Standard & Poor’s Friday revised its outlook on Euronet Services Inc. to negative from stable. At the same time, Standard & Poor’s affirmed its single-‘B’-minus long-term corporate credit and senior unsecured ratings on Euronet.
The outlook revision reflects Euronet’s slower-than-anticipated revenue growth in the second half of 1998 and the first quarter of 1999, mainly because of slower-than-expected growth of credit and debit card usage in some of the company’s main Central European markets. This has lead to a delayed improvement of operating margins and cash flow generation compared with the initial business plan. For Euronet to maintain its current ratings, it is therefore necessary that the company’s profitability and operating cash flow improve considerably during 1999.
The ratings on Euronet reflect the challenges the company faces to grow the size of its operations sufficiently to service its debt obligations. With a network of close to 1,600 automatic teller machines (ATMs) at April 30, 1999 — mainly in Germany, Hungary, and Poland — the company is the leading independent provider of ATM services in Central Europe. While these markets offer great growth potential for ATM services, the growth rate is closely linked to the general issuance of new debit and credit cards, the level of which is hard to predict. Furthermore, Euronet faces competition from networks set up by consortiums of banks with larger scales and resources. It must also negotiate favorable deals with banks and card-issuance organizations in order to attract customers to its ATMs. Euronet’s competitive advantages are its early market entrance — which has given it access to prime site locations — and its modern network and focused operations, which make it possible to offer a full range of ATM services at low cost. Furthermore, the company’s geographic diversity limits its dependence on one specific market, and makes it possible to direct investments toward the most profitable locations. Euronet’s service offerings were broadened following the $18 million acquisition of the U.S. computer software company Arksys in December 1998, and the company is now able to offer vertically integrated products to customers. While the acquisition had a negative effect on Euronet’s liquidity position in the short term, the company still expects to have sufficient cash to fund its initial ATM roll-out plan. In 1998, Euronet had $12 million revenues and a negative $23 million operating cash flow after working capital needs, while Arksys had $12 million revenues and a slight negative operating cash flow. At March 31, 1999, Euronet’s total debt to capital was 88%. Because the company is constantly installing new ATMs, and it takes a certain time for new machines to become profitable, Euronet also expects to have negative operating cash flow and operating losses during 1999. During the first quarter of 1999, revenues were up to $8 million ($5 million excluding Arksys) compared with $2 million in 1998, while cash and short-term liquid assets amounted to $38 million at March 31, 1999, down from $59 million at year-end 1998.Details