Evertec Inc (EVTC) 2017 Q1 法說會逐字稿

Good afternoon, everyone, and welcome to the EVERTEC First Quarter 2017 Earnings Conference Call. Today's conference call is being recorded.

At this time, I would like to turn the call over to Kay Sharpton, Vice President of Investor Relations. Please go ahead.

Thank you, and good afternoon. 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, May 10. Access information for the replay is listed in today's financial release, which is available on our website under the Investor Relations section of evertecinc.com. For those listening to the replay, this was held May 3.

Please note, there is a presentation that accompanies this conference call, and is accessible on the Investor Relations section of our website.

Before we begin, I'd 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 or future performance are subject to known and unknown risks and uncertainty. 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 statement.

During today's call, management will also provide certain information that constitutes non-GAAP financial measures under SEC rules, such as adjusted EBITDA, adjusted net income and adjusted earnings per share. Reconciliation to GAAP measures and certain additional information are also included in today's earnings release and related supplemental slides.

I'll now hand the call over to Mac.

Thanks, Kay, and good afternoon, everyone. Thanks for joining us on today's call. We are pleased with our results for the first quarter of 2017 as we delivered above our financial expectations in a challenging macro environment in Puerto Rico. I'll cover some of the quarter's highlights and provide you with an update on recent developments.

Beginning on Slide 4, we have a summary of the quarter results. Total revenue was over $101 million, an increase of 6% compared to 2016, which was stronger than we anticipated, primarily due to increased transaction volumes. We delivered adjusted earnings per share of $0.45, an increase of 10% over last year. We generated significant cash flow and returned approximately $11 million to our shareholders this year through almost $4 million in stock buybacks and $7 million in dividends.

Now I'd like to give you some more specific updates on Q1 on Slide 5. First, we were pleased with the strong revenue in the quarter. In Puerto Rico, overall revenue grew approximately 4%, and we continued to experience resilient transaction growth. Payment Processing transactions grew more than 10%, but this growth was partially offset by average ticket declines as well as merchant mix shifts. In this regard, we benefited from increased gas prices, increased government payments and general payments growth from the continued cash-to-card conversion on the island.

Additionally, we're encouraged that we have seen a consistent increase in electronic transactions since legislation requiring electronic payment acceptance was passed last June. In the quarter, we also were able to test a commercial offering of our ATH Movil product and the response has been positive. We expect to launch this solution in the second half of 2017. As for Business Solutions, we are pleased with the integration of Accuprint as we have effectively leveraged our existing scale and assets to transition and deliver services to Accuprint's clients.

In Latin America, revenue growth was strong with mid-teens organic growth and the ongoing benefit from the Processa acquisition. In March, we were notified that certain client migrations that we anticipated in LatAm would be delayed. These delays will be beneficial to our expected revenue for this year and, of course, also gives us more time to continue to work on saving those accounts.

Next, as you may have noted from our 8-K filing last week, we also have a leadership transition in LatAm. Mariana Goldvarg stepped down from her position as President of Latin America as of April 28. We thank her for her dedication and contribution to EVERTEC and wish her well. Miguel Arocho, most recently Senior Vice President of Operations of Latin America, will serve as Interim President. We have a strong team in place, and I'm confident of our ability to move forward with our current goals and strategic plans for growth in the region. And finally, we are awaiting federal approval for the acquisition of PayGroup.

Now, I'll give you an update regarding PROMESA in Puerto Rico on Slide 6. The new administration received approval from the Federal Oversight Board of the long-term plan on February 28. Additionally, the board also announced the appointment of the Executive Director, who previously served as Ukraine's Minister of Finance. We believe she is an excellent choice, and this appointment is another important milestone in the PROMESA process for resolving the fiscal situation in Puerto Rico.

Additionally, today, the governor of Puerto Rico announced that he will request Title III under PROMESA for Puerto Rico to restructure its debts in a court-governed bankruptcy-like process. It is preliminary to estimate the impact this will have on the island or EVERTEC, but it's another important step to resolving Puerto Rico's fiscal crisis. We continue to anticipate austerity measures pursuant to the approved long-term plan. We expect to have further insights when the 2018 budget is approved and detailed plans are clear. We continue to believe that EVERTEC is well positioned to assist the government to improve its IT infrastructure. However, any positive impact from these new opportunities would likely be in 2018.

In summary, we are encouraged by our start to the year and our execution thus far.

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

Thank you, Mac, and good afternoon, everyone. I'll now provide a review of our first quarter 2017 results.

Turning to Slide 8, you'll see the first quarter 2017 revenue for the total company and our segment revenue details. Total revenue for the first quarter of 2017 was $101.3 million, up 6% compared to $95.5 million in the prior year, with approximately half of the growth coming from our acquisitions, Accuprint and Processa. With respect to the segment mix, merchant acquiring net revenue decreased 2% year-over-year to approximately $22.5 million, driven primarily by the Q2 contract change for Oriental Bank, of Merchant Acquiring segment to the Payment Processing segment. Excluding the approximately 6% impact of this contract change, Merchant Acquiring would have increased approximately 4%.

Revenue growth was impacted positively by the transaction growth, driven by the ongoing cash-to-card conversion trend, government payments and increased cash volumes. We experienced a further decline in the average ticket as we believe the ongoing economic uncertainty has influenced consumer behavior. The impact of an unfavorable merchant mix continues to reduce the overall net revenue contribution, but this impact was less than in prior quarters.

Payment Processing revenue in the first quarter was $30 million, up approximately 12% as compared to last year. Revenue growth was driven primarily by increases in our ATH debit network and card processing volume. The additional 2 months of Processa revenue increased point-of-sale rental revenue and the contribution of the Oriental contract change I referenced. Additionally, we benefited from approximately $0.6 million of nonrecurring revenue in Latin America.

In the quarter, transaction growth in Puerto Rico was resilient, growing over 10% year-over-year with a stronger back half of the quarter. We also benefited from the calendar shift of Easter to April this year, and this was partially offset by the extra day in 2016 for leap year. In April, transaction growth was approximately 8%, reflecting consistent trends and the Easter holiday impact. Client losses in the quarter in Latin America were slightly less than anticipated due to client-driven delays.

Based on updated schedules provided to us by our clients in the second half of the quarter, we now anticipate client migrations to impact our revenue for the year $3 million to $6 million, down from our prior $7 million to $10 million estimate. While the delays are beneficial, the client decisions remain unchanged at this time.

Business Solutions revenue in the first quarter was strong, increasing 7% to $49 million. We benefited from the Accuprint acquisition, which contributed approximately half of this growth as well as increased revenue related to Banco Popular and other service revenue. Additionally, we have seen the headwinds from cash and item processing volume declines reduce from prior quarter levels.

Moving on to the next Slide, #9, you'll find a reconciliation of our adjusted EBITDA. We incurred share-based compensation of approximately $2.1 million, and we had an adjustment of approximately $0.5 million from a contract liability indemnification reimbursement. Adjusted EBITDA in the quarter was $49 million, an increase of 7% from $46 million in the prior year. Adjusted EBITDA margin was 48.5%, and this represents a 30 basis point increase in our adjusted EBITDA margin compared to the prior year. The margin was higher than we anticipated and is explained in more detail on the next slide.

Moving to Slide 10, you'll see a year-over-year adjusted EBITDA margin bridge for Q1. Starting from the left column, the bridge begins with the adjusted EBITDA margin in the first quarter of 2016 of 48.2%. Moving to the right, we were positively impacted approximately 70 basis points from the operating leverage on our increased volume. Second, we were positively impacted by a foreign currency gain of approximately $1 million or 90 basis points as a portion of our LatAm contracts are U.S. dollar-denominated and with a strengthening U.S. dollar we recognized accounting gains upon remeasurement into local functional currency.

Third, other operating expense increases were approximately 70 basis points. Approximately $0.3 million or 30 basis points reflect the impact of no longer receiving the popular merger agreement maintenance expense reimbursement. The remaining 40 basis points relates to taxes, severance and other expenses. Lastly, we were impacted by increased information security and compliance costs that drove approximately 50 basis points, and we expect these costs to trend higher later in the year. The combined impact of these referenced items resulted in adjusted EBITDA margin of 48.5% for the first quarter of 2017.

Moving to Slide 11, adjusted net income for the first quarter was $33 million, an increase of 6% as compared to the prior year and primarily reflects the higher adjusted EBITDA, partially offset by higher interest expense and higher depreciation as compared to last year. Our effective tax rate in the first quarter was approximately 8%, reflecting some favorable discrete items in the quarter and was slightly below our prior year tax rate of 8.9%. Q1 adjusted earnings per share was $0.45, an increase of 10%, reflecting the benefit of a lower diluted share count as a result of our share repurchase program.

Moving to our year-to-date cash flow overview on Slide 12. Net cash provided by operating activities was approximately $25 million or a $5 million decrease as compared to the prior year, and this includes the impact of settlement timing and other working capital differences. Capital expenditures year-to-date were approximately $7 million.

Next, we paid approximately $5 million in principal debt payments and approximately $1 million in short-term borrowings. These repayments, along with $1 million related to withholding taxes paid on share-based compensation totaled $7 million. And finally, we paid cash dividends to stockholders of approximately $7 million and repurchased approximately $4 million of common stock for a total of nearly $11 million returned to our shareholders. We have approximately $76 million available for future use under the company's share repurchase program, and we recently announced another $0.10 dividend to be paid on June 9, 2017, to shareholders of record as of May 8, 2017. Our ending cash balance at March -- as of March 31 was $52 million, approximately even with our 2016 year-end balance.

Moving to Slide 13, you will find a summary of our debt as of March 31, 2017. Our quarter ending net debt position was approximately $605 million comprised of the $52 million of unrestricted cash and approximately $657 million of total short-term borrowings and long-term debt. Our weighted average interest rate was approximately 3.4%, and our net debt to trailing 12-month adjusted EBITDA was 3.3x. As of March 31, total liquidity, which excludes restricted cash and includes available borrowing capacity under our existing revolver, was $121 million.

At this time, I'd like to provide you with an update on the status of our government receivables. Our receivable at March 31 was approximately $16.2 million, which is down approximately $1.8 million from the balance at the end of 2016. We continue to monitor our receivables diligently and remain focused on our collection efforts. As we mentioned on the last call, in the normal course of business, the majority of our government contracts stand for renewal in June or prior to the new fiscal 2018 year, which starts July 1, 2017. As the 2018 budget has not yet been completed, we are continuing to work towards this goal of contract renewals with the government. Based on our ongoing discussions with the government, we continue to expect to renew these contracts without a significant impact.

Moving to Slide 14, we are updating our 2017 guidance. We are pleased with the first quarter performance, and this, along with the further delay of client migration, allowed us to increase our estimates for the year. We remain cautious about the outlook for the back half of the year as we continue to anticipate that austerity measures will be implemented and have an impact. We now expect revenue to be in a range of $394 million to $404 million, representing growth of 1% to 4%. We now project our Payments segment will be stronger than we had previously anticipated due to the delay of the client migrations and the strong first quarter.

Our adjusted earnings per share outlook of $1.54 to $1.67 represents a range of negative 8% to flat as compared to the adjusted earnings per share in 2016 of $1.67. As a reminder, in our guidance, we've not included any estimates for the pending PayGroup transaction. Additionally, for further clarification, we have not included any potential impact from PROMESA's Title III, which was invoked today. We believe that the government services we provide are critical and will continue accordingly. However, these determinations are ultimately dependent upon the Title III process now.

In summary, we are encouraged by the operating performance in the first quarter. We are cautiously monitoring the unfolding resolution of the Puerto Rico fiscal situation and are focused on the execution of opportunities in front of us.

We'll now open the call for questions. Operator, please go ahead and open the line.

(Operator Instructions) Our first question comes from James Schneider with Goldman Sachs.

This is actually Lara Fourman stepping in for Jim today. My first question was just on the Title III. If you could just talk about kind of the range of headlines that we can see, the range of scenarios and what would be a more positive or negative outcome for EVERTEC? And just how to think about the solutions business based on the headlines we might see?

Yes, thanks for the question. This is Mac. We can't really speculate on the process with Title III. What we can tell you as we've said in the past, that we provide mission-critical services to the government, and to date, we feel like that our receivables are still collectable, and we're very focused on continuing these services. And again, this is going to be a long process with the government. We think there is an opportunity to do even more over time, but our position has not changed given the Title III announcement. Peter do you want to...

No, I think that summarizes it quite well. We are focused on delivering the good service that we do to the government. They have acknowledged our services as essential in conversations with us directly and also publicly, and we're just going to follow the process, and we expect a favorable outcome as Mac articulated.

But I would repeat like we said earlier the fact that there now is an Executive Director in place, the fact that the PROMESA process is working, provides, again, a way for Puerto Rico to deal with the fiscal situation.

And then my other question was just on the guidance. I think you guys raised guidance by $4 million. And then when you were talking about the client delays, you expect the headwind to be $4 million less. But I think that trends were also coming in stronger this quarter, so if you could kind of just reconcile how much the guidance raises from migrations -- delayed migrations or -- and how much was from better trend?

Yes, this is Mac. Let me get Peter to answer that one.

Yes, so as you correctly indicated, $4 million was the net change if you take the midpoint of the range of the attrition change that we made in our guidance. And indeed, we had a strong quarter. We just thought and given the totality of our projections for the year that the guide that we did was appropriate and left it accordingly. The fundamental assumptions for the rest of the year, which include a drop-off in the volume due to the austerity measures we anticipate remain in place and are essentially the same.

Our next question is from John Davis with Stifel.

Just quickly on the attrition delay, Mac -- sorry, Peter, how much of the $4 million was in the first quarter versus the rest of the year?

John, the first quarter was essentially the same as last quarter. So we had a $0.5 million, and then what we expect the attrition to hit us twice as hard in the second half of the year, that's our current projection.

Okay. And then maybe just talk a little bit at a high-level, I appreciate all the detail on the margin guidance and the margin improvement year-over-year. But I think the margin came in somewhat better than, I think, most people had expected. Maybe just talk about longer term puts and takes. The margin has been coming down pretty precipitously for the last few quarters and in a nice balance here. Just help us think about the longer-term margin profile of the company as a whole.

Sure. Well, we're encouraged by the quarter, obviously, as we've indicated, when we bring on volume on our existing platforms and particularly here in Puerto Rico, we generate operating leverage that drives higher margin, that's what was reflected in the first quarter. As we've indicated in our annual guidance, we do have some expenditures that we need to make for information security compliance, which are going to have a bit of a drag on the margin as the year unfolds.

And then as we mentioned on the last call, the attrition is from a very high-margin platform in Latin America and so that's why we expect it to go down. Obviously, if the trends here continue and are better than the austerity that we project, we would produce a higher margin. As of now, in our guidance, you can do the math, but effectively it's at the higher range of our existing 46% to 47%.

Okay. And then, maybe, Mac, any comments on the regulatory process for PayGroup? Is that going kind of as planned, as scheduled, anything there you can share?

Yes, I mean, we really don't have an update. What I would say is we're still optimistic that it's going to close and focused on working with the feds, but no update. But we're looking forward to getting approval and closing the deal. That is our expectation.

Our next question is from Vasu Govil with Morgan Stanley.

Solid results here. I guess, just based on Puerto Rico, you guys have been seeing sort of elevated transaction growth for a few quarters now, and mostly from a revenue perspective, it's getting offset by lower ticket sizes and the merchant mix. I mean, at some point, I would imagine that the ticket size and the merchant mix kind of laps and you start to see better revenue growth. When would that occur if the transaction growth remains where it is?

Vasu, well, this quarter, in fact, we saw a bit of improvement on the mix of -- and the average ticket continued to decline as we indicated in the prepared remarks. We believe some of that to be based on consumer behavior just given the economic stress on the island right now. With respect to the improvement, we did see a slight improvement as I indicated on the mix side of things. So we hope that, that continues and gradually as the economy goes forward, we would see a plateauing of the average ticket, and then we'd be able to produce at the higher net revenue contribution.

Got it. And then just on the departure of Mariana Goldvarg. I thought I got that you said you have an Interim President in place. Is there a more permanent succession plan there?

Well, so Miguel Arocho has been with the company for 25 years and most recently he ran Ops for LatAm. He has got a technology background and a client relationship background. So he's very -- we're very confident in him as an interim, and he may end up being the long-term choice. But right now, we're going to put him in the job for a while and then consider other alternatives.

(Operator Instructions) Our next question comes from George Mihalos with Cowen.

Nice results to start the year. Just wanted to ask on the mid-teens organic growth in Latin America. If you can maybe provide a little bit more color as to what you're seeing and if there's any sort of geography that may be specifically within there is worth calling out?

George, this business is predominantly our Central American business, and those were strong results. We did highlight in our remarks that we had approximately $600,000 from nonrecurring items. So the 15% includes those amounts. Other than that, it's high single digits, which is in line with our expectations. Right now, we are anticipating losses, but we've -- as we've indicated there is strong organic trends in terms of just growth in transactions in those markets.

Are you guys feeling any better or any differently about your ability maybe to keep some of the deconverting clients on to the platform? I know you said that as of now, the deconversions are still in place, but just wondering if you feel any differently about your prospects there.

George, this is Mac. So what I would say is the delay is good news to us, not only to the help side of the team, but it also gives us more time to try and retain those customers. So -- I mean, that's something we'll be continuing to be focused on. They're not gone until they're gone, as we said on previous calls. And again, we're very focused on continuing to cross-sell to our existing customers, continue to win new business, keep some of these clients. And with PayGroup, we think that, that will give us additional opportunities to look at other products we can sell them. So specific to these customers, we'll be very focused on trying to keep them.

This concludes our question-and-answer session. I'd like to turn the conference back over to Mac Schuessler for any closing remarks. Actually -- I apologize, it does look like we have a follow-up question from Vasu Govil with Morgan Stanley.

I just wanted to quickly also ask, I think last quarter, you guys talked about new sales sort of lagging expectations and that you were making investments there. Wondering if you can give us any update on trends that you are seeing in new sales growth. And also are there any metrics that you could share with us that would help provide some visibility into how new sales are trending?

Yes, we don't provide new sales metrics. What we would point to is the mid-teen growth in the quarter which is what we consider success if we can repeat that in the future. Like I said earlier, we are very focused on trying to win new business, and we continue to focus on our pipeline, cross-selling new products to our existing customers and as George pointed out, continue to try and win -- I mean, keep that -- the customers that have told us they're leaving. So that's where our focus is, and we hope that we'll continue to deliver the types of results we have this quarter.

Great. Thanks very much.

So with that -- Again, I'd just say, thanks to everyone for joining the call. We look forward to visiting with many of you over the coming months. And I hope you have a good night. Operator, you can close the call.

The conference has now concluded. We thank you for attending today's presentation. You may now disconnect.