Euronet Worldwide

Moat: 2/5

Understandability: 4/5

Balance Sheet Health: 4/5

Euronet Worldwide is a global provider of electronic payment processing and financial transaction solutions, primarily focused on ATMs, point-of-sale (POS) terminals, card issuance and processing, and digital payments.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview: Euronet Worldwide, Inc. (EEFT) operates within the financial technology sector, providing a range of services that facilitate electronic payments and transactions globally. The company operates through three primary segments:

  1. EFT Processing: This segment focuses on ATM network participation, ATM driving, and related services. It processes cash withdrawals, balance inquiries, and other transactions at its ATMs, which are spread across numerous countries, and offers transaction processing capabilities to banks.
    • Key sources of revenue: ATM management fees, transaction fees, and surcharges.
    • A significant portion of the business is dependent on volume of transactions and number of ATMs deployed.
  2. Money Transfer: This segment provides both digital and physical money transfer services through a network of agents and partners, as well as through its digital platform “Ria Money Transfer”. It facilitates remittances and cross-border payments, focusing on individual-to-individual and individual-to-business transactions.
    • Key sources of revenue: Transaction fees, foreign exchange commissions, and other related charges.
  3. epay: This segment provides prepaid and digital content delivery networks. The company allows retailers to sell prepaid products and digital content and provides payment solutions to these retail locations.

Euronet’s competitive advantage: Euronet’s moat is relatively narrow and is built on several factors, though none are insurmountable:

  • Scale and Network Effect in EFT Processing: Euronet possesses a large and geographically diverse network of ATMs, which creates a barrier to entry for new competitors. The established network effect makes it difficult for smaller players to compete. However, it’s important to note that technological disruptions such as digital payment platforms and new ATM entrants make this moat fragile.
  • Global Reach in Money Transfer: Euronet’s presence and strong network in multiple countries offer a significant advantage over smaller competitors. The combination of a physical and digital footprint further enhances its position. However, the money transfer industry is becoming increasingly competitive with established players expanding and also new competitors emerging.
  • Intangible Assets (Software/Platform): While not widely considered, their platform and software solutions across the three segments provide a certain level of switching costs. However, this is a growing area and the software can be replaced if other companies offer something better at a lower cost, hence no long term durability. While the company has built a certain brand value over its 25-year history, it is not strong or easily differentiated, and does not provide an enormous advantage.

Moat Rating: 2/5 Due to the scale in the processing segment and global reach in money transfers, a narrow moat rating is warranted. The company faces significant competition and is subject to technological disruption making the long term durability of its moat uncertain.

Risks That Could Harm the Moat and Business Resilience:

  • Technological Disruption: Disruptive technologies such as digital wallets and peer-to-peer payment apps are a serious threat to its core business lines, as these alternatives reduce the need for physical ATMs and potentially supplant traditional money transfers. Furthermore, new entrants to the industry might leverage software and newer technologies to gain a competitive edge.
  • Regulatory and Compliance Risk: As a global payment processor, Euronet is subject to multiple regulations across jurisdictions. Changes to these regulations can significantly increase compliance expenses or adversely affect its business model, including regulations related to data security.
  • Competition: Both existing and emerging players in the fintech space present a serious competitive threat, especially in areas such as online money transfer. Competitors offering lower fees or more convenient services could significantly erode Euronet’s market share.
  • Macroeconomic Volatility: The business is highly sensitive to fluctuations in the global economic environment. Factors such as economic downturns, geopolitical instability, and significant variations in foreign exchange rates can all negatively affect the volume of money movement through their services and also directly reduce revenue.
  • Dependence on Financial Institutions and Agents: The business relies on its partnerships with banks and other financial institutions to operate. If these relationships sour or financial conditions at its partners deteriorate, it could significantly impact business and revenue generation. The dependence on agents for the money transfer business is another area to consider and the financial health of these agents can impact the business.
  • Dependence on International Travel: A key driver of their core business is international travel, and when events curtail travel there can be a big negative impact on their business. The pandemic was an example and in addition, many places are seeing slowdowns due to a weakened global economy and high inflation.

Business Resilience

  • Euronet’s has an established position and large network which does provide a measure of stability and resilience.
  • The business’s diverse segments create revenue streams that are varied, helping it to mitigate the impact of negative changes in certain areas.
  • By offering both physical and digital payment options, the business caters to a broader range of consumers and merchants.

In-Depth Financials Discussion:

  • Revenue Distribution: The revenue is primarily divided among the three segments: EFT Processing, Money Transfer, and epay.
    • EFT processing revenues are primarily from the US and Europe.
    • Money transfer revenues come from a geographically diversified customer base with a heavy focus on Asia, Africa and the Americas.
  • Epay revenue is generated around the globe, but is more concentrated on higher-income countries.
  • Margins: The business has reported relatively stable gross profits over the recent years. The operating profits have varied slightly based on the revenue composition. They have historically maintained EBITDA margins of 20% or greater.
  • Profitability: Profitability of the business is greatly reliant on the volume of transactions within their ATM and Money Transfer business.
  • Over the past three years, a huge impact was observed in both revenue and profitability as the pandemic affected international travel, and the subsequent return to more normal transaction volume.
  • Capital Expenditure
    • Capex has been increasing over the last 3 years as the company is investing more into technology and new ATM units.
  • Balance sheet
    • They hold a high cash position around a billion but they do also carry a large debt of almost 4 billion. Most of their total assets are tangible assets. The company has a negative book value due to amortization of intangible assets.
  • The company’s debt to Equity ratio, as reported on the balance sheet, is extremely large at around 2.6x-3x. This has come down from highs of 4x-5x but is still elevated. The net-debt to EBITDA ratio has been declining in recent years and as of 2023, it stands at around 4x-4.5x. The company has also been able to get credit rating upgrades.
  • Cashflows: Cash from operations has been good over the last years. The cash from investing has been negative as the company continues to invest in its business. The free cash flow was around a billion in 2022, while in the 2023 it has been less impressive.

Understandability: 4/5 Euronet Worldwide’s business is relatively straightforward to understand. Its core services—ATM processing, money transfers, and prepaid services—are common and familiar. Its reliance on several partnerships does add complexity to the business which means that certain aspects are very hard to understand from the outside as they have complex financials. In totality, I would give it a 4/5 on the understandability scale.

Balance Sheet Health: 4/5 The company has large tangible assets with very strong cash reserves and manageable short term debt. With a history of being able to service it’s obligations, along with continued revenue and profit growth, I would give the company a balance sheet rating of 4 out of 5. However, it’s large debt is worth keeping in mind.

Recent Concerns/Controversies and Management Perspective

  • Impact of Global Economy: The company has cited a weakening global economic condition that has reduced the discretionary spending of consumers and also has reduced the volume of travel, which is crucial for its Money Transfer segment. This has had a negative impact on the overall financial performance, but this was also expected. The management stated in the latest earnings calls, that there is a gradual recovery in these conditions.

  • Margin Compression: The company has been facing increasing operating costs in all its segments, including higher labor, technology, and utility costs. These are being offset with an increase in transaction volumes and revenue. The management is focused on cost-cutting and more efficient operations in the future.

  • Management feels that while there may be short-term compression in margins, they will continue to benefit from a well-diversified business, and revenue growth will offset any decline in margin over the long term.

  • Currency Volatility: As a global company with revenue in various currencies, it’s performance is also susceptible to large negative impact in fluctuating exchange rates. This may lead to volatility in the stock performance. Management did not make comment on future projections based on currency volatility.

  • Acquisition Integration: A large portion of company revenue is derived from several acquisitions. The company must ensure a smooth transition for their latest acquisition, which is not always possible. Their history has seen acquisitions in the past not yield the intended results. Management is currently focused on a strong integration process.

  • Management maintains that their future growth is dependent on continued M&A activities. So, they will try to make sure that integration is as seamless as possible.

  • Proprietary Technology: The business is increasingly moving away from ATM business and into digital payments. The company is trying to build on their software solutions for growth. It is still early days in this transition, so it will be important to see whether the company is able to compete against other technology companies.
  • Management is very focused on moving away from legacy systems and focusing on innovative technological capabilities.

Overall, despite a few concerns about the current global economic slowdown and the debt levels, Euronet appears to have decent long term prospects with a relatively stable balance sheet. The business is fairly easy to understand but has intricacies in different operating segments and the high debt makes it a risky proposition.