The EML Payments Ltd (ASX: EML) share price has tumbled 35% today after slashing revenue and profit guidance in its third-quarter trading update.
CBI investigation continues to plague growth
EML has cut guidance across a smorgasbord of financial line items. Management now expects:
- Gross debit volume (GDV) of $79-$84 billion, down from $81-$88 billion
- Revenue range of $225-$235 million, down from $230-$250 million
- Expenses range of $106-$109 million, narrowed from $103-$112 million
- Underlying EBITDA range of $52-$55 million, down from $58-$65 million
- Underlying net profit excluding acquisition and regulatory costs of $27-$30 million, down from $27 -$34 million
- Operating cash flow range of 50-60%, down from 80-90%
In simple terms, slowing revenue growth and higher costs have led to downward revisions in earnings. Based on today’s guidance, expenses are growing at double the rate of revenue.
New projects have slowed to just 23 in the March quarter, down from 26 and 41 in the December and September quarters.
Australia and North America remain on track, but EML’s European Prepaid Financial Services (PFS) division is “significantly behind” expectations.
“Operational execution issues in Europe and a more risk-averse approach to new programs impacted the launch of new programs”
“We now anticipate continued challenges through Q4 which has led to a reduction in the guidance range”
The operational challenges cited by management result from the ongoing investigation by the Central Bank of Ireland (CBI) into PFS.
EML acquired PFS in March 2020 and has been plagued by regulatory scrutiny ever since.
The worst looked behind the company when it announced in November the CBI would not impose limit controls on new projects. But the issues seem to run deeper than just regulatory given the company is still underperforming two years on.
What next for the EML share price?
Like Redbubble Ltd (ASX: RBL) and Megaport Ltd (ASX: MP1), EML has learnt the hard lesson that the market will be unforgiving when a company misses expectations.
EML management also made the mistake of underestimating the impact of the regulatory investigations. It takes away resources, mindshare and time from executives with other areas of the business such as new projects.
In hindsight, the more prudent approach would have been to provide conservative guidance and outperform.
But more frustrating for suffering shareholders is the seemingly inadequate communication with investors.
EML made two financially immaterial yet market sensitive announcements in the past month relating to growth projects. Then today’s financial reporting has been misleading, illustrated by recording GDV growth at 408% (when including acquisitions) despite the underlying business doing just 17%.
Arguably, the worst investor relations slip up was announcing the profit downgrade as part of an exclusive conference to Goldman Sachs clients, leaving remaining shareholders unable to address management.
One shining light is the potential takeover interest. Bain Capital recently walked away from the business citing valuation prior to today’s EML share price capitulation.
Possibly a private equity white knight appears, but this will likely only be a small reprieve for suffering shareholders.
EML needs to improve its communication quickly, otherwise the share price will continue to drift lower.
