Earnings Call Transcript - EEFT Q2 2021

Scott Claassen, General Counsel

Greetings and welcome to the Euronet Worldwide Second Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. Please be advised that today's conference is being recorded. It is now my pleasure to introduce your host, Mr. Scott Claassen, General Counsel for Euronet Worldwide. Thank you, Mr. Claassen, you may begin.

Michael Brown, Chairman and CEO

Thank you, Scott, and good morning, and thank you to everyone who is joining us today. I will begin my comments on Slide number 5. As I kick off the quarter's review and knowing the Olympic Games just commenced, I can't help but borrow some words that might be used during the boxing matches to describe some of the outcomes. In our case, it is surely great to see the e-pay and Money Transfer segments punching above their industry weight class record second quarter results and double-digit revenue and earnings growth rates. To say the least, those are some Olympian results. Before I get to the operating results for those of you who have been with us for a while, you know that one of our greatest strengths is the diversity of our business. This diversity can create nuances in the business that make it more challenging to understand when you don't live and breathe it every day. Today, I want to start with the punch line and then I'll fill in the details. Euronet is a strong financial technology company that is ever-evolving to continue to deliver the same strong growth trajectory that we have historically achieved. As I said, e-pay and Money Transfer just delivered record second quarter results across all of our reported financial metrics. The transactions in our EFT segment have proven resilient when borders open and movement restrictions are lifted, and we have developed REN, a world-class technology platform that has allowed us to stay on the cutting edge of payments trends to take advantage of the ever-changing digital landscape. All of which is made possible because of our strong balance sheet. I think the fact that we can talk about Money Transfer and e-pay earnings in the midst of the ongoing COVID pandemic is remarkable. It is a true testament to the dedication and abilities of our Olympic champion teams to stay committed to our long-term growth plans and to our conservative financial management, which has given us the balance sheet to retain our employees and continue to execute on our plan. E-pay delivered its fourth quarter of double-digit growth from continued sales of mobile and digital media content through both physical retail and digital channels. Money Transfer also delivered a fourth consecutive quarter of double-digit earnings growth as a result of continued network expansion, which allowed for strong double-digit growth in US outbound, international, and digital transactions. Technology is really at the core of who we are. We have always led with technical innovation and our development of REN has allowed all three of our segments to advance our payment footprint while also offering our customers cutting-edge payment technology. The EFT results continue to be a bit uneven as travel was slower to resume due to uncertainty around the ever-changing policies on border openings in Europe and slower than expected vaccination rates around the world. Despite the unevenness, the transaction levels improved as we moved through the second quarter with the strongest improvement in the last couple of weeks of June. Now let's go on to Slide number 6, where we have provided some data points to help you better understand the transaction trends we are seeing in EFT. As you know, when we entered the second quarter, the news in Europe was very optimistic that most of the EU would reopen their borders to both EU and non-EU travelers. As we moved through the quarter, it became apparent that the EU vaccination effort was lagging its target. In fact, at the end of June, only about 45% of the adult population in Europe was fully vaccinated. The slower vaccination rates and uncertainty surrounding the emergence of the delta variant of COVID-19 in Europe in the second quarter caused constantly changing requirements on quarantine restriction. This led to unpredictability for travelers and a fear of getting 'stuck' you might say in a country, which resulted in a slower return to travel than we expected early in the quarter or in some cases, as we have seen, a curtailment of a trip to return home before more strict quarantine requirements took effect. That's the bad news. The good news is that people want to travel, that's pretty clear. They are going to travel, and they can't wait to travel again. The Airbnb CEO and Co-Founder, Brian Szczesny recently went as far to say he expects to see a travel rebound of the century. Further, United Airlines CEO, Scott Kirby stated that he expects business and international travel demand to recover to 100%. This confidence is supported by United's unveiling of a $30 billion aircraft order along with hiring of 25,000 employees to support the new plan as the carrier navigates its post-pandemic growth. We know that there is pent-up demand for travel as people have delayed vacations for at least a year, and economies of the current countries depend on travel spend. So, as we see vaccination rates continue to improve and more consistent behavior on border openings and quarantine requirements in countries around the world, people will travel. With the return of travel, our EFT transactions also returned. On this Slide, you can see the Euro-controlled traffic data with our cash withdrawals imposed upon it. What this shows you is that when you have airline bookings with borders open and no quarantine restrictions, our international ATM transactions have bounced back very strongly. Moreover, in July of this year, we're running double the transaction rate compared with July of last year. As you may recall, last year we shared with you the fact that we saw an increase in the average size of a cash withdrawal. While this year we are seeing yet another increase in the average withdrawal amount, confirming the travelers want cash maybe even more in times like these, with all these uncertainties. It’s also important to note that in both Europe and Asia as movement restrictions have been lifted within a country, domestic transactions have rebounded more quickly and significantly than the international transactions, another data point indicating that both domestic users and international travelers will still use cash at similar or better than pre-pandemic levels. So, while the recovery and EFT haven't been as robust as we anticipated last year or even early in the second quarter of this year, we remain confident in our belief that travel will resume and people will still need cash while they travel. Transaction trends and EFT may continue to remain uneven for the rest of 2021 as vaccination efforts continue around the world and countries continue to deal with the more contagious variant of the virus. However, we are monitoring the situation in each market carefully, and as you will see on the next Slide, we are reopening our ATMs, and they are ready to ensure tourists have convenient access to cash when and where they need it. Next slide, please. Over the past several years, we've updated you on how we have built the largest cash deposit network in Poland, making cash deposit safer and more convenient for retailers in the country. This quarter, we further expanded that network, signed network participation agreements with 11 new merchants in the country. We were able to expand and renew several agreements, including our network participation agreement with Liver Bank and OTP Bank in Romania as well as our ATM outsourcing agreement with First Service Credit in the United States. As I mentioned before, we are confident in our belief that there is a pent-up demand for tourism and that tourists want cash when they travel. We have continued to invest in our ATM network, having added more than 1600 high-value ATMs so far this year. During the quarter, we reactivated more than 6,000 of the ATMs that had previously been closed. At the end of the day, our network is stronger than ever, and we have more than 46,000 ATMs ready as borders open. We expect that we will reactivate all but about 1800 of our ATMs as we go through the third quarter, which will leave significantly fewer not activated than the roughly 4300 that remained closed through the third quarter of last year. While 2021 has been more uneven than we expected, we are pleased with the uptick in transactions we are beginning to see. We anticipate that we will be able to exceed the 2019 earnings results in the near future because we have used this pandemic to make our existing network stronger, and we have 13% more Euronet-deployed ATMs in more markets than we did in 2019. It’s just a matter of when people are able to travel and in the spirit of optimism, just this morning, we learned that the UK has announced its opening to all fully vaccinated US and EU travelers. Good news as I close on the EFT segment. Now let's move on to e-pay. E-pay growth in the quarter is highlighted by our continued focus on expanding our product portfolio, our network, and distribution channels, where we sell this content. E-pay's product mix remained stable with approximately 72% of the gross profit from digital media content. This Slide includes a list of some of the new agreements we signed and launched during the quarter. Following our acquisition of the AT&T agreement in the third quarter of last year, we were able to launch prepaid mobile activations for the first time through AT&T's subsidiary brand here in the U.S. We furthered our partnership with Microsoft by adding Microsoft 365 subscription renewals through the mobile operator, Vivo in Brazil, as well as two of the largest electronic retailers in the UK, Dixon and Currys PC World. We continue to expand the channels through which our digital media content can be sold. This quarter, we partnered with Revolut, a Fintech super app based in the UK, to sell digital media content through their app in India. We continue to expand on the multi-category relationship we have created with Amazon Pay, enabling bill payments through the India bill payment system. Finally, in Singapore, we launched QR code-based staging and delivering of Microsoft Xbox Store to customers on smartphones and EGI stores. In addition to these launches, we signed several new agreements during the quarter. Our e-pay team continues to focus on leveraging our technology, which gives us the ability to quickly add content, grow our geographic presence, and expand new distribution channels. Their success is highlighted by the record second quarter revenue and earnings that e-pay delivered. Now, let's go on to Money Transfer. With 6% U.S. outbound transaction growth, 44% growth in overall international outbound transactions, and 74% growth in direct-to-consumer digital transactions, our Money Transfer segment delivered a very strong quarter. However, it's important to remember that this quarter is compared to the COVID-impacted Q2 of last year. So to point out the consistency of the strong Money Transfer growth rates when we calculated the compounded annual growth rate since the second quarter of 2019, we see that the US and international outbound volumes of money transfers grew at 23% and 18% CAGR, respectively, when compared to 2019, driving double-digit CAGR expansion in revenue, operating income, and adjusted EBITDA. I would say that's a stunning expansion under the circumstances in an industry that will barely recover to 2019 levels this year. Our retail network now reaches 490,000 locations for cash pickup across 160 countries, and we are connected to approximately 3.6 billion bank accounts for account deposits. This expansion included the launch of 17 new correspondents in 14 countries during the quarter. We continued to expand our mobile wallet network, which now includes 220 million mobile wallet accounts in 23 countries by launching service with five new wallets in Senegal, Ethiopia, Malawi, Zambia, and Nepal. We also signed agreements with 22 correspondents in 19 countries that will launch in the coming quarters. One of the more notable agreements is with VTB in Russia. This is RIA's first direct partnership in Russia and will help expand our network across the entire CIF and Eastern European region. We believe RIA has the largest bank account deposit network in the industry, reaching more than 3.6 billion bank accounts across 125 countries with a significant portion already with real-time payment capability. We have announced that consumers can now send business payments through RIA's network. Euronet has been busy upgrading and enhancing our payment network for multiple use cases beyond just family remittances. During the quarter, we also launched card issuer processing services for Bank Jago in Indonesia. Going forward, Jago is planning to target more partnerships with travel sites, e-commerce platforms, and so forth. For every account that they get opened, Euronet will provide processing services for both domestic and international transactions from these cards. Indonesia is one of the most underbanked markets in Asia with 50% of its 270 million population without a bank account. It represents a huge opportunity for digital banks like Jago to partner with these platforms and convert these wallet customers to bank account holders and provide financial services to them. We are given the bank an entire next-generation Fintech structure to establish accounts, process transactions, and more. We believe our pipeline for REN is strong, and we're expected to bring you more updates in the coming months, with two segments delivering exceptional double-digit growth, EFT transactions trending better, and a robust technology pipeline, the prospect for continued growth remains strong. With that, I will hand it over to Rick.

Rick Weller, CFO

Thanks, Mike, and good morning everyone. I'll begin my comments on Slide 12. I think Mike's comments are worth repeating. Any quarter where you have two segments that achieved record quarterly earnings is an outstanding quarter. Particularly with the uncertainty that COVID has created. As has been the case for the past five or six quarters, the strength of our balance sheet continues to provide us with the comfort and flexibility to take advantage of opportunities that are driving the business forward. As you can see here, we ended the quarter with nearly $1 billion in cash and restricted cash. The sequential reduction in unrestricted cash represents the shifting of cash into more than 6,000 ATMs we had reopened during the quarter. Adding to our cash balance was approximately $23 million of cash generated from operations during the quarter. For the second quarter, we reported revenue of $714.7 million, operating income and adjusted operating income of $30.1 million, and adjusted EBITDA of $74.7 million. The better-than-expected revenue growth rate was the result of continued strength in our Money Transfer segment where growth outpaced our expectations. The EBITDA results were in line with the lower end of our range of expectations. In the second quarter of 2020, we recorded a $104 million non-cash goodwill impairment charge, $82 million of which was recorded in the Money Transfer segment and $21.9 million recorded in EFT, all stemming from the economic impacts of the COVID-19 pandemic. These impairment charges have been excluded from the prior year adjusted operating income, adjusted EBITDA, and adjusted EPS to provide more comparable year-over-year results. We delivered adjusted EPS of $0.53 per share compared to $0.04 per share for the prior year. On Slide 14, we show you the three-year transaction trends for each segment. EFT transactions grew 46%, driven by improvements in ATM transactions as borders began to reopen, as well as a significant volume increase in low-value point-of-sale transactions in Europe and low-value payment processing transactions in Asia Pacific. E-pay transactions grew 35%, primarily driven by digital media transaction growth across our markets, with particularly strong growth from customers in South America and Asia, who have a high volume of low-value transactions sold through digital channels. And while we say these are low-value transactions, the reality is that while the absolute value of these transactions is low, they are accretive to our gross margin percentage. The significant growth in these transactions was made possible by our REN technology, which has enabled the rapid addition of significant transactions and has allowed us to take advantage of these emerging trends in the payment space. In the Money Transfer segment, we were quite pleased that our most profitable Money Transfer transactions, US outbound and international outbound transactions grew 36% and 44% respectively, which also includes 74% growth in direct-to-consumer digital transactions. These are partially offset by declines in the US domestic transactions, which netted to 33% total transactions year-over-year growth for the segment. Overall, I think it bears repeating that these are exceptionally strong constant currency results, particularly out of the e-pay and Money Transfer segments. And while the EFT results came in at the low end of our expectations, as Mike mentioned, we are encouraged by the positive transaction trends we saw in the last couple of weeks of June and have continued into July, together with the increased average withdrawal amounts. Nonetheless, we have started to see more contagious variants of the virus make headlines, discussions of the US going back to masks, uncertainty stemming from changing travel policies in countries across Europe, and continued vaccination effort. After taking all these considerations into account, we will refrain from giving official guidance but think it is important to provide a couple of data points to help frame your expectations. We would expect third-quarter 2021 consolidated revenue to have recovered to third-quarter 2019 levels and nearly 20% over last year's third quarter. With that, I'll turn it back over to Mike.

Michael Brown, Chairman and CEO

Thank you, Rick. As you know, COVID creates a level of uncertainty that we just can't do anything about. However, we have been proactive in using our technology to our advantage to further expand our e-pay and Money Transfer segments, and the double-digit CAGR growth rates for those two segments are just exceptional. Once travel is allowed to resume, we will continue to grow at consolidated double-digit growth rates well into the future. In the spirit of optimism, just this morning, we learned that the UK has announced its opening to all fully vaccinated US and EU travelers. The Euronet Olympians are fighters, we always have been. We are confident that as the travel restrictions are removed, our EFT team will soon be picking up the goal.

Operator, Operator

Your first question comes from Andrew Schmidt with Citi.

Andrew Schmidt, Analyst

Good morning, Mike. Hey, Rick. Hope you guys are doing well. Thanks for taking the questions here. I wanted to ask about EFT, can you talk a little bit about what you've seen quarter-to-date in the third quarter and then as it relates to what's embedded in the third-quarter outlook? It sounds like you're baking in a little bit of conservatism for unevenness in travel recovery, COVID variants, and things like that. Just to understand a little bit of the context of the embedded EFT segment EBITDA guide relative to what you're seeing quarter-to-date. That'd be helpful. Thanks.

Michael Brown, Chairman and CEO

We are a little bit conservative with the EFT moving into the third quarter, that's correct, but let me just tell you, none of us know, nobody knows what's going to be announced tomorrow. Just as we were walking into the room to make this call, we find out that the UK has opened up its borders. We just hope that turns into real life people because what we have seen is that if I’ve got the people there, we’ll make the money.

Andrew Schmidt, Analyst

The Latin American JV in terms of independent ATM deployment and outsourcing, could you talk about that a little bit from an addressable market perspective? Seems like there's a lot of opportunity there, but what's the way to think about it from an addressable ATM or market perspective as you enter Latin America?

Michael Brown, Chairman and CEO

The interesting thing about Latin America is almost every single country has its own currency. So, unlike the EU, where there's lots of euros going around, with a lot of the countries, we don't have an ability to make a cross-currency transaction. That's what’s exciting. We’ve got a very good partner—this is the biggest money delivery company in South America. We've been building because we wanted to accelerate that and do it a different way. Beyond the ATM opportunity, we see it as a market rich for our technology. Each of these countries is also dealing with things like real-time payment applications, etc.

Andrew Schmidt, Analyst

Got it, very helpful. Thanks a lot, guys.

Peter Heckmann, Analyst

I wanted to follow up a couple of things. Mike, what do you think in terms of your best guess in terms of net ATM installation for this year? Any real change there? How do you think it divides between Europe, Asia Pacific, US, and India?

Michael Brown, Chairman and CEO

I would have to say that we're probably closer to 3500 to 4500 kind of would be the focus and we're still putting ATMs into the one country that we're in South Asia that's locked down and not making a dime because we know when tourists return to that market, it’s almost ATM-less in the tourist areas. So, I don't have the breakdown of east versus west, but we'll say that should be the number, probably between 3500 and 4000 with roughly, I don’t know about 20% to 25% would be Asia.

Peter Heckmann, Analyst

Thank you very much.

Andrew Jeffrey, Analyst

Good morning, Mike. Appreciate the Olympic metaphors and I agree Euronet is probably the least appreciated Fintech publicly traded Fintech out there. My question for you is you’ve built this impressive global money transfer business with 3.6 billion connected accounts. Can you talk about how you intend to monetize that growth?

Michael Brown, Chairman and CEO

We think we’ve got one of the best-positioned networks of any player in the market. We will enable entities to simplify what is a complex payment. It's about bringing all these pieces together and going after the trillions now. Remember, when we acquired RIA, it had 42,000 network locations. We’ve chased it up to 0.5 million by now, we've got another chase in pursuit.

Rick Weller, CFO

As Mike said, there's a lot of people we can work with—direct relationships with companies, partnership relationships, private label agreements with financial institutions to make these payments more efficient.

Darrin Peller, Analyst

Nice job on the Money Transfer and e-pay segments, but I want to touch on EFT a little more. Can you provide a mix of ATMs?

Michael Brown, Chairman and CEO

We’ve got 46,000 ATMs right now. We have about 25,000 high-value ATMs in Europe, we have about 600 to 700 of them in one country in Asia that is locked down, we have about 10,000 that are outsourcing agreements.

Darrin Peller, Analyst

Just regarding cost savings that might come back in 2022 when things are more normalized?

Rick Weller, CFO

If you try to get the numbers around and we've told you how many more ATMs we're going to have that are going to be active and things like that—it cost us nearly a $1,000 a month to run an ATM. You can pencil out some math to kind of see what is the change in that cost is going to be.

Kevin Caponecchi, CEO, e-pay Division

The digital growth has been accelerated through the pandemic, but we believe that trend will continue. Our sales pipeline of new opportunities is overwhelmingly digital.

David Togut, Analyst

What are your updated thoughts on pricing strategy and the Money Transfer business both in the traditional retail cash to cash and online?

Michael Brown, Chairman and CEO

With respect to Money Transfer, we've had stable pricing for several years now, really, don't expect that to change anytime soon. We always look for opportunities, the best ones are the one plus one equals three kind of acquisitions.

Rick Weller, CFO

A very strong balance sheet has enabled our Money Transfer and e-pay businesses to flourish in times when travel has been restricted. We deal with marquee name customers and we are in possession of their money, and they trust us.

Michael Brown, Chairman and CEO

Thank you everyone who has joined us today. Hopefully, we'll have some good news in about 90 days from now.

Operator, Operator

Thank you for participating. This concludes today's conference call. You may now disconnect.