EVERTEC, Inc. 10-Q Summary
Business context and reporting period
EVERTEC is a transaction-processing company serving 26 countries in Puerto Rico, the Caribbean and Latin America. Its businesses include payment services, merchant acquiring and business process management, including ownership and operation of the ATH debit network. This filing covers the unaudited three months ended March 31, 2021, compared with the three months ended March 31, 2020.
Key financial metrics
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Revenue | $139.5 million | $121.9 million | Up 14% |
| Income from operations | $45.0 million | $32.8 million | Up 37% |
| Operating margin | 32.3% | 26.9% | Up 5.4 percentage points |
| Net income | $35.6 million | $22.3 million | Up 60% |
| Net income attributable to EVERTEC | $35.5 million | $22.2 million | Up 60% |
| Diluted EPS | $0.49 | $0.30 | Up $0.19 |
| Adjusted EBITDA | $68.9 million | $56.3 million | Up 22% |
| Adjusted EBITDA margin | 49.4% | 46.2% | Up 3.2 percentage points |
| Cash flow from operations | $34.7 million | $33.9 million | Up $0.8 million |
Segment revenue and adjusted EBITDA increased across all operating segments. Payment Services–Puerto Rico & Caribbean revenue was $36.3 million and adjusted EBITDA was $20.8 million; Payment Services–Latin America revenue was $25.0 million and adjusted EBITDA was $10.0 million; Merchant Acquiring revenue was $30.9 million and adjusted EBITDA was $15.5 million; and Business Solutions revenue was $60.6 million and adjusted EBITDA was $29.6 million.
Cash, cash equivalents and restricted cash totaled $175.4 million at March 31, 2021, including $156.4 million of cash and cash equivalents. Total debt was $475.1 million, consisting primarily of the 2023 Term A Loan and 2024 Term B Loan. The company had $117.0 million of additional borrowing capacity under its revolving facility. The secured leverage ratio was 1.68 to 1.00, and management reported no debt covenant default.
Material changes versus the prior comparable period
- Revenue growth reflected recovery from COVID-19-related volume declines in the prior-year quarter, higher transaction volumes and average tickets, digital-payment growth including ATH Movil, new Latin American client contracts, and approximately $1.0 million of hardware and software sales.
- Cost of revenues increased 11% because of higher salaries, headcount, cloud services and costs associated with hardware and software sales.
- Selling, general and administrative expense decreased 7%, primarily because the prior-year period included higher professional-services costs related to corporate transactions.
- Interest expense declined $0.9 million because of lower interest rates and reduced debt balances.
- The effective tax rate declined to 11.7% from 16.9%, primarily reflecting changes in business mix and additional discrete tax items.
- Investing cash use increased to $34.4 million from $9.4 million, including a $14.8 million customer-relationship acquisition, $12.0 million of software additions, $4.7 million of property and equipment purchases and a $3.0 million purchase of debt securities.
- Financing cash use increased to $48.7 million from $31.4 million, including $21.4 million of debt repayments, $14.3 million of share repurchases, $8.7 million of share-based compensation withholding taxes and $3.6 million of dividends.
- The company acquired a Puerto Rico customer relationship for $14.8 million, to be amortized over ten years, and recorded a $0.6 million software impairment charge and a $0.4 million loss on damaged point-of-sale devices.
Guidance, outlook, commentary and risks
The filing does not provide quantitative financial guidance. Management stated that electronic-payment adoption, digital solutions, technology outsourcing and lower banking-system penetration in Latin America and the Caribbean support long-term growth opportunities. Management believes operating cash flow and available revolver capacity will satisfy liquidity needs for the next twelve months.
The company declared a $0.05-per-share quarterly dividend payable June 4, 2021 and stated that it anticipates regular future dividends, subject to board approval and changing business conditions.
- Popular accounted for approximately 44% of first-quarter revenue, creating customer-concentration and contract-renewal risk under the Master Services Agreement.
- COVID-19 remains a risk to transaction volumes, operating resources, net income and liquidity.
- Key risks include cybersecurity and system disruptions, fraud, credit exposure to merchants, regulatory requirements, changes in card-network rules and fees, and dependence on the ATH network.
- Geographic concentration in Puerto Rico exposes the company to fiscal, political, economic and natural-disaster risks; Latin American operations add currency and political risks.
- Debt is primarily variable-rate. A 100-basis-point increase in interest rates above applicable floors would increase annual interest expense by approximately $2.8 million based on March 31, 2021 balances.
- The company has a $250 million interest-rate swap at a fixed rate of 2.89% through November 2024, but expects approximately $6.9 million of accumulated hedge losses to be reclassified into interest expense over the following 12 months.
- Legal proceedings are considered ordinary-course matters, and management believes any ultimate losses will not be material.
Important facts for investors to verify
- Whether revenue growth and higher merchant-acquiring volumes persist after the COVID-19 recovery comparison and federal-stimulus effects.
- The sustainability of the unusually low 11.7% effective tax rate and the company’s Puerto Rico tax benefits.
- Popular contract-renewal terms and the ongoing contribution of Popular-related revenue.
- Debt repayment requirements, variable-rate exposure, LIBOR-transition effects and available revolver capacity.
- Cash conversion after acquisitions, capital expenditures, dividends, repurchases and debt service.
- Progress of digital-payment adoption, ATH Movil growth and new Latin American customer contracts.
- Potential effects of cybersecurity incidents, regulatory changes, Puerto Rico fiscal conditions and COVID-19-related disruptions.