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Euronet Worldwide Benefits From Network Expansion

By Asit Sharma – Feb 17, 2016 at 4:01PM

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The global payments and money transfer company benefited from recent acquisitions during the fourth quarter of 2015. But it also reaped the advantages of increasing its international footprint.

Idea Bank of Poland's "Wpłatomat," a mini armored vehicle that allows vendors to deposit funds safely from any location after taking large cash payments. The ATM on wheels was developed jointly with Euronet Worldwide, and launched last quarter. Image source: Idea Bank.

Electronic financial solutions provider Euronet Worldwide (EEFT -1.93%) reported a credible end to a strong year in its fourth-quarter and full-year 2015 earnings release on Feb. 9. Euronet's revenue rose 2% to $470.6 million during Q4 2015, while net income climbed 11.3% to $33.5 million. The company achieved diluted earnings per share of $0.61 during the fourth quarter, versus $0.51 in the comparable prior-year quarter. 

Euronet's results are usually best absorbed by reviewing performance in its three distinct operating segments: EFT Processing, epay, and Money Transfer. Below we'll walk through each segment's quarter, and discuss a major theme which will likely characterize the beginning -- if not the whole -- of 2016.

EFT Processing
At $92.9 million in fourth-quarter revenue, Euronet's EFT Processing segment is less than half the size of either epay or Money Transfer. Yet it's by far the company's most profitable segment, with an operating income margin of 22.2%. 

These profits are driven by the segment's global network of ATM machines. Though it "winterized," or seasonally shut down 591 ATMs, primarily in Mediterranean resort areas, EFT added 823 new machines during the quarter.

The company ended the quarter with 21,360 ATMs, an increase of 5% over the prior year. The steady accretion to this base of ATMs continues to be a quiet net income engine for Euronet, even as acquisitions in the Money Transfer segment have received much press and held shareholders' attention for several business quarters running.

Management has set a goal to add at least 2,000 more ATMs to Euronet's total in 2016. A trend investors should note is Euronet's desire to "deploy," or own, the ATMs it puts into service. This increases the variability of ATM revenue and costs during each year, but leads to higher profits. The trend is illustrated below in a graphic found in Euronet's Q4 2015 investor presentation:

Image source: Euronet Worldwide Investor Slide Presentation, released Feb. 9, 2016.

Through its epay segment, Euronet offers mobile airtime "top-up" services, as well as prepaid debit and credit card products. Epay revenue declined 14% to $191.1 million during the quarter. Operating income, however, rose 3%, to $20.0 million. Company management attributed the quarter's revenue decline to a shift in the segment's transaction mix, as processing fees predominated over earned commission fees.

Money Transfer
On the surface, the Money Transfer segment's numbers look quite similar to epay's. Money Transfer garnered $23.4 million in operating income during Q4 2015, on $189.6 million in revenue. These tallies match up with epay's only because Money Transfer's business has been surging recently -- it will soon overtake epay as the organization's largest segment.

Money Transfer's revenue expanded by 22% during the quarter, while growing at the faster pace of 31% for the full year. The segment has benefited greatly from a deal signed in 2014 between Euronet subsidiary Ria and Wal-Mart Stores to provide low-cost money transfer services to Wal-Mart's customers. Money Transfer has added other revenue opportunities via the purchase of forex specialist HiFX in 2014, and also through last year's acquisitions of Malaysian money transfer agent IME, and Canadian forex firm XE.

Money Transfer is now attempting to wring additional value from these partnerships and acquisitions, primarily by expanding its network step by step, similar to the strategy used in the EFT Processing segment. Money Transfer ended the year with approximately 202,000 locations, which represents a 20% bump from 2014's year-end tally.

Reaping the rewards of dealmaking
Serial acquisitions over the past two years have given Euronet access to transactions which greatly increased its sales volume (the meager 2% fourth-quarter total company revenue improvement, for example, was actually an 11% leap when expressed in constant currency terms). 

During management's Q4 2015 earnings conference call with analysts, executives cited several examples of how Euronet is harvesting these investments by scaling its global footprint.

In the fourth quarter, the company launched "send and receive" services at nearly 600 locations of the national Armenian postal operator known as HayPost. It also introduced Instant Pay to Mexico in roughly 500 locations, to take advantage of what management describes as the world's fourth-largest "receive" market for remittances. And in late January, the acquired British HiFX subsidiary unveiled HiFX North America, which aims to compete in the multibillion-dollar U.S. and Canadian currency and global payments markets.

This trend of increasing transaction capacity organically is likely to continue through 2016. Company leadership can be described as opportunistic in regards to purchasing smaller, complementary companies. But the management team presently appears to be focused on optimizing Euronet's investments, at least for a few quarters, before reloading the company's acquisition guns. 

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.

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