Good afternoon, and welcome to the Evertec, Inc. Fourth Quarter 2018 Earnings Conference Call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star and then one using a touch-tone telephone. To withdraw your questions, you may press star and two. Please note, today's event is also being recorded. At this time, I'd like to turn the conference call over to Ms. Kay Sharpton, Vice President of Investor Relations. Ma'am, you may begin.
Thank you, and good afternoon. With me today are Mac Schuessler, our President and Chief Executive Officer, and Joaquin Castrillo, our Chief Financial Officer. A replay of this call will be available until Wednesday, February 27th. Access information for the replay is listed in today's financial release, which is available on our website under the Investor Relations section of evertecinc.com. For those listening to the replay, this call was held February 20th. Please note, there is a presentation that accompanies this conference call, and it is accessible in the Investor Relations section of the website. Before we begin, I'd like to remind everyone that this call may contain forward-looking statements as defined under the Private Securities Litigation Reform Act of 1995. These forward-looking statements about our expectations for future performance are subject to known and unknown risks and uncertainties. Evertec cautions that these statements are not guarantees of future performance.
All forward-looking statements made today reflect our current expectations only. We undertake no obligation to update any statement to reflect the events that occur after this call. Please refer to the company's most recent annual report on Form 10-K filed with the Securities and Exchange Commission for factors that could cause our actual results to differ materially from any forward-looking statements. During today's call, management will provide certain information that will constitute non-GAAP financial measures under SEC rules such as adjusted EBITDA, adjusted net income, and adjusted earnings per common share. Reconciliations to GAAP measures and certain additional information are also included in today's earnings release and supplemental slides. I'll now turn the call over to Mac.
Thanks, Kay, and good afternoon, everyone. Thank you for joining us on today's call. Our record fourth quarter and full-year results in 2018 reflect the resiliency of Puerto Rico and our solid execution both here and throughout Latin America. I'll cover some of the quarter highlights as well as provide you with an update on recent developments, and then comment on our strategies for growth in 2019 and beyond. Beginning on slide four, we have our summary of our 2018 results. Total revenue was approximately $454 million, up 11% compared to 2017, which exceeded the top end of our most recent guidance and well exceeded our initial expectations for the year. We generated adjusted earnings per share of $1.84, an increase of 25%. We also generated significant operating cash flow of $173 million.
This included a one-time benefit in Q4 related to $1.8 million in connection with a federal program for companies affected by Hurricane Maria who retained employees immediately following the storm. We resumed our dividend midway through the year and repurchased stocks in the fourth quarter, resulting in the return of approximately $17 million to our shareholders, with $10 million in stock buybacks and $7 million in dividends. I'd like to give you some more specific updates for our businesses on slide five. First, we are pleased with the continued strong revenues in the quarter. Puerto Rico and the Caribbean grew approximately 23% as we lap the post-hurricane results, with transaction growth of approximately 47% offset by an average ticket decline of 6% as we begin to see average ticket normalize. The team executed well in the quarter, and I'll talk about some of the wins in a moment.
Before I do that, I'd like to briefly mention some of the positive exposure Puerto Rico received to start the year. While the impact of the hurricanes in 2017 were devastating, 2019 kicked off with renewed interest in the island, including The New York Times listing Puerto Rico as the number 1 travel destination, the three-week local run of Hamilton, Jimmy Fallon's show featuring Puerto Rico, and the recent 30-member House delegation visit. We hope that this additional exposure will create a lift in tourism, further investment on the island, and additional congressional aid. As a side note, Evertec was a proud sponsor of the Hamilton event featuring Lin-Manuel himself. While the timing of federal funds in 2019 remains unclear, the certified PROMESA plan projects federal and private insurance flows of $82 billion over the next 15 years, with approximately $13 billion to be distributed in 2019.
Just a few days ago, HUD released the first $1.5 billion in reconstruction funds. Further, the judicial approval of the COFINA restructuring is an important step for Puerto Rico to address its debt problem. Although the impact to our business from the various federal funds will vary from year to year depending on the type of funding, we believe the federal relief funds and the progress made to address the island's debt will have a positive impact on the overall economy of Puerto Rico. Moving to slide six, I'd like to comment on some of our business highlights and how these wins relate to our overall strategy to maintain and grow our business.
While we have a dominant position in Puerto Rico in the merchant and payment segments through our price and service, we will continue to invest in innovation to defend our market share and margin, as well as expand the overall market. As evidence of our commitment, we are pleased that we retained all of our top 40 merchants, and topping off the year, we won the largest worldwide franchisee of McDonald's that serves over 65 restaurants in Puerto Rico. It relates to innovation, we recently launched our integrated pay at the table solution for our clients. This integrated solution improves our clients' efficiencies by speeding up the payment process, increasing the number of tables that can be served, and streamlining the payment reconciliation process.
Largely as a result of this new product, we signed a three-year renewal with one of Puerto Rico's largest casual dining enterprises, International Restaurant Services, which franchises a number of brands such as Chili's, Romano's Macaroni Grill, and P.F. Chang's. Additionally, during the year, we successfully launched PVOT, a dynamic cloud-based point-of-sale system for the SMB market, which integrates processing payments with additional business management tools such as inventory management, reporting and business intelligence, as well as integration options for other back-office software. With our local service capabilities, integration support for our clients, and planned further enhancements, we believe this will be a competitive offering in the regions we have a presence. Recently, we not only launched this in Puerto Rico, but in Tortola and the U.S. Virgin Islands as well.
Additionally, we are pleased with the pilot of our ATH Móvil solution for e-commerce websites and mobile applications that we launched in the fourth quarter with the largest gas station chain in Puerto Rico, Puma, and the largest supermarket chain as well, Econo. In 2019, we will continue to seek opportunities to leverage our technology platforms and operating scale to deliver value-added solutions to our customers and partners. While there will be investment costs associated with these new innovations, we expect to offset these investments with new avenues for growth and continued leveraging of our infrastructure. For example, we can now leverage our regional workforce across our multiple locations to recruit the most cost-effective and productive talent possible to deliver our services. We believe this strategy will allow us to optimize our overall company margins over time.
Turning to slide seven, I'd like to review our recent wins in business solutions and also discuss our opportunities in this segment. First, assisting the government of Puerto Rico is a priority for us. In addition to the two wins we announced last quarter, we recently signed a new contract with the Puerto Rico Department of Education for a technology consulting project. As one of our largest customers in this segment, we will continue to focus on ways to assist the Puerto Rico government to be more effective and efficient. I am also pleased to announce that we extended our contract with Santander Puerto Rico, which is our second-largest business solutions banking client. These two wins are great examples of our continued ability to compete and win new business in this segment through competitive pricing and a unique value proposition.
Looking forward, we will continue to focus on strengthening our relationship with Banco Popular, as well as other clients in this segment, and would expect to benefit from continued market consolidation. Moving on to Latin America on slide eight. In 2018, we more than doubled our segment revenue and EBITDA as compared to our results just three years ago. Results in Q4 were strong, driven by high single-digit organic growth and one-time intercompany revenue between Puerto Rico and LatAm as we begin to cross-sell the PayGroup acquired products and process transactions from the island, partially offset by some anticipated client attrition. Regarding client attrition, I am very pleased that Banco Atlántida in Honduras, who had previously notified us they were leaving, has not only renewed their contract, but also expanded their relationship, doubling their previous contract value.
Additionally, we signed a term license agreement for our risk management product with eGlobal, one of the top providers of switching services in Mexico, and who serves the two biggest financial institutions in the country. Turning to slide nine, I'd like to review the opportunities in Latin America and why we are excited about the potential evolution of these markets. Latin America presents a significant opportunity for growth given its low penetration of card volumes, as well as its growing middle class. We continue to see positive trends in cash-to-card conversion and an increasing online presence and smartphone usage, which will continue to fuel growth of mobility payments. There is also increasing card utilization driven by the growth in the number of merchants authorized to accept cards.
That said, many of the countries are still largely dominated by monopolies or duopolies for payment processing, and these are often owned by the local banks. This environment, however, is evolving primarily due to three pressures. First, there is regulatory pressure. For example, in Argentina, the government mandated that the local bank-owned processor, Prisma, be divested. Prisma recently announced a 51% sale to Advent International, and the shareholder banks have three years to divest the remaining 49%. We hope the regulatory pressure will extend to other countries in Latin America, as this will create an opportunity for new entrants or partnerships. Second, there are competitive pressures. Banks in Latin American markets are now looking for new partners in order to differentiate their service offering from other banks. An example of this is the recent Santander Chile announcement to not renew its contract with Transbank, the sole acquirer processor in that market.
Third, the evolution in technology in the payment space, which is still in the developmental stage in many markets in Latin America, creates additional pressure for the markets to change. Brazil was one of the first payment markets to open in Latin America, which has resulted in new entrants introducing innovative solutions for digital banking, smart POS devices, and other mobile technologies that have served to fuel the growth of e-payments in the market. We believe our innovations, such as our PVOT solution, will be key to being selected as a partner of choice as other markets in Latin America open. Turning to slide 10. Our strategy in Latin America is driven by developing a strong local client base through our acquisitions, such as Processa and PayGroup, that have expanded our geography as well as our product offering.
We are shifting more of our products from a licensing model to a processing model to provide recurring revenue that will hopefully grow with the transaction trends in the region. We have created a cloud-based version of our risk management product that is operating in multiple countries. During 2019 and into 2020, we are further localizing additional payment products, specifically in Costa Rica, Mexico, Colombia, and Chile. We have over 800 employees outside of Puerto Rico, and with our local leadership and Spanish-speaking developers, we can provide customized solutions developed specifically for each client and market. Furthermore, with the completed refinancing of our debt, we have additional capacity on our increased revolver of $125 million, as well as cash on hand and strong free cash flow anticipated for 2019 to grow our business.
We believe we are uniquely positioned to take advantage of opportunities throughout Latin America as the pressure from regulators, the competitive environment, and new technologies open these markets. In 2019, due to our recently completed rebranding effort, we are operating under one brand to solidify our identity in the market. As we close out an impressive year in 2018, I am also proud of our recent inclusion in the Bloomberg Gender-Equality Index, which distinguishes companies committed to transparency in gender reporting and advancing women's equality. At Evertec, one of our core values is diversity. We believe that diversity provides the key ingredient for successful innovation and a high-performing workforce. I want to thank all of our dedicated team members for their commitment throughout 2018 and for building a strong foundation for growth into 2019 and beyond. With that, I will now turn the call over to Joaquin.
Thank you, Mac, and good afternoon, everyone. I'll begin with a review of our consolidated fourth quarter and full year 2018 results and then review each segment in greater detail. Turning to slide 13. Total revenue for the fourth quarter of 2018 was $118.2 million, up 19% compared to $99.6 million in the prior year and reflects the growth over the post-hurricane impacted results last year and increased transaction and sales volumes in Puerto Rico resulting from post-hurricane recovery activity as well as growth in our Latin America business. Adjusted EBITDA for the quarter was $52.6 million, an increase of 42% from $37 million in the prior year. Adjusted EBITDA margin was 44.5%, and this represents a 730 basis point increase in our adjusted EBITDA margin compared to the prior year.
The increase year-over-year is primarily attributable to the growth over last year's hurricane-impacted results as well as an impairment charge taken in prior year fourth quarter of $5 million. We were also favorably impacted by $1.5 million of foreign currency exchange mostly related to remeasurement of assets and liabilities as compared to prior year. Sequentially, our overall margin was impacted by higher corporate expenses as a result of planned corporate initiatives, higher revenues from low-margin lines of business, and contractual one-time obligations and other expenses that negatively impacted our margin for Q4. Adjusted net income in the quarter was $34.5 million, an increase of 95% as compared to the prior year on $0.46 on a per-share basis, an increase of 92%.
The increase primarily reflects the higher adjusted EBITDA, a lower tax rate in the quarter as compared to last year, partially offset by higher cash interest expense. For the full year, total revenue was $453.9 million and was up 11% year-over-year. Adjusted EBITDA was $212.5 million, an increase of 19% with an adjusted EBITDA margin of 46.8%, up 310 basis points as compared to prior year. Adjusted net income was $137.2 million, up 28%, and adjusted earnings per share was $1.84, up approximately 25% year-over-year. Our full-year non-GAAP tax rate was 12.4% as compared to 12.3% in the prior year. Moving on to slide 14. I'll now cover our segment results, starting with merchant acquiring. In the fourth quarter, net revenue increased 42% year-over-year to approximately $25.8 million.
The revenue increase was due to increased volumes as compared to last year's hurricane-impacted results, as well as increased spending related to post-hurricane recovery activities and included a significant increase in electronic benefit card volumes. Our average ticket declined year-over-year, as well as sequentially, moving toward more normal levels as compared to last year. Transactions remained strong and spread was also up relative to last year, which was driven by very high average ticket and dominated by low spread merchant mix of larger retailers and EBT. Spread now reflecting more balanced distribution of volumes between merchants more aligned with pre-hurricane periods. Adjusted EBITDA for the segment was $12.1 million, and adjusted EBITDA margin was 46.8%, up approximately 410 basis points as compared to last year, primarily as a result of the increased revenue.
For the full year, merchant acquiring was up approximately 16% year-over-year at $99.7 million, reflecting the growth over last year's hurricane-impacted results. Adjusted EBITDA for the merchant segment for the full year was $46.5 million, up 24%, and adjusted EBITDA margin was 46.7%, up 300 basis points as compared to last year. On slide 15 are the results for Payment Services Puerto Rico and the Caribbean segment. Revenue in the fourth quarter in the segment was $30 million, up approximately 31% as compared to last year, primarily due to the hurricane impacts. Transactions also reflected significant growth as compared to the hurricane-impacted quarter, resulting in year-over-year growth of 47%. We saw January 2019 transaction volumes grow approximately 10%, as January 2018 was still negatively impacted by the hurricane. Adjusted EBITDA for the segment was $20.2 million, up 148%, and adjusted EBITDA margin was 67.4%.
Adjusted EBITDA benefited from increased revenue growth over last year's hurricanes, as well as the impairment charge that I mentioned earlier. For the full year, the segment revenue grew 12% to $114.1 million, driven primarily by the growth over last year's hurricane results. Adjusted EBITDA for the full year was $75.1 million, up 28%, and adjusted EBITDA margin was 65.8%, up 820 basis points as compared to last year, primarily due to the hurricane and last year's impairment charge. On slide 16, you will find the results for Payment Services Latin America. Revenue in the fourth quarter in the segment was $22.4 million, up approximately 16% as compared to last year.
This growth was driven primarily by high single-digit organic growth and intercompany services and license sales, a portion of which is one-time to the Puerto Rico payment segment of approximately $2.3 million as we continue to progress in our licensing to processing initiatives in key regions. This was partially offset by client attrition of approximately $1 million. Adjusted EBITDA for the segment was $9.4 million and adjusted EBITDA margin was 42%, up significantly as compared to last year, primarily driven by the intercompany services and license sale to Puerto Rico previously mentioned, and an FX gain we benefited from as a result of remeasurement of assets and liabilities in non-functional currency. Adjusting for the intercompany transaction and FX gain, margins for the quarter would've been consistent with prior quarter margins.
For the full year, the segment grew 29% to $80.9 million, driven primarily by the full-year benefit of the PayGroup acquisition and was also impacted by the intercompany transaction to Puerto Rico. Adjusted EBITDA for the full year was $27.7 million, and adjusted EBITDA margin was 34.3%, up 630 basis points as compared to last year, and was also benefited from the intercompany transactions to Puerto Rico. Moving to slide 17, business solutions revenue in the fourth quarter increased 12% to $51.6 million. We benefited from the CPI increase on the Banco Popular MSA, as well as increased hardware and software sales, and increases in almost every revenue category as compared to last year's hurricane-impacted results.
Adjusted EBITDA for the segment was $19.8 million, and adjusted EBITDA margin was 38%, down 810 basis points as compared to last year due to increases in lower margin revenue, such as hardware and software sales, and was also impacted by mostly non-recurring expenses of approximately $2.1 million, including contractual obligations and other expenses. For the year, business solutions grew 5% to $197.6 million. Full-year adjusted EBITDA for the segment was $87.8 million, up 1%, and adjusted EBITDA margin was 44.4%, down 150 basis points year-over-year. Moving to slide 18, you will see a summary of our corporate expense. Our first quarter corporate and other expense was $8.8 million, a year-over-year increase of 92%. The increase primarily reflects higher expenses related to projects completed in the fourth quarter.
For the full year, corporate and other expense was $24.7 million, just about even with prior year as a percent of revenue as we had anticipated. Moving on to our year-to-date cash flow overview on slide 19. Net cash provided by operating activities was approximately $173 million, or a $27 million increase as compared to the prior year. Capital expenditures were approximately $41 million and include some additional spend related to innovation and product development initiatives in Puerto Rico and Latin. Next, our change related to financing activities of approximately $88 million resulted from our Term Loan A repayment that matured in April, our debt repayments, and our refinancing transaction, which I'll comment on in a moment.
Finally, we paid cash dividends to stockholders of approximately $7 million, and repurchased approximately $10 million of common stock for a total of approximately $17 million returned to our shareholders for the year. We have approximately $62 million available for future use under the company's share repurchase program. Our ending cash balance as of December 31st was $87 million, including approximately $17 million in restricted cash. Moving to slide 20, before I review our debt as of December 31st, I'd like to comment on our refinancing that was completed in November. We now have a senior secured credit facility that consists of $125 million five-year revolver, $220 million five-year Term Loan A, and $325 million six-year Term Loan B. The rate as of December 31st on our revolver on Term Loan A is LIBOR plus 225 basis points, a 25-basis-point reduction from our previous revolver and Term Loan A.
Term Loan B rate is LIBOR plus 350, a 100-basis-point increase from our previous Term Loan B. We are pleased with the increased revolver capacity from $65 million to $125 million, giving us additional capital flexibility. Our maximum leverage ratio remained at 4.25 times, and this steps down to four times in October 2020. As a reminder, we currently have a swap in place for $200 million or approximately 37% of our debt at a rate of approximately 5.4%, which terminates in April 2020. Additionally, we entered into a forward swap of $250 million, or approximately 45% of our debt that will become effective April 2020 at a rate of approximately 6.4%. For 2019, we anticipate our cash interest will increase approximately $3 million as a result of the refinancing. Now on to a summary of our debt.
Our year-ending net debt position was approximately $475 million, comprised of the $70 million of unrestricted cash and approximately $545 million of total short-term borrowings and long-term debt. Our weighted average interest rate was approximately 5.2%. Our net debt to trailing 12-month adjusted EBITDA was 2.3 times, reflecting a $60 million cap on cash in accordance with our credit facility. As of December 31st, total liquidity, which excludes restricted cash and includes the available borrowing capacity, was $168 million. Moving to slide 21, I will now provide you with our 2019 outlook. We expect revenue to be in a range of $464 million-$476 million, representing growth of 2%-5%. Our adjusted earnings per share outlook of $1.80-$1.90 represents a range of -2%-+3% as compared to the adjusted earnings per share in 2018 of $1.84.
On a GAAP basis, earnings per share is anticipated to be between $1.26-$1.36. I will now highlight some of the key underlying assumptions and uncertainties that we have analyzed and planned for. EBT incremental funds are expected to continue through March 31st. Once the incremental EBT funding is reduced to normal levels, we would expect a negative impact to our merchant and payment services Puerto Rico and Caribbean segments in the last three quarters of the year. While the PROMESA plan assumes $13 billion will be received in the current fiscal year, actual distribution continues to be slow, and it's still unclear how quickly the funds will be released. The timing of these funds is key to Puerto Rico being able to grow at the rate suggested by the fiscal plan. Furthermore, 2018 benefited from direct funding to consumers through private insurance claims, FEMA funds, and EBT.
Going forward, the funds expected to be received are destined for reconstruction efforts, which are not direct to consumers, and although positive, we are not expecting the same impact to our business. Additionally, the fiscal plan also calls for structural reforms to the government to achieve sustainable growth. Given these three factors, timing, type of funds, and government reforms, we have assumed modest growth in the last three quarters of 2019. Moving to the segments, we project mid-single-digit growth in merchant acquiring, driven by continued strong volume growth in the first quarter, offset by negative impact of the termination of post-hurricane extraordinary EBT funding. Average ticket is anticipated to continue to decline to pre-hurricane levels, and we anticipate a relatively flat spread for the majority of the year.
Our payment services Puerto Rico and Caribbean segment revenue is also anticipated to grow mid-single digits and will continue to benefit from ATH Móvil and ATH Móvil Business. Our Latin America payments segment is anticipated to be high single-digit organic growth, offset by $3 million-$5 million of anticipated client attrition, resulting in flat to slightly positive growth for the segment. As a reminder, a portion of our revenue is still driven by license sales in 2019 rather than recurring revenues, and therefore may be uneven throughout the year. Finally, the business solutions segment revenue growth is anticipated to grow low to mid-single digits, reflecting the tailwinds from the CPI increase and recent new contracts, partially offset by continued decline from cash and item processing. Regarding corporate expenses, we would expect these to approximate 2018 levels as a percentage of revenue.
All of these items are considered in our guidance, and combined, we believe will generate adjusted EBITDA margins in a range of 46%-47%, or approximately an even basis with our adjusted EBITDA margin year-over-year. No FX gains or losses have been included in our outlook. These represented a positive impact in 2018 of approximately $2.5 million. On a quarterly basis, we anticipate Q1 revenues on margins to be somewhat stronger than the rest of the year, given the easier comp versus Q1 of prior year that was still recovering from hurricane impact. We expect the rest of the quarters to be relatively even. Our operating depreciation and amortization is anticipated to increase to approximately $32 million, up $2.3 million, primarily reflecting increased depreciation related to new projects that will be going into production during the year.
As I referenced, our cash interest expense is anticipated to increase in 2019 by approximately $3 million based on impact of our new debt facilities. Our non-GAAP effective tax rate is anticipated to be approximately 13%. The guidance reflects approximately flat average diluted shares of approximately 74.4 million, which we assume that we would repurchase shares to offset any dilution related to long-term incentive compensation. Our capital expenditures for 2019 are anticipated to be in a range of $40 million-$45 million and reflect our ongoing investment in technology, localization of our products in Latin America, and investments in transitioning our licensing model in LATAM to a processing model. Turning to slide 22, I'd like to review our capital deployment strategy. We continue to focus on growth investments internally as well as through M&A.
Our maintenance level of capital expenditures is approximately $25 million, and our investment for growth this year will be approximately $15 million-$20 million. We anticipate keeping our leverage ratio within 2-3 times our adjusted EBITDA, which allows us to use current cash flow or our offsite revolver for acquisitions as opportunities arise. Most potential acquisition targets in the regions we are actively looking into range up to $100 million and can be executed within our current capital structure and available capacity. We carefully evaluate acquisition opportunities based on strategic fit and risk-adjusted returns and also compare these returns to other available uses of capital. We plan to continue our dividends to shareholders, and as excess cash is available, we will repurchase shares on our current share repurchase program. In summary, we executed well during this extraordinary year and delivered strong cash generation.
As we continue to focus on our innovation and opportunities in Puerto Rico and expanding our LatAm business, we look forward to updating you on our progress. We'll now open the call for questions. Operator, please go ahead and open the line.
Ladies and gentlemen, at this time we'll begin the question and answer session. To ask a question, you may press star and then one. If you are using a speakerphone, we do ask that you please pick up your handset before pressing the keys to ensure the best sound quality. To withdraw your questions, you may press star and two. Once again, that is star and then one to ask a question. We'll pause momentarily to assemble the roster. Our first question today comes from Robert Napoli from William Blair. Please go ahead with your question.
Thank you. Good afternoon, Mac, Joaquin, and Kay. Appreciate the question. Just on your guidance for next year. This company generates a lot of cash, obviously. The share count, you're not really reducing the share count. You're not paying down debt. In your model, you're building a lot of cash, which I guess obviously gives you a lot of flexibility for M&A. Is that the right assumption?
Hi, Bob. It's Joaquin. As we've kind of detailed in the prepared remarks, we are investing for growth. We're looking at both internally as we go through some of our products and move our LatAm products from licensing to processing, as well as externally through M&A. Yes, the answer is we are looking first at M&A. We've been consistent in how we pay down our debt, which is through the normal schedule pay downs. We have our dividends. Any excess cash then we apply to share repurchases.
You don't have that in your model, the share repurchases?
No. In our model, as we said, what we've considered is basically leveling out.
Right
dilution from our long-term incentive plan at this point.
Okay. In the revenue guidance, which is essentially in line as are the margins in line with our expectations, the EBT program, what is the effect when that EBT program runs off? You're assuming that that benefit runs off, but the PROMESA funds, the $13 billion, you're assuming that there's no effect on the economy, you're not getting any benefit from the additional stimulus, if you would?
So-
Relief fund
To answer the first part of your question, as it relates to EBT, that represents our percentage of growth to our merchant acquiring segment into next year. As it relates to the funding, I don't think that no impact is what we're considering. What we're saying is timing is key in being able to keep the momentum of growth that we've seen. At this point, what we know is that the disbursement of these funds has been slower than expected, and as such, we've considered a slowdown in terms of growth in transactions because of that timing of funds.
Yeah. Hey, Bob, this is Mac. Let me just give you a little bit more color. The $1.2 billion that came in last year, that's coming out in 2019. There's no subsequent funding. That flows straight through the EBT program and direct through our merchants. Now, there is talk within Congress about funding an incremental $600 million, but that has not been approved. It's still up in the air, and it's still for debate. That's an example of where some programs as to whether or not they'll get funded at all are still being debated by Congress. There are some programs which have been funded and that are now making it to the island once the government proves they have the right processes in place, like the $1.5 billion. Those types of funding we've already modeled into the business.
There is, as we've said on the last call and on this call, there's a significant volume of economic stimulus that's going to pass through the island. The timing is the piece that is the most uncertain at this point. Specifically to your $1.2 billion question on EBT, we have forecasted that to go away, but again, there is a request out there to add another $600 million, it has not been approved.
Great. Thank you. Appreciate it.
Our next question comes from Vasu Govil from KBW. Please go ahead with your question.
Hi. Thanks for taking my question. I guess first just to follow up, Mac, it seems like you're saying that what you've modeled into your guide in terms of fiscal stimulus is only what's been approved so far versus the $13 billion that's expected. Is that the right way to think about it? If there were more approvals, that could potentially be upside versus the guide?
Yeah. I'll let Joaquin answer that. No, we have modeled some significant economic stimulus. Again, it's complicated because the timing of that. I'll let Joaquin talk specifically to the model.
Right, Vasu. The type of funding that's coming through, as we said, is very different to the funding that we saw in 2018 which is going directly to the consumers. The funding that we're expecting, which is earmarked for reconstruction funding, is going to go to corporations and companies that are here in Puerto Rico actually doing the reconstruction work. Obviously, the expectation is that that would increase the labor force and that would, at the end of the day, have more people being able to spend and then get that reflected into our numbers. It's a very different impact. Again, at this point, the timing is something that is uncertain. We've obviously factored some growth into our model considering some of this delay in funding, but an actual number of what the impact of that is not specific.
Understood. Just on the transaction growth rate, I'd got sort of the 47% growth in the quarter but a decline in average ticket. Could you maybe give us how that sort of trended through the quarters, October, November, December, because I know the comms were easy initially, and then maybe what trends you've seen in January, February so far? Thank you very much.
Sure. In terms of how that trended from a transaction perspective, as we were closer to the hurricane, of course, the month of October was almost 130% growth year-over-year because obviously there was no power, no communication, very limited electronic transaction growth. That trended towards 17% for the quarter. That's how we get to the 47% that we had mentioned. As we look into January, we're looking at approximately 10%. Consider January was still somewhat impacted by the hurricane. We saw that pick up and start to get more normalized in the months of February, March.
Got it. Thank you very much.
Thanks, Vasu.
Our next question comes from James Faucette from Morgan Stanley. Please go ahead with your question.
Thank you very much for taking my question. I know you've talked about it a little bit, but I'm hoping you can expound a little bit on your plans for OpEx in the coming year and years. Just what you're seeing both competitively and from an opportunity perspective that's kind of pushing you to look at that. Particularly because your revenue seems about as we had targeted, but the profitability seems to be a little bit directed more towards investment and looking for additional opportunities. Just looking for additional color where you're seeing incremental opportunity from that investment.
Yeah. I'll answer that and let Joaquin finish it off. We are investing in Puerto Rico, both in ATH Móvil and some other innovations. We think that it's going to help us maintain our margin and our market share here and hopefully open up some of the markets. We are making investments in that, and we think we'll be successful in the marketplace by winning new business when we do that, as we talked about on the call. We also think that those innovations are going to be very interesting as some of the markets open up in Latin America. The Pvot solution that we talked about, that type of solution is not in many South American countries. When we talk to candidates for partnerships, they find that a very interesting product because those markets tend to be less mature.
We're investing in that side of the house on the innovation piece for the merchant business and the ATH business. Secondly, if you look at our business in Latin America, we're also investing in localizing the platform that we purchased from Processa. That's part of the expense you'll see as well, and we're specifically localizing that product in markets where we have a presence and where we have clients or we have good prospects. We're localizing it in Colombia, Mexico, Costa Rica and Chile. That's how you think about the OpEx. We're investing not because of really a market trend of a competitiveness from a pricing perspective, but we're investing because we see an opportunity to expand the market in Puerto Rico and maintain our margin here and also open up new markets in Latin America. It's an investment for growth.
Joaquin, I don't know if you want to add anything or?
No, I think you've covered it. We are focused on innovation and trying to position ourselves in Latin America with these products and moving from a licensing model to a processing model and trying to convert that into a more recurring base of revenue into the future.
Let me add one more thing. We are very, and we did it last year at the beginning of the year, we tried to make sure we're very efficient on our expenses. We do feel like now that we have a regional employee base, that we're able to leverage employees across the region, that comment is on early in the call, that we can find the most cost-effective and efficient employees or workforce that we can manage the costs on the expense side as well. That's something we're very active in doing this year, is moving work around to be more cost-effective.
Just following up on that and a couple of the other comments you made. One, as you make improvements to the platform, et cetera, how applicable and transportable is that to other markets and new markets that you may have an opportunity to enter down the road?
Well, a couple of things I'd say. First off, you got to realize in these markets, there's usually one or two players. As they look for an alternative, we may be one of the only or one of the few alternatives because people haven't historically done this and created this capability in market. As far as the amount of work it takes to port from market to market, it really depends on the product. The risk monitoring product tends to be more similar from market to market. There's not a lot of localization regulations that are required to change that product. We already have a cloud-based product that we can port from market to market. On some of the, let's say the acquiring platform, you've got to integrate into local networks. You may have a local tax regime.
You may have local product features that are unique, like certain types of loans and payment features that you've got to add. It really depends on the product. We are trying, as we make this investment, to at least even those that require a more significant component of localization, we are trying to make sure that we put in an operating model that can easily scale or more easily scale as we bring it to new markets.
That's great. Thank you so much.
Yep.
Our next question comes from John Davis from Raymond James. Please go ahead with your question.
Hey, good afternoon, guys. Joaquin, just wanted to touch a little bit further on Bob's question. What are the underlying assumptions in Puerto Rico spending kind of 1Q versus the rest of the year, and how is that relative to
what it was for the full year, understanding there was a lot of variability in 2018. Just trying to get a sense for the spending trends that you're embedding in guidance.
Again, when we look at 2018 was a very erratic year in terms of the spend. We had a lot of reconstruction work coming into the island, people staying for extended period of times here, just working on bringing up the electrical system, the communication system. We had the additional EBT funding coming through. That's about $1.2 billion. We had private insurance claims that were also flowing through the economy and specific FEMA funds that were going to people affected by the hurricane. All of those, which are part of the fiscal plans, $13 billion expected in fiscal 2018, went through the economy in the previous year. As we look into 2019, there's an expectation for an additional $12 billion-$13 billion. Now, if you look at the composition of those funds, the type of funding is different.
These funds are going for, again, reconstruction work and very specific types of work that's going to be done by corporations or companies coming into the island to basically spend that money. What we've seen is that those funds are now subject to additional bureaucracy that's making the deployment a lot slower than what we would've expected. What we've modeled into our guidance is basically a range where we have a modest slowdown of growth after Q1, given the EBT additional funding coming away. Our average ticket continuing to decline as it tries to assimilate to what were pre-hurricane levels, as well as the same impact to our payment processing segment due to the processing of transactions. That's how we've thought of it.
Okay. If I were to summarize it to say that it's likely going to be below 2018 levels, but probably above historic levels as far as spending growth for the full year, taking away kind of the quarterly cadence. Is that a reasonable assumption as far as the underlying spending trends that are embedded in guidance?
Yeah, that's reasonable.
Okay. Mac, I just want to touch on international expansion. I think this is the most kind of bullish you've sounded on it in a while, specifically with Prisma and Transbank in Chile, but also on M&A. It feels like that those opportunities in Chile, for example, potentially would be more of a partnership JV model. Maybe talk a little bit about that opportunity versus more traditional M&A, where you would buy and how you decide whether or not to partner, which is probably less capital intensive versus going out and spending up to $100 million on something as you look to expand in Latin America and South America.
Yeah, let me explain a little bit because we did approach sort of explaining the opportunity and our capabilities a bit differently with this call. I've always been optimistic about the LatAm opportunity. This call we wanted really because as I've spent more time with investors, we realized explaining the opportunity in more depth, explaining the changes in the market because some of these people aren't as visible even though it is public, and then explaining our competencies and capabilities. It was very deliberate to help investors understand that part of the story. I will say I am more enthusiastic as time progresses because of two reasons. One is we do see more movement in the market over the last, call it six months than we have before because of these two moves in two major markets.
I'm also more upbeat because I feel today we have a better footprint than we did three years ago, and we have much better products. I am pretty optimistic about the markets opening. Again, it's like Puerto Rico funding. We can't impact the timing and our position with that. What I would tell you is in these markets, the Prisma deal was forced by the regulators, and that is going to create an opportunity for those banks to look for alternatives now. The Transbank deal is when any bank chooses to leave, it creates disruption across the entire market and opportunities for us to potentially partner with multiple banks or different banks within that country. It could be the nice thing about Evertec is some of these financial institutions we already have a relationship with our fraud product.
We could sell them fraud products. We could also be a processor. We could be a processor for their acquiring business, or we may try and JV on the merchant acquiring side. We're very flexible in the model that we could create for the key partners in each of these markets. Again, the big challenge for us is the timing of these markets, but the movement in these two specific markets most recently are encouraging.
Okay, great. Last one for me. Any update on ATH Móvil, either monetization efforts there or how it's trended? I think you gave some impressive stats of over a million users last quarter. Just curious. I think you started charging for it in the fourth quarter. How that's going? Are you still seeing pretty significant growth there? Any color you could provide would be great.
Sure. We're not breaking it out separately because it's a specific product and we don't report product revenue. What I would tell you is ATH Móvil continues to be a very effective tool for us to increase the value of the ATH network. We are now getting recurring revenue off of it because we monetized that last year. That innovation along with some of the other things that we've done, like pay at the table, has helped us renew some business and secure some of the largest accounts on the island and Pvot. It's early days now, but we do feel like that that's going to be a good product for the SMB market that's underserved today. I would say across all of these innovations we feel good about what the opportunities they're providing in Puerto Rico.
Great. Thanks, guys.
Our next question comes from Georgios Mihalos from Cowen. Please go ahead with your question.
Hey, guys. Thanks for taking my questions. Maybe to kind of start off on some of the prior questions as it relates to the LatAm segment. Mac, I think you said $3 million-$5 million of grow over from some of these de-conversions. Just curious, your sense about maybe being able to do somewhat better than that given the positive news you had this quarter. I also just want to make sure, the mid-single-digit growth that— or excuse me, the high single-digit growth that you were targeting ex the de-conversions, does that include some additional new wins in there, or is that just based on the current book of business that you have now?
What I would say is we're very pleased with the retention that we accomplished. It was a meaningful account for that segment. We were able to double the business. Again, given the timing or the time that's gone by, we think it's not highly probable that we'll continue to retain more of those attriting businesses. As I said, two years ago when we started talking about that will continue to be our focus. If not keep them, find other products that we can sell to them. On the organic growth rate, I'll let Joaquin answer what actually was in that number.
What I would say, George, is ex attrition, what we're targeting is a high single-digit to low double-digits. Obviously, we're now in additional regions. Our expectation is to always grow at least at the rate that the market grows. That's more or less where we are at.
That's the reason, as you know George, to move from a licensing to a processing model because then we grow with the transaction growth within that market. That's going to be more reflective of what the market trend is.
Right.
Okay. That makes sense. Just wanted to ask on the Pvot product, which sounds very interesting, anything you can kind of share in terms of the demand trends and the pricing related to that? I would assume that the discount rates there are somewhat higher than what you would have traditionally seen.
Yeah. What I would tell you is it's early days, but we're very pleased with the initial launch. Most of, or many of them, a meaningful number of the business that we're putting on that product are competitive takeaways. That's a very interesting fact. It is more profitable than a standalone POS because we're charging a similar margin at a higher cost. I would also say this is a market where we believe that the fact we can bring local capabilities, we can integrate it to local networks, as we roll out new products we'll be able to localize the taxing. As we offer local service and implementation, some of these merchants are like a music store. It may be a music teacher. This is actually one of our merchants. He's a musician that teaches music lessons and sells instruments.
Using a PC or technology to upload all of his inventory is not his expertise. Us being here on the island and being able to provide him with that capability is providing a value add that we think is unique to Evertec. Again, it's early days, but we are finding there's demand for the product, and we are finding the way that we deliver the service and the localization is very unique.
Thanks. Cheers.
Once again, if you would like to ask a question, please press star and then one. Our next question comes from Bryan Keane from Deutsche Bank. Please go ahead with your question.
Yeah. Hi, guys. Just a two clarifications on the guidance. Joaquin, maybe you can just help with the cadence of revenue by quarter. Sounds like the first quarter will be the strongest and then it decelerates throughout the year. Is that right?
That is correct. We are expecting Q1 to be a slightly stronger quarter. We are expecting the rest of the quarters to behave relatively how they behaved in the current year. I will just remind everybody, we do have still a piece of revenue in LatAm that is license-based, so it can get a little bit bumpy as it relates to LatAm. We have the attrition that we called out, which we are not necessarily expecting, I know in the past we have called out it is accelerating to the end of the year. We do not expect that to necessarily be the case this year.
Okay. That is helpful. What does that mean then for, I know it is hard to say normalized revenue base by segment, but taking out some of the EBT funding and some of the natural stimulus, is there a way to think about the segments by kind of a normalized growth rate? I think the Latin America region sounds like it is high single-digit, but just trying to think about the merchant acquiring and then the payment services, PR and Caribbean segments, just what they would look like if you did not have stimulus. That is kind of where we are going, it sounds like, after we get post the EBT funding.
What I would say, Bryan, is there is a lot of puts and takes that are going into these numbers today and many different factors that we have called out that provide for more uncertainty than what we would like to have in terms of what we would expect into the future. Today, what we are seeing is obviously the impact of funding coming off of 2018 and assumptions just based on the delays of federal funding specifically to 2019.
Bryan, I did want to end up because I want to make sure I heard the question right. PROMESA has certified a budget with the governor, and the funding is about $82 billion, and that's going to be over multi years. This is going to be a phenomena that occurs in Puerto Rico. I think the estimate is 10-
15
15 years, the majority within the first four, right? I think the challenge is going to be the timing of those funds, and maybe the smoothness of those funds. This is not going to be just a 2019 phenomena. The large volumes, I think north of $10 billion per year, is going to occur for at least the next four years. This is not Evertec's view. This is PROMESA, who was put in place by Congress, their view, along with the governor.
I'll just add that that same plan has expectations for just overall Puerto Rico economy growth that go hand-in-hand with structural reform to the government. If that reform doesn't take place, the numbers within that plan are very different. That's another key factor that needs to be considered when we're looking at this in a longer term. That is on the PROMESA website
if you want to see how the government, both PROMESA and the governor, have forecast. Exhibit eight, I believe, in the PROMESA plan.
No, that's good clarification. Just trying to think about the difference between the EBT funding directly to the consumer versus the PROMESA plan, which is to the businesses, which will foster down to the consumer. Trying to think about it. My last question is just on margins. Margins, the guidance is kind of for flattish margins. I know we talked about some investments and a little bit of client attrition, but is there a way to think about what a normalized margin? Should you be able to get margin increases on a year-over-year basis, X-ing out some of these one-time factors?
When we look at it in LatAm and what we're trying to do in LatAm, we're trying to move from a licensing model to a processing model. With that in mind, trying to leverage our scale and actually grow margin. What I would say is today, our focus is on innovation and trying to get these products to the level that we need to actually be able to execute on that strategy. It's definitely a focus, and we're always focused on trying to look for ways to expand margin and reduce cost. Today, yes, we do have some additional cost that's making our margin flattish.
I think what's important, the Puerto Rico margin, a lot of our investments is here to maintain that margin. We already have pretty healthy margins in Puerto Rico. If you look at the LatAm segment, they're lower margins, 10 to 15 percentage points. Over time, as we have a couple of years where we make that investment, hopefully, we can expand those margins. I would think about our margins across two different places. I would think about Puerto Rico. The hope is that we can maintain margins through investment because we have best in industry. Then I would think about LatAm, that as we make these investments, as we grow the business, every new customer that we bring on one of these platforms that we've localized should come in at a higher incremental margin, bringing up the overall margins. That's going to take time.
The other thing that I mentioned earlier on the call was in managing the overall company margin, we are looking at how do you leverage the workforce across the locations now. We have a couple of hundred employees in Chile, a couple of hundred in Colombia, a couple of hundred in Costa Rica, over 1,000 in Puerto Rico. We now have the ability to move calls, to move processing work, paperwork, those types of things, across the region to try and blend out the best margin possible at the corporate level. Managing that operational efficiency is something that we've become more focused on as well.
Got it. All right. Thanks for the color.
Thanks, guys.
Ladies and gentlemen, at this time, and showing no additional questions, I'd like to turn the conference call back over to management for any closing remarks.
I want to thank everybody for joining the call today. We appreciate your continued interest in the company. Joaquin and I look forward to seeing you over the couple of months. Operator, you can close the call.
Ladies and gentlemen, that does conclude today's conference call. We do thank you for attending today's presentation. You may now disconnect your lines.