Evertec Inc (EVTC) 2015 Q1 法說會逐字稿

Good afternoon, everyone, and welcome to the EVERTEC'S first-quarter 2015 earnings conference call. Today's conference call is being recorded. At this time I would like to turn the call over to Alan Cohen, Executive Vice President and Head of Investor Relations. Please go ahead.

Thank you and good afternoon, everyone. Welcome to the EVERTEC first-quarter 2015 earnings call. With me today are Frank G. D'Angelo, Chairman of the Board; Mac Schuessler, our President and Chief Executive Officer; and Juan Jose Roman, our Chief Financial Officer.

A replay of this call will be available until Wednesday, May 13, 2015. Access information for the replay is listed in today's financial press release which is available on our website under the Investor Relations tab.

As a reminder, this call may not be taped nor otherwise reproduced without EVERTEC's prior consent. For those listening to the replay this call was held on May 6, 2015.

Before we begin, I would like to remind everyone that this call may contain forward-looking statements as 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 as 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 100K 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 the GAAP measures and certain additional information are also included in today's earnings press release.

I would now like to hand the call over to Frank G. D'Angelo, our Chairman.

Thank you, Alan. For the first quarter of 2015, I took on the role of Interim CEO in addition to my responsibilities as Chairman of the Board of Directors. It was important to us that our Company have the proper leadership in place so as not to get off track or lose focus.

During that quarter, Mac Schuessler was a paid consultant reporting directly to me, which gave him the opportunity to become familiar with our products, services, operations and management team. Our first quarter was in line with our expectations and was a good indicator that our folks remained on course. Mac and Juan will expand upon our performance in a few minutes.

As previously communicated effective April 1, Mac became EVERTEC's President and Chief Executive Officer and was added to our Board of Directors. We now have a full slate of nine directors, seven of those independent directors. The Board and I look forward to working with Mac as he takes the Company forward.

It's my pleasure now to turn the call over to Mac to further discuss our operations and financial performance. Mac?

Thank you, Frank. And good afternoon, everyone. Thanks for joining us on today's call. As the new CEO I'm pleased to be addressing each of you today.

Before taking you through our results for the first quarter, I'd like to discuss some of my observations since joining the Company, as well as some initial areas of focus. Since assuming the CEO role I've spent time with employees and members of management, listened to our customers here in Puerto Rico and in Central America, and met with members of the alliance government to better understand the opportunities and challenges facing our business.

Overall, in my short time with EVERTEC, several things have become apparent. My first observation is that the underlying business thesis for EVERTEC resonates very well within the region. My meetings with several bank customers and prospects alike validate their strong desire to do business with EVERTEC.

Across this organization, we understand best the common denominator of the 19 countries located so close to one another -- the Spanish language and the Latin culture. Our customers appreciate that we speak their language. It makes it easier and faster for them to develop relationships with our salespeople, develop requirements with our technical staff and work through issues with our operations teams.

In addition to our Latin characteristics, we're just the right size. We're large enough to provide operational stability but small enough to provide agility. Clients like the fact that we are large enough to make appropriate investments every year in our business but also small enough that within 24 hours, they could talk with the management team and even with the CEO when needed.

Customers also like the fact that it LATAM is our main focus. When we prioritize our resources every year, they know all of our investments will be in the region and not get lost competing with other corporate objectives or geographies. My comments aren't just what I'm thinking, but they're what our customers are saying. The region needs EVERTEC.

My second observation, which actually attracted me to the Company before joining, is that EVERTEC is fortunate enough to have a breadth of products and services that enable us to participate in most markets, regardless of the maturity of the financial services and payments industries in each country. We provide services across the value chain for both the issuing and merchant businesses.

We also drive ATMs in economies that are still cash dependent. So, our product breadth allows us to enter and operate in most markets by providing a product suite that's most appropriate for the current state of that market, and deliver additional products as the market evolves.

My third observation is that while one of EVERTEC's main areas of focus is growing our Latin American footprint, it's also clear that Puerto Rico is a key market. We have a superior position on the island. We own and operate the largest network in Puerto Rico and one of the largest networks in the region, ATH.

As the economy in Puerto Rico continues to face challenges we've been able to help customers with our solutions in multiple ways, thereby benefiting our Company. For example, as banks consolidate, we're able to assist the surviving banks, convert the acquired banks such as Doral. As the government seeks new solutions to manage new tax and social programs, we can help with new technology and services because we operate many of their current systems.

We have the most scale and expertise in the market and we should leverage that when possible. Puerto Rico is important to EVERTEC and although we are closely monitoring the economic situation, we are now also very focused on maintaining our market share and even expanding our share when the opportunities arise.

My fourth observation is that EVERTEC is still evolving from an IT Department of a large organization to becoming a standalone professional services and processing company. This is only natural and somewhat expected as EVERTEC became a publicly traded company just two years ago. However we must improve our ability to execute at every level.

Colombia serves as an example. To date we have clearly underperformed our expectations in that market. We can and will improve our situation in Colombia as over the coming years the opportunity is significant in the Latin America region.

One of our first steps is to insure that we have the right executives focused on the right priorities. We expect meaningful organic and inorganic growth outside of Puerto Rico and we need a leader solely focused on that effort.

I'm pleased to announce we have hired Mariana Lischner Goldvarg as our new President for Latin America. She currently serves as the President of Latin America for Equifax. Mariana was born and educated in Argentina and has operated across the region for over 25 years.

In this new role, Marianna will be responsible for growing our business throughout Latin America by deepening relationships with our existing customers, signing new customers, as well as identifying potential deals in the region. In addition, most of our LATAM operations will report to Marianna to insure that she aligns those operations with the expectations of our customers.

I'm confident Mariana will positively change our performance in the region. This should also positively impact our Puerto Rican business as it will enable Miguel Vizcarrondo and Carlos Ramirez to devote their time to growing our market share and protecting our margins here at home.

Another critical priority that needs appropriate executive support is corporate development. Today we do not have a team or executive solely focused on that effort. So, we've hired a new Senior Vice President for Corporate Development and Strategy with a background in finance and law and with exposure to LATAM. He will move from New York to Puerto Rico and will officially start on June 1.

Over the coming months our executive team will be evaluating each area of our business to insure we are executing at the highest level. The specific areas we will focus on first are a product and platform strategy across each market, our sales and accounts management processes, and our IT operations and project delivery. Based on my customer interactions as we execute with more discipline, I'm confident we can unlock significantly more opportunities.

Turning to the numbers, our first-quarter results reflect a good start to the year. Total revenue was $91.3 million, an increase of 4.5% compared with the first quarter of last year.

Merchant Acquiring revenue was up 4%, Payment Processing was up 5%, and Business Solutions grew 5%, as well. We generated adjusted EBITDA of $45.7 million and adjusted net income per share of $0.39.

Before turning the call over to Juan to take you through the quarter in more detail, I would like to comment on the current situation in Puerto Rico. Puerto Rico has been in a recession for the past eight years. During this period, EVERTEC has been able to utilize its leading market position on the island to its benefit. We continued to see healthy trends in the payments industry as the issues that impact the island were not affecting consumer consumption in the same manner as other segments of the economy.

We've also benefited from the continued cash-to-card trends on the island. As we move forward we will monitor these trends to see if there's a significant change in the market's behavior. In the meantime, EVERTEC will continue to focus on serving its key constituents in the market.

Now I'll close on a personal note. Since January, my family has been integrating into the Puerto Rican community. We have completed our move from Hong Kong to Puerto Rico, purchased a house, and enrolled our children in school. The island is officially our new home. And since my son can now surf every weekend he thinks he officially lives in Paradise.

And with that, I will now hand the call over to Juan. Juan?

Thank you, Mac. And good afternoon, everyone. As Mac mentioned we had a solid quarter. I will now provide a detailed review of our first-quarter results and then conclude by discussing our financial outlook for 2015.

Total consolidated revenue was $91.3 million, up 4.5%, compared with $87.4 million in the prior year. By segment, Merchant Acquiring net revenue increased 4% year over year to $20.1 million, driven primarily by higher spreads as well as transaction growth. Growth was partially offset by a slight decrease in total sales volume in the quarter.

During the first quarter, we saw a decrease in gas stations and utility sales volume of approximately 30% due to the decrease in oil prices as compared to last year. This decrease impacted our growth by about 1% in the quarter.

Payment Processing revenue increased 5% in the first quarter to $26.4 million, up from $25.2 million in the prior-year period. Revenue growth in the quarter was driven mainly by an increase in ATH debit network and processing transactions and accounts on file with the network card product business.

Our payment-related businesses outside of Puerto Rico grew 6% year over year in the first quarter, driven mainly by card product processing. The lower than usual increase was due to a client from an EVERTEC customer which took the processing of its debit and credit cards in-house. And, also, we did not add the same number of customers as last year.

Business Solutions revenue grew 5% to $44.9 million in Q1, driven mainly by higher hardware and software sales versus the first quarter of last year, as well as increased revenue from our core banking solutions. Revenue growth in the quarter was partially offset by lower IT consulting revenue due to the natural conclusion of certain projects and the timing of new project ramps. Excluding hardware and software sales, Business Solutions revenue was in line with last year, as expected.

Moving to expenses, on a GAAP basis, our first-quarter total operating expenses increased approximately 2.8% compared with the prior-year period. Cost of revenues excluding depreciation and amortization was $39.8 million, up $1.9 million or 5% versus the prior year, reflecting higher cost of sales related to the increase in hardware and software sales.

Selling, general and administrative expenses for the first quarter were $7.7 million, down approximately $0.4 million or 4% for the corresponding 2014 period, reflecting lower professional service fees and other expenses. Depreciation and amortization expense increased by$ 0.2 million or 1% compared with the prior year.

Income from operations for the first quarter was $27 million, an increase of 9% compared with the corresponding 2014 period as a result of our increasing revenues, cost containment initiatives and leverage in our business. Total non-operating expenses were $5.7 million, an increase of $1.2 million from the prior year, mainly due to a $1.7 million decline in other income compared with the 2014 period. The decline in other income was due to lower foreign exchange gains related to an inter-company loan with our Costa Rica subsidiary, as well as lower gains on purchases of local currency.

We recorded a GAAP income tax expense of $2.2 million in the first quarter. On a cash basis, our income tax expense was approximately $2.6 million, reflecting amounts paid in March 2015 related to the 2014 tax return filings in countries other than Puerto Rico. As of March 31, 2015, we had approximately $26 million of gross NOLs available to offset future tax payments related to our operations in Puerto Rico.

Adjusted EBITDA for the first quarter was $45.7 million, an increase of 1% from $45.2 million in the corresponding 2014 period. The increase in adjusted EBITDA was driven by revenue growth partially offset by the previously mentioned $1.7 million decline in other income as compared to 2014.

Adjusted Net Income in the first quarter was $30.3 million, down 5% from $32 million in the prior year, due mainly to the aforementioned decline in other income of $1.7 million and higher cash taxes of $2.6 million. Adjusted net income per diluted share decreased 3% to $0.39 from $0.40.

Moving to our balance sheet, as of March 31, we reported $32.4 million of unrestricted cash and $682.1 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 under our Term A and Term B senior secured credit facilities, paid $3 million on our revolving facility, and paid dividends of $7.8 million. As of March 31, total liquidity, which includes unrestricted cash and available borrowing capacity under our revolver, was approximately $112 million.

For the first quarter, our free cash flow, defined as adjusted EBITDA minus CapEx, cash interest expense, and cash income taxes, was $35.1 million compared with $37 million in the prior year. The year-over-year decline in our free cash flow reflects higher cash taxes of $2.6 million in the first quarter of 2015 versus the prior-year period.

Finally, we repurchased $10 million or 452,000 shares of our common stock in the first quarter of 2015. Of the original $75 million authorized shares repurchase program, we had $40 million available as of March 31, 2015.

Finally, regarding our 2015 financial outlook, our guidance remains the same. We continue to expect total consolidated revenue to be between $368 million and $372 million for growth of 2% to 3%, and adjusted EBITDA growth to be between 3% and 4% in 2015. In addition, our fully diluted earnings per share guidance of $1.68 to $1.72 remains unchanged.

We will now open the call for questions. Operator, please go ahead.

(Operator Instructions)

Our first question comes from Brian Keane with Deutsche Bank.

How are you guys doing? And, Mac, congratulations on the new post as CEO. I just want to get your perspective, Mac. Maybe you can give us some thoughts going outside of Puerto Rico at some of the opportunities. I know it's an attractive Latin American market. Maybe you can take it region by region or maybe even country by country for the specific countries and talk about positioning, and how long it will take to gain traction or to grow exponentially in some of the countries outside of Puerto Rico. Thanks.

Okay, great. Right now, answering that question would be a bit premature. One of the reasons we hired Marianna is to help her complete that assessment with us. We're in the process now, going country by country, what we believe the opportunity is across the payments landscape, whether it's processing from the issuing side or it's merchant acquiring. And then we're matching that against the products that we have today and the products we have in development.

What I would tell you on that topic specifically is that's work we're doing now. And over the coming quarters I think we'll have a better view of that.

Okay. And then, Juan, my question on the financials, just on the operating margins -- obviously, I think it was the payment segment that had the drag on it negatively. Going forward does that start to reverse? Or how do we think about modeling the payment positioning?

Regarding the changes in the operating segments, most of it was inter-company allocation between the Merchant Acquiring and the Payment. And also we have some projects that impacted it in the quarter. Overall, as you saw, our margins actually increased or our operating income increased during the quarter.

We expect to continue that trend so we don't expect really any major changes. Again, what's mostly really increasing, certain professional fees and certain expenses in the Payment Processing business, and allocations between the Payment Processing and the Merchant Acquiring business.

Okay, thanks. I'll turn the line, thanks.

Thanks. Our next question comes from Tien-tsin Huang with JPMorgan.

Great, thanks. And Mac, welcome to the call. First for you, I'm curious -- your intro was helpful -- dust do you foresee anymore of the issue of additions or structural investments that need to be made at these early days? I'm asking, can you do what you need to do within the guidance range that's set for 2015?

I'll answer the question first, is that, yes, we are comfortable with the guidance for this year. And I'll tell you a little bit how -- to answer your question let me tell you how I'm thinking about the next 6 to 12 months and what I'm focused on, and maybe that will address your question around leadership, the two additions we've added, or the two key additions,

For this year I'm focused on four things. One is, to your point, deliver on the financials, the financial guidance we've given for 2015. The second is focus very specifically on corporate development and M&A.

That's why we made the new hire, we made this new hire to insure we're developing a good pipeline to insure that we're doing all of the financial analysis and evaluations. And also to manage the legal and regulatory process. They have a legal background and they can help us with that, as well. But focusing on M&A and corporate development is going to be a big piece of what you'll see us focusing on this year.

The third, back to the previous question, is LATAM growth. We're already in the process of evaluating country by country what we believe the opportunity to be. And Marianna's job will be to help us finish that plan and then execute on it towards the back half of the year in the fourth quarter.

The final thing we're doing is -- and this alludes a little bit to what Frank discussed on the last call -- we're evaluating our internal processes and capabilities because I want to insure that right now with LATAM, are we focusing on the biggest opportunities. We're focusing on a lot, we have a lot of opportunities that we're chasing, but I want to make sure we prioritize and, given the size of the Company, to make sure we're going after those that have the most meaningful result on the top line and the bottom.

And then also we're looking at our operations to make sure that when we do have deals and new customers that we can ramp them faster, because I think that's another way we can actually accelerate growth and improve how we do business today. So that's how I'm thinking about the year. And I think we have the two key leaders in place to help us focus on those four areas.

All right great. That's helpful, Mac. My business question I wanted to ask about on the merchant side, I heard the comment -- higher spreads. That feels relatively new so maybe can you elaborate on what's driving that? And maybe back to Mac again what's your pricing philosophy in general? Thank you.

Hi, Tien-tsin, this is Juan. Basically what drives the change in the margins or in the spread was mostly the change in the mix of the retailers. We have higher volume or transactions in retailers with higher spread, and mostly as a result of the reduction in the gas station which usually have much lower spread.

This was mostly the mix between the type of retailers or merchants, so it was not really a change in the pricing for our retailers. We didn't have any change in pricing per se. It was mostly basically the mix in the type of businesses and what we saw. We saw a decrease in the gas station but it moved to other type of retailers with different spreads. And actually, it was positive for us during the quarter.

Then maybe, Mac, just your pricing philosophy real quick and then I'll jump off the call. Thank you.

That's a big question. What I would tell you is we have actively looked at -- if you look at ATH, we own the network here, so we can look at how we price on the network side. And then we also own the largest merchant portfolio in Puerto Rico and have some other businesses.

I would say this Company has done a fairly well job of having some reasonable pricing initiatives to continue to grow the business. We have recently evaluated that, to try to make and decision on are there other organic ways to grow the business through a repricing. There's a whole piece of our business, as you know, Tien-tsin -- the Popular contract -- that have a lot of latitude.

But we are actively taking a look at are there other organic levers we can pull. Pricing is one that I've pulled in my past. And then also looking at our product strategy a little bit to see if there's some incremental revenue we can get off some additional products.

So it's not just signing new business. It's not just corporate development. We're actually looking at those other organic levers, as well.

That's great to hear, thank you.

Thank you. Our next question comes from George Nahalos with Credit Suisse.

Great, thanks for taking my question. And, Mac, congratulations on the new post. Maybe to kick it off, you mentioned M&A in your comments. Can you talk a little bit about how the pipeline looks to you? And is it more that you're trying to focus in certain geographies, or a product that you're looking at? And maybe conversely, as you're looking across EVERTEC's business today are there any sub segments, any products or areas that you think perhaps don't make sense for the Company going forward?

I'll answer that. First is to say we're still thinking through that. And adding this new addition I think will help us think about it more thoroughly. I do believe that a straight merchant acquiring bank deal is not the only way to grow this business.

If you look at some of the deals that I've been involved in in the past, Ezidebit is a public deal, Global Payments -- that wasn't a bank deal because it was more of a technology deal. Even at American Express we grew the business on the purchasing card side through alliances with Ariba, SAP, and Commerce One. So, they're different types of deals. I think we should be very agile with the type of deals we look at.

You may not see us do just a merchant acquiring bank deal. But I think we need to be very flexible in the different alternatives we pursue. I can't answer if that's a change in strategy but that will definitely be the strategy we employ going forward.

Specific products -- we're still evaluating some of the other product opportunities we have, given the lines of businesses we're in.

Okay, I appreciate that commentary. And, Juan, just two points of clarification. I think you mentioned payments growth outside of PR was 6%. Does that compare to the 9% growth from fourth-quarter 2014 or are those numbers not comparable?

No, they are.

They are comparable, okay. Did you give out the POS transaction growth?

It was 5% during the quarter. And actually, (inaudible) numbers actually is consistent in the 5% growth. It has been stable during the quarter. Probably generally was a little slow but now we're tracking again in the 5% to 6% neighborhood in terms of POS growth in Puerto Rico.

Okay, thanks, appreciate that.

Thank you. Our next question comes from Chris Brendler with Stifel Nicolaus.

Hi, thanks, good afternoon. On the international side, you were talking about evaluating the opportunities and taking a step back, which I think makes a lot of sense. But is it fair to say that the old plans of Colombia, Panama, Costa Rica, in particular with processing and acquiring, are no longer the top priorities, and you're taking a wider swath? Or are those still the target countries?

This is Mac. I would say Costa Rica will always be a priority because we have a significant share. And Panama will always be a priority because they have a good business there. But we don't have the share we have in Costa Rica so there's definitely upside.

Colombia, what I would say is it's still so nascent for us as far as our capabilities. The good news is that we now have a satisfied customer and pilot. We plan to add more features over the coming year. And as Marianna comes on board she will figure out how to commercialize it.

I think in Colombia, we definitely learned that we need to do a better job on the due diligence process so that we understand the market before we start talking publicly about this is a market we're going to go into. And maybe in the future you'll see we'll talk about markets when we are actually piloting in those markets. And we also learned we should probably engage customers when we're more ready to pilot, not too early in the process.

So, I think Colombia is still a priority. I think the organization, we've all learned from implementing that. We all wish it had gone faster but I feel pretty good about -- we'll see some slow growth in Colombia in the not too distant future.

As far as other markets, just to answer your question, we're currently in Mexico. I think we want to become more aggressive in how we approach Mexico. We're taking a look at can we drive more ATMs in Mexico, can we do more issuing services.

We're looking at the entire region to say, can come up with a more aggressive game plan throughout the region and not just be dependent on those three markets. But that is work that is still to be done. And, frankly, when I came into the position, Mike Vizcarrondo said we need to get this business self-contained so that we can come up with a business that operates solely focused on the business outside of Puerto Rico.

Right. And the hire there of Marianna, is that in addition to help maintain that focus and maybe take a little bit different attack? Or is she really replacing some of the people who were doing this job before? I just wasn't quite sure if this was a new role or an existing role that's being reseated.

It's a new role. Today this reports under -- a bunch of complex businesses report under one person. And their recommendation, after we discussed it, was to separate it.

So Marianna, the experience she brings is she was at Equifax and Citi for some time, calling on banks. So, her Rolodex is very relevant to our business. She also is doing business in countries where we are today, so she gets Costa Rica, El Salvador, Honduras and Mexico.

And, interesting enough, I think she'll bring insights into countries where we don't do business. She's Argentinian. She's done business in Chile, Ecuador, Paraguay, Peru and Uruguay. These are all places where Equifax has businesses today. So, I think she will give us a perspective at the executive level that will allow us to better understand the entire region.

She brings relationships, as well, with some of these banks?

Yes.

Great. Thanks so much.

Thank you. Our next question comes from Chris Kennedy with William Blair.

Hi, guys, thanks for taking the question. Mac, the Company has always had long-term targets of 8% to 9% revenue growth, 10% to 12% adjusted EBITDA growth. Any thoughts on those?

What I would say is -- and I said it in my opening comments -- I have been incredibly pleased because of the past four weeks I've been the official CEO, I've spent half of my time on the road meeting with customers and prospects. I head back on the road next week. So I'm getting a good sense of what the market demand is.

I can tell you, I'm more excited about the demand for EVERTEC services than I have been in the past. There's a real desire for Latin Americans to do business with someone who speaks their language, understands their culture, but that's big enough to actually have the technology expertise and the financial stability that EVERTEC provides. With that as a caveat, that thesis holds up.

The way you get that 8% to 9% growth is us being much more aggressive on the organic growth, looking at al the different levers we talked about -- sales, pricing, new products -- and then also doing deals. We've got to do all of those very well in order to hit the 8% to 9%. And at this point I'm optimistic.

Okay, great. And then, Juan, just a clarification on the non-Puerto Rican Payment Processing growth. There was a customer that brought the business in-house and I think your prior guidance called for double-digit growth outside of Puerto Rico. Can you just talk about the opportunities for that?

Yes, I think for this year, we thought to be back to over the 10%. We think we will be more close in the high single digits for the remainder of 2015.

Okay, great. Thanks a lot.

Thank you. Our next question comes from Sarah Gubins with Bank of America.

Yes hi, thanks. Good afternoon. Within the 2015 revenue guidance, are you expecting further gains from hardware and software sales? Or do you see the Business Solutions segment trending towards the flat growth that you saw in the first quarter when we take out the hardware and software sales?

We definitely have a good start in terms of hardware and software sales during quarter one. But as you know it's bumpy during the year. From our guidance perspective, our assumption is that it will be in line with expectations for the remainder of the year.

Probably this quarter it was a little higher than our expectation but again, keep in mind that it's bumpy, right? So, next quarter it could be lower than expectations. As we said before, we see hardware and software more for the full year because it can go very high in one quarter, then very low the next one. But it is a good start for sure, Q1, so for now we expect that to be within the range of our guidance for the year.

Okay. And then given the news of a potential Puerto Rico government shutdown, do you see any risk of either shorter- or longer-term cuts to your contract with the government?

Right now, the administration is making all of the efforts to avoid a shutdown. As you can imagine news are on a daily basis here in Puerto Rico. But their focus right now is to cut spending and trying to avoid a shutdown. Usually when they talk about a shutdown it's more of a partial shutdown, mostly in non-essential services.

Our exposure, really, to the government of Puerto Rico is mostly the services we provide to them. Many of them, as a reminder, are mission-critical, as we have discussed before. And around 40% to 50% is funded by the US government and are really considered critical.

If the government really has a partial shutdown we might see some impact in what we call product development areas. We provide program services or support and it will be probably for the time they are shutdown if it is two weeks, a month, whatever it is.

The only one probably will be is we might see some delay in collecting our accounts receivable if they shutdown some agencies that are not essential. That might slow down the payment. Those are probably the most direct impact on EVERTEC. And the product development is usually less than 10% of their revenue we get from the government, so it's not material for EVERTEC.

Great. And then just last question for Mac. As you're going through and thinking and reviewing your strategy for outside of Puerto Rico, what are the things that we should look at and plan to expect to understand what the strategy will be and what timing will look like? I just wanted to get a sense of should we expect something in three months, six months, longer, et cetera?

So, you're just asking the timing of when you think we'll be able to talk more about the different initiatives outside of Puerto Rico?

Yes, and to give us a sense of how you think it will ramp over time and where the opportunities are.

What I would say, ramping over time and giving projections, it's premature until we've done the work. That's something we're actively doing right now. And as I stated, that's why Marianna was hired, so as she comes in we'll complete that work.

And, of course, it will be ever evolving as markets change, as opportunities present themselves. It's never static. But we will, as she comes in the door, go into 2016 with a clear understanding of what we're going to do in Latin America, as it may deviate from what we do today.

Thank you.

Thank you. Our next question comes from Jim Schneider with Goldman Sachs.

Good afternoon and thanks for taking my question. And welcome, Mac, to your new role. I was wondering if we can maybe start out on Colombia. You touched on some of the tactical areas of execution that you thought you maybe didn't get right before. Can you maybe just talk about the broader go-to-market strategy in Colombia and whether you think that's sound in terms of finding local partnerships in the part that you do organically? Do you anticipate any change to that go-to-market strategy or do you think it's just a matter of improving execution?

What I would say on Colombia is it's obvious it's one of the best markets in Latin America to do business. If you look at the ability to do business, if you look at the size of the market, there's nearly as many Spanish-speaking people in Colombia as there are in Spain. It's very comparable. It's a nice-sized market, it's a growing middle class, and you're seeing adoption move from cash to credit or to cards.

If you look at the fundamentals of that market, it's still very attractive to us. And then if you compare that to we now have a technology capability that, again, we're still piloting so it's a little bit in its formative state, what's missing in the middle and what we've got to work on over the coming months is how do we commercialize that and take advantage of the market.

We still have some good relationships in the market. We have a board member who's from Colombia that can help us understand and navigate that market. But we still have work to do to connect the capability we have and how we commercialize it with the opportunity. And, again, that's something we'll be working on this year.

That's helpful, thanks. And maybe just to follow-up on the M&A commentary, as you look at different opportunities can you maybe comment on the maximum size of deal you might be looking at? And specifically how does that tie into the maximum leverage you're comfortable with withholding?

I'm smiling because I don't know that there's ever a limit for any type of deal. Anything's possible, right? -- depending on which way the transaction goes. But what I would say is I think Juan can give you a sense of what our capacity is.

Yes. As we mentioned before, most of the companies we have looked in the past or that we see in the markets are under $100 million, and we're very comfortable. As a reminder, we have a revolver that is $100 million. Plus we generate close to -- free cash flow of about $75 million. So, we're very comfortable in paying and making an acquisition out of our cash flow plus the available revolver that we own.

But to Mac's point, if it's something even bigger than that, then we will have to do, there is other ways to do a transaction. But anything under that is an area we were very comfortable to execute immediately.

That's helpful, thank you.

Thank you. Our next question comes from John Williams with Topeka Capital.

Hi, good evening. Thanks for taking my question. I just had a couple of questions regarding capital allocation. Before that though just the right level of cash for the business, it seems like quarter to quarter you're in the roughly $25 million to $30 million-ish range on cash. Is there a particular level that you're comfortable with there or that is the right level going forward? Do you expect to see that increase over time or is this pretty much where it will stick around?

We're comfortable with that level. Obviously as we grow the business, our needs will change. We generate significant cash flows every month.

Basically what we have been managing during the last years is basically to use, as effective as we can, our excess cash flows. We you look back you will see we have implemented buybacks, we have paid down our revolver when we have used it, and we continue to invest in the Company. We invest around $25 million to $30 million every year in CapEx.

So, we try to be as efficient as possible. Obviously we want to provide the best returns to our shareholders, and we're very conscience of keeping that. We're very comfortable with that. Again, as a reminder, we really operate the business with the operating cash flow we generate every month.

Okay. You gave me a good segue to the second part of my question which is, going forward, how do you think about balancing the buybacks and the dividend with the debt paydown? I know that, back to deal, when you guys became public, the debt pay down was a much higher focus. And it seems like in this market perhaps companies are not really rewarded for paying down. Is that part of your thought process here?

And, secondarily, just on the dividend and on the buybacks, for a smaller market cap company, how high a priority is that going to be going forward? Are you going to look more towards debt or are you going to continue with all three of those items? Thanks.

Regarding the dividend, right now we don't have plans to increase. Obviously we do have plans to keep it. Since the rates are so low we have decided the best return of capital for our shareholders is to invest in the Company first, but secondly has been the buyback. As the rates continue to be low, we think that's the best way to return to our shareholders.

But obviously we'll monitor the interest rate scenario. As it change in the future, we might then change to start using more of our excess cash flows to pay down debt. However, we deleveraged very fast this quarter. We're at 3.6 times net debt. So, we have the flexibility just to change, once we complete our buyback, to pay down. But to your point, right now we don't think we need to accelerate because our average debt is around 3.5% and we consider that very low.

Thanks, appreciate it.

(Operator Instructions)

There are no further questions in queue at this time. I would like to turn the call back over to management for closing comments.

Thank you. I want to thank everyone once again for joining us on today's call. I look forward to personally meeting each of you over the coming months. And if anyone wants to come to Puerto Rico we would love to host you down here. With that, have a great evening.

Thank you. This does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation and have a great day.