August 30, 2019
Listen to Wirecard CEO Markus Braun in March 2019 responding to a question about negative cash flow from MCA:
Except, Wirecard has consistently not done anything of the sort. On the most recent earnings call (Wednesday 7 August), there was yet more obfuscation and an attempt to change what they’d said before:
“I think we said in the last call that Brazil and Turkey was a little bit under 1/3 and the rest is spread over Europe and Asia.”
This is absolutely not what they have ever said. Rather, at various times over the last few months they have claimed that Brazil and Turkey accounted for “over 1/3”, “50%” and “33%” and that the MCA lending is “mainly in Brazil”. Sources can be found in our previous article: Help us understand
If MCA lending has decreased overall to €370M, and now less than 1/3 is lent in Brazil and Turkey, it suggests that Wirecard management wants the market to believe that the MCA business in Turkey and Brazil is shrinking, but without providing any explanation for this. Are the merchants who were supposedly using it now choosing not to? If so, why? Is Wirecard management attempting to backtrack on previous statements, perhaps as a result of our repeated calls, and proof, that there is little or no MCA lending in either of these countries. This, of course, would be a direct contravention of their claim of “complete transparency”.
Geography is not the only confusing aspect of Wirecard management’s statements. The returns continue to be opaque, which is concerning considering the supposed impact of MCA on EBITDA.
Looking at the numbers for the last four quarters in the below chart – the only ones for which we have any publicly available data – it is clear that while MCA lending has supposedly been increasing (explaining less favourable cash flow), the returns have not been consistent.
Note: All sources from management comments on earnings call transcripts - the EBITDA numbers for 3Q2018 and 4Q2018 are an estimated split based on disclosure from management that EBITDA from MCA in 2H2018 was €22M.
So, EBITDA may be increasing, but the returns are not. Why is MCA suddenly less profitable, earning zero or negative incremental returns as Wirecard apparently expands the product outside of Brazil and Turkey, and increases lending overall? Have the economics of the business eroded that fast? Essentially, Wirecard has earned no return on the additional €173M they lent merchants in the first half of 2019 compared with the second half of 2018. The only benefit from the expansion of MCA appears to be the ability to explain reduced cash flow.
Wirecard’s lack of transparency on MCA is concerning. We’ve shown that the MCA lending business in Brazil and Turkey looks to be tiny or non-existent (and this is illegal in Turkey). The only thing that is consistent about management’s statements on MCA is that they are vague and ever-changing.
The financial community is starting to take notice: on the recent earnings call analysts asked multiple questions on MCA leading to the new and materially different set of statements we quote above.
For analysts who may have concerns, but don’t want to enter into a debate about whether management is misleading or misinforming the market and/or don’t take the inconsistency of management’s statements seriously, the simple analysis we’ve performed here should be deeply concerning: an €18bn company has launched a new product that contributed almost 20% of the EBITDA growth in 1H2019, but has seen its return on capital fall for three consecutive quarters and the product itself is now shrinking. In addition, a significant amount of capital is tied up in this product but the company repeatedly refuses to disclose where this money is being lent.
Shareholders would be concerned about a course of events like this for any company. But this is happening at Wirecard, concurrently facing a criminal investigation for accounting fraud and money laundering in Singapore.
For newer readers – here are some of the highlights of our prior work:
Thank you to those that have contributed information that will help us reveal the truth behind Wirecard’s MCA program.
|Wirecard Brazil (€M)||Our|
|Company Reported MCA||400||400|
|Brazil % Estimate||40%|
|Brazil MCA Estimate||160||160|
|Monthly Credit Volume||37.2||37.2|
|Calculated MCA Balance||18.6||18.6|