EVERTEC, Inc. — Q1 2024 Form 10-Q Summary
Business context and reporting period
EVERTEC is a transaction-processing and financial technology provider operating across 26 countries in Latin America, Puerto Rico and the Caribbean. Its businesses include payment services, merchant acquiring, business solutions and the ATH debit network. This unaudited Form 10-Q covers the three months ended March 31, 2024, compared with the three months ended March 31, 2023.
Financial performance and key metrics
| Metric | Q1 2024 | Q1 2023 | Change |
|---|---|---|---|
| Revenue | $205.3 million | $159.8 million | +28% |
| Income from operations | $32.8 million | $40.1 million | -18% |
| Operating margin | 16.0% | 25.1% | Down 9.1 percentage points |
| Net income | $16.4 million | $30.1 million | -46% |
| Net income attributable to common stockholders | $16.0 million | $30.1 million | -47% |
| Diluted EPS | $0.24 | $0.46 | -48% |
| Adjusted EBITDA | $78.2 million | $67.1 million | +16% |
| Adjusted EBITDA margin | 38.1% | 42.0% | Down 3.9 percentage points |
| Cash flow from operations | $36.0 million | $54.5 million | -34% |
Revenue growth reflected the full-quarter contribution from the Sinqia acquisition, organic growth across all segments, higher merchant sales volume and spread, increased Puerto Rico POS and ATH Movil activity, and growth in Business Solutions. Latin America Payments and Solutions revenue increased 110% to $74.2 million, while Payment Services–Puerto Rico & Caribbean increased 9% to $53.0 million, Merchant Acquiring increased 7% to $43.1 million, and Business Solutions increased 4% to $58.1 million.
Operating costs increased 44% to $172.5 million. Cost of revenues rose 34%, selling, general and administrative expense rose 49%, and depreciation and amortization rose 77% to $34.4 million, primarily due to Sinqia-related costs and amortization of acquired intangible assets. Acquired-intangible amortization was $28.8 million versus $16.3 million in the prior-year quarter.
Interest expense increased $14.3 million to $19.9 million following incremental debt raised to finance Sinqia. The effective tax rate declined to 1.8% from 8.6%, primarily because of higher interest expense and deferred tax benefits. The filing reports $48.0 million of adjusted net income and $0.72 of adjusted diluted EPS, compared with $45.6 million and $0.69, respectively; these are non-GAAP measures.
Cash flow, debt and liquidity
- Cash, cash equivalents and restricted cash totaled $317.3 million at March 31, 2024; including cash in settlement assets, the total was $337.6 million.
- Cash and cash equivalents were $293.7 million, including $201.2 million held by foreign subsidiaries for local operations and potential foreign investment.
- Total debt was $1.072 billion, including $443.7 million of Term Loan A, $521.8 million of Term Loan B, $80.0 million drawn on the revolving facility and other obligations.
- The revolving facility had $114.0 million of additional borrowing capacity, after consideration of letters of credit.
- Capital expenditures and software additions totaled approximately $21.9 million, compared with $13.3 million in Q1 2023.
- The company stated that operating cash flow and available revolving capacity are expected to satisfy liquidity needs for at least the next twelve months, subject to operating performance and other factors.
- The total secured net leverage ratio was 2.50 to 1.00, and management reported no default or event of default as of the filing date.
Material changes versus the prior comparable period
- Sinqia, acquired on November 1, 2023, provided a full-quarter contribution to revenue and Adjusted EBITDA but also increased operating expenses, amortization and debt-related interest expense.
- Revenue increased substantially, but GAAP profitability and operating margins declined because costs grew faster than revenue.
- Operating cash flow declined by $18.5 million, mainly due to lower net income and weaker collections of accounts receivable.
- Financing cash use declined because EVERTEC drew $80.0 million on its revolving facility, compared with a $20.0 million repayment in Q1 2023; this was partly offset by a $70.0 million share repurchase.
- The company repurchased approximately 1.5 million shares under a $70.0 million accelerated share repurchase agreement and repurchased 1,516,793 shares during the quarter. Final ASR settlement is expected in Q3 2024.
- The Board increased the authorized repurchase capacity to $220 million through December 31, 2025. A quarterly dividend of $0.05 per share was paid in March, and another $0.05 dividend was declared for payment in June.
- Foreign currency translation shifted from a $14.8 million favorable accumulated balance at year-end 2023 to an $11.6 million unfavorable balance at March 31, 2024, contributing to a $24.1 million other comprehensive loss.
Guidance, outlook, commentary and risks
The filing does not provide explicit quarterly or full-year revenue, earnings or cash-flow guidance. Management highlights continued migration from cash to electronic payments, lower electronic-payment penetration in Latin America and the Caribbean, digital payments growth, technology outsourcing demand and opportunities to expand in existing and new markets.
Key risks include dependence on Popular, which represented approximately 31% of Q1 revenue; cybersecurity, system availability and fraud risks; credit and settlement exposure to merchants and customers; regulatory and network-rule changes; Puerto Rico fiscal and economic conditions; Latin American political, economic and foreign-exchange volatility; inflation and rising interest rates; variable-rate debt; the ability to integrate Sinqia and achieve expected benefits; loss of customers or personnel; and potential natural disasters. A hypothetical 100-basis-point increase in interest rates would increase annual interest expense by approximately $5.2 million based on March 31 debt balances. The company expects to reclassify approximately $10.0 million of cash-flow-hedge gains into interest expense over the next twelve months.
Management reported effective disclosure controls as of March 31, 2024. Sinqia remains excluded from the one-year management assessment scope while its controls are integrated. Legal proceedings are described as ordinary-course matters that management does not expect to have a material adverse effect. The filing reports no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether Sinqia generates the expected organic growth and margin improvement, given its lower current Adjusted EBITDA margin.
- Whether revenue growth can offset higher amortization, personnel, cloud, processing and interest costs.
- Debt paydown, variable-rate exposure, covenant compliance and remaining revolving-facility availability.
- Cash conversion, accounts-receivable collections and the effect of holding substantial cash outside Puerto Rico.
- Final share count and settlement economics of the $70.0 million ASR in Q3 2024, together with additional repurchase activity.
- Revenue concentration with Popular and the terms, minimums and renewal provisions of the related agreements.
- Integration progress, purchase-price allocation changes and potential impairment or retention risks related to Sinqia.
- Foreign-exchange effects, cybersecurity incidents, regulatory developments and any material litigation or contingent liabilities.