EVERTEC

Moat: 3/5

Understandability: 2/5

Balance Sheet Health: 4/5

EVERTEC is a leading full-service transaction processing business in Latin America and the Caribbean, providing a broad range of merchant acquiring, payment services and business solutions.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview

Evertec is a leader in payment processing and technology in Latin America and the Caribbean. The company provides services to financial institutions, merchants, corporations, and government entities, focusing primarily on transaction processing and technology solutions. EVERTEC’s operations encompass a wide range of financial services, from payment processing for merchants to managing the technology infrastructure of banks. In summary, EVERTEC processes payments and helps run the technology of its clients in LatAm and Caribbean markets.

  • Revenue Distribution: EVERTEC’s revenue is primarily generated from three key segments:

    1. Payment Services – Puerto Rico & Caribbean: This segment accounts for the largest share of the company’s revenue, primarily derived from services that enable clients to receive payments through various methods and channels. They focus on supporting traditional in-store and in-person card transactions through their POS and ATM networks.

    2. Payment Services – Latin America Payments and Solutions: The next largest segment by revenues. It includes revenues from credit and debit card processing, internet payment processing, merchant acquiring, risk management, and other services.

    3. Merchant Acquiring, etc. This segment includes merchant and payment processing services, and business solutions.

  • Trends in the Industry: The shift towards digital payments and e-commerce, increasing regulatory scrutiny, and a rise in the use of digital payment methods in Latin America and the Caribbean are some of the biggest tailwinds that are leading to continued growth in the region and for the company.

  • Margins: Historically, the company operates at a respectable margin. In recent years, it has seen a decline in its margin, due to increased competition and other factors. EBITDA margins averaged between 54% to 58% from 2021 through September 2023.

  • Competitive Landscape: The financial technology and payment processing industry is highly competitive. EVERTEC competes with several local and international players, including Global Payments, Fiserv, Adyen and others. This competitive landscape is quite fragmented, but there are many companies competing for market share.

  • What Makes the Company Different: While many payment processing and technology companies exist, EVERTEC differentiates itself through its strong established relationships, particularly within the Caribbean, and its unique expertise in that region. Additionally, EVERTEC’s deep experience in these specific markets, positions it well to adapt to the unique challenges and regulatory environments within these regions.

Financial Analysis

  • Revenue: The Company’s revenue is mostly based on transaction processing and other financial activities. Total revenues increased to 229.7M in the three months ended September 30, 2023, compared to $179.2 million in the prior year period. For the nine months ended September 30, 2023, revenues increased to 620.9 M compared to $503.1 in the prior year period. These increases were primarily due to volume growth and acquisitions.
  • Profitability: Cost of revenues have increased in line with increases in revenues. Operating costs have also increased compared to prior years. For the three months ended September 30, 2023, net income decreased by 32.6%, compared to the prior year. Similarly, in the nine-months ended September 30, 2023, net income is down 34.7% compared to the prior year. The company’s profits are decreasing, due to increasing costs and impairments.
  • Balance Sheet: EVERTEC has a relatively strong balance sheet. The company carries a moderate amount of debt, but has positive equity. The company has high levels of goodwill and intangibles compared to the tangible assets. Total assets are at $2.02B, with a long-term debt of about $763M, as of September 30, 2023. Net cash and cash equivalents equal $332.1M, as of September 30, 2023.
  • Capital Expenditures: In 2022, capital expenditures totaled around $113.9M. The company has reduced capex by around 30% for 2023, to approximately $70M, with the goal of keeping it at that level going forward, according to management comments.
The reduction in capex, with reduced investment into the business, could lead to reduced growth.
  • Controversies: The company did receive a takeover bid from a private equity firm in December 2021, which was rejected by the board, after management deemed it too low. This event has led to a higher amount of debt, which has negatively impacted profits. The rejection also revealed the company’s low financial stability.

Moat Analysis

  • Moat Rating: 3/5
    • Switching Costs: EVERTEC’s services, particularly in transaction processing, create switching costs for customers. The level of integration into banks and businesses makes changing to another provider complex and costly. However, new providers and Fintechs are making it easier and easier to switch, so the level of switching costs are diminishing.
    • Economies of Scale: EVERTEC has a good scale of operation in the markets where it operates, however, it’s still not at the level of scale of bigger players. Having a high scale doesn’t give much of a barrier to entry here.
    • Brand Recognition: The company has some brand recognition in its home market, but it doesn’t create a defensible advantage.
    • Intangible Assets: EVERTEC has some intellectual property and unique licenses that are hard to replicate, however, these aren’t a strong source of moat and will be contested as time goes on.
  • Legitimate Risks:
    • Increasing Competition: The financial technology industry is marked by intense competition and new entrants could pressure margins and erode the company’s market share.
    • Technological Disruption: The continuous innovation in financial technology, such as blockchain and crypto, could pose risks if the company fails to keep up with the new changes.
    • Acquisition Risks: As the company grows by acquisition, it faces risks in properly integrating new businesses. Overpaying in acquisitions may be a bigger threat to value.
    • Economic Conditions: The company has significant operations in emerging markets, which have a higher level of economic and political instability. This can increase the risk of losses.
    • Reliance on Banking Sector: Since a large portion of the company’s operations are related to traditional banks, the risks to the banking sector could also become risks to EVERTEC.
  • Business Resilience: The company has proven its resilience in operating in difficult financial conditions, such as the 2008 financial crisis and the recent pandemic. The company is essential to its clients, as a company that processes payments and helps operate their technology. The company also has a decent degree of diversification. This makes the business relatively resilient overall.

Understandability:

  • Rating: 2/5
    • The company’s business model is not entirely complex, however, the various segments and financial terminology might make it a little less easy to understand for the average investor. The company’s operations are mostly related to technology and transaction processing and that may be a bit difficult for some investors to comprehend.

Balance Sheet Health:

  • Rating: 4/5
    • EVERTEC has a relatively good balance sheet. As of September 30, 2023, the company had around $332.1 million in cash, compared to the debt of about $763 million. The company’s assets and equities are in a good position as of now, and it is able to meet its near-term and long-term obligations. In the coming years, the debt should be looked out for and must start coming down. The company has a lot of goodwill and other intangible assets on the books, which should be taken into account. The company has also cut its capital expenditure, which is also something that needs to be taken into consideration.

Management Commentary and Concerns

  • Recent Earnings Calls
    • Management is focused on improving organic growth and profitability. The company has completed several acquisitions in recent years, and management is focused on integrating them and making them more profitable.
    • The company is focused on growing in faster growing markets and on the business line that is seeing more momentum, and on higher ROIIC.
    • Management discussed how they would return to their target debt to equity ratio in the coming years.
    • Management mentioned several times how the company is going after long-term contracts, and that they are focused on revenue stability.
  • Recent News and Controversies
    • The company has been impacted by the credit crisis. The company has seen a large decline in its stock price, due to the rise in interest rates in the recent times and recession fears.
    • The company is facing increasing competition from newer players, including Fintech companies.
    • The company received and rejected a merger offer, which created some concern among investors and may have led to unnecessary debt increases.
  • Management’s Expectations
    • The management is taking steps to address some of the company’s biggest issues including revenue growth and profit margins. Management has shown intentions of cutting costs to improve efficiency. The management team also intends to use their acquisition expertise to buy and improve other companies to boost their revenues.

Disclaimer: Please remember that this is only based on the documents that are provided and may not completely describe the company. Also, my analysis is not an investment recommendation and is for educational purposes only. Please do your own due diligence before investing in any stock.