsidiary is generating temporarily lower profits, after a renegotiated pricing structure this spring within its contract to provide Wal-Mart's customers with remittance services. The money transfer segment has been essential to Euronet's business model, and more detail on its current quarter and near-term prospects is provided in the following section.

  • In comparing the quarter to the prior-year period, it should be noted that Euronet received a boost from a $15 million non-operational benefit due to favorable foreign-currency translation and lower tax expense. This equaled $0.27 of the total $0.69 improvement in quarterly diluted earnings per share (EPS) against 2016.

ATM on blue background, with green sign on top which reads "ATM / 24 Hour Banking."

Image source: Getty Images.

What management had to say

While shareholders should be pleased with EFT's impact on Euronet's business, some uncertainty exists around money transfer. I've included below part of CFO Rick Weller's review of the segment's quarter, which indicates that money transfer's issues are for the most part a combination of temporary factors:

The money transfer results were impacted by four items, a couple of which were within our control and a couple which were out of our control. First, in April, we renewed our agreement with Walmart which included a price reduction to the customer, which I am glad to say that we are well on our way to recovery through higher volumes. Second, we continued to invest in the launches of the India and Walmart as the networks. Third, we recorded a non-recurring adjustment on a currency item. And fourth, the U.S. was impacted by the hurricanes of Florida, Texas and Puerto Rico, which slowed customer spend. Excluding these four items, operating income would have grown 13%, reflecting the continued strength of our core money transfer business. And finally, to wrap up the money transfer segment, if we set aside the discount given upon the extension of the Walmart2Walmart agreement, both constant currency revenue and gross profit per transaction improved year-over-year. 

Looking forward

While Euronet doesn't issue detailed quarterly guidance, it does submit an adjusted EPS estimate with each earnings report. For the fourth quarter, adjusted EPS is projected to hit $1.12 versus prior-year adjusted EPS of $0.99. Assuming that EFT's organic growth continues, and money transfer's operating income indeed rebounds, this targeted gain of 13% in adjusted earnings should be well within reach for Euronet Worldwide.

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