Good afternoon, and welcome to the EVERTEC Incorporated Second Quarter 2018 Earnings Conference Call. All participants will be in a listen only mode. After today's presentation, Please also note today's event is being recorded. At this time, I'd like to turn the conference call over to Ms. Kay Sharpton, Head of Investor Relations.
Ma'am, you may begin.
Good afternoon. With me today are Max Schuessler, our President and Chief Officer and Peter Smith, our Chief Financial Officer. A replay of this call will be available until Tuesday, August 7. Access information for the replay is listed in today's financial release, which is available on our website under Investor Relations section of evertecinc.com. For those listening to the replay, this call was held July 31.
Please note there is a presentation that accompanies this conference call and it also is accessible on the Investor Relations section of our 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, and we undertake no obligation to update any statements to reflect the events that occur after this call.
Please refer to the company's most recent annual report on Form 10 ks 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 related supplemental slides. I will now hand the call over to Mac.
Thanks, Kaye, and good afternoon, everyone. We are pleased that our results for the Q2 of 2018 exceeded our expectations and we continue to benefit from Puerto Rico's increased rebuilding and recovery activity. Beginning on Slide 4, I'll cover some of the quarter's financial highlights and provide you with an update on recent developments. Total revenue was $113,000,000 an increase of 10% compared to 2017, which was stronger than anticipated due to increased sales volumes and an improved net revenue mix. Adjusted EBITDA was $54,000,000 or 7% over the prior year and adjusted earnings per share was $0.46 an increase of 5% compared to last year.
We generated significant operating cash flow year to date of approximately $77,000,000 which is $6,000,000 above last year. Given the quarter results and our increased confidence with the remainder of the year, we are raising our guidance and Peter will provide further details later on the call. Before I turn to our business update, I want to highlight some recent achievements on Slide 5. On June 22, the company received the President's Special Award from the Puerto Rico Chamber of Commerce for outstanding and timely support to the local business sector in the aftermath of Hurricane Maria. This was a significant honor for EVERTEC, and I'm very proud of our team and their contributions to the recovery of the island.
Regarding innovation, our ATH mobile application has grown to over 1,100,000,000 users, and we have processed over $3,600,000,000 in annualized volume. Our ATH Movil Business solution launched last June has over 10,000 active businesses And last quarter, we implemented revenue generating features, which will create incremental profits for EVERTEC in 2018. Additionally, we recently expanded functionality for nonprofits to receive donations from ATH mobile users and it is currently in use by 12 nonprofit organizations. 1 of the nonprofits, Serra Puerto Rico, which provides medical and education services to people with disabilities, raised over $90,000 in a single day telethon through this new donation feature. As we develop more applications and solutions based on ATH Movil, we continue to add significant value to our ATH network members and our ATH brand.
Lastly, I also want to highlight our recent collaboration with the Puerto Rico Science Technology and Research Trust to support Parallel 18, a business startup accelerator. Parallel 18 offers a 5 month program for 60 to 70 startups each year and helps them grow from Puerto Rico throughout Latin America and beyond. In support of participating companies, EVERTEC will offer free payment services during the program, mentoring and coaching, as well as scholarships to foster of entrepreneurs. Our focus is to collaborate with these innovative emerging tech startups as well as to contribute to Puerto Rico's private sector growth. Moving on to progress in Puerto Rico's rebuilding on Slide 6.
Retail sales have been strong with reports of 7.6 percent growth in the 1st 2 months of the year and 9.5% growth for the full year. Tourism is recovering. 1 of the island's major hotels, the Wyndham Grand Rio Mar opened in March and several other hotels are expected to come online later in the year. We have continued to see improvement in our merchant base. Approximately 90% of our merchants are processing transactions compared to normal levels, and we hope to continue to see modest improvement throughout the remainder of the year.
Merchant attrition levels typically increase in the summer months, reflecting the post school year immigration pattern. While we have experienced increased attrition today, this year's pattern has not been significantly different than prior years and thus is encouraging. Relief funds for Puerto Rico continue to flow in and we believe that we are benefiting from the continued release of private insurance payments as well as initial HUD funding and other expanded benefit programs. Regarding the fiscal budget, unfortunately, the we continue to deliver our important services to the government, our contracts continue to be renewed and we continue to receive payments in the normal course. While the uncertainty related to the government's budget remains a concern, we are encouraged and believe that continued relief will stimulate the economy and benefit EVERTEC over time.
Now turning to Slide 7, I'll continue with our business update. First, we were pleased with the stronger than expected revenue in the quarter in Puerto Rico, which grew approximately 6% 4% if you include the rest of the Caribbean. We experienced a 5% increase in transaction volumes and average ticket continued to be significantly above the prior year, growing 12%. Merchant mix continue to improve as smaller merchants gain market share and process more volume on ATH branded cards. Additionally, almost all merchant categories were up and we are benefiting from temporarily expanded benefit programs as well as increased tax payments.
2nd, in Latin America, revenue was up 48% year over year. Excluding the PayGroup acquisition, organic growth was in the mid single digits, which reflects the impact of some expected client attrition. 3rd, regarding new business, our sales pipeline continues to be strong in Latin America, driven by the PayGroup acquisition. Additionally, we accomplished an important milestone with the implementation of our risk center solution within Banco Santander, the largest bank in Chile. This was the first implementation of the software in an outsourced model.
The market response to this new risk management service capability has been positive and we plan to invest more to incrementally build out our card and risk processing service, which we believe will be unique in the region. Lastly, I want to comment on our M and A activity. You will note that this quarter, we spent approximately 2 $6,000,000 on due diligence for a potential transaction. This spending was related to a significant opportunity in LatAm that we believe could fit our strategic goals. After conducting a thorough analysis, we ultimately decided to pass on the opportunity.
We remain committed to our strategy of expansion in Latin America, but every deal will be carefully evaluated based on the long term benefits provided to EVERTEC and our shareholders. And lastly, I'm pleased the Board chose to reinstate a quarterly dividend of $0.05 a share. We believe this level of dividend provides a balanced return to shareholders while providing further capital flexibility. Although we continue to execute well and have produced strong results in the first half of twenty eighteen, the recovering environment in Puerto Rico is still evolving. We will continue to focus and allocate to growth opportunities in Latin America and maintain our balanced approach of returning cash to shareholders as we assess our expanding opportunities.
With that, I will now turn the call over to Peter.
Thank you, Mac, and good afternoon, everyone. I'll now provide a review of our Q2 2018 results. Turning to Slide 9, you will see the consolidated Q2 results for EVERTEC. Total revenue for the Q2 was $113,300,000 up 10% compared to $103,500,000 in the prior year. Our sales volume continued to be elevated across most Allport merchant payment categories.
Total revenue for the 6 months year to date was $223,600,000 and up 9% year over year. Adjusted EBITDA for the quarter was $53,800,000 an increase of 7% from $50,100,000 in the prior year. Adjusted EBITDA margin was 47.4% and this represents 100 basis point decrease in our adjusted EBITDA margin compared to the prior year. The decline in year over year margin primarily reflects the lower margin contribution of PayGroup, which was partially offset by an improved revenue mix and our cost reduction initiatives. Year to date, adjusted EBITDA was $107,700,000 an increase of 9%.
Adjusted net income in the quarter was $34,500,000 an increase of 7% as compared to the prior year and the increase primarily reflects the higher adjusted EBITDA offset by increased interest and tax expense. The effective tax rate in the quarter was 13.4%, reflecting increased taxes in Latin America and we now anticipate the full year tax rate to be in a range of 13% to 14%. Adjusted earnings per share was $0.46 for the quarter and grew 5% compared to the prior year. Year to date, adjusted net income was $69,100,000 up 6% and adjusted earnings per common share was $0.93 up 4% from $0.89 in the prior year. Moving on to Slide 10, I'll now cover our segment results starting with merchant acquiring.
In the 2nd quarter, merchant acquiring net revenue increased 10% year over year to approximately $26,000,000 The revenue increase was due to increased volumes of approximately 16% driven by the high average ticket, which contributed to a higher net revenue margin. In the quarter, the monthly volume growth range from 11% to 20% and the primary growth drivers were federal relief programs that drove a significant increase in electronic benefit card volume, increased government tax payments and gas purchases in large part reflecting the increase in the price of gas. We believe that insurance proceeds were deployed and also contributed to the overall increase in sales volumes. We anticipate all these growth drivers to sustain through the year. We were also encouraged that the number of smaller merchants grew steadily in the quarter and we have assumed this trend to continue.
We also continue to have a population of merchants that have not processed the transaction since the hurricane. These merchants contribute approximately $1,500,000 of annual terminal and fee revenue. And while it remains unclear when and if they will resume card transacting, we view their resilience as a positive and continue to offer them our assistance. Adjusted EBITDA for the segment was $12,600,000 up 20%. Adjusted EBITDA margin was 48.7%, up approximately 3.90 basis points as compared to last year, reflecting increased sales volumes on ATH branded cards and the improved margin contribution from the increased average ticket.
For the 6 month period, merchant acquiring increased 7% to $49,300,000 primarily due to the same reasons I referenced in the quarter. Adjusted EBITDA year to date for the segment was $23,500,000 up 16% and adjusted EBITDA margin was 47.6%, approximately a 3 50 basis points increase as compared to last year. On Slide 11, you will see the results for the Payment Services, Puerto Rico and the Caribbean segment. Revenue for the segment in the 2nd quarter was $28,000,000 up approximately 3% as compared to last year. Transaction volumes increased from 1st quarter levels with our volume growing 5% on a comparable basis.
Additionally, we benefited in the quarter from increases driven by new transaction fees for services such as ATH Mobile Business. Adjusted EBITDA for the segment was $18,400,000 or flat as compared to last year. Adjusted EBITDA margin was 65.5 percent, down approximately 240 basis points as compared to last year, primarily due to increased infrastructure expenses and product development initiatives. Year to date revenue for the segment was $55,200,000 up approximately 3% as compared to last year. Year to date adjusted EBITDA was $35,700,000 and adjusted EBITDA margin was 64.6%, down approximately 110 basis points as compared to last year.
On Slide 12, you will see the results for our Payment Services Latin America segment. Revenue for the segment in the Q2 was $19,200,000 up approximately 48% as compared to last year. This growth was primarily driven by the PayGroup acquisition. Excluding PayGroup, revenue growth was mid single digits and impacted by just under $1,000,000 of client attrition. We now expect the full year impact of client migration to be in a range of $2,000,000 to $4,000,000 based on additional updates from clients related to delays on their deconversion plans.
Adjusted EBITDA for the segment was $4,800,000 and adjusted EBITDA margin was 24.9%, down approximately 6 70 basis points as compared to last year, primarily due to the lower margin pay group revenue contribution. This decline was consistent with our expectations and we project slightly lower margins in the back half of the year as a result of the projected incremental client attrition. Year to date revenue for the segment was $39,600,000 up approximately 53% as compared to last year. Year to date adjusted EBITDA for the segment was $11,800,000 increasing 23%. Adjusted EBITDA margin was 29.7 percent, down approximately 7 10 basis points as compared to last year.
On Slide 13, you will find the results for the Business Solutions segment. Business Solutions revenue in the 2nd quarter was up approximately 1% to $49,200,000 Revenue in the segment was impacted by increased deferred revenue related to project deliverable timing. We continue to anticipate a year over year revenue increase in the low to mid single digits. For the quarter, adjusted EBITDA was $23,200,000 and adjusted EBITDA margin was 47%, down approximately 110 basis points as compared to last year. Year to date, Business Solutions revenue approximated last year at $97,200,000 and adjusted EBITDA for the segment was $46,300,000 with a 47.7 percent margin reflecting increased project and infrastructure expenses.
Moving on to Slide 14, you will see a summary of our corporate and other expense. Our 2nd quarter expense was $5,200,000 a year over year reduction of 19%. As a percent of total revenue, corporate and other expense was 4.6% and 160 basis points below the prior year. The decline primarily reflects expense reduction actions taken in the year. We plan for modest additional expense in the second half as we execute against planned corporate initiatives.
Year to date, our corporate and other expense was $9,500,000 a year to date reduction of 18% as compared to last year. As a percent of total revenue, corporate and other expense was 4.3% and 140 basis points below the prior year. We continue to anticipate our corporate and other expenses to be flat year over year on a full year basis. Moving on to our year to date cash flow on Slide 15, our beginning cash balance was $60,000,000 including restricted cash of $10,000,000 Net cash provided by operating activities was approximately $77,000,000 or a $6,000,000 increase as compared to the prior year. Capital expenditures year to date were approximately $16,000,000 Next, we paid approximately $36,000,000 in debt payments and reduced approximately 15 $1,000,000 in short term borrowings and other debt, resulting in a total net debt decrease of $51,000,000 dollars As I mentioned on last quarter's call, in April, we paid off our 2018 term loan A of $26,000,000 Our ending cash balance as of June 30 was $70,000,000 and this included $11,000,000 of restricted cash.
Moving on to Slide 16, you will find a summary of our debt as of June 30, 2018. Our quarter ending net debt position was approximately $517,000,000 comprised of $59,000,000 of unrestricted cash and approximately $576,000,000 of total short term borrowings and long term debt. Our weighted average interest rate was approximately 4.5%. Our net debt to trailing 12 month adjusted EBITDA was 2.9 times reflecting the credit agreement, which limits the cash applied in the net debt calculation to $25,000,000 As of June 30, total liquidity was $120,000,000 This balance excludes restricted cash and includes the available borrowing capacity under our existing revolver, which was reduced to $65,000,000 in April. Moving to Slide 17, I will now provide an update on our 2018 guidance.
We are raising our revenue outlook for the year to a range of $435,000,000 to $445,000,000 representing a range of 7% to 9% over last year. The increase in the revenue range reflects our year to date results and an improved revenue projection for the remainder of the year primarily in the merchant segment. In the merchant acquiring segment, July's year over year sales volume low double digits and slightly lower than in the 2nd quarter. July's transaction volumes approximated 4% and slightly below the 2nd quarter as well. We have projected July's trends to continue, but modestly decelerate out of caution.
We now project the merchant segment revenues to grow low to mid double digits and our payment services Puerto Rico and Caribbean segment revenue is now anticipated to grow mid single digits. Regarding overall margin, we now anticipate that our adjusted EBITDA margin will be in a range of 46% to 47% for the year. Margins for the remainder of the year are anticipated to be lower than the first half, primarily driven by an assumed lower average ticket and other projected incremental expenses that were not incurred in the first half of the year. Our adjusted earnings per common share outlook has been increased to $1.68 to 1 point
$7
the 4th quarter tends to be our stronger quarter in the back half of the year. In summary, are encouraged by our year to date performance and continue to benefit from the Puerto Rico economic recovery. We are executing on our cost initiatives and remain focused on our strategic goals. It was a good quarter for EVERTEC and we are pleased to raise our outlook for the year. We will now open the call for
And our first question today comes from Bob Napoli from William Blair. Please go ahead with your question.
Thank you. Congratulations on solid results. Just on the numbers question, you had $2,300,000 of expenses for $2,600,000 M and A expense, I think you said, from a deal that did not occur. Where does that show up? In which segment?
Does it show up in a segment? Or is it out of adjusted EBITDA? Or is it in adjusted EBITDA?
It's out of adjusted EBITDA, Bob. This is Peter.
Okay. Yes.
And so it's we performed it out and out of all our adjusted numbers.
Thank you. As we think about, I mean, you gave the guidance in the back half of the year and and just trying to think through, it seems like Puerto Rico has really stabilized. And I know it's still confusing with some of the funds coming in, but the longer term model for EVERTEC, as we think about 2019, 2020, and what type of revenue growth rate this company should have and what the margin should look like? Can you give any thoughts? Should this be a high single digit revenue grower with expanding margins or and what does the model look like longer term now that things seems to have stabilized in Puerto Rico?
Yes, Bob. This is Mac. I'll answer, then I'll hand it to Peter. As you said at the beginning of the question, it's still difficult to model past this year, and we've tried to do a good job letting you know what 2018 looks like. 2019 2020 will address those years as they come forward.
But there's still some Rico because we don't know we're pretty confident there's going to be a lot of money in relief funding and insurance dollars coming through the island, but the timing of that is still uncertain. But we will continue to focus on executing well here and growing the business in LatAm. Peter, I don't know if you want to? Yes.
Just for a little more color on 2018, at the high end of our guidance, we anticipate a continuation of the exceptionally high average ticket that we've had this year and an insignificant impact from immigration. We're still in the middle of the summer and the pattern on immigration. So we're anxious to see the school openings and so forth, which will give us a better data point. As we projected the second half of the year, we factored in our July volumes, which were lower than the Q2 volumes. We had volumes of low double digits and experienced a lower average ticket in the high single digits and that impacts our margin.
And so we projected that throughout the remainder of the year. Our transaction volumes were slightly lower and we've projected that out as well. Out of caution, on the lower end of our guidance, we reduced those amounts slightly just out of caution more than anything else. With respect to the funding and the items that are still open, there's been a recent announcement of approximately 1 point $5,000,000,000 in a HUD grant, but the rest of the process is quite uncertain with respect to timing. So that's also going to impact us.
And as you're aware, the fiscal situation still remains unresolved visavis the Board and government with respect to the fiscal plan or the budget, excuse me, for next year, which is also an uncertain item here as we look forward to the rest of the year.
And last question for me, just on the non Puerto Rico LatAm and your balance sheet looks really healthy. You brought your dividend back to half of what it was. Debt to EBITDA is going to be under 2.5 I think by the end of the year. And you are looking at deals. Where are where do you see opportunities?
Do you have a pipeline? And what interests you the most on the M and A front?
Yes. Bob, this is Mac. Consistent with the past, when we're focused on continuing to expand our footprint where we can, we've already got a pretty good footprint with the existing deals. So we're very focused on the PayGroup acquisition, making sure we're making the best of that. We're getting the cross sells, which we feel pretty confident in.
But we are continuing to look across the market for products and expansion opportunities. And as you know, with the deal that we announced that we didn't proceed with, it's still an important part of what we're focused on.
Our next question comes from Jim Schneider from Goldman Sachs. Please go ahead with your question.
Good afternoon. Thanks for taking my question and congratulations on the strong recovery. I just want to maybe ask, if it's possible to parse out between the merchant acquiring business and the payment services business, can you maybe isolate how much of the benefit that you're seeing right now is specifically down to the relief effort visavis the kind of just the recovery or balance you're seeing in the rest of the business that will be helpful?
Hi, Jen, it's Peter. So it's very difficult to pinpoint the relief effort as there's nothing direct that we can tie to exactly. One item that is direct that we do identify discreetly is relief funding with respect to our EBT or electronic benefit transfer card payment volumes.
Yes.
And that volume has contributed approximately 7% to our sales volume growth just on those cards this year. So that is direct as a direct result of the relief effort. Apart from that, it's very difficult.
Understand. Hard to isolate. And then I guess, can you maybe just kind of provide us with a broad overview of what you're seeing in Puerto Rico now in terms of the go forward normalized competitive environment, both in the merchant acquiring and payment services sectors? Are you seeing any of your competitors retrench or more importantly, any of your competitors start to back off the market or potentially exit?
This is Matt. No, what I would say given that it's typically an extension of their U. S. Market dynamics. We do see that again the banks that we partner with First Bank and Popular are the strongest financial institutions on the island, which plays to our benefit.
But it is still a competitive environment.
The only thing I'd add to what Mac just mentioned is that we are here in greater scale on the island and to provide more timely service arguably as we go to help merchants as things are so difficult in the recovery with respect to the service levels. Additionally, we've added the ATH Movil Business solution, which is unique here on the island and that's something that we're focused on.
Great. And then maybe one final one. With respect to Bob's earlier question on M and A, you're obviously considering a larger transaction, it sounds like. Can you maybe give us a sense about how much latitude you see your balance sheet at this point? You're sub-three right now.
I mean, is this something you reconsider for the right deal you could imagine scaling up to kind of 4 times leverage? Is that something that you see as doable or desirable at this point?
I would say with respect to our views on that, it really depends on the strategy in the asset. So if we find the right asset, we would feel comfortable doing that in the right business case. But in each case, it's going to have to add value to shareholders long term. One other follow-up just that I'll add to Bob's question earlier is just that with respect to the charge just for housekeeping, it's in the corporate segment and in the SG and A segment.
Yes. And Joe, this is Mac. I mean, look, I think what we're very proud and excited about at EVERTEC is we think we're building a unique franchise in Latin America. And we think that the products that we have, the footprint we have that we've built over the last 3 years is there's no comparable. So any asset that comes up, we'll take a hard look at.
And to your point, we've got a great balance sheet and we'll look at transactions of any size that makes sense for our strategy and create shareholder value, but we'll just as equally walk away from 1 if the complexity is too great or if it doesn't make financial sense. But this is, I mean, still the big focus for our company. So we'll look at every opportunity in the region.
Understood. Thank you very much.
Our next question comes from George Mihalos from Cowen. Please go ahead with your question.
Good afternoon, gentlemen. Let me add my congrats as well on the quarter. Firstly, Pete, I wanted to ask as we sort of model out the back half of 'eighteen, should we now be looking at the typical seasonality? So if we look at how sort of revenue breaks down going back to 2016, is that a good template to use? And then I also just wanted to ask on the margins specifically as it relates to payment services in Puerto Rico and business solutions, you had some revenue growth there that obviously didn't flow down to the bottom line in 2Q.
Is there any reason why we shouldn't be expecting margin expansion now over the back half of the year, specifically for those two segments?
Thanks. With respect to seasonality, George, I think absent some of the uncertain factors that I called out earlier that a typical seasonal pattern would be appropriate for how we look at it, which is typically weighted in the Q4. The Q3 tends to be lighter. With respect to your question on the margins and the contribution, so if you look at as you identified in the Payments and the Business Solutions segment that we didn't get the conversion. And individually on the Payment segment, we had some investments that we made in infrastructure and product initiatives, which happened to fall in that quarter and held it back a bit.
And then with respect to business solution, it's really predicated on the timing of service delivery. We have some more deferred revenue as a consequence of that and revenue recognition, but there's not anything individually that I could call out that we don't think is just a timing related item.
Great. Thanks. And then I'm not sure if I missed it in the prepared remarks, but can you update us on the percentage of your merchant base that's still not processing post the hurricane? Thanks and congrats again.
Yes. Thanks. With respect to normal levels, 10% is the amount that is not processing. However, we would like to say that we are in a new environment. And so we've seen the uptick in merchants still continue, but it has decelerated.
And so we believe and have factored at this level is probably appropriate as we go forward. As we called out, we have these merchants that we still collect fees from. It generates approximately $1,500,000 per year and we factored in approximately half of that going away in the second half of the year as well.
Our next question comes from Tien Tsin Huang from JPMorgan. Please go ahead with your question.
Thank you. Great results. I wanted to ask on the decision to not do the Latin American acquisition. Why was that Mac? Was it fit or just the timing not right?
It really was around the complexity of the deal and also the market conditions of the markets that the asset does business in.
Understood. So but from an appetite standpoint, it sounds like it's still there and from a resource and where you are in the recovery, the interest level in doing deals sounds like it's higher?
Yes. So it was not I mean, look, we were very interested in the asset. We're interested in assets that are available in the region. Like I said, we think we've got a unique platform and products that no one else has. So it wasn't that we have a lack of appetite for these things.
It was just we didn't think the asset was appropriate, again, given the market conditions.
Okay.
Yes, just adding to it, there were some unique regulatory constraints in this in the added complexity as well as market conditions, which ultimately changed. It got worse throughout the process, which also contributed it. But the asset, we really liked. And when we
say market conditions, we mean the market that the country specifically that the company operates in.
Yes, got it. Thanks for that clarification. Just as a follow-up, unrelated, the ATH branded share, it sounds like maybe that's up a little bit. Can you confirm? And if so, are you doing something differently to drive that?
And I think I also heard that pricing was up there too. Can you clarify that? Thanks.
Yes. What I would say
is we can so with ATH, we continue to roll out new features. We announced in the quarter, we have a new feature for not for profits. We also are now charging for some of the features for small businesses to actually accept ATH Movil. So it's actually a better solution for small merchants than a POS because they don't have to make that investment. And we've also started charging some of the financial institutions a small transaction fee for the service that we provide.
So if we are seeing an expansion of ATH transactions across the island, not only because it's the best product and it's the most people love us, but because of the new features and the innovations that we've rolled out really over the last year, but we're beginning to see the financial impact within the last
quarter. Great. That's something we will track then. Thank you.
Our next question comes from Vasu Govil from Morgan Stanley. Please go ahead with your question.
Hi, thanks for taking my question and congratulations on a great quarter. I guess just the question I wanted to ask is that you had some headwinds this quarter from the bank moratorium on payments ending and we still saw pretty solid volume growth and the full benefit from insurance proceeds is yet to come. So when I guess I understand it's prudent to have some caution in your outlook, but any reason why growth shouldn't accelerate from here, especially given the easy comps in the Q4 versus I think you're guiding for stable revenue growth in the back half versus the first half?
I'll give you my view then Peter. Again, timing is what's difficult to predict with the relief funding and the insurance funding. If you think about $3,000,000,000 of $8,000,000,000 is probably company the island. It's surprising given that so many claims are already on the insurance companies and on the relief funding as well. Again, we believe in the budget has over $60,000,000,000 coming through the island, but there's a lot that needs to be done from an approval and a process perspective to actually see those funds locally.
And Peter can talk specifically to how we
look at 2018. Yes. We will see our growth improve due to the effects of the hurricane in the second half. What we were speaking to about too is that we will not see a continuation, particularly in the merchant segment of Q2 as we've seen in July, it decelerated a bit and that's what we've factored in into our outlook.
Understood. And if you could clarify, was there a change in impact from client migration that you were anticipating for this year?
Yes. We had an update from a couple of clients that they've chosen to delay their migrations. And so what we've done is we've reduced the outlook to $2,000,000 to $4,000,000 for the year from previously $4,000,000 to $6,000,000 and that has an effect on next year, which the same change just goes forward to next year, which we currently view as $5,000,000 to $6,000,000
Understood. And then just longer term on Latin America, what sort of your view on potential organic growth once we're past the client deconversion? And correct me if I'm wrong, but my understanding is that most of your presence in Latin America today is on the payment processing side, but regulatory direct merchant acquiring business outside of Puerto Rico. So is it a big focus to expand through the margin acquiring piece into Latin America? And is that something you can do with your existing assets?
Or would that be accomplished only through M and A?
Yes. So this is Mac. So the growth in Latin America, once we get through the attrition, we'd like to be at low double digits, which is sort of aspirational given that that's what we think the market should grow at. But two things, one is we've got to get to the client attrition and we also have to change the model with the pay group business from a licensing business to processing. To your question about would we merchant acquiring versus processing, the thing that EVERTEC has been successful at is offering whatever the market needs at the time.
So, we've very deliberately entered these markets with what the market what's best suited for the market. So in most of these markets, we are a processor because merchant acquiring is still owned by the banks or through a monopoly or duopoly. As it opens up, which we think it will as it has slowly done in some of the larger markets, we're going to be the technology solution with the resources on the ground to help run their merchant business.
Understood. That's very helpful. And one last one, if I can squeeze it in. I guess just on the government budget, that's still not being finalized. Any view on how quickly that situation can get resolved?
At this point it seems like it will mostly be a 2019 impact to the extent that there might be any austerity measures. Is that correct?
I'll just say, I wish I knew how to get it resolved. I thought the courts would do that, but that's taking time. I don't know, Peter, if you've got any.
Yes. We're waiting for a ruling from the courts on the next steps. And so we're uncertain as to what and when that will take place.
I mean, it's a bit unprecedented given that this is not a state and how this plays out. But hopefully PROMESA, now that it's in the
courts, we'll read some conclusions, but Other than there's a recognition of the importance of resolving it, which I think is understood by all parties and that's what we're hopeful we'll bring into closure here shortly.
Understood. Thanks a lot.
Our next question comes from Bryan Keane from Deutsche Bank. Please go ahead with your question.
Hi, guys. Just want to ask on the merchant acquiring moderation. Do you guys have any idea what's causing that in July?
It's predominantly just a lower average ticket. We're seeing the same spending across the categories, but it's generally just a lower average ticket. As we noted, the transactions are off slightly as well, but that would be the observation. In terms of what caused it, we don't know whether it is has anything to do perhaps with immigration or any other cause related to funding, etcetera, which is what creates the uncertainty.
Okay.
And then just on EBITDA margin, historically, there hasn't been that big of a difference between the first half and the second half. Obviously, last year was a huge different impact, but we all know a lot of the reasons why. So just thinking, is there a reason why margins would stay on the depressed level for the back half of this year? And why wouldn't they be more similar to the first half?
Well, the first thing I want
to note is, although the hurricane obviously had the biggest impact, we also acquired PayGroup last early July and that has an impact as that comes on at lower revenue or EBITDA contribution. So that you need to consider that. Other than that, I think it's the reasons that we called out, which if we go by segment, where the merchant acquiring volume, lower average ticket and transactions in the payment processing section, it's just a slightly lower transaction volume. And in Business Solutions, we expect that to rebound as we noted. And then in Latin America, it's the attrition, which is impacting us adversely.
Yes. And these specific infrastructure expenses and product development initiatives that we see in Payment and also I think it's also in the Business Services segment. Do we do those end by the end of this year or is there a timeframe when we get back to more normalized margins in those segments?
Well, in the payment segment, the product initiatives are for future growth. We're building in ATH Movil and other solution capabilities here that will help us grow. With respect to the infrastructure in both categories, those are just necessary expenses. We every year challenge ourselves to reduce them, but we're always going to ensure that the business runs safely and securely and that's what that represents.
And the product initiatives then will be ongoing then those costs just to continue for growth?
Throughout 2018, we will look very carefully at capital allocations we always do going into 2019. Yes. And this is Meg.
In 2018, as we look at the back half of the year, we're trying to make investments. We've demonstrated that ATH Movil, we can make money. We've demonstrated that when we roll out new features, we see lift. So we're trying very hard to try and accelerate some of those investments in 2018. Okay.
All right. Thanks for the color.
Our next question comes from John Davis from Raymond James. Please go ahead with your question.
Hey, good afternoon, guys. Really, maybe, Mac, just want to start on M and A, just specifically the pipeline. I think obviously you guys looked at what feels like a pretty sizable deal. Are there 3 to 4 deals that you guys are looking at quarterly? Is it ebb and flow?
Just trying to get a sense of what the Latin American pipeline looks like and also the size of deal that you would potentially do?
Yes. I mean, we don't talk about deals until they're done. What I would tell you is, again, it continues to be a focus. If you look at Latin America historically in the space, most of the deals tend to be small. And most of the deals, there have been a handful.
We've done several of those if you include PayGroup and Processa. That tends to be the typical size. The larger deals are going to be the outliers. So the larger types of deals where we have to really leverage the balance sheet are going to be unusual, but we will look at those because those could really fit well into our thesis. But I can tell you right now, we constantly are evaluating opportunities across South America, different types of deals, but they tend to be smaller than the types of deals that we've done in the past.
Okay. That's helpful. And then you mentioned in your prepared remarks monetization of the mobile app. You've got a 1,000,000 users or over 1,000,000 today. How meaningful is that?
And what specifically like how are you monetizing? Is it transaction fee? Like who's paying the fee? And do you think that could be an actual significant contributor to P and L down the road?
So originally ATH Movil was rolled out as a free service to sort of encourage adoption and it was P2P. So people were paying each other, they were paying very small businesses, babysitters, lawn maintenance people. If you owe somebody $20 it was that type of transaction. And we waited until we had the scale so that it was kind of one of the things that you have to have and you use on a weekly, if not daily basis, to actually start charging fees. The fees that we charge primarily are to the financial institutions because we are processing transactions for those financial institutions.
But as we add new features like the ability for small businesses to get better reporting on their transactions, we're actually charging small businesses like we would if it were a credit card transaction. And as we look at other features, we will charge consumers or small businesses for those features. But we do believe that it's not only going to be good for the financial growth of the company, but also strengthening the brand on the traditional transactions
as well.
Okay. Very helpful. And Peter, quickly, one more margin question for you. By my math, guidance implies basically 300 basis point lower margin in second half versus first half. I think you called out client attrition.
In my math, that's like 100 basis points. So 200 basis points there, is that really just elevated spending a little bit of conservatism? I just want to make sure that we're not missing any kind of big expenses expected kind of in the back half?
Yes, I think that's accurate. I would call out that the Merchant Acquiring segment has the most leverage, if you will, operating leverage based on volume. So that's where the biggest impact is from the first to the second half in our guidance.
All right. Thanks, guys.
Our next question is a follow-up from Bob Napoli from William Blair. Please go ahead with your follow-up.
Thanks. Just quickly on questions have been asked around ATH Movil, but the 1,100,000 users, 10,000 businesses, where was that a quarter ago and kind of what is the momentum on adding users and businesses?
Yes. So I mean, we haven't published historical information. What I can tell you is it's continually grown. As you add, it's not growing at the same rate, but $1,100,000 on a population of $3,200,000 and you've got a significant amount of the adult population. We are now seeing quick adoption rates as we roll out new features.
So the base of consumers is still growing, but where we're seeing the acceleration is when we launch new products. So the nonprofits, we have a lot of applications to add nonprofits, small businesses. That ramped very, very quickly because that's only been out for a couple of quarters. So we are seeing a quick adoption once we roll out new features.
I mean, is this going to move the needle on the financials in 2019? Or how material can the revenue stream off of that be?
I wouldn't say it's material at this stage, but it's growing very, very significantly and we can provide a further update on that as we look out to 2019.
Great. Thank you.
Thanks, Bob.
And ladies and gentlemen, at this time, I'm showing no additional questions. I'd like to turn the conference call back over to management for any closing remarks.
This is Mac. I want to thank everyone for joining the call. We look forward to seeing you at upcoming investor conferences and talking to you again on the next earnings call. Thanks again.
Ladies and gentlemen, that does conclude today's conference call. We do thank you for joining. You may now disconnect your lines.