Euronet Q3 net income slips

Source: Euronet Worldwide

Euronet Worldwide ("Euronet" or the "Company") (NASDAQ: EEFT), a leading electronic payments provider, today announced its third quarter 2008 financial results.

Euronet's consolidated third quarter 2008 financial highlights included:

  • Revenues of $280.7 million, compared to $241.7 million for the third quarter 2007.
  • Operating income of $18.8 million, compared to $17.6 million for the third quarter 2007.
    * Adjusted EBITDA(1) of $35.3 million, compared to $33.0 million for the third quarter 2007.
  • Net income of $5.8 million, or $0.11 diluted earnings per share, compared to $15.9 million, or $0.31 diluted earnings per share, for the third quarter 2007.
  • Adjusted cash earnings per share(2) of $0.30, compared to $0.31 for the third quarter 2007 (see reconciliation of adjusted cash earnings per share in the attached schedules).
  • Transactions of 367.0 million, compared to 322.9 million for the third quarter 2007.

Segment and Other Results

The EFT Processing Segment reported the following results for the third quarter 2008:

  • Revenues of $54.4 million, compared to $43.5 million for the third quarter 2007.
  • Operating income of $8.3 million, compared to $9.4 million for the third quarter 2007.
  • Adjusted EBITDA of $13.4 million, compared to $13.5 million for the third quarter 2007.
  • Transactions of 182.3 million, compared to 156.4 million for the third quarter 2007.

The year-over-year increase in revenues was primarily attributable to 17% growth in transactions processed. In the third quarter the Company continued to incur significant expenses to develop and deploy its cross-border merchant acquiring business, resulting in decreases in operating income and Adjusted EBITDA. Operating income and Adjusted EBITDA reflect a reduction of $2.5 million and $2.3 million, respectively, when compared to the prior year due to the Company's net operating losses of the cross-border merchant acquiring business. Excluding this impact, operating income would have improved.

The EFT Processing Segment ended the third quarter 2008 with 10,384 ATMs operated compared to 10,516 ATMs at the end of third quarter 2007. As of September 30, 2008, Euronet operates ATMs primarily in Hungary, Poland, Germany, Croatia, the Czech Republic, Greece, Albania, Romania, Slovakia, Serbia, Montenegro, Ukraine, Bulgaria, India and China.

The Prepaid Processing Segment reported the following results for the third quarter 2008:

  • Revenues of $166.8 million, compared to $144.6 million for the third quarter 2007.
  • Operating income of $12.6 million, compared to $10.4 million for the third quarter 2007.
  • Adjusted EBITDA of $16.9 million, compared to $14.7 million for the third quarter 2007.
  • Transactions of 180.4 million, compared to 162.5 million for the third quarter 2007.

Growth in revenues, operating profit and operating margin for the third quarter 2008 compared to the third quarter 2007 was attributable primarily to organic transaction growth. Improvements in revenues and profits were concentrated primarily in our Australian and German markets. The growth in Australia has been the result of a recent market change, which has allowed us to strengthen our position in this key market.

The Prepaid Processing Segment processes electronic point-of-sale prepaid transactions at approximately 409,000 point-of-sale terminals across approximately 212,000 retailer locations in Europe, Asia Pacific and the U.S.

The Money Transfer Segment reported the following results for the third quarter 2008:

  • Revenues of $59.5 million, compared to $53.6 million for the third quarter 2007.
  • Operating income of $3.1 million, compared to $3.4 million for the third quarter 2007.
  • Adjusted EBITDA of $7.9 million, compared to $7.6 million for the third quarter 2007.
  • Transfer transactions of 4.3 million, compared to 4.0 million for the third quarter 2007.

The growth rate of revenues exceeded the transfer growth rate largely as a result of a 34% increase in transfers from non-U.S. locations, where the revenue per transaction exceeds the average, offsetting a 10% decline in transfers to Mexico. While revenues improved 11% for the third quarter 2008 compared to the third quarter 2007, gross margins (revenue less direct costs, primarily receive and payout agent fees) grew by 19%. The improved gross margin was the result of favorable mix produced by continued revenue growth in non-U.S. originated transactions together with favorable management of foreign exchange rate spreads. Operating income for the third quarter 2008 was down compared to the third quarter 2007, primarily due to expansion costs in non-U.S. markets.

Corporate and other reported $5.2 million of operating expenses for the third quarter 2008, compared to $5.6 million for the third quarter 2007. The decrease was primarily due to lower share-based compensation expense.

The Company recorded a net income tax benefit of $6.1 million in the third quarter 2008. This net benefit was the result of tax expense in foreign jurisdictions, more than offset by tax benefits recognized in the U.S. related to substantial unrealized foreign currency losses. However, adjusted cash earnings per share excludes, among other items, the impact of foreign currency gains and losses, as well as the related income tax effect. Therefore, for adjusted cash earnings per share, income tax expense increased $1.3 million to $6.9 million for the third quarter 2008 from $5.6 million for the third quarter 2007. This increase was due to stronger operating earnings in countries where Euronet is taxable, including Australia and Germany, and weaker earnings in emerging market countries where Euronet is in a net operating loss position and, therefore, unable to record tax benefits for operating losses.

The Company's unrestricted cash on hand was $173.9 million as of September 30, 2008 compared to $255.6 million as of June 30, 2008. Euronet's total indebtedness was $427.8 million as of September 30, 2008, compared to $487.1 million as of June 30, 2008. The decrease in both cash and total indebtedness during the third quarter 2008 includes the Company's repurchase of $55 million in principal amount of its $140 million 1.625% Convertible Senior Debentures for $50 million and the retirement of $16 million in term loan.

On October 17, 2008 the Company announced that it revised its fourth quarter 2008 adjusted cash earnings per share outlook to $0.33 per share based on, among other things, the weakening of most of the currencies to the U.S. dollar in markets where it operates. Subsequent to October 17, 2008, those currencies continued to weaken against the U.S. dollar. Accordingly, the Company now estimates that its fourth quarter 2008 adjusted cash earnings per share will be approximately $0.31 per share assuming those currencies remain stable through the end of the year.

We believe that Adjusted EBITDA and adjusted cash earnings per share provide useful information to investors because they are indicators of the strength and performance of our ongoing business operations, including our ability to fund capital expenditures, acquisitions and operations and to incur and service debt. These calculations are commonly used as a basis for investors, analysts and credit rating agencies to evaluate and compare the operating performance and value of companies within the payment processing industry.

The Company's management analyzes historical results adjusted for certain items that are non-operational, not necessarily ongoing in nature or that are incremental to the recurring operations of the business, and management believes the exclusion of these items, as well as the inclusion of pro forma results, provides a more complete and comparable basis for evaluating the underlying business unit performance.

(1) Adjusted EBITDA is defined as operating income excluding depreciation, amortization and share-based compensation expenses. Although depreciation and amortization are considered operating costs under generally accepted accounting principles, these expenses primarily represent non-cash current period allocations of costs associated with long-lived assets acquired in prior periods. Similarly, the expenses recorded for share-based compensation do not represent a current or future period cash cost.

(2) Adjusted cash earnings per share is defined as diluted U.S. GAAP earnings per share excluding the tax-effected impacts of: a) foreign exchange gains or losses, b) discontinued operations, c) gains or losses from the early retirement of debt, d) share-based compensation, e) acquired intangible asset amortization, f) non-cash income tax expense and g) other non-operating or unusual items that cannot be accurately projected. Adjusted cash earnings per share includes shares potentially issuable in settlement of convertible bonds or other obligations, if the assumed issuances are dilutive to cash earnings per share.

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