Euronet Worldwide (NASDAQ: EEFT) closed out 2017 on a positive note in earnings released on Feb. 6, as strength in its ATM transaction network shored up overall fourth-quarter earnings results. Euronet also recorded impairment and tax charges in the fourth quarter, which we'll dive into below, among other details, after a review of the headline numbers.
Euronet earnings: The raw numbers
|Metric||Q4 2017||Q4 2016||Year-Over-Year Growth|
|Revenue||$604.6 million||$519.8 million||16.3%|
|Net income||($22.9 million)||$28.9 million||N/A*|
|Diluted earnings per share||($0.44)||$0.54||N/A|
Data source: Euronet Worldwide. *Difference too large to provide a meaningful comparison.
What happened with Euronet this quarter?
Euronet's loss resulted primarily from adjustments made in accordance with the recent tax legislation enacted in the U.S. The company booked a one-time tax expense charge of $41.6 million, as it accounted for both current and deferred liabilities related to its foreign-based earnings. The tax expense fully absorbed $131 million in net operating carryforwards, which the company had been gradually utilizing to offset U.S. taxable income.
The company also recorded an impairment charge of $31.8 million within its epay segment in the fourth quarter as part of its annual goodwill impairment testing.
In keeping with a recent trend , Euronet's results were supported by outperformance in its EFT processing segment. EFT revenue jumped 33% to $146.5 million, and operating income surged 55% to $25.8 million.
EFT processing reported a 22% rise in transactions, driven in part by continued ATM network expansion. At year end, Euronet operated 37,133 ATMs, an increase of 9% year over year. The company attributed segment success to improving business conditions in India and Europe. In the fourth quarter, Euronet deployed 1,000 new high-value ATMs, primarily in Europe.
The company's epay segment also boasted robust top-line growth, as revenue rose 13% to $221.5 million. However, transactions declined by 17%, primarily due to the loss of what the company describes as a "high-volume, low-margin" customer in the Middle East.
Money transfer, the company's largest segment, advanced revenue by 11% to $237.6 million, while operating income rose just 1%, to $28.9 million. Management attributed this to the effect of weaker profits in the company's Ria subsidiary, which accepted lower negotiated rates on its renewal as a vendor for Walmart 's money transfer services last year. In addition, recent investments in compliance and network infrastructure pressured segment earnings. Management indicated that money transfer's operating income should hit normalized levels during 2018.
The company reduced its debt by $284.1 million from the previous sequential quarter, ending the year with $450.7 million in long-term debt.
What management had to say
During Euronet's earnings conference call, CEO Mike Brown reflected on some of the organization's prominent full-year 2017 achievements:
For the fifth consecutive year, we were able to deliver double-digit adjusted EPS growth despite revenue pressure resulting from lower customer pricing in conjunction with the extension of our Walmart agreement, and the impact of the demonetization in India.In addition to consolidated double-digit growth, we also produce some other very impressive numbers. We delivered more than $2 billion in revenue. We processed more than 3.6 billion transactions. Our global network now reaches nearly 1.5 million devices and locations. We added 3,300 high value ATMs across Europe and India, and we were responsible for $95 billion in cash across our three segments, which is 13% more than in 2016.
Most of the trends Brown mentions above appear set to continue during 2018. Most importantly, as Euronet stabilizes its epay business and absorbs near-term profit decline in money transfer, the company is clearly counting on its traditional strengths in ATM network expansion within EFT processing to bolster overall top-line growth.
Looking to the first quarter of the current year, Euronet's management provided an estimate for adjusted earnings per share of $0.73, which is essentially a flat projection against the comparable prior year quarter. CFO Rick Weller explained on the company's earnings call that three separate factors totaling $0.10 have impacted the outlook for the first three months of 2018.
First, the company sees a tax impact of $0.05 per share, driven by projected earnings in high-tax jurisdictions as well as the effects of the recent tax law changes. Second, the company granted additional discounts to a large European credit card processor in the fourth quarter, in exchange for extending its current agreement over a longer term. This will have a small but tangible effect on margins.
Finally, the company will deactivate a higher number of ATMs during its annual seasonal "winterization." This practice, which occurs primarily in European cities, places a higher cost burden on the ATM network in the first months of the year. The foregone revenue is typically made up during the spring when the ATMs are placed back in service and tourism picks up.
In sum, while Euronet sees some slight headwinds against earnings at the outset of this year, the company still has the potential to enjoy operating leverage if transactions across its three segments continue to improve. The company is next slated to report earnings in early May.
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