EVERTEC, Inc. Q3 FY2020 Earnings Call

Good afternoon, everyone. And welcome to the EVERTEC Third Quarter 2020 Earnings Conference Call. Today’s conference call is being recorded. At this time, I would like to turn the call over to Kay Sharpton, Vice President of Investor Relations. Please go ahead.

Thank you and good afternoon. With me today are Mac Schuessler, our President and Chief Executive Officer; and Joaquin Castrillo, our Chief Financial Officer. Before we begin, I’d like to remind everyone that this call may contain forward-looking statements and should be considered in conjunction with cautionary statements contained in our earnings release and the company’s most recent periodic SEC report. 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 earnings per common share. Reconciliations to GAAP measures and certain additional information are also included in today’s earnings release and related supplemental slides, which are available in the Investor Relations section of our company’s website at www.evertecinc.com. I will now hand the call over to Mac.

Thanks, Kay, and good afternoon, everyone. We achieved strong results with the highest quarterly performance in our company’s history, driven by consumer demand as the economy reopens as well as the impact from new business. Additionally, we have continued to execute on our Latin America initiatives, which will position us for growth over the longer term. Beginning on slide four, total revenue was $137 million for the third quarter, an increase of 15% compared to 2019, adjusted EBITDA was $70 million, an increase of 26% as compared to the prior year, and adjusted earnings per share was $0.65, an increase of 38%. We generated significant operating cash flow year-to-date of $121 million and we returned approximately $18 million to our shareholders through share repurchases and dividends. Additionally, our liquidity as of September 30th was $246 million. Moving on to our update on slide five for Puerto Rico. We continue to see significant transaction revenue as a result of the federal and Puerto Rico government stimulus programs earlier in the quarter, timing of tax payments, and the further reopening of businesses. Merchant revenue surged in July to over 30% growth, tapering off in the subsequent months for a total quarterly revenue growth of 16%. The Puerto Rico government further reduced COVID restrictions beginning in early September. However, consumer demand has been tempered by the expiration of the stimulus support. That said, we are encouraged by the recently announced release of $13 billion in federal funds to rebuild the electric infrastructure on the island, which will be a longer-term benefit to the economy. Additionally, we would expect to see a more immediate impact from the additional $300 per week of unemployment benefit, as outlined by the President’s Executive order, which was approved by FEMA for Puerto Rico only a few weeks ago and began to be distributed last week. Our recent contract with the Department of Education, in which we recently provided new computers and support to the public education system, produced a one-time revenue increase of approximately $4.4 million in the quarter. We also continue to benefit from our digital channels related to the ATH network. Our ATH Movil and ATH Movil Business continue to deliver superior growth and we are encouraged by the adoption rate of both consumers and businesses. We have also expanded the contactless functionality through QR codes from 400 merchants in July to over 1,500 businesses today. On slide six, I will review our Latin American business. Regarding the environment, we continue to see different responses to the COVID-19 pandemic and varying levels of restrictions and re-openings. Chile and Colombia have stabilized their COVID-19 trends and recently lifted certain restrictions. Mexico and Brazil are allowing many merchants to reopen, with Brazil recently achieving more than a month of stability. However, we remain cautious about the outlook throughout the region, given the continuing uncertainty surrounding the virus. Despite the pandemic, we remain focused on executing our LatAm growth initiatives. We continue to leverage our investment in place to pay by localizing the gateway in Costa Rica and Panama. This platform has enabled our partner banks to transition existing merchants to the new gateway, as well as add new e-commerce merchants. Our PayStudio acquiring platform is now in production with two new customers, Alelo in Brazil and ANDA in Uruguay. As we mentioned on our Q4 2019 call, Alelo is one of the largest financial service companies in Brazil, specializing in benefits, incentives, and corporate expense management. ANDA is the largest nonprofit in Uruguay which serves as a benefits provider for a wide range of services such as medical, legal, travel, and other services through employee payroll deductions. Both clients were term license agreements. We continue to expect to be in production on our acquiring processing services with Santander in Chile and our collection platform with Citibanamex by the end of the year. We anticipate all of these wins to contribute to growth in 2021 for our Latin American payments segment and over the longer term. As always, we have continued to invest in our employees and communities. Recently, we completed an employee engagement survey and despite the challenges of working through the COVID pandemic, we saw a 13% increase in participation in the engagement survey to 85%, as well as significant improvements in many areas of employee satisfaction. While we were delighted with the engagement and the feedback, we still have areas of opportunity that we will focus on this year and next. In Puerto Rico and across Latin America, we continued our commitment to the scholarship program, which is in its sixth year, and we awarded over 160 scholarships, an increase of almost 20% from the previous year. This year, we were particularly focused on gender equality, and through specific initiatives, we were able to achieve a balance of 50% female and 50% male STEM scholarship recipients in Puerto Rico. Further, over the past year, we have focused on our environment, social, and governance efforts and we have seen increases in the scores provided by various rating agencies. We are proud of our progress on these important areas of corporate citizenship. With that, I will now turn the call over to Joaquin.

Thank you, Mac, and good afternoon, everyone. Turning to slide nine, you will see the consolidated third quarter results for EVERTEC. Total revenue for the third quarter was $136.5 million, up 15%, compared to $118.8 million in the prior year, reflecting the strong bounce back in consumer demand, positively impacting all our transactional revenue. As Mac mentioned, we also benefited from one-time revenue of $4.4 million with our new Department of Education contract. Total revenue for the nine months was $376.4 million, an increase of 4% year-over-year. Adjusted EBITDA for the quarter was $70 million, an increase of 26% from $55.5 million in the prior year. Adjusted EBITDA margin was 51.3%, and this represents a 460 basis point increase compared to the prior year. The increase in margin primarily reflects the higher transactional revenue and additional services provided to the government. Additionally, we benefited from non-operating income of approximately $2 million due to foreign currency gains related to balance sheet re-measurement. Year-to-date, adjusted EBITDA was $176.5 million, an increase of 3% from $170.9 million in the prior year. Adjusted net income for the quarter was $47.2 million, an increase of 37% as compared to the prior year, primarily reflecting the higher adjusted EBITDA and lower cash interest. This was partially offset by increased operating depreciation and amortization, driven by capital expenditures in the prior year, as well as key projects that went into production this year and late last year. Our adjusted effective tax rate in the quarter was 13.6%, reflecting the mix of business in Q3. We now expect our tax rate in Q4 to range from 13% to 14% depending on the mix of business. Adjusted EPS was $0.65 for the quarter and increased 38% compared to the prior year. Year-to-date, adjusted net income was $108.5 million and approximately flat with last year, and adjusted earnings per common share was $1.49, an increase of 1% from $1.48 in the prior year. Moving on to slide 10, I will now cover our segment results, starting with Merchant Acquiring. In the third quarter, Merchant Acquiring net revenue increased 16% year-over-year to approximately $30.6 million, driven by the impact of increased sales volume. The quarter began with over 30% year-over-year revenue growth in July and moderated to a high-single digits average for the remainder of the quarter. The quarter's results were driven by the reopening of business, pent-up consumer demand, as well as extra funding from federal programs as a result of COVID-19. The Merchant mix during the quarter shifted to a more normal distribution and we continued to benefit from a high average ticket, although transactions were down approximately 8% for the quarter. Spread was up primarily due to the higher average ticket and benefit from card mix, shifting from credit to debit, as well as from international cards to local cards. Adjusted EBITDA for this segment was $15.9 million, up 42%. Adjusted EBITDA margin was 51.8%, up approximately 940 basis points as compared to last year, reflecting the impact of the higher revenue and lower operating expenses primarily due to lower transactions. We will likely see these elevated margins decline as the average ticket normalizes in the fourth quarter. For the nine-month period, Merchant Acquiring revenue increased 2% to $80.5 million. Adjusted EBITDA year-to-date for this segment was $40.6 million, up 14%, and adjusted EBITDA margin was 50.4%, a 560 basis point increase as compared to the last year. On slide 11, you will see the results for the Payment Services, Puerto Rico and the Caribbean segment. Revenue for this segment in the third quarter was $33.3 million, up approximately 9% as compared to last year, primarily due to the higher ATH Movil and ATH Movil Business transactions and other new services. We saw an over 200% increase in ATH Movil revenues, which contributed an incremental $2.3 million in the quarter. This benefit was partially offset by a decline in ATM transaction volumes. Adjusted EBITDA for this segment was $18.5 million, up 1% as compared to last year. Adjusted EBITDA margin was 55.5%, down 490 basis points as compared to last year, primarily due to higher operating expenses driven by higher cloud expenses, POS repair and maintenance, and other project-related expenses. Year-to-date revenue for this segment was $90.6 million, down approximately 2% as compared to last year. Year-to-date adjusted EBITDA was $47.8 million, down approximately 20%, and adjusted EBITDA margin was 52.8%, down approximately 11.8 percentage points as compared to last year. On slide 12, you will see the results for our Payment Services LatAm segment. Revenue for this segment in the third quarter was $21.2 million, up approximately 3% as compared to last year. The increase was driven by the acquisition of PlacetoPay, as well as revenue related to the implementation of Alelo, partially offset by the COVID-19 impact on transactional revenue, the negative effect of anticipated attrition of approximately $1 million, as well as a negative foreign currency impact of approximately $700,000. Adjusted EBITDA for this segment was $9.5 million and adjusted EBITDA margin was 44.9%, up approximately 810 basis points as compared to last year, driven by higher revenue and the benefit of balance sheet re-measurement in non-functional currencies of approximately $2 million. Excluding the re-measurement, adjusted EBITDA margin would have been approximately 34% and generally consistent with our expectations. Year-to-date, revenue for this segment was $62.7 million, approximately flat as compared to last year. Year-to-date adjusted EBITDA for this segment was $23.9 million and adjusted EBITDA margin was 38.1%. On slide 13, you will find the results for the Business Solutions segment. Business Solutions revenue for the third quarter was up approximately 19% to $63 million. The revenue increase in the quarter was primarily due to the Department of Education contract of $4.4 million, new services for Popular and increases related to government contracts, coupled with delays in last year’s government renewals. For the quarter, adjusted EBITDA was $33 million and adjusted EBITDA margin was 52.4%, up approximately 500 basis points as compared to last year. The adjusted EBITDA margin increase was primarily driven by higher revenue, particularly the Department of Education one-time revenue, which was recorded net of expenses. If we normalize for the one-time revenue, the adjusted EBITDA margin would be in our normal percentage range of the mid-40s. Year-to-date, Business Solutions revenue was $174.5 million, up 9%, and adjusted EBITDA for this segment was $84.5 million with a 48.4% margin. Moving on to slide 14, you will see a summary of Corporate and Other. Our third quarter adjusted EBITDA was a negative $6.9 million, an increase of 1% compared to the prior year. Our adjusted EBITDA as a percentage of total revenue at 5% was favorable by approximately 70 basis points as compared to the prior year, primarily due to higher revenues in the quarter. Year-to-date, our Corporate and Other adjusted EBITDA was $20.2 million or 5.4% as a percentage of total revenue and favorable approximately 30 basis points as compared to last year. Moving on to our year-to-date cash flow overview on slide 15. Our beginning cash balance was approximately $131 million, including restricted cash of approximately $20 million. Net cash provided by operating activities was approximately $121 million, a $15 million decrease compared to the prior year, which includes an increase in accounts receivables as a result of the new computers provided under the Department of Education contract. Most of these receivables were paid by the government subsequent to the end of the quarter. Capital expenditures year-to-date were approximately $37 million. We continue to anticipate approximately $45 million of CapEx for the full year. We paid approximately $28 million in long-term debt payments, $3 million withholding taxes on share-based compensation, and $2 million of other debt pay downs, which resulted in a total net debt decrease of approximately $33 million. Year-to-date, we paid cash dividends of $11 million. Although we did not repurchase any stock in the quarter, total repurchases of common stock year-to-date were approximately $7 million. We have approximately $23 million available for future use under the company’s share repurchase program. We recently announced another $0.05 dividend to be paid on December 4, 2020, to shareholders of record as of November 2, 2020. Our ending cash balance as of September 30 was $162 million and it includes approximately $18 million of restricted cash. Moving to slide 16, you will find a summary of our debt as of September 30, 2020. Our quarter ending net debt position was approximately $361 million, comprised of approximately $144 million of unrestricted cash and approximately $505 million of total short-term borrowings and long-term debt. Our weighted average interest rate was 4.5%. Our net debt to trailing 12-month adjusted EBITDA was 1.9 times. This multiple below the 2 times threshold will provide a 25-basis-point improvement in our interest rate on approximately 40% of our debt in the next quarter. As of September 30th, total liquidity was approximately $246 million. This balance excludes restricted cash and includes the available borrowing capacity under our revolver, which remains fully available. Now moving on to our thoughts on the remainder of this year, as well as some initial comments for 2021. Although we are not providing guidance, given the continued uncertainty of COVID-19, we believe we could see low to mid single-digit revenue growth in Q4 2020, if there are no significant changes in the impact of the pandemic. We expect to see sales volume growth slowing in Puerto Rico, as well as average ticket normalizing. We would anticipate modest Business Solutions revenue growth and LatAm should be delivering mid single-digit revenue growth, driven by the new contracts, partially offset by the continued impact of COVID-19 and attrition. Margins should move to more normal levels between 46% and 47% as the average ticket comes down, and unlike Q3, we do not anticipate any significant one-time revenue benefits in the quarter. Now turning to 2021, I would like to comment on several considerations. First, we are pleased with our new agreement in LatAm, which are anticipated to contribute to high-single to low-teens growth in LatAm, assuming some normalization of the COVID-19 impact and recovering currencies that have been a headwind in 2020. We are pleased with the PlacetoPay gateway and anticipate further expansion as we cross-sell this product to other clients in broader geographies. While we have some delays in client attrition in 2020, which will now be realized in 2021, we plan to stop updating these given that 2021 attrition will likely be at similar levels to 2020. Second, in Puerto Rico, we will continue to monitor the flow of federal funds and the potential positive impact to the economy from rebuilding and investment, but the timing still remains unclear as is the impact of COVID-19. We believe our focus on innovations and digital solutions will continue to benefit us in 2021. Lastly, the CPI Index for September was announced on October 13th and was 1.4%, which will benefit our Popular revenues as per the MSA agreement, largely affecting the Business Solutions segment. In summary, it is gratifying to see the results in Q3 and we are executing well against our longer-term initiatives. We look forward to updating you with our full 2021 outlook next quarter. We will now open the call for questions. Operator, please go ahead.

Yes. Thank you. And the first question comes from Bob Napoli with William Blair.

Yeah. thank you. Good afternoon. Nice job on the quarter.

Hi, Bob.

What do you expect from Chile and Citigroup in 2021?

We are still very focused on implementing those projects this year, and in Chile, we already have some merchants processing transactions. We believe these will contribute to 2021, and we have been able to keep these projects on schedule to be completed by the end of the year. However, we are not providing guidance on what this will contribute until the next call.

Okay. Very good. And that it’s included, I guess, in the LatAm, high-single to low-teens revenue growth?

Correct, Bob. It is included in there.

Okay. And then the growth in the Merchant Acquiring segment, the higher ticket, what are you looking for in the fourth quarter for the Merchant segment as far as growth in the Merchant Acquiring segment? And just Banco Popular had some pretty strong growth in spend. I think 27% for the quarter, debit and credit card spend. Does that not match up with EVERTEC’s business?

The numbers for Popular are related to certain transactions that we don't necessarily see, so it's more about correlation.

Okay.

A perfectly, I mean, we saw and as we said on the call, very strong sales volume across the Board and across the quarter, obviously, there is a lot of stimulus that was impacting Q3. As we go into Q4…

Right.

… I think we are trying to obviously continue to get information, stimulus spending have come down from the levels that people were receiving and we still have uncertainty as to whether there’s going to be another package coming in Q4. But to the extent that, that does not happen and we go back to a more normalized economy, let’s say, without the stimulus, we are expecting the average figure to start to come down and normalize, which is actually something we saw throughout the quarter as well. And that’s a big driver of what we are seeing in that segment and the impact to margin as well. So we would expect the margin to also start to normalize for the Merchant Acquiring segment as we move into Q4 considering everything.

But Bob, two things are certain. First, the Puerto Rican Government has approved the $300 stimulus for unemployment, and they have already started implementing this throughout the island. Second, like many other companies, we are experiencing a significant shift to digital. We have observed impressive growth in ATH Movil and ATH Movil Business, with B2B transactions increasing over 350% for the quarter. Overall, there is more than a 200% increase in P2P and B2B transactions combined. Additionally, the demand for QR codes has risen, allowing customers to make purchases at places like Starbucks, McDonald’s, and Burger King without handing over a card. We have expanded the number of locations accepting this payment method by 275% since our last call, and we continue to see strong demand. Currently, 5% of the merchants are ATH merchants that accept QR code payments, particularly those with higher transaction volumes. We are actively onboarding a large number of merchants each week, and the digital shift will persist.

Yeah. That was my next question. It seems like, yeah, Puerto Rico was set up for a massive digital shift, and again, thank you for the color on that. And the ATH, the $2.3 million, was that the revenue in the quarter from ATH?

No. So that was the contribution of both the B2B and the business to our growth in Q3. So not the actual revenue generated by those products.

So the $2.3 million was the growth in dollars over the prior year or the prior quarter?

Over the prior quarter.

Okay. And can you tell me what...

The growth over the third quarter.

Okay. Okay. Okay. Thank you. Appreciate it.

Thanks, Bob.

Thank you. And the next question comes from John Davis with Raymond James.

Hi. Good afternoon, guys. Encouraging to hear the $13 billion being released. How is that supposed to layer in over the next, I assume, a couple of years and also any update on the $8 billion of HUD funding that’s still, I think, in limbo? And then last one here, the $300 a week, how long is that supposed to last in Puerto Rico for the unemployment?

In terms of the $300 million that started last week, and there was actually a retroactive payment going back to the beginning of August. And the program is pretty much the same as in the U.S., and our understanding is that that will go on for about another month.

You asked about the $13 billion for the electrical grid. This funding will be spread over time and will accomplish two main things. First, it will create jobs, stimulating the economy through direct investment in rebuilding the electrical grid. Second, it will have a positive ripple effect on the broader economy. Ultimately, we hope this will help reduce one of the biggest costs of doing business here, which is utilities and electricity. Our goal is to make this a more competitive environment for businesses.

Okay. No. That’s helpful. And then, as I think about outside of Puerto Rico, I mean, Chile is beginning to ramp here toward the end of this year into next year. What are some of the other markets that you potentially are targeting for growth outside of Puerto Rico and has there been any further progress or any, I guess, events of note in some of the other markets, whether it’s bank consortiums breaking up or are we just focused on Chile at this point, maybe just kind of an ex-Puerto Rico broader uptake would be helpful?

Sure. We are observing a couple of trends. Firstly, as we've discussed in previous calls, we're witnessing the breakdown or sale of monopolies, like in Argentina and Transbank. Additionally, we are on track with Santander Chile to implement by the end of the year, and we are already processing transactions for some new merchants. This indicates a shift where customers are willing to move away from monopolies or duopolies. Secondly, regulators are issuing new licenses to fintechs, allowing them to offer payment and banking services, and these fintechs are becoming some of our customers. Earlier this year and last year, we stressed the importance of localizing our platforms in Chile, Colombia, Mexico, and Costa Rica, especially after acquiring PlacetoPay. The PlacetoPay e-commerce gateway is an area we've decided to continue investing in, particularly in Colombia and Ecuador since the acquisition. We have now localized our offerings in Central America, Panama, and Costa Rica for several existing clients, as the previous product did not meet our standards. Now, we’ve provided them with a solution that allows them to migrate their existing merchants to the new platform while attracting new ones due to the significant improvements in the PlacetoPay platform. We are also planning to localize the PlacetoPay platform in Puerto Rico and Chile. These are the key markets we are focusing on, and we now have the product—covering risk management, payment solutions for both issuing and acquiring, and the gateway—while investing in localization tailored to where we operate.

Okay, that's helpful. Lastly, do you have any statistics or specific information about the card penetration in Puerto Rico, or insights into the increase we have seen? For instance, can you share if there has been a noticeable percentage increase in transactions and volume, similar to BPOP, which is up 27%? Any information that could help us understand the shift towards electronic payments in Puerto Rico would be greatly appreciated. Thank you.

I mean a specific stat, John, is really there is a one source. We are taking into consideration many different data points that we have here to kind of give some direction, obviously, we are seeing every category in terms of consumption going up from a sales volume perspective and we are seeing the banks here also report that they are seeing volumes across credit and debit increase. We are seeing the use of all digital channels increasing as well and these are all driven by the use of cards at the end of the day. And so we continue to see a very big opportunity to continue to make inroads into kind of the cash business here in Puerto Rico, which continues to be a big part of the economy. And as Mac said, ATH Movil and ATH Movil Business for us is kind of the best way for us to continue to get additional penetration.

There’s still a resemblance to a more advanced Latin American country when comparing penetration rates to the U.S., as there remains a significant underground and unofficial economy. In traditional sectors like gas stations, supermarkets, and restaurants, penetration may be lower than in the U.S. However, we are making significant inroads in new markets, particularly with B2B and the ATH Movil business, which involves paying service contractors and food trucks. This represents a considerable opportunity for growth. As I mentioned earlier, P2P transactions for the quarter increased by 70%, and ATH Movil Business saw a remarkable rise of over 350% in new electronic payment volume. There are still many opportunities ahead.

All right. Very helpful. Thanks guys.

Thank you. And the next question comes from James Friedman with Susquehanna.

Hey, everyone. Great job to you and your team. I wanted to follow up on your mention of the $300 a week stimulus in your prepared remarks. Could you provide some insight on how long you expect that to last? Additionally, Joaquin, you mentioned that client attrition in 2021 would be similar to that of 2020. Can you remind us what the attrition rate was in 2020? Thank you.

Yes, regarding the $300, you are correct. That amount was approved by the President through an executive order, and the local government is required to match part of it. It’s less than the previous unemployment funding from the federal government. The current duration for this is likely a few more weeks, but we believe it will be beneficial. However, if this continues, the economy remains open, and even though it's a smaller amount, it will have an impact for the next couple of weeks.

What was the other part of your question, James?

On attrition.

Can you talk...

For this quarter, the impact from attrition is about $1 million, and we expect it to reach $3 million to $4 million for the year. Initially, we anticipated it would be $4 million to $5 million. This is why we mentioned a slight delay in attrition, which, as noted in previous calls, has been decreasing for a few years. We expect an additional $3 million to $4 million next year. We plan to avoid updating this figure on a quarterly basis moving forward.

Got it. Okay. Thank you, guys. All the best.

Okay.

Thank you.

Thank you. And the next question comes from James Faucette with Morgan Stanley.

Hi. This is Priscilla Russo on for James. Just two quick questions, on the Latin American trends as these markets have been opening up. Can you talk about what you have been seeing in terms of spend uplift or transaction growth and normalization there? And then on generally the health of the merchants within Puerto Rico, obviously travel is an outsized portion of your GDP and so even though you may not have direct exposure to travel, I just wanted to understand how businesses there are doing, are they buying more products from you, perhaps using the pivot POS devices, any color on that would be helpful? Thanks.

Yeah. Yeah. In terms of just the overall portfolio and our exposure to tourism, as we have mentioned in the past, we don’t have any significant direct exposure. Most hotels or airlines that we have in Puerto Rico are usually processing transactions through a corporate processor. So we have limited direct exposure. Obviously, tourism is a bigger part of the Puerto Rico economy. Although, it’s really closer to 5% really of GDP, and it has an indirect impact through restaurants and retail sales. And even though it’s down, again, as we said, we have seen sales volumes up in pretty much every category. And in terms of the general state of the portfolio of merchants, we have seen a slightly higher percentage of inactive merchants over the quarter. Many merchants that haven’t started back to process or that are having maybe a little bit more difficult in getting off to business, but in general terms, that continues to also move toward normalization, so nothing really that we are overly concerned in terms of those getting back online. And in terms of Latin America, look, I mean, we continue to focus on the four countries that we have mentioned in the past, Chile, Colombia, Mexico, and Costa Rica, and in getting our processing platform up and running, making sure that we are putting ourselves in a position to continue to expand margin into the future. And as we said, with Santander, it’s kind of our first client onto this platform and showing the success that we can bring by having a processing platform in these countries.

Thank you. And the next question comes from George Mihalos with Cowen.

Hey, guys. Thanks for taking my questions. Really just two clarification points for me, I want to make sure, I am thinking about some of these things correctly. So, just on the acquiring side, I think, you said, July was up 30% and then it had moderated to kind of high single digits in September. I am just curious, have those high single-digit trends continued in October, have you seen any sort of moderation from there? And then just as it relates to the EBITDA, I think, you called that the $4.4 million onetime from the DOE and then another $2 million, anything else that we would need to adjust to kind of come up with a normalized margin? I think I am kind of backing into like a 48% margin if I do the math?

That's correct, George. Those are the two main items we highlighted that you should consider as a one-time impact on the higher margin we reported. Could you remind me of the first part of your question, George?

As it relates to the acquiring segment, I think, you said, in kind of up high singles?

Yeah. No. I mean, so in October, I would say, that there has been some slight moderation in terms of sales volume. We continue to see a fairly strong sales volume. We have seen the average ticket, however, come down and transactions continue to be lower than the prior year. But as we said before, those usually go hand-in-hand, so as we have seen a slight improvement or recovery from the transactional side, we have seen that average ticket start to come down. So it’s something that even though the high sales volume that we saw in July was there, on a sequential basis, we have seen that average ticket come down and that is reflecting itself in October as well.

Thank you. Appreciate it.

Thank you. And the next question comes from Korey Marcello with Deutsche Bank.

Hey, guys. Thanks for taking my question. You mentioned 5% of the ATH merchants have the QR code now and that’s kind of ramping quite quickly. I am just curious if you could just give some high-level thoughts on kind of where you see that penetration going forward? And more importantly, do you guys see a lift on kind of QR code transactions per merchant versus other transactions, just trying to think about that a little bit deeper?

We launched this product in the previous quarter, Q2, and the adoption rate at the merchant level has been quite rapid. We are currently analyzing how this affects the transaction volumes with merchants. Our goal is to convert more transactions to our product transactions for ease of use and to encourage more transactions through ATH over other types of electronic payments, as that is our debit network. We have seen a 275% increase in the number of locations, and within those locations, the use of the QR code is also rising. By the end of 2020, we aim to capture a significant volume, focusing on larger chains and major merchants to help them get started. We are also testing ways for smaller merchants to implement the product more independently. This is a key focus for us as it strengthens our relationships with merchants and promotes both electronic payments and specifically ATH payments.

Got it. That’s very helpful. I would like to hear more about e-commerce in Puerto Rico and some of the markets you serve. What trends are you observing in e-commerce, and how is EVERTEC positioned to take advantage of the e-commerce opportunity in the coming years?

We are observing a trend with our payment solutions, especially with our e-commerce gateway, PlacetoPay. In Ecuador, we've experienced significant volume growth recently. Now that we've localized the product in Costa Rica and Panama, we're beginning to see success as banks are adding new merchants rather than just sticking with their existing base under the previous product. The earlier product limited our growth potential in the region. We also plan to switch to this new product in Puerto Rico, and the acquisition of PlacetoPay has been highly successful, positioning it as the future gateway for our company. Thank you. And I want to thank everyone for joining the call. I hope each of you and your families remain safe. We look forward to connecting with you virtually over the coming months and really look forward to seeing you again in person once we get past the pandemic. Thank you and good night.

Thank you. The conference is now concluded. Thank you for attending today’s presentation. You now disconnect your lines.