February 16, 2017
By Jim Daly
The lingering impact of some retailers’ slow conversion to EMV chip card acceptance continued to plague prepaid card services provider Blackhawk Network Holdings Inc. in the fourth quarter. Blackhawk reported late Wednesday that revenues fell short of its expectations in part because of a “continued EMV headwind” at stores that sell Blackhawk-provided prepaid cards that was higher than the company forecasted.
Pleasanton, Calif.-based Blackhawk, whose products include the ubiquitous Gift Card Mall kiosks seen in grocery stores and other retailer locations, had expected the EMV chip card problems to ease as 2016 went on. Two of the company’s largest non-EMV-compliant distribution partners achieved EMV compliance in the fourth quarter, but a month behind schedule, the company said in its fourth-quarter earnings report.
The EMV issue cost Blackhawk $19 million in adjusted operating revenues in the fourth quarter and $18 million in adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA). Offset by cost cuts, the net earnings impact was $6 million. Comparable numbers for all of 2016 were $52 million in adjusted revenues and $46 million in EBITDA, and after cost cutting the net EBITDA impact was $31 million.
Blackhawk reported last year that some of its grocery-store distributors were refusing to accept credit card payments for prepaid cards, especially open-loop gift cards, because prepaid cards can be quickly converted to cash after being purchased with a counterfeit magnetic-stripe credit card. The problem would be greatly reduced if the retailers accepted counterfeit-resistant EMV chip cards, but some of Blackhawk’s clients hadn’t yet retrofitted their stores for EMV, despite the payment card networks’ October 2015 liability shifts. The shifts make merchants responsible for counterfeit losses if their point-of-sale terminals can only read mag-stripe cards. As they waited to convert, some non-EMV grocers put restrictions on prepaid card sales, including purchase limits or by requiring cash or regular debit cards for purchases.
Transaction dollar volume on Blackhawk-processed cards was $6.95 billion in the fourth quarter, down slightly from $6.96 billion a year earlier. For the full year, volume grew less than 1% to $16.7 billion.
Chief executive Talbott Roche told analysts in a conference call that EMV is now largely a 2016 problem, though some fallout will continue into this year. Apart from the clients’ conversion problems, Blackhawk said its Visa-branded open-loop gift card with a 5% cash-back feature launched in the third quarter is selling well, and its incentives, international, and digital businesses are growing. Dollar volume in the online, mobile, and other digital channels increased 93% last year, the company said.
Sales of the Visa cash-back card will be expanded to 7,000 to 10,000 more stores in 2017, up from 8,000 at the end of 2016, Roche said. She also said Blackhawk signed Target Corp. as a new distribution partner. “We will roll out across their 1,800 stores and become the third-party gift card provider for target.com in the second half of 2017,” she said, according to a call transcript from Thomson Reuters StreetEvents.
Blackhawk reported net income of $24.7 million in the fourth quarter, down 41% from $41.6 million a year earlier, on net revenues of $780.6 million, up 3% from $756.4 million. For the year, net income dropped 90% to $4.66 million from $45.6 million in 2015 on revenues of $1.9 billion, a 5% increase from $1.8 billion in 2015.
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