ATM processing and money transfer giant Euronet Worldwide's (NASDAQ:EEFT) third-quarter 2018 results, issued on Oct. 19, support the sense that 2018 is turning out to be a stellar year, characterized by volume expansion and new growth opportunities. Below, let's review the quarter's highlights and analyze the factors behind the company's continuing operational improvements:

Euronet earnings: The raw numbers

Metric Q3 2018 Q3 2017 Year-Over-Year Growth
Revenue $714.5 million $637.8 million 12%
Net income $102.7 million $100.3 million 2.4%
Diluted EPS $1.89 $1.80 5%

Data source: Euronet Worldwide. EPS = earnings per share.

What happened with Euronet this quarter?

  • Euronet's electronic funds transfer (EFT) processing segment posted revenue growth of 16% against the prior-year quarter, to $261.7 million.

  • EFT processing's top-line improvement was a function of a 10% increase in year-over-year ATM count and a 16% advance in transaction volume during the quarter.

  • As in previous quarters, new ATM growth was focused on the company's core geographical regions of Europe and India. Euronet deployed 3,200 ATMs between the two regions, including approximately 400 Easycash-branded machines in Ireland, which it acquired from Ulster Bank in May.

  • Revenue in the company's epay segment improved by 1% to $185.4 million. Due to Euronet's adoption of GAAP accounting standard ASC 606 in January 2018, reported revenue in the epay segment is now presented net of certain fees, versus the previous gross revenue presentation. Under the former method, epay's revenue would have increased 10% during the period.

  • In keeping with a recent trend, epay's transactions declined by 3% during the quarter, due to the loss of a high-volume, low-margin customer in the Middle East in the third quarter of 2017. Epay has now "lapped" the anniversary of this event.

  • Per management, epay's year-over-year comparisons should improve starting next quarter, as the division continues to prioritize digital content and retail sales of gift cards, software, and games over its declining mobile airtime top-up services.

  • Euronet's money transfer (remittances) segment achieved revenue of $268.4 million, which represents 18% expansion against the comparable quarter. 

  • Highlights of money transfer's quarter include fast growth in new digital customer interfaces launched in the segment's Ria and XE subsidiaries. Ria also secured a deal with transactions behemoth PayPal to provide cash pick-up services for PayPal's Xoom app at Ria's 150,000 international network locations.
  • Euronet's overall double-digit revenue expansion outpaced expense growth during the quarter. Operating income improved by 29% against the prior-year quarter to $150.9 million. The top-line growth also bulked up profit on a percentage basis: Operating margin of 21.1% improved by 2.7 percentage points versus the third quarter of 2017. 

  • This leverage didn't translate into a huge jump in net income, however, as you can see in the table at the top of this article. This is mostly due to a $10.9 million swing in foreign currency exchange loss between the current and prior-year quarters, as well as a $16.3 million income tax benefit in the third quarter of 2017, which boosted net income comparatively against the most recent three months.

  • Adjusted diluted earnings per share (EPS), which removes the effects of foreign currency translation, the one-time 2017 tax benefit, and other smaller items affecting comparability, increased by 34% to $2.16, roughly $0.05 ahead of management's previous guidance.

  • Subsequent to quarter-end, Euronet replaced its $675 million senior secured credit facility with a five-year, $1 billion unsecured credit facility provided by a consortium of previous and new lenders. The new borrowing program reflects Euronet's improving credit position in the debt markets.

Man in suit using an ATM.

Image source: Getty Images.

What management had to say

As I discussed in my earnings preview, Euronet disclosed earlier this month that Visa Inc. will allow dynamic currency conversion, or DCC, on global transactions outside of Europe beginning in April 2019. DCC allows travelers to conduct foreign transactions in their home currencies for a fee, and it's proven to be a lucrative revenue stream for Euronet.

During the company's earnings conference call, management confirmed for investors that an anticipated $0.60 to $0.65 boost to annual EPS from Visa's geographic extension was estimated using the company's current ATM count. Thus, it doesn't include new DCC revenue from anticipated 2019 machine additions. CEO Mike Brown stated, in answer to an analyst's question:

[The estimates are based] on our existing fleet. So to the extent that we would deploy ATMs in new jurisdictions and things like that, [we] will add to our future growth opportunities.

Brown also observed that the DCC expansion makes ATM markets outside of Euronet's two core regions more attractive:

The international ability -- the ability to acquire international transactions and do DCC with them from Visa will allow us to expand into other markets as well outside of just the EU and India.

Finally, executives touched on the looming possibility of DCC regulation in Europe, and like last quarter, Brown expressed optimism that ultimate regulation may lean more toward price transparency than a reduction or cap on DCC fees.

Looking forward

With each earnings report, Euronet typically provides a single forward number for investors to watch: adjusted diluted EPS for the next three months. Thus, for the fourth quarter of 2018, Euronet's earnings guidance consists solely of an adjusted EPS goal of $1.27. If the company maintains current momentum, hitting this target would clinch a 12.4% advance over the $1.13 of adjusted EPS Euronet pocketed in the fourth quarter of 2017.