Euronet Worldwide Inc

NASDAQ:EEFT

Earnings Call Transcript 2021-Q4

[Operator]

Good day, ladies and gentlemen. Greetings and welcome to the Euronet Worldwide Fourth Quarter and Full-Year 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions]

It is now my pleasure to introduce your host, Mr. Scott Claassen, General Counsel for Euronet Worldwide. Thank you. Mr. Claassen, you may begin.

[Scott Claassen, General Counsel and Secretary]

Thank you. Good morning, and welcome everyone to Euronet's quarterly results conference call. We will present our results for the fourth quarter and the full-year of 2021 on this call. We have our Chairman and CEO, Mike Brown; our CFO, Rick Weller; and the CEO of our epay division, Kevin Caponecchi, on the call.

Before we begin, I need to call your attention to the forward-looking statements disclaimer on the second slide of the PowerPoint presentation we'll be making today. Statements made on this call that concern Euronet's or its management's intentions, expectations or predictions of future performance, are forward-looking statements. Euronet's actual results may vary materially from those anticipated in such forward-looking statements. As a result of a number of factors that are listed on the second slide of our presentation. Euronet does not intend to update those forward-looking statements and undertakes no duty to any person to provide any such update. In addition, the PowerPoint presentation includes a reconciliation of the non-GAAP financial measures we'll be using during the call to their most comparable GAAP measures.

Now I will turn the call over to our CEO, Mike Brown. Mike?

[Michael Brown, Chairman, President and Chief Executive Officer]

Thank you, Scott, and thank you to everyone who is joining us today. I'll begin my comments on Slide number 5. I am happy to be joining you today on the other side of a year that continued to present more uncertainties from the COVID pandemic, but one where we have emerged stronger with more products and better network and even more advanced technology. Just as it did through the heart of the pandemic, the strength of our balance sheet has afforded us the luxury of continuing to invest in our business and our best-in-class employees.

Our pre-pandemic strategy consisted of two key points: one, deploy ATMs in more markets; and two, expand our physical and digital distribution in both epay and Money Transfer. Our investments validated that these strategies remain effective, and we believe that they will continue to result in strong earnings growth rates in the coming years.

We achieved these strong double-digit growth rates in revenue, adjusted operating income and adjusted EBITDA for the full-year of 2021, despite a year with highly irregular travel patterns, that moved from heavy restrictions across most of the world to promising travel patterns later in the year, only to be set back by Omicron in the second half of the fourth quarter.

Despite this setback, the current data suggests a strong rebound in travel recovery beginning in the second quarter of this year 2022. As we ended the year, and airlines increased flight capacity, we saw improvements in cash withdrawal trends, particularly through the first half of the fourth quarter as the Omicron variant spread across the globe, air travel was interrupted and lockdowns were implemented in certain countries, resulting in lighter transaction recovery than early in the quarter.

In epay, we continue to see strong adoption of our digital products in many of our markets, and we achieved $1 billion in revenue for the first time in that segment's history. And in Money Transfer, we continue to deliver strong double-digit growth rates on the U.S. and international outbound transactions, including the Middle East and Asia, which were offset by lower domestic transactions and transactions in the Middle East and Asia, where transactions still suffered from government-mandated lockdowns.

All of the data from this fourth quarter, together with the continued global expansion of vaccine programs and many countries' decision to open borders to regain some of the GDP loss during past travel seasons give us optimism in our expectation that 2022 will be a strong year for Euronet.

Now let's go on to Slide 6, and I'll discuss the current travel data in more detail. On Slide 6, we have presented an updated version of the graph we provided to you in the last couple of quarters, which shows actual and projected European flight data for this year versus 2019, overlaid with our total international cash withdrawals for the same period as well as our transaction recovery from non-EU cardholders. This chart really helps you see the trend we mentioned on the previous slide. The actual flight data continued to improve through the first half of the fourth quarter, and our international cash withdrawals were tracking better than flight data in the travel recovery transactions.

As you can see a sharp increase in non-EU transactions represented by the blue dots, and which represent 25% of the total international transactions presented on the gold dot. However, in mid-November, you can see that the flight data started declining with the spread of the Omicron variant, and our total international transactions, including non-EU transactions, also declined sharply as new travel restrictions and lockdown requirements were put in place in several markets.

You'll notice the orange circles on the graph are industry predictions that were made prior to Omicron, which have not yet been updated to account for the new variant. What we see in the news continues to confirm a view similar to what these numbers represent. As we have said in the past, we tend to see intra-Europe transaction recovery ahead of flight recovery largely because travel by automobile is faster to a range and returns more quickly than airline travel.

While the decline in transactions from Omicron couldn't have been predicted when we provided guidance in October, we continue to be encouraged that when borders were open with limited or no travel restrictions and when flights were operating, tourists were eager to travel and that continued to translate into cash withdrawals for our EFT business. There have been many predictions of a strong travel recovery in 2022 as vaccine efforts continue to spread across the world and as people learn to live with COVID as part of their lifestyle.

Let's go on to Slide number 7, where we have presented some of these articles with a little bit more detail. At various points during the pandemic, we felt like we could see that light at the end of the tunnel only to enter another COVID wave. However, this time, to steal a baseball analogy, it feels like we maybe rounding third base and heading for home. We are seeing articles that quote various officials, starting to predict that COVID will become an endemic during 2022 for some parts of the world.

We are also seeing new treatments being approved, vaccines finally reaching the less developed countries and airline expectations starting to climb back up in anticipation of better travel numbers this year. In January, a survey of Americans who travel for business or pleasure before the pandemic, 91% of those respondents have plans to travel in the next six months, and 25% have said that the pandemic no longer influences their decision to travel according to a travel market research firm, Longwoods International.

We are seeing major brands like Visa and Mastercard make statements that consumers are learning to live with the pandemic and also that spending surged in the final three months of 2021 despite the disruption caused by Omicron. Some of the more encouraging stories include comments that airlines are starting to recover. In fact, with their popular budget airline in Europe, reported a 243% increase in passengers year-over-year for the fourth quarter of 2021.

Perhaps the most important and to the most significant portion of our EFT business beginning this February, a couple of days ago, the EU made a policy shift from safe listing travelers to Europe by country and replacing them with restrictions based on individual travelers COVID status. These recommendations were based on three factors. First, the Omicron variant appears to be much milder version of the COVID-19 and therefore, less worrying; second, citizens are tired of these ongoing restrictions; and third, these countries have concluded that travel restrictions do not prevent the spread of COVID-19.

In their recommendation, they noted that a person-based approach will substantially simplify the applicable rules and will provide additional clarity and predictability for travelers. Outside of Europe, where strict lockdowns and travel restrictions have been in place for much of the pandemic, we are starting to see some easing of these policies. For example, the Philippines announced that effective February 1, the government will allow fully vaccinated foreign travelers in the country, and several other Asian countries are considering plans to allow tourists into certain island beach areas of their countries.

All of these third-party indicators give us optimism that we may now be where we thought we were a year ago. While there is not a universal view that 2019 travel levels will be achieved, the confidence of achieving near 2019 levels is continuing to build, giving us confidence that the EFT segment will deliver significant contributions to our consolidated results this year. While we do not expect the EFT results to fully achieve 2019 levels with the improved EFT results in 2022, together with the growth that we have achieved in epay and Money Transfer over the last two years, we continue to expect that we will produce 2022 earnings similar to those in 2019.

Now let's move on to Slide number 8, and we'll talk about some of our EFT expansion in the quarter. Slide number 8. Over the years, we have consistently demonstrated our willingness and ability to expand our product portfolio and distribution capabilities. You may remember that in March of last year, we announced our intention to acquire the merchant acquiring arm of Piraeus Bank in Greece. This acquisition expands Euronet's merchant acquiring capabilities, including a leading position in Greece for online acquiring in a market that continues to have the same growth trajectory that we saw when announcing the acquisition. This has taken a little longer to close than we originally expected, but we expect to close later this quarter.

We also signed an agreement with Safepay, a fintech start-up in Pakistan. Safepay as a developer of a financial platform that facilitates digital payments in Pakistan. The company's platform assist stores to increase checkout conversion, speeds up accounts receivables and streamlined sales by helping customers to pay online. Euronet will provide the technology to help Safepay interact with Visa's Internet payment gateway services.

In addition to a focus on expanding our non-ATM services, we also continue to expand our ATM network. This quarter, we launched new ATMs in Montenegro. Montenegro is a beautiful country with rugged mountains, medieval villages and beaches along the Adriatic coastline.

In 2019, the country welcomed more than 2.6 million tourists and year-over-year growth was booming. This will be a nice addition to our ATM networks across Europe. In Spain, we continue to sign agreements with banks so that their domestic customers have access to Euronet's more than 3,300 ATMs in the country, significantly expanding the convenience for the bank's customers. This quarter, we signed an agreement with Orange Bank and EURO 6000, a consortium of 12 banks in Spain. We now have 25 network participation agreements with 72 banks in Spain, which is a reflection on the great value our ATM network provides the banks and their domestic customers. We also continue to add more ATMs in our existing markets. During the quarter, we added another 375 deployed ATMs, 511 outsourced ATMs and 259 low-margin ATMs.

We seasonally deactivated nearly 4,000 machines due to the slower travel season in the winter and the travel disruptions and new lockdown restrictions caused by the spreading of the Omicron variant. For the full-year, we added more than 3,350 new deployed ATMs. We reduced our outsourcing count by about 850 machines and added 432 low-margin ATMs, bringing our total ATM estate to 48,619.

As we look forward, we would expect to add between 4,000 and 4,500 ATMs to our estate this year. As we wrap up the year on EFT, we are encouraged that as travel came back, our growth strategy was validated. People will still travel, they'll still want cash when they do so. We even found that they were withdrawing more cash in each transaction. So as travel continues to trend back to pre-COVID levels, we are proud that we have a larger, stronger network to serve both our domestic and international customers in 33 countries around the world.

Now let's move on to Slide 9, and we'll talk about epay. epay had an outstanding year, delivering double-digit growth across all metrics and reaching $1 billion in revenue for the first time in its history. These exceptional results were achieved through the continued growth in our digital media distribution, both in physical retail as well as through digital distribution channels and through growth in mobile top-ups sold through the digital channels. The expansion in digital distribution has been extremely important for many consumers around the world for the last couple of years. Movement restrictions and the lockdowns imposed during the pandemic highlighted the importance of the digital economy.

For people who previously relied on physical retail, the transition to the digital economy was challenging by implementing new digital distribution agreements with retailers by adding mobile wallet distribution and perhaps most importantly, by digitizing traditional payment methods, epay provided a path for these customers to fully participate in the digital economy. The technology to make these payments happen is complex, but the technology we have spent years developing and improving made these conversions achievable to our customers. And as you can see on this slide, we continue to sign new agreements for more products distributed through all of our channels. This quarter, we launched Apple products on PhonePe and AmazonPay wallets in India.

These two wallets do exceptionally high transaction volume, and Apple will be another nice addition to their product offering. We also saw nice growth in other Asian markets. In Indonesia, we launched digital media content at Alfamart, one of the largest convenience store chains in the country as well as tender digital codes, which will be distributed through Tokopedia, Indonesia, one of the largest e-commerce platforms in Southeast Asia.

Finally, we launched digital distribution of Just Eat a leading global online food order and delivery service kind of like Uber Eats in seven European countries, including Germany, Austria and Switzerland. epay has developed industry-leading partnerships with the most popular global brand a vast network of retailers and digital distribution partners and best-in-class technology that makes integrating the brands and the retailers quick, seamless and convenient. Brands benefit from increased distribution, retailers benefit from having more content to offer their customers and the customers benefit from having the choice in how they want to interact with their funds, whether in a physical store location or as a participant in the world's digital economy.

All of this together is a result of many years of hard work and dedication from our teams to build a strong infrastructure and this year, it paid off with strong double-digit growth rates in the business. With our continued product development, distribution expansion and technological advantage, we continue to believe epay will achieve annual operating income growth in the low double-digit range. However, as we introduce more products into epay's portfolio, the epay business is likely to become more lumpy through the quarters, ending the year with an annual growth rate that we expect to be in the low double-digit range.

Now let's move on to Slide number 10, and we'll talk about Money Transfer. We continue to expand our industry-leading payments and remittance network, which now reaches 510,000 physical locations in 165 countries as well as 3.7 billion bank accounts and 439 million wallet accounts. We also continue to expand our mobile wallet presence, adding service to another 20 wallets across 11 countries, including seven new markets, El Salvador, Myanmar, Pakistan, Tonga, Vanuatu and Vietnam. We expanded our digital presence by launching our Ria app in two new countries, Australia and Malaysia, and we added two countries to our bank deposit network, Japan and Madagascar. COVID has certainly presented its share of challenges over the last couple of years, but our payments and remittance business were well positioned to address the changing needs and preferences of our customers, namely real-time account deposit and digital adoption.

We've seen account deposit volumes grow in excess of 20% over the last five years. But there was a convincing shift in consumer preference to bank accounts and mobile wallets during the pandemic, and this increased our account deposit volumes by 44% last year in 2021.

During this past year, 29% of Ria's cross-border remittance volumes were paid to an account, and including Xe, 50% of our Money Transfer segment's cross-border international payments and remittance volumes are sent directly into an account with the vast majority of these being received in under five minutes.

Finally, Ria continued to see strong digital transaction growth in the app and riamoneytransfer.com site with 55% direct-to-consumer digital transaction growth in the quarter, which gave a 72% growth for the full-year. I should also mention that Xe saw strong corporate and consumer payment transaction growth rates during the year of 29%. Now those are some impressive growth rates. We made significant investments in our Money Transfer network, our teams and our products in 2021. And we expect these investments and commitments to fuel double-digit operating income growth in 2022.

Now let's move on to Slide number 11, where I'll provide you with a brief update on our progress with the Dandelion platform. As we told you this past November, we launched our Dandelion platform, which offers our core Money Transfer infrastructure as a service to the broader financial services ecosystem. We have continued to make great progress on our network expansion and product improvement, where in this quarter, we have enabled Xe2Ria rails for B2C and B2B in Indonesia. This is the first country processing both B2B and B2C payments through Xe and Ria. Additionally, we enabled corporate payments to four new countries, Costa Rica, Japan, Malaysia and Mexico.

We also launched service with STP in Mexico, creating real-time service for both corporates and individuals to all banks in Mexico. These are great enhancements for our Dandelion product, which allow us to enable new use cases into adjacent verticals that will contribute nicely to the Money Transfer growth in the coming quarters.

I just want to remind you that Dandelion not only powers payments to third parties, but also powers our own assets such as Ria Digital and Xe. In that regard, I believe it is worth pointing out the scope of our broader portfolio of consumer digital product and the success we are seeing with them. As many of you know, we offer real remittance services through our Ria app and riamoneytransfer.com, and we offer consumer payments, including remittances, through our Xe app and xe.com.

When all three digital customer revenues are totaled, including the relatively insignificant Dandelion revenues at this point in time, it accounts for approximately 9% of our total Money Transfer revenues in the fourth quarter 2021. We are extremely excited about this sizable part of our business, where we are seeing hyper growth and what is beginning to be a meaningful part of our business.

In the fourth quarter, we saw transaction growth of 50%, which gave us 68% for the full-year. And on the revenue side, we grew at 35% for the quarter and 51% for the year. Certainly, these are impressive, exciting growth rates. As I reflect on our digital customer base, I can't help, but to admire some of the trading multiple certain competitors in the digital transfer space enjoy like revenue multiples ranging from 6x to 24x revenue. So in theory, the digital transfer part of our business should be worth something approaching $3 billion alone.

This valuation reflection confirms our conclusions to develop our digital assets and reinforces our results to push hard at nursing this part of our business that's growing at 35%. Now bear in mind that, as I pointed out earlier, inside these numbers are Dandelion volumes still play a smaller role, but with even more explosive growth. So at some point down the road, we might want to break these revenues out for you, so that you can keep up with our amazing progress and potential that this product has for us.

As we told you when we launched our Dandelion service, we are extremely excited about this new endeavor where with the incremental work that we have done, we have expanded our current total addressable market of $700 billion to a new TAM of $155 trillion, positioning us for continued double-digit growth while disrupting the status quo of the cross-border payments world. We look forward to giving you more update on this new business line.

Slide number 12. Now let's transition to another of our exciting technology solutions, REN. REN is really starting to take off with implementations of numerous significant payment projects throughout the world and a strong pipeline of new deals. In December, Banco Atlantida, the oldest bank and the largest bank by assets in Honduras and the fifth largest bank in all of Central America, expanded their relationship with Euronet by licensing REN self-service our multi-vendor ATM terminal driving software.

Banco Atlantida is looking to expand its presence across Central America and implementing REN self-service will enable that bank to use their fleet of ATMs and what they call a digital conversation channel with each customer individually as opposed to it being a cash dispensing cost center. Offering new services to customers outside of traditional bank branch is a major challenge for banks saddled with old technology infrastructure, implementing REN self-service will provide a path to offer new services to their customers in a more efficient, integrated and secure manner.

In Singapore, this is really cool news, we signed a REN deployment agreement with Trust Bank Singapore Limited which is a digital bank joint venture between Standard Charter Bank and NTUC Enterprise, the largest supermarket chain in Singapore, amid sardine demand for online and mobile alternatives, new digital players are transforming the banking landscape. The bank was looking for a strategic partner to provide consumer services based on a micro services-based cloud native digital platform deployed in the public cloud.

Our REN technology aligned very well with their strategic goals. So our team conducted a proof-of-concept using Amazon Web Services cloud in just 7 days to demonstrate the technical capabilities of REN. Our REN team blew away the bank's expectations and is now working to fully launch the product, which we expect to happen in the next several months. This will be the first project where we will offer REN payment services from a native cloud and also our first collaboration with Amazon Web Services.

We are excited about the possibilities that this will afford us as more cloud-first and digital-only banks are emerging globally and as traditional banks look to move their payment workloads to the cloud. This quarter, we completed the first phase of a multiphase modernization product with Standard Chartered Bank in Hong Kong. Finally, we signed an agreement with Touch 'n Go Digital in Malaysia. Touch 'n Go, the parent company of the Touch 'n Go Digital was established to set up a road toll system in Malaysia through a closed loop card.

Touch 'n Go Digital was incorporated to digitize the closed loop card and create frictionless payments in order to expand the closed loop card beyond the toll roads. They launched a mobile wallet, which has become the largest wallet in Malaysia with more than 22 million users, which for some perspective, means that nearly 70% of all Malaysia have the Touch 'n Go mobile wallet powered by REN. Through the partnership with Touch 'n Go, we will leverage our REN technology to enable the issuance of virtual cards and/or physical cards, allowing the customers to utilize the balances in their e-wallet through Visa's global merchant and ATM networks.

In short, REN will be the backbone for one of the largest fintech and the largest payment wallet in Malaysia. This is possible because of REN's ability to bring a new card program to market quickly, it's developer-friendly APIs and a secure and highly resilient platform. These implementations are extremely impressive, so I'd like to pause for a moment and reflect on the significant power of REN. The attractiveness of REN is that it uses a modern microservices-based architecture that is compatible with the most popular programming languages, hardware, databases and best practices.

The modular architecture enables specific areas of an application to be created or upgraded without interruption to the rest of the system. We have proven that this power again this quarter using APIs to create a significant structure for Trust Bank in just seven days. Not seven months or seven years as might have been the case with more antiquated payment options, which are currently used in the marketplace. REN also connected to AWS native cloud which is at the high end of what fintechs are looking for. This allows our partners to address locally the services that AWS offers internally, increasing the speed to market for these fintechs.

REN provides a platform for complex projects. For Touch N Go Digital, we developed a platform to allow our customers, users the ability to use a closed loop card to do open loop transaction that is not easy and not something every tech partner can provide. We are seeing an increasing number of technology leaders at fintechs and banks relying on these inherent features of REN to provide the powerful payments technology they need while maintaining their freedom of choice to work within the development environments that are best suited to their teams.

REN is also crucial in helping these teams leverage the latest advancement such as real-time payments and ISO 20022 digital wallets and cloud-based solutions. And most importantly, REN enables them to quickly meet the demands of their customers for faster, more convenient and highly secure experiences. Hopefully, the overview of the details on these REN agreements gives you a much more tangible understanding of how REN really is a difference maker. To underscore the tangibility of the momentum of our success, we have now signed 21 REN agreements, which we expect to contribute a minimum of $78 million in revenue over the next six years. And it's worth noting that this is revenue, which comes with very high margins. And our pipeline will continue that momentum with opportunities with more than half of what has already been signed. So while we've always known that our REN technology is special, there's nothing like customers validating its usefulness to the signing of long-term contracts. We look forward to continuing to share more REN success stories with you in the next quarter.

As I close my comments, I think you can see from these highlights that we have the potential for a long runway of growth ahead of us through our sound strategies to grow each of our segments and through our new technology that is transforming the way payments are made. COVID presented a small setback in terms of growth, but it also gave us an opportunity to sharpen our focus to validate these strategies and emerge stronger on the other side. And I hope that 2022 is the beginning of the other side. I believe the double-digit consolidated growth rates we achieved this year are just the beginning of a new streak of strong growth rates, and I'm excited to talk to you about our achievements as we move through the year.

With that, I will turn it over to Rick.

[Rick Weller]

Thank you, Mike, and good morning to everyone who's had a chance to join us. I'll begin my comments starting with the balance sheet on Slide 14. I think it's worth repeating that we were pleased to finish the quarter with consolidated double-digit growth. As it has been for the past two years, our balance sheet remains strong and continues to allow us to invest in our physical and digital networks, our technology, compliance, new products and new markets. As you can see, we ended the year with more than $1.2 billion in cash. The sequential increase is the result of $65 million in cash generated from operations, $125 million cash returned from ATMs and a drawdown on our revolver to enable effective treasury management for year-end settlements across many currencies. The majority of which was repaid after year-end. Partially offsetting these increases in cash were capital expenditures of approximately $30 million and share repurchases of approximately $228 million.

Finally, as we move through 2022 and see the return of earnings to pre-COVID levels in lockstep with the continued recovery of tourism, we anticipate this year the return of pre-COVID leverage ratios.

Slide 15. For the fourth quarter, we achieved revenue of $811 million operating income of $25 million, adjusted operating income of $67.6 million and adjusted EBITDA of $113 million. The slightly lighter than expected EBITDA growth rate was largely the result of the impact of the Omicron variant on the cash withdrawal trends in the EFT segment, as Mike discussed earlier. Had it not been for the travel interruptions caused by Omicron, our transactions were on course to put us within the range of our adjusted EBITDA expectations for the quarter. We delivered adjusted EPS of $1.15, a 4% increase from $1.11 for the fourth quarter last year.

Slide 16 shows our three-year transaction trends by segment. EFT transactions grew 42% as a result of improving domestic and international cash withdrawals together with a continued benefit from a significant increase of low-value point-of-sale transactions in Europe and low-value payment processing transactions from an Asia Pacific customers bank wallet and e-commerce site. epay transactions grew 21%, driven by continued strength in mobile top-up and digital media content distributed through digital channels. Money Transfer transactions grew a net increase of 10%, including 19% growth in both U.S. and international outbound transactions excluding the Middle East and Asia as well as 55% growth in direct-to-consumer digital transactions.

This growth was partially offset by declines in the domestic business and a 26% decline in transactions from the Middle East and Asia where transactions still suffer from the government-imposed mandated lockdowns. Absent the declines in domestic and Middle East and Asia, our Money Transfer transactions would have grown about 15% year-over-year.

Next slide, please. On Slide 17, we present our results on an as-reported basis. Year-over-year, most of the currencies in the major markets where we operate declined in the mid single-digit range with a few outliers, including the British pound, which increased about 2%. To normalize the impact of these currency fluctuations, we have presented our results on a constant currency basis on the next slide.

Slide 18, please. The strong increase in EFT revenue, operating income and adjusted EBITDA were the result of increased domestic and international cash withdrawal transactions driven by improving travel trends stemming from the gradual lifting of travel restrictions across Europe, particularly in the first half of the fourth quarter. We also continued to deploy new ATMs in anticipation of a more robust recovery this year and a full recovery in 2023. Fingers crossed, no more nasty variance lurking in the shadows. epay revenue and operating income each grew 7% and adjusted EBITDA grew 5% from increased digital distribution of digital media and mobile content.

However, I would also like to point out that in the last year's fourth quarter, one of the mobile operators passed through certain incremental commissions to retailers to support them through the financial difficulties brought about by COVID lockdowns. Similar amounts were not passed through this year in the fourth quarter.

Moreover, in the fourth quarter this year, a key customer from our cadooz business in Germany took in-house their voucher processing. If we were to exclude the effects of the supplemental mobile operator commissions and the key customer results from the fourth quarter last year on a pro forma basis the epay business, revenues and operating income would have grown about 10% year-over-year.

Finally, for epay, setting aside mix driven by the large increase in low-value transactions in India, revenue and gross profit per transaction both expanded nicely in the quarter. Money Transfer revenue grew 11%. Adjusted operating income declined 6% and adjusted EBITDA declined 5%. Revenue growth was the result of strong 19% growth in the U.S. and international outbound transactions, excluding the Middle East, Asia as well as 55% growth in direct-to-consumer digital transactions which was partially offset by weakness in the U.S. domestic business and larger-than-expected declines in the Middle East and Asia due to continued strict lockdowns and travel restrictions in the region. These factors, together with increased investments in our network, new products, technology, compliance and advertising contributed to operating income and adjusted EBITDA declines of 6% and 5%, respectively.

Revenue and gross profit per transaction remained stable year-over-year as well as sequentially on a quarterly basis. As you saw in our press release, the Money Transfer results also included a $38.6 million contract, asset impairment due in large part to large to COVID-19-related disruptions, which resulted in lower-than-expected transfer volumes on certain contracts. The drivers behind the full-year results for each of the segments are largely the same as this fourth quarter.

So I won't go through the full-year results in detail, but we have presented the results on the next few slides for you. With increasing optimism of travel resuming to more pre-COVID type levels, albeit somewhat delayed due to the Omicron variant, together with the investments we have made to continue to grow our physical and digital networks across the business and our new product deployments, we would expect first quarter 2022 adjusted EBITDA to be in the range of $75 million to $85 million and that year-over-year first quarter revenues will come in at double-digit growth rates likely in the low teens range.

Despite the lingering impacts of the Omicron variant on the first quarter results, we expect travel trends to improve in the remaining three quarters and we remain optimistic in our view that our full-year earnings will be similar to those of 2019, fully recognizing that we still do not expect a full recovery of our most profitable cross-currency transactions in 2022. But it's looking more likely that we might see a full recovery in 2023. I can't wait for that to happen, and I'm sure most of you have similar thoughts.

As I draw my comments to a close, I think it's worth noting that these strong double-digit growth rates we achieved for the full-year are considerably better than we expected when we started the year. And we are excited to anticipate delivering stronger growth rates as the world returns to a new normal.

With that, I'll hand it back to Mike to wrap up the quarter on Slide 25.

[Michael Brown, Chairman, President and Chief Executive Officer]

Thanks, Rick. I think there are a lot of highlights and information on these slides. So let me summarize a few of the key takeaways as I see them. First of all, all industry data and more of this comes out every day for you to read on the Internet, point to a significantly better travel season across the world, which gives us confidence in our view that our EFT segment earnings results will again significantly contribute to our consolidated earnings growth.

Let's remember, EFT did roughly $370 million in EBITDA in 2019, dropped to only $39 million in 2020, jumped back up last year to $90 million in 2021 with really only 4.5 months of real possibility for travel last year. That's a $50 million swing in a year, so you can easily see the leverage that we have in this business as travel resumes. epay and Money Transfer both continued to grow at strong rates, both of these divisions have had an extraordinary growth over the last two years. And we have doubled down to invest more in personnel and programs to continue strong double-digit growth in the future.

Consumer digital plus Dandelion is 9% of our total money transfer revenue and is growing at exceptionally strong double-digit growth rates. We are still on track to deliver connections for the B2B portion of this project that will connect our customers and their customers to more than 80% of the world's GDP by the end of the first quarter 2022. Our REN technology is really gaining steam. And in the fourth quarter, we signed – actually, it was third and fourth quarter, we signed 21 new agreements worth $78 million in revenue over the next six years.

Demand for RFPs, proofs-of-concepts have just about overwhelmed our staff, and we are adding capacity to sell more and deliver more deals more quickly. I cannot promise, but I am optimistic that 2022s REN sales will be at least 2x that of 2021. So while COVID caused a reduction to our historically strong double-digit growth rate trajectory, it did not diminish the value that our business, employees and products and technologies have added to the payments world and we expect that 2022 will be the year where we get back on the rails of those double-digit growth rates.

With that, I will be happy to take questions. Operator, will you please assist?

[Operator]

[Operator Instructions] Our first question or comment comes from the line of Andrew Schmidt from Citi. Your line is open.

[Andrew Schmidt, Citigroup Inc.]

Hey, Mike, Rick, Kevin. Thanks for taking my questions here and appreciate all the detail on the technology and the utility. So all good stuff. I want to start off on the EFT segment. Could you talk about your assumptions for the recovery in high-value international transactions in that segment? And how it might have changed from what you outlined in the third quarter. Just curious, the level of recovery you see in the high-value portion of those transactions to get to that sort of $7 number from 2019? Thanks.

[Rick Weller]

Yes. Our thinking hasn't changed, albeit we have seen a little bit of backdrop because of Omicron. But if it weren't for really, I would call it the enthusiasm that we're seeing across the travel industry, it could have led us to a more conservative kind of view. But with the enthusiasm we've been seeing out there, I'm going to say, which is largely supported by the fact that the Omicron variant is proving to be less worrisome, less impactful on health and therefore, I think, causing people to be more resilient and more interested in getting out. And I think people are just quite frankly tiring.

So our assumptions back then is that we would see that the international travel will kind of resume to about, let's call it, an 80% to 90% of 2019 levels kind of trajectory. And that our high value transactions would be somewhat north of 70%, but kind of in that ballpark. And so if we see that that we get a much more robust recovery than that, obviously, that would be very beneficial. And I would tell you, look, a few months ago, I would read some things after Omicron came out that just kind of didn't settle well with me thinking, all crap, here we go again.

But as we've washed through this wave, we've really, I think, started seeing that there is such a more significant level of optimism of getting back and starting to travel. And in fact, Mike even shared with me this morning a discussion he had with a friend of his who has recently been trying to book a trip to go to Europe this summer. And the agent said, look, things are getting tight. You might want to think about booking in 2023. I mean that's great news for our business. So again, we're kind of thinking total in that 80% to 90%, the high value something north of 70%, but that's kind of where we're shaking out right now, Andrew.

[Michael Brown, Chairman, President and Chief Executive Officer]

And just – the one point I need to make here is that the EU has come out and told all their member states that they don't think lockdowns help curtail the spread of this pandemic. So when you come to that conclusion, all of a sudden, all that friction which is what's been the challenge to get people to go back out, all that friction starts to disappear. So that's what's exciting.

[Andrew Schmidt, Citigroup Inc.]

Yes. That's great to hear. And this is consistent with the trends that we see as well. I appreciate that commentary. Just as a follow-up before I hop back in the queue. On the Money Transfer margins down on an EBITDA basis from a margin perspective in 2021, it seems like a combination of comparisons, mix and then investments. Just trying to get your thoughts on 2022. What are the factors we should think about in the margin trajectory there? Thanks.

[Michael Brown, Chairman, President and Chief Executive Officer]

Well, I'll let maybe Rick talk about margins in specific, but the general thought here is, our two largest areas where over 70% of our money comes from is Europe and North America. And you saw those transactions are way up, continued strong growth. We're getting whacked in the Middle East and in Asia, and that kind of pulls us down. But when we are watching these huge growth rates, well over 15% in those two areas, we said, let's kind of double down here. Let's expand to more digital apps in more countries. Let's make some investments, we've done so. And that's really whacked our margins here on the outset. So what we hope is that as our revenues continue to grow this year, we'll grow more into the margins that we've seen in the past. But it is going to be in the first quarter and probably not in the second quarter. Would that be right?

[Rick Weller]

Yes. I think that's well said, Mike, I would just add on to that, that unfortunately, we've seen more pressure out of the Middle East and Asia than we’ve kind of then – really than we've seen in the rest of the world. For all practical purposes, we've really only seen what I would call the virus impact in our domestic business, again, kind of localized, if you will, and then also in the Middle East, Asia. And as we said, we had 26% back draft on that. And even if that decline just slows as opposed to continues, which at least the signs are out there that it would, then as Mike said, it will kind of keep us from maybe getting that that rebound recovery in the first and second. But we expect to enjoy more of that benefit coming in the third or fourth.

[Andrew Schmidt, Citigroup Inc.]

Got it. Thank you very much, guys. Appreciate the comments.

[Michael Brown, Chairman, President and Chief Executive Officer]

Okay.

[Operator]

Thank you. Our next question or comment comes from the line of Peter Heckmann from D.A. Davidson & Company. Your line is open.

[John Rodriguez, D.A. Davidson & Co.]

Hey, everyone. This is John on for Pete. In prepaid, what was the background for the loss of the key customer? I think you generated approximately $5 million in annual operating profits. And what was the competitive takeaway? Or was that customer acquired or something else? Do you guys think that prepaid can grow at double-digit in 2022?

[Rick Weller]

Yes. I'll jump in here and comment real quickly and then ask if Kevin has anything else to offer here. But this just an in-house versus purchasing from outside decision. As you can appreciate, the volumes that we were doing were admirable, they were – we were very happy with that. But at the end of the day, it was just simply a cost kind of a decision that they made to bring it in-house. And so on one hand, it's bad that you lose it on the second hand, it's great that you know that you can drive and grow a customer's business to where you're that meaningful for them. And so it was just simply in-house versus outsourcing, if you will. So Kevin, if you have anything else you'd like to offer jump in.

[Kevin Caponecchi]

No, no, that's right. And then with regard to the expectation, I think Mike and Rick both articulated that we're shooting for a low double-digit growth through 2022.

[John Rodriguez, D.A. Davidson & Co.]

Got it. Thank you. Yes. And I know that management anticipates double-digit growth in Money Transfer in 2022? And how do you guys think – we should think about the relative growth rates between digital and agent-based transfers as well as the contribution from Dandelion?

[Michael Brown, Chairman, President and Chief Executive Officer]

Okay. So Dandelion, you remember, that was kind of a little mix of apples and oranges there. You saw that we had huge growth in our digital business this year. We expect that to continue. We ended up with around 50% growth for the year and in our digital business. And Dandelion will be a piece of that as we go out there and sell this to more and more fintechs like we have been doing in the past. So we'll see that start to contribute. We really believe that once we get through Q1, and we've got 80% of the world's GDP connected to us with those countries. Then we've got kind of a full product to sell. Right now, we've got a few early adopters, and that's great.

But by the end of Q1, we'll really have kind of more of a full product to sell, and we should see those contributions. When it comes actually to the margins – do you make more money on a physical transaction versus a digital transaction. I would say that a lot of people – this is a great way to lie. You can kind of bake these numbers anyway you want. The reality is because I don't have an agent to pay on a digital transaction, the gross profit per transaction seems to be greater right off the top. But that leaves out the fact that when you do digital, you've got to market digital. And you've got to consider what it costs you to acquire those customers. So I would tell you that at the end of the day, the digital transactions that we do have a better margin than our physical ones, but not a way, way better margin.

[Rick Weller]

Well, what I'd also tell you is to not get yourself preoccupied with margins, worry about how much money you drop in your bank account, profits, okay? So while I could mathematically produce a better margin on a digital transaction, I may not make as much money. And as you know, we're in the business of making money. So I think what we'll continue to see is an outsized growth of our consumer digital product here. As we said, it makes up about 9% of our business with a fraction of that being the Dandelion. We said that it grew 35% on a year-over-year basis here in the fourth quarter on the revenue side, even better on transaction side. And we would expect that kind of growth rates to continue. And if we really start hitting our stride on Dandelion, it could give us some yet even better opportunity there. So I think we'll continue to see some very nice growth, nice hyper growth out of our digital consumer channel. And again, looking very forward to the contributions from Dandelion as it kind of comes into its kind of first phase of maturity.

[John Rodriguez, D.A. Davidson & Co.]

That's great color. Thank you so much.

[Operator]

Thank you. Our next question or comment comes from the line of Darrin Peller from Wolfe Research. Your line is open.

[Darrin Peller, Wolfe Research, LLC]

Hey, thanks guys. I want to hold it on EFT for one more minute. When we look at the run rate, it was trending off of about 80 – mid-80% of 2019 levels. And when you look at the underlying $7 in EPS for 2022, are you assuming that, that rate generally holds? I know you're talking about reopening, but then Omicron offset some of it. Really the big question would just be if you can give us a sense of what you're incorporating for travel into the 2022 numbers? And maybe remind us, if you don't mind, the earnings sensitivity. So if we go back from the 80-ish percent rate or 60% to 70% rate we're at now up to 100% and 120%. What kind of step function would you expect to see in earnings per share?

[Rick Weller]

Well, let's see. What I would tell you, we're kind of seeing right now, especially on our high-value transactions, we wouldn't be quite at the 60% range there. We're probably closer to a 50% range. And we're a little higher on other international, but we don't make the kind of profit on a, just call it, a plane old interchange transaction as what we do on a DCC type of a transaction there. So maybe what we're seeing in the business is just a little bit inside, but let's call it directionally correct with what you're talking about. And as Andrew Schmidt asked earlier what our assumptions were for 2022, we're expecting those high-value transactions to come up and run just north of 70%. But that's kind of on an average for the year. So given that we're a little less than that right now, we would expect that would be ramping up a little bit more. But also keep in mind that we get a significant volume of our cross-border transactions in the second and third quarters.

To give you kind of a general perspective, we get about 10% of our high-value transactions in the first quarter we get about 43% to 45% in the third quarter. And then that balance is split between second and fourth with a bigger bias towards second, okay? So we start seeing that stride kind of develop in the third – in the second quarter and really coming in the third. So just a few percentage differences on what we see peak out in the third quarter can be dramatically different. With respect to the leverage of that, I could go through lots of different math, but I think it's easiest to see in kind of what Mike said earlier, when our volumes are increasing, we expanded our business on a year-over-year basis in the $50 million, $60 million kind of dollar range.

So there's incredible leverage. Even the delta difference between taking a look at our EBITDA number in terms of 2019, what we generated in EFT and you kind of compare it to, I'll just say, some of the street average numbers out there. You'll still see that there is a very big delta difference in that EBITDA number. I mean, in the ballpark of approaching $80 million, $100 million, it's substantial. So that's really what you see as the leverage from these high-value transactions coming through.

[Michael Brown, Chairman, President and Chief Executive Officer]

And that $50 million differential that we just talked about between last year and this year – in 2020, those markets were open for about 2.5 months this year for 4.5 months, but extra two months bought us $50 million. So that just shows you a huge amount of leverage on that.

[Darrin Peller, Wolfe Research, LLC]

All right. That's helpful. And then just one quick follow-up. I know, Mike, you've always talked quite a bit about the focus on profitability over revenue in the business. When I look at the margins of some of your growth parts of your business that we see, and let's focus on epay for a minute since Kevin's on also. I mean it still comes in at a relatively lower margin that I'd like to see for a very good operating leverage scale opportunities. So can you talk through that? I mean it's going to be an area of…

[Michael Brown, Chairman, President and Chief Executive Officer]

Yes. Let's not – okay. So let's not forget, we'll let this be the last question, operator. Let's not forget, epay is a distributor of digital content around the world. We have to split the commission, the revenue that we make with our partners, either physical or digital. So on average, we give away 80% of every revenue dollar in epay. So this idea that our margins can accelerate to teens or 20 or whatever, it's impossible because if we had no cost at all within epay, I'd have a 20% margin. So what you really have to – and EBITDA margin, what you have to really do is look at the operating margin. Operating margin in that business is probably 60-plus percent. And it is the most crushingly good margins that we have in the entire business. So you got to remember the kind of business that is. We have three different businesses that have three different econometric models. And you've got to factor that in.

[Rick Weller]

Yes. I just would add to that, as I would like it to be 60%, it's more like 50, Mike, but that's okay. But if you look back to the last couple of years, and if you would take our either EBITDA margins or operating margins of the epay segment and divide them into gross profit rather than into revenue. What you would see is about 50%. And I mean it's –I think, arguable, anyone would accept that 50% margins in the business are absolutely brilliant, right? But that's because we give 80% of it to the retailer. So if we didn't account for it on what I'll call it a gross commission basis, you would see that number much, much better.

And I mean, at the end of the day, that's really what you saw as the leverage that came through in 2021 on the epay business, is that as we grew that business, it gave us very nice operating income leverage expansion through the year. Now we're being more conservative on what that number is going to be as we go forward. But I would also really ask you to think about epay in a world of being a deposit processor, a digital economy enabler. Because what we're doing is we're allowing people to put money into an account that they can use to buy digital commerce whether that's music or video or it's even physical good like Amazon or Uber Eats kind of stuff. I mean this is all what I'll call, digital economy purchases, and that's really where you've been seeing the momentum of our business grow is in this, I'll call it, digital economy facilitation process.

And we're starting to see the lines, if you will, blur a little bit between our epay kind of business and our EFT kind of business, where it's payment processing.

So I think that there's incredibly more margin out there to go after, more opportunity. We're going into more countries. We get more products. So I think we'll continue to have a very good business there. But I would look at that margin may be slightly different than the way the – let's just call it, the basic top and bottom of GAAP produces a number.

[Michael Brown, Chairman, President and Chief Executive Officer]

All right. Thank you very much for that question. With that operator, I think we're a little bit over time here. So I'll close these questions. I look forward to talking to you in about 90 days. Hopefully, we'll be seeing the end of this Omicron thing by then, and we'll have some good news. So talk to you all later, and thank you very much.

[Operator]

Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may now disconnect. Everyone, have a wonderful day.