Evertec Inc (EVTC) 2015 Q4 法說會逐字稿

Good afternoon, everyone, and welcome to the EVERTEC fourth quarter and full-year 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. Please go ahead.

Welcome to the EVERTEC fourth quarter and full-year 2015 earnings call. With me today are Mac Schuessler, our President and Chief Executive Officer; and Peter Smith, our Chief Financial Officer.

A replay of this call will be available until Wednesday, February 24. Access information for the replay is listed in today's financial release which is available on our website, under the Investor Relations tab. As a reminder, this call may neither be recorded or otherwise reproduced without EVERTEC's prior written consent. For those listening to the replay, this call was held on February 17.

Please note there is a presentation that accompanies this conference call, and it is accessible in the IR section of our website as well as via the link provided in the press release earlier today. 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 and we undertake no obligation to update any statements 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 earnings per share. Reconciliations to GAAP measures and certain additional information are also included in today's Earnings Release and related supplemental slides.

I will now hand the call over to Mac.

Thank you, Alan, and good afternoon everyone. Thanks for joining us on today's call. We're pleased with our results for 2015 as we met our expectations in a challenging environment. I'll cover some of the year's highlights, provide you with an update on recent developments, and close with some comments on 2016.

Beginning on slide 4, we have a summary of our 2015 results. Total revenue was almost $373 million, an increase of 3% compared to 2014 which was slightly ahead of our most recent guidance. We generated adjusted EBITDA of $185.6 million, an increase of 2%, and adjusted earnings per share of $1.68, an increase of 2%. We generated significant free cash flow and returned approximately $86 million to our shareholders this year through a $55 million stock buyback and our $31 million in dividends.

Additionally, as we announced in the Earnings Release, the Board of Directors approved an increase and extension of the Company's current stock repurchase program with a total of $120 million now available for our future use. I'm pleased that we have the cash flow and capital flexibility to repurchase shares, pay dividends and pursue other business development opportunities.

On slide 5 is a summary of our 2015 accomplishments. Our focus in 2015 has been to transition the organization, both from one that has operated like an IT department of a bank to a professional technology and processing Company. We continue to make good progress as we delivered on the promises made at the beginning of the year.

First, we focused on executing well in Puerto Rico. Between the expansion of our relationship with First Bank, our conversion of Doral Bank and the performance of our local payments business, I feel confident we have done well within this challenging environment. As the economy has worsened, our local service focus and long-term commitment to the island has distinguished us from our competition. Unfortunately, island residents continue to migrate to the US and GDP continues to shrink.

However, I am proud that we have been able to successfully grow through this headwind, and as a testament to our business model, the cash electronic payment opportunity on the island and the valued services we deliver compared to our competitors. We committed to accelerating growth in Latin America and now have a leadership team in place with that focus.

We have more work than we expected to bring our service delivery and account management to the level required for sustained growth. Although the Latin American markets we serve are also facing some financial challenges, I'm confident that we'll announce meaningful wins as we progress throughout the year and execute against the opportunity in front of us.

We also said we'd focus on corporate development. I'm pleased with the process that we established to assess deals and that we continue to make progress on filling the deal pipeline. We now have one deal pending regulatory approval and the pipeline is active. However, the Processa has taken time to close and I will speak to this more in a moment.

Finally, I am proud of the culture we are building here within EVERTEC. As an example of our commitment to the community, in 2015 we awarded 31 local scholarships to top students in Puerto Rico. We successfully launched our first EVERTEC volunteer day with over 600 employees and family members contributing thousands of hours volunteering on weekends with local nonprofit organizations and environmental cleanup efforts across both Costa Rica and Puerto Rico.

Within EVERTEC, we have recently expanded participation in our equity incentive program to additional leaders in the Company. We are driving a culture of meritocracy, awarding performance demonstrated through achievement. We believe building an engaged workforce with a service culture will benefit EVERTEC and all the places where we do business.

Now let me turn to an update on our deal activities on slide 7. As we discussed with you on our third-quarter earnings call in November, we extended and expanded our business relationship with First Bank for a term of 10 years. As part of this arrangement, we purchased First Bank's merchant portfolio for approximately $10 million.

We are proud that First Bank selected us as their partner in the competitive selection process and that business delivered good results in the quarter. We will continue to look for opportunities to add value and further expand our services with First Bank and others on the island.

Next I'd like to update you on the status of the Processa transaction. As previously discussed, we entered into an agreement to buy 60% of Processa, a Colombian Payment Processing company. Toward the end of the fourth quarter, we announced we extended the terms of this deal to March 31 because regulatory approval is still pending.

As a reminder, because of the bank's Holding Company Act we are still considered a subsidiary of Banco Popular for regulatory purposes. We continue to wait for regulatory approval and are confident EVERTEC has satisfied our obligations and that, to our knowledge, there's no issue to EVERTEC that would prevent approval. We remain optimistic that the deal will be approved.

Moving to slide 8 on Latin America. Regarding the fourth quarter, we generated high single digit growth in Latin America. However, as we previously mentioned, we experienced some customer attrition from those who have previously informed us of their intentions to leave. The LatAm leadership team is working to retain customers and is also actively building a pipeline of new prospects.

As I mentioned earlier, we expect to announce meaningful customer wins as we progress throughout the year. In 2016 we intend to focus on growing within the current footprint and will increase our technology investments to ensure we have the best products where we compete. Once the pending transactions is complete, we expect to leverage Processa to grow in the Colombian market. Outside of our current markets, our aim is to grow primarily through M&A.

Now I'd like to turn to a discussion of Puerto Rico on slide 9. In 2015, we experienced transaction growth of over 4%. We ended the year with government receivables down $3 million compared to the prior year. And although resolution to the Puerto Rico fiscal situation is still unclear, our January transactions remained strong at over 5%.

As you may have noted in our recent 8-K filing, the Department of Justice of Puerto Rico announced it has initiated a formal investigation into whether EVERTEC has engaged in contact that interferes with free competition within Puerto Rico. We have not been formally contacted by the Puerto Rican Department of Justice with regard to its investigation.

I would like to provide some further background on the matter. In Puerto Rico, the US, and elsewhere, merchants have generally objected to payment card transaction fees, often alleging that these fees established by card networks, processors and financial institutions are excessive and anti-competitive. In the US, and therefore Puerto Rico, the Durbin Amendment significantly addressed the issue by regulating fees for certain debit card transactions and by requiring more than one network option on each card.

These regulatory changes have lowered fees for merchants substantially and vendors like EVERTEC compete for these transactions every day. As a requirement of the Durbin Amendment, the Federal Reserve periodically publishes debit network fees to show the rates that debit networks charge merchants. In the last published Fed report, EVERTEC's ATH network ranked as one of the most economical networks for merchants. We also comply with the rules and regulations of Durbin and assist our bank clients with compliance.

As is the issue in many countries where there's an underground cash economy, merchants raise concerns and resist the increase of electronic payments that add transparency to their gross receipts for taxation purposes. In Puerto Rico, EVERTEC is the leader of electronic payments and as the provider of electronic payment solutions to the government is often referenced in these concerns.

It is important to note that EVERTEC has responded to similar type of Puerto Rico Department of Justice investigation or inquiry prior to Durbin and was successful in demonstrating the competitive environment within which we operate. Specifically in 2009, while EVERTEC was a subsidiary of Banco Popular, a similar investigation was initiated. The investigation concluded without any action taken by the Puerto Rican Department of Justice.

We remain confident that we compete every day in this market and will fully cooperate in all respects with the investigation. As appropriate, we also see this process as an opportunity to engage in constructive conversation of how a healthy, progressive and competitive payments industry can provide clear benefits to consumers, businesses and the government in Puerto Rico.

Lastly, as we begin 2016 with an improved organization, we plan to continue our focus on growing our business by delivering superior solutions and driving value for our clients. It will take some time to see our growth accelerate, but I am confident in our future success.

With that I will now turn the call over to Peter.

Thank you, Mac, and good afternoon, everyone. I'll now provide a detailed review of our fourth-quarter results and our full-year performance and then provide our financial outlook for 2016.

Turning to slide 11, you will see the fourth-quarter and full-year segment revenue details and the same for the total Company. Total revenue for the fourth quarter of 2015 was $95.5 million, up 2% compared to $93.5 million in the prior year. Total revenue for 2015 was $372.9 million and up 3% year-over-year.

With respect to the segment mix in the fourth quarter, Merchant Acquiring net revenue increased 12% year-over-year to $23.4 million, reflecting sales volume growth primarily driven by the addition of newly acquired First Bank merchant contract which contributed approximately 10% growth. The overall sales volume increase we experienced was also driven by significant increases in tax payments where we worked with the government of Puerto Rico to accept card payments and this growth was partially offset by lower volumes for gas and utilities driven by the ongoing year-over-year decline in oil prices.

In terms of recent trends, we note that in the quarter smaller merchants received less payment volume and large retailers grew payment volumes. This trend results in a lower net revenue mix for EVERTEC. For 2015, Merchant Acquiring grew 8% to $85.4 million and this represents approximately 23% of our total revenue.

The growth during the year was primarily attributable to the continued payment migration from cash to card transactions in Puerto Rico and the factors I just referenced. Payment Processing revenue in the fourth quarter was $27.7 million, approximately flat with the prior year. Increases in our ATH debit network volume were offset by reduced revenue from contracts with the Puerto Rico government of approximately 3%.

Additionally, approximately 1% pertaining to First Bank Payment Processing revenue was terminated and replaced by the new Merchant Acquiring relationship. The reduced government revenue pertained to a payments-related lottery program that was terminated in the quarter as a result of changes the government is making to their tax collection programs.

Transaction growth in Puerto Rico was resilient with payment transactions growing 5% year-over-year for the quarter, modestly increasing from slightly lower growth we experienced in late August through October. This 5% transaction growth rate trend continued in January.

For the full year, transactions grew 4% and the Payment Processing segment grew 3% to $108.3 million, representing 29% of our total revenue. Payment transaction growth in the year was partially offset by the terminated government program I referenced. Business Solutions' Q4 revenue decreased 1% to $44.5 million, primarily reflecting the impact of the year-over-year $1 million decline in hardware sales.

In the quarter, we continued to experience solid growth in our core banking business driven by new services and volume increases related to bank consolidation activity in Puerto Rico. This growth was partially offset by year-over-year decreases in our paper-based business. For the full year, business solutions grew 2% to $179.2 million, reflecting the growth in our core banking services, partially offset by lower item processing and IT consulting service revenue. Business Solutions is approximately 48% of our total revenue.

Moving on to the next slide, number 12, you will find a reconciliation of our adjusted EBITDA for the fourth quarter and full year 2015. The adjustments to EBITDA in the fourth quarter of 2015 included our typical adjustments for share-based compensation, Popular merger-related costs including transaction and other one-time fees, and the elimination of non-cash equity method income. Adjusted EBITDA for the quarter was $46.8 million, a decrease of 2% from $47.5 million in the prior year.

Adjusted EBITDA margin was 48.9% and represents a 190 basis point decline in our adjusted EBITDA margin compared to the prior year. Our Q4 adjusted EBITDA growth and our adjusted EBITDA margin percentage were impacted by certain items that I will review in more detail in the next slide. For 2015, adjusted EBITDA grew 2% to $185.6 million at a 49.8% margin which is also down 90 basis points from 2014.

Moving to slide 13. You will see a year-over-year adjusted EBITDA margin bridge for Q4 which highlights certain items that affected our adjusted EBITDA margin in the fourth quarter. Starting from the left column, the bridge begins with the adjusted EBITDA margin in the fourth quarter of 2014 of 50.9%.

Moving to the right, we benefited approximately 30 basis points from the increase in revenue and the favorable margin mix of Merchant Acquiring revenue in the fourth quarter of 2015, partially offset by the negative impact of changes in the government-related programs. Second, we wrote off certain uncollected receivables in LatAm this quarter which impacted us approximately 100 basis points. These write-offs primarily relate to receivables that were complicated by a system conversion over a year ago. We decided in the quarter not to pursue the receivables in the interest of account relationships and hence wrote them off.

Third, we were impacted by the business-to-business tax and other operating taxes by approximately 70 basis points. Fourth, we continued our investment related to a card issuing product initiative and this reduced margins approximately 60 basis points. We anticipate this growth investment to continue through 2016 as we continue to enhance our platform to meet the market needs in specific LatAm countries. The combined impact of these items resulted in an adjusted EBITDA margin of 48.9% for the fourth quarter of 2015.

Moving to slide 14. Adjusted net income in the fourth quarter was $33.1 million, down 4% from $34.4 million in the prior year. The decline reflects lower operating earnings and an approximate $800,000 increase in cash taxes, which was partially offset by approximately $500,000 in interest savings driven by a lower outstanding debt balance and a reduced interest rate. Our effective tax in the fourth quarter was [30.5%] and was primarily lower due to tax planning initiatives that we completed in Q4 that reduced non-Puerto Rico tax expense.

Cash taxes in the quarter were $1.1 million, compared to $300,000 in Q4 of 2014. The increase was due to the timing and increase of cash payments to taxing authorities from pre-existing liabilities. Full year GAAP effective tax rate was 8.4%, which compares to 10.1% in 2014. The reduction in the rate is primarily attributable to the tax planning initiatives that I previously mentioned.

Q4 adjusted net income per diluted share was $0.44 and flat to the prior year. Full year 2015 adjusted net income was $129.9 million and was also approximately flat with last year. Adjusted diluted earnings per share for the year was $1.68, up 2% from $1.65 in 2014.

Moving on to our cash flow overview for 2015 on slide 15, net cash provided by operating activities was approximately $160 million, a 14% year-over-year increase driven primarily by working capital improvements. Moving along the bridge, capital expenditures totaled approximately $45 million and include $10 million for the purchase of the First Bank merchant portfolio contract.

Year-to-date, the Company has made $27 million in principal debt payments on our credit facilities. Additionally, there has been an approximate $6 million increase in restricted cash due to settlement timing. During the year, we paid cash dividends to stockholders of $31 million and announced today another $0.10 dividend to be paid on March 17, 2016, to shareholders of record as of February 29th, 2016.

In the quarter we actively repurchased our stock and for the full year we repurchased approximately $55 million of common stock. With today's announcement of an incremental $100 million authorization, we now have a total $120 million available for future use under the Company's share repurchase program. Our ending cash balance at December 31 was $28.7 million, down approximately $3 million from our 2014 year-end balance. In sum, cash flow has our focus and we are pleased with the improvement in 2015 and the significant funds we were able to return to shareholders.

At this time, I'd like to provide you with a general update on the status of our government business and the receivables with the Puerto Rican government. Our 2015 revenue from the Puerto Rican government represented 9.1% of our overall revenue and we view less than 10% of this revenue as discretionary. Further, approximately 45% of the government revenue pertains to US federally funded programs.

We do not hold any direct credit of the government and as a Puerto Rican-based Company, we remain committed to delivering essential services to the government and Citizens of Puerto Rico. Our receivable with the Puerto Rican government at December 31, was $18 million, which is down from approximately $21 million at the end of 2014 and up approximately $2 million from our ending Q3 balance.

This receivable balance as of January 31 is relatively unchanged from December. Under the circumstances, we will continue to monitor our receivables diligently.

Moving to slide 16, we provide a summary of our debt. This slide reflects a quarter ending net debt position of approximately $646 million, comprised of the just mentioned $28.7 million of unrestricted cash and approximately $674 million of total short-term borrowings and long-term debt. Our weighted average interest rate was 3.04% and our net debt to adjusted trailing 12-month adjusted EBITDA was slightly below 3.5 times.

As of December 31, total liquidity which includes unrestricted cash and available borrowing capacity under our revolver, was approximately $112 million. Our debt has historically been 100% variable rate debt and in the fourth quarter with the first interest rate hike in years we decided to fix a portion of our debt.

Specifically, we entered into a one-year forward interest rate swap on $200 million of our term loan B debt through its 2020 maturity or approximately 30% of our total credit facility. This forward swap will not impact our interest expense or earnings in 2016, but will become effective in January 2017 commencing then with a fixed rate of approximately 4.4%.

Moving to slide 17. Before I discuss our 2016 financial outlook, I'd like to comment on some changes we have made to our calculation of adjusted net income and adjusted net income per share. Historically we have deducted the cash taxes paid in the reporting period to derive adjusted net income. Going forward for 2016, we will calculate GAAP tax expense for purposes of adjusted net income, recording the GAAP tax expense applicable to pretax adjusted earnings.

We believe this change provides a more accurate measure of our operating performance as a tax reported is applicable to the income generated in the period. To assist you with the change and for an understanding of its impact, we provided a supplemental schedule in the Earnings Release which has reconciled historical quarterly results for 2013 through 2015.

Additionally with respect to our projection of cash taxes, in 2016 we estimate a range of $8 million to $9 million and we have an available net operating loss balance at December 31, 2015, of approximately $22 million that we project will offset approximately $8 million of taxes over the next two to three years. Additionally, for this year we will now be providing guidance ranges on revenue and adjusted earnings per share which is consistent with our peers in the industry.

We expect revenue to be in the range of $373 million to $380 million, representing growth of zero to 2%. Our adjusted diluted earnings per share guidance of $1.57 to $1.64 represents a range of negative 2% to 2% as compared to the adjusted diluted earnings per share in 2015 of $1.61.

As we have discussed, we are operating in a challenging economy in Puerto Rico given the fiscal situation and our other Latin American markets are also experiencing macro challenges. We believe our revenue and overall guidance reflects these conditions.

Now I'll add some further information with regards to our revenue assumptions. The revenue range includes the First Bank transaction which will deliver approximately 2 percentage points of revenue growth in 2016 but also assumes a possible decline in Puerto Rico volumes. Additionally, the range reflects the anticipated attrition of LatAm clients that have notified us of their intent to terminate.

We expect LatAm revenue growth to be flat to mid single digits, depending on the timing of these migrations. Additionally as we mentioned on our prior call, a significant portion of our business was repriced pursuant to a contractual CPI decrease effective October 1st. With respect to our segment revenue mix, we anticipate Merchant Acquiring net revenue growth to be mid single digits year-over-year, which includes the benefit from First Bank for the first three quarters as well as some projected tail-off of volume growth as the year progresses.

Our payments processing and Business Solutions businesses are anticipated to be similar to our fourth-quarter revenue results, depending on the timing of client migrations that I previously mentioned. Regarding margins, we have planned for incremental investment spending in Latin America and have planned investments to upgrade our information security and infrastructure, all of which total approximately $2.5 million.

Additionally in 2016, we no longer receive an expense offset of approximately $1.5 million related to the maintenance expense reimbursements provided for in the Popular merger agreement. We anticipate the 4% business-to-business tax that went into effect October 1, 2015, to be replaced by the back tax in April 2016 following the latest government communications and the current law.

On a full-year basis, we are assuming the net tax impact related to these items will be neutral. We have partially offset the impact of these expense increases with cost actions. All of these items are considered in our guidance and combined we believe will generate EBITDA margins in a range of 48% to 49%.

For further clarification, in our guidance we have not included any estimates for the Processa transaction. The guidance does not reflect additional share repurchases. The ending share count as of 12/31/2015 is approximately 75 million shares. Our effective tax rate is anticipated to be between 8.5% to 10% and interest expense follows the latest consensus LIBOR projections. Our capital expenditures are expected to be in the range of $35 million to $40 million.

In summary, we are operating in challenging markets right now, but we have a cash efficient business model that is supported by the macro underlying cash electronic payment migration. While we cautiously monitor the resolution of the Puerto Rico fiscal situation, we are pleased by our progress in 2015 and look forward to executing in 2016.

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

Thank you. We will now begin the question-and-answer session.

(Operator Instructions)

And our first question will come from George Mihalos of Cowen.

Thanks for taking my question, guys. Just wanted to start off on the guidance, kind of how we think of the first half versus the back half. You mentioned some contracts coming off on the LatAm side. Should we expect revenue growth to be more weighted to the first half of the year relative to the back half?

Hey, George, it's Peter Smith. We would look at the year kind of on a balanced approach, actually. We expect some of the falloff to occur as we indicated, but there's some other items on the front half that kind of keep it balanced.

Okay. And then, Mac, you spoke encouragingly about the pipeline. Can you elaborate on that? Obviously the new wins would not be in the guidance, I would presume. How long will it take to ramp, in your estimation, a new business win?

Hey, George. It's typically in this industry nine to 18 months, because you have the sales process and then you actually have to convert them onto your platforms. What I would tell you is, as we've talked about previously, the focus for the end of this year, of 2015 and the focus early 2016 is really to rebuild the pipeline.

We've got an active pipeline today and we got some big wins in and I don't think it will have a big impact on 2016, but I think it will have a good impact on the future growth of the business.

Okay. And then just last question from me, a housekeeping item. I think you mentioned LatAm grew about 8% in the fourth quarter. So kind of sort of back-of-the-envelope math, does that imply that Puerto Rico in aggregate grew about 1%? Is my math right there?

That's correct.

Okay. Thank you.

Thanks, George.

The next question comes from Bob Napoli of William Blair.

Thank you. First I guess what would you expect the cadence of buybacks to be? You bought back, what, about $54 million worth of stock this year? The $120 million that you have out there is more than 10% of the Company. How would you anticipate executing on the buyback?

Hi, Bob. We look at -- first, we were pleased by the announcement and the authorization by the Board. As we look at buybacks, we just follow our capital allocation methodology where we're first looking for growth and then to the extent we don't have those investments available and we have extra cash, excess cash, we return it to shareholders. As we go through the year, that's how it's going to flow. We're going to follow that methodology consistently.

Okay. And then the VAT tax that's coming into play, is that a risk to the guidance here? You're assuming that the tradeoff with the business tax, there's no net effect from those two. But isn't the VAT tax a risk that is going to compress consumer spending?

The way we've looked at it, you're correct in that we've isolated the B2B tax and it's overlapped one quarter. That basically neutralizes it. With respect to the VAT tax, there's some opportunities that we expect to offset. What you referenced, which is a potential outcome, specifically as we are incurring the B2B tax now as it transitions to a VAT tax, we will be able to recover that through our remittances with the government.

Then last question, I guess, on the Colombia. What is your strategy once you close that deal? How much revenue does it bring and what is the strategy to grow in that market?

This is Mac. We can't really talk about revenues. It's a private Company right now. It would be inappropriate at this point to disclose the revenue.

What we would tell you is we were just in Bogota a couple of weeks ago visiting the Management team there. As we have talked about previously, they have a fantastics roster of clients, including the other equity investor Compensar, who we told you is the second largest in its space as far as a funds distribution Company.

The second is the largest retailer is also a customer. So the roster they have of customers and the ability to cross-sell into those is part of the strategy. Secondly, the ability to do additional development for the entire enterprise out of Colombia because of the workforce they have and then the ability to leverage some of their products and services outside of Colombia. So we're incredibly excited about the investment and making that part of EVERTEC.

Thank you.

Thanks, Bob.

The next question will come from Jim Schneider of Goldman Sachs.

Good afternoon. Thanks for taking my question. I was wondering if you could maybe give us an update, Mac, on your strategic priorities? Specifically the things you've looked at outside of Colombia and you want to invest more in. And then specifically can you address anything where the Company's already been investing in but you might look to pull back.

Let me talk a little bit -- there's a couple pieces of that. From an M&A perspective we focus on different types of investments. One is where we can increase our footprint. So Colombia, clearly the Processa deal was an opportunity to expand outside of where we currently do business.

The second would be to find new product capabilities and fortunately Processa offers that as well. Finally, we look at investments where we can leverage our scale. We would look at an opportunity in Puerto Rico if we were able to get a good multiple on it and we were able to do it, process those types of transactions like the First Bank deal, using the scale and leverage that we have.

We're very focused on investments right now from a technology perspective where we do business today. So Puerto Rico, Central America and the Caribbean, focusing on organic growth in those markets. And as I said earlier, we'll look at trying to increase our footprint through M&A outside of where we do business today.

That's helpful. You're investing on things you want to grow the business in, you don't want to sacrifice those. But to the extent the macro environment were to worsen further, what kind of levers do you have to pull back on the cost control side? Are we pretty much tapped out on that or is there still more that can be done?

I'll take the question, then hand it to Peter so you can get his view. I would say we've been doing that as we go along today. We've been very effective at trying to cut costs where we can in Puerto Rico and as we invest in LatAm, make sure we're very diligent about those. So as we progress throughout the year and adding some of the incremental investments we've added, even in 2015, by adding in Latin American management team but still making our numbers, is something that we're always conscious of.

As far as levers going forward, I'll let Peter give his view.

As Mac alluded to, we've already taken some cost action to offset some of the headwinds we've outlined here. Additionally, we have other projects underway that we're working on that are longer in nature that we're focused on that should deliver more savings. So they're just not really going to add a lot into 2016, but we look forward to completing those and reducing our cost structure accordingly.

Great. Thank you.

Thanks, Jim.

Next we have a question Vasu Govil from Morgan Stanley.

Hi, thanks for taking my question. I guess starting with Puerto Rico first, given the macro conditions there are still in flux, I'm wondering if you can help us think about whether there's much buffer baked in guidance if consumer spending was to take another stepdown in coming months?

I'll let Peter take that.

Well, what we planned in our guidance is for a bit of a tail-off in volume and what we're seeing is less spend per ticket and a bit of a mix shift in terms of transaction volume with smaller merchants to larger merchants. All those are kind of incorporated into our outlook.

We planned for some of that and our view is that that is cautious and our best estimate at this time. I think anything a step below that would be unexpected to us. (Inaudible)

Got it. Thank you. Just quickly, I know the last couple of quarters you talked about some legislative changes which could potentially drive increased card acceptance in Puerto Rico. Have you started to see any benefit from that and is there a way to quantify what the benefit could be?

I think we've seen a couple of things. We have seen an increase in government payments and the government accepting payments. We are seeing legislation, as we talked about earlier, for certain types of merchants have to accept now, more than just cash. So that is part of the upside that they were seeing in our business today. To Peter's point, we've also seen some weakening on the small merchant side.

Got it. Thanks very much.

The next question comes from Sara Gubins of Bank of America-Merrill Lynch.

Hi, this is [Fatan Naguli] calling in for Sara Gubins. My first question is what are the incremental costs associated with managing the outage that occurred in early 1Q? Are there additional costs associated with updating systems?

For everyone who is unaware, we had an outage on January 9 that had about a two-hour duration. If you look at the January numbers and the transaction volume, it was consistent with our expectations, so it doesn't appear to have impacted our volumes. As far as ongoing costs, I'll let Peter address that.

There were relatively insignificant. We had some costs with respect to the press and so forth that we did and we hired some consultants to help us investigate the outage and really those were the incremental costs that we've incurred.

And they're baked into guidance.

Correct.

Got it. Got it. All right. And then my second question is can you give us guidance on revenue by segment? I believe you said mid single digit for Merchant Acquiring, but what were for the other two?

What we referenced in the comments was essentially similar to Q4.

Got it. Got it. All right. That's all I had. Thank you.

The next question comes from Tien-Tsin Huang of JPMorgan.

Great. Thanks. I was wondering, Mac, if the DOJ investigation has any potential impact on your pipeline and your ability to close deals?

So what I would say is there's no indication of that today. We operate sort of in a very competitive market. We're still winning business and our view right now is that has no impact on our ability to compete in Puerto Rico.

Okay, good. Just wanted to check. I guess the loss of the lottery business, is there a replacement product potentially there that you can compete for? Because I know that was sort of something you had built specifically for that. So is that --

Yes, I'll address it. Everybody on the call knows, the [Evalodo] was actually every time a sales receipt was printed there was a lottery number on it to ensure that consumers would ask for a receipt and ensure that the taxes were calculated and actually paid and remitted.

The government, now that it's moving to a VAT system, has decided they have new tax regimes, as part of the VAT, new VAT system, they're replacing some of these old legacy systems. We're actively competing for that and we plan to be part of these new systems they're implementing but we still have work to do to continue to win some of that business but we're very actively working with the government.

Okay. Got it. So that's still in the -- like you said, in the pipeline --

Right.

-- as a potential win. Okay. Just last one, I think I feel like I always ask this question, so forgive me. Just in general around IT spending with Banco Popular and some of the other banks, take away the government, (inaudible) cost quite a bit, how does the spend environment feel on the IT side with your larger bank clients?

So what I would say, this is a challenging environment for any Company headquartered out of Puerto Rico. If you look back at the First Bank transaction, I think what we realized on the island is more increasingly they're looking at EVERTEC as an opportunity to do business with us.

So they're still investing, they still want to have the best products. They also have businesses in the US that they're investing in. We don't see what I would call a pullback. So there is still opportunity to do more with the banks in Puerto Rico.

I would just add that we continuously are engaged with Banco Popular and helping them enhance their core platforms and the rest of their infrastructure, so that is an ongoing focus, I think, probably for their efficiency as well.

All right. Great. That's helpful. And the slides are helpful. Thank you.

Thanks.

The next question comes from John Davis of Stifel.

Hey, good afternoon, guys. Peter, just a quick one. Could you quantify the acquiring revenue from First Bank in the fourth quarter?

We referenced the percentage that it contributed, which was 10% out of the 12% growth. So you can kind of --

Okay. Good to know. I just wanted to drill down a little bit on the transaction growth assumptions embedded in 2016, both in Puerto Rico and outside of Puerto Rico. And if you could just talk a little about the puts and takes there, and what the underlying transaction growth assumptions are.

In Latin America we're still experiencing double-digit growth on our existing clients and that is indication that with respect to the business we have, it's healthy and growing nicely. With respect to Puerto Rico, as I referenced earlier, we've modeled in a bit of a decline in the volume as the year goes on, as we expect the economy and sales tax and a few other impacts to impact our volumes. More so on the payment volume side as compared to transactions, which generally will occur but at a lower value.

Okay. That's helpful. And one for you, Mac, maybe. How do you guys look at capital allocation given where the stock's trading. Does that influence buyback versus M&A or if there is M&A opportunity, it doesn't matter how cheap the stock is, that's the first priority. Just want to get your thoughts there.

I think it's a healthy balance. I'll let Peter describe how he thinks about it. M&A is important to the Company. And as we've talked about long-term, it allows us to expand our footprint in a very effective manner because you don't have to create all the operating overhead and you can move more quickly into markets. M&A is still something we're very focused on.

However, we do have to balance that against the current stock price. But we're focused on both, but M&A is still something we're very, very keen to do. We have a very healthy pipeline and we're looking forward to close the Processa transaction.

Okay. That's helpful. Last one from me. The DOJ investigation, any chance that it jeopardizes any government contract renewals or are there any big ones up for renewal we should be aware of? Just any thoughts there would be helpful.

So at this point we haven't been formally served with any type of documents or requests. So we don't know the full scope of the investigation. It's primarily, in some of the initial conversations that we've seen, that had discussions in the legislature it's been focused on the payments business, not on our government contracts.

I would tell you the government contracts that we have we've won competitively. We're one of the most mission-critical vendor to the government and we haven't seen them pull back from those discussions. So my view is this probably will not impact that.

Okay. Great. And maybe one last one. Sorry. On Processa, given the regulatory approval environment as being considered, a subsidiary of Depop, does that make the new strategic shift towards smaller deals, does that impact it where it's such a headache to get done, maybe you need to do bigger deals or how is this kind of elongated process had any impact on your thinking as far as M&A goes?

So what I would say is, again, we're still optimistic that we'll close on Processa and we love the opportunity because although it is a small Company, they have a great reputation in Colombia and we think we can accelerate the growth faster if we do this deal. We're still very, very focused on closing this transaction and not speculating on future deals. Like I said, we are actively talking to sellers and we still actively have a pipeline.

Okay. Very helpful. Thanks, guys.

(Operator Instructions)

Our next question is a follow-up from Bob Napoli of William Blair.

Hi. Thank you. Just on the EBITDA margins, what are your thoughts longer term on the ability to expand those margins or are you expecting to be in investment mode for the next few years?

Bob, first thing I'd like to mention is with respect to volumes as we bring them on on our existing platforms, we should see increases in our margins. As we look into each market, we're really looking to invest based on return on invested capital and metrics around that, given our capital and cash availability.

We're very focused, obviously, on driving margins through some of the cost actions that I referenced and I believe as we look into our specific investments in these markets, we can better assess what the overall margin will be. But margin percentage itself isn't going to direct those investments, (inaudible) the return on invested capital.

Okay. So you expect those margins to grow over time as you grow the business?

As I mentioned, I think with respect to each investment in each market it may be different, but with respect to our existing assets and platform to the extent we're bringing on volume we would expect those margins to go up.

Then the deconversions that you've had, have you had new customers that want to deconvert or are the issues that caused those deconversions behind you? Do you have that under control? How much revenue are you losing from the clients that are deconverting?

Bob, this is Mac. What I would say is the losses are in the guidance and we're not providing more detail beyond that.

We have a great team in place that I think is doing a good job of getting in front of customers, understanding we make sure we understand the issues, we're already resolving the issues. We're already seen an impact into our customer satisfaction. So we believe we've gotten in front of the issue and we're working through it now. Additionally, as I said, they're working on new opportunities. We think we've got our arms around it at this point.

And then the Evalodo, how much revenue was the Evalodo?

We don't give specific information on contracts at that level. I would just add that, as Mac mentioned earlier, we're looking to offset the majority of it through some other opportunities that we're pursuing with the government.

But those are not in your guidance?

Oh, they are, they are.

The new opportunities are in your guidance?

Correct, yes. We're in active, active stages of those opportunities.

Great. Okay. Thank you very much.

Thanks, Bob.

This concludes our question-and-answer session. I would like to turn the conference back over to Mac Schuessler for any closing remarks.

I want to thank everybody again for joining us on today's call. I look forward to meeting and spending time with each of you this spring at several of the conferences and some of our meetings. And, again, have a great evening.

The conference is now concluded --

Yes, please close the call.

I'm sorry. The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.