Business Context and Reporting Period
EVERTEC, Inc. filed this unaudited Form 10-Q for the quarter ended March 31, 2023. The company provides merchant acquiring, payment processing, debit-network, business-process-management and technology services across 26 countries in Latin America and the Caribbean. Its principal operations are based in Puerto Rico, and it owns and operates the ATH debit network.
Popular remained EVERTEC’s largest customer, representing approximately 37% of first-quarter revenue versus 43% in the prior-year quarter. Popular no longer owns EVERTEC stock, but the parties continue to operate under amended commercial agreements.
Financial Results and Key Metrics
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Revenue | $159.8 million | $150.2 million | Up 6% |
| Income from operations | $40.1 million | $46.0 million | Down 13% |
| Operating margin | 25.1% | 30.6% | Down 5.5 percentage points |
| Net income | $30.1 million | $38.9 million | Down 23% |
| Net income attributable to EVERTEC | $30.1 million | $38.9 million | Down 23% |
| Diluted EPS | $0.46 | $0.53 | Down $0.07 |
| Adjusted EBITDA | $67.1 million | $72.7 million | Down 8% |
| Adjusted EBITDA margin | 42.0% | 48.4% | Down 6.4 percentage points |
| Cash flow from operations | $54.5 million | $67.7 million | Down $13.2 million |
Revenue growth was driven primarily by Merchant Acquiring, Payment Services–Puerto Rico and Caribbean, organic growth in Latin America, pricing initiatives, increased transaction volumes, ATH Movil growth and acquired businesses. Revenue was partially offset by assets sold in the 2022 Popular transaction.
- Payment Services–Puerto Rico and Caribbean: Revenue increased to $48.4 million from $40.0 million; Adjusted EBITDA increased to $27.9 million from $23.9 million. Margin declined to 57.6% from 59.8%.
- Payment Services–Latin America: Revenue increased to $35.3 million from $28.8 million; Adjusted EBITDA increased to $10.4 million from $9.6 million. Margin declined to 29.3% from 33.5%.
- Merchant Acquiring: Revenue increased to $40.3 million from $35.6 million, but Adjusted EBITDA declined to $15.6 million from $17.1 million. Margin declined to 38.7% from 47.9%, primarily due to the Popular revenue-sharing arrangement and higher processing costs.
- Business Solutions: Revenue declined to $55.7 million from $62.6 million, and Adjusted EBITDA declined to $22.4 million from $29.6 million, primarily because of assets sold in the Popular transaction and higher printing-related operating costs.
Cost of revenues increased 18% to $76.4 million, while selling, general and administrative expense increased 17% to $23.9 million. Management attributed the cost increases principally to Popular revenue sharing, higher personnel costs, additional Latin American headcount, provisions for operational losses, printing supplies and cloud services.
The effective tax rate declined to 8.6% from 13.7%, reflecting jurisdictional effects and a discrete Puerto Rico tax benefit. Foreign-currency remeasurement produced a $4.9 million loss in Q1 2023 compared with a $2.7 million gain in Q1 2022.
Cash Flow, Liquidity and Debt
- Cash and cash equivalents were $173.7 million at March 31, 2023, compared with $197.2 million at December 31, 2022. Cash, cash equivalents and restricted cash totaled $192.7 million.
- Operating cash flow was $54.5 million. Investing cash flow used $36.6 million, including $23.3 million for the paySmart acquisition, $9.3 million for software additions and $4.1 million for property and equipment.
- Financing cash flow used $40.6 million, including a $20.0 million repayment of short-term borrowings, $6.3 million of share repurchases, $5.2 million of long-term debt repayment and $3.2 million of dividends.
- Total debt consisted principally of a $405.3 million carrying value for the Term Loan Facility. The unpaid principal balance was $409.8 million, with maturity on December 1, 2027.
- The $200.0 million revolving facility had approximately $194.0 million of additional borrowing capacity at quarter-end.
- A $250 million interest-rate swap fixes a portion of the company’s variable-rate debt at 2.929% and matures in November 2024.
- Management stated that operating cash flow and available revolver capacity should be adequate for liquidity needs over the next twelve months. The secured leverage ratio was 0.97 to 1.00, and no credit agreement default had occurred as of the filing date.
Material Changes, Outlook and Risks
On February 16, 2023, EVERTEC acquired 100% of paySmart Pagamentos Eletronicos Ltda. for approximately $25 million. paySmart provides issuer processing and BIN sponsorship services in Brazil. The preliminary purchase-price allocation included approximately $5.1 million of goodwill and $13.4 million of identified intangible assets; the allocation was not yet final as of March 31, 2023.
Management continues to view electronic-payment adoption, digital payments, outsourcing by financial institutions and growth in Latin America and the Caribbean as key opportunities. The company also expects recurring quarterly dividends, although future declarations remain subject to board approval and business conditions. No formal quantitative revenue or earnings guidance is provided in the filing text.
Key risks include customer concentration with Popular, contract renewal and revenue-sharing terms, cybersecurity and system interruptions, merchant credit exposure, regulatory and network-rule changes, Puerto Rico’s economic and fiscal conditions, Latin American political and economic instability, foreign-exchange volatility, inflation, rising interest rates, indebtedness, tax incentives, natural disasters and the ability to integrate acquisitions.
Legal proceedings are described as arising in the ordinary course of business. Management believes aggregate potential losses are not expected to have a material adverse effect, although the filing states that loss estimates are unavailable for certain matters in early stages. Disclosure controls and procedures were effective as of March 31, 2023, with no material changes in internal control over financial reporting.
Most Important Facts for Investors to Verify
- Whether revenue growth can continue while the Popular revenue-sharing arrangement, higher personnel costs and other operating expenses pressure margins.
- The sustainability of the sharp decline in Business Solutions revenue and Adjusted EBITDA following the Popular asset sale.
- The final purchase-price allocation, integration costs and operating contribution of the paySmart acquisition.
- Exposure to variable-rate debt, including the effect of higher SOFR rates after considering the interest-rate swap.
- Liquidity after debt service, dividends, share repurchases, capital expenditures and potential acquisitions.
- The extent of ongoing revenue concentration with Popular and the terms and renewal risks of the related agreements.
- The impact of foreign-currency volatility, inflation and economic conditions in Puerto Rico and Latin America.
- The comparability of Adjusted EBITDA and other non-GAAP measures, particularly because the company modified its Adjusted EBITDA definition in 2023 and recast prior periods.