Electronic payments and remittances giant Euronet Worldwide (EEFT +1.12%) displayed crisp revenue growth in its earnings report issued April 25, which covered the first three months of the current year. Below, we'll outline summary numbers, delve into pertinent details underlying the results, and review management's perspective on the quarter:
Euronet earnings: The raw numbers
| Metric | Q1 2018 | Q1 2017 | Year-Over-Year Growth |
|---|---|---|---|
| Revenue | $550.5 million | $473.4 million | 16.3% |
| Net income | $26.4 million | $28.1 million | (6%) |
| Diluted EPS | $0.49 | $0.51 | (3.9%) |
Data source: Euronet Worldwide.
What happened with Euronet this quarter?
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Euronet's double-digit revenue gain was facilitated by a healthy year-over-year increase in transactions recorded across all three major business segments. A total transaction count of 904 million represented a 5% increase against the comparable 2017 quarter.
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The EFT processing segment reported revenue of $135.7 million, a 28% increase over the prior year. Operating income improved 5% to $11.5 million. The division's ATM network expanded by 9% to 38,358 ATMs at quarter's end. As in recent quarters, new machine additions were concentrated in Europe and India.
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Within the ATM additions total, EFT put 812 high-value ATMs into service during the quarter. Management pointed out that these machines were installed in the seasonally low first quarter, pushing up operating costs, yet paving the way for higher revenue throughout the busier second, third, and fourth quarters of the year.
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Euronet's epay segment booked an improvement of 8% in its top line, to $176.8 million, while operating income rose 22% to $16.9 million. Last quarter, the company reported the loss of a "high-volume, low-margin" customer in the Middle East. The exit of this customer indeed affected volume, as total epay transactions declined 16% versus the prior-year quarter, to 258 million. Yet epay enjoyed higher margins per transaction over the last three months. In addition, the segment's operating margin benefited from a continuing strategy shift, in which it's gradually replacing mobile prepaid services with nonmobile revenue streams, including software and gaming products sold at retail outlets.
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Euronet's money transfer segment notched a revenue gain of 17% against the prior year, to $238.9 million. Operating income increased just 2%, however, to $26.5 million. The money transfer segment's RIA subsidiary renewed its contract with Walmart to provide money transfer services to Walmart's customers in April 2017. Price concessions on the multiyear renewal are pressuring the segment's current-year operating margin. Management also cited a legal dispute settlement and expansion of Euronet's payout network in India as factors weighing on the money transfer segment's first-quarter operating income.
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In conjunction with its earnings release on April 25, Euronet announced the acquisition of Innova TaxFree Group, a Madrid-based technology company that facilitates value added tax (VAT) refunds for international travelers. Euronet did not disclose terms of the relatively small transaction.
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Management provided an update on the prospect of EU regulation of Dynamic Currency Conversion (DCC), which allows an ATM operator to convert a foreign cash withdrawal to the cardholder's home currency, at a fee ranging from the single digits to the mid-teens. The price of transacting in the user's home currency can thus often seem prohibitive, and critics believe that travelers are better off avoiding DCC. Yet Euronet and other merchant providers argue that the system provides transparency to the cardholder, removing the mystery of foreign currency conversion from ATM withdrawals.
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During the company's earnings conference call, management relayed that the European Commission has issued a proposal that would enable the European Banking Authority to issue guidelines on DCC and potentially establish caps on DCC margins. While DCC plays an important role in EFT processing margins, CEO Mike Brown estimates that a timeline encompassing both issuance of regulations and final compliance with any margin caps could stretch out to 2023. This gives Euronet some lead time to absorb any impact to its bottom line, and replace lost DCC contribution with other business opportunities.
Image source: Getty Images.
What management had to say
On Euronet's earnings call, Brown indicated that each of the company's major segments will continue to see healthy revenue expansion this year. The following is his succinct overview of the company's current segment opportunities -- and threats it faces:
EFT is well positioned to deliver strong revenue and earnings growth this year. We're committed to meet or exceed our 3,500 high-value ATM growth target this year, as well as rolling out other interesting new products. We're monitoring the DCC situation closely and will continue to be transparent as we gain more clarity. Epay continues to grow nonmobile and is further diversifying its product portfolio with interesting opportunities. Money transfer outlook is strong with significant growth in our Europe and Middle East businesses, and continued network expansion up to 350,000 [points of sale], notably in Asia. Our digital strategy is gaining traction, and our international payments business is recording double-digit growth.
Looking forward
Euronet typically provides limited earnings guidance on a quarterly basis. Looking ahead to the second quarter of the year, management forecasts adjusted EPS of $1.32. If met, this target would represent an increase of roughly 21% over the $1.09 of adjusted EPS that Euronet booked in the second quarter of 2017.
