Good day. Welcome to the EVERTEC second quarter 2016 earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star then two. Please note, this event is being recorded. I would now like to turn the conference over to Kay Sharpton, Vice President of Investor Relations. Please go ahead.
Welcome to the EVERTEC second quarter 2016 earnings call. With me today are Mac Schuessler, our President and Chief Executive Officer, and Peter Smith, our Chief Financial Officer. A replay of this call will be available until Thursday, August fourth. 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 July 28th. 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 performance are subject to known and unknown risks and uncertainties. EVERTEC cautions that these statements are not guarantees of future performance. All forward-looking statements made today reflect our current expectations only. We undertake no obligation to update any statement to reflect the events that occur after this call. Please refer to the company's most recent annual report on Form 10-K, filed on May 26th, 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. Also note that the completion of the filing of the 2015 10-K and restated historical financial results, we've provided in the earnings release a supplemental schedule reconciling the quarterly non-GAAP results to the most comparable GAAP results for 2014 and 2015. I'll now turn the call over to Mac.
Thanks, Kay, good afternoon to everyone. We're pleased to announce our second quarter results, as we exceeded our expectations in a challenging environment. I'll cover some of the quarter's highlights and provide you with an update on recent developments. Beginning on slide four, we have a summary of the quarter. Total revenue was approximately $97.7 million, an increase of 5% compared to the second quarter of 2015. We delivered adjusted earnings per share of $0.43, an increase of 7%. We generated significant free cash flow and returned approximately $21 million to our shareholders through stock buybacks and dividends. On May 26th, we completed our restatement and filed both our 2015 10-K and our first quarter 2016 10-Q, satisfying the credit agreement waiver requirements, which allowed us to return to our share repurchase activity.
I want to thank Peter, his team, and our auditors for their hard work in completing the restatement before May 31st. On slide five is an update on Puerto Rico. As you know, President Obama signed the Puerto Rico Oversight, Management, and Economic Stability Act, or PROMESA, into law on June 30th. PROMESA provides a framework to address the Puerto Rican debt crisis. A U.S.-nominated federal oversight board of seven voting members, ultimately appointed by President Obama, should be in place by September the first. The oversight board will further include the governor of Puerto Rico as a non-voting member. Working with the Puerto Rico government, the oversight board has broad powers to ensure that financial plans and balanced budgets are achieved with a goal of attaining stability and access to capital markets at reasonable rates.
PROMESA automatically stays all litigation and other actions against Puerto Rico, its agencies, and public companies to collect claims against them. The stay will remain in effect until February the 15th, 2017, may be extended. The law also exempts Puerto Rico from regulations issued by the Secretary of Labor relating to overtime rates for certain employees for the time being. Additionally, the bill establishes an economic task force to evaluate potential federal impediments that inhibit the growth of the Puerto Rican economy. Between September first and September 15th of this year, the eight-member task force, which has already been put in place and includes two Puerto Rican members of Congress, will provide a status update to Congress on the most urgent needs for consideration. Not later than December 31st, the task force will issue a report with recommended changes to existing laws.
Importantly, PROMESA provides that the oversight board may, in consultation with the governor, ensure the prompt and efficient payment of taxes through electronic reporting, payment, and auditing technologies. As for EVERTEC, we believe there will be opportunities to assist the government on progressive technology projects and electronic payment initiatives. While we are optimistic that this legislation is a constructive step forward, this is just the first step in a longer journey to economic recovery for Puerto Rico. Although we believe there will be austerity measures and reduced government spending as a result of PROMESA, we are hopeful that the removal of uncertainty will begin to encourage investment and provide economic stimulus over the long term. Moving on to slide six, I'd like to focus on our business highlights in the quarter. Puerto Rico remains a challenging environment, I am pleased with the team's execution.
Revenue grew approximately 1% and was impacted by the previously terminated government contract and other revenue mix shifts that Peter Smith will review. Card payment transaction growth was approximately 5% in the quarter, consistent with prior trends. There were three new business events in the quarter that I would like to highlight. First, through a competitive process, we were able to win a new contract with Oriental Bank. This will replace our existing contract with them, and while there are changes in the accounting that Peter Smith will comment on later, this is again an example of how our service levels on the island resonate well with the local business community. Second, as we anticipated, we signed a contract with the Puerto Rican government supporting the delivery of their new tax solution, which will benefit our third quarter.
Third, we are encouraged about the potential for new business as a result of the recent legislation that became effective on June 15th, requiring merchants with revenue greater than $50,000 to offer an electronic payment option. We are pleased to see an uptick on POS rentals as a result of this legislation. However, it is still too early to predict the impact of additional volume since we expect these to be smaller, low-volume merchants. Overall, though, we are encouraged to see regulation that is supportive of electronic seamless payments in Puerto Rico. Finally, we believe there will be further opportunities with the changes in the Puerto Rico economy and the enactment of PROMESA to leverage EVERTEC's scale in support of the island. Turning to our Latin America results on slide seven. Revenue growth was significant with the benefit of the Processa acquisition as well as a favorable year-over-year comparison.
After considering these items on a comparable basis, Latin America generated low double-digit revenue growth and outperformed our expectations. We also have a number of client migrations that have been pushed out to a later date. On a recent trip to Costa Rica and Colombia, I met with customers and noticed two observations. First, our integration of Processa is going well, and we expect to be able to leverage our position in Colombia to further grow this business in years to come. There's enthusiasm in the market about what Processa will be able to deliver with the backing of EVERTEC. Second, we have received positive feedback from our customers on our new account management structure. We continue to work on our customer service and won't be satisfied until we have delivered on our vision of excellence in innovation and customer experience.
Regarding new business, I'm pleased to announce that the LatAm team was able to sign a new contract in Honduras with Davivienda, as well as renew an existing contract in Costa Rica. While the dollar amount of the new business is not material, we are pleased that Davivienda, the third-largest bank headquartered in Colombia, expanded its relationship with us in a competitive process. We continue to focus on other proposals in our pipeline to build our business in the region. Turning to slide eight, you may have noticed our new branding in the presentation. This new logo, image, and slogan is meant to position the new and better EVERTEC. The tagline was changed from "Transaction solutions simplified" to "Technology that speaks your language." We want our customers to know that significant change is underway with the new executive team, new investments, and renewed commitment to service.
To our shareholders, this new branding translates into a focus on growth. Lastly, regarding that focus on growth, our corporate development team continues to focus on the M&A opportunities, and as always, we will update you with the specific information when appropriate. With that, I will now turn over the call to Peter.
Thank you, Mac, good afternoon, everyone. Before I begin my comments on the quarter, I want to note that with the completion of the restatement and the filings of our 2015 Form 10-K and the Q1 2016 Form 10-Q on May 26th, we satisfied the required compliance conditions of our credit facility waiver amendment and avoided further potential interest rate increases to our facility. I want to thank my team and our auditors for their diligent efforts. Additionally, we hosted our shareholder meeting this morning here in Puerto Rico with all proposals receiving overwhelming shareholder support. I will now provide a review of our second quarter results then update our financial outlook for 2016. Turning to slide 10, you will see the second quarter and six-month revenue for the total company and our segment revenue details.
Total revenue for the second quarter of 2016 was $97.7 million, up 5% compared to $93.4 million in the prior year. We had a positive impact from the inclusion of the Q4 '15 expanded FirstBank relationship, as well as a full quarter of contribution from the Processa acquisition in Q1. Total revenue for the six months year to date was $193.2 million and up 4% year-over-year. With respect to the segment mix in the second quarter, merchant acquiring net revenue increased 10% year-over-year to approximately $23.3 million, driven by our expanded FirstBank merchant acquiring relationship. This growth was partially offset by a shift of revenue in the quarter from the merchant acquiring segment to payment processing segment, reflecting a new contracting arrangement with Oriental Bank that closed in the last month of the quarter.
Specifically, Oriental sought to take more control over the contracting with their merchants and shift to a transaction processing arrangement. As a consequence, the scope of merchant acquiring work we perform has reduced, we are pleased to have won their business in a competitive process and look forward to our continued relationship. As we experienced in Q1, sales volume growth was impacted by lower average ticket, primarily related to gas prices, as well as other merchant mix shifts. Also, as a reminder, in the second quarter last year, we experienced stronger consumer spending in advance of the sales tax increase to 11.5%. For the six-month period, merchant acquiring grew 12% year-over-year to $46.2 million. Payment processing revenue in the second quarter was $28.2 million, an increase of approximately 5%.
Revenue growth was driven primarily by increases in our ATH debit network and card processing volume, Processa revenue, and the Oriental Bank contract change that I referenced. Additionally, our LatAm revenue growth was strong due to a favorable comparison in the prior year, which had a delayed contract renewal that reduced revenue. This revenue growth was partially offset by the segment revenue shift associated with the change in the FirstBank agreement and the terminated government lottery tax program, both of which occurred in Q4 2015. As Mac mentioned, we closed on the new government tax program contract, and it is expected to be a contributor in the third quarter. Additionally, as he touched on, we have experienced delays in the anticipated client attrition in LatAm. We continue our efforts to retain these clients and now expect the majority of the attrition to impact us in late 2016 and 2017.
In the quarter, transaction growth in Puerto Rico continued its trend, with payment transactions growing approximately 5% year-over-year for the quarter, and the trend remained steady in July. For the six-month period, payment processing grew 4% to $55.1 million, driven by the same reasons I previously mentioned. Business Solutions Q2 revenue increased 2% to $46.2 million. We experienced growth in our core banking business and in hardware sales, which was approximately half a million more than last year. This growth was partially offset by year-over-year decreases in item and cash processing, as well as reduced IT services. In the prior year, IT services revenues were elevated by work related to the Doral Bank conversion. For the six-month period, Business Solutions grew 1% to $91.9 million, reflecting the growth in our core banking services, partially offset by lower item processing and IT services.
Moving on to the next slide 11, you will find a reconciliation of our adjusted EBITDA detailing our adjustments to EBITDA. In terms of impacts related to the restatement, we incurred incremental expense of $2.3 million and otherwise had our typical adjustments for restructuring severance and share-based compensation. Total restatement cash expenditures were approximately $6 million and following GAAP, the lender consent fee of approximately $3.5 million is required to be deferred and amortized as interest expense over the life of the facility. Adjusted EBITDA for the quarter was $48.8 million, an increase of 4% from $47 million in the prior year. Adjusted EBITDA margin was 50%, and this represents a 30-basis point decline in our adjusted EBITDA margin compared to the prior year. Our Q2 adjusted EBITDA growth and our adjusted EBITDA margin % are explained in more detail on the next slide.
Year-to-date, adjusted EBITDA was $94.9 million, an increase of 2%. Moving to slide 12. You will see a year-over-year adjusted EBITDA margin bridge for Q2. Starting from the left column, the bridge begins with the adjusted EBITDA margin in the second quarter of 2015 of 50.3%. Moving to the right, we first benefited approximately 80 basis points from a favorable revenue mix. Second, we had a favorable impact of approximately 40 basis points due to an unusually high health insurance expense in the prior year second quarter related to a specific claim. Third, investment expense increased year-over-year approximately 80 basis points, primarily due to incremental investment expense related to our Latin America growth initiatives, as well as expenses related to corporate development. We expect these investments to continue. Fourth, the B2B tax and other operating expense headwinds impacted us by approximately 70 basis points.
As an update, the VAT tax that was legislated to replace the business-to-business tax in April was ultimately not implemented into law. Instead, the status quo 4% business-to-business tax was permanently extended by the Puerto Rico Legislative Assembly. As a result, we will incur a year-over-year expense impact of approximately $500,000 in Q3. As a reminder, this B2B tax will anniversary in Q4. Additionally, in 2016 and in the future, we no longer receive an expense offset related to maintenance expense reimbursements provided for in the Popular merger agreement, which impacted us approximately 30 basis points. The combined impact of these referenced items resulted in an adjusted EBITDA margin of 50% for the second quarter of 2016. Moving to slide 13. Adjusted net income in the second quarter was $32 million, an increase of approximately 4% from $30.9 million in the prior year.
Our effective tax rate in the second quarter was 12.2% and includes the impact of some discrete tax items in the quarter that increased the rate. For the year-to-date period, we had an effective tax rate of 10.6%. We now anticipate an effective tax rate for the full year to be at the higher end of our previously expected range of 8.5%-10%, primarily due to the Processa acquisition and the impact of these discrete items in the quarter. Q2 adjusted earnings per diluted share was $0.43, an increase of 7% from $0.40 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 $63 million, up 6%, and adjusted diluted earnings per share was $0.84, up 10% from $0.76.
It is also important to note that the restatement lowered our full year 2015 adjusted earnings per share $0.02 from $1.61-$1.59, and our comparisons reflect these restated amounts, which are all available in the release. Moving on to our year-to-date cash flow overview on slide 14. Net cash provided by operating activities was approximately $69 million, a decrease of $7.3 million year-over-year, and this primarily reflects the impact of restatement-related expenses, settlement timing, and other working capital timing differences. There's been an approximate $4 million decrease in restricted cash as we substituted $4 million 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 million in U.S. dollars, as we had indicated in Q1. Capital expenditures year-to-date were approximately $19 million.
We expect CapEx to increase throughout the year and continue to plan for CapEx to be approximately $35 million-$40 million for the year. Next, the company made a total of approximately $10 million in principal debt payments, $3.6 million for the credit waiver amendment fee, offset by $3 million increase in short-term borrowings. Finally, year-to-date, we paid cash dividends to our stockholders of approximately $15 million and repurchased approximately $15.6 million of common stock, for a total of nearly $31 million returned to our shareholders. We have approximately $104 million available for future use under the company share repurchase program, and we announced today another $0.10 dividend to be paid on September 2nd, 2016, to shareholders of record as of August 9th, 2016. Our ending cash balance at June 30th was $36 million, an increase of approximately $7 million from our 2015 year-end balance.
At this time, I'd like to provide you with an update on the status of our government receivables. Our receivable at June 30th was approximately $20 million, which is up $1.7 million from the balances at the end of 2015. Given the government debt situation and the introduction of PROMESA, we continue to monitor our receivables accordingly. Moving to slide 15, we provide a summary of our debt. This slide reflects a quarter-ending net debt position of approximately $632 million, comprised of the just mentioned $36 million of unrestricted cash and approximately $668 million 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 was approximately 3.4 times. As of June 30th, total liquidity, which includes unrestricted cash and available borrowing capacity under our existing revolver, was approximately $112 million.
Moving to slide 16, I will now provide an update on our 2016 guidance. We are increasing our guidance ranges on revenue and adjusted earnings per share, primarily due to the positive results in the second quarter, partially offset by the impact of the business-to-business tax that I referenced earlier. We now expect revenue to be in a range of $382 million-$388 million, representing growth of 2%-4%. Regarding the revenue growth in the second half of the year, the Oriental contract change that I discussed earlier removes approximately 1% of revenue growth. Our adjusted diluted earnings per share guidance of $1.61-$1.67 represents a growth range of 1%-5%. While we experienced a higher adjusted EBITDA margin in Q2, we don't expect that to sustain given the ongoing investment we are making in the business as well as the expense headwinds that I discussed earlier.
Thus, our EBITDA margin guidance of 48%-49% remains unchanged. In summary, we are pleased with the operating performance in the quarter and in the first half of the year. While we remain cautious as we monitor the Puerto Rico economic situation, we remain focused on the execution of our annual goals and strategic initiatives. We will 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. To ask a question, you may press star then one on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. At this time, we will pause for a moment to assemble our roster. Our first question will come from George Mihalos of Cowen and Company. Please go ahead.
Great. Thanks. Thanks for taking my question, guys. Wanted to start off with, if we look at the higher revenue outlook you have, the higher guidance in revenue for the year, is that entirely due to the timing of some of the deconversions getting pushed out, or was there anything else that would have impacted it as well?
Hi, George, it's Peter. It's a combination. It's the contribution of Processa, which is performing very well, and it also includes the delay that you referenced.
Okay, great. Just back of the envelope, if we look at Puerto Rico versus international, did Puerto Rico grow in aggregate somewhere around 3%? Is my math right there or?
No, George, it's incorrect. It's 1%, and it was 1% down for a few reasons. In particular, we had a difficult comparable last year. We had Doral, which added a bunch of revenue. We had a bit of a spike in our merchant business related to the transition to the new sales tax. Then we just had a slight deceleration in the volume that we called out here with respect to the lower average ticket and the merchant mix that we experienced in the quarter.
Okay. Just last question from me as it relates to the First Data deal with Bancolombia. Any thoughts around that?
Hey, George, it's Mac. First Data in Bancolombia have had an issue in the relationship for the past, probably three years. It wasn't a surprise for us to see them extend that into merchant acquiring. I actually met with the Bancolombia guys when I was there maybe six weeks ago. It was obvious they were entertaining this process well before we bought Processa. We weren't surprised by that. I do think long term, what this means for the market in Colombia is that banks are making decisions to go outside of the existing model of the processors that are in that country, and they're looking for different alternatives. I think long term, this provides an opportunity for EVERTEC and Processa as banks look for different solutions.
The deal with Bancolombia was sort of in formation well before we did our Processa deal, and we had a relevant presence in the country.
Okay, thank you.
Yep.
Our next question will come from Jim Schneider of Goldman Sachs. Please go ahead.
Thanks for taking my question. I was wondering if you could maybe just comment on the overall kind of consumer spending environment you see in Puerto Rico. It would appear from the volume numbers that things aren't really any slower and if anything, are getting maybe slightly better if you strip out all the kind of merchant mix and other spread issues. Can you maybe kind of comment on, realizing that you can't really see the future that far out, what the overall consumer spending environment is and if there's any reason to believe that things would get worse from here rather than better?
This is Mac. I'll address it just from a sort of a qualitative perspective and then let Peter answer from a numbers perspective. What I would say is, as we've said on previous calls, the real fiscal issue in Puerto Rico has been with the government. We are hopeful now that PROMESA provides a way for the government to work through the debt issue. In the past, we haven't seen a significant impact to retail spend because, again, this has been a government debt issue. As PROMESA comes in and has to make some tough decisions, and we look at our austerity measures to cut back on government spending, it's unclear to us how that will impact the economy. Right now, we haven't seen it in retail spend. Yeah.
What I would just add to what Mac had said is that what has been impacting us is the lower average ticket. Transactions have held steady at 5%. Then we've experienced a lower mix, which generates lower revenue. As we have looked at the rest of the year, consistent with how we've looked at it at the beginning of the year and last quarter, we still have continued to project a little decline as we do expect some of the measures that are taking place in the year to lower sales a bit as we go forward, and view that as just being cautiously prudent.
That's helpful. Then maybe as a follow-up, to the extent that you do get some revenue growth sustaining into 2017 and you feel better about the overall backdrop stabilizing, can you maybe talk about some of the investment initiatives you're thinking about as you start to get a little bit more leeway on the OpEx side and kind of maybe rank order your top three priorities in terms of if you had an extra few million dollars here and there, what do you spend it on?
As we've discussed, we're spending a bit more CapEx. We're focused very much on Latin America and the product set that we have there. That's where the bulk of our investment and focus is going in terms of investment. With respect to Puerto Rico, we're looking to be opportunistic, as we've discussed before. Looking at opportunities as things are challenged on the island, and we can take advantage of our scale. To the extent we see something that's attractive in that capacity, that'll warrant some investment for us. Other than that, it's just sort of the maintenance capital that we're continuously spending, and really those are the areas that have our focus from an investment perspective.
All right. That's helpful. Thanks very much.
Our next question will come from Vasu Govil of Morgan Stanley. Please go ahead.
Hi, thanks for taking my questions. First, could you help us break down the revenue contribution from Processa as well as the FirstBank deal during the quarter?
Yeah, I'll provide just generally what the contributions are. Together, they represent the bulk of our growth. FirstBank's performance has continued to be very strong, consistent with what we had last quarter, and approximately 14%, if you look at it in terms of contribution to the merchant segment. We had the shift in Oriental and then the shift, as we described before, in the pricing and sales mix that we have that has impacted the overall net revenue for merchant. With respect to Processa, the revenue's consistent with what we talked about last quarter. If you look at our guidance lift that we did last quarter, it's slightly better than that, as I indicated.
We're very happy with the performance thus far. It's split roughly 80/20 between the payments segment and business solutions as well.
This is Mac. I would just say on both of those, just to reiterate, we're very pleased with the performance of both of those portfolios and businesses.
Great. That's very helpful. I guess it's too early for 2017 guidance, but just wanted to get your preliminary thoughts there. Based on what you're seeing in the macro environment, the progress you've made in Latin America, do you think there is potential for meaningful revenue acceleration in the next year, or do you think that that's unlikely in the absence of any meaningful M&A deals?
My view is 2017 is premature to talk about. We've got to see what PROMESA is going to focus on and [what the impact] Puerto Rico and our view on that. We've also got to take a look at, as we've talked about, LatAm over-performs in the quarter, and part of that is because some of those exits of accounts will occur in 2017. It's premature to really give you any sort of visibility in 2017. It would be disingenuous.
I agree with Mac.
I appreciate that.
We're focused on our planning, obviously, and looking at all aspects of Latin America, including the pipeline and so forth. All of that is going to ultimately come out in our guidance.
Got it. Thanks a lot.
Our next question will come from Bob Napoli of William Blair. Please go ahead. We'll move to the next question. Our next question will come from Bryan Keane of Deutsche Bank. Please go ahead.
Hi, this is Ashish Sabadra calling on behalf of Bryan Keane. I had a question around the Oriental Bank. You mentioned that they wanted to gain control over their acquiring business. I was just wondering if you can provide some more clarity on what drove that decision. Just a follow-up on that would be, how should we think about you mentioned that shifted the revenue from acquiring to payment processing, did you also get a one-time benefit in the quarter and how should we think about that benefit from Oriental Bank and payment processing going forward?
This is Mac. I'll talk a little bit about Oriental's strategy. What I would say is they wanted to get closer to the merchant relationship and actually own the sale and the relationship more intensely. What I'm very proud of is that this demonstrates that EVERTEC, we're not just a pure-play merchant acquirer and that we're able to provide whatever solution the customer so desires. The fact that they changed their model, we were able to adapt. It also demonstrates, as we've constantly said, this is a very competitive environment, and I can tell you we're competing with some of the biggest names in the industry that you would know, and we still won that business, and we're very pleased to keep them as a customer. I don't know, Peter, if you want to add anything.
I would add that first, there was no one-time fee associated with the transition in the contract. Mac summed up very well the reason for the change. As we look forward, as we indicated, it is about a 1% decline in our overall revenue. Just for clarification on the merchant segment, it is about a 6%-7% decline in terms of overall merchant revenue. Hopefully that is helpful.
Thanks for that clarity. Second question on PROMESA. Thanks for providing a lot of color on that front. Just looking at the two aspects. One is the government austerity. Could that affect your government revenues, and how we should think about it? The tailwinds that you talked about from greater electronic payments as well as more projects coming on. Would that be more a 2017 event?
When we talk about the government austerity, I think that is more related to they are the largest employer on the island, so are they going to have to make cuts from an employment perspective? It is less related to their technology investments because our thesis would be they are going to have to invest in new technology to automate the tax systems, to better automate the current government. Our focus during this period, I cannot predict what the impact would be because this is sort of uncharted territories. However, if you look at the past, this has been a tough situation, and we have been able to navigate well. During this period, we are going to focus on three things. One is we will continue, part of PROMESA is actually ensuring that they do automate the tax programs, they do automate payments, and they are demonstrating that with legislation today.
A part of our strategy or the first part would be helping the government in those efforts, I think we are very well positioned to do that because often we are the incumbent, and when we do automate these programs, we create jobs in Puerto Rico at EVERTEC, which is good for Puerto Rico. The second piece is continued consolidation on the island. As we have seen in the past with Doral and with other banks, as the economy continues to contract, we will benefit from that. The third is we will continue to focus on putting more payments transactions through our systems. We talked earlier on the call about the legislation that was passed that merchants over 50,000 now have to have a form of electronic payment as an option.
Those are the types of programs that we believe will put more payments transactions through EVERTEC. The way we're thinking about is what's going to be our strategy during this period, and it's going to be focusing on those three areas. We can't speculate exactly what PROMESA is going to do. Frankly, the members of that committee haven't even been named yet. We do have a strategy of how we're going to operate in this environment.
The only thing I would add to Mac's comments there would be that with respect to the majority of our significant contracts, we have renewed them. They are subject to fiscal funding clauses, which are natural and occur in most governments and certainly things that we deal with for years here at EVERTEC. The significant contracts have been renewed.
No, thanks for the color and good results and congrats.
Okay, thank you.
Our next question will come from Sara Gubins of Bank of America Merrill Lynch. Please go ahead.
Hi. Thanks. Good afternoon.
Thanks.
Should the hardware benefit that you got in business solutions continue, or was there anything one-off in nature around that?
Yeah. Hi, Sara. Just as a general goal of ours, we'll take hardware opportunities that are opportunistic and don't really seek them. This one was really, I would say, more of a one-off situation in Dominican Republic, where we actually had a client, and they wanted to have a hardware as part of their overall managed service that we provide. We accommodated that, and that's what that transaction represents.
Okay, thanks. Could you give us an update on the operational strategy that you've talked about in prior calls, where you're trying to focus on improving your efficiency and service?
In Latin America, specifically?
My sense is that it was in Puerto Rico specifically.
Yeah. I mean, we've been very focused across all of the geographies on better managing the accounts that we have and the relationships that we have. The fact in Latin America, we weren't effective at that in the past is why we put a team in place. What I would say is you can tell by the win with Oriental, you can tell by the win by Davivienda, we're doing a much better job at managing these relationships and renewing them and extending them.
Okay, great. Do you still have a way to go on that, or have you reached service levels that you're now happy with?
I would say, in Puerto Rico, we have very good levels. In LatAm, the feedback I've gotten from the clients is they're very happy with the account management piece. I would say I'm still not satisfied until I see the wins to demonstrate that they're actually creating results, financial results.
Great, thanks. Just last question. You've talked about it in response to a number of questions, but could you maybe just give us an outline of what you're expecting by segment for the full year for revenue trends, given a pretty broad range of moving pieces?
Yeah. We do have quite a few moving pieces. I think, with respect to just giving precision on the segment guidance, we'll not do that. I think we described what's going on in the merchant area with the puts and takes around Oriental, in particular. The other thing I'd remind you of is that we have the FirstBank, which has driven the most of our growth, that anniversary's November 1st. You can put those two together to kind of derive that. With respect to the payment segment, obviously, we're benefiting from Processa, and that has been a full quarter of that. We do have the government contract that is coming on. I want to call that out. That's going into the business solution segment as well. Those are, I think, more significant moving parts. Hopefully, that's helpful, Sara.
Great. Thank you.
Our next question will come from John Davis of Stifel. Please go ahead.
Hey, guys. Good afternoon. Peter, maybe one quick one. Just as we think about guidance on the second half of this year, do you kind of expect a little bit of acceleration of growth in Puerto Rico from the 1% and maybe a little bit of decel from the low double digits in LatAm? Just trying to think about on-island versus off-island growth in the back half.
I think that's correct. As we look forward, we have, as we've discussed, modeled out a bit of decline in the sales volume in Puerto Rico. As you indicated, we do expect to have some of the attrition in the back half of the year hitting us in Latin America. I think you got it right.
Okay, perfect. Mac, does First Data's entry into the secondary LatAm markets have any impact on your strategy or M&A plans, or maybe just broadly talk about the competitive landscape in the smaller Latin American markets?
Sorry, you said First Data's entry?
Yes.
Yeah. First Data's already in the market, we compete with them every day in Central America, and they've been in Colombia for quite some time, particularly in the issuing business. It doesn't change how we operate, and I don't think it changes the opportunity for us. As I mentioned earlier, I think really what you're going to find in some of these markets, Colombia, Mexico, they're really changing and that the banks are looking for alternatives beyond what they have in the marketplace today. Right now, everybody's doing business with the same processor, and they're looking for opportunities to differentiate themselves. I mean, Bancolombia, I know the senior guys there. It's a great bank. I would love to have that business.
Generally, what I would say is there are other opportunities there, and I think this is a sign of good things to come versus an issue.
Okay. Finally, I'm assuming no, but any update or comments on the DOJ investigation? Any ideas on timing?
No. I mean, our position remains the same, and we have no reason to believe otherwise. We think this is a very competitive market, and we compete for business every day. Oriental's a great example. We don't have a timeline from the government, but as soon as we have an update, we'll let you know.
Okay. Thanks, guys.
Thanks.
Our next question will come from Tien-Tsin Huang from JP Morgan. Please go ahead.
Great. Thanks so much. Just, Mac, the Oriental Bank, that deal, I'm wondering, can we interpret that at all to be a secular change in terms of banks wanting to do more full direct
Acquiring. I guess what I'm trying to get at is could that open up the opportunity to maybe service consortia down the road if they want to break up and do more direct acquiring and control things themselves? I'm just trying to read between the lines what else that could mean, if that makes sense.
What I would say is Puerto Rico is a more mature market like the U.S. than some of the other markets in Latin America, so I don't think it's indicative necessarily of anything going on in LatAm. I wouldn't overread. What I would say is Oriental Bank is a great bank that is really trying to compete through differentiating and getting closer to their customers because That's sort of their focus. I don't think it implies anything else about the other banks here, because the FirstBank deal is a 10-year deal. Popular is, we're still got another eight or nine years on that. I don't think it implies anything about additional changes to this market.
Like I said a couple times on the call, I think what it does indicate is they're very pleased with the service we provide, and they still want us to be their back office. I don't think it indicates anything about any other changes in this market.
Okay. That answers it well. Thanks for that. Just in terms of that change to a processing deal only, is there any offset in costs that we can consider given the change?
We sustain roughly the same margin, obviously, we're doing less work, there's less profit that we make, as we called out, there's a revenue impact of about 1% on the company.
Okay, understood. Just, I guess I'll jump off the line, I always ask that question around just BPOP or Banco Popular and sort of their IT spending, sort of given this environment. Any change there in terms of visibility or predictability of that business?
What I would say is, I think with all the changes that are going on in Puerto Rico, there are opportunities for Banco Popular to do more work for the government as well on some of the banking services side. Again, if some banks choose to exit or are forced to exit the market, I think Popular will be the beneficiary of that. It's not easy to predict. A lot of it's recurring, it is predictable, as far as the incremental, I'm optimistic that, again, as there are changes in Puerto Rico, they'll be the beneficiary of those changes, subsequently, we will be as well.
Yeah. As I indicated last call, we have a very active schedule of work that we're performing with them collaboratively, and that's still unchanged.
That makes sense. Thanks for that.
Thanks, Tien-Tsin.
Again, if you have a question, please press star then one. Our next question will come from Bob Napoli of William Blair. Please go ahead.
Thank you. Appreciate that. Just on. I'm not sure what answer you can give me, but I don't think it's The pipeline of business, both organically and inorganically, if you could give, I know you don't want to overpromise, but I was just wondering what the opportunities are. As you sit here today, Mac, and from when you came on board, are you seeing as many opportunities for new business organically and inorganically as you thought you would? Is a pipeline building? Maybe if you could just give some color on organic and inorganic pipeline and what types of things are out there would be helpful.
Sure. Yeah, I know. Mind you, Bob. What I would say is on the M&A front, the inorganic side, we're very pleased that we're constantly looking at opportunities, and they exist in the region, and I think we have a unique visibility into that pipeline. A pipeline doesn't equal a deal. We won't really talk about or get you excited about something until we have something to get excited about. There are opportunities in the region, is probably the best way to put it, and several of those opportunities are visible to us. On the organic side, I would say the underlying trends in Latin America as far as the rise of middle class and the adoption of electronic payments is very healthy.
Once we get past the issue of these migrating accounts, are able to add new business, I think we'll get the organic growth where we need it to be. What's happening is we're over-performing a bit this year because some of the migrations we anticipated are getting pushed out a bit. That's that phenomenon. I think I'm very pleased with the region within which we operate. I think there are opportunities both organically and inorganically.
Okay. The migrating accounts, any chance that they won't migrate, or is that just timing?
I'm smiling because they're not gone till they're gone, and that's what I tell my team. These are accounts that have made a strong indication that they contemplated over this sometime because we were not managing them effectively from an account management perspective. This is going to be a real impact. We are going to work very, very hard at retaining them the best that we can. Right now, given we didn't have the function in place, we will see some migration. We're continuing to try and save what we can, and if we save something significant, we'll let you know.
Last question. You added another key piece to your team during the quarter, a gentleman from Visa. Is your team complete at this point, or are there other key hires you're looking at or opportunities to hire talented people to add to your senior team, or is the team set?
No, the team is set in that the last thing I wanted to do was get someone to help manage the product and marketing function. That was sort of if I looked at the strategic hires that I need to make, it's corp dev, it was someone to run LatAm, and then a team underneath that. It was the CFO, and then it was product and marketing. As far as strategic hires to really help us focus on our strategic initiatives, we're finished.
Great. Thank you.
All right. Thanks, Bob.
Ladies and gentlemen, this will conclude our question and answer session. I would like to turn the conference back over to Mac Schuessler for any closing remarks.
Again, thank you for joining the call. We're pleased with the results, and I hope in the coming months, I look forward to seeing each of you as we travel to different locations. We look forward to keeping you updated on our results. Thank you.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.