Euronet Worldwide, Inc. (EEFT) Q3 2012 Earnings Report, Transcript and Summary

Greetings, and welcome to the Euronet Worldwide Third Quarter 2012 Earnings Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded. It's now my pleasure to introduce your host, Mr. Jeff Newman, Executive Vice President and General Counsel for Euronet Worldwide. Thank you. Mr. Newman, you may begin.

Thank you, Saheed. Good morning, and welcome, everyone, to Euronet's Quarterly Result Conference Call. On this call, we will present our results for the third quarter 2012. We have Mike Brown; Rick Weller; and Kevin Caponecchi, on the call. Before we begin, I'd like to make a disclaimer concerning forward-looking statements. Statements made on this call that concern Euronet's or its management's intentions, expectations or predictions of future performance are forward-looking statements. Euronet's actual results may vary materially from those anticipated in such forward-looking statements as a result of a number of factors, including conditions in world financial markets, general economic conditions, technological developments affecting the market for the company's products and services, foreign exchange fluctuations, the company's ability to renew existing contracts at profitable rates, changes in ATM and other transaction fees, changes in laws and regulations affecting the company's business, including immigration loss. These risks and other risks are described in the company's filings with the Securities and Exchange Commission, including our annual report on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K. Copies of these filings may be obtained via the SEC's EDGAR website or by contacting the company or the SEC. Euronet does not intend to update these forward-looking statements and undertakes no duty to any person to provide any such update under any circumstances. The company regularly posts important information on the Investor Relations section of its website. Now I'll turn the call over to Rick.

Thank you, Jeff, and welcome, everyone. I will begin with the third quarter financial results on Slide 5. In the third quarter 2012, Euronet delivered revenue of $316 million, operating income of $24 million and adjusted EBITDA of $42.6 million. Our cash earnings per share was $0.42, aided by about $0.01 of tailwind from foreign exchange rates since we last provided guidance. I might also point out that the reported 14% growth in cash earnings per share would have been approximately 22% growth if foreign currency exchange rates remained the same year-over-year. While I might be a bit biased, I'd say these are some outstanding results. I will discuss the segments results in more detail when I get to segment reporting in a few slides. Let's move to Slide 6, please. On Slide 6, you can see the 3-year trend in transactions for all 3 segments. The EFT segment continued to show strong transaction growth of 22% in the quarter with expansion across virtually all markets. Poland, Romania, India, Middle East and our cross-border acquiring business achieved the largest growth. While we have since -- while we have seen nice transaction growth from our cross-border acquiring business, we are still working to get to second customer. The epay segment saw a modest 2% transaction growth in the quarter. This increase was largely attributable to expansion in North America and Germany, offset by declines in Brazil, Australia and Spain. Old news, but still impacting our year-over-year comparisons. Finally, Ria continued to see strong growth with total transactions increasing 25% during the quarter. This transaction growth was driven by increases in both money transfers and non-money transfers. Money Transfers increased 14% in the quarter, driven by a 19% increase in U.S.-initiated transfers. U.S. growth included an 18% increase in transfers to Mexico,…

Thank you, Rick and welcome everybody, to the call. I'm very pleased with the earnings growth from our EFT and Money Transfer segment, both aim to work hard to expand our network and to leverage that growth, offsetting the softness that we have within the epay segment. I will get into more detail in the next few slides, but I believe we have the right strategy and we are well positioned to deliver strong earnings as we finish out this year. So let's move on to Slide #12 when we can talk about the EFT segment, our legacy segment that we started the company with, 18 years ago. Here on Slide 12, we present our second quarter financial highlights for the EFT segment. Our EFT team continued their trend of delivering exceptional results with 80% operating income growth in the quarter on a constant dollar basis. For the last several quarters, we have been telling you about the expansion of our networks and our product portfolio to include additional ATMs and value-added services. Our success with this strategy has been stunning. As Rick mentioned, we saw a seasonal lift in the revenue from value-added services in the third quarter, so we expect to see strong growth as a result of network expansion in the fourth quarter from EFT. The benefit from the seasonality in the third quarter though, will make it hard to keep up with the third quarter growth rates. Now let's move on to Slide 13 and we can talk about our specific EFT highlights for the quarter. There's a lot of words on this slide, I apologize, but I'll kind of go over some of the high points. You can see that we signed and launched a number of new agreements during the quarter. We deployed 3…

[Operator Instructions] Our first question comes from Mike Grondahl from Piper Jaffray.

Mike, could you talk a little bit about the EFT backlog, kind of by region, and how you think that'll play out over the next year? And then maybe secondly, attached to EFT is, what type of drag were the India ATMs and how do you see that ramping up?

Okay, so where we see the growth, okay, as we kind of -- first of all, let's break down where our kind of our, say, 2 or 3 areas that we see ATM expansion in. So that we could say Europe and we can kind of break it down in both Western Europe and Central Europe. And then in also India, those are the 3 areas for growth of ATMs in the last year and over the, probably as we see, coming up in the coming year. Now with respect to India, as Rick said, we've got a lot of ATMs in India. We've got kind of uneven results, I've kind of mentioned that on prior calls before as well. So we are still assessing that, we're relocating a few ATMs, we're making sure that we find a secret sauce that matches site selection for India, just like we have in all the other markets where we have IAD. So for the time being, you're not going to see a lot of ATMs growing in the coming quarter, we're assessing, relocating and figuring this all out, but then we could see some additional growth once we get this all figured out. Because we've got some really interesting and exciting projections for that market. You asked about the drag on as target to Europe, you've asked about the drag on it. So we've got 1,800 working ATMs in India and they're ramping up in their transactions. So therefore, you don't make money on the outset, and we're losing right now about 600k to 700k per quarter on that drag. So when you look at our EFT results, had we not made the investment that we're excited about in India, that would've brought darn near another $0.01 a share to us this…

Great. And then just real quickly, the buyback you guys talked about, was that 1.3 million shares in the September quarter or was that a cumulative number?

No, that was $1.3 million. So it's kind of a weeny amount. But we've picked them up where we saw a good buy and we will continue to be selective and take advantage of the market opportunity for buyback of stocks. So we've still got, I think we were authorized to buy back up to $80 million -- I'm sorry, Rick, correct me. Yes, so we bought back $17 million worth of the $100 million the board has authorized us to do a year ago.

Our next question comes from John Kraft from DA Davidson.

I wanted to circle back on a couple of issues. One specifically into the U.S. to Mexico corridor at 18%, it looks to me like that may be your strongest ever, at least I've seen for a while. And Mike, you suggested that the execution is the rationale there for the success, but I'm assuming here that there's also some share gains from some of your larger vendor competitors and is it also fair to say that there's an improving industry outlook overall, maybe related to housing?

I can't tell you exactly where the new money is coming from. But certainly, there -- I think with our kind of a slightly recovering economy here, the first people that most businesses sign on are temporary workers, whether that's in construction or production or whatever. Immigrants are classically kind of temporary workers, so you tend to see your recovery, your economic recovery first and maybe our neck of the woods before you see it in the full-time guys. So execution, when we talk about execution, we point out that we've actually been cultivating new and stronger relationships with lots of new agents over the last 2 years. And then as the economy started to turn, we were able to capitalize on that. And with respect to market share gains from our competitors, I don't have their data versus my data right now, you'll have to see how they all come out. But obviously, having an 18% gain, which is the largest gain we've ever had to Mexico, it had to come from someplace. And I don't think the number of transactions to Mexico, although we haven't seen Bank of Mexico's number get through anywhere near 18%.

And while that 18% is the largest we've had since we have owned Ria, Ria in its past, it's had numbers like that, representing that the market is available out there.

Right.

Got you. Okay, that's helpful. And then one more, if I could. Going to some of the struggling epay areas, it doesn't appear that the changing strategy in some of the new vendors in Brazil or the go-direct strategy in Australia has spread to other markets or other vendors within those markets, is it fair to put those issues behind us?

I think so. I would have to say that we don't really have time on this call to go into it in detail, but I have a number of times. Those are -- you hate to promise that something like that could never occur again. But I would tell you that the models chosen in for sure in Brazil, and maybe even in Australia, are a bit counterintuitive and don't match anything we've ever seen before. And I think for that reason now, you've seen them for a year, everybody's seen them for a year and nobody's doing anything like that. In Brazil in particular, every mobile operator we know in every single other market is moving away from small distributors towards large distributors, because they don't want to get stuck with a receivable from a bunch of little kind of fly-by-night companies. They like the fact that you have larger companies with balance sheets and transparent financials, because don't forget, we only get paid, call it, 7% or 6.5% commission, but we have to break -- we have to give the rest, the whole face value you left that back to the mobile operator. So the receivable that we have -- that they have on their books is considerably higher than the amount of profit we make per transaction. And sometimes, and we've seen this happen time and time, market after market, some of these guys just basically take the money and run.

So John, I would add just a couple other observations to that, is that the challenge that we do talk about from time to time is that we're in so many different markets and it's a little harder to understand our business, because we're not just a U.S.-type of base business. And that's also the beauty of our business is that we are diversified across a number of markets. And what we have not seen things like that, trends or activities like that, marketing approaches spread from market to market or even within the same mobile operator ownership group that may operate in different markets because they just are different cultural approaches to their marketing and consumer usage patterns and things like that. The only thing that we do see that's consistent from market to market is the efficiency of use of electronic top up. And so we obviously take advantage of that and then we'll continue to deploy, as again we've seen consistently market to market, is the interest in the nonmobile product, so that we leverage each one of those point-of-sale. But again, I would just say that the diversity is what we benefit from and we do not see those kinds of things top from market to market.

And our next question comes from Chris Shutler from William Blair.

Let's start in EFT. So you added Spain and Italy to your IAD network in Q3, and that's your first ATM presence, I think, in those 2 countries. So maybe -- can you just talk about the opportunity there in terms of breaking out a couple of years, how many machines you think you might be able to install there and just what the competitive environment looks like?

Well, first of all, we've only got about like 5 or so ATMs in each, because we both -- we went live just kind of like last month. We don't have many in there right now, so really, it didn't change our numbers. But the fact is we're able to take advantage of our PSD license and acquiring license to go into these 2 markets, and bringing our number of markets up to 11. Spain and Italy are 2 huge markets. And when you take a look at what's happening, actually, the number of ATMs in Spain has gone down, 5% or 6% over the last 2 years, because banks are removing, are closing down branches and closing down ATMs. What we recognize is that there are opportunities across several countries in Europe to take advantage of the fact that the bank [indiscernible] and there are opportunities that have ATMs in well-placed locations and give consumers a good and transparent or good and -- a good experience and has good ubiquity for where they are. So I can't tell you how many, but I mean, you think there'd be at least a couple of hundred in each market and maybe more, so we'll see. We just -- what we do in every market is we keep adding ATMs until we realize we're getting into kind of a profit saturation point in between all the different kinds of transactions that we sell on our ATMs. What's interesting is that number just keeps getting bigger and bigger as we offer one more services to those customers and more and more revenue streams to ourselves.

And then a couple of questions on epay. I guess, I mean, there's a lot of moving pieces right now in that segment. So if you group out the areas that aren't performing so well, so Brazil, Australia and Spain, can you just maybe walk us through what the -- kind of what the basic growth rates is in the other country, the other big countries in that segment, whether it's U.S., Germany, et cetera? Just so that we have some idea what we should be looking at as sort of a normalized growth rate when you do come out of these issues?

Yes. Well, Chris we'll, for competitive reasons, not give you the numbers on each one of those markets. But as Mike said, in the value-added services, we saw good strong, very strong double digit, like 24% kind of growth on a year-over-year our non-value product. I mean, on nonmobile product. So that's kind of an overarching observation, so that's obviously good. Also recognize that or I'll just point out that the change that we saw, the change that we saw in Australia and Brazil was pretty substantial. So recovering off of those takes a fair bit of work. But I think it's fair to say in the U.S. market, we've seen good double-digit transaction growth in the Germany market, it's been one of the key fuelers of the nonmobile product. And so, seeing good double-digit growth in those numbers year-over-year, you can anticipate that Germany, again, was a good strong growing country. We had a couple of other smaller countries that are continuing to contribute to the growth cycle places like Italy, where we're still a distant third player in a very big mobile top-up market. We're continuing to make inroads, as Mike mentioned, one of these larger customers we've signed up here was in Italy, we'll continue to that. So I think if you'd take a look at those other markets kind on balance, we'd probably see something like mid to upper single-digit growth rates coming out of those kind of markets with a bit of an advantage tilted towards nonmobile.

The upper single digits you're talking of profitability?

Yes.

Okay. And then the last one is on the -- you didn't talk, I don't think, about the Sydney transport deal at all on the call. Just give us...

Yes, the update on that is I think we'll go live here in the fourth quarter with a pilot. But the pilot doesn't mean it's not going to go live. The pilot just means we've got to work all the kinks out of the system. And as we -- after we do that, we'll start to roll that out across next year.

Over which quarters?

Go ahead, Kevin, you've got the updates.

Chris, this new project, it actually involves 3 phases. The first phase is ferry boats, the second phase is trains and the third phase is buses. That rollout is over a long period of time, over 3 years. The first phase is ferries, so we'll be doing a pilot going live in December with one of the ferry boats. If that goes well, gains traction, they'll expand it to more ferries in 2013. And at the end of 2013, we'll start a pilot with trains and it'll go like that.

You'd just like to get them to add airplanes in there and then we'd have those 3...

Our next mission comes from Jason Nacca from Sidoti.

Just a quick question with cadooz. Now that you've got it for over a year, and I think should have some better visibility, can you provide some insight on what you're seeing on the conditions in the corporate side, particularly in Germany and other countries alike?

Asked about cadooz.

Oh, cadooz. Well, cadooz is -- we're cautiously excited about what they've got on their plans for the fourth quarter. It's a funny game there, because a lot of these corporations use them as kind of Christmas-time incentives to their employees or to gather new customers. So it's one of those things where everybody kind of crams everything in, in the last quarter, that's a big quarter for us and we see those revenues realized over Q4 and Q1. So we're cautiously optimistic that we're going to have a record-breaking quarter for cadooz in Q4. We'll let you know at the end of the year on our next call.

I'd say that there's 2 other things I would add to that, Mike, and that is, Germany is one of the strongest and certainly biggest economies in Europe. And as we see that economy being strong, corporations being strong, the corporations are continuing to do things to promote their products and things like that. So that's been helpful to us. I think even as we kind of reflect backwards, we've seen some really nice wins on the cadooz side coming out of the corporate sector there. So good strong economy, a big economy in Germany. And so that all plays to our favor. The second thing is, Germany is one of these countries where they offer companies some nice tax incentives to pay for things like meals or other types of things for employees that get worked into these voucher programs that cadooz offers. So there's a couple of things that kind of go really well for us here terms of macro trends here, the strength of the business environment in Germany, together with the added incentives for things like being stimulated by their tax structures. So a good piece of it.

I guess the final thing I would say, Rick, is that we're similar to other businesses. We're constantly evolving and creating new products. And the cadooz businesses has produced about 3 or 4 new products that seems to be gaining traction in the market. So we're pretty happy with that business.

Okay. And just one more question. Last quarter, we talked about some cash payout locations in Thailand, about 1,700 that you added. Can you provide me with some color on this expansion, what you're seeing in Thailand, if you're gaining any traction and some other Southeast Asian region?

Well, we mentioned a few here for Asia. We mentioned the ones around India, Pakistan, Nepal, et cetera. Of course, Malaysia, we're focusing on. We're always focusing on places like the Philippines. I don't have any specific information for you other than that's just our focus. We just keep adding more and more payouts in more and more countries, and better ubiquity. Because you've got to have a payout that's close to where the family member lives of the guy who sent them back money. So if we -- when you have twice as many payout locations and twice the ubiquity, you can get more and more customers. So that's just kind of an ongoing mantra, you'll hear me talk about that every quarter until I croak. So nothing specific other than we'll just continue to work it. Right, thank you.

I'm showing no questions at this time, sir.

Okay, good. Well, I thank you, one and all, for taking an hour with me and I look forward to talking with you again in another quarter. Bye-bye.

Ladies and gentlemen, thank you for participating in today's conference. This concludes our program for today. You may all disconnect and have a wonderful day.