Q4 2021 EVO Payments Inc Earnings Call
[music].
Good morning, My name is Rob and I will be your conference operator today at this time I would like to welcome everyone to the Evo payments fourth quarter 2021 conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a.
<unk> and answer session. If you would like to ask a question. During this time simply press star followed by the number one on your telephone keypad, if you'd like to withdraw your question again press Star one. Thank you Ed O'hare Senior Vice President Investor Relations you May begin your conference.
Good morning, and welcome to Evo payments fourth quarter and year end earnings conference call.
Our press release and supplementary slides are available on the Investor relations portion of our website.
Before we begin I want to remind all listeners that evo payments exactly under the safe Harbor provisions of the private Securities Litigation Reform Act.
Certain statements in this conference call such as projections regarding future performance may be considered forward looking statements within the meaning of the act.
Such forward looking statements are subject to risks uncertainties and other factors, which could cause actual results to differ materially from those expressed or implied by such forward looking statements.
For additional information on these factors please refer to our press releases and filings with the SEC.
Please refer to our press release for an explanation of the non-GAAP financial measures discussed in today's call along with a reconciliation of those measures to the nearest applicable GAAP measures.
Today, we will discuss our fourth quarter results and our overall business performance.
Joining me on the call are Jim Kelley, our Chief Executive Officer.
Panther, our Chief Financial Officer, Darren Wilson, President of the International segment, and Brendan <unk> President of the Americas segment.
I will now turn the call over to Jim.
Thank you Ed.
Morning, everyone and thank you for joining us today.
EBIT delivered strong financial results through 2021, despite the lingering impacts of the pandemic.
And the resulting constraints on economic activity I would like to extend my thanks to our employees partners.
And customers for their hard work and collaboration all of which made for a very successful year.
<unk> included slides on our Investor Relations website that highlight our key accomplishments in 2021.
The consistent execution of our growth strategies translated into a strong fourth quarter as we closed out the year.
As you can see from our slides the company demonstrated volume growth of 21% compared to the fourth quarter of 2020.
And 16% compared to 2019.
For the quarter constant currency revenue grew 17% adjusted EBITDA increased 15% and margin of 38% was consistent with the prior year.
As a reminder, in the fourth quarter of 2020.
Our previously announced salary reductions remained in place for most of the quarter.
When normalizing for these reductions.
Adjusted EBITDA increased 20%.
And margin expanded 120 basis points.
These financial results are solidly ahead of market expectations. When you take into consideration the significant strengthening of the us dollar during the quarter.
Tom will discuss our fourth quarter and full year financial performance and our 2022 guidance later on the call.
I'm also extremely pleased with our achievements to expand our business during the year, we successfully executed our well established bank Alliance and tech enabled growth strategies across both Europe and the Americas through a combination of organic sales, new and existing partnerships and acquisitions, resulting in expanded distribution and accretive M&A.
Yes.
I would like to highlight some of our significant business achievements. This year beginning with our bank alliances you may recall that in June together with our bank partner <unk>, we secured regulatory approval for our joint venture and formally launched our operations in Chile.
This business is off to a solid start which Brendan will elaborate on later in the call.
In November we signed a long term extension of our exclusive marketing Alliance agreement with the bank of Ireland to continue providing merchant acquiring services to the Republic of Ireland and Northern Ireland.
This has been a high growth market for Evo and I am confident that this growth trajectory will continue as we make additional end market investments. Finally in December we announced a long term strategic relationship with the National Bank of Greece, which will significantly increase our merchant portfolio size and expand our bank distribution channel to complement our existing European.
Footprint.
I'm very excited about this acquisition and the progress, we're making in Greece, which Darren will discuss in detail later on the call.
And our Tech enabled division, we demonstrated solid growth both domestically and internationally, we continue to sign new partners and enhance our products and capabilities through internal product development and strategic acquisitions in 2021 across all our markets. We signed more than 150 Tech enabled partners and completed two gateway.
Acquisitions as merchants continue to adopt software at the point of sale since we announced the acquisition of Anderson's acts and Pago CLS summer. Both gateways are now fully integrated we are successfully cross selling these gateways into our existing customer base and signing new customers and partners through our direct sales teams.
I'm also pleased with the progress we made this year to advance a number of corporate responsibility and governance initiatives, specifically, we appointed two new board members, Stacy Penny or two and Nicky Heartland and recently launched our ESG website to provide the public with additional disclosures related to the Companys. Many ESG priorities. We also.
To be active in our local communities across our markets both through donations and partnerships with nonprofit organizations. We remain committed to advancing the interest of our shareholders merchants partners employees and our communities and we look forward to building upon these programs going forward.
21 was a successful year for the company and I am encouraged by the solid business and financial trends. We are seeing through February I look forward to another year of strong performance as favorable card adoption trends and a resumption of cross border activity continue to provide healthy tailwind across our markets. We are well positioned for accelerated revenue growth through our investments in <unk>.
International markets with low card penetration, such as Chile, and Grace and our expanding tech enabled referral network lastly, our significant capital capacity and leverage of two two times enables us to continue to invest in new products and technologies, while executing our M&A growth strategy I will now turn the call over to Darren to discuss.
Our European business Darrin.
Thanks, Jim for the quarter, Europe's constant currency revenue increased 29%, which is consistent with the segment's 2009% volume growth in the quarter.
These results were largely attributable to growth from our bank referral and tech enabled channels across all markets.
With stronger DCC volume from the increase in cross border activity in the quarter.
As Jim previously mentioned since our last call. We made several exciting announcements in Europe , including the renewal of our marketing Alliance with bank of Ireland on the formation of a long term exclusive joint venture with the National Bank of Greece.
In Ireland, we continue to execute on our strong extreme of referrals from bank of Ireland. As we also expand our tech enabled referral network and integrated payment solutions for I imagined.
For example in December we signed Domino's Pizza as a result of our banking relationship and proprietary integrated payment offerings.
In Greece, we are focused on our business integration plan.
<unk> identifying a general manager, who will join us from MTG and readying, our go to market strategy, which will enable us to launch operations upon receiving regulatory approval we are.
We're working with NBA to secure this approval, which we continue to anticipate receiving in the second half of the year.
<unk> merchant acquiring business performed as expected in the fourth quarter and in line with the financial information we provided in our December press release.
I am excited about our upcoming expansion into Greece, which upon closing will represent approximately 15% of our European revenue, providing further diversification for the segment.
Upon commencing operations in Greece, we expect this market to follow a similar trajectory.
The European market, a successful international growth strategy is anchored by exclusive long term merchant referral relationships with leading international financial institutions that provide meaningful distribution for our products and services coupled with our extensive tech enabled network enhances that growth.
Changes and Diversifies, our referral streams across that market.
This strategy has resulted in annual merchant portfolio growth of more than 10% annual volume growth of approximately 20% and more than 50, New tech enabled partners, yielding consistent mid teens annual revenue growth for our European segment.
Our strong financial performance and recent business expansion achievements demonstrate the success our strategy, including our ability to capitalize on certain macroeconomic tailwind such as increased card utilization and accelerated adoption of software at the point of sale.
While government restrictions lingered in the fourth quarter due to omicron surges.
Markets continue to experience strong growth across most industry verticals.
In the fourth quarter, we continue to work with our banking partners to broaden the merchants, especially in Poland and the Czech Republic, where we have enhanced our sales strategy to capitalize on the latest legislative support which encourages digital payments adoption.
These initiatives have enabled us to significantly increase our new customer signings.
<unk> and notable market share gains in both markets relative to our existing footprint.
Also during the quarter, we continued to invest in our tech enabled channel to address the accelerated adoption of software at the point of sale across all segments.
This strategy complements our bank referral network and further diversifies, our industry vertical to drive enhanced growth for our business.
And all of our European markets, we signed new Isps and other tech enabled partners, which enabled us to sign new tech enabled merchants, including new customers in Spain, and a mass transit win in Poland.
I'm also very excited to announce that we launched a soft pulse smartphone terminal application in the Czech Republic.
To enable contactless tap or pin entry on our merchants' phone or tablet.
This year, we plan to expand this offering to our European market beginning with Poland.
As we move further into 2022, we look forward to additional investments in market, leading products and capabilities to support Australia strategies and drive accelerated growth for our European business I'm encouraged by the recent lifting of many COVID-19 related restrictions across the segment and look forward to the continued return of cross border.
Activity, including DCC.
Which coupled with the launch of our <unk> business will drive strong revenue growth.
I'll now turn the call over to Brendan who will provide an update on our Americas segment Brendan.
Thanks Darrin.
For the quarter, the Americas constant currency revenue increased 10%, which reflects the segment's 13% volume growth in the quarter.
These results were largely attributable to growth from our bank referral channels in Mexico, and Chile in our tech enabled channels across all markets.
Beginning with Latin America, where we have long term exclusive bank referral relationships that anchor our distribution. We continue to work closely with our financial institution partners as we decisively expand our tech enabled sales strategies across this underpenetrated region.
Our business in Chile demonstrated accelerated growth in the fourth quarter with the merchant portfolio expanding over 50% compared to the third quarter.
Since we launched operations last June our portfolio has expanded to approximately 10000 merchants, which is up from 3000 customers at the time of our Pago <unk> acquisition.
We're making additional investments in the market to support the strong new merchant demand.
Several key initiatives underway to accelerate our sales customer support product and technology capabilities.
We have collaborated with the bank to build a robust pipeline of large corporate accounts, which should provide the business with scale relatively quickly.
In Mexico, we once again delivered strong growth in the market leveraging both our bank referral and tech enabled sales channels throughout the quarter.
Our merchant portfolio increased 6% compared to last year and volumes grew 16%, which resulted in revenue increasing 15%.
Our tech enabled business also demonstrated strong revenue growth of 15% consistent with the historical trends for this business.
Turning to the U S.
Our growth is driven by our expanding tech enabled business, which experienced 15% revenue growth for the fourth quarter compared to the prior year.
During the quarter, we continued to sign new referral partners expand our existing relationships and enhance our product and services suite.
Beginning with our ISP business, we continue to bring new integrations to the market in conjunction with our strategy of enhancing existing referral relationships to maintain growth for this business.
In our <unk> business, we continue to execute our organic growth strategy by forming new integrated payments partnerships that allow us to sign new merchants through our growing referral network. Together. These efforts provide a strong momentum to continue growing our tech enabled channel as we move into 2022.
Finally, as we previously mentioned over the last year, we have significantly expanded the infrastructure of our <unk> fabric Gateway to also include B to C capabilities in the U S for years <unk> fabric has been a market leading BTB payments platform and today supports our largest U S corporate customers.
As a result of our recent investments in pay fabrics retail capabilities. We are repositioning the U S e-commerce business around a robust proprietary technology and transforming our go to market strategy to actively signed numerous rural partners with direct integrations to Evo our new sales approach is off to a solid start and we have.
<unk> added new partners spanning a range of verticals our U S E Commerce business will therefore be comprised of two distinct channels.
Our legacy indirect ecommerce business, which relies on third party gateway referrals, and subsequently has lower margins and higher attrition.
And our new direct e-commerce business the sales strategy of which is built around our in house end to end payment solution and targets larger higher margin merchants.
We believe that we can leverage pay fabric to build stronger referral relationships and attract higher quality customers as we deploy our partner sales model similar to that of our <unk> and <unk> businesses.
I am pleased with our fourth quarter and 2021 performance, which is reflective of our continued investments in our sales channels are proprietary capabilities and strategic acquisitions. In 2022, we look forward to additional growth from our tech enabled channel across all markets continued strong performance in Mexico, and the acceleration of our business in Chile as we work.
With Dci to grow market share with that I will turn the call over to Tom who will cover the financials in more detail Tom.
Thanks, Brendan and good morning, everyone.
As noted in our previous comments, we delivered strong quarterly and full year results.
For the quarter on a constant currency basis revenue increased 17% adjusted EBITDA increased 15%.
Margin of 38% remained flat compared to the prior year.
After normalizing for the salary reductions that remained in place for most of the fourth quarter of 2020, adjusted EBITDA increased 20% and margin expanded 120 basis points.
Further compared to a normalized 2019, our fourth quarter revenue grew 10% and adjusted EBITDA increased 28%.
These solid results reflect our strong volume growth in the quarter, which increased 21% compared to 2020 and 16% compared to 2019, despite the backdrop of the pandemic.
This quarter's results outperformed market expectations as we were able to grow through the headwind of the significant strengthening of the U S dollar, which adversely impacted revenue by approximately $3 million or three percentage points of revenue growth.
For the year constant currency revenue grew 11% adjusted EBITDA increased 20% and margin expanded 250 basis points to 36%.
Recall that in the first quarter many of our markets implemented significant restrictions as a result of the delta variance, resulting in a 6% decline in revenue.
However, as economic activity rebounded throughout the remainder of 2021 revenue grew 17% and EBITDA increased 24%.
We were able to deliver these solid financial results by growing our merchant portfolio generating record volumes, expanding our partner network and actively managing our costs and capex.
These results demonstrate our ability to consistently generate strong top and bottom line growth.
We remain optimistic that as the impact of the pandemic abates. These trends will accelerate as we leverage our recent investments and capitalize on the continued cash to card tailwind that have persisted coming out of the pandemic.
Okay.
With respect to segment performance in Europe , our year over year constant currency revenue increased 29% and adjusted segment profit increased 26%.
Sequential revenue spreads decreased slightly primarily due to the seasonal decline in DTC revenue.
However, we continue to see strong year over year growth in cross border activity and DCC revenue, which doubled during the quarter compared to 2020, but remains approximately 10% below 2019 levels.
In the Americas year over year constant currency revenue increased 10% and adjusted segment profit increased 14%.
Our international markets now comprise over 60% of our revenues and when we add grease to our portfolio. Later this year international revenues will comprise approximately 65% of our business.
Okay.
Adjusted corporate expenses for the quarter were $7 $3 million, which increased 37% from the prior year, primarily due to the normalization of expenses in relation to the temporary cost reductions we implemented in 2020.
Adjusted net income for the quarter increased 31% to $28 million.
Compared to last year and adjusted net income per share for the quarter was 29.
Which increased <unk>, <unk> or 26% compared to a year ago.
At the end of the quarter diluted shares totaled $95 million, an increase of $1 3 million weighted average shares compared to the prior year.
In the fourth quarter capital expenditures were $7 5 million versus $7 8 million in Q4 2020.
Of this amount approximately 60% was for terminals as we continued to board additional margins were.
We are actively managing our terminal inventory and the broad based supply chain issues to meet merchant demand.
As a reminder, we either rent terminals over multi year contracts or sell them to our merchants and generate accretive returns relative to the capital used to acquire the terminals.
Free cash flow for the third quarter increased 24% to $38 million compared to the prior year, resulting in a free cash flow conversion of 77% driven by our strong earnings and lower interest expense.
During the quarter, we refinanced our senior credit facilities, lowering our credit spread of 100 basis points and extending our maturity to 2026.
In addition, our pay fixed interest rate swap of 20 basis points remains in place through the end of the year, which mitigate the near term impact of rising interest rates.
Our capital position remains extremely strong with over $200 million of.
Of available cash and $200 million of capacity under our revolver.
The generation of free cash flow and the active management of our balance sheet resulted in us lowering our leverage from two nine times a year ago to two two times at the end of this year.
Turning to our outlook. We are encouraged by the recent government decisions in Europe to remove pandemic related restrictions, which will translate into increased consumer spending and cross border activity.
The overall economic outlook in our markets calls for solid growth. Despite the recent inflationary pressure.
We anticipate this economic backdrop, coupled with our enhanced distribution capabilities will allow us to continue to grow volumes and expand our merchant portfolio in 2022.
Further we expect a slight improvement in spreads as DCC revenue returns to 2019 levels and volumes from our SME merchant portfolio increase.
With respect to expenses, we took decisive actions to reduce our cost structure at the onset of the pandemic, including the termination or furloughing of approximately 500 employees.
And by the end of 2020, we had realigned our cost structure and reduced our expenses by approximately 10%.
These actions enabled us to introduce additional resources in targeted high growth areas of our business over the course of 2021.
While also expanding our margin 250 basis points.
As we move into 2022, our continued active management of the business is allowing us to address the recent inflationary conditions, especially as it relates to wages and make additional human capital investments, while also continuing to grow the company.
By the end of this year, we anticipate our total employee base will approximate pre pandemic levels.
For 2022, we anticipate full year revenue growth of 11% to 13%.
EBITDA growth of 13% to 15% and 80 to 90 basis points of margin expansion.
As for the first quarter, we expect to see the typical mid single digit seasonal decline in revenue from Q4 to Q1 and.
And expect EBITDA margins to be flat compared to the first quarter of last year.
Our guidance excludes the incremental earnings from our recent acquisition of the NPG merchant acquiring portfolio and assumes FX rates remain consistent with the fourth quarter.
With that I'll turn the call back over to Jim.
Jim.
Thank you Tom I will now turn the call over to the operator to begin the question and answer session operator.
At this time I would like to remind everyone in order to ask a question Press Star then the number one on your telephone keypad.
Your first question comes from the line of Bob Napoli from William Blair. Your line is open.
Thank you and good morning, and nice job in the quarter.
And on the outlook.
Tom when do you when do you expect to close the acquisition in Greece.
Yet laid out that was $30 million of revenue and about 12 million of EBITDA on an annualized basis, we want to scale.
Yes.
So what you saw in <unk>.
Guidance on all maybe on Greece acquisition, and maybe I'm Shelly.
Sure Hey, Bob Good morning.
So yes.
We there yes.
Yes, So let me okay.
I was I was catching.
Catching some feedback so on the outlook that we provided that as I mentioned in my prepared remarks, that's without.
Increase included in there.
Timing remains uncertain, we still think it's second half of this year.
We're working hard with the bank partner Darren can provide some commentary on that here in just a second.
Complete my comments, but.
We're working with the regulator and as you know when you work with the regulator in Europe and it requires some level of approval it's out of our control.
With respect to their business their business continued to perform well in the fourth quarter.
Nothing would change relative to the information that we prepared.
And disseminated to the market in December we still see that business on a pro forma basis full year is kind of a $30 million top line 12.
$12 million our share of the of the EBITDA when you think about the relative ownership percentage.
You also asked me about Chile.
Launch into that market continues to go well Brendan can also provide some comments in terms of what's going on within the market there we.
We feel like we got off to a good start in 2021 saw it contributed a little bit of revenue and EBITDA like we had anticipated, but more importantly, we're seeing good growth in the merchant portfolio and as you know it's that growth in the merchant portfolio that fuels the more accelerate accelerated growth that we anticipate in 2022.
<unk>.
Darren you want to.
<unk>, yes.
Hi, Bob Thanks for the question, so, yes, Greece progressing well the banks are already submitted OLED paperwork in terms of the spinoff will spin out of the business to get it registered with the regulator on that next week meeting the regulator personally as well when you look at the benchmarks in the market.
Greece's for systemic banks have done transactions last year. The first one took just shy of a year to get registered second one's about eight months. So the regulator now has got a pretty strong pro forma for how these transactions works.
Since the second half of this.
This year is we're very confident in and close.
Thank you and then just one.
Omnicom the first on your business.
In the fourth quarter.
Broadly obviously your business has been more hit by more aggressive closing global economies in Europe , whereas that how much does that affect your business and how it's trended and are you seeing significant opening and <unk>.
European markets in particular.
Sure.
At a high level, Bob and then I'll, let Darren comment about omicron and what's going on in Europe , particularly here in 2022, some encouraging signs.
It affected our business, but when you look at our volume numbers, we were encouraged to see those 20% kind of growth rates.
Quarter over quarter, some of that has to do with a year ago, we were dealing with delta. So it was kind of one variant versus the other.
But it definitely did not seem to have the same effect as delta we saw that not just in our volumes, but we saw that in terms of how governments react and we saw that in terms of hospitalization levels et cetera. So it definitely had a lessening effect, but it had some level of effect and I think that gives us some dry powder as we think about <unk>.
<unk> 2022, I would also say one of the thesis thesis that we've been putting forth others have been putting forth over the course of the whole pandemic is the cash to card conversion.
We see that sticking and something thats going to continue to provide frankly all of our markets. Some level of tailwind because we think the move towards digital payments is something that consumer behavior has adapted to.
Thanks, Tom.
In Europe , specifically exactly as Tom says good volume trends.
Also we're seeing all markets open up in terms of the restrictions the uk's, leading the way for once.
As an Englishman in terms of lifting of restrictions actually starting to charge for tests.
Self isolation et cetera, but I'm back traveling through Europe every week now and the restrictions are very light.
Good trends good early indications this year on.
Continued purchasing volumes.
Great good to hear thank you.
Yeah.
Your next question comes from the line of Ashwin <unk> from Citi. Your line is open.
Thank you.
Folks.
Good quarter congratulations.
Thank you Ashwin.
Hey.
Hi, I guess my first question is with regards to the pipeline of partnership opportunities.
As we started seeing some openings.
And <unk>.
<unk> come to an increase in <unk>, what should we expect in terms of.
In terms of say the next 12 to 18 months, where you're looking at from the bank partner perspective any.
Any comment any with regards to has many mission.
And so on.
Yes.
I'm going to let Brendan since royalty other hereof Brendan cover his markets and then.
Darrin as well for Europe .
Good morning, Ashwin, So in Latin America.
It's the markets that I've been sort of harping on for the last couple of years, we continue to be actively looking at Colombia, Peru, Argentina to some extent.
And then Ecuador, I would say it would be the other one that would be attractive and thats the combination of size <unk>.
Stability of economy currency and the underlying FX volatility.
And then sort of general market dynamics, but in each of those markets. There are some headwinds to getting something done which would be there's a central processor that is generally owned by banks and unraveling that involve some degree of complexity that sir.
Ed the temperature in each of those markets.
Is one of our regulator that wants to see the market's open wants to see more competition wants to see cash.
Fade in favor of card.
And that was the same dynamic that we faced in Chile, and Mexico, as well and obviously that worked out to our benefit so yes, I feel quite confident as Darren said we are.
Back on the road I made two trips to South America in January alone.
So we're out and we're meeting with folks and.
Think.
The market dynamics are such that change is inevitable and it's a question of when.
And just to add to that I think the fact that we're up running successfully in Chile, we've been in Mexico now for on a five years.
It gives us a lot of credibility, where we have processing and customers on the continent.
<unk>.
So it's a big market Big area. It's also a small markets everybody knows each other.
And the greatest validation of the next opportunity to partner with the bank is the last thing that you did business with in there.
Happy with the performance that we lived up to our commitments that we said during the honeymoon phase. After the deal was signed and closed did we show up with all the things that Darren and Brendan have done to successfully launch in both of those regions to uncover Europe sure. Thanks, Ashwin, Thanks, Brendon and Jim Yes.
Similar to Brendan in Jim's comments.
A lot of healthy activity kind of post the pandemic.
Many of the markets in Europe . Both your question was about banks, but there is a tech enabled pipeline that too which.
Which is really where the trajectory of payments is obviously going as we outlined in our prepared comments so.
Looking at markets that still have high growth potential like Greece with high concentration of cash so.
So the cash to card conversion gives good tailwind.
So good trends, there and new markets. Some markets are not currently in and there are also potentially tuck in.
Opportunities in markets already and as I said with tech enabled.
Acquisitions, so feel pretty confident as Brendan does with a healthy pipeline over the next 12 to 18 months as you asked us right.
Okay great.
Quick question on Collins.
During the course of the year, given that 2022 and will continue to have some E com.
Let me comment than that.
So that and.
Yes.
Cause.
With Cumulus.
But we'll find out.
I wanted to clarify on that.
Ashwin, it's Tommy now nothing really material with respect to stimulus I think youre right. There are going to be some lumpy comps as we as we move into 2022 and compared to 2021, particularly Q1 of last year Q1 of last year was soft because that's when.
Delta in particular was moving through our markets Europe in particular was hit pretty hard by Delta.
And that's why we provided the the comment about.
The sequential trends between Q4, and Q1, we think thats, probably a better relative position for you to think about how 2020 to take shape and then I think from then from there. The Q2, three and four trends are probably pretty consistent with the seasonal trends that we see in our business.
Two starting to ramp up as we head into the spring.
And then the summer and the travel season cross border returning the benefit of DCC et cetera, and then.
The typical <unk>.
Strong fourth quarter with the holidays.
But less less related to stimulus and more just related to the ebbs and flows of market conditions in 2021.
Understood. Thank you guys.
Thanks Ashwin.
Our next question comes from the line of Kartik Mehta from Northcoast Research. Your line is open.
Thanks, Tom I know you talked a little bit about inflation, but I'm wondering maybe some positive impact you could have on the business because the average ticket size goes up. So if you look at inflation as a whole maybe some of the costs are being impacted by versus some of the benefits.
How do you think inflation plays out positive or negative for the year for the company.
Yes, I think it depends on the degree frankly, kartik because youre right. When you think about inflation and the mix of our business that's volume based and therefore would benefit from inflationary.
Increases in Europe , we're give or take kind of a 90% volume based fee business in the U S closer to.
65, 70%. So there is a modest inflationary pressure that doesn't cause the consumer to move to the sideline and not spend it all can actually provide as you said a little bit of lift in volumes and revenue per transaction.
If the inflationary becomes.
Comfortable to the to the consumer where they arent.
Spending money on discretionary goods, then obviously then it kind of.
Totally shuts down the volume and you don't get the benefit of that tailwind.
Yes, I think our expectation is that it's a manageable level of inflation.
That it's been a number of years since we've had any kind of inflation in the economy.
Consumer balance sheets come out of the pandemic generally in good shape ready access.
Credit so we don't see the consumer running to the sideline and we would anticipate some level of lift rather than downdraft.
Hey, Jim just a bigger question.
Quick question for you I know Darren and Brendan talked about some opportunities in different countries in Latin America, and Europe , but as you look at the company as it gets bigger do you think there is a bigger opportunity from an acquisition and growth standpoint on the <unk> business or do you think there is still a lot of runway left for the traditional merchant acquiring business.
Thanks Kartik.
If you're localizing to the U S. I think there is I mean, theres always opportunities, it's a big market.
It's just for the potential it has 24 Choi of untapped potential on card.
<unk>.
Is just a primary focus of the company as well as E Commerce and Brendan's comments.
We talked about launching our BDC platform, which is.
Extension of our pay fabric platform. So I think E. Commerce continues to be a growth focus for us in all our markets <unk> doesn't really exist at the same rate outside the U S.
But it's going to be a focus you'll continue to hear more and more about that and we are just as active looking for.
Additional investment opportunities domestically on <unk> as we are in the other markets.
I think the interesting.
Corollary to all of this is that we're not localized in any one market around acquisitions is what is the market potential have for US and then how do we take advantage of this when it's a new market.
<unk> through a buy in acquisition and historically they've been through a bank and then as Darren said earlier, followed on with Tech enabled that goes on at the same time. So we're not biasing the cash available the company one direction or the other it's really more what are the opportunities and to these opportunities.
Fit the strategy that we've deployed now here for 12 years as we've expanded internationally and I don't think thats changing if anything it's only going to accelerate as we open up the markets and people start traveling and thanks look around and say.
What did I missed during the last two years and who can help me accelerate my ability to support my customers and I think that's only going to heat up over the next 12 months.
Perfect. Thank you very much appreciate it.
Thanks, Thanks Kartik.
Your next question comes from the line of Tien Tsin Huang from Jpmorgan Chase Your line is open.
Tien Tsin Huang from Jpmorgan Chase your line is open.
Hi, I hope you can hear me.
Hey, Tien Tsin, it's definitely an area, Hey, guys, Hey, Jim Hey, Darren just.
Brian I just wanted to ask on the on the margin front firms. If you don't mind, just I know, there's a lot of puts and takes on margin for everybody. This year.
You're standing up some new business you've got.
Employees coming back on.
Contribution margin from some of our high yielding stuff coming back to you so anything unusual or call outs to.
To remind us of as the year plays out on the margin front.
No Tien Tsin, I think we've kind of moved through those transition periods within the business. Obviously in 2020, we had a lot of noise with the actions we took from an expense standpoint in 'twenty one.
We added close to 200 people in the business, particularly in the second half of the year as we saw hiring efforts.
Gain traction and.
And so I think we exit 'twenty, one and enter 'twenty, two with with margin feeling back to normal again, yet significantly higher than where we were two years ago. Obviously, we've been able to to get the margin up 250 basis points alone in 2021, I think now as you've noted in our in our guide.
We see kind of margin improvement at a more measured pace.
And that 80% to 90 basis points range, as we grow scale and leverage the fixed cost.
That we have in the business and I think that will just create some inherent margin improvement, but no real noise for you to have to to model through.
If you remember when we went public.
Sorry, I forgot sorry, Tien tsin.
When we went public I think our guidance was like 50 to 75 and now it's 70 to 90 basis points, yes, So where we are in the same range a little bit higher.
Improvements that we made I think there was some skepticism early on whether those would sustain after 2020 and as we've demonstrated through 'twenty, one and now in our guidance through 'twenty. Two that is now part of the company I think that was a learning of ours.
Post IPO and we got a lot of feedback on margin relative to our larger competitors and we were able to now maybe one of the small positives of Covid, we were able to.
Take advantage of the time too.
Re reorient some of our expenses and eliminate those that we didnt need our in source ones that we could leverage our existing capabilities. So now it's really a function of just getting bigger and companies like Greece and other markets that we go into as Chile starts to grow.
That's going to continue to press that line up over time.
Yes, no I just want to make sure that.
Since you are structurally higher.
Pre pandemic with a higher contribution margin erosion. So that's great. That's great. So my quick follow up maybe if you don't mind for Dan just I know you mentioned some wins like Dominoes I know, there's a lot of.
I mean, the activity out there I don't think you guys Didnt have credit for some of the work you've done there. So just quickly on Domino's you have is there a big pipeline for wins like that.
Just curious how those wins.
Our coming about who you're competing with isn't changed and same thing with yield dynamics. There. Thank you.
Yeah.
Thanks, Tien tsin.
I appreciate the feedback as well yes.
Good strong pipeline I think the for example dominates.
An island.
As we announced we have renewed the bank of Ireland contract and we've got really excellent engagement with the bank and the corporate channel.
In terms of unlocking many of their larger larger businesses. Similarly throughout all of our markets, though in Europe .
Got really good engagement with our bank partners, Greece again has great opportunity in the corporate space.
We've got the capabilities under the Omnichannel exactly as you say.
Realized culprits, so it's a big big focus, especially through the tech enabled channels, that's really where the corporates are playing in terms of integrated type solutions.
And given the acquisitions, we made last year as well intensive Anderson zacks and leveraging.
Clear one in Spain.
Pipeline is very healthy.
Just to add to that in Ireland in particular that renewal is I think a big win it's just re establishes.
Our reputation to stay with banks stay with us.
Even when you are up to a renewal period of time.
I think the other coming out of Ireland is that business, which was traditionally more bank branch referral.
<unk> based merchants that has moved very aggressively since COVID-19 .
And ISC e-commerce market and Fortunately, we are well positioned to take advantage of that the Andersons <unk> acquisition. We did last year is going to be additive, even though it's based in the UK will be additive to.
Meeting the ISC needs in the in the Irish market.
Alright.
Alright, Good luck Tonight, good luck with the game Tonight Tien.
Tien tsin.
Before we begin would be welcome.
Right.
Your next question comes from the line of Andrew Jeffrey from curious Securities. Your line is open.
Hi, Good morning, appreciate you taking the questions.
Thanks and Brendan.
I'm intrigued by the comments about.
The repositioning of the U S E com business.
Can you elaborate a little bit on what you think your competitive advantages I mean that that's a space that by all accounts has gotten a lot more crowded I think especially towards the enterprise and to continue on so I wonder.
How you think about the competitive positioning what the opportunities are there.
Yes.
We've tried to position ourselves as a fully integrated solution whereby.
Our inside sales team works with partners and collaboratively cells, our payments offering that will inure to the benefit of the partner in the form of revenue.
And thats sort of collaborative integrated approach.
<unk> co branded all of that kind of stuff, we don't see a lot of that in the market.
On the technical side, what we've done with pay fabric if you looked at.
The API is the documentation that we hand to our partner as part of the integration process and the timeline required to integrate I feel very confident that that's best in class I had a call with the technical team a couple of days ago, and I said, one to 10 look at the comp set where do you think we are and I was told nine five and these aren't great in flavors and I sort of take that.
As fact.
But.
If you look at the four or five partners that we have signed up thus far and the pipeline of merchant referrals that they have behind those partner agreements and the.
The approach that we're taking in working through their back book and then.
The immediate opportunity directly in front of us of accounts that they've signed up in the last 30 days that are now acquiring opportunities for us.
What we've heard from the partners is that integrated sales approach is difficult to find in the market and again, we're leading with this as a revenue opportunity for you and if youre not realizing if that's a mistake.
And so we're playing with sales were playing with the integrated sales approach and then as I, just referenced where we're leading with.
The quality of the technology as well.
And do you think.
Youre going to see material traction.
That business this year, such that you could blend.
North American organic revenue growth as you've already got pretty good I'd say above trend growth I would think in your <unk> segment.
Yes, no question.
It's a layer cake, what we're doing is we're signing partners and then closing merchants referred from those partners and as the partner base grows the referrals. We're naturally grow in the cake will get taller and if you think about our legacy.
E Commerce business, which was largely indirect via third party gateways.
That was far.
Lower quality merchants had experienced higher attrition it was smaller.
<unk> and therefore, the revenue per customer was lower but it will take for example, one company that services. The veterinary space. They have a pipeline of 650 merchants that theyre, making immediately available to us upon signing the agreement they had 50 merchants that they had.
<unk> signed in the last 30 days that are an immediate opportunity for us to go close so thats 700 merchants in 700 merchants in my World is clearly material and Thats just one of the four another one we signed.
<unk> services business, where the average merchant there is doing $501 million.
Dollars per annum volume again Thats a good size account I think we're talking relatively attractive spreads. There. So yes over time I feel very confident that revenue is going to compound and we will see some acceleration out of the E com business.
Just to echo something that the indirect business as we described in the comments Brendan just mentioned that has not been a growth business for us for some time, we exited back in 2013 2014.
Kind of the core focus of that business, which was just didn't align with the company's strategy and the acquisition of notice, which gave us pay fabric and then building out the capabilities of pay fabric on the <unk> side and the success there it was really the math.
Yes.
You suggested making <unk>.
That was a couple of years ago and it took some time obviously to pivot.
But we know e-commerce is not going away, we're not chasing the shopping cart business.
We're really an extension of the ISC business that we do successfully today out of our Tampa Office. Now. This is just more of a virtual one.
Again, a lesson out of e-commerce .
Covid is ecommerce was front and center.
So I don't think its material. This year, just like Chile is not going to be overly material in the first year, but in the second and third and fourth year as Ireland is a good example that Ireland is a significant part of our business today and we're extending now for another seven years. So we're optimistic we have a great team leading the effort and.
We will continue to report on our progress.
Helpful. Thank you.
<unk>.
Sure. Your next question comes from the line of Ramsey El <unk> from Barclays. Your line is open.
Hi, Thanks for taking my question this morning.
Could you help us think through the contribution from Chile.
Our full year guidance, we're just trying to figure out kind of how.
To size it get a little better tighter view of how to size it.
Yeah, Hey, Ramsey, it's Tom.
So let me kind of level set when you think about 2021 is just kind of a jumping off point as I mentioned earlier when responding to Bob's question.
Chile contributed a couple million dollars topline and basically kind of breakeven ish bottom line, but we've got really good sales momentum the merchant portfolio that we acquired from Banco Brasil has continue to to grow.
You'll recall that as our gateway down there and then the <unk> relationship has really gained traction here in the second half of the year and we've seen the merchant portfolio get up to almost 10000 merchants.
As we ended the year, we've seen we've seen continued good sales momentum.
And we would expect that.
Accelerate as we just get more rhythms more at bats, with the BCA team.
And frankly onboard some of the merchants that are in the pipeline.
So long winded way to get on and get to your answer and that is kind of contribution within our overall guidance, we see Chile.
Contributing close to kind of a $10 million ish kind of top line number.
And having pretty attractive margins call it $35, 40% kind of margins, obviously, we're going to continue to invest in that business and therefore will add infrastructure as we gain scale, but it's it is factored into our guidance and it's a modest contributor to the overall increase in <unk>.
Revenue that we anticipate year over year.
Can I just quickly want to add one thing to Toms comments.
Obviously agree with everything Tom just said, we have probably experienced more success in the large corporate segment earlier on than I anticipated and these merchants are big chunky accounts the margin has been in <unk>.
Pricing in the market was always somewhat uncertain because of the Trans bank dynamic again Trans bank was the monopoly provider here to fore.
And these are Mastercard didn't have their hands in interchange rates and all of that is changing obviously, so we are obviously in the market.
<unk> Mastercard are pushed out interchange rates in the sort of broader repricing exercise thats ongoing.
But the large corporate segment has a fair amount of momentum the bank as Tom said is very very engaged and our sales team down there has done a very nice job aligning our product set to ensure that we can board as many of those large corporates as quickly as possible.
That's super helpful.
Can I also ask you to kind of go around the globe and give us an update on the non U S. ISP business I'm presuming. It's obviously most evolved in Europe , but maybe you could give us a status report on penetration of ISP in Europe versus some of the other markets for example, Latin America that Youre that youre in now.
Thanks, Brian , Yes, Youre right in terms of.
Cover Europe and hand back to Brendan.
In America.
Lately, we are seeing traction in all markets across Europe really good progress.
Throughout the Gms in each can.
<unk> really focused on it so.
Traction in Germany, really partner oriented business as the market really doesn't.
Because the traditional bank referral model.
Good strong relationships with Deutsche Bank. It is very much a partner business and the team has done an excellent job.
Oriented and pivoting more strongly towards tech enabled.
And if you wanted a quick walk around Poland. Similarly.
Very strong referrals from the bank, but the country similar to Czech Republic is going through taxation initiatives to encourage merchants too.
Take cards <unk> digital payments. So we launched the soft falls in Czech Republic, which is where you can tap your card to your phone.
Our merchants' phone tap opened on their phone.
<unk> similar announcements in the market about self pulse initiative.
In the integrated and partnership model is a great opportunity and we will be rolling that out across Europe . This year.
Spain, we are in very unclear one now for a few years.
The traction we get through ice fees is very significant in the U K, we don't have a bank partner so about half of our business comes through Isps and growing rapidly so significant.
The opportunities there so each country.
Is performing extremely well and then e-commerce gateway that we've rolled out across Europe again for unattended.
<unk> relationships, that's where the traction is really growing as Jim said earlier in terms of.
Through Covid E Commerce digital.
Is the growth agenda, so we're seeing.
Great progress in E Commerce ISC.
Over to you Vernon.
So Chile, it's obviously too early to comment with respect to the ISP business in Mexico on the Tech enabled side the bigger piece of the business today is e-commerce , it's roughly 15% of the business, but it's growing kind of 30 ish percent.
And the gateway that we bought in Chile last year at this Pago facility Gateway is.
As in the process of being launched into the Mexican market I anticipate that'll be done in the next couple of weeks.
And on the <unk> side, it's just very very early days.
So it is not material to the business today. It is a big point of emphasis.
For me.
And the Mexican leadership team and we have calls on it regularly and have I think a robust pipeline of opportunities, but I think we have the right team and technology in place, but as it relates to earnings contribution today, It's a story for tomorrow not today.
Out of our Canadian business, we do have a very vibrant partnership with one large ISP.
That ISP is contributing more than 500 accounts a month, which.
As the world is extra.
Extraordinary that partnership has been in place for a number of years now the senior leadership team in Canada and that in that company out of the UK maintain a really healthy relationship and we continue to renew it.
Economics that allow us to make a healthy margin and then finally with respect to the Tampa business here domestically.
We don't talk about it as much as perhaps we should but that business actually just had its best month on record in a very long time.
We've done some.
Enhancements to our sales team, we made some more investments.
On the on the business development side and on the inside sales team and we're now out I think maintaining a more robust dialogue with the dealer network as you will recall the legacy Sterling business got to got to market by dealing with resellers are dealers that in turn sell software solutions and we have I think done.
Our job of penetrating what had previously been a more.
A more dormant.
Portfolio of resellers, so specifically in the U S imac as optimistic about our ISP business as I have been in a number of years and I think Darren had one more comment I wanted to thank thanks, Brendan Yes, I just forgot one market in terms of update your estimates walk around Europe . So island I missed we talked about the bank of Ireland renewal, but the team there have done a phenomenal job we've got more than.
<unk> 40, ISP partners really signed over the last 18 months to 24 months.
Very strong complementary distribution channel an island in December the bank.
Thank you that was excellent detail really appreciate it.
Your next question comes from the line of Bryan Keane from Deutsche Bank. Your line is open.
Hi, guys how are you doing.
Just wanted to add Brian .
Get the details on DCC as we think about cross border coming back.
What would be some of the positives the obvious positive impacts to the model and just thinking about what's in what's in guidance for this year.
Yeah, Hey, Brian It's Tom So we do expect cross border activity to return.
As Darren said, we see the restrictions coming off in the consumer eager to get back to traveling again, I think that will help us in lots of different ways, just more international card volume, but also DCC, specifically, we have DCC returning to 2019 levels.
For our for our company think of DCC is kind of mid single digit revenue contribution. So it's not huge but it's certainly something that's meaningful to us, particularly on the increment.
And we would see DTC growing in that $10 million to $15 million range relative to what it contributed in 2021.
So I think it's something that.
It's hard to predict because it's ultimately consumer behavior and consumer decisions our hit rates have continued.
To be on par with what we've seen before so we haven't seen any kind of material change.
We will see some seasonal effects with respect to DTC, obviously, that's related to cross border activity.
<unk> in the fourth quarter was particularly fourth quarter of 2021 was particularly strong at doubled relative to last year again, probably more of a commentary about 2020 than 2021, but we did see strong DCC volume return.
Seasonally Q1 is typically pretty low, but just to give you a data point as to why we're confident in 'twenty. Two returning to 2019 levels that Q4 number of 2021 was pretty close to the Q4 number of 2019. So we think 2020 is an anomaly.
And in 2022 will grow off of that 2021 base.
The other thing I'll comment on is not specific to your question, but I think it is something that is worth noting just related to FX.
Obviously.
Give or take 60% of our business is international the peso the slide in the euro or the currencies that were most sensitive to.
With some of the hawkish comments from the fed you've seen a strengthening of the dollar that did create a call. It 3 million, 3% growth rate kind of headwind for us in Q4.
Obviously, theres a lot of geopolitical pressures out there there's continues to be the inflationary discussion that we were talking about earlier on the call.
Our expectation is that FX rates remain fairly consistent with where we entered 2022 I think that's kind of generally where economic consensus is on on FX rates, but that is a variable that we will have to deal with it obviously comes to us it's not nothing that we can control but.
But I wanted to mention that somewhat related to your DTC question, because it does kind of speak to kind of the international composition of our business.
That's really helpful.
And the other follow up just trying to get.
My arms around merchant count and thinking about the growth rate you guys had this year versus what youre expecting for organic merchant growth in 'twenty two.
Yes, so yes.
We've seen good growth on the merchant account side, particularly in the markets that you would expect Poland had seen strong merchant count UK Ireland.
Obviously in Chile.
Really off of a base of practically zero, so <unk> got an extremely strong growth there.
As Brendan said within the tech enabled.
Components of our U S business, we've seen good good mid count growth there as well, we see merchant count is something that's going to grow steadily but the ingredients that go into kind of our overall performance as portfolio growth volume per merchant.
We've mentioned before some of the DCC in Chile components.
I think merchant count is something that we'll continue to see nice steady growth, but it's only one factor that goes into our overall.
Our revenue outlook.
Great. Thanks for the color.
Thanks.
Your next question comes from the line of George <unk> from Cowen Your line is open.
Thanks for taking my questions guys I guess the first one.
Brendan if you could elaborate a little bit on the e-commerce opportunity with pay fab working I guess more more specifically sort of like the target merchant that youre going after perhaps in terms of size and ultimately as this thing ramps I'm, assuming the benchmark should just sort of the E comm growth in the U S.
Going forward, so very sort of healthy double digit growth as opposed to the sort of flattish E comm growth that.
That you were seeing in E. Comm pre pandemic is that is that sort of the right way to think about it.
Yes, I really think about our e-commerce business exactly as I articulated earlier I think of it as two completely distinct businesses. The first is an indirect business largely through authorized dot net of which we have almost no control. It is entirely at success or failures completely predicated on the activity.
Visa and that particular month, the health of their merchant referrals.
Quality of those referrals varies pretty widely from month to month so.
We see pretty wide ranging approval rates out of the underwriting team and that's no indictment of the underwriting team. It's a reflection of the quality of the referrals and then.
As Jim mentioned, we got out of a big line of business. There are a number of years ago and since that time the business has.
Experienced slightly negative growth rates.
Through the President and I have no reason to expect that that will change and that business is naturally because it was built up over a number of years much more material than the second piece of the business, which is the direct business and the direct business is entirely within our control. We've got a team of business development professionals signing up partnerships. We've got a team of inside sales folks that are closing.
Merchant referrals from those.
Partners and I think the number that I gave you earlier out of one partner.
Intended that to be anecdotal, but in the aggregate reflective my expectations is those merchants are doing between 500001 million bucks of volume per annum.
And I think that to me is is a reasonable.
Expectation.
Terms of specific segments that were particularly interested in we've had five wins, thus far so five partner agreements that were excited about the focus has been healthcare.
Veterinary.
And then field services field services to us means.
Lawn care in some instances it means home improvement providers.
But we've got a pretty robust pipeline of partner opportunities in those three segments, specifically and right now we're trying to hunt a bit with a rifle more than a shotgun just because we're trying to identify segments, where our products that meets the needs of the partners nearly immediately.
George and I have a question.
George I know your question Didnt cover Europe , but also European just.
The alternative Carla to Brendan's updates.
So Europe's.
For the two models that Brendan talk to your model is direct totally say, that's all markets selling in house Evo Payment's Gateway European Gateway.
To all size of merchant so from the larger merchants.
One we updated previously was the national luxury and islands.
The National Australia as it says large corporates there on e-commerce traffic through to SME sized businesses as well as the full market range of merchants in terms of target merchant size. It really the full range. We also enable.
Through direct selling side through the OSV partnerships, we have established.
The referral partners that'll be referring merchants tourists, who will be selling direct through inside sales as Brendan says.
E Commerce solutions, so that's the model for Europe .
Okay. That's great color just Darren a quick follow up you sound encouraged on all geographies throughout Europe .
Or is there any one specific one outperforming expectations any one perhaps coming in perhaps a touch softer than what you are looking at is really just across the board strength right now.
Pretty much across the board.
As I said earlier, all market saw easing restrictions, Poland denounce that Oh restrictions are lifted from the first of March.
<unk> done the same so we're seeing consistent trends and bounce back across the whole of Europe , I think the the opportunities of where the markets are.
Or regulators governments.
Implementation.
Taxation recovery systems processes. So.
<unk> touched on Czech Republic, Poland, really encouraging merchants to take digital payments.
And kind of eradicate the Castro black economy, so they can track.
Transactions are sales and therefore gain higher tax receipt so.
Those are giving us a stronger emphasis but really yeah, I'm seeing encouraging trends as Tom touched on that we sell through through Q4 with DCC as well strong trends in our markets.
Great Congrats on the results guys.
Thank you.
And there are no further questions at this time, Mr. Jim Kelly CEO I turn the call back over to you for some closing remarks.
Okay. Thank you operator, and thanks, everyone for your continued interest in Evo.
This concludes today's conference call. Thank you for your participation you may now disconnect.
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