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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The terms "Euronet," the "Company," "we" and "us" as used herein refer to Euronet Worldwide, Inc. and its subsidiaries.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This report contains statements that constitute forward-looking statements within the meaning of section 27A of the Securities Act of 1933 and section 21E of the Securities Exchange Act of 1934 (“Exchange Act”). Generally, the words "believe," "expect," "anticipate," "intend," "estimate," "will" and similar expressions identify forward-looking statements. However, the absence of these words or similar expressions does not mean the statement is not forward-looking. All statements other than statements of historical facts included in this document are forward-looking statements, including, but not limited to, statements regarding the following:
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our business plans and financing plans and requirements;
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trends affecting our business plans and financing plans and requirements;
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trends affecting our business;
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the adequacy of capital to meet our capital requirements and expansion plans;
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the assumptions underlying our business plans;
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our ability to repay indebtedness;
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our estimated capital expenditures;
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the potential outcome of loss contingencies;
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our expectations regarding the closing of any pending acquisitions;
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government regulatory action;
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the expected effects of changes in laws or accounting standards;
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technological advances; and
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projected costs and revenues.
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Although we believe that the expectations reflected in these forward-looking statements are reasonable, we can give no assurance that these expectations will prove to be correct.
Investors are cautioned that any forward-looking statements are not guarantees of future performance and involve risks and uncertainties. Actual results may materially differ from those in the forward-looking statements as a result of various factors, including, but not limited to, conditions in world financial markets and general economic conditions, including the effects in Europe of the negotiations related to the United Kingdom's proposed departure from the European Union, and economic conditions in specific countries and regions; technological developments affecting the market for our products and services; our ability to successfully introduce new products and services; foreign currency exchange rate fluctuations; the effects of any breach of our computer systems or those of our customers or vendors, including our financial processing networks or those of other third parties; interruptions in any of our systems or those of our vendors or other third parties; our ability to renew existing contracts at profitable rates; changes in fees payable for transactions performed for cards bearing international logos or over switching networks such as card transactions on ATMs; Visa's rule change to allow our ATMs to provide DCC beginning mid-April 2019; our ability to comply with increasingly stringent regulatory requirements, including anti-money laundering, anti-terrorism, anti-bribery, consumer and data protection and GDPR or PSD2, requirements; changes in laws and regulations affecting our business, including tax and immigration laws and any laws regulating payments, including DCC transactions; changes in our relationships with, or in fees charged by, our business partners; competition; the outcome of claims and other loss contingencies affecting Euronet; general economic, financial and market conditions and the duration and extent of any future economic downturns; the cost of borrowing, availability of credit and terms of and compliance with debt covenants; renewal of sources of funding as they expire and the availability of replacement funding; the outlook for markets we serve; and those factors referred to above and as set forth and more fully described in Part I, Item 1A — Risk Factors of our Annual Report on Form 10-K for the year ended
December 31, 2018
and in Part II, Item 1A-Risk Factors in our Quarterly Report on Form 10-Q for the quarter ended
June 30,
2019
. Our Annual Report on Form 10-K and Quarterly Reports on Form 10-Q are available on the SEC's EDGAR website at www.sec.gov, and copies may also be obtained by contacting the Company. Any forward-looking statements made in this Form 10-Q speak only as of the date of this report. Except as required by law, we do not intend, and do not undertake any obligation, to update any forward-looking statements to reflect future events or circumstances after the date of such statements.
OVERVIEW
COMPANY OVERVIEW, GEOGRAPHIC LOCATIONS AND PRINCIPAL PRODUCTS AND SERVICES
Euronet is a leading electronic payments provider. We offer payment and transaction processing and distribution solutions to financial institutions, retailers, service providers and individual consumers. Our primary product offerings include comprehensive automated teller machine (“ATM”), point-of-sale (“POS”), card outsourcing, card issuing and merchant acquiring services; software solutions and cloud based payment solutions; electronic distribution of prepaid mobile airtime and other electronic payment products; foreign currency exchange services and global money transfer services. We operate in the following three segments:
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The EFT Processing Segment, which processes transactions for a network of
46,636
ATMs and approximately
307,000
POS terminals across Europe, the Middle East, Asia Pacific and the United States. We provide comprehensive electronic payment solutions consisting of ATM cash withdrawal and deposit services, ATM network participation, outsourced ATM and POS management solutions, credit and debit card outsourcing, DCC, domestic and international surcharge and other value added services. Through this segment, we also offer a suite of integrated electronic financial transaction software solutions for electronic payment and transaction delivery systems.
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The epay Segment, which provides distribution, processing and collection services for digital media (formerly referred to as non-mobile content) and prepaid mobile airtime. We operate a network of approximately
700,000
POS terminals providing electronic processing of digital media and prepaid mobile airtime top-up services in Europe, the Middle East, Asia Pacific, the United States and South America. We also provide vouchers and physical gift fulfillment services in Europe.
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The Money Transfer Segment, which provides global consumer-to-consumer money transfer services, primarily under the brand names Ria, IME and xe. xe also provides global account-to-account money transfer services. We offer services under the brand names Ria and IME through a network of sending agents, Company-owned stores (primarily in North America, Europe and Malaysia) and Ria branded websites (riamoneytransfer.com and online.imeremit.com), disbursing money transfers through a worldwide correspondent network that includes approximately
385,000
locations. xe offers money transfer services on its websites (xe.com and x-rates.com) and through its customer service representatives. The xe websites also provide foreign currency exchange information. In addition to money transfers, we also offer customers bill payment services (primarily in the U.S.), payment alternatives such as money orders and prepaid debit cards, comprehensive check cashing services for a wide variety of issued checks, along with competitive foreign currency exchange services and prepaid mobile top-up. We offer services under the brand name xe through our websites (www.xe.com and https://transfer.xe.com). Through our HiFM brand, we offer cash management solutions and foreign currency risk management services to small-to-medium sized businesses.
|
We have six processing centers in Europe, five in Asia Pacific and two in North America. We have 36 principal offices in Europe, 14 in Asia Pacific, nine in North America, three in the Middle East, two in South America and one in Africa. Our executive offices are located in Leawood, Kansas, USA. With approximately
72%
of our revenues denominated in currencies other than the U.S. dollar, any significant changes in foreign currency exchange rates will likely have a significant impact on our results of operations.
SOURCES OF REVENUES AND CASH FLOW
Euronet primarily earns revenues and income from ATM management fees, transaction fees, commissions and foreign currency exchange margin. Each operating segment’s sources of revenues are described below.
EFT Processing Segment
— Revenues in the EFT Processing Segment, which represented approximately
33%
and
30%
of total consolidated revenues for the
second
quarter and
first half
of
2019
, respectively, are primarily derived from fees charged for transactions made by cardholders on our proprietary network of ATMs, fixed management fees and transaction fees we charge to customers for operating ATMs and processing debit and credit cards under outsourcing and cross-border acquiring agreements, foreign currency exchange margin on DCC transactions, domestic and international surcharge, foreign currency dispensing, and other value added services such as advertising, prepaid telecommunication recharges, bill payment, and money transfers provided over ATMs. Revenues in this segment are also derived from license fees, professional services and maintenance fees for proprietary application software and sales of related hardware.
epay Segment
— Revenues in the epay Segment, which represented approximately
27%
and
28%
of total consolidated revenues for the
second
quarter and
first half
of
2019
, respectively, are derived from commissions or processing fees received from mobile phone operators for the processing and distribution of prepaid mobile airtime and commissions earned from the distribution of other digital media products, vouchers, and physical gifts. The proportion of epay Segment revenues earned from the distribution of prepaid mobile phone time as compared with other digital media has decreased over time, and digital media now produces approximately 61% of epay Segment revenues. Other digital media products offered by this segment include digital content such as music, games and software, as well as other products, including prepaid long distance calling card plans, prepaid Internet plans, prepaid debit cards, gift cards, vouchers, transport payments, lottery payments, bill payment, and money transfer.
Money Transfer Segment
— Revenues in the Money Transfer Segment, which represented approximately
40%
and
42%
of total consolidated revenues for the
second
quarter and
first half
of
2019
, respectively, are primarily derived from transaction fees, as well as the margin earned from purchasing foreign currency at wholesale exchange rates and selling the foreign currency to customers at retail exchange rates. We have a sending agent network in place comprised of agents, customer service representatives, Company-owned stores, primarily in North America, Europe, and Malaysia, and Ria, and xe branded websites, along with a worldwide network of correspondent agents, consisting primarily of financial institutions in the transfer destination countries. Sending and correspondent agents each earn fees for cash collection and distribution services, which are recognized as direct operating costs at the time of sale.
The Company offers a money transfer product called Walmart-2-Walmart Money Transfer Service which allows customers to transfer money to and from Walmart stores in the U.S. Our Ria business executes the transfers with Walmart serving as both the sending agent and payout correspondent. Ria earns a lower margin from these transactions than its traditional money transfers; however, the arrangement has added a significant number of transactions to Ria’s business. The agreement with Walmart establishes Ria as the only party through which Walmart will sell U.S. domestic money transfers branded with Walmart marks. The agreement is effective until April 2020. Thereafter, it will automatically renew for subsequent one year terms unless either party provides notice to the contrary. The agreement imposes certain obligations on each party, the most significant being service level requirements by Ria and money transfer compliance requirements by Walmart. Any violation of these requirements by Ria could result in an obligation to indemnify Walmart or termination of the contract by Walmart. However, the agreement allows the parties to resolve disputes by mutual agreement without termination of the agreement.
Corporate Services, Eliminations and Other
- In addition to operating in our principal operating segments described above, our “Corporate Services, Eliminations and Other” category includes non-operating activity, certain inter-segment eliminations and the cost of providing corporate and other administrative services to the operating segments, including most share-based compensation expense. These services are not directly identifiable with our reportable operating segments.
OPPORTUNITIES AND CHALLENGES
Our expansion plans and opportunities are focused on eight primary areas:
|
|
•
|
increasing the number of ATMs and cash deposit terminals in our independent networks;
|
|
|
•
|
increasing transactions processed on our network of owned and operated ATMs and POS devices;
|
|
|
•
|
signing new outsourced ATM and POS terminal management contracts;
|
|
|
•
|
expanding value added services and other products offered by our EFT Processing Segment, including the sale of DCC, acquiring and other prepaid card services to banks and retailers;
|
|
|
•
|
expanding our epay processing network and portfolio of digital content;
|
|
|
•
|
expanding our money transfer services, cross-currency payment products and bill payment network;
|
|
|
•
|
expanding our cash management solutions and foreign currency risk management services; and
|
|
|
•
|
developing our credit and debit card outsourcing business.
|
EFT Processing Segment
— The continued expansion and development of our EFT Processing Segment business will depend on various factors including, but not necessarily limited to, the following:
|
|
•
|
the impact of competition by banks and other ATM operators and service providers in our current target markets;
|
|
|
•
|
the demand for our ATM outsourcing services in our current target markets;
|
|
|
•
|
our ability to develop products or services, including value added services, to drive increases in transactions and revenues;
|
|
|
•
|
the expansion of our various business lines in markets where we operate and in new markets;
|
|
|
•
|
our entry into additional card acceptance and ATM management agreements with banks;
|
|
|
•
|
our ability to obtain required licenses in markets we intend to enter or expand services;
|
|
|
•
|
our ability to enter into sponsorship agreements;
|
|
|
•
|
our ability to enter into and renew ATM network cash supply agreements with financial institutions;
|
|
|
•
|
the availability of financing for expansion;
|
|
|
•
|
our ability efficiently to install ATMs contracted under newly awarded outsourcing agreements;
|
|
|
•
|
our ability to renew existing contracts at profitable rates;
|
|
|
•
|
our ability to maintain pricing at current levels or mitigate price reductions in certain markets;
|
|
|
•
|
the impact of changes in rules imposed by international card organizations such as Visa and Mastercard on card transactions on ATMs, including reductions in ATM interchange fees, restrictions on the ability to apply direct access fees, the ability to offer DCC transactions on ATMs, and increases in fees charged on DCC transactions;
|
|
|
•
|
the impact of changes in laws and regulations affecting the profitability of our services, including regulation of DCC transactions by the E.U.;
|
|
|
•
|
our ability to expand and sign additional customers for the cross-border merchant processing and acquiring business; and
|
|
|
•
|
the continued development and implementation of our software products and their ability to interact with other leading products.
|
We consistently evaluate and add prospects to our list of potential ATM outsource customers. However, we cannot predict the increase or decrease in the number of ATMs we manage under outsourcing agreements because this depends largely on the willingness of banks to enter into outsourcing contracts with us. Due to the thorough internal reviews and extensive negotiations conducted by existing and prospective banking customers in choosing outsource vendors, the process of entering into or renewing outsourcing agreements can take several months. The process is further complicated by the legal and regulatory considerations of local countries. These agreements tend to cover large numbers of ATMs, so significant increases and decreases in our pool of managed ATMs could result from the acquisition or termination of one or more of these management contracts. Therefore, the timing of both current and new contract revenues is uncertain and unpredictable.
Software products are an integral part of our product lines, and our investment in research, development, delivery and customer support reflects our ongoing commitment to an expanded customer base.
epay Segment
— The continued expansion and development of the epay Segment business will depend on various factors, including, but not necessarily limited to, the following:
|
|
•
|
our ability to maintain and renew existing agreements, and to negotiate new agreements in additional markets with mobile operators, digital content providers, agent financial institutions and retailers;
|
|
|
•
|
our ability to use existing expertise and relationships with mobile operators, digital content providers and retailers to our advantage;
|
|
|
•
|
the continued use of third-party providers such as ourselves to supply electronic processing solutions for existing and additional digital content;
|
|
|
•
|
the development of mobile phone networks in the markets in which we do business and the increase in the number of mobile phone users;
|
|
|
•
|
the overall pace of growth in the prepaid mobile phone and digital content market, including consumer shifts between prepaid and postpaid services and moves by mobile operators to sell prepaid mobile airtime directly to consumers;
|
|
|
•
|
the effect of competition among mobile operators on the cost of mobile data and airtime which results in fewer or less frequent purchases of prepaid mobile airtime by consumers;
|
|
|
•
|
our market share of the retail distribution capacity;
|
|
|
•
|
the development of new technologies that may compete with POS distribution of prepaid mobile airtime and other products;
|
|
|
•
|
the level of commission that is paid to the various intermediaries in the electronic payment distribution chain;
|
|
|
•
|
our ability to fully recover monies collected by retailers;
|
|
|
•
|
our ability to add new and differentiated products in addition to those offered by mobile operators;
|
|
|
•
|
our ability to develop and effectively market additional value added services;
|
|
|
•
|
our ability to take advantage of cross-selling opportunities with our EFT Processing and Money Transfer Segments, including providing money transfer services through our distribution network; and
|
|
|
•
|
the availability of financing for further expansion.
|
In all of the markets in which we operate, we are experiencing significant competition which will impact the rate at which we may be able to grow organically. Competition among prepaid mobile airtime and digital content distributors results in the increase of commissions paid to retailers and increases in retailer attrition rates. To grow, we must capture market share from other prepaid mobile airtime and digital content distributors, offer a superior product offering and demonstrate the value of a global network. In certain markets in which we operate, many of the factors that may contribute to rapid growth (growth in digital media products, expansion of our network of retailers and access to products of mobile operators and other digital media providers) remain present.
Money Transfer Segment —
The continued expansion and development of our Money Transfer Segment business will depend on various factors, including, but not necessarily limited to, the following:
|
|
•
|
the continued growth in worker migration and employment opportunities;
|
|
|
•
|
the mitigation of economic and political factors that have had an adverse impact on money transfer volumes, such as changes in the economic sectors in which immigrants work and the developments in immigration policies in the countries in which we operate;
|
|
|
•
|
the continuation of the trend of increased use of electronic money transfer and bill payment services among high-income individuals, immigrant workers and the unbanked population in our markets;
|
|
|
•
|
our ability to maintain our agent and correspondent networks;
|
|
|
•
|
our ability to offer our products and services or develop new products and services at competitive prices to drive increases in transactions;
|
|
|
•
|
the development of new technologies that may compete with our money transfer network, and our ability to acquire, develop and implement new technologies;
|
|
|
•
|
the expansion of our services in markets where we operate and in new markets;
|
|
|
•
|
our ability to strengthen our brands;
|
|
|
•
|
our ability to fund working capital requirements;
|
|
|
•
|
our ability to recover from agents funds collected from customers and our ability to recover advances made to correspondents;
|
|
|
•
|
our ability to maintain compliance with the regulatory requirements of the jurisdictions in which we operate or plan to operate;
|
|
|
•
|
our ability to take advantage of cross-selling opportunities with the epay Segment, including providing prepaid services through our stores and agents worldwide;
|
|
|
•
|
our ability to leverage our banking and merchant/retailer relationships to expand money transfer corridors to Europe, Asia and Africa, including high growth corridors to Central and Eastern European countries;
|
|
|
•
|
the availability of financing for further expansion;
|
|
|
•
|
the ability to maintain banking relationships necessary for us to service our customers;
|
|
|
•
|
our ability to successfully expand our agent network in Europe using our payment institution licenses under the Second Payment Services Directive ("PSD2") and using our various licenses in the United States; and
|
|
|
•
|
our ability to provide additional value-added products under the xe brand.
|
For all segments, our continued expansion may involve additional acquisitions that could divert our resources and management time and require integration of new assets with our existing networks and services. Our ability to effectively manage our growth has required us to expand our operating systems and employee base, particularly at the management level, which has
added incremental operating costs. An inability to continue to effectively manage expansion could have a material adverse effect on our business, growth, financial condition or results of operations. Inadequate technology and resources would impair our ability to maintain current processing technology and efficiencies, as well as deliver new and innovative services to compete in the marketplace.
SEGMENT SUMMARY RESULTS OF OPERATIONS
Revenues and operating income by segment for the
three and six
months ended
June 30, 2019
and
2018
are summarized in the tables below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues for the Three Months Ended June 30,
|
|
Year-over-Year Change
|
|
Revenues for the Six Months Ended June 30,
|
|
Year-over-Year Change
|
(dollar amounts in thousands)
|
|
2019
|
|
2018
|
|
Increase
(Decrease)
Amount
|
|
Increase
Percent
|
|
2019
|
|
2018
|
|
Increase
(Decrease) Amount
|
|
Increase
Percent
|
EFT Processing
|
|
$
|
231,946
|
|
|
$
|
194,893
|
|
|
$
|
37,053
|
|
|
19
|
%
|
|
$
|
377,649
|
|
|
$
|
330,597
|
|
|
$
|
47,052
|
|
|
14
|
%
|
epay
|
|
184,160
|
|
|
166,463
|
|
|
17,697
|
|
|
11
|
%
|
|
360,274
|
|
|
343,308
|
|
|
16,966
|
|
|
5
|
%
|
Money Transfer
|
|
276,783
|
|
|
261,816
|
|
|
14,967
|
|
|
6
|
%
|
|
533,364
|
|
|
500,652
|
|
|
32,712
|
|
|
7
|
%
|
Total
|
|
692,889
|
|
|
623,172
|
|
|
69,717
|
|
|
11
|
%
|
|
1,271,287
|
|
|
1,174,557
|
|
|
96,730
|
|
|
8
|
%
|
Corporate services, eliminations and other
|
|
(1,022
|
)
|
|
(948
|
)
|
|
(74
|
)
|
|
8
|
%
|
|
(1,911
|
)
|
|
(1,818
|
)
|
|
(93
|
)
|
|
5
|
%
|
Total
|
|
$
|
691,867
|
|
|
$
|
622,224
|
|
|
$
|
69,643
|
|
|
11
|
%
|
|
$
|
1,269,376
|
|
|
$
|
1,172,739
|
|
|
$
|
96,637
|
|
|
8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income (Expense) for the Three Months Ended June 30,
|
|
Year-over-Year Change
|
|
Operating Income (Expense) for the Six Months Ended June 30,
|
|
Year-over-Year Change
|
(dollar amounts in thousands)
|
|
2019
|
|
2018
|
|
Increase (Decrease)
Amount
|
|
Increase
Percent
|
|
2019
|
|
2018
|
|
Increase
Amount
|
|
Increase
(Decrease) Percent
|
EFT Processing
|
|
$
|
76,516
|
|
|
$
|
52,922
|
|
|
$
|
23,594
|
|
|
45
|
%
|
|
$
|
93,284
|
|
|
$
|
64,469
|
|
|
$
|
28,815
|
|
|
45
|
%
|
epay
|
|
17,555
|
|
|
16,329
|
|
|
1,226
|
|
|
8
|
%
|
|
35,554
|
|
|
33,224
|
|
|
2,330
|
|
|
7
|
%
|
Money Transfer
|
|
35,346
|
|
|
32,612
|
|
|
2,734
|
|
|
8
|
%
|
|
66,120
|
|
|
59,066
|
|
|
7,054
|
|
|
12
|
%
|
Total
|
|
129,417
|
|
|
101,863
|
|
|
27,554
|
|
|
27
|
%
|
|
194,958
|
|
|
156,759
|
|
|
38,199
|
|
|
24
|
%
|
Corporate services, eliminations and other
|
|
(11,520
|
)
|
|
(11,494
|
)
|
|
(26
|
)
|
|
—
|
%
|
|
(20,967
|
)
|
|
(20,918
|
)
|
|
(49
|
)
|
|
—
|
%
|
Total
|
|
$
|
117,897
|
|
|
$
|
90,369
|
|
|
$
|
27,528
|
|
|
30
|
%
|
|
$
|
173,991
|
|
|
$
|
135,841
|
|
|
$
|
38,150
|
|
|
28
|
%
|
Impact of changes in foreign currency exchange rates
Our revenues and local expenses are recorded in the functional currencies of our operating entities and translated into U.S. dollars for financial reporting purposes; therefore, amounts we earn outside the U.S. are negatively impacted by a stronger U.S. dollar and positively impacted by a weaker U.S. dollar. Considering the results by country and the associated functional currency, we estimate that our reported consolidated operating income for the
second
quarter and
first half
of
2019
were each approximately 5% less, due to the changes in foreign currency exchange rates when compared to the same periods of 2018.
To provide further perspective on the impact of foreign currency exchange rates, the following table shows the changes in values relative to the U.S. dollar of the currencies of the countries in which we have our most significant operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Translation Rate
Three Months Ended June 30,
|
|
Decrease Percent
|
|
Average Translation Rate
Six Months Ended June 30,
|
|
Decrease Percent
|
Currency (dollars per foreign currency)
|
|
2019
|
|
2018
|
|
|
2019
|
|
2018
|
|
Australian dollar
|
|
$
|
0.7002
|
|
|
$
|
0.7567
|
|
|
(7
|
)%
|
|
$
|
0.7064
|
|
|
$
|
0.7713
|
|
|
(8
|
)%
|
British pound
|
|
$
|
1.2851
|
|
|
$
|
1.3602
|
|
|
(6
|
)%
|
|
$
|
1.2938
|
|
|
$
|
1.3760
|
|
|
(6
|
)%
|
euro
|
|
$
|
1.1236
|
|
|
$
|
1.1919
|
|
|
(6
|
)%
|
|
$
|
1.1295
|
|
|
$
|
1.2104
|
|
|
(7
|
)%
|
Hungarian forint
|
|
$
|
0.0035
|
|
|
$
|
0.0038
|
|
|
(8
|
)%
|
|
$
|
0.0035
|
|
|
$
|
0.0039
|
|
|
(10
|
)%
|
Indian rupee
|
|
$
|
0.0144
|
|
|
$
|
0.0149
|
|
|
(3
|
)%
|
|
$
|
0.0143
|
|
|
$
|
0.0152
|
|
|
(6
|
)%
|
Malaysian ringgit
|
|
$
|
0.2412
|
|
|
$
|
0.2534
|
|
|
(5
|
)%
|
|
$
|
0.2428
|
|
|
$
|
0.2542
|
|
|
(4
|
)%
|
New Zealand dollar
|
|
$
|
0.6625
|
|
|
$
|
0.7042
|
|
|
(6
|
)%
|
|
$
|
0.6719
|
|
|
$
|
0.7156
|
|
|
(6
|
)%
|
Polish zloty
|
|
$
|
0.2626
|
|
|
$
|
0.2799
|
|
|
(6
|
)%
|
|
$
|
0.2633
|
|
|
$
|
0.2870
|
|
|
(8
|
)%
|
COMPARISON OF OPERATING RESULTS FOR THE
THREE AND SIX
MONTHS ENDED
JUNE 30, 2019
AND
2018
EFT PROCESSING SEGMENT
The following table presents the results of operations for the
three and six
months ended
June 30, 2019
and
2018
for our EFT Processing Segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
Year-over-Year Change
|
|
Six Months Ended
June 30,
|
|
Year-over-Year Change
|
(dollar amounts in thousands)
|
|
2019
|
|
2018
|
|
Increase Amount
|
|
Increase Percent
|
|
2019
|
|
2018
|
|
Increase Amount
|
|
Increase Percent
|
Total revenues
|
|
$
|
231,946
|
|
|
$
|
194,893
|
|
|
$
|
37,053
|
|
|
19
|
%
|
|
$
|
377,649
|
|
|
$
|
330,597
|
|
|
$
|
47,052
|
|
|
14
|
%
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct operating costs
|
|
105,568
|
|
|
96,326
|
|
|
9,242
|
|
|
10
|
%
|
|
189,344
|
|
|
178,163
|
|
|
11,181
|
|
|
6
|
%
|
Salaries and benefits
|
|
21,339
|
|
|
19,046
|
|
|
2,293
|
|
|
12
|
%
|
|
40,770
|
|
|
36,051
|
|
|
4,719
|
|
|
13
|
%
|
Selling, general and administrative
|
|
10,745
|
|
|
10,216
|
|
|
529
|
|
|
5
|
%
|
|
19,831
|
|
|
19,331
|
|
|
500
|
|
|
3
|
%
|
Depreciation and amortization
|
|
17,778
|
|
|
16,383
|
|
|
1,395
|
|
|
9
|
%
|
|
34,420
|
|
|
32,583
|
|
|
1,837
|
|
|
6
|
%
|
Total operating expenses
|
|
155,430
|
|
|
141,971
|
|
|
13,459
|
|
|
9
|
%
|
|
284,365
|
|
|
266,128
|
|
|
18,237
|
|
|
7
|
%
|
Operating income
|
|
$
|
76,516
|
|
|
$
|
52,922
|
|
|
$
|
23,594
|
|
|
45
|
%
|
|
$
|
93,284
|
|
|
$
|
64,469
|
|
|
$
|
28,815
|
|
|
45
|
%
|
Transactions processed (millions)
|
|
752
|
|
|
677
|
|
|
75
|
|
|
11
|
%
|
|
1,444
|
|
|
1,299
|
|
|
145
|
|
|
11
|
%
|
ATMs as of June 30,
|
|
46,636
|
|
|
41,205
|
|
|
5,431
|
|
|
13
|
%
|
|
46,636
|
|
|
41,205
|
|
|
5,431
|
|
|
13
|
%
|
Average ATMs
|
|
45,717
|
|
|
40,513
|
|
|
5,204
|
|
|
13
|
%
|
|
43,317
|
|
|
39,082
|
|
|
4,235
|
|
|
11
|
%
|
Revenues
EFT Processing Segment total revenues for the
three and six
months ended
June 30,
2019
were
$231.9 million
and
$377.6 million
, respectively, an increase of
$37.1 million
or
19%
and
$47.1 million
or
14%
as compared to the same periods in
2018
, respectively. The increases in total revenues for the
three and six
months ended
June 30,
2019
were primarily due to an increase in the number of ATMs under management in Europe and Asia Pacific. Specifically, the increase in the number of ATMs contributed to increases in the number of transactions processed. The transaction growth includes an increase in value-added transactions on the ATMs and point-of-sale terminals, primarily attributable to increases in DCC transactions due to Visa's rule change to allow our ATMs to provide DCC beginning
second
quarter of
2019
, domestic and international surcharge, and foreign currency dispensing. Foreign currency exchange rate movements decreased total revenues by approximately
$13.1 million
and
$24.8 million
for the
three and six
months ended
June 30,
2019
, respectively, as compared to the same periods in
2018
, respectively.
Average monthly revenues per ATM were
$1,691
and
$1,453
for the
three and six
months ended
June 30,
2019
, respectively, compared to
$1,604
and
$1,410
for the
three and six
months ended
June 30,
2018
, respectively. Revenues per transaction were
$0.31
for the
second
quarter of
2019
and
$0.26
for the
first half
of
2019
, compared to
$0.29
for the
second
quarter of
2018
and
$0.25
for the
first half
of
2018
. The increases in average monthly revenues per ATM for the
three and six
months ended
June 30,
2019
were primarily the result of an increase in value-added transactions on the ATMs and point-of-sale terminals, including increases in DCC transactions due to Visa's rule change to allow our ATMs to provide DCC beginning
second
quarter of
2019
, domestic and international surcharge, and foreign currency dispensing.
Direct operating costs
EFT Processing Segment direct operating costs were
$105.6 million
and
$189.3 million
for the
three and six
months ended
June 30,
2019
, respectively, an increase of
$9.2 million
or
10%
and
$11.2 million
or
6%
as compared to the same periods in
2018
, respectively. Direct operating costs in the EFT Processing Segment consist primarily of site rental fees, cash delivery costs, cash supply costs, maintenance, insurance, telecommunications, data center operations-related personnel, as well as the processing centers’ facility-related costs and other processing center-related expenses and commissions paid to retail merchants, banks and card processors involved with POS DCC transactions. The increases in direct operating costs for the
three and six
months ended
June 30,
2019
were primarily due to an increase in the number of ATMs under management, particularly our independent ATM network, partly offset by the impact of the strengthening of the U.S. dollar against key foreign currencies.
Gross profit
Gross profit, which is calculated as revenues less direct operating costs, was
$126.4 million
and
$188.3 million
for the
three and six
months ended
June 30,
2019
, respectively, compared to
$98.6 million
and
$152.4 million
for the
three and six
months ended
June 30,
2018
, respectively. The increases in gross profit were primarily due to the growth in revenues from increases in ATMs under management, DCC transactions, domestic and international surcharge, and foreign currency dispensing. The net impact of the U.S. dollar strengthening against key foreign currencies partly offset the increase in gross profit for the
three and six
months ended
June 30,
2019
. Gross profit as a percentage of revenues (“gross margin”) was
54.5%
and
49.9%
for the
three and six
months ended
June 30,
2019
, respectively, as compared to
50.6%
and
46.1%
for the
three and six
months ended
June 30,
2018
, respectively. For the
three and six
months ended
June 30,
2019
, the increase in gross margin was attributable to increases in DCC transactions due to Visa's rule change to allow our ATMs to provide DCC beginning
second
quarter of
2019
, domestic and international surcharge, foreign currency dispensing, and also a higher volume of sales of POS devices in Greece in the
second
quarter of
2018
on which we earned a lower margin which did not occur in the current period.
Salaries and benefits
Salaries and benefits expense increased
$2.3 million
or
12%
and
$4.7 million
or
13%
for the
three and six
months ended
June 30,
2019
, respectively, compared to the same periods in
2018
, respectively. As a percentage of revenues, these costs increased to
9.2%
and
10.8%
for the
second
quarter and
first half
of
2019
, respectively, compared to
9.8%
and
10.9%
and for the
second
quarter of
2018
and
first half
of
2018
, respectively. The increases were primarily due to additional headcount to support an increase in the number of ATMs and POS devices under management.
Selling, general and administrative
Selling, general and administrative expenses for the
three and six
months ended
June 30,
2019
were
$10.7 million
and
$19.8 million
, respectively, an increase of
$0.5 million
for both the
three and six
months ended
June 30,
2018
. The increases in selling, general and administrative expenses were primarily due to an increase in costs to support the growth in the business partly offset by the strengthening of the U.S. dollar against key foreign currencies. As a percentage of revenues, selling, general and administrative expenses were
4.6%
and
5.3%
for the
three and six
months ended
June 30,
2019
, respectively, compared to
5.2%
and
5.8%
for the
three and six
months ended
June 30,
2018
, respectively. The decreases in selling, general and administrative expenses as a percentage of revenues were primarily attributable to the increases in the number of DCC transactions processed due to Visa's rule change to allow our ATMs to provide DCC beginning
second
quarter of
2019
, domestic and international surcharge, and foreign currency dispensing, which did not require similar increases in support costs.
Depreciation and amortization
Depreciation and amortization expense increased
$1.4 million
and
$1.8 million
for the
three and six
months ended
June 30,
2019
, respectively, compared to the same periods in
2018
, respectively. The increases were primarily attributable to the deployment of additional ATMs under management and software assets. As a percentage of revenues, depreciation and amortization expense was
7.7%
and
9.1%
for the
second
quarter and
first half
of
2019
, respectively, as compared to
8.4%
and
9.9%
for the same periods of
2018
. The decreases in depreciation and amortization expenses as a percentage of revenues were primarily attributable to the increases in the number of DCC transactions processed due to Visa's rule change to allow our ATMs to provide DCC beginning
second
quarter of
2019
, domestic and international surcharge, and foreign currency dispensing, which did not require similar increases in fixed assets.
Operating income
EFT Processing Segment operating income for the
three and six
months ended
June 30,
2019
was
$76.5 million
and
$93.3 million
, respectively, an increase of
$23.6 million
or
45%
and
$28.8 million
or
45%
as compared to the same periods in
2018
, respectively. EFT Processing Segment operating income for the
three and six
months ended
June 30,
2019
increased primarily due to increases in the number of DCC transactions due to Visa's rule change to allow our ATMs to provide DCC beginning
second
quarter of
2019
, domestic and international surcharge, and foreign currency dispensing as a result of the increased number of ATMs, partly offset by the impact of the strengthening of the U.S. dollar against key foreign currencies.
Operating income as a percentage of revenues (“operating margin”) was
33.0%
and
24.7%
for the
second
quarter and
first half
of
2019
, respectively, compared to
27.2%
and
19.5%
for the same periods of
2018
. The increase in operating margin was primarily due to higher revenues partially offset by higher operating expenses incurred to support the increased revenues and additional ATMs under management. Operating income per transaction was
$0.10
and
$0.06
for the
second
quarter and
first half
of
2019
as compared to
$0.08
and
$0.05
for the same periods of
2018
.
EPAY SEGMENT
The following table presents the results of operations for the
three and six
months ended
June 30, 2019
and
2018
for our epay Segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
Year-over-Year Change
|
|
Six Months Ended
June 30,
|
|
Year-over-Year Change
|
(dollar amounts in thousands)
|
|
2019
|
|
2018
|
|
Increase (Decrease) Amount
|
|
Increase (Decrease) Percent
|
|
2019
|
|
2018
|
|
Increase
(Decrease)Amount
|
|
Increase
(Decrease)Percent
|
Total revenues
|
|
$
|
184,160
|
|
|
$
|
166,463
|
|
|
$
|
17,697
|
|
|
11
|
%
|
|
$
|
360,274
|
|
|
$
|
343,308
|
|
|
$
|
16,966
|
|
|
5
|
%
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct operating costs
|
|
140,427
|
|
|
125,423
|
|
|
15,004
|
|
|
12
|
%
|
|
273,952
|
|
|
260,345
|
|
|
13,607
|
|
|
5
|
%
|
Salaries and benefits
|
|
14,998
|
|
|
14,327
|
|
|
671
|
|
|
5
|
%
|
|
29,751
|
|
|
28,744
|
|
|
1,007
|
|
|
4
|
%
|
Selling, general and administrative
|
|
9,424
|
|
|
8,490
|
|
|
934
|
|
|
11
|
%
|
|
17,476
|
|
|
17,223
|
|
|
253
|
|
|
1
|
%
|
Depreciation and amortization
|
|
1,756
|
|
|
1,894
|
|
|
(138
|
)
|
|
(7
|
)%
|
|
3,541
|
|
|
3,772
|
|
|
(231
|
)
|
|
(6
|
)%
|
Total operating expenses
|
|
166,605
|
|
|
150,134
|
|
|
16,471
|
|
|
11
|
%
|
|
324,720
|
|
|
310,084
|
|
|
14,636
|
|
|
5
|
%
|
Operating income
|
|
$
|
17,555
|
|
|
$
|
16,329
|
|
|
$
|
1,226
|
|
|
8
|
%
|
|
$
|
35,554
|
|
|
$
|
33,224
|
|
|
$
|
2,330
|
|
|
7
|
%
|
Transactions processed (millions)
|
|
369
|
|
|
264
|
|
|
105
|
|
|
40
|
%
|
|
707
|
|
|
522
|
|
|
185
|
|
|
35
|
%
|
Revenues
epay Segment total revenues for the
three and six
months ended
June 30,
2019
were
$184.2 million
and
$360.3 million
, respectively, an increase of
$17.7 million
and
$17.0 million
as compared to the same periods in
2018
, respectively. The increases in total revenues were primarily due to an increase in promotional digital media transactions fulfilled by our cadooz subsidiary that were recorded on a gross value basis and an increase in the number of digital media transactions processed. Foreign currency exchange rate movements decreased total revenues by approximately
$9.1 million
for the
second
quarter of
2019
and
$24.9 million
for the
first half
of
2019
as compared to the same periods in
2018
, respectively.
Revenues per transaction were
$0.50
for the
second
quarter and
$0.51
for the
first half
of
2019
compared to
$0.63
and
$0.66
for the same periods in
2018
, respectively. The decrease in revenues per transaction was primarily the result of the increase in a high volume of low-margin transactions processed in India.
Direct operating costs
epay Segment direct operating costs were
$140.4 million
and
$274.0 million
for the
three and six
months ended
June 30,
2019
, respectively, an increase of
$15.0 million
and
$13.6 million
as compared to the same periods in
2018
, respectively. Direct operating costs in our epay Segment include the commissions we pay to retail merchants for the distribution and sale of prepaid mobile airtime and other prepaid products, expenses incurred to operate POS terminals and the cost of vouchers sold and physical gifts fulfilled. The increases in direct operating costs for the
second
quarter and
first half
of
2019
were primarily due to the increases in promotional digital media transactions fulfilled by our cadooz subsidiary and commission paid to wholesalers partially offset by the impact of the U.S. dollar strengthening against key foreign currencies.
Gross profit
Gross profit was
$43.7 million
and
$86.3 million
for the
three and six
months ended
June 30,
2019
, respectively, as compared to
$41.0 million
and
$83.0 million
for the
three and six
months ended
June 30,
2018
, respectively. The increases were primarily due to the growth in digital media transactions processed, partly offset by a decrease in prepaid mobile transactions processed in certain markets and the net impact of the U.S. dollar strengthening against key foreign currencies.
During the
three and six
months ended
June 30,
2019
, the gross margin was
23.7%
and
24.0%
for the
three and six
months ended
June 30,
2019
, respectively, as compared to
24.7%
and
24.2%
for the same periods in
2018
, respectively. The decreases in the gross margin for the
three and six
months ended
June 30,
2019
were driven by the promotional digital media transactions fulfilled by our cadooz subsidiary that was recorded on a gross value basis.
Salaries and benefits
Salaries and benefits expense increased
$0.7 million
or
5%
and
$1.0 million
or
4%
for the
three and six
months ended
June 30,
2019
, respectively, compared to the same periods in
2018
, respectively. The increases were mainly driven by increased headcount to support growth in the segment. As a percentage of revenues, salaries and benefits were
8.1%
and
8.3%
for the
three and six
months ended
June 30,
2019
, respectively, which were generally consistent with
8.6%
and
8.4%
for the same periods in
2018
, respectively.
Selling, general and administrative
Selling, general and administrative expenses were
$9.4 million
and
$17.5 million
for the
three and six
months ended
June 30,
2019
, respectively, an increase of
11%
and
1%
as compared to the same periods in
2018
, respectively. As a percentage of revenues, selling, general and administrative expenses were
5.1%
and
4.9%
for the
three and six
months ended
June 30,
2019
compared to
5.1%
and
5.0%
for the same periods in
2018
, respectively.
Depreciation and amortization
Depreciation and amortization expense primarily represents depreciation of POS terminals we place in retail stores and the amortization of acquired intangible assets. Depreciation and amortization expense was
$1.8 million
and
$3.5 million
for the
three and six
months ended
June 30,
2019
, respectively, a decrease of
7%
and
6%
as compared to the same periods in
2018
, respectively. The decreases were primarily due to certain intangible assets becoming fully amortized in 2019. As a percentage of revenues, depreciation and amortization expense was
1.0%
for both the
three and six
months ended
June 30,
2019
as compared to
1.1%
for both the
three and six
months ended
June 30,
2018
.
Operating income
epay Segment operating income for the
three and six
months ended
June 30,
2019
was
$17.6 million
and
$35.6 million
, respectively, an increase of
$1.2 million
and
$2.3 million
as compared to the same periods in
2018
, respectively. Operating income for the
three and six
months ended
June 30,
2019
improved as a result of the increase in the portion of higher-margin digital media transactions.
Operating margin for the
three and six
months ended
June 30,
2019
was
9.5%
and
9.9%
, respectively, as compared to the
9.8%
and
9.7%
for the same periods in
2018
, respectively. The decrease in the
second
quarter of
2019
was primarily due to the promotional digital media transactions fulfilled by our cadooz subsidiary. The increase in the
first half
of
2019
was primarily driven by an increase in the percentage of revenues from digital media products which earn a higher margin than mobile transactions. Operating income per transaction decreased to
$0.05
for both the
three and six
months ended
June 30,
2019
, respectively, from
$0.06
for both the same periods in
2018
, respectively. The decreases in the
three and six
months ended
June 30,
2019
were primarily due to the increase in high volume, low margin transactions processed in India.
MONEY TRANSFER SEGMENT
The following table presents the results of operations for the
three and six
months ended
June 30, 2019
and
2018
for the Money Transfer Segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
Year-over-Year Change
|
|
Six Months Ended
June 30,
|
|
Year-over-Year Change
|
(dollar amounts in thousands)
|
|
2019
|
|
2018
|
|
Increase Amount
|
|
Increase Percent
|
|
2019
|
|
2018
|
|
Increase
(Decrease)Amount
|
|
Increase Percent
|
Total revenues
|
|
$
|
276,783
|
|
|
$
|
261,816
|
|
|
$
|
14,967
|
|
|
6
|
%
|
|
$
|
533,364
|
|
|
$
|
500,652
|
|
|
$
|
32,712
|
|
|
7
|
%
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct operating costs
|
|
148,834
|
|
|
140,707
|
|
|
8,127
|
|
|
6
|
%
|
|
286,238
|
|
|
268,138
|
|
|
18,100
|
|
|
7
|
%
|
Salaries and benefits
|
|
52,713
|
|
|
49,118
|
|
|
3,595
|
|
|
7
|
%
|
|
103,869
|
|
|
96,475
|
|
|
7,394
|
|
|
8
|
%
|
Selling, general and administrative
|
|
31,731
|
|
|
31,426
|
|
|
305
|
|
|
1
|
%
|
|
60,840
|
|
|
61,125
|
|
|
(285
|
)
|
|
—
|
%
|
Depreciation and amortization
|
|
8,159
|
|
|
7,953
|
|
|
206
|
|
|
3
|
%
|
|
16,297
|
|
|
15,848
|
|
|
449
|
|
|
3
|
%
|
Total operating expenses
|
|
241,437
|
|
|
229,204
|
|
|
12,233
|
|
|
5
|
%
|
|
467,244
|
|
|
441,586
|
|
|
25,658
|
|
|
6
|
%
|
Operating income
|
|
$
|
35,346
|
|
|
$
|
32,612
|
|
|
$
|
2,734
|
|
|
8
|
%
|
|
$
|
66,120
|
|
|
$
|
59,066
|
|
|
$
|
7,054
|
|
|
12
|
%
|
Transactions processed (millions)
|
|
28.9
|
|
|
26.9
|
|
|
2.0
|
|
|
7
|
%
|
|
55.5
|
|
|
51.2
|
|
|
4.3
|
|
|
8
|
%
|
Revenues
Money Transfer Segment total revenues for the
three and six
months ended
June 30,
2019
were
$276.8 million
and
$533.4 million
, respectively, an increase of
$15.0 million
or
6%
and
$32.7 million
or
7%
as compared to the same periods in
2018
. The increases in total revenues for the
three and six
months ended
June 30,
2019
were primarily due to an increase in the number of money transfers processed, driven by growth in the foreign agent and correspondent payout networks. Foreign currency exchange rate movements decreased total revenues by approximately
$7.9 million
for the
second
quarter of
2019
and
$17.1 million
for the
first half
of
2019
as compared to the same periods in
2018
.
Revenues per transaction decreased to
$9.58
and
$9.61
for the
second
quarter and
first half
of
2019
, respectively, from
$9.73
and
$9.78
for the same periods in
2018
. The decreases were primarily due to the impact of the U.S. dollar strengthening against key foreign currencies.
Direct operating costs
Money Transfer Segment direct operating costs were
$148.8 million
and
$286.2 million
for the
three and six
months ended
June 30,
2019
, respectively, an increase of
$8.1 million
or
6%
and
$18.1 million
or
7%
as compared to the same periods in
2018
. Direct operating costs in the Money Transfer Segment primarily consist of commissions paid to agents who originate money transfers on our behalf and correspondent agents who disburse funds to the customers’ destination beneficiaries, together with less significant costs, such as bank depository fees. The increases in direct operating costs for the
three and six
months of
2019
were primarily due to growth in the number of money transfer transactions processed in foreign markets.
Gross profit
Gross profit was
$127.9 million
and
$247.1 million
for the
three and six
months ended
June 30,
2019
, respectively, as compared to
$121.1 million
and
$232.5 million
for the
three and six
months ended
June 30,
2018
, respectively. The increases in gross profit were primarily due to growth in the number of money transfer transactions processed in foreign markets.
During the
three and six
months ended
June 30,
2019
, gross margin remained flat at
46.2%
and
46.3%
, respectively, as compared to the same periods in the
2018
.
Salaries and benefits
Salaries and benefits expense increased
$3.6 million
or
7%
and
$7.4 million
or
8%
for the
three and six
months ended
June 30,
2019
, respectively, as compared to the same periods in
2018
. The increases in salaries and benefits were primarily due to the expansion of our operations in the U.S. and foreign markets. As a percentage of revenues, salaries and benefits were essentially flat at
19.0%
and
19.5%
for the
three and six
months ended
June 30,
2019
, respectively, as compared to
18.8%
and
19.3%
for the same periods in
2018
.
Selling, general, and administrative
Selling, general and administrative expenses for the
three and six
months ended
June 30,
2019
were
$31.7 million
and
$60.8 million
, respectively, an increase of
$0.3 million
or
1%
for the
second
quarter of
2019
, and were essentially consistent for the
first half
of
2019
as compared to the same periods of
2018
. The increase for the
second
quarter of
2019
was primarily due to expenses incurred to support the growth of our money transfer services in both the U.S. and foreign markets largely offset by the impact of the U.S. dollar strengthening against key foreign currencies.
As a percentage of revenues, selling, general and administrative expenses were
11.5%
and
11.4%
for the
three and six
months ended
June 30,
2019
, respectively, as compared to
12.0%
and
12.2%
for the same periods in
2018
. The decreases were primarily due to the increase in the number of money transfers processed, which did not require similar increases in support costs.
Depreciation and amortization
Depreciation and amortization primarily represents amortization of acquired intangible assets and depreciation of money transfer terminals, computers and software, leasehold improvements and office equipment. Depreciation and amortization expense increased
$0.2 million
or
3%
and
$0.4 million
or
3%
for the
three and six
months ended
June 30,
2019
, respectively, as compared to the same periods in
2018
, largely due to the increased capital additions as a result of business growth.
As a percentage of revenues, depreciation and amortization expense was
2.9%
for the
second
quarter of
2019
and
3.1%
for the
first half
of
2019
, which was essentially unchanged compared to
3.0%
and
3.2%
for the same periods of
2018
.
Operating income
Money Transfer Segment operating income for the
three and six
months ended
June 30,
2019
was
$35.3 million
and
$66.1 million
, respectively, an increase of
$2.7 million
or
8%
and
$7.1 million
or
12%
as compared to the same periods of
2018
. Operating income for the
three and six
months ended
June 30,
2019
increased primarily due to the growth in the number of money transfers processed partly offset by the additional salaries and benefits costs incurred.
As a percentage of revenues, operating margin was
12.8%
and
12.4%
for the
three and six
months ended
June 30,
2019
, respectively, as compared to
12.5%
and
11.8%
for the same periods in
2018
. Operating income per transaction increased to
$1.22
and
$1.19
for the
three and six
months ended
June 30,
2019
, respectively, from
$1.21
and
$1.15
for the same periods in
2018
. The increases in operating margin and operating income per transaction were primarily due to the growth in the number of money transfers processed which did not require similar increases in support costs.
CORPORATE SERVICES
The following table presents the operating expenses for the
three and six
months ended
June 30, 2019
and
2018
for Corporate Services:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
Year-over-Year Change
|
|
Six Months Ended
June 30,
|
|
Year-over-Year Change
|
(dollar amounts in thousands)
|
|
2019
|
|
2018
|
|
Increase (Decrease) Amount
|
|
Increase (Decrease) Percent
|
|
2019
|
|
2018
|
|
Increase (Decrease) Amount
|
|
Increase (Decrease) Percent
|
Salaries and benefits
|
|
$
|
9,500
|
|
|
$
|
9,232
|
|
|
$
|
268
|
|
|
3
|
%
|
|
$
|
16,955
|
|
|
$
|
16,159
|
|
|
$
|
796
|
|
|
5
|
%
|
Selling, general and administrative
|
|
1,946
|
|
|
2,229
|
|
|
(283
|
)
|
|
(13
|
)%
|
|
3,863
|
|
|
4,697
|
|
|
(834
|
)
|
|
(18
|
)%
|
Depreciation and amortization
|
|
74
|
|
|
33
|
|
|
41
|
|
|
124
|
%
|
|
149
|
|
|
62
|
|
|
87
|
|
|
140
|
%
|
Total operating expenses
|
|
$
|
11,520
|
|
|
$
|
11,494
|
|
|
$
|
26
|
|
|
—
|
%
|
|
$
|
20,967
|
|
|
$
|
20,918
|
|
|
$
|
49
|
|
|
—
|
%
|
Corporate operating expenses
Overall, operating expenses for Corporate Services were
$11.5 million
and
$21.0 million
for the
three and six
months ended
June 30,
2019
, which were consistent when compared to the same periods in
2018
. The increases were primarily attributable to an increase in bonus expense due to our improved operating results compared to targets.
OTHER INCOME (EXPENSE), NET
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
Year-over-Year Change
|
|
Six Months Ended
June 30,
|
|
Year-over-Year Change
|
(dollar amounts in thousands)
|
|
2019
|
|
2018
|
|
Increase (Decrease) Amount
|
|
Increase (Decrease) Percent
|
|
2019
|
|
2018
|
|
Increase (Decrease) Amount
|
|
Increase (Decrease) Percent
|
Interest income
|
|
$
|
513
|
|
|
$
|
416
|
|
|
$
|
97
|
|
|
23
|
%
|
|
856
|
|
|
712
|
|
|
144
|
|
|
20
|
%
|
Interest expense
|
|
(10,029
|
)
|
|
(10,061
|
)
|
|
32
|
|
|
—
|
%
|
|
(18,228
|
)
|
|
(17,667
|
)
|
|
(561
|
)
|
|
3
|
%
|
Loss on early extinguishment of debt
|
|
(8,903
|
)
|
|
—
|
|
|
(8,903
|
)
|
|
n/m
|
|
|
(9,831
|
)
|
|
—
|
|
|
(9,831
|
)
|
|
n/m
|
|
Foreign currency exchange (loss) gain, net
|
|
(121
|
)
|
|
(20,690
|
)
|
|
20,569
|
|
|
n/m
|
|
|
3,087
|
|
|
(18,755
|
)
|
|
21,842
|
|
|
n/m
|
|
Loss from unconsolidated affiliates
|
|
—
|
|
|
—
|
|
|
—
|
|
|
n/m
|
|
|
—
|
|
|
(117
|
)
|
|
117
|
|
|
n/m
|
|
Other (loss) gains
|
|
(29
|
)
|
|
29
|
|
|
(58
|
)
|
|
n/m
|
|
|
(4
|
)
|
|
60
|
|
|
(64
|
)
|
|
n/m
|
|
Other expense, net
|
|
$
|
(18,569
|
)
|
|
$
|
(30,306
|
)
|
|
$
|
11,737
|
|
|
n/m
|
|
|
$
|
(24,120
|
)
|
|
$
|
(35,767
|
)
|
|
$
|
11,647
|
|
|
n/m
|
|
________________
n/m — Not meaningful
Interest income
The increase in interest income for the
three and six
months ended
June 30,
2019
when compared to the same periods in
2018
was due to the interest earned from the immediate proceeds we received from the issuance of Convertible Notes and the Senior Notes before they were fully utilized in the business.
Interest expense
The increase in interest expense for the
first half
of
2019
compared to the same period in
2018
was primarily related to the greater weighted average borrowings outstanding offset by lower weighted average borrowing rates.
Loss on early extinguishment of debt
The increase in loss on early extinguishment of debt for the
three and six
months ended
June 30,
2019
when compared to the same periods in
2018
was due to the retirement of the Retired Convertible Notes that would have matured in 2044 on May 28, 2019.
Foreign currency exchange (loss) gain, net
Foreign currency exchange activity includes gains and losses on certain foreign currency exchange derivative contracts and the impact of remeasurement of assets and liabilities denominated in foreign currencies. Assets and liabilities denominated in currencies other than the local currency of each of our subsidiaries give rise to foreign currency exchange gains and losses. Foreign currency exchange gains and losses that result from remeasurement of these assets and liabilities are recorded in net income. The majority of our foreign currency exchange gains or losses are due to the remeasurement of the change in USD value of our euro-denominated Senior Notes beginning
second
quarter of
2019
and intercompany loans which are not considered a long-term investment in nature and are in a currency other than the functional currency of one of the parties to the loan. For example, we make intercompany loans based in euros from our corporate division, which is composed of U.S. dollar functional currency entities, to certain European entities that use the euro as the functional currency. As the U.S. dollar strengthens against the euro, foreign currency exchange losses are recognized by our corporate entities because the number of euros to be received in settlement of the loans decreases in U.S. dollar terms. Conversely, in this example, in periods where the U.S. dollar weakens, our corporate entities will record foreign currency exchange gains.
We recorded a net foreign currency exchange loss of
$0.1 million
for the
second
quarter of
2019
and a net gain of
$3.1 million
for the
first half
of
2019
, as compared to net foreign currency exchange losses of
$20.7 million
and
$18.8 million
for the same periods in
2018
. These realized and unrealized foreign currency exchange losses and gains reflect the fluctuation in the value of the U.S. dollar against the currencies of the countries in which we operated during the respective periods.
INCOME TAX EXPENSE
The Company's effective income tax rate was
31.5%
and
31.6%
for both the three and six months ended
June 30, 2019
, respectively, as compared to
27.3%
and
30.1%
for the
three and six
months ended
June 30, 2018
, respectively. The Company's effective income tax rate for the
three and six
months ended
June 30, 2019
and
2018
was higher than the applicable statutory income tax rate of
21%
as a result of certain foreign earnings of the Company being subject to higher local statutory income tax rates and the application of the U.S. global intangible low-taxed income ("GILTI") tax provision to the Company. The GILTI provision subjects the Company's current foreign earnings to U.S. taxation which creates additional U.S. tax expense. The increase in the effective tax rate for the
first half
of
2019
compared to the same period in
2018
is due to (i) the release of unrecognized tax benefits in the first half of
2018
from the settlement or expiration of tax audit examinations and (ii) the mix of foreign earnings in higher tax rate jurisdictions.
NET LOSS ATTRIBUTABLE TO NONCONTROLLING INTERESTS
Noncontrolling interests represents the elimination of net income or loss attributable to the minority shareholders’ portion of the following consolidated subsidiaries that are not wholly owned:
|
|
|
|
|
|
Subsidiary
|
|
Percent
Owned
|
|
Segment - Country
|
Movilcarga
|
|
95%
|
|
epay - Spain
|
Euronet China
|
|
85%
|
|
EFT - China
|
Euronet Pakistan
|
|
70%
|
|
EFT - Pakistan
|
Euronet Infinitium Solutions
|
|
65%
|
|
EFT - India
|
NET INCOME ATTRIBUTABLE TO EURONET
Net income attributable to Euronet was
$68.2 million
and
$102.7 million
for the
three and six
months ended
June 30,
2019
, respectively, an increase of
$24.4 million
and
$32.6 million
as compared to the same periods in
2018
. The increase in net income for the
first half
of
2019
was primarily due to an increase in operating income of
$38.2 million
, a
$21.8 million
increase in net foreign currency exchange gain, partly offset by a
$17.2 million
increase in income tax expense, an increase in loss on early extinguishment on debt of
$9.8 million
, and an increase in interest expense of
$0.6 million
.
LIQUIDITY AND CAPITAL RESOURCES
Working capital
As of
June 30, 2019
and
December 31, 2018
, we had working capital, which is calculated as the difference between total current assets and total current liabilities, of
$1,220 million
and
$709 million
, respectively. Our ratio of current assets to current liabilities at
June 30, 2019
and
December 31, 2018
was
1.82
and
1.51
, respectively. The increase in working capital was primarily due to the addition of current portion of operating lease liabilities and ATM cash funded by the long-term debt.
We require substantial working capital to finance operations. In the Money Transfer Segment, we fund the payout of the majority of our consumer-to-consumer money transfer services before receiving the benefit of amounts collected from customers by agents. Working capital needs increase due to weekends, and domestic and international banking holidays. As a result, we may report more or less working capital for the Money Transfer Segment based solely upon the day on which the reporting period ends. The epay Segment produces positive working capital, but much of it is restricted in connection with the administration of its customer collection and vendor remittance activities. In our EFT Processing Segment, we obtain a significant portion of the cash required to operate our ATMs through various cash supply arrangements, the amount of which is not recorded on Euronet's Consolidated Balance Sheets. However, in certain countries, we fund the cash required to operate our ATM network from borrowings under our revolving credit facilities and cash flows from operations. As of
June 30, 2019
, we had approximately
$809 million
of our own cash in use or designated for use in our ATM network, which is recorded in cash and cash equivalents and trade accounts receivable, for ATM withdrawals pending settlement, on the Consolidated Balance Sheet.
We had cash and cash equivalents of
$1,558 million
at
June 30, 2019
, of which
$1,294 million
was held outside of the United States and is expected to be indefinitely reinvested for continued use in foreign operations. Repatriation of these assets to the U.S. could have negative tax consequences.
The following table identifies cash and cash equivalents provided by/(used in) our operating, investing and financing activities for the
six
month periods ended
June 30, 2019
and
2018
(in thousands):
|
|
|
|
|
|
|
|
|
|
Six Months Ended
June 30,
|
Liquidity
|
2019
|
|
2018
|
Cash and cash equivalents and restricted cash provided by (used in):
|
|
|
|
Operating activities
|
$
|
56,714
|
|
|
$
|
69,304
|
|
Investing activities
|
(68,760
|
)
|
|
(68,990
|
)
|
Financing activities
|
505,945
|
|
|
360,922
|
|
Effect of foreign currency exchange rate changes on cash and cash equivalents and restricted cash
|
4,907
|
|
|
(25,471
|
)
|
Increase in cash and cash equivalents and restricted cash
|
$
|
498,806
|
|
|
$
|
335,765
|
|
Operating activity cash flow
Cash flows provided by operating activities were
$56.7 million
for the
first half
of
2019
compared to
$69.3 million
for the
first half
of
2018
. The decrease is primarily due to fluctuations in working capital mainly associated with the timing of the settlement processes with content providers in the epay Segment and with correspondents in the Money Transfer Segment, partly offset by improved operating results.
Investing activity cash flow
Cash flows used in investing activities were
$68.8 million
for the
first half
of
2019
compared to
$69.0 million
for the
first half
of
2018
. During the
first half
of 2018, we used
$12.9 million
for a business acquisition. There was no material acquisition in the
first half
of 2019. We used
$67.7 million
for purchases of property and equipment for the
first half
of 2019 compared to
$53.4 million
for the
first half
of 2018. Cash used for software development and other investing activities totaled
$1.0 million
and
$2.8 million
for the
first half
of
2019
and
2018
, respectively.
Financing activity cash flow
Cash flows provided by financing activities were
$505.9 million
for the
first half
of
2019
compared to
$360.9 million
for the
first half
of
2018
. Our financing activities for the
first half
of
2019
consisted of net borrowings of
$524.1 million
compared to net borrowings of
$536.7 million
for the
first half
of
2018
. The increase in net borrowings for the
first half
of 2019 compared to the same period of 2018 was the result of the issuance of
$1,195 million
of new Convertible Notes and Senior Notes to fund the operating cash of our IAD networks, repay revolving credit facility borrowings of
$2,253 million
and retire the Retired Convertible Notes of
$447 million
. During the second quarter of 2018, we entered into a short-term credit facility in the amount of $300 million for the sole purpose of providing providing cash for our ATM network which expired on November 30, 2018. During the second quarter of 2019, we repaid
$14 million
of short-term debt obligations. We repurchased
$2.4 million
and
$176.7 million
of our stock during the
first half
of
2019
and
2018
, respectively. During the
first half
of 2018, we repurchased $175.0 million of our shares and paid $
1.7 million
for the amount of payroll taxes represented by the common stock withheld on restricted stock vestings and stock option exercises compared to
$2.4 million
for the same period of 2019. We received proceeds from stock option exercises of
$7.0 million
and
$4.1 million
for the
first half
of
2019
and
2018
, respectively.
Other sources of capital
Credit Facility
- On October 17, 2018, the Company entered into a
$1.0 billion
unsecured credit agreement (the "Credit Facility") that expires on October 17, 2023. The Credit Facility allows for borrowings in Australian Dollars, British Pounds Sterling, Canadian Dollars, Czech Koruna, Danish Krone, Euros, Hungarian Forints, Japanese Yen, New Zealand Dollars, Norwegian Krone, Polish Zlotys, Swedish Krona, Swiss Francs, and US Dollars.
As of
June 30, 2019
, fees and interest on borrowings are based upon the Company's corporate credit rating (as defined in the Credit Facility) and are based, in the case of letter of credit fees, on a margin, and in the case of interest, on a margin over the London InterBank Offered Rate ("LIBOR") or a margin over the base rate, as selected by us, with the applicable margin ranging from 1.125% to 2.0% (or 0.175% to 1.0% for base rate loans).
As of
June 30, 2019
, we had
$6.1 million
of borrowings and
$46.3 million
of stand-by letters of credit outstanding under the Credit Facility. The remaining
$947.6 million
under the Credit Facility was available for borrowing based upon the borrowing base and financial covenants in our Credit Facility.
Convertible debt
- On March 18, 2019, we completed the sale of
$525.0 million
in principal amount of Convertible Senior Notes due 2049 (“Convertible Notes”). The Convertible Notes were issued pursuant to an indenture, dated as of March 18, 2019 (the "Indenture"), by and between the Company and U.S. Bank National Association , as trustee. The Convertible Notes have an interest rate of
0.75%
per annum payable semi-annually in March and September, and are convertible into shares of Euronet Common Stock at a conversion price of approximately
$188.73
per share if certain conditions are met (relating to the closing prices of Euronet Common Stock exceeding certain thresholds for specified periods).
The Company may not redeem the Notes prior to September 20, 2022. The Company may redeem for cash all or any portion of the Convertible Notes, at its option, (i) on or after September 20, 2022 if the closing sale price of the Company's Common Stock has been at least 130% of the conversion price then in effect for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading day period (including the last trading day of such period) ending on, and including, the trading day immediately preceding the date on which the Company provides notice of redemption and (ii) on or after March 20, 2025 and prior to the maturity date, regardless of the foregoing sale price condition, in each case at a redemption price equal to 100% of the principal amount of the Convertible Notes to be redeemed, plus accrued and unpaid interest to, but excluding, the redemption date. No sinking fund is provided for the Convertible Notes.
Additionally, holders have the right to require the Company to repurchase for cash all or part of their Convertible Notes on each of March 15, 2025, March 15, 2029, March 15, 2034, March 15, 2039 and March 15, 2044 at a repurchase price equal to 100% of the principal amount of the Notes to be repurchased, plus accrued and unpaid interest to, but excluding, the relevant repurchase date. In addition, if a fundamental change, as defined in the Indenture, occurs prior to the maturity date, holders may require the Company to repurchase for cash all or part of their Convertible Notes at a repurchase price equal to 100% of the principal amount of the Notes to be repurchased, plus accrued and unpaid interest to, but excluding, the fundamental change repurchase date.
1.375% Senior Notes due 2026
- On May 22, 2019, the Company completed the sale of €600 million ($669.9 million) aggregate principal amount of the Senior Notes that expire on May 2026 (the “Senior Notes”). The Senior Notes accrue interest at a rate of 1.375% per year, payable annually in arrears commencing May 22, 2020, until maturity or earlier redemption. As of June 30, 2019, the Company has outstanding €600 million (
$682.1 million
) euro-denominated principal amount of the Senior Notes. In addition, the Company may redeem some or all of these notes on or after February 22, 2026 at their principal amount plus any accrued and unpaid interest.
Other debt obligations
- Certain of our subsidiaries also have available credit lines and overdraft facilities to generally supplement short-term working capital requirements. As of
June 30, 2019
, there was
$24.3 million
outstanding under these other obligation arrangements.
Other uses of capital
Capital expenditures and needs
- Total capital expenditures, including capital lease expenditures, for the
first half
of
2019
were $72.8 million. These capital expenditures were made primarily for the purchase of ATMs to expand our independent ATM network in Europe and Asia, the purchase and installation of ATMs in key under-penetrated markets, the purchase of POS terminals for the epay and Money Transfer Segments, and office, data center and company store computer equipment and software. Total capital expenditures for
2019
are currently estimated to range from approximately $140 million to $150 million.
At current and projected cash flow levels, we anticipate that cash generated from operations, together with cash on hand and amounts available under our Credit Facility and other existing and potential future financing sources, will be sufficient to meet our debt, leasing and capital expenditure obligations. If our capital resources are not sufficient to meet these obligations, we will seek to refinance our debt and/or issue additional equity under terms acceptable to us. However, we can offer no assurances that we will be able to obtain favorable terms for the refinancing of any of our debt or other obligations or for the issuance of additional equity.
Inflation and functional currencies
Generally, the countries in which we operate have experienced low and stable inflation in recent years. Therefore, the local currency in each of these markets is the functional currency. Currently, we do not believe that inflation will have a significant effect on our results of operations or financial position. We continually review inflation and the functional currency in each of the countries where we operate.
OFF BALANCE SHEET ARRANGEMENTS
On occasion, we grant guarantees of the obligations of our subsidiaries and we sometimes enter into agreements with unaffiliated third parties that contain indemnification provisions, the terms of which may vary depending on the negotiated terms of each respective agreement. Our liability under such indemnification provisions may be subject to time and materiality limitations, monetary caps and other conditions and defenses. As of
June 30, 2019
, there were no material changes from the disclosure in our Annual Report on Form 10-K for the year ended
December 31, 2018
. To date, we are not aware of any significant claims made by the indemnified parties or parties to whom we have provided guarantees on behalf of our subsidiaries and, accordingly, no liabilities have been recorded as of
June 30, 2019
. See also Note 12, Commitments, to the unaudited consolidated financial statements included elsewhere in this report.
CONTRACTUAL OBLIGATIONS
As of
June 30, 2019
, there have been no material changes outside the ordinary course of business in our future contractual obligations from the amounts reported within our Annual Report on Form 10-K for the year ended
December 31, 2018
, other than those resulting from changes in the amount of debt outstanding discussed in the Liquidity and Capital Resources section.