Euronet Worldwide's epay Business Has Turned a Corner

For global transactions facilitator Euronet Worldwide (NASDAQ:EEFT), the final quarter of 2018 revealed highly credible performances in each of the company's three major business segments. More importantly, Euronet's epay division appears to be returning to growth mode after several quarters of middling results.

Let's review highlights from the report, issued on Feb. 7, as well as management's earnings expectations for the first quarter of 2019. (Note that all comparable numbers that follow refer to the prior-year quarter, the fourth quarter of 2017.)

Euronet earnings: The raw numbers Metric Q4 2018 Q4 2017 Year-Over-Year Growth

Revenue	$649.4 million	$604.6 million	14.9%
Net income (loss)	$60 million	($22.9 million)	N/A
Diluted EPS	$1.10	($0.44)	N/A

Data source: Euronet Worldwide. N/A = Not applicable. 

What happened with Euronet this quarter?

Image source: Getty Images.

Revenue from electronic funds transfer (EFT) processing rose 10% to $146.5 million. The company attributed this growth to a 13% rise in transactions and a 9% increase in active ATMs. Euronet added roughly 1,300 high-value ATMs in Europe and India during the fourth quarter, bringing its total ATM count to 40,354 at year end. EFT processing's operating income decreased by 13% to $22.4 million, due to a one-time $6.6 million acquisition charge during the quarter that management tied to an unspecified previous acquisition.

Epay segment revenue decreased by 3% to $215 million. The company adopted new GAAP accounting standard ASC 606 in January 2018; under the prior reporting standard, epay revenue would have increased by 13%. The segment achieved a 21% jump in transactions, to 344 million. The higher volume was attributed to an increase in transactions in Germany and India, which partly offset the prior-year loss of a high-volume, low-value customer in the Middle East.

Epay recorded operating income of $29.3 million, against a loss of $6.3 million in the fourth quarter of 2017 (in which the business recorded a $31.8 million goodwill impairment charge). On an adjusted basis for comparability, epay's operating income improved 13% over the prior-year quarter.

As the growth of its mobile airtime top-up services has waned, epay has diversified its revenue base by branching out into nonmobile revenue, including the sale of digital content and services, as well as branded physical gift cards. In the fourth quarter, epay launched a nonmobile digital content mall on Amazon.de (Amazon Germany), and launched Adidas gift cards for retail sale throughout Europe, among many other digital and physical product rollouts. Investors finally appear to be viewing the segment as a revenue driver, after a couple of years of panning epay as a hindrance to growth.

Revenue in Euronet's largest segment, money transfer, jumped 15% to $274.1 million. However, operating income was flat at $29.3 million. This was due to an impairment charge the company took in the fourth quarter against intangible assets related to the HiFX brand name. HiFX operations have been merged into the faster-growing, globally recognized XE brand of foreign exchange services. Money transfer transactions rose 15% during the quarter. Management attributed money transfer's growth to increased market share in its primary Ria brand, and a growing number of digital money-transfer transactions.

What management had to say

In the company's earnings conference call, CFO Rick Weller pointed out both epay's effective performance and the strength of results when all three segments expand in tandem: 

[Epay] delivered a very strong fourth quarter. Adjusted for the new 606 revenue standard, constant-currency pro forma revenue grew 17%, adjusted operating income grew 19%, and adjusted EBITDA grew 16%. These excellent results were driven by strong fourth-quarter sales on nonmobile content. Gross profit per transaction came in a bit due to a stronger mix of India transactions, but operating margins expanded year over year due to a continued growth of our high margin non-mobile products ...

This was a very strong finish to 2018 where all three segments posted double-digit growth across all metrics. With the double-digit epay contributions this quarter, together with the double-digit performance of EFT and money transfer, it's easy to see that [Euronet] is firing on all cylinders.

Looking forward

Euronet provides very limited earnings guidance. The organization expects first-quarter 2019 adjusted EPS of $0.83. If it meets this benchmark, Euronet will surpass the $0.73 in adjusted EPS earned in the first quarter of 2018 by a vigorous margin of 14%. Investors are clearly enthused over both current conditions and the outlook for continued EPS growth: Shares have ascended 12% in the two trading sessions following Euronet's earnings release.