Business Overview and History

EVERTEC, Inc. (NYSE:EVTC) is a leading full-service transaction processor and financial technology provider in Latin America, Puerto Rico, and the Caribbean. The company offers a broad range of merchant acquiring, payment services, and business solutions to a diverse customer base, including financial institutions, merchants, corporations, and government agencies. EVERTEC's comprehensive suite of technology-driven offerings has positioned it as a strategic partner for businesses seeking mission-critical services to enable secure and efficient transactions.

Headquartered in San Juan, Puerto Rico, EVERTEC was founded in 1988 as a joint venture between Popular, Inc. and Banco Santander. Initially, the company focused on providing payment processing and other technology services primarily to financial institutions in Puerto Rico. In the early 2000s, EVERTEC began expanding its operations across Latin America and the Caribbean, leveraging its expertise in electronic payments to serve a growing customer base of banks, merchants, and government agencies in the region.

A significant milestone in EVERTEC's history was the launch of its ATH network, which has grown to become one of the leading personal identification number (PIN) debit networks in the Caribbean and Latin America. In 2010, EVERTEC entered into a 15-year master services agreement with its largest customer, Popular, Inc., providing the company with a stable revenue stream and allowing it to further invest in its technology infrastructure and product capabilities. However, in 2022, EVERTEC and Popular renegotiated this agreement, eliminating the exclusivity requirement and adjusting certain pricing terms.

Over the years, EVERTEC has expanded its suite of services beyond payment processing, offering a comprehensive portfolio of business process management solutions that serve the core operational needs of its diverse client base. This includes services such as core banking, cash processing, IT outsourcing, and business process outsourcing. The company has had to continually invest in its technology, security, and compliance capabilities to meet the evolving needs of its customers and maintain its market leadership position in an increasingly competitive and rapidly evolving payments landscape.

Today, EVERTEC operates across 26 countries in Latin America, processing over 6 billion transactions annually through its electronic payment networks. The company's four business segments – Payment Services - Puerto Rico & Caribbean, Latin America Payments & Solutions, Merchant Acquiring, and Business Solutions – collectively serve a diverse customer base, providing critical infrastructure and technology solutions that enable its clients to issue, process, and accept transactions securely.

EVERTEC's Payment Services - Puerto Rico & Caribbean segment provides revenue from services related to the ATH debit network and other card networks, including authorization, processing, management, and recording of ATM and point-of-sale (POS) transactions, as well as ATM management and monitoring. This segment also generates revenue from card processing services such as credit and debit card processing, authorization and settlement, and fraud monitoring and control for issuers, as well as payment processing services, including payment and billing products for merchants, businesses and financial institutions, ATH Movil person-to-person and ATH Business person-to-merchant digital transactions, and EBT services for the government of Puerto Rico. Revenues in this segment are primarily driven by the number of transactions processed.

The Latin America Payments & Solutions segment provides similar network and processing services for the ATH network of ATMs and other card networks in Latin America, including authorization, processing, management, and recording of ATM and POS transactions, and ATM management and monitoring. This segment also generates revenue from card issuer processing, payment processing services, and licensed software solutions for risk and fraud management, card payment processing, and outsourcing of mission-critical IT services. Revenues are primarily driven by the number of transactions processed.

The Merchant Acquiring segment generates revenue from services that allow merchants to accept electronic payment methods, including a discount fee and membership fees charged to merchants, debit network fees, and rental fees from POS devices and other equipment, net of credit card interchange and assessment fees. Revenues are generally based on a percentage of the transaction value.

The Business Solutions segment provides a full suite of business process management solutions, including core bank processing, network hosting and management, IT professional services, business process outsourcing, item processing, cash processing, and fulfillment. Revenues are derived from a mix of recurring fixed fees and volume-based fees.

Financial Performance and Ratios

EVERTEC's financial performance has been resilient, with the company reporting consistent revenue growth and strong profitability. In the latest fiscal year (2023), the company generated $694.71 million in revenue and $79.72 million in net income, translating to a net profit margin of 11.5%. The company's return on assets (ROA) and return on equity (ROE) stood at 7.7% and 17.4%, respectively, indicating efficient utilization of its asset base and effective capital management.

For the most recent quarter (Q2 2024), EVERTEC reported revenue of $211.98 million, up 27% year-over-year, and net income of $31.90 million, up 13.2% year-over-year. The revenue growth was driven by strong transactional growth in Puerto Rico and Latin America, as well as the contribution from the Sinqia acquisition. The net income growth was primarily due to the higher revenue, partially offset by higher operating depreciation and amortization expense and higher cash interest expense related to the Sinqia acquisition.

Liquidity

EVERTEC's liquidity position remains solid, with a current ratio of 1.82 and a quick ratio of 1.82 as of June 30, 2024. The company's debt-to-equity ratio of 2.00x as of June 30, 2024 suggests a moderate level of leverage. EVERTEC had $257.70 million in cash and $194 million available under its $200 million revolving credit facility as of June 30, 2024, providing ample liquidity for operations and strategic initiatives.

In terms of cash flow, EVERTEC generated $224.29 million in operating cash flow and $139.31 million in free cash flow during the 2023 fiscal year. For the most recent quarter (Q2 2024), operating cash flow was $95.37 million, up 41.3% year-over-year, and free cash flow was $60.92 million, up 36.6% year-over-year. The company's strong cash generation capabilities have enabled it to invest in growth initiatives, make strategic acquisitions, and return capital to shareholders through dividends and share repurchases.

Geographical and Segmental Performance

EVERTEC's revenue is primarily generated from its operations in Puerto Rico and Latin America. In the latest fiscal year, the company's Puerto Rico-based segments (Payment Services - Puerto Rico & Caribbean and Merchant Acquiring) accounted for approximately 60% of total revenue, while the Latin America Payments & Solutions segment contributed the remaining 40%.

Within the Puerto Rico and Caribbean region, the company has consistently delivered strong organic growth, driven by increases in transaction volumes, an improved spread in the Merchant Acquiring business, and the continued expansion of its ATH Movil digital payment platform. In the Latin America segment, the integration of Sinqia has been a key driver of revenue growth, complemented by solid performance in the legacy business.

For the first six months of 2024, EVERTEC saw strong revenue growth across its segments, with total revenues increasing 28% year-over-year to $417.3 million. The Latin America Payments and Solutions segment was a key driver, with revenues increasing 74.5% year-over-year to $148.9 million, partially due to the acquisition of Sinqia. The Merchant Acquiring and Business Solutions segments also saw healthy revenue growth of 8.4% and 6.9% year-over-year, respectively.

EVERTEC's Business Solutions segment, which provides core banking, cash processing, and IT outsourcing services, has also been a steady contributor to the company's overall performance, generating approximately 16% of total revenue in the latest fiscal year.

Risks and Challenges

While EVERTEC's diversified business model and geographic presence have been instrumental in its success, the company faces certain risks and challenges that could impact its future performance:

1. Regulatory and Compliance Risks: As a financial technology provider, EVERTEC operates in a highly regulated industry, and changes in laws and regulations could affect its operations and profitability.

2. Competitive Landscape: The payments and financial technology industry is highly competitive, and EVERTEC faces competition from global and regional players, which could put pressure on pricing and market share.

3. Dependence on Key Customers: A significant portion of EVERTEC's revenue is derived from a limited number of large customers, including Popular, Inc., its largest client, which accounted for approximately 31% of total revenue in the latest fiscal year.

4. Cybersecurity and Data Privacy Risks: As a processor of sensitive financial data, EVERTEC is exposed to the risk of data breaches and cyber attacks, which could result in reputational damage and financial losses.

5. Macroeconomic and Political Risks: EVERTEC's operations in Latin America and the Caribbean expose it to macroeconomic and political uncertainties, which could impact consumer spending and the financial health of its clients.

Outlook and Guidance

In its most recent guidance for the full year 2024, EVERTEC provided the following outlook:

- Revenue: $846 million to $854 million, representing growth of approximately 22% to 23% over 2023. - Adjusted EBITDA Margin: Approximately 39%, down from 40.6% in the prior year. - Adjusted Earnings per Share: $2.98 to $3.07, reflecting growth of 5.7% to 8.9% compared to the $2.82 reported for 2023.

The company's segment-specific guidance for 2024 includes: - Merchant Acquiring: Expected to grow in the mid- to high single-digit range - Payments Puerto Rico: Expected to grow in the mid-single-digit range - Latin America Payments & Solutions: Expected to grow in the high 60s to low 70s percent, taking into account the impact of foreign currency - Business Solutions: Expected to grow in the low to mid-single digits for the full year

EVERTEC's optimistic guidance is supported by the continued momentum in its core business segments, the successful integration of Sinqia, and the ongoing growth in digital payments adoption across Latin America. The company remains well-positioned to capitalize on the region's underpenetrated financial technology market and deliver long-term value for its shareholders.

Conclusion

EVERTEC's comprehensive suite of payment and technology solutions, coupled with its dominant market position in Puerto Rico and expanding footprint in Latin America, have positioned the company as a strategic partner for businesses seeking to navigate the complex and rapidly evolving financial technology landscape. With a strong financial profile, a diversified revenue stream, and a clear growth strategy, EVERTEC is poised to continue its trajectory as a leading player in the Latin American payments ecosystem.

The company's attractive business model, characterized by recurring revenue, scalability, significant operating margins, and moderate capital expenditure requirements, provides a solid foundation for future growth. As the penetration of electronic payments in EVERTEC's markets remains significantly lower relative to the U.S., there are substantial growth opportunities to be captured. The ongoing shift from cash and paper methods of payment to electronic payments, coupled with the adoption of new contactless payment technologies driven by the fintech sector in Latin America, further enhances EVERTEC's growth prospects.

With its strong performance in recent quarters, successful integration of strategic acquisitions, and positive outlook for the full year 2024, EVERTEC demonstrates its ability to execute on its growth strategy and adapt to evolving market conditions. As the company continues to invest in innovation and expand its presence across Latin America, it is well-positioned to capitalize on the growing demand for advanced payment and financial technology solutions in the region.