EVERTEC, Inc. 2023 Q2 Form 10-Q Summary
Business Context and Reporting Period
EVERTEC, Inc. 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, business process management, core banking, technology outsourcing and fraud monitoring. This unaudited Form 10-Q covers the three and six months ended June 30, 2023, compared with the corresponding 2022 periods.
Popular remained EVERTEC’s largest customer, representing approximately 37% of revenue in both the quarter and six-month period. The company operates through Payment Services—Puerto Rico & Caribbean, Payment Services—Latin America, Merchant Acquiring and Business Solutions.
Key Financial Metrics
| Metric | Q2 2023 | Q2 2022 | Change |
|---|---|---|---|
| Revenue | $167.1 million | $160.6 million | +4% |
| Income from operations | $34.8 million | $46.6 million | -25% |
| Net income attributable to EVERTEC | $28.2 million | $33.6 million | -16% |
| Diluted EPS | $0.43 | $0.47 | -9% |
| Adjusted EBITDA | $74.5 million | $74.1 million | +1% |
| Adjusted diluted EPS | $0.71 | $0.67 | +6% |
| Metric | Six Months 2023 | Six Months 2022 | Change |
|---|---|---|---|
| Revenue | $326.9 million | $310.8 million | +5% |
| Income from operations | $74.9 million | $92.7 million | -19% |
| Net income attributable to EVERTEC | $58.2 million | $72.5 million | -20% |
| Diluted EPS | $0.89 | $1.00 | -11% |
| Adjusted EBITDA | $141.6 million | $146.8 million | -4% |
| Adjusted diluted EPS | $1.41 | $1.32 | +7% |
Q2 GAAP operating margin was approximately 20.8%, compared with 29.0% in the prior-year quarter. Six-month operating margin was approximately 22.9%, compared with 29.8%. Q2 net margin attributable to EVERTEC was approximately 16.9%, compared with 20.9% in 2022; six-month net margin was approximately 17.8%, compared with 23.3%.
Six-month cash flow from operations was $126.2 million, compared with $129.9 million in 2022. Investing cash outflow was $58.4 million, including $22.9 million for the paySmart acquisition, $24.2 million for software additions and $11.3 million for property and equipment. Financing cash outflow was $58.6 million, including debt repayments, dividends and share repurchases. Cash, cash equivalents and restricted cash totaled $211.1 million at June 30, 2023, or $228.6 million including cash included in settlement assets.
At June 30, 2023, cash and cash equivalents were $191.6 million. Debt consisted primarily of a $404.6 million unpaid-principal Term Loan A balance, with a $400.4 million carrying amount. The $200 million revolving facility had $194.0 million of available capacity. The secured leverage ratio was 0.86 to 1.00, and management reported no default or event of default.
Material Changes Versus the Prior Comparable Period
- Revenue growth reflected higher payment-services volumes, ATH Movil and ATH Business growth, merchant-acquiring pricing and volume improvements, and contributions from the BBR and paySmart acquisitions.
- Cost of revenue increased 8% in Q2 and 13% for the six-month period, driven by the Popular revenue-sharing arrangement, increased Latin American personnel costs, acquisition-related headcount and higher cloud-service usage.
- Selling, general and administrative expense increased 47% in Q2 and 32% year to date, primarily due to higher transaction-related professional fees and personnel costs.
- Depreciation and amortization increased 14% in Q2 and 8% year to date, reflecting acquired intangible assets and internally developed software.
- Business Solutions revenue declined 12% in Q2 and 11% year to date, mainly because of assets sold in the 2022 Popular Transaction. Its Q2 Adjusted EBITDA margin fell to 41.0% from 46.1%.
- Merchant Acquiring revenue increased, but Q2 Adjusted EBITDA declined to $15.6 million from $17.5 million. Margin declined to 37.9% from 45.5%, primarily due to revenue sharing, higher processing costs and a declining average ticket.
- Payment Services—Puerto Rico & Caribbean Q2 Adjusted EBITDA increased to $29.2 million from $23.9 million, while Payment Services—Latin America increased to $14.1 million from $10.2 million.
- The prior-year period included a $4.1 million software impairment charge, benefiting the year-over-year comparison for certain operating costs and segment profitability.
- Six-month foreign-currency remeasurement changed from a $0.9 million gain in 2022 to a $4.5 million loss in 2023, partly offsetting operating performance.
Guidance, Outlook, Risks and Unusual Items
The filing does not provide specific quantitative full-year revenue or earnings guidance. Management expects continued opportunities from migration to electronic payments, lower electronic-payment penetration in Latin America and the Caribbean, technology outsourcing and growth in digital and contactless payments. Management believes operating cash flow and available revolver capacity will satisfy liquidity needs for the next 12 months.
On February 16, 2023, EVERTEC acquired paySmart, a Brazilian issuer-processing and BIN-sponsorship business, for approximately $25 million. On July 20, 2023, EVERTEC entered into an agreement to acquire Sinqia in Brazil. The transaction was expected to close in the fourth quarter of 2023, subject to customary conditions, and was expected to be funded with cash on hand and committed debt financing of $600 million. The filing cautions that closing, integration, financing and anticipated synergies are not assured.
The company announced a $0.05-per-share quarterly dividend and increased its share-repurchase authorization to an aggregate $150 million through December 31, 2024. Future dividends remain subject to board approval and business conditions.
- Material customer concentration with Popular and dependence on the applicable master-services and merchant-acquiring agreements.
- Cybersecurity, processing-system, fraud, technology-infrastructure and third-party service-provider risks.
- Puerto Rico economic, fiscal, political and demographic pressures, including government exposure and migration.
- Latin American and Caribbean foreign-exchange, regulatory, political, economic and natural-disaster risks.
- Variable-rate debt and rising interest rates; a hypothetical 100-basis-point increase would increase annual interest expense by approximately $2.6 million on the debt balance at June 30, 2023.
- Inflationary pressure on wages, benefits, occupancy and administrative costs, which may not be fully recoverable from customers.
- Acquisition and integration risks related to paySmart, Sinqia and future transactions.
Legal proceedings are described as arising in the ordinary course of business; management believes any aggregate loss will not materially affect the company. Management concluded that disclosure controls were effective as of June 30, 2023, with no material changes in internal control over financial reporting.
Investor Verification Items
- Verify the sustainability of revenue growth and whether margin pressure from Popular revenue sharing, personnel costs and cloud services persists.
- Assess Popular concentration, contract minimums and the financial impact of the amended Popular agreements.
- Review the final financing terms, leverage impact, closing conditions and integration progress for the Sinqia transaction.
- Reconcile GAAP results with Adjusted EBITDA and Adjusted EPS, particularly share-based compensation, transaction costs, amortization, foreign-currency effects and other exclusions.
- Monitor cash conversion, capital expenditures, acquisition spending, debt repayment and remaining revolving-facility capacity.
- Evaluate exposure to foreign exchange, interest rates, inflation, cybersecurity incidents and regulatory changes across the operating countries.
- Confirm the continuation and affordability of dividends and share repurchases under the company’s debt agreements and acquisition financing plans.