Good afternoon, everyone, and welcome to the EVERTEC second quarter 2015 earnings conference call. Today's conference call is being recorded. At this time, I would like to turn the call over to Alan Cohen, Executive Vice President and Head of Investor Relations. Please go ahead.
Thank you, and good afternoon, everyone. Welcome to the EVERTEC second quarter 2015 earnings call. With me today are Mac Schuessler, our President and Chief Executive Officer, and Juan José Román, our Chief Financial Officer. A replay of this call will be available until Wednesday, August 12th. 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 not be taped nor otherwise reproduced without EVERTEC's prior consent. For those listening to the replay, this call was held on August 5th. Before we begin, I would 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 statement to reflect the events that occur after this call. Please refer to the company's most recent annual report on Form 10-K, filed with the Securities and Exchange Commission, for factors that could cause our actual results to differ materially from any forward-looking statements. During today's call, management will provide certain information that will constitute non-GAAP financial measures under SEC rules, such as adjusted EBITDA, adjusted net income, and adjusted net income per share. Reconciliations to GAAP measures and certain additional information are also included in today's earnings release. Before turning the call over to Mac, I wanted to let you know that we plan on participating in the upcoming Deutsche Bank Technology Conference on September 16th in Las Vegas.
We look forward to seeing many of our investors at the conference. I will now hand over the call to Mac.
Thank you, Alan, and good afternoon, everyone. Thanks for joining us on today's call. We are pleased with our second quarter results, and we are on track with our expectations for the year. Total revenue was $93.2 million, an increase of 2% compared with the second quarter of 2014. We generated adjusted EBITDA of $47.2 million, an increase of 4%, and adjusted net income per share of $0.44, an increase of 7%. Before turning the call over to Juan to take you through the quarter in more detail, I would like to comment on current economic matters in Puerto Rico, provide some insights on our Latin America business, and close with some thoughts on our strategies for 2015. Even with the challenging economy in Puerto Rico, we continue to see revenue growth across all our business segments.
Our performance is reflective of our leading market position on the island and the ongoing benefit from cash to card trends that are helping to drive our payments business. Many of you may be aware, the Puerto Rican government temporarily increased the local sales tax from 7% to an 11.5% effective July 1st. We worked hand-in-hand with the Puerto Rico Department of the Treasury, Hacienda, to ensure that the tax increase took effect as seamlessly as possible for our merchants. We undertook an advertising campaign directed towards merchants to elevate awareness of the tax change and informing them of the steps required to prepare in time. Members of our executive team were in the field visiting our merchants at midnight the night of the change, validating that the increase took effect as scheduled, and we were pleased that this change was implemented smoothly.
It relates to our business, the sales tax increase could be a benefit to our revenue in the merchant acquiring segment, since our fees are based on sales volume, which would include the additional 4.5% sales tax increase for approximately half of our merchant sales volume. Keep in mind that for some categories, the sales tax does not apply, including gasoline, utilities, and supermarkets. Said, it's too early to tell what impact the tax increase could have on overall consumer spending in Puerto Rico over time. Far in July, we have not seen a significant consumer spending change. Regarding the Puerto Rico debt challenges, we are keeping a close eye on developments. Let me emphasize that we have no credit exposure to any debt issued by the Puerto Rican government, its agencies, or public corporations.
To the extent that there is any negotiated debt relief, this should further strengthen the government's ability to pay its operating costs. Approximately 10% of our revenues are from the government of Puerto Rico, spanning many different agencies and contracts. Moreover, many of the services we provide to the government are considered essential. More than 40% of these services are funded by the U.S. federal government. We believe that the services we provide, which could be considered discretionary, represent only 1%-2% of our total revenue. Moving forward, we will seek opportunities to assist the government as it implements efforts to become more efficient. Turning to Latin America. Our payments-related businesses outside of Puerto Rico grew in the single digits during the quarter, which is not what it should be.
We continue to sign new business, including our first albeit small bank in Mexico and a major U.S. retailer in Costa Rica. However, we need to win larger accounts to return to double-digit growth. To that end, our new President of Latin America, Mariana Goldbarg, has been traveling extensively over her first two months to our Latin American markets in Colombia, Costa Rica, Panama, and Guatemala. Throughout her travels, Mariana has been meeting with employees, customers, and potential partners to assess our opportunities and challenges. She is reviewing the organization, our infrastructure, and our product offerings country by country. Some changes are already underway, but she is still developing a plan for our next phase of growth in LatAm. Regarding our priorities for 2015, I believe we are making good progress.
We are strengthening and aligning the management team to focus on key priorities, as evidenced by our addition of the President of LatAm. We are reigniting our corporate development initiatives. Our Senior Vice President for Corporate Development and Strategy started in June. We now have a new process in place to evaluate acquisition opportunities and strategic partnerships. We are continuing to focus on Puerto Rico and growing market share, which continues to be evident in our results. We are reviewing our key business areas such as our product and platform strategies, sales and account management processes, and IT operations and product delivery, which I will update you on in the coming quarters.
Lastly, as you saw in our release, our board of directors has approved an increase and extension of the company's current stock repurchase program for a total of $65 million available for future use through September 2016. I am pleased that we can be opportunistic in our share repurchases and have the capital flexibility to repurchase shares, pay dividends, as well as pursue other business development opportunities as they arise. Juan, the floor is yours.
Thank you, Mac, and good afternoon, everyone. I will now provide a detailed review of our second quarter results, comment briefly on our year-to-date performance. Then conclude by reviewing our financial outlook for 2015. Total consolidated revenue for the second quarter of 2015 was $93.2 million, up 2%, compared with $91.3 million in the prior year. By segment, merchant acquiring net revenue increased 7% year-over-year to $21.2 million, driven primarily by sales volume growth. A portion of the increase is a result of an income tax amnesty established by the Puerto Rico government to pay past due taxes during the second quarter of 2015, which represents around 2% of the growth. This growth was offset by lower volume for gas stations and utilities, led by the continuation of lower oil prices as compared to last year.
While oil prices are slightly higher than the first quarter of 2015, the gas stations and utility sales volume decreased as compared to last year. These decreases impacted our growth by about 1.5% in the quarter. Payment processing revenue increased 1% in the second quarter to $26.8 million, up from $26.6 million in the prior year period. Revenue growth in the quarter was primarily driven by an increase in our ATH debit network and processing transactions and accounts on file within our card product business. This growth was offset by a one-time benefit in the second quarter of 2014 of approximately $700,000 of revenue from the Department of Education program in Puerto Rico. Excluding this one-time benefit in 2014, payment processing revenue would have increased 3%. POS transactions in Puerto Rico increased 5% during the quarter as compared to last year.
Business Solutions revenue grew 1% to $45.3 million in Q2, driven mainly by our core banking business due to new services and an increase in volume for existing services related to the latest consolidation of banks in Puerto Rico. The increase was partially offset by a decrease in hardware and software sales of $660,000. Moving to expenses on a GAAP basis, our second quarter total operating expenses were flat compared to the prior year period. Cost of revenues, excluding depreciation and amortization, was $40.7 million, up $1.6 million or 4% versus the prior year, reflecting higher compensation expenses due mainly to the share-based compensation plan established at the end of the first quarter of 2015. Selling, general, and administrative expenses for the second quarter were $8.9 million, down approximately $1.5 million or 14% from the corresponding 2014 period.
This decrease reflects lower professional fees, mainly as a result of the debt offering during the second quarter of 2014 that was withdrawn, offset by higher compensation expenses, due mainly to the aforementioned share-based compensation plan. Depreciation and amortization expense decreased by $400,000 or approximately 2% compared with the prior year, primarily due to lower equipment depreciation expense. Income from operations for the second quarter was $27.6 million, an increase of 9% compared with the corresponding 2014 period as a result of our increase in revenues, cost-containment initiatives, and leverage in our business. Total non-operating expenses were $5.2 million, a decrease of $500,000 from the prior year. Partially due to lower interest expense of approximately $300,000 as a result of the lower outstanding debt balance. We recorded a GAAP income tax expense of $2.1 million in the second quarter.
On a cash basis, our income tax expense was approximately $1 million. As of June 30, 2015, we had approximately $24 million of gross NOLs available to offset future tax payments related to our operations in Puerto Rico. Adjusted EBITDA for the second quarter was $47.2 million, an increase of 4% from $45.5 million in the corresponding 2014 period. Adjusted EBITDA margin was 50.6%, an increase of 80 basis points as compared to the second quarter of 2014. The increase was driven by revenue growth as well as cost-containing initiatives and leverage in our business. Adjusted net income in the second quarter was $34.2 million, up 6% from $32.2 million in the prior year. Adjusted net income per diluted share increased 7% to $0.44 from $0.41.
Moving to our balance sheet, as of June 30, we reported $38.8 million of unrestricted cash and $661.5 million of total short-term borrowings and long-term debt. During the quarter, we made a mandatory repayment of approximately $4.8 million on borrowings under our Term A and Term B senior secured credit facilities, paid $16 million on our revolving facility, and paid dividends of $7.7 million. As of June 30, total liquidity, which includes unrestricted cash and available borrowing capacity under our revolver, was approximately $135 million. As we pay down debt in the second quarter, our net debt to adjusted EBITDA ratio moved under 3.5 times. Having reached this level, our credit agreement provides for a reduction of 25 basis points in the applicable margins in both our term loans and our revolver, representing approximately $1.6 million annualized interest savings. Such reduction will become effective in August.
For the second quarter, our free cash flow, defined as adjusted EBITDA minus CapEx, cash interest expense, and cash income taxes, was $28 million compared with $32 million in the prior year. The decrease is due to a higher CapEx during the quarter versus the same period last year as a result of the timing of the investment. We continue to expect total CapEx for the full year to be within our projection of $30 million. I want to briefly touch on our year-to-date results. Total consolidated revenue was $184.6 million, up 3%, compared with $178.8 million in the prior year. Adjusted EBITDA year to date was $92.8 million, up 2%, and adjusted diluted earnings per share was $0.83, up 4%. Regarding our 2015 financial outlook, we're tracking well year to date, and our guidance remains the same.
We continue to expect total consolidated revenue to be between $368 million-$372 million, for growth of 2%-3%, and adjusted EBITDA growth to be between 3%-4% in 2015. Our adjusted diluted earnings per share guidance of $1.68-$1.72 remain unchanged. We will now open the call for questions. Operator, please go ahead.
Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment while we pull for questions. Our first question comes from Bryan Keane of Deutsche Bank. Please go ahead.
Yeah. Hey, guys. Mac, what would be the impact to EVERTEC from a Puerto Rico default? I know you talked about it a little bit, but can you just talk about the different angles that default would cause to you guys directly?
Yeah. First off, we can't really predict the future. Keep in mind, again, we're not a creditor to the government or any of the public utilities. Most of the business that we do with them, or a little bit less than half, is funded by the U.S. government. That would still be funded, and we believe it would still be paid. The remainder is primarily what we consider mission-critical. Most of our contracts don't require that we continue to pay them. They're mission-critical, and we believe that those would be important services for the government to continue. Like I said earlier, by mission-critical, again, we run the Justice Department systems. We run a lot of systems
Across the island. There is probably 10%-20% that you could consider discretionary of the total spend that the government has with us. Maybe 1%-2% of our total revenue that could be considered discretionary, that they might cut back. We don't foresee that. That they might cut back and that you could consider potentially at risk. What I would also say, though, as the government experiences these changes, they're rolling out, as you saw, we helped them roll out their new sales tax program across all of our merchants. They're talking about a new value-added tax. As they look at different ways to create efficiencies in the governments, or as they look at new tax regimes, those could actually be opportunities. That's sort of how we view the rest of the government. Do you want to add anything, Juan?
Yeah, Mac, let me add. In addition to that, our accounts receivable have remained the same. Really, in term of collection, we have not seen any change, as compared to the past. Actually, have decreased a little bit compared to last year. So far, and I think it's key to Mac's answer, is that we don't have credit exposure at all to the government. Immediately, there will be no impact to our business, to our day-to-day.
I mean, we are staying very close to the government. We're staying close to Hacienda, our customers. I mean, it's something we're very actively managing. That's sort of our view.
Would you see any impact to consumer volumes?
No. Even July, actually, we have some preliminary numbers. It's very consistent. Even though the new sales tax, the increase in the sales tax was effective July, at least in terms of volume for the first month, obviously it's just one month, it has been consistent with what we have been seeing the whole year. So far, we have not seen any impact on the consumer.
Okay. That's helpful. I know international revenue growth was 6% last quarter. It sounds like maybe it was low single digits this quarter. I didn't hear the number, what international growth grew at.
For the payment this quarter, it was 4%.
4%. The softness we saw in payment, does that rebound going forward, or should it stay at this low single-digit level, Juan?
I think we'd expect a little bit better in the second half of the year. We're implementing certain customers within Q3. I think it will be something around 5%-6%.
Even going into the last call, getting on board here, it was quickly clear that we needed to change how we're approaching LatAm. That was why we immediately brought in a professional, bringing in Mariana early on as part of the strategy. We're not pleased. Look, even if it goes from 4% back to 6%, back to 9%, that's not where it needs to be from a company perspective. Clearly, that's what Mariana's on board to do, but that will take some time.
Okay. All right. Thanks for the color.
Yep.
Our next question comes from Tien-Tsin Huang of J.P. Morgan. Please go ahead.
Hey, guys. It's Stephanie Davis on for Tien-Tsin. Thanks for taking my question.
Throw us off there.
My first question. The last time there were PREPA default fears, you guys saw a bit of an impact on consumer confidence, and some volumes took a hit. Could you talk a little bit about the current situation with PREPA and the government and any potential impacts you're factoring in from this?
No. Stephanie, this is Juan José. We don't have a direct business. Some minimum amount of revenue, less than $10,000 in a year. We don't have any exposure really to public corporations. It's just minimum. Our services is more with the central government. As Mac said, close to half is federally funded. Even the negotiation or the changes in PREPA, it will not have any impact on EVERTEC.
On consumer confidence front, there's no impact of that at all either? There's less concern about that right now?
Well, it's early, right? As I mentioned, in July, we saw some preliminary numbers for July already. The number of transactions continued to be consistent to what we saw in Q2. At least, initially, we're not seeing. Keep in mind, the expenses, the consumer spending, in our case, don't include the big tickets like auto or construction. That might see a different impact, right? The day-to-day consumer actually continued to be kind of in line with what we saw in Q2.
Understood. Are there any pricing levers you could pull domestically if volumes do, for some reason, take a hit? How long would it take to kind of push that through?
Well, as a reminder, in our merchant business, assuming the volumes stay the same, it might be positive because of the increase in the sales tax. We generate revenue based on the dollar value, right? Assuming, let's say, exactly the same volume, actually, we can see some upside in our revenue, just because of the increase in the sales tax.
All right, guys, thanks for taking my call.
Thank you.
our next question comes from James Snyder of Goldman Sachs. Please go ahead.
Hi, this is Jordan Fox on for Jim. In terms of the Colombia opportunity, I was hoping you could provide an update as it relates to securing a banking partner in that market. More broadly, I guess since the last call, what have you guys learned in terms of evaluating the most appropriate go-to-market strategy there? Thank you.
Sure. As I said, I'll speak a little bit first about Mariana moving into her job and how that relates to Colombia. Mariana has spent a lot of time on the road. She's been to Colombia, she's been to Guatemala, she's been to Costa Rica several times because that's where our employee base is. She and I actually spent time together in Colombia in Cartagena, which is where the annual banking conference is, and we actually met with the president of our customer there. It is a bank customer. It's small, but it's a growing bank. What I would say is, and I said it earlier on the call, there's been a lot to be desired on the execution of bringing up that platform. We now have a customer up.
We're still building some capabilities and features, and Mariana is building a plan to how does she commercialize that to grow it in Colombia. There's still work to be done. She's already been on the ground. We've met with the customer. We've determined additional requirements that we need to complete before we can fully launch it. That is a focus.
Got it. That's very helpful. Just given the economic background in Puerto Rico currently, what trends are you seeing in regards to same-store sales, credit versus debit volumes? Any other things that you might highlight here?
Regarding the volume, as I mentioned, we saw in the quarter our POS transactions around 5%. July is around 5% again. It's consistent. If the increase in the sales tax will have a real impact, we have not seen yet. Obviously, it's just one month, but it's a good indicator. It is consistent. It's 5% growth, which has been consistent for the last, I think it's nine months now.
I think we have to keep in mind, too, you have to remember that one of our largest customer absorbed one of the other banks on the island, so we're seeing the benefit of that. We have a significant amount of everyday spend, and consumers are still spending. The problem right now that you're reading about in the press is primarily with the government. Consumer spending, the initial indicators are that it's still holding up. Everyone's question on the call is what happens to consumer confidence long term? We can't project that, but we can tell you the early indicators are that there's not an immediate impact based on what you're seeing on television with the government.
Got it. Are you seeing any differences as it relates to credit versus debit volumes?
Not really. No. It's consistent with No. Credit and debit, the use of it, the number of transactions is just consistent. Nothing really to call out.
Okay, thank you.
Our next question comes from Sara Gubins of Bank of America Merrill Lynch. Please go ahead.
Hi, this is actually Payom Bagheri calling in for Sara Gubins. I just want to go back on the Doral question. How much of a benefit was Banco Popular's acquisition of Doral assets in the quarter? Was there any one-time project work to call out?
In the quarter? Not really. What will happen is that in the implementation, the integration of Doral Bank into Banco Popular, we assisted Banco Popular with the process. That it show up as part of our IT consulting services. The reality is that substitute other projects that we have with the bank because the priority was the integration. It kind of pushed back most of the work that we were, other priorities, right? The priority was integration. What we do expect now that it's already integrated is to continue with the projects that were put in hold for a while just to integrate Doral. No surprise really in the quarter, at least in terms of the special project. Definitely we start in the month of June. We integrated, we start having the accounts in our files.
We start processing for the bank the incremental loans related to the acquisition. We have, let's say, one of the three months of the impact of Doral Bank. Obviously, it will be a positive for the remainder of the year.
Got it. Okay. Just switching gears a little bit, are you subject to the new 4% professional services tax that is expected to be in place from October 1st to the end of March of last year?
Yes, we are. It will be the way it works is that is the business-to-business. There are certain services that we do pay today, the sales tax is 11% now. It's for the remainder of the B2B that didn't have before sales tax that we will have the 4%. We will be subject that effective October 1st. That we consider, we evaluated about looking into our guidance, right? To reaffirm our guidance. Even with we will see an incremental cost. Because of the year is progressing, we still will be within our. We're very comfortable to be within our guidance.
Got it. Okay. My last question is, are you seeing any pushback on merchant acquiring fees? Is there a more difficult pricing environment?
No. We haven't seen a noticeable change in the pricing environment in Puerto Rico.
Okay. That's all I had. Thank you.
Our next question comes from Smiti from Morgan Stanley. Please go ahead.
Hi, thanks. This is Vasu Govil for Smiti. First I just wanted to confirm if the EPS guidance includes any accretion from the increased buyback authorization.
Not for this one. When we provide our original guidance, we did consider some of the buyback. This increase that was just approved today does not really change our guidance for the year.
Understood. Thanks. Then just maybe, can you talk about the pipeline for potential M&A and JVs or partnerships in markets outside of Puerto Rico? Particularly on the JV front, is that still the primary strategy for international expansion? To the extent that it is, can you talk to us about the types of discussions that you're having with potential bank partners, and what could be the potential catalyst for some of these banks to actually formalize a partnership with EVERTEC?
Sure. I am happy to give an update just generally on how we view our progress in corporate development. As I said on the last call, we brought in a resource to specifically focus on corporate development strategy. He started a couple of months ago, he's making very good progress. I think of corporate development for EVERTEC in sort of four different buckets. One is identifying deals in the marketplace. The second is evaluating those deals, going through the rigor of the financial analysis, sort of a strategic review to see if they make sense for our company. The third is the negotiation process. Once we find a target that we like, going through the process to actually win and close the deal. For us as well, the fourth piece is to process it through the regulators because we fall under the Bank Holding Act.
We also have regulatory requirements in some of these different countries. What I would tell you is the first two pieces I talked about, identifying deals in the marketplace and having a rigor around evaluating possible deals, we're making very good progress. We're looking at deals in multiple countries. We're putting those through a process to evaluate those. There's nothing at this point that I can really declare as a deal we're ready to do. When we're at that point, I'll let you know. I do think those first two pieces, getting a good perspective on the market and having an ability to evaluate deals, we've made significant progress.
Great. Thank you. Thanks for the color.
Our next question comes from John Williams from Topeka. Please go ahead.
Hey, good evening, guys. Thanks for taking my question. Just had a quick question for Mac, it's a little bit more detailed version of a little bit of what you were just talking about. A lot of the questions we've been getting about just the background on what was going on in terms of winning new deals outside Puerto Rico, the questions are related to this. I guess if you could just help us out by giving a little more detail on what was being done before, what wasn't being done before you joined, and what you're doing now, like some specifics just around how you approach these different markets.
I know they're all different, I think one of the challenges people have in understanding what potential catalysts are going to come in is at least the fact that they don't necessarily understand the sales cycle and the sales process. It'd be helpful to get a little more detail on that.
Look, I'm happy to give as much detail as I can right now. I can't really speak to the past and what the previous sort of regime did. I can tell you when I walked in, having a robust view of what deals were available in the marketplace, what assets were attractive, even if they weren't currently on the market, that was not readily available. Having a perspective on the market and deal opportunities is something that we now have. Putting those through an evaluation process, figuring out what type of assets would we purchase in a Colombia, or would we purchase in a Costa Rica, and building a thesis on what makes sense for our business and evaluating those, that is something we now do.
I can't really give you a view yet. It would be disingenuous to try and give you a view yet on what acquisitions will look like in these different markets. Over time, that's sort of the next phase of where we'd like to be.
Are you finding as you go through that customers will start with one particular product or type of product and then bring that on and then maybe consider adopting other things and other verticals perhaps that you guys are offering, or is it really very much dependent on the country that you're in at that particular time?
It's dependent on the country. You have to be opportunistic. You may find some markets where all the merchant acquirers are still owned by banks, and they don't have any plan to change that because they still want to subsidize deploying terminals in the market so they can get the interchange on the issuing side. In that type of case, you would go in and you would try and offer card product services where you actually help them with card issuance, manage those card accounts. You may even be the processor on the back end for their merchant portfolio, but they may still want to own it. In other markets, more mature markets typically is where you'll see a bank willing to sell their merchant portfolio. We're still assessing, and we're hearing different noise in the market.
You also may say, look, there may be a completely different way to enter the market, recurring payments, some type of direct payment systems between the banks. There are other sort of alternatives that we would need to evaluate thoroughly before we do something that was very different than a sort of an issuing deal or an acquiring deal. It's going to vary from market to market based upon the maturity of that market. If we treat every market the same, and we try and replicate deals that are being done in the U.S. and LatAm, then I don't think we'll make progress. We are looking at the markets to figure out the maturity level of each and what the most appropriate opportunity would be based on the market.
Okay. That's helpful. The two deals you mentioned earlier, Mac, are not material, but to your point, it sounds like a little bit of progress in that front and signing up a couple of smaller deals. Is that fair to say?
Yeah. What it shows is we're continuing to make progress. Again, LatAm growth, I won't be happy till it's back in double digits, quite frankly.
Thanks. Appreciate the color.
Yeah. Thank you.
Our next question comes from Bob Napoli of William Blair. Please go ahead.
Good afternoon. Mac, the company before you got there had some long-term objectives that they had when they went public, 8%-9% revenue growth, 10%-12% EBITDA growth. I know you've just been there a few months, and I know you're starting well below that. What are your thoughts on those as being viable long-term objectives as you get the corporate development machine rolling and ramp up growth outside of Puerto Rico?
Yes. The only thing from a growth perspective, I'm comfortable with this year's numbers. As far as future numbers, I think as we get closer to 2016, we'll have a view on that. As I said on previous calls, in order to get the company's growth where we want it to be, we need to do three things. Execute well in Puerto Rico, which frankly, I think we're doing, particularly given the environment. We continue to be very focused on our biggest customer here, very focused on how we manage the government, and very focused on how can we gain market share with disruption in the marketplace. The second piece is getting LatAm back to double digits, which is Mariana's job, and the third is the deal piece. I do think there's two pieces to your question.
One is the deal piece is important to get this company to the growth rate that everyone desires. Giving long-term guidance is not something that would be appropriate today. In the coming quarters, I think we'll have a better view on that.
Okay. Then, I missed part of the upfront of the call, I have another. With regards to Mariana, did you give any feedback on thoughts now that she's been on board and her thoughts of the opportunities outside of Puerto Rico and your thoughts along, having worked with her now for a few months?
Yes. Well, I would say her observations are similar to mine. First off, she spent a lot of time with customers, particularly the biggest ones, to ensure that their needs are being met, because retaining the customers we have is incredibly important. She spent some time with prospects to understand what opportunities might there be for new business, and she's sort of assessing her leadership team and the operations that she has today. I think she shares my original observations that, A, the opportunity is great for a player like EVERTEC, but that, B, we still have to get ourselves through this transformation from an IT department to professional services company, and that will be a big part of her strategy moving forward. She's already making some changes internally, ensuring that we're managing the biggest accounts, like I said, that we're focused on the biggest opportunities.
I think her observations were similar to mine. She's very focused on putting the strategy and the plan in place to get it where it needs to be.
Last question, any thoughts on Cuba as an opportunity?
No. What I would say is it's an interesting opportunity. I think it's going to be some time before it's a material market. I would put it sort of as very much an emerging market. We are learning more. There are delegations going from Puerto Rico to learn more about the market, to spend time with some of the business executives in that country, that is something we will definitely give attention to in the near term.
Great. Thank you.
Thanks, Bob.
Our next question comes from John Davis from Stifel. Please go ahead.
Hey, guys. Mac, maybe you could start by talking a little bit more about the tax increase. Not to be a dead horse here, but is there any chance that you could see the higher tax rate push more transactions to cash or the gray market? I understand the revenue is better, but if you lose transactions, could that offset some of it, or just thoughts around that would be great.
It's hard to predict. What I would say is the sales tax went from 7% to 11.5%. That wasn't for all categories, though.
Supermarkets, gas-
Right
gasoline, and utilities. Some of the biggest, it's almost half of what we process actually didn't get any increase. That's important because those are the day-to-day purchases of the consumer. It's not like would be an across the board 4.5% increase impacting the whole economy. Obviously, there is an impact, but in the day-to-day, which is, by the way, one of our stronger areas in the merchant side, which is supermarket, gas, and utilities, there is no impact at all.
What I would say generally about the Puerto Rican government is tax collections is a general area that they're focused on because they want more participation in the tax system, and they know that there's some avoidance today. Just like all governments around the world, electronifying payments is a way to accomplish that. One of the things Puerto Rico did about five years ago is every time you have a receipt in Puerto Rico, they put a lottery number on it to encourage consumers to request receipts. What I would say is we haven't seen it in the July numbers. I understand your concern. It's a concern that we should all be aware of, but the Puerto Rican government is very focused on continuing to try to get transactions electronified so they can get participation in the tax regime.
It's a risk, but right now, we're not seeing any negative impact.
Okay. Well, that's helpful. Juan, just a quick question. It looks like the acquiring margins for the first half of the year were a little bit better while processing was lower. Is there any meaningful changes to expense allocation or anything else that's driving kind of the difference in segment margins year-over-year?
Keep in mind, Q2 of last year, we have a, let's call it one-time, it was an educational program, was around $700,000 for the quarter that we didn't have this year, and it's basically all margins, right? That impacted the operating income for the segment in the quarter. That's mostly the impact. Besides that really is the mix of the allocation because of the increase or decrease in the sales volume. As you see, we have more merchant acquiring revenue, which is very profitable. It changed a little bit because, again, some of our allocations follow the changes in the revenue.
Okay. That makes sense. Thanks, guys.
Okay.
As a reminder, ladies and gentlemen, if you would like to ask a question, please press star then one at this time. Once more, we will pause momentarily to assemble our roster. Seeing no further questions, I'd like to turn the floor back over to management for any closing comments.
Again, I'd like to thank everyone for joining the call. I hope to see many of you at the Deutsche Bank conference in Las Vegas. For those of you who are unable to make that, we'd love to host you in Puerto Rico, particularly as we get into the winter. Thanks again.
Thank you. Today's conference has now concluded, and we thank you all for attending today's presentation. You may now disconnect.