Earnings Call Transcript - EEFT Q3 2021

Scott Claassen, General Counsel

Thank you. Good morning. And welcome everyone to Euronet’s quarterly results conference call. We will present our results for the third quarter 2021 on this call. We have Mike Brown, our Chairman and CEO; Rick Weller, our CFO; and Kevin Caponecchi, the CEO of our epay Division on the call. Before we begin, I need to call your attention to the forward-looking statements disclaimer on the second slide of the PowerPoint presentation we will be making today. 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 that are listed on a second slide of our presentation. Euronet does not intend to update these forward-looking statements and undertakes no duty to any person to provide any such update. In addition, the PowerPoint presentation includes a reconciliation of the non-GAAP financial measures we will be using during the call to their most comparable GAAP measures. Now, I will turn the call over to our CEO, Mike Brown. Mike?

Mike Brown, CEO

Thank you, Scott, and thank you everyone for joining us today. I will begin my comments on slide number five. I am so glad to be here talking to you today about these exciting double-digit consolidated growth rates, especially given the uncertainty of border openings, uneven vaccination efforts and increasing virus spread due to the Delta variant, which were all in the mix throughout the quarter. As I have reflected on these results, a few key highlights stood out for me. First, we were able to achieve consolidated third quarter 2021 revenue that topped the same quarter in 2019, which is particularly impressive given that EFT is still being heavily impacted by the COVID travel restrictions. This means that the revenue from epay and Money Transfer has grown significantly, supporting our view that we will emerge from the pandemic stronger than when we entered. Second, our Money Transfer network now has surpassed the 0.5 million physical network locations and our Money Transfer app now reaches 20 countries. Third, epay recorded its fifth consecutive quarter of double-digit adjusted EBITDA growth, primarily from the continued strength of mobile and digital media sales through our digital distribution channels. Our EFT transactions rebounded at a very strong pace as European borders were reopened to fully vaccinated passengers from inside Europe and select countries outside of Europe. Moreover, we have seen some elongation in the travel season due to the pent-up demand for travel after nearly 18 months without it. All of these achievements were made possible by our strong balance sheet, which has afforded us the ability to maintain our dedicated workforce, to continue to invest in our industry-leading REN payments platform, as well as our digital networks in both epay and Money Transfer, and also take advantage of the strategic opportunities that have been presented to us. While our Money Transfer results were a bit uneven with strong U.S. and Europe outbound growth, as well as digital transaction growth, we saw a stronger than expected negative impact from the continued COVID lockdowns in the Middle East and the Asia-Pacific region, and the continued pressure on the U.S. domestic business. Aside from those two geographies, we have really continued to see very strong growth rates in our transactions and lots of good progress in Money Transfer, which I am excited to tell you about in the coming slides. But first, let’s go to slide number six and we will talk about the European travel trends and the impact on our business. This is a lot more optimistic slide than the ones I have been showing you over the last couple of quarters. Here on slide six, we have updated the graph we presented last quarter, which shows actual and projected European flight data for this year versus 2019, overlaid with our total international cash withdrawals for the same periods, as well as our transaction recovery from non-EU cardholders. When we spoke to you on our second quarter earnings call this year, the EU had just decided to reopen the borders to fully vaccinated U.S. travelers. However, the status of the borders in the EU were changing every day, causing a lot of uncertainty about when, not if, but when tourists would be able to travel again. As the graph shows, flight levels immediately responded to the opening of borders and our total international transactions responded almost as quickly. While we were very pleased to see our total international transactions return to about 70% of 2019 levels, the recovery of our EFT segment profits is a bit more nuanced than that. Let me take a minute to remind you of our different transaction revenue types. Our lowest value transactions are recovering much faster than our highest value transactions. First, we have domestic interchange and domestic surcharge. These transactions recovered quickly as the in-country movement restrictions were lifted. Next, we have the international interchange, which makes up most of the recovery in the international transactions, as these are largely EU citizens traveling to different countries within the EU. The transactions that apply to cardholders with non-euro bank accounts, which are our most profitable transactions, have seen a significant lag in the last year's recovery. However, the good news is the European borders are now generally open to most vaccinated travelers and people now have a year to plan their 2022 summer vacation. We are also starting to see certain countries in Asia starting to open their borders, which will further contribute to next year’s recovery. What we do know from the last two travel seasons is that when the travel restrictions were lifted people quickly returned to travel and they still withdrew cash. Right now the vaccination efforts continue to improve, therapeutics are becoming available, and people want to travel. If these factors continue in a favorable line, we anticipate that our 2022 transactions will possibly recover to between 80% and 90% of 2019 levels. The results could be better than we expect, of course, and they were here in the third quarter versus the guidance we gave you on the prior calls, or they could be worse, but right now this is our best view. What I also know is that our ATM network is stronger and more far-reaching than before COVID, and this travel season has once again proved that travelers are still going to use ATMs. We are excited for next year when we hope that many of these hurdles will be behind us. Now let’s move to slide number seven and hit some of the EFT highlights. During the quarter we launched merchant acquiring services at La Samaritaine, a high-end shopping mall in Paris. Euronet is now offering payment services to more than 200 terminals within the mall. We also launched card-less cash payout for BNP Paribas corporate clients in Poland, further expanding our product offering in one of our most important markets. In India, we launched ATM switching and card management services and signed several renewed agreements across Europe and India. We continued to see flights increase and more tourists on the ground in our countries. We invested further in our ATM network by adding more than 1,300 ATMs and reopened about 730 ATMs that were previously closed. We saw such a strong rebound in our transactions as movement restrictions were lifted from around the globe. We believe, and this third quarter transaction trend certainly confirms, tourism will return and we will have a strong balance sheet that we will be able to strengthen our network, adding more countries and adding more high-value ATMs. We are looking forward to 2022. We will be ready to reopen all of our ATMs for the entire travel season if COVID conditions continue to improve, as we have seen so far this year. So now let’s go on to slide number eight and we will talk about epay. In this third quarter, our epay team continues its nice rhythmic beat, the fifth consecutive quarter of double-digit operating income growth. So how is this possible? Several years ago, epay disrupted the traditional content distribution market by recognizing the need to create digital distribution for items that had traditionally been distributed as a physical product. epay re-imagined the way these things were purchased around the world by digitizing the barcode, which eliminated the need for a physical plastic gift card or a CD to install new software or a new game. In addition to the digital delivery of all types of content, epay developed an industry-leading technology platform to deliver this content to banks, mobile operators, e-commerce sites or mobile wallets, all in addition to the traditional physical retail distribution. Today we see a major transition in the traditional payments landscape. According to the most recent McKinsey study, over the next five years acquirers will grow by 40% from non-acquiring revenue. For years, we have been actively positioning epay to make these types of non-plastic alternative payments and provide our merchants more ways to make money and for consumers a more efficient way to get their products. Additionally, we have the technology in place to connect with emerging fintech to achieve real-time payments and offer their customers more value-added products. In some cases, we are even doing two transactions in one. We are providing the content that the fintechs can offer their customers to purchase, and we are processing real-time payments of these transactions through our real-time payment engine. We know that the future embraces digital. We have superior technology and connections to mobile wallets around the world, which combined with our leading physical retail network places epay in the prime position to continue to grow well into the future. This quarter, we launched several new agreements, including Microsoft XBOX Subscription Services with Telefonica, one of the largest mobile operators in Spain. We expanded distribution of Microsoft Office 365 to fnac, the online store of one of France’s largest retailers. In Italy, we signed an agreement with LIS, formerly known as Lottamatica, to distribute Nike, Helbiz Live, AirBnB, and Blizzard. Our epay teams continue to innovate our technology platforms, which in turn expands the services we are able to provide to our fintech, retail, and content partners. The fruits of their efforts show up in their earnings, where they have posted double-digit growth for the past five quarters. Now, let’s move on to slide number nine and we will talk about Money Transfer. Our Money Transfer network has eclipsed 500,000 locations. I’d just like to take a step back and remind everyone that when we bought REN, we were a very distant third in the Money Transfer industry with 42,000 locations, mostly in Latin America. We have grown that network more than a thousand percent and built an account deposit network that now reaches 3.6 billion bank accounts and 416 million mobile wallet accounts. Our account deposit transactions grew 31% during the quarter versus the prior year and our account deposit volume now represents 29% of our overall cross-border principal flow. This physical network combined with our digital payouts gives us the most far-reaching Money Transfer network in the world and is one of the key drivers behind our seven-fold Money Transfer earnings growth since the acquisition in 2007. During the quarter, we significantly expanded our wallet presence with service into five strategic wallets, GCash and PayMaya in the Philippines, IME Pay in Nepal, WiPay in Trinidad and Tobago, as well as PayTm in India. Our partnership with PayTm is groundbreaking as PayTm becomes India’s first platform to accept international remittances directly into their digital wallet. Over the last few years, we have expanded with several post offices around the world. We continue to disrupt the status quo and this quarter we expanded our post office networks with cash pickup services in four more countries, including the India Post, the Vietnam Post, the Uganda Post, and the Bhutan Post. We also signed a partnership agreement with Noble Financial to transition all of its 117 agents in the U.S. to the Ria brand platform and network. All of these agreements are examples of companies needing real-time cross-border payments for their customers and realizing that our Money Transfer network can provide the most efficient and cost-effective manner to send these transactions. We continued to work on expanding this product offering and we look forward to sharing more news on it in the near future. Now let’s go on to slide number 10 and we will talk about our REN technology. As you reflect back on the comments from each of our three segments, you can’t help but hear the significance of the role our cutting-edge technology is playing in our success. We have signed an agreement with Jalin, the national switching system of Indonesia, which is the fourth largest population in the world. Euronet will deploy REN to modernize one of the largest switching infrastructures in Southeast Asia, replacing two competitive technology installations. Additionally, you may have read the press release announcing our signing of a REN implementation agreement with Marker Trax. Marker Trax is disrupting the market with its first-of-a-kind regulatory compliant and cashless alternative to the traditional casino marker. This is the first use of REN in a non-bank setting and will be a game changer in the gaming market. When I think about my original mission when I founded Euronet, it was to bring payment convenience to those who had not had it before. As the payment industry has rapidly evolved, so have we. I think a quote from Gary Larkin, the Chief Strategy Officer at Marker Trax summarizes our future the best. He said, 'We are also extremely excited to be the first to leverage the fintech enabling technology of REN in a new market vertical like gaming that needs an innovative platform to support its rapid transformation to a cashless environment.' That summarizes the power of this technology, our network, and our assets. We shall not only use them to further our core business, but also position other fintechs and neobanks to rapidly expand their businesses. And we are just starting at the starting line. Stay tuned for more exciting announcements on the REN technology. With that, I will hand it over to Rick.

Rick Weller, CFO

Good morning and thank you everyone for joining. I will begin my comments on the balance sheet on slide 12. As Mike mentioned, we were able to achieve third quarter 2021 consolidated revenue above 2019 levels. The mix of revenue has changed, but achieving more than 2019 levels, while still in the midst of this pandemic, was only possible because of the strength of our balance sheet, which allowed us to invest in our digital and physical networks and take advantage of opportunities. As you can see, we ended the quarter with more than $1 billion in cash. The sequential increase is the result of cash generated from operations during the quarter of nearly $120 million. Next slide, please? For the third quarter, we achieved revenue of $816 million, or 104% over the third quarter 2019 revenue, with one segment still significantly impacted by COVID-related restrictions. We also achieved operating income of $114 million and adjusted EBITDA of $155 million. Those better than expected consolidated growth rates were the result of the outperformance of our EFT segment, where we saw international transactions rebound at a faster pace than expected as borders were partially reopened to fully vaccinated individuals. We delivered adjusted EPS of $1.77, a 58% increase over the $1.12 in the third quarter last year. Next slide, please? Slide 14 shows our three-year transaction trends by segment. EFT transactions grew 29% as a result of more domestic and international cash withdrawal transactions. Epay transactions grew 23%, driven by continued strength in mobile top-up and digital media content distributed through digital channels. Money Transfer transactions grew a net of 10%, including 18% growth in both the U.S. outbound and European outbound transactions, and 58% growth in direct-to-consumer digital transactions. This growth was partially offset by declines in the domestic business and a 32% decline in transactions from the Middle East and Asia due to strict government-mandated lockdowns. On slide 15, we present our results on an as-reported basis. To normalize the impact of currency fluctuations, we have presented our results on a constant currency basis on the next slide. Now on slide 16, EFT revenue grew 56%, operating income grew 908% and adjusted EBITDA grew 207% as a result of increased domestic and international cash withdrawal transactions, benefiting from the partial lifting of travel restrictions across Europe. Overall, a nicely balanced quarter for epay. Money Transfer revenue grew 8% from the strength of 18% growth in both the U.S. and European outbound transactions. While we always see pockets of price pressure, when setting aside the FX volatility rate benefits we realized last year, our Money Transfer segment saw relatively consistent revenue and gross profits per transaction when looking at it year-over-year. Moreover, when looking at sequential quarterly results here too we saw relative consistency. Now, shifting gears a bit regarding the outlook for the fourth quarter, our best insight would yield revenue relatively in line with the third quarter, producing adjusted EBITDA in the range of $120 million to $130 million. Moreover, with the results of our seasonally strongest third quarter in the history books, we began to think about what next year might look like. As Mike mentioned earlier, based on the tourism of this third quarter together with continued increases in vaccination rates across the globe, new therapeutics being introduced, and fewer border restrictions, we could see 2022 tourism transactions breakthrough 80% of 2019 levels, maybe higher. If we see that level of travel recovery, together with excellent growth from our epay and Money Transfer businesses, we could see 2022 revenue approximately 30% higher than our 2019 revenue, producing earnings similar to those of 2019. As I draw my comments to a close, I think it’s worth repeating that this was a great quarter for Euronet, where we delivered revenue above pre-COVID 2019 levels, signed and launched several new agreements, expanded our technology to new countries and verticals, and continued to grow our digital distribution and networks. With that, I will hand it back to Mike to close out the quarter.

Mike Brown, CEO

Thanks, Rick. I’d like to close by emphasizing that all of these highlights were accompanied by a very strong set of financial results, which show that Euronet's emergence is not only as a leading fintech, but it further demonstrates our rapid evolution into being a fintech enabler. We have been able to transform ourselves because REN, our modern, flexible, and powerful technology, combined with our global reach and strong portfolio of assets, allows us to maintain a leading position in the industry. We have built the most powerful and broad-reaching Money Transfer networks in the world. It appears that travelers are coming back. We expect this to continue as vaccination rates continue to improve, as therapeutics come to the market, and because economies need travelers. Epay continues to develop digital distribution and merchant solutions that can directly compete with acquirers today. We have a lot to be proud of and even more to be excited about. With this quarter now closed, I look forward to telling you more in the next quarterly call. And finally, we continued to make great progress in introducing new ways to leverage our existing assets into new B2B product offerings. We are crossing the Ts and dotting the Is. So I hope to be talking to you more about some exciting things in the near future, stay tuned. With that, we will be happy to answer your questions.

Operator, Operator

Thank you very much. Your first question comes from Andrew Schmidt from Citi. Your line is open.

Andrew Schmidt, Analyst

Hey, Mike. Hey, Rick. Thanks for taking my questions. Good to see the step-up in earnings power here and the significant expansion use cases across the platform. I just want to start off with just a clarification question. Rick, I think you mentioned the expectation on a preliminary basis that 2022 earnings would be similar to 2019. Are you referring to adjusted EBITDA, operating income, or net income? Just as a quick clarification to start off?

Rick Weller, CFO

I was really referencing the adjusted cash EPS number, Andrew, to give you a clear picture down the income statement.

Andrew Schmidt, Analyst

Perfect. Super helpful. And then, when we talk about 80% and 90% of transactions recovered versus 2019 in EFT, how does that translate to EBITDA, because I know there are some mixed assumptions that need to be made in terms of domestic versus cross-border and other products in that segment. So what’s the right way to think about that in terms of translating EBITDA as a percentage of the 2019 base?

Mike Brown, CEO

Our most profitable transactions are cross-currency transactions, particularly those involving international travelers coming into Europe. This year, these transactions recovered to about 40%. In contrast, the recovery rate for intra-European travel is between 60% and 80%, varying between domestic and international. The primary difference between 2019 and the last quarter is that an increase in overseas flights would significantly boost our performance next year.

Rick Weller, CFO

To add to Mike’s comments, it gets to be some rather involved or complicated math, but from a macro perspective, we’ve shared before that the richness of these transactions comes into our P&L at about a roughly 80% margin rate. So, you can see that if we can move the needle a bit on the volume of these transactions, you could see in our third quarter results that as these transactions come in better than expected, they contribute nicely to the bottom line. If you look at that next-year number with the growth we’ve seen from epay and Money Transfer, you can see that kind of margin leverage comes through on EFT to get us to a 2019 earnings level. So, in summary, as we see those transactions come through, they are going to come through with robust margin levels, contributing nicely to the bottom line.

Andrew Schmidt, Analyst

Very helpful. And then, it’s great to have EPS baseline out there for 2022, but it’s still a little bit early. So, I would imagine that you probably take a good level of conservatism in here. If you can clarify that a little bit, is there a level of conservatism that’s taken here, just because we are not even in 2022?

Rick Weller, CFO

We have to. We don’t know and we know that when Americans want to travel abroad, it takes more thought, preparation, and consideration than just flying within Europe. It’s a lot easier for us to go to New York than it is to go to Rome, so we factor that in. It could be better. We’ll monitor the tracker on how many overseas reservations are being made, and that will significantly influence things. The average revenue per transaction is generally higher on cross-currency transactions, and many of them are several dollars higher when you get to the spread on foreign currency. But while we introduce price pressure, it’s all about mix going forward.

Andrew Schmidt, Analyst

Absolutely. Perfect. Well, thanks a lot, guys. It’s great to see the progress. I will jump back in the queue. Cracking the quarterly results. Thanks a lot.

Operator, Operator

Yes. Your next question is from Andrew Jeffrey with Truist. Your line is open.

Andrew Jeffrey, Analyst

Hi. Good morning. I appreciate you taking the question. Mike, a question on Money Transfer and a question on epay. Can you talk a little bit about the investments you are making in the Money Transfer segment and how you think you are going to be able to monetize these connected wallets and the connected bank accounts? Can you give us a little color on the volume that’s going to bank accounts? But can you talk about, one, specifically, where you are investing, and two, whether or not you think monetization of some of these digital accounts and account deposits in particular can drive yield and growth?

Mike Brown, CEO

You saw our numbers just over this last quarter where our account deposit transactions grew 31% during the quarter versus the prior year, and our account deposit volume now represents almost 30% of our total volume. This huge asset, with 4 billion digital ways to drop money into an account or a wallet, has accelerated our growth. If you want to grow into the future, everybody goes digital but you need to have the endpoint. That’s our advantage. We are also planning to repurpose those for B2B kinds of transactions in the future, a much larger market than family remittances. So having this head start will be an asset worth investing in.

Rick Weller, CFO

I’d elaborate on some of the technology comments Mike made. We have built a wonderful platform of technology that is easy to connect to. When fintech players build things to meet customer needs more efficiently, they then need to make payments around the world. We have the best network in the world covering every payment mean, which is part of how we monetize it. We monetize this through the ease of integrating with our technology which opens up many opportunities to utilize our assets.

Mike Brown, CEO

We really like that there are many companies out there attracting customers with their product offers. However, all of them need a payment methodology. We handle every aspect, including compliance. Our REN technology is also being used to enable real-time payments, positioning us as experts, giving us a substantial advantage. These aspects work hand in hand to give us a strong edge.

Andrew Jeffrey, Analyst

Okay. That’s helpful. Should we expect to see all that translate into better yield, Rick? I mean, one of the questions we get when we think about the tension between traditional cash-to-cash versus digital is how that impacts our unit economics?

Rick Weller, CFO

Yes. As Mike said, as we focus on B2B and move up the market, these transactions should yield to better unit economics. Our cost to terminate these transactions is very low. If you look at the average fee for sending money traditionally, it’s often around 1%. You can see how easily better pricing contributes to our margins.

Operator, Operator

We have a question from Darrin Peller with Wolfe Research. Your line is open.

Darrin Peller, Analyst

Thanks, guys. Yeah. When we look at the normalized potential of the business now, what do you think, based on the different trends around challenger banks requiring more and banks pushing back on needing more surcharging rules? What would you say a normal scenario looks like for the EFT business from a revenue and profitability standpoint? Because we can see the acceleration on the Money Transfer and epay sides, but I’m curious about the EFT side given its profitability level.

Mike Brown, CEO

Well, you know, it took us about eight years to build out Europe, and our profits in 2019 for the transactions we handled there were around $300 million in EBITDA. With new rules from Visa that allow us to accept similar transactions globally, wherever there’s a Visa or MasterCard, we see significant growth potential ahead. In a normal world with no travel restrictions, I believe our revenue could exceed 2019’s numbers for EFT, especially since we’ve added more ATMs than we had in 2019.

Rick Weller, CFO

If we had no travel restrictions, it is quite likely that our revenue numbers for the EFT segment would exceed 2019 levels. Since we have added to our asset base and continue to expand, we can quickly ramp that up if travel resumes at full capacity.

Darrin Peller, Analyst

What about the Money Transfer segment given the competition and pricing pressures from new entrants? To what extent do you think you will stack up in a world where competitors are lowering pricing?

Mike Brown, CEO

First, remember, the family remittance business is highly competitive. While competition is a daily challenge, we have not felt significant pricing pressure. We consistently deliver value to our customers, and when we analyze our performance, pricing pressure has not been evident in our results. Our service remains competitive, and considering our long-standing reputation, we continue to serve growing markets effectively.

Rick Weller, CFO

As we stated, we see pockets of pricing pressure all the time, being in a global marketplace means we constantly have to adapt. Our response varies by market. With nearly a third of our business now being payouts to bank accounts, we’ve found a more efficient way to maintain our profitability. We have built our business model to remain robust even when faced with competitive pressures.

Mike Brown, CEO

Let’s remember we have about 5.5% to 6% of the family remittance market, presenting a substantial opportunity ahead. Although we face challenges, the market demand is strong, leading to substantial growth potential.

Operator, Operator

Your last question is from Mike Grondahl with Northland Securities. Your line is open.

Mike Grondahl, Analyst

Hey, guys. Congrats on Jalin and Marker Trax. Could you kind of help us understand the revenue model a little bit there like per ATM or per transaction? How do you envision that working?

Kevin Caponecchi, CEO, epay Division

We have got two revenue models associated with REN. One is our traditional software and license model, and the other is a transaction revenue share model. In the case of Jalin, it’s more the traditional software license model. In the case of Marker Trax, it is a revenue share related to transactions.

Mike Brown, CEO

In many installations, we lean more towards transaction-based models because the volumes are high. We expect the expenses to grow along with the assets. This model ensures we align our interests with the partners over the long term.

Kevin Caponecchi, CEO, epay Division

The sales pipeline is extremely strong, and we have to be selective in our deployments because there are more opportunities than we currently can fulfill.

Mike Grondahl, Analyst

Got it. That’s helpful. So thanks, guys.

Kevin Caponecchi, CEO, epay Division

Thank you!

Mike Brown, CEO

Alright. Well, with that last question, I want to thank everyone once again for joining us on the call today. We look forward to giving you updates in another 90 or so days. Thank you very much.

Operator, Operator

This concludes today’s conference call. Thank you for joining. You may now disconnect.