Euronet Worldwide, Inc. (EEFT) Earnings Call Transcript & Summary

Welcome to the Wells Fargo TMT Summit 2020. [Operator Instructions] Please note, this session will be recorded.

Great. Thanks, and good afternoon, everybody. This is Tim Willi with Wells Fargo Securities. Thrilled to have with us Mike Brown, Founder and CEO of Euronet, always entertaining conversation and informative. So we've been looking forward to this all day.

Mike, maybe we just sort of start off with probably the question you've gotten the last 10 months, and I'm sure all day today talking about DCC, ATMs and travel. So maybe we just get that one out of the way and sort of talk to people. I think there's still a little bit of knowledge about exactly how those transactions, where they come from. It's not just people from the U.S. and from Asia, and places flying into Europe, there's a lot of what you call sort of localized. So maybe you could sort of talk through what you saw in 3Q and the bounce back, which I think surprised everybody, and sort of how to think about that part of the EFT business before we get into some of the other areas.

Okay. So to give you a little bit of a history, we had the whole COVID lockdowns in Europe that everybody saw in the news. I mean it was pretty militarily done, where they shake you down if you left your house and all that in probably March, April, May and then into June. It's still pretty bad in Europe, but they were -- to the point where the governments were saying, we're not going to reopen our borders until October. But then all of a sudden, on June 15, the -- all the European governments got together, and said, no, we need to open our borders. We'll open them up just to each other beginning on July 1. So what that did was it knocked out about 25% of our potential transactions, cross-border transactions that come from countries outside of the EU. That's America, Canada, Australia, [ Latvia ] or whatever, okay? So they said that -- so with 2 weeks' notice on June 15, they said beginning July 1, you can go on vacation. And it was amazing to me, and it actually surprised me we beat our forecast by a lot because I didn't -- imagine without a vaccine, without any kind of really any way to protect yourself that we saw people going on vacations like instantly in the countries that you could drive to, which are ones like Central Europe, Croatia, Germany, et cetera. We saw within 3, 4 -- probably within 4 weeks of the opening of the borders, we saw -- we were up to 50% of last year's transactions in 2019. And that's pretty amazing considering we're putting just 25% of them because we're shut out of those -- those were the Americans, et cetera. So we were really doing 2/3 of last year's transactions in the drive to countries. In the countries that you have to fly to or you have to make more thoughtful reservations for airplanes, et cetera, ahead of time, we got to about 40% of last year's potential transactions. So still really quick rebound. That makes me feel very good about this year no matter when the border is open and for sure 2022. So what the vaccine I think will do is as that starts to pervade the culture and kind of the psyche of the leaders, I think that they will start to open their borders probably a lot earlier than July this year. And based upon what we saw last year, we're cautiously optimistic. I can't imagine it's going to be anywhere near 2019 levels because we're still -- we're not going to have vaccinated the entire group, but I am excited. And that also, at a minimum, positions me very well for 2022, because by then, we'll have the vaccines everywhere, enough firewalls set up and fire breaks or whatever they call them, set up.

Well -- and the point is as though that even if like true international travel, Asia, Australia, U.S., even if that doesn't come back super quick within sort of the EU and the ability to move around, you can recapture 75% of sort of what you had. We don't need to load up airplanes and fly people in from all over the world to get that business largely where it was. Yes. Yes.

That's correct. Now, and let's be realistic, I'm not going to get 75% of 2019 this year. But it kind of depends on if they let some of the -- some of those non-Europeans in, maybe I can hit those numbers. And it really all depends on how fast they get their collective act together because if they say, we're going to open, say, on April 1 and they tell everybody that in the first quarter, it gives people the confidence to make the plane reservations, get themselves organized and so forth. So it really -- it's not about the vaccine as much as is it about policy.

Yes. So let's turn to some other aspects of EFT and then we'll hit the other businesses. But you obviously have a long history in this division. And frankly, outsourcing for banks has been a big part of the EFT story for those that have watched it for a long time. You talked a lot about that, sort of reemerging thematically, did a small acquisition in the U.S. along those lines as well, which is interesting given you've never really been in the ATM business in the U.S. since you sold off [indiscernible] a while ago. And then international, I guess, then market expansion, right? You've moved into an unnamed Asian country this year. You talked about several others that you've eyed up and feel like you're ready to make a move. So let's sort of hit on those aspects of EFT that are not as tough decision.

Yes. So we could start to see [ where are we ]. We can start with outsourcing. Outsourcing is one of those things that most banks just don't like to do, even though I can do a better job than they can do internally and I can do it cheaper. And the reason is because a bank's IT director loses his power. Maybe in some of these countries, he loses his kickbacks from suppliers. Or in Western Europe, the thing that we fight all the time are just the unions. The unions don't want to outsource anything to anybody, okay? So those are the negatives. The positives are, I can do it better and I can do it faster. And for a long time, banks consider their ATM strategic brand flags. They're not thinking about that as much anymore because they're actually closing their branches at an alarming rate. Over the last 8 years, probably 40% of the branches in Europe have closed. And it's projected over the next 3 years, 25% more will close. So as those branches close, ATMs disappear that were in the branches, and that just means more of the market is open for me. And it also, as they're doing that, you can tell they're trying to rationalize their cost structures. More and more banks might be inclined to doing outsourcing. If you look at our outsourcing contracts, of which we probably have 12,000 ATMs owned by banks and contracts around the world, they're all in Central and East -- Central and Eastern Europe and in Asia because Western Europe won't do it. But that's sort of -- in the U.S. now with this, we've got a couple of thousand there. So -- and the reason is because the Asian banks, they're scared to death of these wallets. Wallets are kind of turning on their heads, the whole idea of do you need a bank or not need a bank. And so the IT department doesn't have -- they're trying to keep up with wallet kind of fintech-y kind of advancements and they're not as worried about ATMs. So we see, going forward, a lot more opportunity for outsourcing than we saw in the past. When you look outside the U.S., I mean, if 4%, 5% of all the ATMs in the world are outsourced, that would surprise me. So big old market there. And with almost 50,000 ATMs that I have and the cost advantages I have and the technological advantage I have, there's no reason people shouldn't do it. It's just trying to get them to do it.

So on outsourcing, and again, I know it was a small transaction. We got a lot of ground to cover in our limited time here, but maybe just a couple of thoughts about Dolphin. I mean I know it wasn't big. So maybe a couple of years from now, it's like, well, we didn't spend a ton of money, it didn't work out, what have you. Or was this...

I don't think it's going to be that. I think Dolphin need -- what Dolphin has told us is they need advanced technology like what we've been deploying in Europe for years. And they also needed a bigger balance sheet behind themselves because they're out there, giving very good service with kind of what I'll call standard technology that everybody offers in the U.S. And they -- we'll be able to give them better technology and a balance sheet that will allow them to go after bigger and bigger deals. So that's -- so we're excited about that. And they're closing more deals every day.

I mean did you -- obviously, you've built a big franchise, Europe, Asia, India. Should we think about the U.S., if we say 5 years from now, 6 years from now, hey, like we'll be talking about a strong year in the U.S. is actually helping to drive growth of EFT overall? Or is it probably...

Yes, I believe so. And you can't beat outsourcing. Outsourcing doesn't require a lot of capital. We have all that technology. Those are pure profit plays. And to your first question about new markets, let's not forget about that because I'm really excited about the expansion with or without these borders opening and closing. And in Europe, the reality is I've got -- I'll probably be live in 5 or 6 new markets next year, if I get a little bit of luck behind me. You never know until you're live because the regulator could change their mind and blah, blah, blah, but we're really close. We're kind of -- we're to the details of closing 5 or 6 more countries. And based upon the one country that we've gone into in Asia that is extremely profitable for us, we're really excited about that. And don't forget, a lot of these new markets we're going into are much more cash-based than Europe. I mean in Europe, you're going to spend -- 95% of your spend will be at the card. Maybe 5% with cash out of our ATMs. You go to these other markets, it might be 50-50.

Yes. No, there's definitely a lot of cash, and there's a lot of growth in accounts, but the point-of-sale infrastructure is still lagging the growth of accounts and people and so.

And you know with all these wallets, why do you need that point-of-sale infrastructure?

Yes. Yes, yes. What -- so let's touch on wallets and maybe like use that as a segue into epay because you built a lot of stuff digitally with epay. You've announced a variety of different wallet partnerships to put some of the epay, the catalog, as I call it, of all the content that you've built over the 20-ish years you've been in that business into these wallets, whether it's Paytm in India or some other wallet partnerships you've announced, the WeChat Pays, the Alipays. So I mean what's the opportunity, I guess, for Euronet with wallets across all the products or the 3 business lines, the money transfer, the cash access and then epay to really work with this huge wallet ecosystem that's emerged around the world.

Yes. And it's emerging. It's grown like crazy. And it's not just wallets per se, the pure wallet guys like an Alipay guy, but it's also these nouveau banks or whatever you call them. These fintech bank kind of guys who really live out of an app on your phone. They don't have branches or very few branches. Or I might be able to just break it down by division. In the epay division, it's really obvious. epay, we can deliver and distribute all of this epay content through wallets. We've seen -- you can do your mobile phone top up, you can buy a Google Play card, you can do Xbox, PlayStation, whatever it is, okay? So we can sell all those epay products. To us it's a brand new sales [ tail ]. It's just like for a long time, you could only do top up your mobile phone at a retail. Where do you take your money, okay? Or buy a gift card at a retail. Well, now we can do all that directly with a wallet. And so that's very exciting. In fact, when you look at our growth in Brazil and in India, et cetera, these are all with these new fintech banks or with wallets. And just one little small example of this is when we went live to do prepaid mobile top up, the very first time we did this in the very first quarter with just one of the wallets in India called PhonePe. They've got about 200 million users. In the first quarter we turned that on, we did 90 million transactions. 0 to 90 million in 90 days. It was absolutely stunning. So we took that success. We went to Google, and we said, "Do you want to distribute your Google Play that way?" And they said, "Heck, yes, we'll give it a shot." And then that just blew everybody away. So we're doing those kinds of things with wallets on the epay side. On the money transfer side, wallets are going to be the new place to pay out. In the old days, the only place you could pay out was either directly to a guy's bank account. Most people didn't have bank accounts in the poorer countries. Or you could go walk into the branch of a bank, with your transaction number and your ID and you can pick up your money at that branch. Well, now this is going to be replaced, we believe, by all these wallets because the wallets want the money, want the credit inside it and so you can spend. And everybody's got a wallet and you can buy things, but both physical and online with a wallet. And the third one on the EFT segment, we're actually starting to use wallets now to be able to allow you to do -- to take money out of ATMs as an example. And we're also, in EFT, we're connecting up bricks-and-mortar retailers and their POS systems. We're allowing them to do what we call alternative payments, meaning wallets, et cetera. So we're doing that across Europe and elsewhere. So I mean just in one little market in Poland, we're doing 1 million wallet cash withdrawals a month. And that's just -- and the adoption curve for that was like 0 to 1 million a month in about a year. I mean that's how fast these things are moving.

Yes. One of the things that I think the market grapples with from time to time is Euronet's businesses are all about cash and cash is dead. And I'm sure that's something -- I think about it as when you started the company, cash was -- that's what you -- it was cash. So you built a company that was about getting people cash. Right now we're moving into omnichannel and digital and all your businesses have been positioned to also be digital, but you've never let go of the sort of physical cash access points, which I think as a unique attribute, right? There are a lot of pure digital players that can't deliver any kind of physical capabilities, [indiscernible] and the PayPals sort of working with you. Could you talk a little bit about the omnichannel strengths of Euronet. I mean you've hit some examples, I guess, there. And then also amongst the 3 divisions, sort of the synergies that you've seen over the years about being able to leverage EFT with money transfer or epay with money transfer and maybe that omnichannel discussion in that as well, if it's easy to do.

Okay. So first I'll talk about the fake news that cash is going to be gone next week, okay? And this is -- the reality is there will be more and more noncash transactions in the developed world every day, okay? So we see the pie for cash kind of going down slowly, but it's a lot slower than anybody ever would predict because -- but in the meantime, we just want to be that guy to give out cash. And if you're a traveler and you're on vacation in Europe and you want to order an ice cream -- you want to get an ice cream cone on a [ malty toast ], you're not going to do this with a card. They're only going to take cash. So you need a little bit of cash. We just want to be the guy to give you that little bit of cash. But that doesn't mean we aren't investing heavily into the digital world. In fact, right now, probably 30% of the transactions in epay are all digital. We've watched our money transfer, digital transactions grow in the third quarter. They were up 125% over prior year. They're growing like [ banshees ] for us. And we're seeing also in EFT, the alternative payment acquiring. And also, like I said, more and more of these banks are going to -- they're going to want to touch that wallet customer. These -- every bank on the planet is scared to death that the wallets will put them out of business. And so they've got to be wallet-friendly. They've got to be able to have their ATMs, their POS stars, everything talk to a wallet as a payment mechanism as opposed to a piece of plastic. This plastic is -- if you want to say, cash is passé, I'm telling you, plastic is more passé. Because why do you need a piece of plastic if you can do everything with a wallet. And it's more secure, there's no fraud and you can do everything instantly. So we're playing both sides of this, but in the meantime, I mean, I can't help but make a heck of a lot of money on ATMs to spend some cash to tourists. And those things are just so -- I mean I get 70%, 80%, 90% ROICs on every ATM that I put out there. So I'll use that cash to continue to reinvest in our company. And that's what I've done with the technology that -- with the money that that's generated, I've invested in more technology and more digital stuff.

Yes. On the topic of technology and the investments, Ren is out there. I think you just turned on Mozambique, if I remember correctly. I think it's an aspect of the story that people are very intrigued by, I know from a financial perspective, not a huge driver now, but it would seem like some are out there on our horizon that's not super distant. That this emerges as an interesting little business and revenue stream. But the question we always -- so could we talk about that, but then also competitively, the question I think people scratch their heads on is, how did Euronet get this contract? How did they slide in there? Isn't this something that like the big card networks you're supposed to be partnering with governments for or whatever. And here's Euronet from Kansas City, it's slid in to work with the central bank of Mozambique. Could you talk about...

And we're talking to several other central banks. Well, it really comes down to the technology we have. We have the only platform independent, cloud-ready piece of technology that has micro services that's modern tech for banks. If you take a look, every frigging financial transaction, you do, Tim, is going to run through 35-year-old technology. And picture what your computer looked like 35 years ago. Well, that's what this transaction's going through. That's why these wallet guys and these fintech players are starting to gain market share so fast because they can be reactive. They've got a really good piece of technology that can change and so forth with the people. And so we invested in this technology to make ourselves more nimble. And so we kind of eat our own dog food. And in that respect then we just said, okay, now let's spend 2 years to productize this so that we can sell it to outsiders, because this whole fintech world isn't going to be able to survive with 35-year-old technology forever and ever. And they're going to need to replace all that stuff. And we've got the technology to do that. So you're right. This could be the fourth leg and it's still might be bigger than all the other legs at some point in time.

So I mean... [Technical Difficulty]

We lost Tim. Okay. While Tim comes back online. So I think our investment in digital is just kind of -- this is part of our culture, always invest, always try to come up with that next piece of technology because technology is how you disrupt. And that's what we've done, whether it was with wallets -- yes, are you talking to me? So anyway, that's kind of what we've done. I'd like to take a moment, too, to just talk about money transfer while we -- because we don't have a lot of time, we just lost Tim and he'll come back. But my money transfer business, sure, I grow my digital in Q3, 126% over last year, and that's all hunky-dory, love that. But I want to point out to people that the money transfer business, 75% of all family remittance is done through bricks-and-mortar today. Only 25% is done digitally. So when you look at that 75%, I have 5% of those 75%. That's where I've been very strong, and we continue to grow this 4, 5, 6x faster than World Bank numbers say the industry is growing. We're getting more and more market share. We grew in Q3. Our U.S. outbound transactions were up 22% over last year and our European outbound was 26%. World Bank says we'll be flat this year for growth. Here we are growing. Most years, it's like 4% or 5%. So no matter how you cut it, we're gaining more and more bricks-and-mortar market share, while at the same time, well over doubling our digital presence. So we have an omnichannel approach in the money transfer business. And that omnichannel approach is winning every which way. We're not just -- I believe some people might -- some of the digital players might be cannibalizing their bricks-and-mortar. But to me, we're actually growing both of them very, very fast. So I'm really excited about that. We still don't have Tim, so I'm trying to think of what I should talk about next. I think maybe -- I want to talk to you a little bit about innovation, too. So we -- in money transfer too -- by the way, in money transfer, when it comes to bricks-and-mortar, we've added Kroger, which traditionally was a Western Union-only player for the last 20 years. We've added BSN, a nice Western Union customer out of Texas. A nice little -- [ actually ] a grocery store chain. We've added probably 4 different post -- 5 different post offices around the world that were exclusive with one of our competitors as well. So we're going to grow this bricks-and-mortar business, while we're still going to spend a lot of time on the digital because the future will be digital, but it won't be 100% digital because when immigrants come from cash-based economies, even to one of these more developed economies, it takes them a while to get bank accounted and all this stuff. They're going to probably send money back using the kind of cash as their preferred methodology for quite some time. So I just want to play it both ways. Then the next thing I think I'd like to talk about is some of these other innovations. We -- one of the reasons we got in Kroger was because 2 years ago, we developed a SaaS solution just for them, epay did this, which allowed them to sell multiple products and compare each of the vendors' price for that so that they could guarantee their customers the very lowest price. And that's how we got this deal. So the same systems in there between us and Western Union, and where basically what it does is you say, "I want to send $300 to Mexico," it will tell you using either us or Western Union, what's the best deal to Mexico. And so we believe, over time, because we are the best deal, we never had this channel before. We can be aggressive and garner good market share there with respect to the money transfer business. And then lastly, let me tell you a little bit about one of the other innovations we've done. This is a combination of EFT and epay -- not money transfer exactly, but those 2 guys. So a year ago, Target wanted to be able to sell more AppleCare products. AppleCare is kind of the insurance product for when you buy a phone or a laptop or something like that. And they were having very low attachment rate. Very few people going into Target spend $1,000 on a computer, spent that extra $150 for AppleCare. And so they said, well, maybe what we need to do is approach this on a per month basis. So what we did is we -- within 6 weeks, we [ gen-ed ] up a product to be able to swipe -- the guy swipes his card through and then every month, we hit his card for about $6 a month, and he pays for his AppleCare insurance product. This helped the attachment rate go up quite a bit because it was so much less expensive to that customer. They still want insurance, but after spending a $1,000, you don't want to spend another $150. So then we took that technology and we exported that to Korea. Because we had a very interesting thing where Microsoft came to us, and they said, we want to sell Microsoft All Access premium, which is their ability to start with Xbox, with a game on Xbox, take -- pause that game and continue that on your phone and even then go to your computer if you so wish. So what they did -- what we did was, is we created a bundle that was a combination of a new Samsung phone, the Microsoft All Access and also a higher data rate from the mobile operator, largest mobile operator in Korea. And we sold that as a triplet, you might say, as a combined bundle for about $25 a month, and then we'll hit their account every single month for the next 2 years. So this is another example of -- and by the way, this was so successful that we projected out how many we'd sell in the first month, and we did those numbers in the first 2 days. So Microsoft, very excited about this. Want to take us to 7 other countries to do it. So these are the kind of things that you'll see us do. We don't have one big killer like elephant gun shot that will triple our profit overnight or something like that or add 20%. What we have is many, many little ones that all add up to the growth rate that we've had. And when you look at our 2019 and prior 8 years before, we had a CAGR growth rate of our profit in the neighborhood of about 22%. So this is how we do it. Just lots of little things, and we're technologically enabled to do so. Tim, I think you got about a minute.

I apologize. Obviously, you found some things to talk about. I'm not sure what you talked about so I don't want to ask you something you just went over. So I'll let you keep going, you got one more minute to talk about something that you...

Maybe last is everybody talks about, okay, what are you going to do with the money that you have? What's kind of our balance sheet strategy? Well, you can see on our balance sheet that we've got about $400 million in cash in ATMs and a little over $1 billion in cash in the bank. So my primary focus for that cash would be to find acquisitions that can continue to grow like the rest of the company. Earlier this year, in March, I bought back 3.7% of the company's stock at an average of $112, which in the summer time when we had a $90 stock price, didn't look so smart, but now I look a lot smarter. So it's amazing what a couple of months we'll do to your IQ. But -- so my preference is always acquisition over stock buybacks, because stock buybacks just help your denominator. They don't grow your business. So that would be probably my best season. And last year, I threw out almost $350 million in cash, operating cash, our bank account went up by that much. And this year, I'll be close to somewhere around $100 million. And so we're still making money this year, just not as much as we'd like to because we need to get the tourists back. So that's pretty much it.

Great. Well, Mike, I apologize for my technical glitch. I do not know what happened there. But anyway, thanks for filling in the airtime. I knew you'd be all right. So thanks for the time. Thanks for participating in the conference, and have a great rest of your day.

Thank you very much, Tim. Thank you. Bye.

Thanks.