Good afternoon, everyone, and welcome to the EVERTEC Third Quarter 2016 Earnings Conference Call. Today's conference 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.
Welcome to the EVERTEC Third 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, November 9. 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 was held on November 2. Please note there is a presentation that accompanies this conference call and it is accessible in the IR section of our 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 performances 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 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 share. Reconciliation to GAAP measures and certain additional information are also included in today's earnings release and related supplemental slides. I'll now hand the call over to Matt.
Thanks, Kaye, and good afternoon, everyone. We're pleased to announce our 3rd quarter results. I'll cover some of the quarter's highlights and provide you with an update on our recent developments. Beginning on Slide 4, we have a summary of the quarter. Total revenue was approximately $94,500,000 an increase of 2% compared to the Q3 of 2015.
We delivered adjusted earnings per share of $0.41 an increase of 5%. We generated significant free cash flow and returned approximately $22,000,000 to our shareholders through stock buybacks and dividends. On Slide 5 is an update on Puerto Rico. Before I review the results of the quarter, I want to briefly comment on our pending acquisition for approximately $10,000,000 This acquisition will leverage our excess capacity in the Business Solutions segment as well as provide some cost synergies. We are currently waiting for Federal Reserve Board approval and anticipate closing in the Q4.
This acquisition is yet another example of our ability to utilize our scale and financial flexibility to take advantage of additional opportunities in Puerto Rico. Moving on to our results in Puerto Rico, this quarter, we experienced the strongest transaction growth in almost 2 years. Transactions grew 8%, offset by average ticket declines as well as merchant mix shifts. Transaction growth was primarily driven by increased tax payments as well as continued increases in cash to card conversion. While the Zika virus has negatively impacted the Puerto Rican tourism industry, our diversified business has limited direct exposure and thus was not meaningfully impacted this quarter.
Unfortunately, during the quarter, we were disappointed with a project that reduced our payment revenue growth. This revenue reduction, combined with the Oriental contract change, contributed to a 3% revenue decline in the quarter. Delivering this project is a high priority for us and the team is actively working to resolve it. Our primary focus is to satisfy our client. We are also diligently working on innovating new solutions to differentiate and strengthen our value proposition to our clients and their customers.
To this end, we continue to see fast paced growth in our person to person ATH mobile application, which has over 700,000 registered users today. With the explosion of smartphones and tablets, ATH mobile is becoming part of the fabric of life here in Puerto Rico. From paying the babysitter to paying the food truck vendor, it further reinforces our ATH brand and today the service is free. In coordination with the financial institutions on the island, we are now working on a commercial offering that will provide new features to our merchants to capitalize on the rapid acceptance of the ATH Movil product. It is also worth noting that in September, Puerto Rico experienced the most significant power outage in 30 years.
But I am pleased to report that EVERTEC's backup infrastructure worked as planned and our business was largely unaffected. Moving on to Slide 6, I'll give you an update regarding PROMESA, known as the Puerto Rico Oversight Management and Economic Stability Act. The Federal Oversight Board was appointed September 1, and we are pleased with the overall composition of the Board and the strong Puerto Rican representation. Additionally, Governor Garcia Padilla presented his long term fiscal plan for Puerto Rico to the Oversight Board on October 14. The plan laid out the significant financial challenges of the island and the Board now has a better understanding of the severity of the situation.
Governor Garcia Padilla is not running for reelection and thus the election will bring a transition to the next administration, which will be tasked with the implementation of the 2017 plan approved by the Board. Additionally, the Board's Executive Director appointment deadline has been extended until mid January. We will continue to monitor the situation, but visibility remains unclear. We will have a better perspective when the new government is in place and the 2017 plan is finalized. That said, it was very clear in the Governor's presentation of the fiscal plan that investments are necessary to improve the government's IT infrastructure to reduce costs and improve efficiencies.
We continue to believe that EVERTEC is well positioned to assist the government to achieve these goals, leveraging our local workforce, knowledge of existing systems, and payments infrastructure. Additionally, the economic task force created under PROMESA and headed by Senator Orrin Hatch is working on compiling a report that will include recommendations on how to remove federal impediments that inhibit the growth of the Puerto Rican economy. This report is due to Congress on December 31. The task force is working through the challenge of obtaining reliable data on the economic, financial and fiscal situation in Puerto Rico, and they have called on and received proposals from stakeholders for law changes or initiatives to stimulate growth. During this difficult time in Puerto Rico, here at AVERTECH, we are focused on 3 things.
1, to deliver services that help the government achieve their goals 2, drive more transactions to our payment networks through innovations and service and 3, continue to position ourselves and our partners for opportunities that leverage our scale to drive attractive returns. Turning to our Latin America results on Slide 7. Revenue growth was significant with continued strong organic volumes, a hardware sale and the ongoing strong performance of the Processa acquisition. On a comparable basis, Latin America, excluding the hardware sale Processa, generated mid teens revenue growth and continues to outperform our expectations due to delayed client migrations. The LatAm team continues to pursue new opportunities as well as contract renewals.
Additionally, they were able to retain clients totaling approximately $1,000,000 in annual revenues that had previously indicated that they would be migrating off our platforms. As we mentioned on the last call, we now anticipate the majority of our client migrations to occur in 2017 and Peter will provide more details on the estimated potential impact In summary, although we anticipate headwinds in 2017 in both Puerto Rico and Latin America, we are pleased with our strategic progress, including having announced our 3rd acquisition within 12 months. 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 Q3 results and then review our financial outlook for 2016 and provide some comments on 2017. Turning to Slide 9, you will see the Q3 and 9 months revenue details. Total revenue for the Q3 of 2016 was $94,500,000 up 2% compared to $92,900,000 in the prior year.
We had a positive impact from the inclusion of the Q4 2015 expanded FirstBank relationship as well as the contribution from this year's Processa acquisition. This growth was offset by a project delay in our payment segment that negatively impacted revenues of approximately $2,000,000 in the quarter. Total revenue for the 9 months ended September 30 was $287,600,000 up 4% year over year. With respect to the segment mix, in the 3rd quarter, merchant acquiring net revenue increased 6% year over year to approximately 22,000,000 dollars driven by the First Bank merchant acquiring relationship. This growth was partially offset by a shift of revenue from the merchant acquiring segment to the payment processing segment, reflecting a new contracting arrangement with Oriental Bank in Q2.
This shift impacted the segment revenues growth by 6% to 7%. Also as a reminder, the First Bank transaction anniversaries this November. As we have experienced throughout this year, revenue growth was impacted positively by ongoing transaction growth offset by lower average ticket as well as other merchant mix shifts. For the 9 month period, merchant acquiring grew 10% year over year to $68,100,000 Payment processing revenue in the 3rd quarter was $27,600,000 approximately even with last year. Revenue growth was driven primarily by increases in our ATH debit network and card Oriental contract change I referenced.
This revenue growth was offset by the segment revenue associated with the change in the First Bank agreement and the terminated government lottery tax program, both of which occurred in the Q4 of 2015. Additionally, as Mac referenced, we had a project delay that impacted us approximately $2,000,000 in the quarter. The delay pertains to a contract renewal where we agreed to deliver an enhanced solution while we continue to process transactions on the existing solution. The delay prevents us from recognizing revenue until we deliver the solution and resolve the impact of the delay with the client. Our primary focus is to take care of our client and we are working diligently to deliver the new solution.
In the quarter, transaction growth in Puerto Rico was strong, growing approximately 8% year over year and this elevated transaction level has continued into October, in part driven by increased processing of electronic payments by government agencies. We also benefited from the recent legislative initiatives to require the acceptance of electronic payments for small businesses, although it's difficult to estimate the sustained impact at this time. For the 9 months period, payment processing grew 3% to $82,700,000 driven by the same reasons I previously mentioned. Business Solutions revenue in Q3 increased 1% to $44,900,000 Our growth was driven by the new government tax hosting service and other IT services, which added approximately $1,600,000 more than last year. This growth was partially offset by year over year decreases in our paper based businesses.
In the 9 month period, Business Solutions grew 1% to 136,800,000 dollars primarily reflecting growth in our core banking services, partially offset by lower item processing and IT services. Moving on to the next slide, number 10, you will find a reconciliation of our adjusted EBITDA. We incurred restructuring severance expense of $600,000 along with share based compensation of $1,400,000 Additional adjustments include transaction related expenses and the equity income in our subsidiary for a total of $700,000 Adjusted EBITDA for the quarter was 45,100,000 dollars a decrease of 4% from $46,900,000 in the prior year. Adjusted EBITDA margin was 47.8% and this represents a 2 70 basis point decline in our adjusted EBITDA margin compared to the prior year. Our Q3 adjusted EBITDA growth and our adjusted EBITDA margin percentage are explained in more detail in the next slide.
Year to date, adjusted EBITDA was $140,000,000 approximately even with last year. Moving to Slide 11, you will see a year over year adjusted EBITDA margin bridge for Q3. Starting from the left column, the bridge begins with the adjusted EBITDA margin in the Q3 of 2015 of 50.5%. Moving to the right, first, we were positively impacted approximately 20 basis points by our revenue mix, which was then offset by approximately 100 basis points by the project delay I referenced. 3rd, investment expense increased year over year by approximately 90 basis points, primarily due to incremental investment expense related to our Latin American growth initiatives.
4th, the business to business tax impacted us by approximately 60 basis points or approximately $500,000 in Q3. And as a reminder, this tax will anniversary in Q4. Additionally, in 2016 and in the future, we no longer receive expense offset related to maintenance expense reimbursements provided for in the Popular merger agreement, which impacted us approximately 40 basis points and this will anniversary in Q3 2017. The combined impact of these referenced items resulted in an adjusted EBITDA margin of 47.8 percent for the Q3 of 2016. Moving to slide 12, adjusted net income in the 3rd quarter was $34,400,000 approximately even with the prior year.
Our effective tax rate in the 3rd quarter was 7.7% and includes the impact of a discrete tax item in the quarter that decreased the rate. For the year to date period, we had an effective tax rate of 9.7% and we expect this rate to approximate the full year rate. Q3 adjusted earnings per diluted share was $0.41 an increase of 5% from $0.39 in the prior year and reflects the benefit of a lower diluted share count as a result of our share repurchase program. Year to date, adjusted net income was $93,400,000 up 4% and adjusted diluted earnings per share was $2 to our year to date cash flow overview on slide 13, net cash provided by operating activities was approximately 125,000,000 dollars roughly even with the prior year, and this includes the adverse impact of restatement related expenses earlier in the year, 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, the Processa acquisition was approximately 6,000,000 dollars Capital expenditures year to date were approximately US31 million dollars We expect CapEx for the year to be at the high end of our US35 million dollars to US40 million dollars range, driven in part by increased point of sale hardware purchases. Next, the company made a total of approximately $16,000,000 in principal debt payments, dollars 3,600,000 for the credit waiver amendment fee and a reduction of approximately $2,000,000 in short term borrowings. Finally, year to date, we paid cash dividends to stockholders of approximately $22,000,000 and repurchased approximately $30,000,000 of common stock for a total of nearly $52,000,000 returned to our shareholders. We have approximately $90,000,000 available for future use under the company's share repurchase program and we recently announced another $0.10 dividend to be paid on December 2, 2016 to shareholders of record as of November 14, 2016. Our ending cash balance at September 30 was $45,000,000 an increase of approximately $16,000,000 from our 2015 year end balance.
Moving to Slide 14, before I review a summary of our debt at the end of the Q3, I'd like to comment on a future change to our credit facilities. Earlier this week, we received commitments to extend the maturity of our Term Loan A and revolver facilities. We received commitments to amend and extend $215,000,000 of our Term Loan A $65,000,000 of our revolving credit facility to generate 2020 from the existing April 2018 maturities. The remaining $35,000,000 of our existing Term Loan A and the $35,000,000 of our existing revolver respectively will remain in place and mature as scheduled in April 2018. As consideration for the extension, we agreed to pay 100 basis point consent fee and to amend the coupon to a LIBOR plus 2 50 basis point fixed rate or a 25 basis point increase from our current rate, which varies based on our leverage ratio.
We also agreed to amend and reduce the Maxim senior secured leverage ratio from 6.6 times to 4.75 times and then to a further step down after 24 months to 4.25 times. And finally, the amendment requires scheduled amortization payments over the extended term. We expect to close the transaction later this week and total cash charges are expected to be approximately $4,500,000 in the 4th quarter. Importantly, this transaction will closely align our Term Loan A maturity to our 2020 Term Loan B maturity and extend our favorable debt cost structure. As a reminder, we entered into a 1 year forward interest rate swap in the Q4 of 2015 on $200,000,000 of term loan B principal and the swap becomes effective in January 2017.
Previously, all of our debt was variable and the swap provides for approximately 30% of the overall facility to be at a fixed rate of approximately 4.4%. At constant current rates, we anticipate our cash interest expense to increase in 2017 approximately $2,500,000 because of the swap and refinancing. Now on to a summary of our debt for the Q3 of 2016. Our quarter ending net debt position was approximately 611,000,000 dollars comprised of the $45,000,000 of unrestricted cash and approximately $656,000,000 of total short term borrowings and long term debt. Our weighted average interest rate was approximately 3% and our net debt to trailing 12 month adjusted EBITDA has been reduced to 3.27 times from our year end 2015 multiple of 3.5 times.
As of September 30, total liquidity, which includes unrestricted cash and available borrowing capacity under our existing revolver, was approximately 125,000,000 dollars At this time, I'd like to provide you with an update on the status of our government receivables. Our receivable at September 30 was approximately $18,000,000 which is essentially flat with the balance at the end of 2015 and down from the Q2 balance. Given the government debt situation, the upcoming Puerto Rican elections and the PROMESA process, we continue to monitor our receivables accordingly. Moving to slide 15, I will now provide a review of our 2016 guidance. We are reaffirming our guidance ranges on revenue, EBITDA margin and adjusted earnings per share.
We expect revenue to be in a range of $382,000,000 to $388,000,000 representing growth of 2% to 4%. Our EBITDA margin guidance of 48% to 49% remains unchanged. Our adjusted diluted earnings per share guidance of $1.61 to $1.67 represents a growth range of 1% to 5%. Now turning to some comments on 2017, we have a number of items that are notable that I'd like to review. First, the Oriental contract change that was effective this past June will continue to have approximately 1% negative revenue impact through the first half of twenty seventeen.
2nd, in Latin America, we are currently estimating attrition of $7,000,000 to $10,000,000 in revenue related to client migrations and anticipate these to be evenly spread throughout the year. This estimate is based on migration dates provided to us by these clients. 3rd, the pending acquisition we announced should help partially offset these anticipated revenue headwinds, but we'll have a lower margin contribution as compared to TAM attrition, which is high margin card processing revenue. 4th, the CPI index for September was announced October 18 and was 1.5%, which will positively impact a significant portion of our business solutions revenue. Finally, although the impact of PROMESA remains unclear, we do anticipate some economic headwinds in Puerto Rico related to potential loss.
We look forward to competing for potential 2017 IT and payments initiatives as they arise. We are carefully monitoring the PROMESA process and we believe that the final 2017 fiscal plan should give us a clear perspective. We will update you with our full 2017 outlook next quarter. We'll now open the call for questions. Operator, please go ahead and open the line.
Thank you. We will now begin the question and answer session. And our first questioner today is Jim Schneider from Goldman Sachs. Please go ahead.
Good afternoon. Thanks for taking my question. Thanks for the early guidance and look on 2017. Can you maybe provide a little bit color on what's going on with the client migrations you mentioned? Is that a competitive takeaway from another card processor?
Can you give us a little bit of color on how many clients that is and the relative size of those?
Yes, Jen, this is Mac. So, we've been talking about this for about a year now that we had some clients that had notified that they were going to migrate based on the servicing that we've provided in the past. We have thought many of those would roll off in 2016 and now we believe those will roll off in 2017. The most of these have gone to different either they've either brought it in house, gone to competitors, but there's no really competitor concentration on these departures. And as far as customers, we're not naming any or sizing the individual customers, but it's multiple customers.
It's not just one customer. So again, it's something we talked about in the past. It occurred because of the way they were serviced in the past. We thought they'd leave this year, but they're not going to be leaving until next year. I don't know, Peter, if you want
to add anything? I'd just add that we didn't feel it was appropriate earlier to quantify this as we're still in the process of trying to retain the clients. And we feel that we have diligently explored that
to the fullest at this
time and was just responsible to share the amount with publicly. Yes. And as
we said earlier, we did save a minimal amount when we saved about $1,000,000 of revenue through our episode over the past year. They're gone until they're gone. So we're going to continue to try and see if there are ways to keep these customers. But we've been working on it for
a year now, and we
think this is going to have an impact next year.
Thanks for clarifying that. I guess I had assumed that they had already kind of were already in runoff mode. So that's helpful. And then maybe as a follow-up follow on to that. Can you maybe just give us, Max, from your comments on PROMESA, it sounds like you have some hope that you might actually benefit from some of the IT infrastructure initiatives that might get initiated under that plan.
Can you give us some kind of color about understanding it's early days, what form those kind of programs might take and if that's in fact a correct conclusion?
Yes. So it would be premature to tell you exactly what programs and plans are going to implement. What I would tell you is, if you look at the dialogue with Promethe people that we've talked to, it's very clear that economic stimulus is as important as creating more efficiency in the government. And given we're the largest employer on the island, the largest technology company, I believe there's an understanding that we're very well positioned to assist that. We've been building good relationships on the island with the government to make sure that we're positioned.
So we do think that's going to be an opportunity next year to some but you got to remember, once the programs are decided and put in place, it may have some impact in 2016, but beyond 2016 in particular 2017. 2017.
And I think another very important aspect of it is getting the respective agencies on a common platform. Central platform and leverage infrastructure across the government and we view that as a big opportunity for the government and ourselves.
Yes. And we talked earlier too. If you look at the transaction growth in our payments business, 8% is pretty good and a lot of that was because of government accepting payments and government initiatives. So we think that our businesses have the opportunity to benefit from some of the changes and improvements to the island.
And just we will learn more next quarter as the plan is taking shape. There was an initial document that was presented by the Governor, but that is under review by the Board and it will only be finalized after the new government takes shape. And that will give us a clear picture, which we'll share next quarter with everyone.
That's helpful. And Michael, just last one for me. On the margin commentary you provided on 2017, are you saying that the growth of those customer migrations is going to kind of flatten the margin profile heading into 2017? Or are you just going to get less margin expansion than you otherwise would given the incremental high incremental margins in your core business?
Yes. Well, we have high margins showing a typical payment processing business, which this is in Latin America. It's a card issuing business where we switch transactions for ATM and card products. And so if you lose that revenue, we use the same leverage infrastructure, so it's going to be challenging for us to offset the entire amount of the margin loss that we expect. We will obviously work towards that.
And then the other thing we highlighted in the script is that the acquisition pending acquisition that we expect to close in the quarter should partially offset that with its contribution, but won't fully offset it as we anticipate right now. So there will be margin pressure as a consequence of those two things.
Thank you. Thanks, Jim.
Our next questioner today is Bob Napoli with William Blair. Please go ahead.
Thank you. Just on the just to follow-up on the migration. The $7,000,000 to $10,000,000 dollars that you said is coming off equally, is that the amount of revenue that you'll lose last year next year? Or is the that and so the run rate going into 'eighteen is higher or is that the total maybe just if you I'd like to understand how much total revenue you're losing as I think?
Yes, Bob. 7% to 10% would be the accurate amount of revenue loss that we'd anticipate in 2017 as a consequence of the timing projected timing of those departures. The aggregate value of that is slightly higher, but in that range, that is the amount that we anticipate to impact 2017.
So the aggregate amount is more like 15,000,000
dollars No, no, no. No, it's a couple of million different. So the 7 to 10 is the view on what we
think would exit next year. Yes. But that does not factor in any organic growth on the base.
Okay. Then the migration I mean, are you through the clients that are going to migrate? Have you been able to are we going to see net additions of clients from here? Or I mean, I understand that those were long standing issues. And I know you've made a lot of organizational adjustments, Max, since you've been there.
But would we expect this to be the end of the migrations of materiality?
Yes. So, I mean, our view is, again, this is something we were facing going into 2016. Our goal in 2016 was to do 2 things. 1 is retain as much as we could and then focus on new business. This is what we believe today is what will depart based on historical decisions and we believe this is without understanding today the limit of that and that we've saved about $1,000,000 So, it would have been greater, but our efforts have saved $1,000,000 So, we think we have our arms around the issue of the past and that we're managing the business beyond that.
So we don't anticipate more beyond this.
Yes. And then Bob, just in terms of an annualized number, it would be 10% to 14% would be sort of the ballpark range of the aggregate volume.
Okay. And then as far as new business that you're adding and the acquisition, I guess, it would have been nice to see an acquisition in payment processing outside of Puerto Rico, but why the acquisition in Business Solutions and how much revenue and EBITDA does this add?
Let me answer so I'll try and answer a couple of pieces of that and then I'll hand it to Peter. One is we're still focused on new business because you asked about new business and then
M and A. Yes.
We're still very focused on new business in LatAm. As we said at the beginning of the year, we want to continue to ensure that we're adding new accounts in the new territories. Right now, we don't have anything to announce, but that's still a significant focus of the team. And it's kind of like M and A, we can't really talk about it until we have one to talk about. But on the M and A side, what I'd say, the team is still focused on opportunities in Latin America.
It's a priority for the company and we're continually looking at opportunities. This deal specifically, the valuation was very good and it really leverages existing capabilities and has some great synergies. So we like the valuation. We like the leverage and we think financially it's a great deal or a good deal. And I'll hand that to you.
Yes, I
would just add to that. This was we stated before publicly if we came across an opportunity here in Puerto Rico where we could leverage our scale and get real attractive returns on our capital that we would take advantage of that and this is an example of that. Until we close the transaction, we're not going to give further detail other than the purchase price. But we expect to close that in Q4 and we'll update everybody in advance of next year's guidance.
But Bob, it doesn't change our focus on LatAm. I mean, we said there are 3 types of deals, geographic expansion, product expansion and leveraging scale in Puerto Rico. And again, this is that third, but we're still focused on those that provide the opportunities in the other two buckets.
Great. Thank you.
Thanks, Bob.
Our next questioner today is George Mihalos from Cowen. Please go ahead.
Great. Thanks guys. Just wanted to ask as it relates to the 'sixteen guidance and what it implies for 4th quarter revenue, it's a pretty wide range. I think it's anywhere from sort of minus 1 to plus 5. Can you talk a little bit about the puts and takes that you've built into that?
And just to be clear, does that include any potential revenue from the Business Solutions acquisition?
First, we will not include now or ever any revenue from an acquisition until we announce it. So it does not include any revenue from the acquisition. Secondly, there are really 2 key puts. One is just uncertainty as we go through PROMESA here and just not knowing how that's all going to unfold here in the quarter. And the other is the project delay and just not knowing the exact resolution of that.
We debated bringing up the bottom of our range, but then ultimately decided to leave it where it was, just not knowing those two things. So that hopefully gives you a little color into our thought process and how we arrived at that number.
Okay. So it sounds like you're hopeful that you can resolve the $2,000,000 delay this quarter. Is that a fair characterization?
We're extremely focused on doing that, yes. It requires, obviously, us to deliver and the client to accept what we deliver and so forth. So we are working on that diligently.
Okay. And I know you guys don't want to include any revenue, obviously, until the acquisition closes. But is the thinking right now that from a revenue perspective, almost all of the loss contract headwind will be made up by the acquisition, but you're still going to have sort of a profitability delta or an EBITDA delta given the lower margins?
I think that's a reasonable way to consider it.
Okay. And just last question for me, the pipeline of new business in LatAm, anything new there? Do you feel any differently than maybe you have over the last quarter or so? Thank you.
Yes. So, no, nothing to announce at this time. As we said at the beginning of the year, we'd be disappointed if we don't announce them throughout the year. So, every quarter that we don't, I'm not happy. But this we'll continue to focus on it and when we have deals, we'll announce.
Thank you. Thanks.
Our next question today is a follow-up from Bob Napoli with William Blair. Please go ahead.
Yes. How is the business progressing in Colombia?
Yes. So I would
say we're very pleased with the performance of the business in Colombia. And as we told you, it the business organically in LatAm, the historical business grew well. And then we add in Processa, it grew exceptionally well. So we're very, very pleased with that acquisition. It's exceeding our expectations.
Yes. I'd just add with a little more specificity with a significant currency headwind, it's still mid teen growth even after factoring that in. So it's exceeded our plan and it's doing very, very well. Yes. And the other thing, Bob,
I would say, we don't have a history of acquisitions up until the last year and a half. Those that we've announced, we feel very good about how they performed post acquisition, which I think is a good sign for the company.
Is I mean, is your pipeline of I mean, I understand you're not going to announce anything, but do you feel like you're getting you're seeing enough opportunities now that fit to such that the likelihood of you closing attractive deals related to your goals are more likely today than they were a year ago or?
I don't think our thesis has changed. I mean, I think the region is complicated because every country, the industry is different. As I've said, Mexico started selling merchant acquiring businesses. In Colombia and some of the other countries, there's noise. Some of the processors may come on the market.
In some countries, there's nothing like that. So every country is different. It's complicated. To me, that should be our advantage. So I don't think our thesis on M and A has dramatically changed.
And I mean, the mid teens growth in Latin America sounds good. How do we think about that though? I mean, is it when you're looking at next year, essentially you have the migrations obviously. And I don't know, I guess ex the migrations, the ex the bad stuff is the good is that type of a growth rate sustainable or can accelerate?
I believe it is. I think we've got the same clients there and have the same trends in place. I think we can and aspire to do better by improving the solutions for the markets as working on and investing on that. And so that's our aim. And then obviously, we have to close business here and that would potentially improve that.
Last question, the tax rate for 'seventeen, what would you expect to be your
Yes, Bob. We expect that to approximate where we're exiting 16%, so right in sort of the middle of 9% and 10% or 9.5%, 9.7% -ish range.
I'm sorry, the revenue benefit from the CPI increase?
Yes. That's about $500,000 per quarter for 3 quarters.
$500,000 per quarter for 3 quarters starts the end?
Then we anniversary
it next quarter
in Q4. Okay. All
right. You get it in the Q4, it will be you get okay. All right.
Thank you. Thanks, Bob.
Our next questioner today is Tien Tsin Huang with JPMorgan. Please go ahead.
Hey, thanks. Just a follow-up on Bob's question just on the acquisition and deal front. Just any change in priority across the three business lines? I know Puerto Rico sounds like it's of a business solutions opportunity. Has merchant versus payment processing changed in priority for you?
What I would say is outside of Puerto Rico, we're still focused on the payments business. But again, what we do today is not just merchant acquiring, we do processing. So we're looking at different types of businesses as it relates to payments is the main target outside of Puerto Rico.
Yes. I'd just add that anything that could complement our business here in Puerto Rico on either the payment side or the merchant side, we obviously look for that as well in terms of Puerto Rico. And then otherwise, as we've always stated, our focus outside Puerto Rico is payment.
Got it. Any change in sort of the regulatory tone in some of the countries you're going after that, that might change the pace of deals?
Well, what we've noticed is that from a regulatory perspective, some of these countries have 1 or 2 processors or merchant acquirers and there's interest in more competition and the banks are looking for more innovation. So it's hard to predict. I think the pace of the industry changing some of the larger countries is going to increase, but the pace at which these assets turnover is hard to predict. Because if you're selling a straight merchant acquirer like Banamex, that's an easier transaction than if you're trying to break up a processor that has 10 or 12 banks participating. So there's I think there's an acknowledgment that the industry needs to shift, but how some of these assets unfold or transform themselves maybe a little bit less clear.
Okay. That's helpful to hear because it feels like the whole level playing field concept is getting louder, but hard to see what the real movement is on the ground. Thank you.
Yes. Thanks,
Tien Tsin. Our next questioner today is John Davis from Stifel. Please go ahead.
Hey, good afternoon, guys. I wonder maybe if
we could talk a little
bit about the 8% transaction growth in Puerto Rico and why that didn't translate to better revenue growth acquiring and processing and maybe what some of the puts and takes are there?
Yes. Hi, John. First, we're encouraged by the aggregate transaction volume, obviously, and that continues to be better than what we project. And so having that and then seeing that also continue in October is great. In terms of the conversion on the merchant line, really, we have the same trends in place.
1 is a continued lower average ticket price, which we're experiencing, and then the merchant mix shift, which based on the pricings we have with the respective merchants, larger merchants and the government, that doesn't translate into the same revenue growth as transactions or sales volumes.
Okay. But like on an apples to apples basis, small merchants, large merchants, are there any changes in the pricing dynamics or are those pretty stable?
No, it's the same. It's really the mix.
Okay. And then final one for me would be, I appreciate the puts and takes for the EBITDA margin this quarter. But as I look out into 'seventeen, I try and think about growth investments. When should we able to start to see those year over year changes be more flat? Basically,
when do
you think you're going to have the level of growth or investment spending kind of level out and stop weighing on the margin? Thanks, guys.
Well, I would say that in the investments that we have today, we've really made in 2 areas. 1 is with respect to having the Latin American management team that's in place and the account function that we've added. So that will anniversary this year. And then separately, in terms of products, we've continued to invest as we have to tailor products to suit the needs in each particular market as we continue our strategy of building products to certain markets. So we'd anticipate that to go on certainly through next year and then we'd have to revisit that.
But we'd expect some sustained investment on products going into next year. Okay.
That's it for me. Thanks, guys.
Thank you.
This will conclude our question and answer session. I would now like to turn the conference back over to Mac Schuessler for any closing remarks.
Great. Thank you. I want to thank everyone once again for joining us on today's call. I look forward to meeting and spending time with each of you and our analysts and our investors over the coming months. Hope you all have a great evening.
Thank
you. Please close the call.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.