Evertec Inc (EVTC) 2014 Q1 法說會逐字稿

Good afternoon, everyone, and welcome to the EVERTEC first-quarter 2014 earnings conference call. Today's conference is being recorded. At this time I'd like to turn the conference over to Luis Cabrera, Senior Vice President and Head of Investor Relations. Please go ahead, sir.

Thank you, operator. Good afternoon, everyone. Welcome to EVERTECs first-quarter 2014 earnings call. I'm Luis Cabrera, Senior Vice President and Head of Investor Relations for EVERTEC. With me today is Peter Harrington, our President and CEO, and Juan Jose Roman, Executive Vice President and CFO.

A replay of this call will be available until Wednesday, May 14. Access information for the replay is listed in today's financial press release which is available on our website under the investors relations tab. As a reminder, this call may not be taped or otherwise reproduced without EVERTEC's prior consent. For those listening to the replay, this call was held and recorded on May 7, 2014.

Before we begin I would like to remind everyone that this call may contain forward-looking statements, as they are defined under the Private Securities Litigation Reform Act of 1995. These forward-looking statements about our expectations for future performance are subject to known and unknown risks and uncertainties. EVERTEC cautions that these statements are not guarantees of future performance.

All forward-looking statements made today reflect our current expectations only, and we undertake no obligation to update any statement to reflect the events that occur after this call. Please refer to the Company's most recent Annual Report on Form 10-K filed with the Securities and Exchange Commission, for factors that could cause our actual results to differ materially from any forward-looking statements.

During today's call, Management will provide certain information that will constitute non-GAAP financial measures under SEC rules such as adjusted EBITDA, adjusted net income, and adjusted net income per share. Reconciliations to GAAP measures and certain additional information are also included in today's earnings press release.

With that, we'll begin by turning the call over to Peter Harrington, our President and CEO. Peter?

Thank you, Luis, and good afternoon, everyone. Thanks for joining us on today's call. Our first quarter results were in line with our plan, and we're pleased with the start of the year, particularly in our payment businesses. Overall, we're on course to achieve results within our full year guidance range.

Total revenue in the quarter was flat, with our payment businesses showing solid growth. Merchant acquiring revenue was up 10%, and payment processing up 4%, while business solutions was down 6%. Adjusted EBITDA increased 8%, and adjusted net income grew a strong 16% to $0.40 per share.

In our merchant and payment processing segments, we had a solid start to the year. Our payments business continued to benefit from the ongoing cash to card conversion trend in the markets we serve. We are executing on our growth plan and taking share by leveraging our scale, reputation, best-in-class network, and services.

Revenue growth in our payments businesses outside of Puerto Rico continued to be strong as well, increasing 15% compared with the first quarter of last year and we continued to see stable and solid transaction growth within Puerto Rico, with POS processing transactions up 8% year-over-year. Demand for our payment services across our entire Latin American footprint remain solid, and our new business pipeline continues to build.

I would like to take a minute to discuss a few new business highlights and payments. First, I'm excited to announce that we recently signed a financial institution customer in Colombia, to whom we'll be providing card product processing services. This quarter, we also launched ATH Mobile, our new P-to-P product for ATH customers with six financial institutions in Puerto Rico.

And finally I'm happy to report that the Government of Puerto Rico has informed us of its intent to award us a new five-year contract to continue providing services that support the governments EBT program. We have been the sole provider of EBT processing services to the Government of Puerto Rico since the program began in 1998.

Now for business solutions. You'll remember that on our February call, we said we expected revenue growth to be lumpy this year. In the first quarter, business solutions revenue was down because of lower levels of hardware and software product sales, compared to the particularly strong sales we booked in the first quarter of 2013.

It's worth noting that excluding hardware sales, business solutions revenue was up 2% in the quarter. Based on what we're seeing today with respect to sales and project implementation timeframes, we expect business solutions revenue to build over the remainder of the year and still be in the low single digit range, as previously discussed.

To that point, we have approximately $3 million of hardware and software sales already committed to be delivered in Q2 and Q3. Outside of hardware and software sales, we continue to see solid demand for our core business process management solutions such as core banking, as well as network services and IT consulting.

Before turning the call over to Juan, I'd also like to tell you about a new initiative with the Government of Puerto Rico. The Government recently awarded us a contract expanding our current sales tax aggregation services agreement, leveraging our [Evoloto] product.

We've been mandated to develop and host a portal to help manage the new added value tax and credits that go into effect on July 1. Once this service begins, we'll anticipate that it will yield additional payment processing volume over our current network.

I will now turn the call over to Juan Jose, who will take you through our financial results in more detail. Juan?

Thank you, Peter, and good afternoon, everyone. As Peter mentioned, we have a good start to the year. While business solution revenue was down, the payment businesses did well, and we delivered solid adjusted EBITDA and double digit earnings growth.

I will now spend some time going through our first quarter financial results in more detail. Beginning with revenue on a consolidated basis, total revenue was essentially flat at $87.2 million. Merchant acquiring net revenue increased 10% to $19.3 million from $17.5 million in the prior-year period primarily driven by an increase in transaction volumes. Payment processing revenue increased 4% to $25 million in the first quarter, up from $24.1 million in the prior year period.

This growth was driven by new customer additions and increasing accounts on file within our card product business, as well as an increase in POS processing transactions. It's worth highlighting that the payment processing year-over-year growth this quarter was affected by the timing of revenue recognized from a Department of Education program we process in Puerto Rico.

In the first quarter of 2014, we recognized no revenue related to this program, versus approximately $0.6 million recognized in Q1 of 2013. We began processing for this program again in April and will recognize revenue for these services in the second quarter. Excluding the effect of such programs, our Q1 payment processing segment revenue would have increased 6%, compared with Q1 of last year.

Our payment-related businesses outside of Puerto Rico continue to grow at a strong pace in Q1, up 15% versus the prior-year period, mainly driven by card product processing. Additionally, POS volume growth within Puerto Rico remains steady, up a solid 8% compared with the prior year.

Our business solutions segment revenue decreased 6% to $42.9 million in the first quarter, compared with $45.8 million in the prior-year period. As Peter discussed, this decrease was mainly due to a decline in hardware and software product sales in the quarter, amounting to $3.5 million, partly offset by increasing volume in our network and core banking products and services.

Moving to expenses. On a GAAP basis, our first quarter total operating expenses were down approximately 7%, compared with the prior-year period. Cost of revenue excluding depreciation and amortization was $37.6 million, an increase of $2.9 million or 7% from the corresponding 2013 period. This decline was due to an reduction in cost of sales, resulting from lower levels of hardware and software product sales, and to lesser extent, lower operating taxes.

Selling, general and administrative expenses for the quarter were $8.1 million, down $0.8 million or 9% for the corresponding 2013 period. This decrease was mainly due to the absence of $0.9 million of management fees previously paid to our portal and Popular. Income from operations for the first quarter was $24.9 million, an increase of 32%, compared with $20.4 million in the corresponding 2013 period.

Total non-operating expenses were $4.5 million, a decrease of $10.4 million from the corresponding 2013 period. This decrease was driven mainly by interest expense reduction of $8.4 million, resulting from our debt refinancing, and $1 million in foreign exchange gains related to an intercompany loan with our Costa Rica subsidiary.

Our GAAP income tax expense in the first quarter was $2.2 million, up from $51,000 in the prior year. On a cash basis, we paid no income tax in first quarter because of our payments made in FY13. We expect cash taxes to return to a more normalized rate, beginning in the second quarter.

As of March 31, 2014, we had approximately $73 million of NOLs available to offset future tax payments related to our operations in Puerto Rico. Adjusted EBITDA for the first quarter was $45.2 million, an increase of $3.4 million or 8%, from $41.8 million in the corresponding 2013 period. Increasing adjusted EBITDA was predominantly due to revenue growth and significant operating leverage in our merchant acquiring and payment processing businesses, as well as the $1 million foreign exchange gain.

Adjusted EBITDA margin was 61.9%, compared with 47.8% in the prior year. Even when excluding the FX gain in the quarter, our adjusted EBITDA margin increased 290 basis points versus the prior year period, reflecting the strong operating leverage inherent in our payment businesses. Adjusted net income in the first quarter was $32 million, up 16% from $27.5 million in the prior year. This increase was due mainly to adjusted EBITDA growth and lower levels of operating depreciation and amortization expense, and cash taxes.

Moving to our balance sheet. As of March 31, we reported $27.2 million of unrestricted cash, and $720.8 million of total short-term borrowings and long-term debt. During the quarter, we made a mandatory repayment of approximately $4.8 million on borrowings outstanding on our term A and term B senior secured credit facilities, paid 10 million on our revolving line of credit, and paid dividends of $7.8 million.

As of March 31, total liquidity, which includes unrestricted cash and available borrowing capacity on our revolver was approximately $87.2 million. We continued to generate significant levels of free cash flows. For Q1 2014, our free cash flow defined as adjusted EBITDA minus CapEx, cash interest expense, and cash income taxes, was approximately $37 million, up 20% compared with the prior-year period.

Finally, this afternoon, we announced that our Board of Directors declared a regular quarterly dividend of $0.10 per common share. We remain committed to the prudent return of capital to our shareholders.

Now on to our guidance. Based on the trends we're currently seeing in transaction volumes, new business activity and product implementation, we are reiterating the 2014 outlook that we provided on our last quarterly call. Revenue growth between 5% and 7%, adjusted EBITDA growth, at least 100 basis points higher than our revenue growth rate, and fully-diluted earnings per share of between $1.65 and $1.71. We continue to expect full year 2014 operating depreciation and amortization of approximately $32 million, cash interest expense of approximately $23 million, and fully diluted shares of approximately 79.2 million.

We expect 2014 cash income tax expense of approximately $3 million. Our 2014 effective tax rate outlook on a GAAP basis remains between 10% and 12%. With that, Operator, we will now open up the call for questions.

(Operator Instructions)

We'll take our first question from George Mihalos with Credit Suisse.

I think if I heard correctly, Peter, you mentioned that growth outside Puerto Rico was 15%, I think that accelerated a little bit from the back half of 2013. I want to confirm that, and can you give us the percentage of revenue that was sourced from outside Puerto Rico in the quarter?

Yes, it did slightly accelerate from what we saw in the fourth quarter, and yes, it's give or take, for a round number, 15%.

Okay and then Juan Jose you reiterated the guidance of 5% to 7% on the top line. Is your sense, given where the first quarter came in with a bit of slower growth on the business solutions side, is your sense that you're tracking more towards the lower end for the year, or maybe another way to ask is, what would have to happen for you guys to be able to hit the upper end of the range at 7%?

I think that a lot of it will depend on hardware and software, and as we've said before, it's hard to predict exactly when it will fall into the P&L. Last year, we saw very strong hardware and software in the first quarter, this year it was very soft. And I think that though based on the commitment that we have already for some of the sales in Q2 and Q3, we still feel comfortable that we're going to get to where we expected for the full year on the hardware and software side, so it will be more driven -- to your point, it will be driven more by the payment businesses. It won't be driven by business solutions. To get to the higher end of the range, will come from, through the payment businesses outperformed what we originally thought they would do.

Okay, great. Last question for me, on the contract renewal, on the EBT side, was pricing relatively stable on that deal? Thank you.

Yes, relatively. I mean for us, it will be net neutral because we picked up a couple of small services that offset a small discount that we gave them from their original pricing, so net-net, it's neutral.

We'll take our next question from Smitti Srethapramote with Morgan Stanley.

The government of Puerto Rico recently submitted a proposal for a balanced budget. What kind of impact, if any, do you anticipate from seeing from that proposal? And then if you could just give us just an update regarding what you're seeing, and what kind of payment trends you're seeing in Puerto Rico so far in April?

So on the first one, as we said before, we really didn't see any real, no negative impact at all, compared to what the budget is doing now. Again to be up front, that was the Governor's proposal. We haven't seen anything on a piece of paper, so there is some high level numbers out there.

But from what I've seen there's nothing they are talking about that has any impact on EVERTEC, and I think, as we've said before and as we stated earlier on the call, we actually think there may be some potential positives, and that as we said, we were able to add-on to our Evoloto product and what we do for them around sales tax to be able to provide this portal service to them on the VAT tax. So I think if anything, I think it's neutral, worst case, and at best, I'd pick up some of this to help them cut costs and become more efficient.

The second part of the question, it's basically similar to what we saw in Q1 so we are very happy, very comfortable that the trends continue, at least so far up to April.

And maybe can you give us an update on the Visa merchant acquiring license situation in Colombia?

So yes. We're fine with that. We're at this point, as I've said before, we're waiting for Visa to get the low value license, but what I want to make sure that you understand is the license in and of itself doesn't generate revenue. As I've said, we will not go into the market under the EVERTEC name, so it will be leveraging that license for a partner, and that's when we will start generating revenue.

So it's there. We're working on trying to find a partner, and Visa is trying to get their low value network license. So that continues.

Thank you.

Our next question will come from Bryan Keane with Deutsche Bank.

Just want to clarify the Colombian signing with the financial institution, is that related to the merchant acquiring agreement that we talked about last quarter, or is that something separate?

No, it's a separate processing customer. It's really our second Colombian customer, so we have the customer today that we're still in the implementation process for. This is a second customer. As I said, I thought we were making progress on sales. We have signed now our second customer. That won't generate revenue, obviously, until 2015 but it has nothing to do we're acquiring. It's purely for card processing.

And so any update on not only Colombia, but just internationally, for other bank alliances?

No real update. We're still working on the one we've been working on. We're taking baby steps forward, but we're moving forward. And like I said, with the first Colombian customer, we're still in the implementation phase, and there's really nothing different from what we've said before. We will generate revenue when we finish the implementation.

Okay, and then just looking at the segmented operating margins, I might have missed this, but obviously the merchant acquiring margins were down quite a bit, and payment processing was up quite a bit. I'm not sure if I understood why the big swings here, and I assume that evens out going forward or how do we think about that going forward? Thanks.

You are right. Mostly it's the result of some changes in terms of how we allocate expenses between segments, so as you very well notice, payment actually increased significantly higher, right, as a relation to the revenue, it's just moving some expenses out of MAB from that acquiring payment to the acquiring So it's internal allocations, it started second quarter of last year, really. It was noticed more in this quarter, because it also includes lower non-transactional revenue in the quarter, but it would be more stable, but if you take both together, the payment and the merchant, the margin, you will see as a percentage of the growth in revenue is a solid 41% increase in operating income.

And so overall adjusted EBITDA margins were up quite a bit year-over-year, but you're still kind of reiterating the 100 basis point type margin expansion for the year, so does that mean there will be further investments that crank up that lower -- that first quarter ahead of Plan B?

Not necessarily. Keep in mind hardware and software usually have much lower, significantly lower margins, since we didn't have in this quarter those hardware and software sales, our margins in total are much better, right? So as we start adding more hardware in the next quarter, then that reduces a little bit, right? Or the margins increase, and are not as significant as what you saw in Q1.

Okay, thanks so much.

We'll take our next question from Tien-Tsin Huang with JPMorgan.

I wanted to just ask a silly question. What exactly are you selling on the hardware and software front, and how discretionary is it?

The range is huge, Tien-Tsin. I mean it comes from servers to, it comes from cloud, it comes from our hardware solutions business. It is made up of a number of different components, so it's network equipment, routers, software-related to it, so it all depends and some of the projects we do on the IT Management, on the network side, and on the core banking side, which a couple are, there is hardware related and software related to the project.

And in some cases, we actually sell that hardware, because we have the partnerships with the major providers like Avaya and IBM and Cisco and Dell and Microsoft, et cetera. So as part of the deal, we sell them hardware and software as part of the deal. In almost all cases we host that in our data center but they actually own the hardware and software, because it is specific for them.

Understood. To the extent that it is tied I guess to an IT budget, or I guess maybe in this case a contract, I'm just trying to get a sense of how much visibility you have. I understand the timing, of when it might come through, but could it fall off completely, is what I'm trying to understand?

No, and that's why we tried to give you some flavor that we've already got $3 million of it committed for delivery in the second and third quarter. It comes with the project but we don't see anything at this point that's telling us there won't be these projects that will deliver this hardware and software right now.

Some of it, the nice thing about hardware and software is the time frame from contract to revenue generation is very quick, not like the processing businesses where you have to implement the customer, so there are projects that we expect that we've got in the pipeline that we're working on, that we've already got 3 million committed from. There are projects that just historically we do on a year-over-year basis, that we still expect to get between now and the end of the year.

Good. That's helpful to hear. Just wanted to get that education, thanks.

Just, I heard the comments around acquiring stuff but just how about in general movement in the pipeline? How does it feel tone wise and then same thing with project ramps. Are things ramping on time in general here, in terms of the stuff you're implementing?

Yes, I would say, as we pointed out, Colombia has been slower than we expected. Outside of that, we don't see any negative impact in both the pipeline, the new sales pipeline for the processing business, or the delivery of customers, as Juan said.

Some of the growth we're seeing is because we bring in customers that we sold last year or at the very end of 2013, that we signed, that we're now bringing that revenue on. So we don't see anything based on what we sold last year. We'll bring that on, the only thing that's been delayed has been Colombia, beyond what we thought, outside of that, and that we've talked about before, but we don't see any other issues.

That's great, thanks.

We'll take our next question from Sara Gubins with Bank of America-Merrill Lynch.

How good of a benefit could the new value-added tax contract with the government be?

It is a project that we will do between now and June, and then, because it adds on to what we do in Evoloto, there's probably about, give or take, I don't know, $1 million to $2 million maybe of benefit that we'll see over a full year basis next year.

Should we think about it as a $1 million run rate, is that about right?

Probably more than that. Somewhere between $1 million and $2 million. This just landed on the door, we just signed it, so we think somewhere between maybe $1.5 million and $2 million probably is more realistic.

Okay, great. And then within the payment processing segment, the revenue growth decelerated in spite of the easier comparison, and I know you mentioned some of it was the government contracts, but given that the comparison is significantly easier, I just wanted to understand if there are any factors that are driving the deceleration?

No. I think what you're going to see is we expected it to be around 6%, and I think what you'll see in the second quarter is it will accelerate, because the revenue we expect in the first quarter will be in the second quarter, so I think you'll see that in the second quarter and then it will flatten out to where we expected it to be in the third and the fourth quarter.

Okay, thank you.

(Operator Instructions)

We'll hear next from Bob Napoli with William Blair.

First of all just on the hardware and software sales, just the margins on that must be extremely low, because you beat our EBITDA number, even while you missed the revenue number by a fair amount. Are we talking about 5% gross profit margin?

5% to 10% is probably not a bad. We try to get as much as 10%, but they are very low margin deals.

Does it make sense to break out that separately, just, I mean how much like in last year's revenue, $184 million, how much of the business solution, I'd guess it's all in business solutions, and is that, how much was it, what was it for the full year last year?

We don't have the number in front of us, Bob, but we can look into that for you.

It just might be worthwhile to break that out separately, because it's a big number and it moves, and everybody looks at revenue, but it's like zero and very, very little in profit, so it's just distortion, an immaterial distortion.

Exactly, and as Juan said, it distorts the margin too because when it's not there the margin goes way up, and when we get a big quarter like we did last year, it drags the margin down.

Yes.

You're right. At the end of the day it doesn't have a real impact on our ability to grow earnings.

Just a question on the growth of the payments revenue, the 15% growth. What markets, is that the primarily the Caribbean? Are you seeing that out of Panama? What markets are you getting the growth in?

We get it, quarter by quarter, it changes market by market. It's probably more so right now in central America than it is in the Caribbean.

In which countries in particular? Just curious.

Well it would be -- our fundamental countries are Panama, Costa Rica, El Salvador.

Okay. And then what is going on in Colombia? What is causing the delay? I know the first customer you had, I think you were pretty excited it might be $5 million, maybe as much as $10 million of revenue once that customer got ramped up, and its just taken so much.

What is causing the delay? Is it regulatory issues in Colombia? Are you still really comfortable with that market? What's causing that delay, and do you still think that type of revenue is likely from that customer?

Yes, and I think, and maybe some got lost in translation. The first customer will not generate $5 million annually for that customer. What I think we were talking about is that the total contract value was $5 million, and so I may have misled you there with my comments.

But the delay is around two things. One, it is, the customer is, it's a scope issue to some extent exactly what we're doing for them, how we're doing it for them, and some of it is just fundamental in the first customer in a new market, it's always the most painful, the most difficult, because we have to put all of the connections in place with a local networks to operate the customer.

And as you can imagine, they are not necessarily in a rush to have a new competitor in the market. So they don't say no, they just it takes longer then. Once we build the connection, Bob, to that network, then I don't have to do that for the second, the third and the fourth customer, but the first time around it's more painful and takes longer.

Do you think you're going to be able to build? Colombia is a bigger market than all of the other markets put together pretty much. Do you have, are you getting the momentum? Is that going to be a game-changer market for you over the next three to five years?

Without a doubt, and that's why I was happy that we signed the second customer. That was to me a very good sign that we're starting to pick up momentum on the sales side. Because obviously I can't do it with one customer alone. The goal now is to start building on -- we've got the salespeople on the ground, start building the pipeline, which we have been doing, and now we're starting to see the benefits of that, as we start to sign additional customers in the market.

Great. Thank you.

I'm still very comfortable though that will be a very good market for us over the next three to five years.

Thank you.

(Operator Instructions)

We'll take a question from John Davis with Stifel.

I think quickly, Peter, you referenced processing growth of 8% year-over-year in the first quarter and that's a slight acceleration from 2013 in Q4 specifically. Can you talk about what's driving that there? Is the Puerto Rican economy getting any better? Any color would be appreciated.

Yes its been in the 7%, 8% range, I think. The numbers we've been given out the last year were 7% and 8%, so it's in around the same time.

We don't see any real acceleration, I guess what's more positive to us is we see no negative impact on that. With all of the noise and everything that's going on in Puerto Rico over the last year, the consumption remains very strong and we're seeing that in just the year-over-year, quarter-over-quarter, month-over-month POS processing.

So we expect that based on what we've seen for the last now what, probably year. We expect that number will stay in the 7% to 8% range for the rest of 2014.

Okay, thanks, that's helpful. And Juan quickly, D&A ticked down a little bit this quarter, I think it was a little lower than we were expecting. Anything going on there, and how should we think about that going forward?

No it's mostly natural. There were some software and hardware that are just fully depreciated, but I think it's just timing as we keep adding CapEx and we get more to the average that you have seen in the last year. That's why for the full year we should be around $31 million to $32 million in the end.

Okay, great. Thanks for the color.

It was just mostly hardware and software fully depreciated. That's the reason.

Okay, great. Thanks.

That will conclude today's question and answer session. Mr. Harrington, I'll turn the call back over to you for any additional or closing remarks.

Thank you, operator. In summary, I'm pleased with the start of the year. EVERTEC is well-positioned to continue to increase its share in Latin American payment processing markets.

We remain focused on executing our strategic growth initiatives, serving our clients, and driving profitability and shareholder value. We thank you for your support, and we look forward to discussing our second-quarter results with you in our next earnings call. Operator, you may now end the call.

Thank you. That will conclude today's conference. Thank you all for your participation.