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 Q2 2015 earnings call. With me today are Mac Schuessler, our President and Chief Executive Officer and Juan Jose Roman, our Chief Financial Officer. A replay of this call will be available until Wednesday, August 12. 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 5. Before we begin, 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 ks filed with the Securities and Exchange Commission for factors that could cause our actual results to differ materially from any forward looking statements. During today's call, management will provide certain information that will constitute non GAAP financial measures under SEC rules, such as adjusted EBITDA, adjusted net income and adjusted 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 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 Q2 results, and we are on track with our expectations for the year. Total revenue was $93,200,000 an increase of 2% compared with the Q2 of 2014. We generated adjusted EBITDA of $47,200,000 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 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 20 15. 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. As many of you may be aware, the Puerto Rican government temporarily increased the local sales tax from 7% to an 11.5% effective July 1. 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. As 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, sales tax does not apply, including gasoline, utilities and supermarkets. That said, it's too early to tell what impact the tax increase could have on overall consumer spending in Puerto Rico over time. So 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. First, 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. 2nd, 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. 3rd, more than 40% of these services funded by the U. S.
Federal government. We believe that the services we provide, which could be considered discretionary, represent only 1% to 2% of our total revenue. Moving forward, we will seek opportunity to assist the government as it implements efforts to become more efficient. Now 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 Alvia 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 Goldvard, has been traveling extensively over her 1st 2 months to our Latin American markets in Colombia, Costa Rica, Panama and Guatemala.
Throughout her travels, Marianna 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 Lat LatAm. Regarding our priorities for 2015, I believe we are making good progress. We are strengthening and aligning the management team to 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, and 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. And 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, 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 $65,000,000 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 2nd quarter results, comment briefly on our year to date performance and then conclude by reviewing our financial outlook for 2015. Total consolidated revenue for the Q2 of 20 15 was $93,200,000 up 2% compared with $91,300,000 in the prior year. By segment, merchant acquiring net revenue increased 7% year over year to $21,200,000 driven primarily by sales volume growth. A portion of the increase is a result of our income tax amnesty established by the Puerto Rico government to pay past due taxes during the Q2 of 2015, which represents around 2% of the growth.
This growth was offset by lower volume for gas station and utilities led by the continuation of lower oil prices as compared to last year. While oil prices are slightly higher than the Q1 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 2nd quarter to $26,800,000 up from $26,600,000 in the prior year 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 Q2 of 2014 of approximately $700,000 of revenue from a 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 solution revenues grew 1% to $45,300,000 in Q2, driven mainly by our core banking 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 2nd quarter total operating expenses were flat compared to the prior year period.
Cost of revenues excluding depreciation and amortization was $40,700,000 up 1 point $6,000,000 or 4% versus the prior year, reflecting higher compensation expenses due mainly to the share based compensation plan established at the end of the Q1 of 2015. Selling, general and Selling, general and administrative expenses for the Q2 were $8,900,000 down approximately $1,500,000 or 14% from the corresponding 2014 period. This decrease reflects lower professional fees, mainly as a result of the debt offering during the Q2 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 Q2 was $27,600,000 an increase of 9% compared with the corresponding 2014 period as a result of our increase in revenues, cost containment initiatives and leverage our business.
Total non operating expenses were $5,200,000 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 $2,100,000 in the 2nd quarter. On a cash basis, our income tax expense was approximately $1,000,000 As of June 30, 2015, we had approximately $24,000,000 of gross NOLs available to offset future tax payments related to our operations in Puerto Rico. Adjusted EBITDA for the 2nd quarter was $47,200,000 an increase of 4% from $45,500,000 in the corresponding 2014 period. Adjusted EBITDA margin was 50.6%, an increase of 80 basis points as compared to the Q2 of 2014.
The increase was driven by revenue growth as well as cost containment initiatives and leverage in our business. Adjusted net income in the 2nd quarter was $34,200,000 up 6% from $32,200,000 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 $38,800,000 of unrestricted cash and $661,500,000 of total short term borrowings and long term debt. During the quarter, we made a mandatory repayment of approximately $4,800,000 on borrowings under our Term A and Term B senior secured credit facilities, paid $16,000,000 on our revolving facility and paid dividends of $7,700,000 As of June 30, total liquidity, which includes unrestricted cash and available borrowing capacity under our revolver was approximately $135,000,000 As we pay down debt in the 2nd 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 $1,600,000 annualized interest savings.
Such reduction will become effective now in August. For the Q2, our free cash flow defined as adjusted EBITDA minus CapEx, cash interest expense and cash income taxes was $28,000,000 compared with $32,000,000 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. However, we continue to expect total CapEx for the full year to be within our projection of $30,000,000 Now I want to briefly touch on our year to date results. Total consolidated revenue was 184 point $6,000,000 up 3 percent compared with $178,800,000 in the prior year.
Adjusted EBITDA year to date was $92,800,000 up 2% and adjusted diluted earnings per share was $0.83 up 4%. Finally, 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 3 $68,000,000 $372,000,000 for growth of 2% to 3% and adjusted EBITDA growth to be between 3% 4% in 2015. In addition, our adjusted diluted earnings per share guidance of $1.68 to $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 Our first question comes from Bryan Keane of Deutsche Bank. Please go ahead.
Yes. Hey, guys. Mac, what would be the impact to EVERTEC from a Puerto Rico default? Maybe you can just I know you talked about it a little bit, but can you just talk about the different angles that default would cost to you guys directly?
Yes. So when I was first off, we can't really predict the future. But keep in mind, again, we're not a creditor to the government, right, or any of the public utilities. Most of the business that we do with them are a little bit less than half is funded by the U. S.
Government. So that would still be funded and we believe it would still be paid. The remainder is primarily what we consider mission critical. So 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, there is a piece and by mission critical, again, we run the Justice Department systems. We run a lot of systems across the island. There is probably 10% to 20% that you could consider discretionary. The total spend that the government has with us, so maybe 1% to 2% of our total revenue they could be considered discretionary that they might cut back. We don't foresee that, but that they might cut back and that you could consider potentially at risk.
What I would also say though is as the government experiences these changes, they're rolling out as you saw, we help them roll out their new sales tax program across all of our merchants. They're talking about a new value added tax. So 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. So that's sort of how we view the rest of the government.
Do you want to add anything Juan? Yes, Mark. Let me add. In addition to that our accounts receivable have remained the same. So 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, so far, I think it's key to Mac's answer is that we don't have credit exposure at all to the government. So the immediately there will be no impact to our business to our day to day.
But I mean we're staying very close to the government. We're staying close to ASEAN, to our customers. I mean it's something we're very actively managing, but 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. So even though the new sales tax, the increase in the sales tax was effective July, at least in term of volume for the 1st month, obviously it's just one month, but it has been consistent with what we have been seeing the whole year. So, 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 digit this quarter. I didn't hear the number.
What international growth grew at?
For the payment this quarter was 4%.
4%. And so the softness we saw in payment, does that rebound going forward? Or should it stay at this low single digit level 1?
I think we will be we do expect a little bit better in the second half of the year. We're implementing certain customers in Q3. But I think it will be something around 5% to 6%.
Yes. So even going into the last call, it was getting onboard here, it was quickly clear that we needed to change how we're approaching LATAM. So that was why we immediately brought in a professional bringing in Mariana early on as part of the strategy. So 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.
So clearly, that's what Mariana is on board to do, but that will take some time. Okay. All right. Thanks for the color.
Our next question comes from Tien Tsin Huang of JPMorgan. Please go ahead.
Hey guys, this is 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 there's 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, we actually Stephanie, this is Juan Jose. We don't have a direct business, some minimum amount of revenue less than 10,000 in a year. So we don't have any exposure really to public corporations. It's just minimum. Our services is more with the central government.
And as Max said, close to half is federally funded. So even the negotiation or the changes in PREPA, we don't expect it will not have any impact on EVERTEC.
And on consumer confidence front, there's no impact to that at all either. There's a lot of uncertainty
about that. It's early, right? But as I mentioned, in July, we saw some preliminary numbers for July already. The number of transactions continue to be consistent to what we saw in Q2. So at least initially we're not seeing and keep in mind they are the expenses, the consumer spending in our case don't include debit tickets like auto or construction that might see a different impact, right?
But the day
to day consumer actually continue to be kind of in line with what
we saw in Q2. How long would it take to kind of push that back? Yes. Okay. And then
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 and we generate revenue based on the dollar value, right? So assuming, let's say, the exactly the same volume, actually could be 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.
And our next question comes from James Schneider of Goldman Sachs. Please go ahead.
Hi. This is Jordan Fox on for Jim. In terms of the Columbia opportunity, I was hoping you could provide an update as it relates to securing a banking partner in that market? And 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. So as I said, I'll speak a little bit first about Mariana moving into her job and how that relates to Colombia. Marianna 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. And 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 earlier on the call, our execution has been there's been a lot to be desired on the execution of bringing up that platform, but we now have a customer up. We're still building some capabilities and features and Mariana is building a plane to how does commercialize that to grow it in Colombia. So 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. But that is a focus.
Got it. That's very helpful.
And 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 are around 5%. July is around 5% again. So it's consistent. If the increase in the sales tax will have a real impact, we have not seen yet. Obviously, it's just 1 month, but it's a good indicator.
So it's consistent. It's 5% growth, which we have been consistent for the last, I think it's 9 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. So 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.
Now 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. And 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 transaction is just consistent. Nothing really to call out.
Okay. Thank you.
And our next question comes from Sarah Gubins of Bank of America Merrill Lynch. Please go ahead.
Hi. This is actually Faitan Begoli calling in for Sara Gubins. I just want to go back on the Doral question. So 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. So what will happen is that in the implementation, the integration of the bank of Total into Popular, we assisted Banco Popular with the process and that is show up as part of our IT consulting services. But the reality is that substitute other projects that we have with the bank, because the priority was the integration. So it kind of pushed back most of the work that we were other priorities, right? So the priority was integration.
So what we do expect now that is already integrated is to continue with the projects that were put in hold for a while just to integrate Dorali. So no spike really in the quarter, at least in terms of the special project. However, definitely we start in the month of June, we integrated, we start having the accounts in our files. So we start processing for the bank the incremental loans related to the acquisition. So we have like, let's say, one of the 3 months of the impact of Plural, obviously it will be a positive for the remainder of the year.
Got it. Got it. Okay. And 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 1 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. So it's for the reminder of the B2B that didn't have before a sales tax that we will have the 4%. So we will be subject that effective October 1.
That we consider, we evaluated about looking into our guidance, right, to reaffirm our guidance. So even with we will see an incremental cost, but because of the year is progressing, we still will be within our we're very comfortable to be within our guidance.
Got it. Okay. And my last question is, are you seeing any pushback on merchant acquiring fees? Is there a more difficult economic sorry, a more difficult pricing environment? No.
I mean, we haven't seen a noticeable change in the pricing environment in Puerto Rico.
Okay. That's all I had. Thank you.
And 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. So this increase that was just approved today doesn't really change our guidance for the year.
Understood. Thanks. And then just maybe can you talk about the pipeline for potential M and A and JVs or partnerships in markets outside of Puerto Rico? And particularly on the JV front, is that still the primary strategy for international expansion? And 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. So I'm 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 and he's making very, very good progress. There's sort of we think I think of corporate development for EVERTEC in sort of 4 different buckets.
1 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. And for us as well, the 4th piece is to get it process it through the regulators because we fall into 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, very good progress. We're looking at these deals in multiple countries. We're taking 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. And when we're at that point, I'll let you know.
But 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 and it's a little bit more detailed version of what a little bit of what you were just talking about. So 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. And so
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. But 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 would 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. So 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 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. But 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. I mean, 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. So 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 be on the processor on the back end for the merchant portfolio, but 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. So we're still assessing and we're hearing different noise in the market. And then 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. So 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 issuing deal or an acquiring deal. But 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. So 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?
Yes. What it shows is we're continuing to make progress. But again, LatAm growth, I won't be happy to look it's back double digits, frankly.
Thanks. Appreciate the color.
Yes. 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% to 9% revenue growth, 10% to 12% EBITDA growth. And I know you've just been there a few months and I know you're starting well below that. But as 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. So the only thing from a sort of growth perspective, I'm comfortable with this year's numbers. As far as future numbers, I think as we get closer to 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 3 things, execute well in Puerto Rico, which frankly, I think we're doing, particularly given the environment. And 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. So I do think there's 2 pieces to your question. One is the deal piece is important to get this company to the growth rate that everyone desires, but giving long term guidance is not something that would be appropriate today. But in the coming quarters, I think we'll have a better view on that.
Okay. And then I missed part of the upfront of the call, I have another. With regards to Mariana, I mean, I just 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, we 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, and that we're focused on the biggest opportunities. But I think our observations were similar to mine. Now she's very focused on putting the strategy and the plan in place to get it where it needs to be.
And then 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. It 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. And so that is something we will definitely give attention to in the near term.
Great. Thank you.
Thanks, Bob.
And 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? So
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.
So that was not for supermarkets, gas, definitely and utilities. So some of the biggest is almost half of what we process actually is the same, didn't get any increase. So that's important because those are the day to date, right, purchases of the consumer. So it's not like it 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 our by the way, one of our strongest areas in the merchant side, which is supermarket gas and utilities, there is no impact at all.
But 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. And just like all governments around the world, electronifying payments is a way to accomplish that. One of the things Puerto Rico did about 5 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. So they what I would say is, we haven't seen it in the July numbers, right? I understand your concern.
I would 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. So it's a risk, but right now we're not seeing any negative impact.
Okay. That's helpful. And then Juan, just
a quick question. 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 the expense allocation or anything else that's driving kind of the difference in segment margins year over year?
Yes. Keep in mind Q2 of last year, we have a let's call it one time, it was educational program was around $700,000 for the quarter that we didn't have this year and is basically all margins, right? So that impacted the operating income for the segment in the quarter. That's mostly the impact. Beside that really is the mix of the allocation because of the increase or decrease in the sales volume, right?
As you see, we have more merchant acquiring revenue, which is very profitable. So it changed a little bit because again some of our locations follow the changes in their revenue.
Okay. That makes sense. Thanks guys. Okay.
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. And 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.
And thank you. Today's conference has now concluded and we thank you all for attending today's presentation. You may now disconnect.