Good morning and welcome to the EVO Payments Fourth Quarter and Year-End 2018 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] Please note this event is being recorded.

I would now like to turn the conference over to Ed O'Hare, Senior Vice President of Investor Relations for EVO. Please go ahead..

Good morning and welcome to EVO Payments fourth quarter earnings conference call. This call is being webcast today and a replay will be available through our Investor Relations section of EVO's website, shortly after the completion of this call.

Please note that some of the information you will hear during our discussion today will consist of forward-looking statements. These forward-looking statements are based on currently available information and actual results may differ materially from the views expressed in these statements.

For additional information on factors that may cause our actual results to differ from the views expressed in any forward-looking statements made today, please refer to our earnings release and the risk factors discussed in our periodic reports filed with the SEC, including our most recent 10-K, which will be available on our website.

In an effort to provide additional information to investors, today's discussion also include certain non-GAAP financial measures, an explanation and reconciliation of these non-GAAP financial measures to the nearest GAAP financial measures can be found in our earnings release available on our Investor Relations website.

Today, we will discuss our fourth quarter and year-end 2018 performance. Joining me on the call today is Jim Kelly, Chief Executive Officer; Kevin Hodges, Chief Financial Officer; Darren Wilson, President, International and Brendan Tansill, President, North America. Now, I'll turn the call over to Jim Kelly..

Thanks, Ed and good morning, everyone. Welcome to EVO's fourth quarter earnings call, where we will review our results for the quarter, summarize our accomplishments for 2018 and discuss major themes for 2019. In the fourth quarter, EVO delivered 12% in constant currency revenue growth, resulting in 25% constant currency adjusted EBITDA growth.

These accomplishments reflect our strong referral base with leading in-market banks, ISV partners and other referral relationships and continued integration efforts across the company. The strong finish to 2018 is further demonstrated by our 16% transaction growth in the fourth quarter across Europe and North America.

Over the past six years, the company has built a robust distribution network within our direct and tech enabled divisions. Internationally, our network is anchored by banks, which are the foundation of our expansion strategy.

To-date, we successfully completed 14 international bank alliances and partnerships and we continue to see a robust pipeline of opportunities in current and prospective markets. Our primary strategy is straightforward. First, we identify opportunities with leading financial institutions in attractive geographies.

Second, once the bank relationship has been secured, we immediately begin executing our joint go-to-market strategy and initial sales effort, including addressing legacy, pricing inconsistencies and integrating the portfolio into our infrastructure.

And finally, once integrated, we launch our broad array of products and services and introduce our tech enabled and direct sales to accelerate market growth. Our success in building these relationships reflect the strength of our senior leadership team, our proven track record for execution and our differentiating product capabilities and services.

We remain well-positioned as a strong, proven partner for financial institutions, as they continue to evaluate their strategies for digital payments. Domestically, we continue to expand our revenue via two primary tech-enabled business units, ISV and B2B.

Together, these components of our tech-enabled divisions are strong drivers of transaction growth in the high teens, thanks to our strong sales execution coupled with market leading products, services and distribution.

E-commerce remains a significant component of this division, although its performance has lagged behind our other tech-enabled business units. Historically, we are focused on signing small e-commerce merchants.

More recently, we have moved upstream to focus on more mid-market e-commerce merchants and expand our domestic product capabilities, which we believe will improve growth in this business unit, as we exit 2019. Turning to our domestic direct division, we made two significant changes in the second half of 2018 to improve our performance.

First post IPO, we reorganized our leadership team to bring in new talent and restructure our sales and support services to better serve our merchants. Second, we acquired the remaining interest in one of our subsidiaries, allowing us to directly control its sales.

Once the federated buyout annualizes in Q3 of this year, we believe our direct sales division will deliver mid-single digit revenue growth heading into 2020. These steps will improve the overall growth for North America, which is currently led by the U.S. ISV and B2B business units and the direct division in Mexico.

As we reflect on 2018, we have many accomplishments to highlight, not the least of which was completing a successful IPO in May and a subsequent follow-on offering in September.

For the full-year, we delivered solid constant currency top line revenue growth of 11% and constant currency adjusted EBITDA growth of 15%, with margin improvement of 99 basis points for the year to 26.3%.

We delivered margin expansion in 2018 by integrating our acquired businesses in the U.S., Spain, Germany and Poland, further developing our start-up markets in Ireland and the Czech Republic and growing the top line in both of our segments.

Our strong 2018 performance was due to the leadership of our executive team and our general managers and country managers, who run the business along with the 2,200 employees across the markets we serve.

During the year, this team successfully negotiated seven acquisitions and bank partnerships, made significant progress on our back-end and front-end integrations and extended our ISV network to continue driving growth in our tech-enabled division.

It was a successful first year as a public company and we are very excited about the opportunities that lie ahead for EVO. As we look forward into 2019, we anticipate Europe will continue to deliver the solid growth we've previously demonstrated.

We remain focused on expanding our product capabilities across the region, as we leverage our recent tech-enabled acquisitions such as IPG, ClearONE and the newest European acquisition, Way2Pay. We will continue to invest in the tech-enabling capabilities to ensure our platform offers market leading solutions for our customers.

These solutions are complementary to the countless software companies that are gaining momentum across Europe. In addition, we remain on track with the previously announced integrations in Germany and Spain and continue to work through the regulatory process of our acquisition in Portugal, which we believe we'll finalize sometime this summer.

Turning to North America, we continue to see strong growth in Mexico. We delivered solid sales results with year-over-year revenue growth of 12% in 2018, aided by a very close relationship with our alliance partner bank, Citibank.

We recently released our global e-commerce platform in Mexico and we'll now more directly participate in the early stage high growth segment of the market. Finally, we are focused on migrating our back-end processing infrastructure in Mexico to our primary U.S.

platform, which will provide savings plus migration, while expanding our capabilities in the country. This migration will further benefit the company as we look to enter other Latin American markets.

In the U.S., we continue to drive sales growth in our tech-enabled and direct divisions since the completion of the Sterling platform migration in October. The U.S. remains our largest market, representing over 35% of total company sales.

We continue to roll out new merchant solutions from our Snap platform to service tech-enabled relationships and to look to identify complementary tech enabling acquisition opportunities and operating efficiencies.

Lastly, we remain focused on expanding our distribution footprint in our current markets and into new markets such as Asia Pacific and Latin America. While the timing is beyond our control, given our track record capabilities and most importantly our team, we anticipate further expansion in 2019 and into the future.

Overall, we are pleased with our results and remain very excited about the future growth of the company. Kevin will now cover financial performance and our outlook for 2019.

Kevin?.

Thank you, Jim, and good morning, everyone. As Jim mentioned, EVO delivered another strong quarter to conclude a successful 2018 in our first year as a public company.

For the fourth quarter, we reported revenue growth of 9%, compared to the prior year or 12% on a currency neutral basis, with acquisition and a Q4 2017 Mexico revenue timing adjustment contributing to three percentage points of that growth.

In the fourth quarter, we continued to deliver currency neutral revenue growth in our largest international markets, including Poland at 23%, Spain at 23%, the Irish and UK market at 37% and Mexico at 11%, after considering the previously mentioned adjustment.

Adjusted EBITDA on a currency neutral basis increased 25% to $44.3 million, compared to $35.3 million in the prior year. Currency neutral adjusted EBITDA margin increased 324 basis points in the quarter to 29.4%. Pro forma adjusted net income was $14.7 million for the quarter, reflecting growth of 70%.

As in past quarters, our adjusted results exclude M&A transaction and integration related items, including the write-off of certain acquired trademarks we are no longer using, employee termination cost and share based compensation expenses.

Looking at our North America segment, revenue in the quarter increased 7% over the prior year period on a reported basis and 9% on a currency neutral basis. This growth was fueled by our tech-enabled division in the U.S. and the buyout of the remaining interest in Federated. Within this segment, our U.S.

tech-enabled revenue increased 14%, compared to the prior year period and represented 50% of U.S. revenue. Further, our U.S. tech-enabled transaction growth was 13% in the fourth quarter, compared to the prior year period. U.S.

direct and traditional revenue grew 8%, reflecting the continued improvement of our direct division and the Federated Buyout, offset by expected declines in our traditional division. Our direct division now represents 39% percent of U.S. revenue, while the traditional division represents 11%.

On a currency neutral basis, our revenue per transaction in North America increased 4% in the quarter, which reflects the growth in our B2B and ISV business units. Segment adjusted EBITDA for the quarter was $31.5 million, an increase of 16% on a currency neutral basis.

North America adjusted EBITDA margin improved 217 basis points to 35.8% in the quarter. This improvement reflects the benefit of our operating efficiencies and integration efforts. Turning to Europe, we saw strong performance out of this segment as well, although the strengthening U.S. dollar had a notable impact on our reported results.

Segment revenue in the quarter grew 12% over the prior year period on a reported basis and 16% on a currency neutral basis. In the fourth quarter, our revenue per transaction in Europe declined 5% due to the growing number of large merchants performing well in the market and lower DCC take rates.

We saw fourth quarter European tech-enabled revenue grow 22% on a currency neutral basis, versus the prior year, driven by our sales in Poland, Spain, Ireland and the UK. The tech-enabled division now represents 33% of European revenue.

Segment adjusted EBITDA for the quarter was $20.1 million, an increase of 51% on an adjusted basis, and an increase of 57% on a currency neutral basis. For the quarter, adjusted EBITDA margin was 32%, which was up 838 basis points, compared with the prior year.

As we have discussed on previous calls, we made investments in the prior year related to the growth in the market and the pending IPO, which have annualized in the second half of 2018 and predominantly led to the strong growth in margin in the quarter.

Our adjusted results exclude $25.8 million of net expenses, which include $8.7 million related to M&A transaction and integration costs, $14.6 million due to an impairment of the Sterling trade name that we transitioned over to EVO branding, $1.6 million attributable to share based compensation expenses and $900,000 due to employee termination expenses.

Turning to our corporate expenses, adjusted corporate expenses grew $2.6 million to $7.3 million for the quarter, primarily due to new public company costs. Consolidated net loss attributable to EVO Payments Inc. was $4 million for the quarter, resulting in a $0.16 loss per basic and diluted Class A share.

Reflecting adjustments described in our press release and all share classes, pro forma adjusted net income per share was $0.18. At the end of the quarter, our basic share count was 25.6 million, which represents the weighted average Class A common stock outstanding.

Including all shared classes and dilutive securities, we had 82.4 million shares outstanding. In the fourth quarter, we spent $9.8 million in capital expenditures.

As we had mentioned on prior calls, approximately 60% of our CapEx is for point of sale terminal in our international markets, where we follow the market practice of providing merchants the terminals. We ended the quarter with net leverage of 4.5 times, LTM adjusted EBITDA.

In addition due to our refinancing and debt pay down activities related to our IPO and secondary offering, interest expense declined 25% in the quarter, compared with the prior year period.

Free cash flow described as adjusted EBITDA, less capital expenditures, less net interest expense was $22.9 million, an increase of 600% over the prior year period. For 2019, we are giving guidance based on recent trends, completed acquisitions and changes in FX.

As you know, EVO's exposure to foreign markets is larger than most of our peers as 65% of our revenue comes from outside the U.S. We see many economists anticipating the U.S.

dollar will continue to strengthen against the currencies in our international markets and we expect these headwinds to impact our reported revenue by approximately 400 basis points and adjusted EBITDA by approximately 450 basis points in 2019 versus 2018.

Before turning to our outlook for 2019, I want to provide an update on EVO's adoption of ASC topic 606, revenue from contracts with customers, the new revenue accounting standard. Under 606, we will be reporting GAAP revenues net of fees paid to payment networks.

We are adopting ASC 606 in 2019 as we qualified as an emerging growth company under the Jobs Act. During 2019, we will report GAAP results reflecting this new revenue standard and non-GAAP results using the old method to aid and comparability.

And finally, for 2019 guidance, we expect reported revenue with the impact of ASC 606 to range from $488 million to $505 million. On an adjusted basis, adding back the impact of ASC 606, we expect revenue to range from $593 million to $610 million, for a growth of 5% to 8% over 2018.

As noted earlier, we expect FX headwinds in 2019 to be approximately 400 basis points. Therefore, on a constant currency basis, we expect adjusted revenue growth to be at 9% to 12% over 2018 results. Net loss on a GAAP basis is expected to be in the range of $12 million to $9 million, compared to a net loss of $99 million in 2018.

Adjusted EBITDA is expected to be in a range of $156 million to $163 million, reflecting growth of 5% to 10% over 2018 adjusted EBITDA and 10% to 14% over currency neutral 2018 adjusted EBITDA.

Adjusted EBITDA margin is expected to range from 26.4% to 26.7% reflecting expansion of 27 basis points to 60 basis points over 2018 currency neutral adjusted EBITDA margin. Net loss per share attributable to EVO on a GAAP basis is expected to be $0.26 to $0.21, compared to a net loss per share attributable to EVO of $0.70 in 2018.

Pro forma adjusted net income per share is expected to be in the range of $0.53 to $0.56, which reflects the growth in adjusted EBITDA described previously offset by additional depreciation expense in 2019 from point of sale terminal deployments and recently completed acquisitions.

The impact of the higher depreciation expense impacts our 2019 pro forma adjusted net income per share by approximately $0.18. These numbers are calculated based on a pro forma share count of 82.4 million shares, which include all share classes.

We expect capital expenditures to be in a range from $50 million to $55 million, with 60% being comprised of point of sale terminals. We are very pleased with our fourth quarter and year-end 2018 results. I will now turn the call back over to Jim..

Thank you, Kevin. I will now turn the call over to the Operator to begin our question-and-answer session.

Operator?.

Thank you. [Operator Instructions] Our first question comes from Tien-tsin Huang with JP Morgan. Your line is now open..

Hey, good morning.

Thanks for that details, Jim, I just wonder, maybe ask how you're thinking about fiscal '19 growth versus fiscal '18? What are the big differences you think and the drivers aside from the FX that you guys talked about?.

Yeah. I think, if you look at Europe last year or this in '18 we had the benefit of the fiscalization in Poland, Poland is our biggest market. And so, we expect as I said on the last call that will not continue at the same pace. This year in Poland continues to drive that market.

But having said that, Poland will continue to be a strong grower for next year. I think Spain likewise where two years ago Spain had a more difficult time with the Santander transactions for - Spain had a very strong year last year.

They're well set up with ClearONE and their new relationship with Liberbank, we expect, although it's not Spain, Portugal will start in - over the summer. And so we're expecting Europe to continue to do well, it may be slightly less, but that was a bit of an anomaly having this fiscalization take place internationally.

And then closer to home, I think Mexico, as we said on initial comments, we expect that to continue to perform well in the low double digits. And then the U.S. market we see the B2B and ISV businesses continue to do well. Our direct business, we saw an improvement in the fourth quarter.

As we said or I said in the last call, heading out of '19, we expect U.S. direct business which is more traditional feet on the street business, we've seen that term from a business that was slightly down to modestly up and we expect that to continue to improve during this year into next year.

So across the board, as the guidance suggests, I think the business is continuing to perform well in all markets..

All right. That was great. That's helpful. And then on the - just as a quick follow up, the in-organic revenue growth contribution in fiscal '19, how big is that in terms of acquired revenue.

And I'm curious, just beyond the numbers, the acquisitions like Way2Pay and you mentioned ClearONE just now, what does that do for you? What kind of synergy or how does it open up growth with some of these countries for you?.

So, I'll do this with Kevin. I'll take the Way2Pay question. So Way2Pay is a, I think it's more of a value added service added to our IPG Gateway, the one we acquired two years ago. So this is capabilities, the product is already excuse me in up and running in Ireland.

So it's an existing business that we had a relationship with, that we simply acquired and will continue to push across Ireland and the UK markets and then across Europe and possibly our other markets.

That's really just building out tech-enable in terms of capabilities and in terms of the product itself, it's not material to the business today, but it's more capabilities to drive organic growth in the future..

And then Tien-tsin, just overall, the acquisitions that we completed in '18 add about 2% to the growth in '19. We're not including Portugal yet, you know, we announced that last year, but that deal hasn't officially closed yet..

All right. Great. Thanks, guys..

Thank you..

Thank you. And our next question comes from Jason Kupferberg with Bank of America Merrill Lynch. Your line is now open..

Hey, thanks. Good morning, guys. I just wanted to pick up Kevin kind of where you left it off on the depreciation comment. I realize obviously it's a non-cash expense, but it's a big number in '19, probably the biggest delta between where your EPS guide is and the consensus.

Can you just go little deeper on the sources of this and to what extent is this a transitory spike in depreciation or not?.

Sure. There's kind of three main sources of kind of the increase in depreciation expense. The first was really coming from the acquisition that we completed kind of in the second half of the year. And you'll see when you look at the P&L kind of sequentially, you'll see the depreciation increase going from Q3 to Q4.

The other component is just the strong growth that we see in the international markets. As we've talked about, we see point of sale deployments continuing in those markets to coincide with the growth.

And then the final piece just relates to - in the international market where we have the terminals, compliance changes, rule changes around terminal security. So over the past couple of years have been a terminal upgrade process. And so we've just kind of called that out again as a contributor to the increased depreciation..

Okay. So you do expect this to pass after 2019 and then we kind of go back to more normalized levels, I mean assuming that you don't do more M&A obviously, but....

Yeah, this is, Jim, as it relates to acquisitions, as we buy a merchant portfolio from Bank X, you're getting merchant contracts and terminals. So those terminals are now on our books and we have to begin to amortize them. Sometimes they're not fully compliant.

We may not know all the ins and outs of the entire portfolio if you're talking about tens of thousands of merchant terminals. So it actually caused a spike in spend to be able to replace non-compliance terminals with compliance terminals. And the terminals don't last forever, compliance changes do change.

So it's an unfortunate byproduct of being in international markets and I don't anticipate that anytime soon until the market changes, where there aren't terminals, because we've got something else or we can convince merchants internationally to buy the terminals or lease them versus rent them.

It is a by-product of our business oriented to the international market. So it was a little bit higher, this quarter we had some acquisitions. We bought a business to right size a couple of years ago. We had to change out, I think the entire terminal base. MONETA we just launched last year, Liberbank which was about 25,000 terminals.

So all that stuff together with just the growth that you saw and I think the other big one that we shouldn't pass is Poland. So we had the fiscalization, we put 30,000 terminals out - without offsetting revenue. I think as we describe the first year, we don't feel that was part of the program in Poland.

So it is a little bit oriented to - I wouldn't say it's a one-time, but it is definitely higher now that it would probably normally be..

Okay. Got it. And then I wanted to ask on adjusted EBITDA margins, I know you're talking about 27 basis points to 60 basis points in constant currency terms in terms of a year-over-year increase. Normally you target 50 basis points to 75 basis points last quarter, it sounded like maybe you were planning on '19 being even a little bit better than that.

So just wanted to understand some of the ins and outs in the margin for 2019 since it seems like we may not get as much as you would typically target..

Well, and as you see for the year that just passed, I think we targeted 50 basis points to 75 basis points, we ended up at 99 basis points. So we get some credit for that 99 basis points going into '19, I would guess. We're trying to manage the investments in the business, at the same time is driving margins.

I think we've done a very good job over the last two years or since going public, focusing on margin, probably more so than when we were a private company. But I think the range of 20 to 60 or 27 to 60 is still well within the expectation that we set 50 basis points to 75 basis points.

And it's just - the year is just starting, we have a number of initiatives. During the year, we have some conversions that will be completed during the year, some of which are starting, some of those that start, cause a little bit of a near-term offset to normal margin growth, but we feel comfortable with the range that we gave..

Okay. Just last one for me, I know you mentioned some evolution of your strategy in the e-com space.

Can you just spell out for us how fast that business did grow in '18? I know it wasn't as fast as some of the other areas of tech-enabled, but many numbers you can give us around that as well as what you might target longer-term, once you have a chance to implement some of your newer growth strategies. Thanks, guys..

Okay. So the U.S. e-commerce business is different than what we do internationally, domestically we use third party partners. So we're really somewhat at the mercy of the referrals that come to us.

And as I said in the comment, we've pivoted beginning last year and into this year to focus on larger versus smaller - the smaller ones tend to have higher turnover and other consequential issues associated with them. In terms of breakouts, I don't think I'm going to sub-divide it even further beyond what we do.

But it is a slower growth and it is one of the reasons why even though the B2B business and the ISV business continue to grow in the mid-teens or high teens in the case of B2B, the overall North American business because of our e-commerce business and the direct traditional are the ones that we continue to focus on to try to improve the growth rates..

Okay. Got it. Thank you..

Yes..

Thank you. And our next question comes from Ashwin Shirvaikar with Citi. Your line is now open..

Hey, guys, this is Andrew Schmidt on for Ashwin. Thanks for taking my question.

I was wondering if you could walk through the EBITDA margin assumptions by segment, seems like we would get more margin expansion in the Europe segment given the process and consolidation there, but just curious how you're thinking about margin expansion by segment?.

Sure. Hey, Andrew, it's Kevin. So if we look at Europe, we've talked about some of the margin or the platform migrations, we had a couple of them last year in Spain. We're continuing to work on say like the Liberbank portfolio migration.

They take time, so it's not a kind of one-time cut off, so we continue to move merchants in Spain over to the Polish platform. We also talked last quarter about some of the activities around the shared service center in Poland.

So that migration is underway and I think we said, we wouldn't start to see those savings until we sort of exit '19 and really see the benefit of those savings going into 2020.

So I think a lot of the margin expansion that we saw just in the quarter is really coming from annualizing a lot of those investments that we have been calling out, the investments in tech-enabled sales, standing at the shared service center, investing in the European management team, those were investments we made prior to the IPO and as we've been calling out, they started to annualize in Q4..

Got it.

And then in the U.S.?.

So same type of items going on to U.S., we have - just the growth happening in our tech-enabled channels, we already migrated the Sterling platform, we talked about that on the last call.

A lot of the Sterling integration activities had already been completed and we've sort of now been investing in growing our tech-enabled division, primarily ISV, B2B and looking after the e-commerce portfolio. Mexico, we can take a look at migrating that portfolio, but that's a longer platform migration, we're not anticipating that in 2019..

Okay, thank you. That's helpful. And then Jim, maybe a question for you strategically, as we think about in your commentary, you talked about prospected new markets in regards to the JV pipeline.

As we think about Asia Pacific, is there anything that changes with the conversation with banks there, your go-to-market strategy has to change, what are some considerations as we think about use potentially expanding there?.

I don't know that the conversation is necessarily changing. I mean, we are active in all the regions in terms of very early stage conversations.

And as I mentioned in the comments, I think banks in today's market are very focused on digital and how can they stay close to their customers, and this is tends from my experience, banks tend not to want to invest heavily in this type of business and pursue partnerships. And we're well situated to be that partner.

As I said, I think we have 15 bank relationships now that we've developed over the last five years. We're very good at sourcing them and then getting across the contract stage and then executing. And I think it's the execution side and the resume that we have and the calling card.

We're a prospective new bank, we would make available any of our existing relationships to talk to about what the experience was after the ink dried on the page..

All right. Thank you, guys. Appreciate the comment..

Thank you..

Thank you. And our next question comes from Oscar Turner with SunTrust. Your line is now open..

Hey, guys, good morning..

Good Morning..

Good morning..

So first question just on North America, I was wondering what kind of channel growth assumptions are underlying your '19 revenue forecast for North America?.

So if we take, I guess, Mexico first, we as I said in the comments, we expect Mexico to continue to execute in low double digit growth rates, that's a business that's predominately direct. So this is somewhat old school referrals from financial institutions. Again, Mexico is low card penetration.

So we're benefiting as are others from the shift from paper to plastic. The second piece would be e-commerce, as I mentioned, we've now launched our IPG gateway, which would also have the Way2Pay product on it into the marketplace, that goes in this quarter and would be able to more specifically participate in the shift to e-commerce previously.

As we bought the business, there was like in the U.S., they used partners who had gateway infrastructure. So now we'll have our own solution and we'll also be able to - we have customers in Europe who want to do business in Mexico, who are already on the platform in Europe that will be using the platform in Mexico.

So we see Mexico as a fantastic market for us. It's almost the same size as the U.S. and we would expect that that channel will continue to show growth for many years to come.

I think in North America excuse me, in the U.S., we've got the kind of three that we break it down, tech-enabled, which I think we've described as the mid-teens or so for the B2B and ISV together, slower growth as I mentioned on e-commerce and then the direct business, absent the acquisition, together with the acquisition, we're growing, but Federated we own some of - we did not own all of.

So we're getting the benefits for the first nine months of this year of that acquisition. But even absent that acquisition, our direct business did grow in the fourth quarter very modestly, but that's a big win over where it had been historically.

And the team that's managing that business, which is the feet on the street business, continues to do quite well. So our expectation is we'll continue to see it improve during the year and coming into '20, we would be expecting and say the 4% to 6% range in terms of growth.

Remember that, that market is the 65% or so the U.S., which has not shifted to ISV. So you would not expect that that business is going to grow double digit, that wouldn't make a lot of sense since the ISV business is really taking share away from traditional feet on the street type of business.

And then our last is traditional and this - these are businesses that are no longer in business. So we effectively have a legacy portfolio. We pay out commissions on that portfolio, but it is essentially a runoff business, which as Kevin said represents, I think less than around 10%..

It's around 10%, it's going to decline 20%. I mean, it's in line with normal merchant attrition for an ISV type portfolio..

But our strategy is going to continue to grow the overall size of the pie. So as we make investments, as we open up in Portugal or in other markets that we invest in, the impact of something like traditional is going to become smaller and smaller.

It still represents significant cash flow that we take and reinvest in higher growth businesses, but it will continue to be somewhat of a drag on our U.S. business..

Okay, yeah, appreciate that color. Thanks..

Yeah..

And then second question is on Europe, most things like you guys are seeing strong growth from the tech-enabled segment there, is that mainly being driven by e-com? And then how should we think about the pace of adoption of ISV solutions in Europe, and when that channel could be material to segment growth?.

So we have our President of Europe here, we'll give him a chance to answer some questions that will have all the fun.

Can you go ahead, Darren?.

Thanks, Jim. So I think each market is seeing pretty healthy growth potential through all vertical or channels. Yes, the adoption of tech-enabled is moving from Western Europe across Eastern Europe at a reasonable pace. UK, Ireland is the faster growing countries compared to Eastern Europe, but we are seeing good ISV tech-enabled growth potential.

And similarly, we've now launched our e-commerce gateway across all of our markets, seeing positive growth trajectory on the e-commerce side as well, worth maintaining good referral relationships on the organic direct business - direct and partner business with our bank alliances. So good channel growth across all verticals..

Okay. Thank you..

Thank you. And our next question comes from Bryan Keane with Deutsche Bank. Your line is now open..

Good morning, guys. Just a couple of clarifications, on the U.S. direct business that's shown the improvement, I know you've gone from negative to positive growth.

Is the key there the management change, what exactly is kind of happened to make that improve in terms of growth rate and then the outlook obviously has improved as well?.

So, Bryan, I'm going to have Brendan, who manages it directly take that question..

I guess it's definitely not management that's making it. No, yeah, thanks for the question, Bryan. So as I think Jim mentioned on the prior call, this was a business that we had acquired from founders many years ago and we changed our management in the direct channel in the, I think, early part of the second quarter of last year.

And the second - the new management there has really brought accountability and focus, they've brought in a significant amount of talent directly below the senior manager of the channel. And they have injected the building with energy and culture.

And when you go down there, there's absolutely a buzz and a commitment to winning that I don't know existed previously. So I think it's all the things that you would expect, it is focus and accountability every day at the office..

Got it helpful. And then just curious on the acquisition pipeline if it's how it looks and if we should expect basically in the year another couple of tuck-in acquisitions to add a point or two to revenue growth as we've seen in previous years. Thanks..

I guess short answer to that would be yes, the size of these acquisitions as I said in my comments and the timing obviously are out of our control.

But we're an acquisitive company, it doesn't mean we're trying to drive up the size of our balance sheet, but we are acquisitive and Companies of sizes that probably are not as exciting to some of our competitors would still be very meaningful to us.

For example, the company Way2pay, it's a niche that would be very that we think is going to be very helpful not just to the European market, but potentially other markets. And then bank portfolios, that continues to be a very significant focus of Brendan, Darren, myself, David Goldman, who runs M&A for us. He's on the road of tremendous amount.

So I think the pipeline continues to be very robust on a mere to different opportunities in lots of different markets..

Okay. Helpful. Thanks for the color..

Thank you. And our next question comes from Georgios Mihalos with Cowen. Your line is now open..

Hey, thanks. Good morning, guys. So I wanted to start-off in North America and just curious the success that you're having in the ISV channel there, I'm just wondering, are you starting to see sort of a, you know, more material increase in the referral fees to partners as that business is growing, you're getting more volume.

And then secondly, in kind of keeping on this margin theme, if we think of the migration Mexico to the U.S., how substantial will that be, maybe within the context of the Sterling migration that you just completed from a cost saving standpoint?.

So the first question first, so on the ISV referral fees, you know, I think the answer is that we are being as I said I think on the last call, we continue to be disciplined about the fees that we're prepared to pay.

We are prepared to compensate our partners fairly and equitably, but we don't feel the obligation to get irrational and that hasn't in any way precluded us from boarding significant number of new partners each month in each quarter.

So do we episodically see a competitor of ours get more aggressive on splits or up fronts, of course, but do we feel compel to be as irrational as our most irrational competitor, of course not. And there's a good chunk of the market that continues to behave incredibly rationally.

And the other positive attribute of the channel is that there remains a very vibrant community of new software companies entering the channel on a constant basis. And those partners if found early and selected prudently, you know, you can grow with them. So, no, we haven't sort of seen a steadily increase in our referral fees to our partner base.

And I don't sort of see that being an obligation in order to succeed anytime in the near-term..

And George in terms of the conversion and all these conversions represent opportunities, I guess you're taking a business that's we're paying a fee for service for processing and we're putting it on a fixed infrastructure, because we own the system, there's no licensing fee, the number of people that are running the system are the same.

I don't think we're at a position yet to know the exact amount of the savings. And therefore, it's not - as Kevin said, it's not factored into '19, not going to happen in '19. We're moving a third of the Mexican market onto our system.

So that takes some time to plan it out and close the gaps and all the other stuff that we've been doing for the last 10 - I guess eight years here and 20 years in my career. But we'll come back to you probably by this time next year with some views on where Mexico is so.

For this year, Mexico is really just in the planning cycle, development cycle, testing cycle, all the stuff that you do to move a portfolio..

Okay. And if I could sneak one more just on the European side, the ClearONE acquisition, I'm just curious, are there any specific European geographies where you were sort of seeing more traction, on the ISV side post the acquisition. Thanks..

Could you just clarify that when you say more fraction? I'm not sure, I know what that?.

Is there specific European geographies that seem more open kind of to ISV, you think kind of that move to tech-enabled?.

So we just had a - we just had our Board meeting yesterday and part of the Board meeting we brought in people across Europe to present to the Board. The ISV strategy is first time the Board get a chance to see the kind of people that do the work every day.

And I could say, for example, Poland, I think Poland has a very robust opportunity in the ISV space, that's still very, very early stages. Spain, as we've mentioned, when we got there one, Spain has a lot more ISV potential than I had appreciated even a year ago, a year and a half ago.

UK, I think is going to probably eclipse us in terms of new merchants on a direct side for ISV. So they're out there, because consumers demand the type of things that ISV's solve in markets and all over the world I'm assuming. Right now I can just speak to North America and Europe.

I think the next place that we want to push more aggressively on the ISV front will be Mexico and we have planned in a way to do that as well..

Great. Thanks..

Yeah..

Thank you. And our next question comes from Cris Kennedy with William Blair. Your line is now open..

Hey, guys. Thanks for taking the question.

Can you just give an update on the consolidation efforts that you're taking in Europe and how that's going and kind of when that whole process will be complete?.

Sure, not sure, it ever is complete, because every time we buy something else, there's more consolidation. I think specifically on somewhat people consolidation, if we took it from the different regions to one that's been more significant is Spain. So Spain is a migration of our merchant portfolios from Banco Popular, which we acquired many years ago.

So I would say we are 80% done. The only thing that's holding us up is some file work from the bank, so that we're able to migrate some larger merchants without impacts. But otherwise, we would have the Spanish Popular migration complete. Liberbank is just getting started.

Unfortunately, Liberbank is on a different central processor in Spain than the one we just moved. So that was bad luck for us, because all the work we did, we have to redo for Liberbank. But that is going on now and probably will start migrating by I would say the end of this year.

You said it Darren?.

Yeah, I adhere..

Yeah, aside from - and then once Portugal closes, then Portugal will be the same thing, that same team that works on conversion full time, they'll turn their attention to Portugal, we have a group out of Spain that has done Popular as well.

Now Liberbank will handle BIC [ph] on top of it and that would probably not start probably to the beginning of next year at the very end of this year. On the people side, we've been consolidating back office type of space.

When we first entered Europe years ago, we kind of stood up a different - a bunch of different markets that had administrative functions, accounting functions locally. And now as a public company, we're centralizing everything back to Poland. So there's a process underway to move more and more of that infrastructure.

Germany was one that we called out during this year. So I would say by the end of the summer, most of the heavy lifting on the infrastructure side will be done, this is the post IPO type of work been on the conversions as I laid out, that's going to be ever go on - ever ongoing as we make additional investments with new bank portfolios..

Okay, that's great. Thank you. And then just one follow-up on, I think you mentioned Latin America is a long-term opportunity. Can you just kind of talk about the opportunities there and how you guys are focused on penetrating that market? Thank you..

Yeah, you - in Latin America, if you were go to the ones that represent significant opportunity, you would see the same dynamic across several of the markets, which would be a centralized processor generally owned by all of the banks, all of them reselling the same product set and competing purely on price.

And what - in each of these markets what you would find if you speak to the regulators is a strong desire to stamp out the black economy, to drive card acceptance and card usage among consumers in the path that the regulators see to that. The most efficient means to that end would be the introduction of a mono-line international acquirer processor.

So the idea is to get off the central processor, to introduce innovation, to introduce product differentiation and thereby to compete on something other than price. So it takes time. You know, these guys owning equity in a central processor, they need to figure out a way to monetize that equity value, some of these central processors are profitable.

So you saw that in the case of Argentina, in the PRISMA asset that traded in the back half of last year, a highly profitable company. And some of these businesses are not profitable, which simplifies the situation to some extent.

So it takes time, but you know, the good news is, myself and David and Darren and Jim, we all spend a lot of time on airplanes, close to these situations. And I think we're relatively well positioned when these banks are in a position to finally make a decision on how they want to proceed..

Great. Thanks a lot, guys..

Thank you..

Thank you. And our next question comes from James Schneider with Goldman Sachs. Your line is now open..

Good morning. Thanks for taking my question. Jim, I was wondering if you could maybe comment on your outlook for the U.S. business and your expectation to see, I believe you said some acceleration exiting this year and into 2020.

Is that simply a function of ISV growth and direct kind of accelerating, and then the continued run off in traditional or are there any moving pieces beyond that we should be thinking about?.

I think as Brendan mentioned and it sounds maybe somewhat simplistic, but you know, we're a service business.

So it's the people that drive our business that support our customers and the change of management in our direct business, the oversight of the business coupled with the fact that EVO was originally set up as essentially a holding company with a number of owned subsidiaries like Federated or on core the ones that we've been buying in over the years.

So as a result of now putting them all under one umbrella, one management team, the go-to-market is more is not only centralized but more organized than it was maybe prior to this. And this is just finishing up as I said Federated was just last year.

So I think that will have the impact that we described, which is to take something that was for a period of time declining, that will now start to grow, it's not going to reach the levels of the ISV because it's working against the mix shift.

But regardless, they still provide a very good service in the marketplace, the direct business and I think that will be beneficial. And the other is our e-commerce business, as I said this was more of a business where we worked with third party gateway partners and we have some reorienting to do in that business to help accelerate it's growth.

So I think the combination of the two, we've put timing out as 2020. I think we have line of sight on the direct business. I think on e-commerce we still have some work to do.

But those two things together, plus continuing to see benefit the mix shift from direct to ISV and B2B growth, I don't expect to see those changing in the next year to two years..

That's helpful. Thanks. And then relative to what you said about M&A and bank portfolios, where would you expect to see most activity, will that be in Europe or potentially in the U.S.? And can we just kind of make a comment on what you're seeing in terms of market valuations at this stage? Thank you..

Okay. So I think for us, you know, the most likely is probably more Europe than the U.S., what's available in the U.S. from a bank standpoint is limited to non-existent. The trade in the U.S.

has occurred many years ago and I don't think banks, not that banks are bad business in the U.S., I just don't think banks have the same, play the same role in our industry as domestically as they do internationally.

So you should look at us internationally as we just did EuroBic and Liberbank, MONETA, these are smaller ones, but we don't really make that decision. It's really what's the opportunity and how does it fit an overall strategy for the company.

I think beyond North America and Europe, the ones that we've said on several occasions would be South America, that is a very attractive market. We believe it's a common time zone. So we don't have the issue of flying 12 hours to a totally different time zone.

And given the large presence we have already in Latin America through Mexico, we have a workforce that and leadership that has experience working in South America. So I think we're well positioned to participate in the shift in that region.

And then for Asia Pacific, at least the senior management team, Darren, myself, Kevin, our CIO and others here, while we were at global worked years in Asia Pacific, stood up the Asia-Pacific market for global and that and that continues to be an area of interest.

Although, I wouldn't make the effort to be in a region without a major initial relationship, kind of an anchor tenant, it's too far away, too many time-zones, but both of them I think are opportunities over the next 12 months to 24 months..

Thank you..

You bet..

Thank you. And our next question comes from Ramsay El-Assal with Barclays. Your line is now is open..

Hi, everybody. This is Ben Budish on for Ramsay. I wanted to actually follow-up on an earlier question on just the ISV strategy in Europe.

Now you've acquired ClearONE, is the thought maybe to go after some more of those smaller ISVs that wouldn't attract some of the larger processors or integrate more with larger ISVs or maybe a mix of both?.

I think it'd be a mix of both in terms of capitalize on the ISV partners now that we have that we will certainly due to play one that we can integrate more partners. I mean, ClearONE has well over 100 integrations already. So capitalize on that success and continue those integration.

And then, yes, much like the complementary value added opportunities such as Way2Pay, look at those additional adjacent vertical to support integrating ISV partners. Categorically, we're not looking to buy ISVs, we're not a software business.

We want to partner with ISVs and maintain our agnostic stance of capturing the full market potential of the range of ISVs in the vertical they operate. So really ClearONE is an integrator, not an ISV, just - but just to be clear on the role of ClearONE.

So yes, weather a more ClearONE opportunities across the domestic markets we operate as an integrated that would certainly be a strategy we'll be looking to pursue..

Okay, great. And then just one more on your interest expense.

You had a small footnote in the release that was kind of helpful, but maybe just more broadly, can you talk about your pace of debt paydown over the next couple of years? When do you think you can hit your target leverage ratio?.

Sure. So we set that target leverage ratio two to three times, that again, we're not saying we're going to be out of the M&A game. So, we are still going to continue to pursue acquisitions.

The model itself tends to deleverage about a turn a year, we have amortization on the term loan already and then as we have excess cash flow, we can pay off revolver. We tend to use the revolver for acquisitions, that balance will pop up when we do a deal, and then come back down as we have the cash flow to pay it off..

Okay. Great. Thanks, guys..

Thank you. And our next question comes from Larry Berlin with First Analysis. Your line is now open..

Good morning, gentlemen.

Quick question for you on Europe, given the economic turmoil and the forbidden word of Brexit, what are your assumptions going to 2019 for - on the economies in those countries?.

Hi. So, yeah, you're right with the turmoil with the Brexit very kind of overnight. So I think firstly it's important to understand our licensing and registration is all domiciled in Germany. So we operate from Germany or from Europe into the UK.

So ultimately, if as a result or Brexit that we need to do something just domestically to continue our license in the UK, then we'll do something just for the UK. But in terms of operating across Europe, we have a solid footprint in terms of licensing from Europe in the economic region.

So then in terms of domestic market, yeah, I think it's hard for any of us on this call to predict what's going to happen over the forthcoming months. When we look at the economic projections in each market, each country is stable, showing good growth projections generally, low inflation among economies. So the prospects forecast still look robust..

Thank you, guys..

Thanks, Larry..

Thank you. And our next question comes from Chris Brendler with Buckingham Research. Your line is now open..

Hi. Thanks and thanks for taking the questions, a lot of great detail here. Jim, I want to follow-up on sort of M&A in the U.S. market in particular and just sort of this perception we get from as an outsider that it's definitely heating up, it seems like it's almost frothy at sometimes, do you feel like the market in the U.S.

has got to that point and it's better to look elsewhere or and also would love to get your thoughts on the whole partner versus owning software companies debate that goes on today. Thanks so much..

Okay, that's a big topic.

You know I - sorry?.

Squeezing me in at the end for a big question..

Yeah, I know maybe there is always less listening. I guess I'm the first one, yeah, there's always M&A activity. So we have so many investment bankers in the world. But for what we're looking to acquire, it's really - it's oriented to financial institution portfolios. So those have traded in the U.S.

There's very, very few I can list in probably on one hand that haven't previously traded. And for ones that already exist on one of our competitors platforms, the economics of trying to buy out that portfolio to move it to your platform would be not sure would be economically viable.

And I guess as I mentioned earlier, I don't think financial institutions are the primary source of business flow that they use to be in the U.S., just given the number of myriad of choices that we have or merchants have as options. So it's not that we don't participate in the U.S., we've made three or four acquisitions in the U.S.

in the last couple of years, but those have really been around something that EVO already own the piece of or in the case of Sterling, it was something that we saw as great distribution and helped us get deeper into the ISV space domestically here.

So it's not we wouldn't buy in the U.S., I think there are going to be niche vertical markets around enabling software companies as opposed to competing with software Companies. So that's what I would expect you would see EVO do domestically. Internationally, it's going to continue to be financial institutions enabling the technologies.

In some cases we'll provide these value added bolt-ons like the Way2Pay, that will be additive to what we currently have as a capability. On the software side, it's not as though I think that's a bad strategy. There's many of companies that are doing it and doing it very effectively.

I think for us though, just given our size, we're not interested in the channel conflict that's going to come from being in the software business.

And then secondly, we're not a software company, we may have a lot of software developers, we may deal with software often the time, but we did not have the creative juices within EVO to come up with the next point of sale solution for retail, restaurant , et cetera.

And after you buy these companies and you integrate them, who's left to be the innovator or do they stagnate over time? And you then have to reinvest in another technology because you've kind of lost your way. So I'm not currently oriented to buy software Companies.

I don't think it solves anything that fits the fourth party model and we're big believers in the fourth party model and the role we play in enabling whatever the merchant wants at the point of sale. We're not looking to tell the merchant that this is the point of sale that they need to use.

We want to be able to say, we'll support whatever within reason, we'll support whatever you would like to pick to meet your needs at your location..

Fantastic color, thanks so much..

Okay, thank you..

Thank you. And I'm not showing any further questions at this time. I would now like to turn the call back over to Jim Kelly for any closing remarks..

All right. Thank you, operator and thank you all for joining this morning and we greatly appreciate your continued interest in EVO..

Ladies and gentlemen, thank you for participating in today's conference. This concludes our program and you may all disconnect. Everyone, have a wonderful day..