Euronet Worldwide, Inc. (EEFT) Q4 2013 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen and welcome to the Euronet Worldwide Fourth Quarter and Full Year 2013 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. (Operator Instructions) As a reminder, this conference call is being recorded. I would now like to introduce your host for today’s conference, Jeff Newman, Executive Vice President and General Counsel for Euronet Worldwide. You may begin.

Thank you, Nicole. Good morning, and welcome everyone to Euronet’s quarterly results conference call. We will present our results for the fourth quarter and full year 2013 on this call. We have Mike Brown, our CEO; Rick Weller, our CFO; and Kevin Caponecchi, the President of Euronet on the call. Before we begin, I need 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 financial markets and 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 or other transaction fees and changes in laws and regulations affecting the company’s business, including immigration laws. 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 to the Investor Relations section of its website. Now I will turn the call over to Rick. Rick?

Thanks Jeff. Good morning, and welcome to everyone that’s had a chance to join us today. We finished the year strong delivering fourth quarter revenue of $375 million, $16 million operating income and $53 million in adjusted EBITDA. As you may have read in our press release, operating income includes an $18.4 million impairment charge related to a portion of our epay business. This is a U.S. GAAP non-recurring, non-cash adjustment. And to better understand our fundamental business, we will center our discussions around the adjusted operating income, which excludes the impairment charge. To that end, adjusted operating income was $34.5 million for the fourth quarter. Our cash earnings per share was $0.63. This is a 43% increase over the fourth quarter 2012. This increase was primarily the result of our continued focus on adding new products to our portfolio and expanding the presence of our existing products and services. This $0.63 was also impacted by about $0.01 of headwind from foreign exchange rates since we provided guidance in October and tax benefits stemming from the realization of certain deferred tax assets in various taxing jurisdictions. Excluding the tax benefit, cash EPS growth would have been in line with guidance. Overall, this was another strong quarter for our business. On Slide 6, we show the three-year trend of transactions in each segment. EFT transactions grew 4%. This growth was driven by increases in virtually all of our markets and partially offset by declines from the IDBI contract termination in India we discussed earlier in the year. Excluding the impact of the IDBI agreement, transactions would have grown 11%. Epay transactions declined 4% from decreases in the UK, Australia and the Middle East. These volume declines were partially offset by growth in Germany, India and North America. Finally, total transactions for…

Thanks, Rick and welcome everyone. This certainly was a great year for Euronet. As the results show, we saw great earnings expansion generated from our three core businesses. There wasn’t one key win that drove the results. We just continued to work hard and focused on adding new locations and products to our existing portfolio. Our teams did an exceptional job and their efforts are reflected in our results. Let’s move on to Slide #19 and we will discuss the EFT segment first. Okay. EFT, I think the stunning EFT results speak for themselves. The 36% constant currency adjusted op income growth for 2013 over 2012 will follow the 47% constant currency op income growth we achieved in 2012 over 2011. These strong earnings reflect our success in organically developing new products and technologies. We are able to leverage these new products and technology over our regional processing centers in a quick and cost efficient manner giving us sustainable competitive advantage in the market. We believe these competitive strengths will continue to result in meaningful growth for this EFT segment. Slide #20 please, begins our highlights for the EFT segment. We signed an agreement with MasterCard to deploy contactless POS terminals across Greece. Through this agreement we will rollout these terminals to a number of merchants throughout the country. We have deployed terminals to four large merchants in Athens and we will continue to deploy more terminals throughout the first quarter. In Q4 we are able to expand or renew several agreements with valuable customers. In Romania we expanded our network participation agreement with Intensa San Paolo Bank, so Intensa customers continue to use ATMs in our network free of charge. We also extended our ecommerce acquiring agreement with MCB Bank, which is Muslim Commercial Bank in Pakistan. We renewed…

Thank you. (Operator Instructions) And our first question comes from the line of Peter Heckmann of Avondale. Your line is now open.

Hi, good morning. Could you provide a little bit more color on prepay, I missed some of your comments there. You saw little bit of falloff in both locations and transactions and I am not sure if I understand all the puts and takes, could you review?

Yes. Well, Pete, I think that as we looked at the fourth quarter as I mentioned there, the revenues were essentially flat, but gross margin was up 5% year-over-year. And so it was some fairly simple dynamics behind that. We saw a little decline in our mobile business but more than offset that in our non-mobile business that as Mike reviewed we had – we had some continued launches of product with things like the PayPal, the Google products, the software type of products have all played pretty well. So I don’t think that it’s too much more complicated or too many more moving parts than that as we finished the year. Does that help a bit, Pete?

Okay, so transactions year-over-year were down 4% and so you had prepaid content growing offset by mobile prepaid correct? And…

No, it was prepaid mobile was going down a bit offset by continued growth in the non-mobile.

Okay, it wasn’t offset if transactions were down 4%.

Well, the gross margin was because as you know we make more money per transaction on those, so good rich value transactions.

Okay, that’s fair and then you had a 13% decrease in locations and I see somewhere in here says because of the elimination of U.S. sites if you covered that on the call I missed it, could you review?

Yes, we had also talked about that in the third quarter there. We worked with one of the mobile operators in the United States to kind of rationalize if you will some less than productive sites out there. So it resulted in some depression on or some reduction in those sites, but not much in terms of business to us.

They are basically culling very unproductive sites, which to us were very few transactions, so.

Got it, got it, okay and then – and again I apologize if I missed it, could you just talk about the ATM backlog and how that’s characterized between your expectation for proprietary units, instillation for the year, but as well what you have in backlog for outsourcing both brown label and otherwise?

Well, Pete we don’t put per se brown label in our backlog numbers here. Our backlog would look like we have got several hundred in the backlog that’s assigned – under assigned kind of commitments now. We would expect that our – if you just kind of take a look at our overall ATM growth numbers is that we should be able to see what’s in our backlog with continued deployments and outsourcing signings that we should be able to grow commensurate or better than what we did this year. And this year we improved our ATMs our growth – we grew our ATMs 14% year-over-year if you take out those IDBI ATMs that went out of the picture earlier in the year.

Okay and then any thoughts on the proprietary side. I know it’s not a backlog number, but are you seeing attractive economics given your financial flexibility where you would be deploying your own ATMs then…?

Absolutely, Pete, I mean that was where basically most of the 14% came last year. So that’s what we want to continue to do this year.

Okay, thanks.

I mean most banks I mean the reality is banks don’t have strong balance sheet still. They are not deploying many new ATMs on their own. We try to get more outsourcing agreements and we nail them now and again. But one thing that’s totally in our control is taking advantage of some of the proprietary lessons that we have learned of expanding our own ATMs both with the brown label in India and across Europe taking advantage of the PSD license that we have, we are in I think 12 or 13 different countries right now in the EU.

Okay, thanks. I will get back in the queue.

Thank you. And our next question comes from the line of Mike Grondahl of Piper Jaffray. Your line is now open.

Yes, thanks for taking my questions. Could you talk a little bit how the Google Play rollout went in Germany from late summer and sort of what are plans going forward there?

Yes, this is Kevin. So, we rolled out Google Play in Germany in the fourth quarter to strong results kind of in line with what we expected given the high predominance of android devices versus iOS devices. And we are working with Google on a number of additional rollouts throughout the year, this year.

Okay. And the bank in Spain, La Caixa.

La Caixa, yes.

La Caixa how does – is that fully rolled out and how does something like that ramp, are there other banks in the backlog that you think will go that route?

Yes, so the way to think about the banks is the bank represents a full channel and within that channel there is kind of three sub channels online banking, mobile banking and the ATM. We are in the early stages of rollout with the La Caixa starting with online channel. And we will expand with them to their other sub channels. And to answer your question about other banks, the banking channel is a strategic channel for us for epay. And we believe there is lots of opportunities to expand with banks throughout the world.

And with the success Mike that we had with PostFinance and in Switzerland it just gives us a great - it’s our kind of poster child to go to talk to other banks because these are exactly the kind of customers that these banks want. They want yuppie kind of young kids making money with nice phones who do mobile banking on I mean that’s just their target market rather than old or retired folks who might be coming to their bank right now.

So it’s a strategic play for the banks and in terms of their acquisition strategy with customers and it’s an important channel for us for further expanding our distribution.

Okay. And maybe just lastly Mike what are one or two things you are sort of most excited about for 2014?

Well, last year was a year where we just hit singles and doubles all year and we didn’t do anything magic, there wasn’t any one big deal. There wasn’t an acquisition that changed our dynamics or anything. What I am excited about is doing just what I did in 2013 and trying to do it in 2014 and then some, so just expanding more ATM locations particularly ones that are under our own control, adding more products and epay across more geographies like we are doing, and more channels taking advantage of the banking channel, that’s very exciting. Money transfer continues to do very well for us. And so we are just going to do just what we did last year and we are going to just try to do a repeat performance, I mean it’s the lot of work between now and December to accomplish that, but that is an absolutely kind of block and tackling, that’s our modus operandi for this year.

And thinking that I would just add Mike that with our guidance of the $0.45 in comparison to the year-over-year numbers that represents 20% increase in cash EPS year-over-year, so looks like we would be off to a good start to have that repeat performance but as Mike said it’s lot of hard work between now and end of the year.

But we look back and we got the pay off. We grew our bottom line by 30% last year, I mean that’s phenomenal. We just got to keep that momentum going.

Okay, thank you guys.

Thank you and our next question comes from the line of Chris Shutler of William Blair. Your line is now open.

Hi Chris.

Hi guys good morning.

Good morning.

Good morning.

So let’s start in EFT, so all the metrics I mean particularly the adjusted EBITDA and adjusted op margin this quarter they declined frankly a little bit more than I expected from Q3. And I understand Q3 is now a lot stronger particularly with DCC and there may have been some extras especially from India in Q4, but could you maybe just give a little bit more color and walk through the dynamics from Q3 and Q4 and what changed and how we should think about it is now because it’s a little bit more pronounced now going forward?

Yes. If you remember our last call, go rewind that one, we said that Q3 will be for the foreseeable future our strongest quarter for EFT. And it’s because it’s not just a DCC game, it’s a travelers’ game. Well, when we usually make money off domestic interchange in a given time period that number ranges from $0.28 to $0.60 depending on which country in Europe that we are in, okay. But the nice thing is and in the summer quarter all of Europe is on the move, okay. And it isn’t just us making money off foreign currency transactions. The fact is Germans go to Greece, when they go to Greece, it’s no longer and everybody likes traveling all over the place, so you got all this crisscrossing going on. And so when you do even a euro to euro transaction like that, where there is no foreign exchange at all, you get paid not the domestic interchange, but the international interchange, which is kind of like around could be a dollar, could be a euro, something like that. And so just as you look at it with the fact that we have so many of our own deployed ATMs now as opposed to in the old days, it was primarily through outsourcing, where we got paid a fixed fee every month depending on how many ATMs the bank had now because we are expanding our own ATM channel. So dramatically we will just see more and more basically margin fall to our bottom line due to the travelers in Europe and etcetera. So, we will see that for a long time, our goal again just – it just worked so well and that we are going to just throw out more ATMs as fast as we can and as many countries as we can. So more locations and also better locations where we are now in so many countries and we are figuring out the tricks to each country what makes a good location, how do you mail them so forth that. So we are doing that. So, you will see this year in 2014 and EFT is going to fall off Q3 this year.

Okay. And Mike, you mentioned having a lot more owned ATMs today, how many can you give us the number how many you actually own versus outsource?

We own about six or less depending on how you count it. We own 6,000 that we run and operate out of the 18,000, but outside of that even that 18,000 we have got another 2,500 or so in India. So I guess you could say we have 18,000 at risk, I am sorry, we have 8,000 at risk or 8,500 at risk ATMs, which just two years ago we had less than half that number.

Okay, great. And then the only other question would be pure commerce, so maybe if I go for that ‘14, but maybe if you could just give us the (indiscernible) about the timing of the incremental operating profit from pure commerce?

Well, we are excited about this. This year, we brought several large customers live, towards the very end of last year. So we will start to see the 12-month kind of impact of that this year plus we are signing more deals all the time. So, yes, we will – we are not going to guide this exactly how much that is going to give us, because we will have to kind of see, but at least we are live now. And one of the great example is DFS is – the contract we have with DFS is the four big U.S. international airports, which is San Francisco, LA, Honolulu, and JFK. So, we will see all those start to accrue benefit this year. But in 2013, all it was blocking and tackling bringing these factors live, signing a whole bunch of new agreements, but we did – we saw the expense related to training and everything and given all these things up to speed, but we didn’t see much of the revenue. So, we will see that here in this year. I might also add too. You look at India, India is a totally different game than Europe. When we put ATMs in Europe, because they have so many cars and everybody kind of gets where they are, we see a pretty fast ramp up in Europe on our ATMs to get to the point where we need to, where in India, it’s kind of a six-month thing. So when you are loading a bunch of new ATMs in India in a quarter, expect that to be an absolute expense drag, because it still cost you about a month to run the (indiscernible) a month to run the suckers, even though it hasn’t yet ramped up, because it’s all local transactions in India. So that’s like if we get all it’s not about how many ATMs we put in some quarter in India, expect that to be a drag on our earnings for probably the next two to three quarters. But the nice thing is we got enough empirical evidence with 2,500 of these suckers now that we know they pay. Well, we, yes we have just got to wake that six, seven, eight months before they start paying and then they start printing money for us.

Okay, great. And then just one more, Mike on money transfer, just wanted to get your thoughts in terms to where you are at in ‘14 in terms of operating income versus the last couple of years? I know transaction growth had been starting a little bit in line with the industry, and also just curious one of your competitors, saw a little bit of a rebound in transaction growth in January, I am just curious if you have seen the same things? Thanks.

Part of you were cutting out there, Chris. Could you – I mean, about half of what you said was kind of cutting out, could you repeat it again? I don’t know for some reason there is a bad line here.

Sure. I apologize. Just curious in 2014 you have more on money transfer operating income growth and then have you seen a rebound in transactions in January?

Yes, yes. Actually, January is good. Actually, one of the big rebounds that we saw over last year was Europe and particularly Spain, which is our largest market there. And we were – Spain was really under a lot of pressure, but it grew quite strong last year. So it’s also a mixed game too. Let’s not forget that we do something around 43%, 44% of our transactions come out of Europe or outside the U.S., but they generate around 53%, 54% of our gross margin. So what that tells you mathematically is that we make on average more profit on a European transaction than on a U.S. transaction. So when you see recoveries in Spain and we mentioned here Spain, UK, France etcetera that we are doing quite well this year, those are on average on a margin – weighted margin basis that those transactions carry more weight than one from the U.S.

Okay, thank you.

Thank you. (Operator Instructions) And I am showing no further questions at this time. I would like to hand the call back over to Mike for any closing remarks.

That’s all I have got for today. I thank everybody for your time and we will look forward to talking to you after Q1 is done. Thank you very much everybody.

Ladies and gentlemen, thank you for participating in today’s conference. This does conclude today’s program. You may all disconnect. Have a great day everyone.