EVERTEC, Inc. — Q3 2023 Form 10-Q Summary
Business context and reporting period
EVERTEC is a transaction-processing company serving 26 countries in Latin America and the Caribbean. Its businesses include payment services, merchant acquiring, the ATH debit network, fraud monitoring, core banking, technology outsourcing, and business-process management. This unaudited Form 10-Q covers the three and nine months ended September 30, 2023, compared with the corresponding 2022 periods.
Financial performance and key metrics
| Metric | Q3 2023 | Q3 2022 | 9M 2023 | 9M 2022 |
|---|---|---|---|---|
| Revenue | $173.2 million | $145.8 million | $500.1 million | $456.6 million |
| Income from operations | $39.6 million | $23.8 million | $114.4 million | $116.5 million |
| Net income attributable to EVERTEC | $10.0 million | $137.8 million | $68.2 million | $210.3 million |
| Diluted EPS | $0.15 | $2.06 | $1.04 | $2.98 |
| Adjusted EBITDA | $78.7 million | $60.2 million | $220.3 million | $207.0 million |
| Cash flow from operations | Not separately reported | Not separately reported | $163.5 million | $159.0 million |
- Q3 revenue increased 19%; nine-month revenue increased 10%. Growth occurred across all segments, led by Payment Services–Latin America and Payment Services–Puerto Rico & Caribbean.
- Q3 operating margin was approximately 22.8%, compared with approximately 16.3% in the prior-year quarter. The nine-month operating margin was approximately 22.9%, compared with approximately 25.5% in 2022.
- Q3 Adjusted EBITDA margin was approximately 45.4%, compared with 41.3% in the prior-year quarter. Nine-month Adjusted EBITDA margin was approximately 44.0%, compared with 45.3% in 2022.
- Q3 net income was significantly reduced by a $29.2 million unrealized loss on a foreign currency swap related to the planned Sinqia acquisition. The prior-year period included a $135.6 million gain on the sale of a business in the Popular Transaction.
- Cash, cash equivalents, and restricted cash totaled $198.4 million at September 30, 2023; including cash included in settlement assets, the total was $215.5 million.
- Total debt, including the term loan, revolving borrowings, and note payable, was approximately $408.6 million on a carrying-value basis. The Term Loan Facility had $399.4 million of unpaid principal, and the Revolving Facility had $6.0 million outstanding with $188.0 million of additional borrowing capacity.
- Capital expenditures for software and property and equipment totaled approximately $50.6 million during the first nine months. Investing cash outflows also included the $22.9 million paySmart acquisition, $26.5 million of Sinqia shares, and $5.5 million invested in a joint venture.
Material changes versus the prior comparable period
- Payment Services–Puerto Rico & Caribbean revenue rose to $51.6 million in Q3 from $44.6 million, with Adjusted EBITDA increasing to $30.4 million from $25.1 million.
- Payment Services–Latin America revenue rose to $46.2 million from $33.7 million, aided by a $6.3 million catch-up adjustment under the Getnet Chile contract, organic growth, and the paySmart acquisition. Adjusted EBITDA increased to $17.5 million from $10.9 million.
- Merchant Acquiring revenue increased to $40.6 million from $36.9 million in Q3, while nine-month Adjusted EBITDA declined to $46.6 million from $48.5 million because of revenue sharing with Popular, higher processing costs, and a declining average ticket.
- Business Solutions Q3 revenue increased to $56.5 million from $49.3 million, partly because the prior-year period included a $6.9 million one-time credit to Popular. Nine-month revenue declined to $169.2 million from $176.6 million following the sale of higher-margin assets in the Popular Transaction.
- The company acquired paySmart in Brazil for approximately $25 million and formed a payment-services joint venture in Latin America. It had contributed $5.5 million of a total $13.5 million commitment by September 30.
- Popular remained the largest customer, representing approximately 34% of Q3 revenue and 36% of nine-month revenue, compared with 35% and 40%, respectively, in the prior-year periods.
- EVERTEC repurchased 208,564 shares during Q3 and had approximately $150.0 million remaining under its expanded repurchase authorization.
Guidance, outlook, commentary, risks, and unusual items
The filing does not provide specific quantitative revenue, earnings, or margin guidance. Management expects continued opportunity from the migration from cash to electronic payments, digital-payment adoption, technology outsourcing, and expansion in Latin America and the Caribbean. Management stated that operating cash flow and available revolver capacity should meet liquidity needs for the next twelve months, subject to future operating performance and market conditions.
- EVERTEC agreed to acquire Sinqia in Brazil. Closing was expected in Q4 2023 and remained subject to customary conditions, regulatory and corporate approvals, funding, and other conditions. The company obtained commitments for up to $600 million of debt financing and expects to use cash on hand and financing.
- The Sinqia transaction creates execution, integration, financing, dilution, foreign-exchange, and potential impairment risks. Failure to close could result in transaction costs, adverse publicity, and stock-price pressure.
- Interest-rate exposure remains material because the term loan is variable-rate. A hypothetical 100-basis-point increase in rates over the applicable floor would increase annual interest expense by approximately $1.6 million, based on September 30 balances.
- Foreign-exchange risk includes a $29.2 million liability on the Sinqia-related currency swap at September 30 and $7.3 million of foreign-currency remeasurement losses during the first nine months.
- Key continuing risks include dependence on Popular, cybersecurity and system outages, payment-network and regulatory changes, merchant credit exposure, Puerto Rico fiscal and economic conditions, international operations, inflation, rising interest rates, natural disasters, and loss of the company’s preferential Puerto Rico tax rate.
- Management reported no material adverse effect expected from pending legal proceedings, no debt default, and effective disclosure controls as of September 30, 2023.
Most important facts for investors to verify
- Whether the Sinqia transaction closed as expected, the final purchase consideration, debt raised, share issuance, and resulting leverage.
- The sustainability of revenue growth excluding the $6.3 million Getnet Chile catch-up adjustment and other one-time or transaction-related items.
- Whether Merchant Acquiring and Business Solutions margins recover after Popular-related revenue sharing and the sale of higher-margin assets.
- Actual interest expense and covenant compliance after any Sinqia financing; the reported secured leverage ratio was 0.90 to 1.00 at September 30, 2023.
- Exposure to Popular, which represented approximately 36% of nine-month revenue, and the terms and renewal prospects of related agreements.
- Integration performance and expected synergies from paySmart and Sinqia, including potential goodwill or intangible-asset impairment.
- The effect of currency movements, inflation, cybersecurity incidents, regulatory changes, and Puerto Rico or Latin American economic conditions on cash flow and profitability.