Cash still has future, says Euronet, but misses revenue expectations

Euronet, a provider of electronic financial transaction solutions, has reported favourable earnings progression for the fourth quarter of 2022, despite revenue growth that fell short of investors’ expectations.

Euronet, listed on NASDAQ with its headquarters in Kansas City, does much of its business in Euros but reports in dollars. The company’s total group turnover increased 7% to reach $866m, although this figure would have been 16% at constant currencies. Almost all the growth was driven by the continued strong performance of Euronet’s EFT processing division, which operates 50,000 ATMs globally and saw sales increase 29% to $210m. This is the part of Euronet that interests us at Business of Payments. Year on year revenues from the ePay and money transfer divisions, on the other hand, remained flat in dollar terms.

CFO Rick Weller attributed the growth in EFT sales to “improved domestic and international cash withdrawal transactions.. as well as the positive performance from the acquisition of Piraeus Bank’s merchant acquiring business in March 2022.” Management highlighted the success of the ATM deposit network in Poland, which saw $6bn (in zlotys) deposited during 2022 and plans to extend the network to Romania in partnership with Unicredit.

Euronet remains optimistic about the future of cash. The company’s CEO, Mike Brown, stated that “We do not believe that cash is going away, and the value of our cash business creates significant value to our shareholders.” An example is that pre-pay cards issued by its epay division for the likes of Spotify, Xbox, Nintendo, and Paysafe can be topped up on Euronet ATMs in Spain. 

The profitability of ATMs is supported by Euronet’s remarkable ability to maintain substantial commission rates for individuals who withdraw foreign currency while traveling abroad. For instance, I recently encountered an example at a hotel in Malta, which imposed a 13% mark-up on withdrawals made in Sterling.

This means that the prospective return of Chinese travellers to Europe is less exciting for Euronet than for many others since Union Pay, the Chinese debit card, does not permit dynamic currency conversion (DCC). The extension of the Eurozone to include Croatia is also not helpful. Euronet has recently retired 350 ATMs which “were in places that would likely not be profitable given the country’s conversion to the euro.” 

Longer term, there continue to be regulatory threats to DCC. Recently, Alicante Council ordered the removal of 137 Euronet ATM’s because of excessive charges.

Despite rising salary expenses, Euronet was able to keep costs under control, with total operating expenses falling 1% even after reporting 10% growth in salaries and benefits to $142m. This led to an adjusted operating income growth of 17% to $79m and an expansion in the group’s operating margin to 9.1% from 5.2% in the same quarter of 2021. The company’s preferred measure of profitability, adjusted EBITDA, grew 12% to $127m, again due to the improved performance in EFT processing.

Euronet’s strong recovery continues – EFT revenues up 41%

Euronet’s impressive recovery continued in Q3 as resurgent international travel boosted revenues and profits. The company processed 48% more transactions than a year earlier with average profit per transaction up 25%. Euronet is headquartered in Kansas but does most of its business outside the US

Total group revenue in Q3 was $931m, 14% higher than the same period in 2021. In addition to the rebound in travel, sales were also boosted by the acquisition of Piraeus Bank’s merchant acquiring business in March 2022 and “a significant volume increase in low-priced payment processing transactions in Asia Pacific.”

Michael Brown, Chairman and CEO said, “Consumers across the globe, not only want to travel, but can’t wait to travel and they still want to use cash when they finally arrive at their destination.” The travel recovery has been patchy. Happily for Euronet, Greece outperformed. International arrivals were up 2% in Greece on 2019 levels although total European inbound travel remains down 26% on pre-pandemic numbers. 

Euronet comprises three divisions. The ePay and money transfer units grew sales in low single digits but EFT (which includes ATM processing and merchant services) once again had a stand-out quarter. EFT grew revenues 41% to $319m with total transactions up 48% at 1.7bn.

The new Greek operation seems to have made a positive start. It contributed $30m to EFT revenues and is winning ISVs partnerships and marquee corporate accounts. For example, Euronet has signed a resale agreement with EpsionNet, a local software company with “more than 100,000 customers” and added 3,000 new merchants including Carrefour, McDonalds, Odeon and Heron Energy. Outside Greece, Euronet signed and onboarded 770 new merchants during Q3 through its Innova Tax Free and Pure Commerce business units.

While some commentators fear for the future of ATMs as customers shift spending to cards, Euronet remains optimistic. Michael Brown explained that travellers still need some cash and, with banks closing branches at an increasing pace, they will get money from the “first ATM you trip over when you’re on vacation… and there’s a higher likelihood they’ll trip over my ATM versus the bank’s ATM.

Euronet continues to expand its footprint as the leading independent ATM operator. The company finished the quarter with 51,437 ATMs, up 8% despite “facing some challenges in the ATM supply-chain, which has slowed down some of our ATM expansion.”

Total operating income was up 47% to $168m driven once again by a strong EFT performance which demonstrated strong operational leverage in growing income 85% to $116m. Margins expanded from 27.8% to 36.4% boosted by a 25% increase in operating income per transaction to 6.3c. As international travel recovers, Euronet’s search for high value transactions can sometimes push pricing a little too far. I found a Euronet ATM in Malta last month charging 9.5% commission for DCC. 

Total adjusted EBITDA, the company’s preferred measure of profitability, was up 36% to $212m. EFT again outperformed with EBITDA increasing 63% to $140m. Michael Brown said “we spend a lot of money on R&D. And that’s why we’ve got the tech stacks that continue to win more and more business. But we don’t whine about it. I mean we don’t say, “Oh, we’re spending this much more on R&D this year, just to make your future better and use that as an excuse for bad results today.”