Mox Reports – Euronet (EEFT) To Drop 50-60% On Latest DCC Developments


Euronet (EEFT)

  • As much as 30-40% of Euronet’s profits and EBITDA are generated solely by DCC revenues with ultra high margins. The sell side has largely missed this entirely.
  • During 2017, scathing public criticism erupted from a wide array of journalists, travel advisers and celebrity TV hosts, directly alleging Euronet “fraud”, “rips offs” and “scams” with DCC. Evidence posted in photos, screenshots and videos.
  • Multiple independent investigations then concluded specifically that “DCC should be banned”
  • Following the public scrutiny, a wide range of Euronet insiders began aggressively dumping their shares (and just ahead of a key vote in November 2017 by the EU Parliament)
  • Since then, EU legislation covering DCC has passed multiple key milestones.
  • Final regulations are set to be passed by June 2018
  • Euronet trades on a steep premium to peers because of perceived growth prospects. Any reassessment will see disproportionate downside to the share price

Euronet is Overwhelmingly Dependent Upon DCC for Revenues, Profits and Growth

  • Euronet’s share price has quintupled over the past five years due to strong growth in revenues, profits and cash flow.
  • By far the largest contributor to profits and growth has been “Dynamic Currency Conversion” by which Euronet can extract fees of as much as 10-15% from unwitting ATM customers when they travel abroad.
  • Euronet refuses to disclose the contribution of DCC to its profits, but it is possible to calculate that DCC alone is responsible for 30-40% of all profits at Euronet.
  • Sell side analysts under-estimate this huge reliance on DCC. Despite visible evidence in Europe, US sell side analysts model DCC fees (via currency spread) at just 4-6% rather than the widely observed 10-15%.
  • Sell side analysts also fully dismiss the likelihood of a disruption in these DCC revenues, describing Euronet as a very “transparent” ATM operator
  • In mid 2017, following scathing public criticism and independent investigations, a wide range of Euronet insiders began aggressively dumping shares

Euronet Worldwide: Company Overview

Euronet (EEFT)

Business Overview

Euronet provides payment and transaction processing and distribution solutions to companies and individuals. NASDAQ listed Euronet was founded in Hungary and is now headquartered in Leawood, Kansas. As of the most recent fiscal year, 72% of revenues came from outside of the US.

Euronet operates in three business segments: The Electronic Funds Transfer (“EFT Processing”) segment focuses on ATM and POS operations, including cash withdrawals and POS purchases at over 33,000 ATMs and 163,000 POS terminals across Europe, the Middle East and Asia Pacific. The EFT processing segment is also responsible for ATM and POS “Dynamic Currency Conversion” or “DCC”, which is a key focus of this report.

Euronet’s epay segment focuses on prepaid mobile airtime “top up” and other electronic payment products and collection services for various payment products, cards and services, vouchers etc.

Euronet’s Money Transfer segment focuses on global consumer-to-consumer and account-to-account money transfer services including via company owned counter stores, partners and via company owned websites.

Euronet Worldwide: Financial Results and Performance

Over the past five years, Euronet has seen strong growth in revenues, EBITDA, profits and cash flow. Margins have expanded steadily across the board. As we will see below, the vast majority of this profitability and growth is being driven by the EFT Processing Segment. Furthermore, within that segment, the bulk of these profits, margins and growth are being driven specifically by DCC, which provides Euronet with incremental gross margins approaching 100%.

Euronet (EEFT)

Euronet (EEFT)

As shown herein, Euronet’s profits, cash flow and growth are all being overwhelmingly driven by DCC and its ultra-high margins. This is why the stock has quintupled.

Following Scathing Publicity and Investigations, Insiders Aggressively Dump Shares

In the sections below we will see how vocal public criticism of Euronet’s DCC practices erupted in early 2017. Consumer advocacy groups then began a series of independent investigations just ahead of a key European Union vote on the future of DCC. At just that time, insiders began aggressively dumping shares.

Euronet (EEFT)

Euronet (EEFT)

As public scrutiny intensified in 2017, a wide range of insdiers began aggressvily dumping shares ahead of a key vote by the EU Parliament.

Euronet Dependence on EFT Segment (Including DCC)

By far and above, the biggest driver of Euronet’s strong financial results has been its EFT Processing segment which largely focuses on ATM/POS transactions across Europe, the Middle East and Asia. EFT Processing is responsible for 74% of operating profits and more than 100% of recent profit growth, largely due to the ultra high profitability of DCC.

It is quite noticeable that Euronet specifically refrains from disclosing the contribution it gets from DCC. Several analysts have acknowledged this absence and made their own estimates, which have then varied quite widely. At a minimum, common sense tells us that the incremental gross margin from DCC approaches 100%. Euronet simply charges a higher price via Dynamic Currency Conversion in exchange for delivering the same amount of foreign currency. The extra markup is therefore ≈100% profit margin that flows straight to operating profits and EBITDA. From Euronet’s most recent 10Q for September 2017, we can see the following. Euronet is estimated to keep 65% of the pure profit, sharing some with local partner merchants.

Euronet (EEFT)

For Euronet, the EFT Segment is responsible for 74% of operating profits and more than 100% of recent profit growth. This is because of the ultra high margins brought in as a result of DCC transactions.

EFT Processing Segment – EBITDA Contribution

For EBITDA, the contribution of EFT Processing largely parallels operating profit above, except that there is a moderate impact of depreciation compared to epay and Money Transfer. As we saw above, with margins approaching 100%, any revenues from DCC flow straight through to EBITDA for Euronet, with Euronet keeping an estimated 65% of it.

As part of its quarterly earnings announcement, Euronet discloses its adjusted EBITDA metric for each segment. Comparing the 3Q 2017 press release vs. the 3Q 2016 press release we can see the following changes in adjusted EBITDA by segment.

Euronet (EEFT)

The key takeaways are largely in line with what we saw on earnings above.

  • The EFT Segment represented 67.1% of total EBITDA in 3Q 2017
  • Total EBITDA grew by $32 million vs. 2016 – all of which was attributable to the EFT Segment
  • Both epay and Money Transfer comprise much smaller contributions to EBITDA
  • Despite occasional growth in top line revenues, neither epay nor Money Transfer are making any meaningful contribution to bottom line EBITDA growth

Article by Mox Reports

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