Euronet Worldwide (NASDAQ: EEFT) understands one simple truth about the payments processing industry in which it competes: To grow revenue, you have to be extremely aggressive in gaining access to transactions.
The company's second-quarter 2015 earnings, reported at the end of last month, illustrate this principle effectively. An admirable showing versus the prior year can be directly traced to management's recent deal-making. Let's review the quarter's results, as well as the near-term strategic direction the executive team communicated.
Q2 Earnings: Can we just end here?
After reviewing the performance of the Money Transfer segment during the company's July 29 earnings conference call, CEO Mike Brown jokingly stated, "I was wondering if I should just end my comments here, because what more can you say after almost doubling your operating income?"
In fact, the entire call seemed to have this quality, as the company exhibited robust growth across a number of measurements. Revenue rose 7% to $425.1 million versus the prior year's quarter. Net income climbed nearly 31% to $26.8 million. Euronet's diluted earnings per share rose by a similar percentage, from $0.38, to $0.50.
As the company pointed out in its earnings release, most of its revenue -- about 70% -- is earned outside the U.S., and the results were thus dampened by the dominance of the U.S. dollar against other world currencies. Removing the effects of the greenback for comparative purposes, the company's revenue in constant currency terms increased 22%. Operating income of $47.2 million increased 38% from the prior year, but an impressive 67% in constant currency.
As you might have gleaned from CEO Brown's comment, a single line of business stood out this quarter. Euronet's operations are divided into three major segments: EFT Processing, which is responsible for processing ATM transactions, "epay," a business that primarily processes prepaid mobile airtime, and the aforementioned Money Transfer, which enables domestic and international consumer-to-consumer fund transfers.
Of the three segments, Money Transfer has proved the fastest growing revenue stream as of late, having received a boost last year, when Euronet subsidiary Ria signed a deal with Wal-Mart Stores (NYSE:WMT) to provide transfer services for the retail giant's customers.
Management cited the Wal-Mart agreement, as well as momentum at its HiFX subsidiary, as reasons behind the segment's outstanding quarter. HiFX, which operates in the U.K., Asia, and Australia, is known for its online foreign-exchange and money-transfer services. Euronet acquired the company in May 2014, just weeks after announcing its partnership with Wal-Mart.
In the following graphic, which appeared in Euronet's slide presentation released with earnings, we can see how Money Transfer is fueling the company's growth:
Money Transfer's 43% year-over-year growth in transaction count is reflected in the widening role this segment carries in Euronet's overall business. Last year, Money Transfer contributed a little more than 31% of total revenue in the second quarter. In Q2 2015, Money Transfer's top line of $165.6 million made up 39% of total company revenue.
To capture growth, you must capture access to rising markets
Money Transfer's performance has so far vindicated Euronet's approach to gaining market share in the payments-processing industry. Essentially, the company is complementing its built-in revenue growth by forming alliances and stepping up its pace of acquisitions, positioning itself to be first in line for future customer transactions.
It should be noted that the EFT Processing segment is by far the most profitable of Euronet's three business lines. Last year, EFT Processing enjoyed an operating income margin of nearly 47%, as compared with Money Transfer's 22% margin, and 31% for epay. Yet company leadership wants to capitalize now on a vibrant market for international remittances. Thus, Euronet's resources for 2014 and 2015 have so far been funneled into extending Money Transfer's reach.
In June, the company announced that it had gained entry into the Asian and Middle East "send" (remittance) markets by acquiring Malaysia-based money-transfer provider IME. And in July, Euronet unveiled the acquisition of global online foreign currency and payments website XE.
Management explained on its earnings call that these two acquisitions offer Euronet faster growth than it would be able to achieve organically. CEO Brown offered up an interesting illustration, noting that "sends" originating in the U.S. among all payment processors totaled $131 billion in 2014. In the 11 principal remittance markets in which IME operates, "sends" last year totaled $135 billion, though these markets have just one-third the population of the United States. This activity is due to the huge numbers of workers in Asia who cross borders and send money home, to countries such as India, Pakistan, and Bangladesh.
Similarly, the XE site offers a formidable base for transaction growth. According to Euronet executives, XE is a top-five global business news site, boasting a traffic volume of 200 million unique visitors over the past 12 months. XE has previously used a third party to offer global payments and transfers. Post-acquisition, Euronet subsidiaries Ria Digital and HiFX will provide these services.
In the second quarter, Euronet reaped the harvest from last year's significant investments in its Wal-Mart relationship and purchase of HiFX. Investors will now look forward to understanding how the IME and XE transactions will affect future results, of which the first hint should come in late October, with the release of Q3 results. And looking forward to 2016, it seems likely as well that we haven't seen the last of the strategic acquisitions for Euronet.
Asit Sharma has no position in any stocks mentioned. The Motley Fool recommends Euronet Worldwide. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.