Good afternoon, and welcome to the EVERTEC Incorporated 4th Quarter and Full Year 2016 Earnings Conference Call. All participants will be in listen only mode. Please note, this event is being recorded. At this time, I would like to turn the call over to Kay Sharpton, Vice President of Investor Relations. Please go ahead.
Thanks. Welcome to the EVERTEC 4th quarter 2016 earnings call. With me today are Max Schuessler, our President and Chief Executive Officer and Peter Smith, our Chief Financial Officer. A replay of this call will be available until Wednesday, March 1. Access information for the replay is listed in today's financial release, which is available on our website under the Investor Relations tab.
As a reminder, this call may neither be recorded nor otherwise reproduced without EVERTEC's prior written consent. For those listening to the replay, this call will be held February 22. Please note there is a presentation that accompanies this conference call and it is accessible in the IR section of the website as well as via the link provided in the earnings release earlier today. 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 on May 26, 2016 with the Securities and Exchange Commission for factors that cause our actual results to differ materially from any forward looking statement. 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 share. Reconciliation to GAAP measures and certain additional information are also included in today's earnings release and related supplemental slides.
I'll now turn the call over to Matt.
Thanks, Kaye, and good afternoon, everyone. Thanks for joining us on today's call. We are pleased with our results for 2016 as we delivered on our financial goals and made solid progress on our strategic growth plans. I'll cover some of the year's highlights, provide you with an update on recent developments and briefly comment on 2017. Beginning on Slide 4, we have a summary of our 2016 results.
Total revenue was almost $390,000,000 an increase of 4% compared to 2015, which was slightly above our most recent guidance. We generated adjusted diluted earnings per share of 1 point $6.7 an increase of 5% and also at the top of our guidance range. We generated significant cash flow and returned approximately $70,000,000 to our shareholders this year through almost $40,000,000 in stock buybacks and $30,000,000 in dividends. Now I'd like to give you some more specific updates on Q4 as well as on Puerto Rico. On slide 5 is an update on our results for the quarter.
First, we were pleased with the strong revenue in the quarter surpassing $100,000,000 in quarterly revenue for the first time in the company's history. Peter will give more specifics on the quarter in a moment, but we benefited from transaction growth and the completion of certain IT projects. In Puerto Rico, overall revenue grew approximately 3% and we continue to experience resilient transaction growth. Transactions grew 8%, but this growth was partially offset by average ticket declines as well as merchant mix shifts. The transaction growth was primarily driven by increased government payment and general payments growth from the continued cash to card conversion on the island.
Even with these solid results, we continue to be negatively impacted by the project delay that we discussed last quarter. However, I am pleased to announce that we made progress in the quarter. We worked with our client to clarify the project scope, extend the project deliverable date and amend the contract for a mutual benefit. Peter will provide more details on the financial impact. In Latin America, revenue growth was significant with the ongoing benefit from the Processa acquisition.
On a comparable basis, excluding Processa, we are now beginning to see the initial impact of client migrations and generated mid single digit revenue growth as a result. Now I'll give you an update regarding PROMESA and Puerto Rico on slide 6. The new Governor received authorization from the Federal Oversight Board for a 1 month extension of the deadline to submit the long term fiscal plan to February 28 as well as a 2 month extension to the stay on litigation to May 1. Additionally, the Puerto Rican government passed the Puerto Emergency and Fiscal Responsibility Law in late January, which extends the moratorium period on debt payments until May 1 and allows the government to continue to pay for essential services as a priority over principal debt service. At this time, we have very little visibility into the measures that will be taken to address the government situation.
The new administration's fiscal plan is being prepared and it ultimately requires the PROMESA Board's approval. Once the plan is approved and the details of the action plans are public, we should have better perspective. That said, anticipate austerity measures that will negatively impact the economy in the short term and this is reflected in our 2017 outlook as Peter will cover in more detail. Ultimately, private sector investment is the key to a healthy economy and long term growth. We believe that meaningful progress on growth initiatives are required to encourage investment on the island.
We continue to believe that EVERTEC is well positioned to assist the government to improve its IT infrastructure. Reflecting on 2016 and our accomplishments, slide 7 is
a summary of the areas I'd like
to comment on. Our focus during the past 2 years has been to transform this company. While there have been challenges and there is still work to be done, I am pleased with the significant progress we have made. We have a renewed commitment to our customers. We have upgraded our systems and reorganized our delivery and support teams to provide dedicated personnel to improve service and create a more collaborative team approach for our top customer, Banco Popular.
Additionally, we are pleased with the performance of our expanded merchant acquiring relationship with First Bank and the continuation of our relationship with Oriental. We also boarded new merchants and experienced 6% growth in transactions for the year in Puerto Rico. We have continued to strengthen the ATH network through innovations such as ATH Movil and increased the participation of local banks in the network. In Latin America, we found we have more work than we originally anticipated. We made significant progress, but had more work to do to meet our expectations.
As we discussed last quarter, the improvements made during the year allowed the team to retain certain clients had previously notified us that they would leave. And while our new sales in the year didn't meet our goals, we were able to land some minor clients. We are better positioned now for successful selling due to the team's hard work in 2016. Next, I want to highlight the capital investment that we have made in the business. In addition to our acquisitions, we have invested approximately $80,000,000 in the business over the last 2 years.
These investments are important to sustaining our current customer base as well as growing our future business. Over the past 2 years, we have upgraded or removed hundreds of servers, improved numerous applications and databases and improved overall infrastructure and security. Additionally, we have paid for the deployment of many POS terminals to comply with industry and regulatory specifications. As a consequence of these investments and ongoing initiatives, we have experienced declines in incidents over the past 2 years. We have a more stable and improved infrastructure, increased capacity, improved redundancy and higher availability for our customers.
We will continue to invest in our infrastructure to protect our systems to ensure we provide efficient and high performing service. As for corporate development, we closed on both Processa and AccuPrint during the year. AccuPrint is a company engaged in data processing and printing primarily for banks and insurance companies. The transaction is accretive to 20 17 earnings and will leverage our existing capacity on the island and contribute to our Business Solutions segment. The process that we established to source and assess deals is effective and I'm pleased to announce that we have an agreement on another deal that is pending regulatory approval.
More details on this transaction are on slide 8. We have entered into an agreement to buy 100 percent of PayGroup, which is headquartered in Santiago, Chile. It is a payment processing and software company serving primarily financial institutions throughout Latin America. This acquisition will expand our geographic footprint into additional countries and strengthen our position in several other existing markets. As a reminder, we are regulated by the Bank Holding Company Act and we are working with Banco Popular to obtain federal bank regulatory approval.
We are excited about this transaction and continue to look for combinations that will fit our strategy to deliver pavement technologies across Lifetime. In summary, although we anticipate headwinds in 2017, we are driving the business forward, investing in core assets to continuously improve the customer experience and grow market share in the region. 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 Q4 and full year results and then review our financial outlook for 2017.
Turning to slide 10, you will see the Q4 and the full year 2016 revenue for the total company and our segment revenue details. Total revenue for the Q4 of 2016 was $101,900,000 up 6% compared to $95,700,000 in the prior year. We had strong growth in our Business Solutions segment driven by the completion of IT consulting projects in the quarter, the benefit of the CPI increase on the Banco Popular Master Service Agreement as well as a minor increase from our recent AccuPrint acquisition, which closed in mid December. We also continued to benefit from the year over year impact of our Processa acquisition. Total revenue for the full year 2016 was $389,500,000 up 4% year over year.
With respect to our segment mix, in the 4th quarter, merchant acquiring net revenue decreased 1% year over year to approximately $23,000,000 driven primarily by the Q2 contract change with Oriental Bank from the Merchant Acquiring segment to the Payment Processing segment and it also reflects the anniversary of the First Bank transaction in November. As we've experienced throughout this year, revenue growth was impacted positively by the ongoing transaction growth offset by a lower average ticket as well as other merchant mix shifts driven by the continuation of higher volumes at merchants with lower net revenue contribution such as large retailers and the government. For the full year, merchant acquiring grew 7% year over year to $91,200,000 Payment processing revenue in the Q4 was $28,800,000 up approximately 4% as compared to last year. Revenue growth was driven primarily by increases in our ATH debit network and card processing volume, process of revenue and the contribution of the Oriental contract change I referenced. As Mac mentioned, we had a contract modification that required us to defer approximately $2,000,000 of revenue in the quarter.
The modification clarified and expanded the scope of our project and extended the timeframe for delivery into 2017. As a consequence, the approximately $4,500,000 in deferred revenue at year end related to the project will be recognized ratably over the approximately 3 remaining years of the underlying processing contract. This revenue is factored in our 2017 guidance. In the quarter, transaction growth in Puerto Rico was resilient, growing approximately 8% year over year and this elevated transaction level has continued into January in part driven by increased processing of electronic payments by government agencies. We also continue to see the benefit from the mid-twenty 16 legislative initiatives requiring the acceptance of electronic payments for small businesses.
While this increased volume that we've experienced the last two quarters is encouraging, it is difficult to assess whether it will be sustained given the macroeconomic uncertainty. Additionally, as we anticipated, we experienced modest client losses in the quarter in Latin America of approximately $500,000 For the full year, payment processing grew 3% to $111,500,000 driven by the same reasons I just mentioned. Business Solutions revenue in the Q4 was strong, increasing 12 percent to $50,000,000 Our growth was driven by completed IT service projects in the quarter, which added approximately $2,000,000 more than last year as well as the government tax hosting service contract signed in the year. Additionally, we benefited from the impact of the increase in the CPI index and a partial month from the AccuPRINT acquisition. For the 12 month period, Business Solutions grew 4 percent to $186,800,000 Moving to the next slide, number 11, you'll find a reconciliation of our adjusted EBITDA.
We incurred severance expense of approximately $700,000 along with share based compensation of approximately $1,800,000 Additional adjustments of $5,900,000 in the quarter reflect debt extinguishment expense related to our refinancing, a software asset write down and a fee paid to resolve a software maintenance contract matter. Adjusted EBITDA for the quarter was 47,600,000 dollars an increase of 2% from $46,600,000 in the prior year. Adjusted EBITDA margin was 46.7 percent and this represents a 200 basis point decline in our adjusted EBITDA margin compared to the prior year. Our Q4 adjusted EBITDA growth and our adjusted EBITDA margin percentage are explained in more detail on the next slide. 2016 adjusted EBITDA was $187,600,000 an increase of 1% as compared to last year and adjusted EBITDA margin was 48.2%.
Moving to slide 12, you will see a year over year adjusted EBITDA margin bridge for Q4. Starting from the left column, the bridge begins with the adjusted EBITDA margin in Q4 of 2015 of 48.7%. Moving to the right, first, we were positively impacted by 20 basis points from our revenue mix, which was then offset by approximately 100 basis points from the contract modification I referenced. 3rd, investment expense increased year over year by approximately 40 basis points primarily due to incremental investment expense related to personnel hired to support our Latin American growth initiatives. 4th, operating tax increases were approximately 30 basis points or approximately $300,000 in Q4.
We no longer receive an expense offset related to maintenance expense reimbursements provided for in the popular merger agreement and this impacted us approximately 50 basis points. The impact of this maintenance reimbursement item will anniversary in the Q3 of 2017. The combined impact of these referenced items resulted in an adjusted EBITDA margin of 46.7 percent for the Q4 of 2016. Moving to slide 13. Adjusted net income in the 4th quarter was $31,300,000 a decrease of 6% as compared to the prior year.
Our effective tax rate in the 4th quarter was 10.9% and includes the impact of discrete tax items in the quarter that increased the rate relative to the earlier quarters in 2016. As a reminder, last year's quarterly tax rate in Q4 was 2.6% and reflected favorable impacts of tax planning initiatives put in place in the quarter. For the year to date period, we had an effective tax rate of 9.9% as compared to 9.7% last year. Q4 adjusted earnings per share was $0.43 a decrease of 2% from $0.44 in the prior year and primarily reflects the higher tax rate in the current year quarter as partially offset by the benefit of a lower diluted share count as a result of our share repurchase program. Year to date, adjusted net income was 124 point $7,000,000 up 1% and adjusted earnings per share was $1.67 up 5% from $1.59 in the prior year.
Moving on to our year to date cash flow overview on slide 14. Net cash provided by operating activities was approximately 168,000,000 dollars or a $5,600,000 increase as compared to the prior year and this includes the impact of restatement related expenses, settlement timing and other working capital timing differences. There has been an approximate $4,000,000 decrease in restricted cash as we substituted $4,000,000 of our unused revolver to satisfy a card network cash collateral requirement related to our card processing business. Next, we spent $42,000,000 dollars This slightly exceeded our expectations and was primarily driven by unanticipated customer demand in the quarter for new point of sale terminals pursuant to existing customer contracts in Latin America. Next, we paid approximately $23,000,000 in principal debt payments and other borrowings, as well as approximately $8,000,000 for the credit waiver amendment fee and debt issuance costs related to our recent refinancing.
These outflows were partially offset by an increase of approximately $11,000,000 in short term borrowings. And finally, year to date, we paid cash dividends to stockholders of of approximately $30,000,000 and repurchased approximately $40,000,000 in common stock for a total of nearly $70,000,000 returned to our shareholders. We have approximately $80,000,000 available for future use under the company's share repurchase program and we recently announced another $0.10 dividend to be paid on March 20, 2017 to shareholders of record as of March 1, 2017. Our ending cash balance as of December 31 was $52,000,000 an increase of approximately $23,000,000 from our 2015 year end balance. Moving to slide 15 is a summary of our debt in the Q4 of 2016.
Our quarterly ending debt position was approximately $612,000,000 comprised of the $52,000,000 of unrestricted cash and approximately $663,000,000 of total short term borrowings and long term debt. Our weighted average interest rate was approximately 3.2 percent and our net debt to trailing 12 month adjusted EBITDA was 3.4 times reflecting the amended credit agreement, which limits the cash applied to the net debt calculation to 25,000,000 dollars As of December 31, total liquidity, which includes unrestricted cash and available borrowing capacity under our existing revolver was $120,000,000 At this time, I'd like to provide you with an update on the status of our government receivables. Our receivable balance at December 31 was approximately $18,000,000 which is essentially flat with the balance at the end of 2015 and the balance from Q3. Given the government's fiscal status, we continue to monitor our receivables diligently. Moving to slide 16, I will now provide a review of our 2017 guidance.
We expect revenue to be in a range of $390,000,000 to 400,000,000 dollars representing growth of 0% to 3%. Our adjusted earnings per share outlook of $1.50 to 1 $0.63 represents a range of negative 10% to negative 2% as compared to the adjusted earnings per share in 2016 of 1.67 dollars On a GAAP basis, earnings per share is anticipated to be between $0.92 $1.06 And a reconciliation to our adjustments to reconcile the GAAP EPS range to non GAAP adjusted EPS outlook is provided in the earnings release. I will explain our key underlying assumptions now. 1st, the current fiscal situation in Puerto Rico presents a forecasting challenge for us, but we are committed to sharing our estimates and assumptions throughout the year. That said, with respect to the revenue range, we project a modest decline in Puerto Rico transaction volumes over the year as anticipated austerity measures are implemented.
The impact of the AccuPRINT transaction is anticipated to deliver approximately 2 percentage points of growth in 2017 and the impact of the recent CPI index increase is anticipated to contribute approximately 0.5 point of growth. As a reminder, the Oriental contract change that was effective this past June will have a 1% negative revenue impact through the anniversary in the first half of twenty seventeen. And finally, the range includes the anticipated client attrition in LatAm that we discussed last quarter, which is anticipated to occur throughout the year. With respect to our segment revenue mix, we anticipate merchant acquiring net revenue to be slightly negative to low single digits year over year. This estimate reflects the year over year impact of the Oriental contract I mentioned and the anticipated reduction in Puerto Rico transaction and sales volumes.
Our Payment Processing segment growth is anticipated to be flat to low single digits depending on the timing of the client migrations that I previously mentioned. And finally, the Business Solutions segment revenue growth is anticipated to be low to mid single digits reflecting the addition of AccuPrint, the CPI index impact and other IT projects expected to contribute during the year. With respect to the Puerto Rican government revenues, which are approximately 7% of our total revenue, we've only planned for revenues based on existing contracts and have not included any potential new business or other changes to our contracts since we have limited visibility into either at this time. It's important to note that a majority of our government service contracts renew in June 2017 and we assume that we will renew them without significant changes. Regarding margins and profitability, I want to highlight 4 items that are affecting our outlook.
1st, a lower revenue mix contribution resulting from the loss of high margin processing revenue that is only partially offset by new business in the AccuPrint acquisition 2nd, increased investment expense in Latin America to improve our product set and delivery capabilities third, increased compliance and information security related expenses 4th, increased interest in operating depreciation expense. Additionally, in 2017, as I mentioned earlier, we will continue to be negatively impacted by the termination of the maintenance expense reimbursements provided for in the Popular merger agreement throughout the first half of this year. We expect these expense increases to be only partially offset by cost and productivity actions in our plan. All of these items are considered in our guidance and combined we believe will generate adjusted EBITDA margins in a range of 46% to 47% or approximately a 100 to 200 basis point decrease in our adjusted EBITDA margin. Our operating depreciation is also anticipated to increase approximately $4,000,000 to $32,000,000 primarily reflecting increased point of sale terminal purchases, which are depreciated over a shorter time period.
As I referenced, our cash interest expense is anticipated to increase in 2017 by approximately $4,000,000 Approximately $2,500,000 is related to our existing swap that went into effect in January and the impact of our recent refinancing. Also we have planned for a further $1,500,000 increase based on consensus LIBOR projections. Our projected stock compensation expense is $9,000,000 to $10,000,000 and reflects the 3rd year of a restricted stock program and thus the first full year of vested related expense. Our effective tax rate is anticipated to be between 9.5% to 10.5% and this guidance does not reflect additional share repurchases. The weighted average diluted shares are estimated to be approximately 73,500,000 shares for the year.
Our capital expenditures for 2017 are anticipated to be in a range of $35,000,000 to $45,000,000 and this includes continued investment in our infrastructure. For further clarification in our guidance, we have not included any estimates for the PayGroup transaction. In summary, we remain focused on our growth initiatives and improving our business on a sustained basis. We do anticipate some headwinds in the year as PROMESA related austerity measures are implemented and look forward to competing for potential 2017 government led IT and payments initiatives in Puerto Rico as they arise. We look forward to updating you on our progress and outlook as the year unfolds.
We will now open the call for questions. Operator, please go ahead and open the line.
We will now begin the question and answer session. The first question comes from George Mihalos with Cowen. Please go ahead.
Great. Thanks guys. I guess first question just on the guidance and the outlook for the year. Should we assume that the first half results will be somewhat stronger than the back half on an organic basis based on what on your guide and I guess some of the austerity measures and the roll off some of the payment processing contracts?
Hi, George, it's Peter. I'll provide I think a bit of guidance on our segments, which will help you with your question. First, with respect to the Merchant segment, we expect to have a bit of headwind as we have about 6% that is applicable to Oriental in terms of the headwind for the first half of the year. And then after that, that anniversaries and we are projecting the volumes to tail off in the second half of the year as you thought. With respect to the Payments segment, we have continued growth for the 1st couple of months from Processa, which is expected to anniversary after the 1st couple of months.
And then we will benefit for the first half from the Oriental contract change that I mentioned. And we expect the attrition in Latin America to occur gradually throughout the year. So the impact will be more significant in the second half of the year as again you kind of pointed to and that will be partially offset by organic growth in new business. And then finally with the Business Solutions segment, we are going to benefit for the full year from the AccuPRINT and the CPI impact together that's around 5%. And as I indicated, we have the government contracts that we'll be renewing around mid year and we anticipate a slight decline in sort of discretionary government work throughout the year and the normal decline that we have in our paper based business.
So overall, the general profile is going to closely resemble actually last year or 16, but those are the puts and takes. So hopefully that helps address your question.
Great. Yes. Thank you. And just as a follow-up question, you guys talked about retaining some of the business that was slated to roll off on the payment processing side. Can you talk a little bit about your efforts front on the new sales front and maybe some of the challenges you're seeing and how you're addressing those?
Thank you.
Hey George, this is Mac. Yes, so we talked a little bit on the last call that we've been able to retain a few of the accounts that we're leaving. That status hasn't changed. We still have a few that we're able to retain. We've won some additional small accounts in the quarter.
We continue to pursue opportunities across the region. We do believe that the Chile acquisition by expanding our Rolodex and our breadth of products will help in that effort as well and that will continue to
be a focus for 2017.
The next question comes from John Davis with Stifel. Please go ahead.
Hey, good afternoon guys. Maybe just want to drill down on the merchant acquiring growth in the quarter for a second. My math First Bank and Oriental kind of should have offset for the Q4. So maybe just talk about the core trends in the acquiring business and kind of what the outlook is on a core basis going into 2017?
Sure. Hi, John. In the quarter, 4th quarter, the puts and takes are as follows. So the Oriental impact again is 6% of growth and that was offset by approximately 3% for First Bank and we incurred other growth in the quarter of approximately 2%. So that's how we get to the negative one percent for the quarter.
What we're seeing just in terms of the volume, the transaction volume has been strong or resilient I should say at 8%. We are continuing to see a low average ticket impact and that shaves off approximately 3%. And then with the other merchant mix shifts, that's how we arrived at sort of that 2% for the quarter. In terms of what our outlook is, we expect that to continue for the first half of the year and then have some drop off in the volume as we anticipate the impacts of the austerity will affect the volume.
Okay. And then maybe just briefly the puts and takes on the margin outlook next year. I mean, I know you said down 100 to 200 basis points. Just maybe walk through some of the puts and takes there for 2017?
Sure. As we indicated in the script there, the mix is going to impact us as the volume that we anticipate losing in Latin America in particular is very high margin card processing volume. And the volume that we're bringing on for AccuPRINT won't be able to we don't project we'll be able to offset that. In terms of our expenses, we highlighted that we're going to be investing more in Latin America, in particular in our product set and that will impact the expenses. We have other unavoidable expenses that we have for compliance and information security that we have to commit to.
And then we're partially offsetting that with cost actions and productivity plans that we have in place for the year, but unfortunately we can't offset the majority of that expense.
Okay. That's helpful. And then last one for me. Mac, any color on PayGroup? Are you willing to give us any type of revenue, EBITDA, run rate?
Is it reasonable to assume a 10 times multiple, so you're looking at $3,000,000 to $4,000,000 Maybe any color there would be helpful.
Yes. So we're not giving any color on the sort of those attributes of the business right now. The only thing we'll tell you is we're incredibly excited about the opportunity. Like I said, it's going to increase our Rolodex throughout the region. They've got some marquee banks throughout South America.
It will continue to expand our product portfolio, so we have more to offer each of our customers and it will really strengthen our LatAm management team. It's a team that's been in place for quite some time. But we'll give more details after we close the transaction. As you know, we have to go through the regulatory process with our bank partner. But we'll
give more details after we close.
Okay. And last one or maybe just a quick follow-up on that. Any reason why the quick turnaround? Obviously, the bank approval wasn't as easy maybe as you had thought for Processa. And it seems like January or sorry, June 12 is coming up shortly.
Any reason why that date? Or do you think you're going to have any issues hitting that?
No. So look, we've submitted a couple of deals to the feds now and we were able to get both those approved. If you look at process, it took a little longer than we had hoped. But the AccuPrent deal was a little bit faster. So we hope we can get it done within that timeframe and that's a date that we felt was reasonable.
But again, we still got to go through the hurdles, go through the process, but we anticipate that it will close.
Okay. Thanks, guys.
The next question comes from David Ridley Lane with Bank of America. Please go ahead.
Sure. So can you update us on the total LatAm revenue losses that you expect in 2017? I believe you're talking about $7,000,000 to $10,000,000 spread evenly through the year. Is that still a good number?
Yes. Hi, David. Yes, that hasn't materially changed since we informed you guys last quarter.
Okay. And does the AccuPrent acquisition have higher or lower margins versus the Business Solutions segment?
It approximates the Business Solutions segment. So I think that it's a good proxy for the margins on that business.
Got it. And then I know the guidance excludes any future share repurchase, but sort of more theoretically, does the size of the PayGroup acquisition and the potential cash outflow there change your pace of share repurchases or how you're thinking about that?
Well, we don't comment on the specifics of our share repurchase activity. But with respect to the acquisition, we plan to fund that approximately 50% from cash on hand, offshore cash that we have as well as our revolving facility. And just with respect to our overall capital allocation methodology, it remains the same where we're investing for growth. We're committed to returning a balanced return to our with respect to our dividend. And we also are deleveraging in normal course and comfortable with our leverage.
And to the extent we have excess cash, we're committed to returning that through our share repurchase program. Obviously, the funding is significant for the Chile acquisition as you pointed out. And we are also mindful that we have to pay down our term loan A in April 2018 of $30,000,000 and so that's also factored into our planning. And we're generally just a bit cautious in this year as we look into the Puerto Rico macro situation. So all of those are taken into consideration.
And that's how we're going to follow through the year.
Okay. And last one for me. And in sort of the guidance, are you assuming the Puerto Rican transaction are slightly negative in the second half?
Did I hear that right?
We've not planned for negative. We expect it to go down anywhere from 3% to 6%.
Okay. All right. Perfect. Thank you very much.
Thank you.
The next question is from Chris Kennedy with William Blair. Please go ahead.
Hey, guys. Thanks for taking the question. Mac, you alluded to new sales activity in 2016 didn't meet your goals. Can you give a little bit more color on that? How far below your goals was it?
And what you're doing to change that?
Yes. So we didn't get financial goals.
What we said at the
beginning of the year is that we had hoped to announce some significant wins. And throughout the year, we found that we had more to do to improve the account servicing. So this year, we've really as we talked about on previous calls, improved account servicing and management. We've made some investments in products. So we did towards the end of the year, we were beginning to win some small accounts again.
But 2017, we'll continue to focus on continue to build the pipeline and continue to try and grow the business faster organically.
Okay. And then PayGroup, can you talk a little bit more of kind of where you source that deal?
Sure. So PayGroup, we sourced that ourselves and it was an exclusive process. We've been working on it for about a year now. And like I
said, I think it's a testament
to our corporate development function that we've built.
Okay. And then one last one. On the government renewals, can you just talk about historically when a renewal happens? Is there a pricing cut or just how that process goes? Thanks.
Yes. So annually, a lot of these contracts renew. So this is a normal process. And with respect to pricing, there it depends, I think some of the contracts have sort of an annual renewal feature, but the pricing is in place for a longer period. And each one has an individual negotiation.
The way we look at our overall business as we've indicated is that we're providing essential services to the government. We think we compete in public processes for these contracts. And as we've indicated before, we believe as an essential service that those will continue. And that has been articulated by the government with respect to essential services generally, right? Not necessarily specific to ours, but just as a general priority of theirs.
Okay. And then government is did you say 7% of revenue or 9%?
7%. It used to be 9%. It's come down a bit via the EBITLotto contract that we had and just through the overall growth of our total revenue. Okay, got it. Thanks a lot.
Thank you.
This concludes our question and answer session. I would like to turn the conference back over to Mac Schuessler for any closing remarks.
As always, we want to thank
you for joining today's call. We look forward to updating you throughout the year. Thanks again.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.