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spk06: Good day, and thank you for standing by. Welcome to the Evo Payments first quarter 2021 conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during this session, you will need to press star 1 on your telephone. If you require any further assistance, please press star 0. I would now like to hand the conference over to your speaker today, Ed O'Hare, Senior Vice President of Investor Relations. Thank you. Please go ahead.
spk08: Good morning and welcome to Evo Payments' first quarter earnings conference call. This call is being webcast today and a replay will be available through the 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 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, particularly due to the impact of COVID-19 on our business. 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 today's press release and the risk factors discussed in our periodic reports filed with the SEC. including our 2020 10-K, which is available on our website. In an effort to provide additional information to investors, today's discussion also includes 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. We have also posted slides on our website detailing recent volume trends for the company to further assist with today's discussion. Today, we will discuss our first quarter results and provide an update on the impact the pandemic is having on our business. Joining me on the call is Jim Kelly, Chief Executive Officer, Tom Panther, Chief Financial Officer, Darren Wilson, President of the International Segment, and Brendan Tanso, President of the America Segment. I will now turn the call over to Jim.
spk12: Thank you, Ed. Good morning, everyone, and thank you for joining us today. It's hard to believe that it's been over a year since the COVID-19 pandemic first swept across the globe. While today, many of our international markets remain under lockdown, we continue to be encouraged by recent volume trends across the company as vaccination programs gain momentum and markets reopen. For the first quarter, volumes were down 2% compared to 2020, which reflects the lapping of the initial impact of the pandemic beginning in March. This slight decline in year-over-year volume demonstrates an improvement from the fourth quarter when our volumes were down 4% year-over-year. As you can see from the slides, compared to 2020, March volumes were up 17% and April volumes were up 48%. Compared to 2019, March and April volumes were up mid to high single digits. These positive growth trends not only capture the lapping of the initial COVID impact, but also demonstrate growth relative to pre-pandemic levels, despite the ongoing restrictions. These results give us confidence that both consumers and merchants are embracing card payments, a trend we believe will continue well beyond the pandemic. Later on the call, Darren and Brendan will discuss the reopening trajectory of each of our markets to provide a better understanding of our current operating environment and, more importantly, the developments we anticipate as the vaccine rollouts continue. Turning to our financial performance, compared to the first quarter of 2020, on a constant currency basis, revenue declined 6%, while adjusted EBITDA increased 6%, and margin expanded 360 basis points to 32%. These results reflect the ongoing impact of the COVID-related restrictions offset by our continued expense management. Tom will cover our first quarter financial performance in more detail later on the call. As more restrictions are lifted and global economic activity resumes, we continue to anticipate a strong recovery in the second half of this year and believe pent-up consumer demand and increases in personal savings will fuel significant consumer spending across our markets. For example, in the UK, which is our first European country to have transitioned into a phased reopening plan, we have seen an immediate spike in volumes across all categories. Based on these recent results, coupled with our experience last summer, which you can see in our volume slides, we believe that similar trends will be replicated in our other markets when they reopen, resulting in strong organic growth and margin expansion. Looking out to the remainder of 2021, we remain keenly focused on M&A and continue to evaluate a range of potential opportunities to expand our distribution and product capabilities. As our international markets recover, we anticipate an increase in activity with many financial institutions evaluating their payment capabilities and capital needs in light of the pandemic. Given the significant actions we have taken to improve our liquidity and reduce our leverage, we are well positioned to execute on our M&A strategy of expanding distribution through international bank partnerships and enhancing our tech-enabled capabilities. I will now turn the call over to Darren to discuss our European business in more detail. Darren?
spk07: Thanks, Jim. For the quarter, European constant currency revenue declined 17% year over year, which demonstrates the continued impact of the hard lockdowns across many of our markets. These results also reflect the strong financial performance we delivered in January and February of the prior year before COVID began to significantly impact our operations. Despite the quarterly decline in revenue, I'm encouraged by the growth opportunity of our European segment once markets reopen and consumer spending returns I am confident that our revenue will return to the growth rates that exceeded pre-pandemic levels as we benefit from pent-up demand and higher card utilization. During the first quarter, volumes were approximately 6% lower compared to 2020. As you can see from the slides, our volumes were down from January and February 2020. However, beginning in March, volumes improved to well above 2020 levels when we lapped the initial impact of the pandemic. and despite the lockdowns, our recent volumes have approximated 2019 levels. These results demonstrate the growth of our merchant portfolio, an increase in cash-to-card conversion rates, and a merchant's adaptability and resiliency throughout the crisis. Our volumes have largely withstood the negative impact of the ongoing COVID-related lockdowns, as our portfolio includes many large merchants, such as grocery chains, pharmacies, and supermarkets, which are widely considered as essential businesses. While these large retailers impact our net revenue spreads, their strong results have contributed to our volume improvement, particularly in recent months. Looking forward to the second half of the year, we expect an acceleration of business activity from our small and medium-sized merchants. which along with some resumption in cross-border activity, will drive revenue growth and spread increase as markets reopen. I will now provide brief market overviews of recent operating trends, beginning with Poland, where we have continued to see solid volumes despite the reinstated lockdowns in March and April. Recently, the Polish government is gaining confidence in the vaccine distribution process and the related decline in infection rates. which may lead to additional lifting of restrictions beginning after the May Day holiday. In the Czech Republic, restrictions have begun to ease as certain non-essential businesses are starting to open. While this is a small market for EVO, we see positive volume trends which are indicative of the health of this business. Turning to Germany, the country has struggled to remain open and is now rolling out self-testing kits to assist with reopening its economy. Although the increased lockdowns include a curfew, the overall impact to our business is less severe than in the prior year lockdowns. In Spain, most lockdowns remain in place, although tourism from Europe is steadily picking up. While travel restrictions within the country remain in place, Europeans are now allowed to travel into Spain. As we look to the summer vacation season, Many of our hospitality merchants, largely hotels, are showing strong bookings in the back half of the year, as many Europeans are eager to resume travel by the end of the summer. While Ireland remains under lockdown, with pubs having been closed for over a year, there has been some reopening activity, which allows for increased movement within individual jurisdictions now that a small portion of the country has been vaccinated. Most recently, on April 26th, the government announced that golf courses and athletic facilities are permitted to open, albeit at limited capacities. Lastly, as Jim mentioned, in the UK, due to the recent acceleration in the country's vaccine rollout, most restrictions have been lifted and our positive volume trends reflect the strong rebound in consumer spending driven by pent-up demand. For example, recently we've seen volumes double in categories such as consumer services and restaurants. If infection rates continue to decline, the government expects to lift all restrictions by mid-June. Despite this challenging operating environment, I am encouraged by our sales efforts across both our bank referral and tech-enabled channels, which continue to drive growth of our merchant portfolio. Tech-enabled revenue today accounts for over 20% of our European revenue, and we expect that mix to increase through the expansion of our tech-enabled partner referral network and continued merchant adoption of software solutions, which accelerated during the pandemic. I will now turn the call over to Brendan, who will provide an update on our Americas segment. Brendan?
spk11: Thanks, Darren. For the quarter, the America's constant currency revenue was flat, which reflects the solid performance of our Mexican business, coupled with modest declines in our U.S. direct and traditional divisions. Volumes for the quarter demonstrated improvement as restrictions continued to be lifted and economic activity increased. In the U.S., volumes for the quarter were approximately 1 percent above the prior year. By April, volumes were 48 percent above the prior year, in 12% above 2019. We are seeing a steady recovery in this market with SMEs, which comprise a significant portion of our U.S. portfolio continuing to reopen. B2B continued to grow in the mid-teens, a trend this business maintained throughout the pandemic due to the adoption of business automation tools and increased card acceptance. B2B now represents approximately 20% of our U.S. revenue, which we expect to increase as we capitalize on additional sales opportunities. We are confident this business will realize long-term benefits from the pandemic's impact on accounts receivables as companies continue to automate back office processes. Our ISV business, which is largely concentrated in hospitality, grew mid-single digits in the quarter despite the challenging operating environment. We are gaining sales momentum coming out of the pandemic by signing new partners and rolling out new products and capabilities. We are investing in capabilities and partnerships both within the hospitality vertical and across additional verticals to continue to meet consumer demand and further diversify our business. Turning to Mexico, infection rates remain elevated and the vaccine rollout lags out of our other markets with less than 10% of the population having received the vaccine. Despite these headwinds, our volumes increased 5% this quarter compared to last year as our large multinational merchants continued to weather the pandemic. In April, volumes increased 58% compared to 2020 and 23% compared to 2019. I am encouraged by these results, which demonstrate our ability to leverage our diverse referral network, including bank partners and an expanding ISV channel to grow our merchant portfolio. Similar to the U.S., we are beginning to see our SMEs return to pre-pandemic levels, which will drive additional revenue growth. Before I turn the call over to Tom, I would like to provide a brief update on Chile. We continue to work with the CMF to demonstrate the readiness of our operating platform. This process, although going very well, has taken longer than anticipated as a result of the regulator's extensive review of our processes in the midst of a global pandemic. This was somewhat expected given Evo is the first independent acquirer to enter the Chilean market with systems located outside of the country. You may recall that we are leveraging our Mexican platform for the business in Chile and elsewhere in Latin America as we look to expand further into that attractive region. That being said, we have fully enabled our operations, included beta processing for a small group of merchants, hiring sales and operational personnel, and securing terminals for deployment. With that, I will turn the call over to Tom, who will cover the financials in more detail.
spk02: Tom? Thanks, Brendan, and good morning, everyone. On a currency-neutral basis, revenue for the quarter declined 6%. However, adjusted EBITDA increased 6%, and margin of 32% expanded 360 basis points compared to the prior year. These solid results demonstrate our effective cost management and ability to grow EBITDA and margin despite quarterly volumes being down 2% compared to last year and the continued shift in merchant mix. We remain confident that as the pandemic abates and economic activity increases, volumes will strongly rebound and spreads will return to historical levels, resulting in an acceleration in revenue growth and margin expansion. With respect to segment performance, in Europe, our year-over-year constant currency revenue declined 17%, and adjusted segment profit declined 37%. In the Americas, year-over-year constant currency revenue was flat, and adjusted segment profit increased 22%. As reflected in our volumes, the Americas' revenue benefited from improving activity in both the U.S. and Mexico. In addition, the majority of our cost reductions last April affected areas supporting our slower growing portfolios, resulting in lower fixed costs and solid EBITDA growth. Adjusted corporate expenses for the quarter were $5.5 million, which declined approximately 26% from the prior year, primarily due to our continued expense management. Adjusted net income of $13 million for the quarter increased 45% compared to last year. Adjusted net income per share was 13 cents, which increased 2 cents, or 18%, compared to the first quarter. Exclusive of the preferred shares we issued last April, EPS increased 36%. At the end of the quarter, dilutive shares totaled $94 million, an increase of 11 million weighted average shares compared to the prior year. During the quarter, our capital expenditures related to point-of-sale terminals in our international segment increased 33% to $6 million to meet the strong merchant demand, which included terminal rollouts to several large customers, including a national grocery chain and the Berlin Police Department. In addition, we paid $4 million related to a software license for our European platform that will be amortized over five years. We ended the quarter with leverage at 2.8 times, which is down from 2.9 times at the end of 2020. Our strong liquidity and low leverage, coupled with $170 million of available cash and $200 million of unused capacity in our credit facilities, provides us the financial resources to capitalize on M&A opportunities that are likely to become available as economic activity resumes. Turning to our outlook, our first quarter results were ahead of our expectations, and economists continue to forecast a strong recovery in the second half of the year across our markets. Therefore, we remain comfortable with our previously issued guidance, with 2021 revenue growing 10% to 12%, adjusted EBITDA growing 16% to 20%, and margins expanding 200 to 250 basis points compared to 2020. With that, I will turn the call back over to Jim.
spk12: Thank you, Tom. As we continue to manage our business through this crisis, I'd like to again thank our employees, partners, customers, and shareholders for their continued support. Our significant margin expansion and strong liquidity will further aid us through the remainder of the pandemic and position us to capitalize on the business opportunities we expect in the second half of the year and beyond. We continue to focus on expanding our distribution, leveraging the efficiencies we have put into place to deliver strong results as economies recover. I will now turn the call over to the operator to begin the question and answer session. Operator?
spk06: As a reminder, to ask a question, you will need to press star 1 on your telephone. To withdraw your question, press the pound or hash key. Please stand by while we compile the Q&A roster. Your first question comes from Robert Napoli with William Blair.
spk10: Thank you very much, and good morning, everybody. Nice trend. I like the April chart and the comparisons to 2019 are really helpful. Still the outlook, maintaining the outlook, you still have a lot of work to do to get to that EBITDA range. And the margins are especially low in Europe. And just maybe some commentary on the confidence that you have and the substantial acceleration in earnings growth. as we move through the year.
spk12: Thanks, Bob. I think the best way to look at it is if you look at the second quarter, coming out of the second quarter last year, how strong these markets, Europe in particular, even Mexico, which is doing well but still is in the throes of the pandemic, does not have the same benefit to widespread vaccination as we do here in the United States. Even Europe is other than maybe the U.K., has lagged the availability of the vaccine. But if you look at the summer months last year and how quickly all of our markets came back as soon as the lockdowns were released, that's really the evidence that we point to. Beyond, in Tom's comments, he was talking about economic outlook from a variety of experts as to the second half of the year. But we can see in our business that the business is a bigger business because more greater utilization of card. And that's with less merchants than we had last year, either because merchants failed or they're still dormant. They haven't been able to open up because of the lockdowns. So yes, it is still a It's not a layup to arrive at those numbers, but given what I just described, our expectation is that it will all flow together. The cost reductions that we put into place to manage through the pandemic in 2020 you know, those have largely stayed in place. We haven't seen an appreciable increase in headcount in the company. Now, some of that is driven by there's a lot of dislocation that's going on right now, a lot of turnover, because if you look at employees for the last 12 months, they really haven't changed jobs. So you've got a pent-up demand of people looking for different opportunities in their careers. So, you know, we're going to face that. That's something that all companies are going to face going into this next year. We have a lot of articles that are out on it. But assuming the lockdowns release, and, you know, Darren is our bellwether to European lockdowns, so he's already been allowed out of his house, finally. I've been watching him on Zoom for the last year, sitting in his garage. He's got a loft upstairs in his garage, and I know he's sick and tired of sitting there, but Ireland will be soon to follow, Poland as well. So they need the business as much as we do. From an economy standpoint, the government can't continue to provide stimulus forever without some economic activity. So right now, our best view is provided those lockdowns are released. This is a a big recovery opportunity for us in Europe in particular. And by the end of the year, our margins are significantly bigger than they are today, given that the first quarter still is facing lots of lockdowns. I'll see if Tom wants to add anything.
spk02: Now, Jim, good thorough response. I think the only thing I would add, Bob, is that we also expect lift from continued improvement in spreads. We expect some level of cross-border activity to resume, maybe not to the same level that we saw in 19 pre-pandemic, but we do think that there will be green shoots of activity from cross-border. And then I think the U.S. Q1 serves as a good bellwether for, economically, the just general economic conditions that we expect in our other markets. You know, the 6% GDP, the strong consumer spending, et cetera, I think foreshadows well what's going to happen in our other markets. So we're just going to get some general lift from the economies being strong.
spk12: You know, just to pile on as well, I think New York is opening, isn't that right, Brendan? Yep. May 19th, I believe. Yeah. So they haven't been open yet for full-service restaurants.
spk10: Thank you. I'll take your EBITDA above 2019 on that guidance. That's good to see. Just a follow-up question, a lot to ask, but I'll just ask one more. The B2B business, 20% of the U.S. growing still mid-teens. What are your plans for that business or your goals? And from an investment perspective, is your technology where it needs to be? Can you accelerate the growth? I mean, it's obviously a massive TAM. And is that an area where you're looking specifically to add through acquisition?
spk12: Yeah. The short answer is absolutely. For the U.S. business, this is an e-commerce business. It's just business-to-business e-commerce predominantly. But I'm going to let Brendan take you through more of the specifics.
spk11: Hi, good morning, and thanks for the question. So on B2B, and I think I actually referenced this maybe on the last call, but I think the rough numbers are $25 trillion of spend in the U.S., and I think only $1 trillion of it is on card. So you're talking, you know, 4% penetration today and obviously with a lot of room to go. Our last two acquisitions here in the U.S. have been specific to B2B. Notice in California, DeLego in Kitchener, Ontario. Later this month, we're actually standing up our own proprietary ACH platform. We've got a couple of merchants in beta now that we're excited about, and that allows us to in-source a service that our merchants have otherwise clamored for for some time. Where do we see ourselves investing prospectively? I think there are obviously more ERP solutions that we'd like to get integrated to. So, integrators to ERP. Today, we focus on SAP, Oracle, and Microsoft. And then the other piece would be, we talked about in the last call a little bit, Bob, the payable side. So, I continue to think that merchants are going to want one throat to choke. Today, we focused our efforts on the receivable side. And I do think that there are opportunities to have a stickier customer relationship by addressing some pretty basic needs on the payable side as well. And then the final piece would be building a distribution network of resellers and ERPs similar to what we have out of our Tampa ISV business, so that we are increasingly less reliant on direct merchant sales and more signing partner relationships because as Jim will often say to me, you know, distribution is the name of the game. And in the U.S., partner referral relationships constitute our most vibrant referral source. So that's where we're headed, and we think it is just an enormous opportunity. We spend collectively quite a bit of time trying to make sure that we maximize that opportunity for Evo. Great.
spk10: Thank you. Appreciate it.
spk11: Thanks, Bob.
spk06: Your next question comes from , with JP Morgan.
spk09: Thank you. Hello, everyone. I hope everyone's well. Just, Jim, I guess I have to go to your opening comments around, you know, bank conversations picking up. I know some of your peers have secured some JVs and whatnot. So can you elaborate a little bit more? Things are thawing out. Is it pretty broad-based? What regions? I know you can't give away all the secrets here, but I'd love to learn a little bit more.
spk12: I'd be happy to give you all my secrets, but I'd get in trouble. I don't think there's been a ton of them that have been out there. I mean, we've looked at the ones that have been announced as well. Yes, I would say it's beginning to thaw. I think it's still early in terms of Europe, as we just described, is still very much in a lockdown. So I think the banks have to... as a point of distribution for us, but have to assess the impact of COVID on their balance sheet, on their business. And I think it's one of two things. One, it's going to be an interest in capital. This wouldn't necessarily be the only business that probably would be part of a raise. And then the second is capabilities, that they just lived through the worst pandemic in 100 years. And how did they fare in terms of capabilities meeting the needs of their customers from a payment standpoint, or merchants. And yes, it is beginning to thaw. As I said last year, it's difficult to form these long-term agreements, and ours tend to be 10 years in nature without getting a chance to meet in person. And Europe is just beginning to open up in terms of travel. Now, we're still very much focused on South America as well. And unfortunately, they're They're heading into the winter season, and their play on the pandemic has not gone as well as expected. So I think that in terms of additional markets in South America may be a longer putt than what we'll see in Europe.
spk09: Yeah, that makes sense. My quick follow-up, if you don't mind, just on the, maybe for Tom, just thinking about the second quarter revenue number here, put you on the spot. I think consensus is like 5% down from the 2019 level. It sounds like the U.S. is running a little ahead. Is that reasonable in your mind? Lots of puts and takes, so I figured I'd ask here. Thank you.
spk02: Yeah, I know you're right, Tenjin. There are lots of puts and takes, and I think the pace of recovery in Europe will have a big impact on Where that comes out right now, I think the second quarter consensus top line number looks certainly in line with the broader guidance that we've provided. I think margins accelerate in the second half because by then our expectation is that you've got Europe on all cylinders, not just on two. And so I would say that as we look at our guidance and look at it on a quarterly basis, we see margins accelerating versus flatlining over the next three quarters.
spk09: Very good. Thanks for that. Thanks, Digit. Thanks, guys.
spk06: Your next question comes from George Myhalos with Cowan.
spk01: Good morning. This is Allison on for George. Thank you for taking my question. I was hoping to provide more color on what you're seeing quarter to date in Europe. In particular, what geographies are accelerating the most and how disparate are the growth rates between the different countries?
spk02: Yeah. Hey, Allison. It's Tom. And Darren, certainly feel free to weigh in as well. They're boots on the ground. You know, as we've talked a couple of times now, we've seen the lockdowns persist in Europe. That obviously has an impact on us. You know, I would say UK and Ireland are the ones that seem to be, especially UK, seem to be the ones that have progressed the fastest. Poland has been a bit episodic. They had a strong march. I know that's still inside the Q1, but then did see some retraction in April when their restrictions were pretty severe, but then started to come back. So I would say it's good momentum, but certainly not functioning at the same level that we would say the U.S. has. And then Spain continues to be probably the slowest of our markets. But we do expect, just based on what we can see with travel bookings and the signals that the government is giving, that we do expect Spain to still be able to salvage a vacation season come the third quarter.
spk07: Thanks, Tom.
spk02: Okay, great. Thank you.
spk07: I'd echo the comments. I mean, UK is well vaccinated with all the headlines, you know, excuse me, getting on for a high 90% of adult population over 50, having at least the first shot, but over 60% of the total population. Our European country is kind of averaging about 30% having had vaccinations. But the roadmap is the UK fully opens with no restrictions in June, but essentially everything open from mid-May. Poland end of May, Germany in June opening. And as I said in my comments at the start, the hotel bookings in Spain for the second half of the year through our customers are recovering extremely well and showing good forms. So it plays to the very first question I think Bob asked in terms of the trends and the outlook. So we're With also the tech-enabled growth where more merchants are taking e-commerce or some tech-enabled solution is showing well. And, of course, those smaller merchants bringing the higher margins trend well, too. But the real indicator has been the U.K. with volumes ticking up significantly with the lockdowns easing.
spk02: And one other point I'll make that I didn't think of when I was first commenting is the merchant portfolio looks very healthy. The active merchant count still remains very high, almost at pre-pandemic levels. We've seen some net growth year over year on the merchant portfolio. So, you know, I think we're well positioned that when the business comes back, there are merchants there to receive it that we're processing for, and that's why we're optimistic.
spk01: Got it. That makes sense. Thank you for that. And then just as a quick follow-up, I heard the liquidity update, Tom, that you gave. I'm curious if you can provide an update on your priorities for additional M&A as the world starts to reopen.
spk12: I'll take that, Jim. So it isn't as though we took our eye off of M&A. I think we're pretty disciplined as to what we're interested in that aligns well with the company's overall strategy was, as Brendan mentioned, and yes, I say often, which is building distribution. And we build that through bank distribution in markets where banks are still very germane to a merchant's decision to select an acquirer. And then in other markets, we're looking for distribution through tech-enabled, and tech-enabled in our vernacular is B2B and the ISV channels. So you should anticipate, as the Thaw, as Tingen said, as the Thaw begins in Europe and in other markets, that you'll see more M&A activity out of us in those two areas.
spk01: Great. Thank you for taking my question.
spk12: Yep.
spk06: Your next question comes from Kartik Mehetta with North Coast Research.
spk05: Hey, good morning. Jim, I wanted to ask you about margins for the company moving forward. You've obviously been able to take a lot of cost out, and I'm wondering, you know, as we move forward, do you think the company's in a different spot? Would you expect overall margins to maybe be different going forward than you had originally anticipated before kind of COVID hit?
spk12: Yeah, it's funny. I was I had a conversation similar to this just yesterday. And just before COVID hit, I mean, we just had a budget approved. We had already sized our expenses going into 2020. And within two weeks, we ended up reducing 600 positions, which I don't know if that reflects well on us or not that we had that ability within the organization. But I think it speaks to the rest of the organization, to the employees who are here who picked up the slack. Now, some of that was covered by the fact that, you know, our business, as is everybody else, was much slower than it had been expected going into 2020. Coming out of 2020, we probably have another couple hundred employees that are in the queue to hire as the markets thaw and we start reinvesting to capture sales and support on customer service. I think on IT and product, we've continued through the pandemic well. But if you go back to your question on margins, I'm not anticipating those additions are going to have a material impact to our expectations for margins. As I've said a couple of times, this is going to become a bigger company, even without additional acquisitions, just because of the amount of spend on card that we will benefit from. And also, we're going to start seeing DCC probably improve by 100 percent. It's down significantly from where it was, you know, historically. So those things conspire together. As Darren was saying, markets opening up that we're on anticipating, Tom and I are anticipating that the back half of the year, we're going to see margins that are sustainable and are significantly better than what we've delivered, you know, pre-pandemic.
spk05: And then just one last question. Darren, you talked about Europe and maybe the impact of ISVs are having. Has the pandemic changed how you're selling in Europe? And do you think that if it has changed, has the change become permanent as we come out of the pandemic?
spk07: Thanks, Karthik. Has the change in selling into the markets to ISVs or generally in the market, you're meaning, to merchants?
spk05: Good morning, Darren. Just overall, if you've seen it.
spk07: Not really seen the mix shift from kind of traditional channels. Clearly, banks have been distracted with other activities. But in terms of the partners we've got, we're still seeing a maintained healthy referral chain from them. But yes, ISVs are getting traction in all markets. So bolstering our partner channels to sign up ISVs for sustainable distribution that way on a referral model basis, typically again, is definitely a growth agenda. Tech-enabled, as usual, kind of starts in the States and then follows Western Europe going East. So all of our markets are active in the ISV space. But as Tom alluded to, we're seeing net merchant, solid, strong net merchant growth across Europe which is being driven by all channels. That said, inevitably banks are pivoting to more of an online proposition now from the face-to-face with many branch closures happening. So what we've had experience on in terms of online marketing with them, it's just really pivoting that activity. But no, we're seeing good sustainable volumes.
spk05: Thank you. Really appreciate it. Thanks, Jardik.
spk06: Your next question comes from Ramsey L. Asal with Barclays.
spk03: Hey, guys. This is Ben on for Ramsey. I wanted to follow up on Bob's question from earlier and ask about the guidance range on the revenue side. It seemed like Q1 came in ahead of your expectations, and there was kind of a lot of optimism talked about around the fall. And it seems like there's a few kind of external factors, like Europe is going to start allowing some tourists to come in kind of later through the year. So I just wanted to ask, you know, what are the puts and takes? on the decision to leave the guidance range for revenues unchanged, you know, kind of what's going maybe better than expected and what's worse. And to what degree does this expect, you know, kind of unknowns about volatility versus ?
spk12: Yeah, I think Tom and I will do this together. I think the first is, you know, when we normally provide guidance like any company does, it's based on our performance, what we've done historically. And, you know, we generally have a much better feel. Right now we're banking on these markets opening up. And Ireland, as an example, I know the team from Ireland is listening, but Ireland, for example, has surprised us as to how aggressive the lockdowns have been there. And Ireland's a big growth market for us. Germany was opened. they just kind of closed a couple of weeks ago. In Spain, our team in Madrid can't travel outside of Madrid, but other Europeans can travel into Spain. So we're providing guidance based on the expectation that these things are going to change, as Darren described, but we don't have a crystal ball. So I think at this stage, I'm not sure it does us or anyone any good to get ahead of the expectations of a variety of governments that we can't necessarily predict. The expectation is, yeah, everything is moving in the right direction. I was in a restaurant here in Atlanta Monday night for the board dinner. I walked in. None of the restaurant staff had masks on any longer because they dropped the mask mandate here in in Georgia. So if that's what we start to see across the globe because of the vaccination program has been successful, then we should be well into the range that we provided you. But if there are some bumps, then then we're being conservative to protect the downside. But Tom can add to that.
spk02: I think the only thing I would add, Ben, is that we appreciate the fact that we had a beat in the quarter. It was a slight beat and well within the range that we referenced over a full year basis. So it really wasn't something that would cause you to say, based on one quarter in the bag, that we've seen enough to increase guidance. And then I'd say when we were offering that guidance two months ago at the end of February, that we had optimism then. We probably had fewer data points because the U.S. wasn't as far along. We weren't sure what the vaccine program was going to be in Europe. So we've seen more traction that validates the view that we had at the end of February. And so I think that's why we're confident to reiterate, but don't feel like it's something that we would want to adjust at this point.
spk03: Okay, that's a really helpful color. Thanks. And if I can just ask one kind of like housekeeping question. You mentioned B2B is now 20% of the U.S. Do you have a sense of what that would be, you know, excluding COVID? I remember just a couple of years ago, I think it was just like 5%, and it obviously has been growing very nicely. But had the rest of the business been kind of growing normally, where would B2B be today? And how does that compare to your other tech-enabled channels in the U.S., the ISV and the e-com? Thank you.
spk11: Yeah. Hey, Ben, it's Brendan again. I don't know that COVID has distorted, per se, the percent of B2B that B2B represents versus the balance of the business. B2B, it hasn't been negatively impacted the way that some of our other businesses have. Actually, in some instances, we've probably seen some uplift. E-commerce is an example. We've seen some shift there. But I don't think that the numbers that you're seeing today are going to go down in any way. In fact, I would expect them to continue to elevate as the business is clearly the fastest growing business within our U.S. portfolio. Relative to ISV specifically, I do think that that business's overall contribution to the U.S. business has been negatively impacted in a material way because of its exposure to hospitality. So our ISV business is heavily exposed to restaurants. And we have just seen restaurant activity slow in many, many geographic areas. I mean, Jim said earlier, New York's opening on May 19th. And we talked about in the board meeting that there tends to be a bit of a smile across America. So if you drew a line or a circle across the southern half of the U.S. and then up a little bit on either coast, you see some pockets of activity. But then as you get further north or towards the middle of the country, And our geographic exposure is we're not concentrated anywhere. So I think if things reopen, you'll see more impact on the ISV side. That business will come back faster, I think, than the balance of the U.S. business, and that will start to contribute more to the overall profitability of the region. Okay, great.
spk03: Thanks for taking my questions. Thank you.
spk06: Your next question comes from Brian King with Deutsche Bank.
spk13: Hey, guys. Good morning. Tom, just wanted to make sure I understood. The first quarter beat above expectations. Which parts were exactly kind of came in above where you guys had budgeted?
spk02: Again, Brian, it's a fairly modest beat, but the Americas, no surprise there. I think we saw activity in the U.S. in particular ramp quickly. That's a function of the chain activity. effect of vaccines rolling out, businesses reopening, and the pent-up demand and stimulus checks and all those types of things. A 6% GDP number in the U.S. I don't think was necessarily something that people were anticipating. Mexico has stayed resilient. So there, that continues to be a good outcome because we're always concerned, given that they've been slower with the vaccine rollout and their infection rates tend to run high, although it has been declining recently. But they have continued to remain resilient. I think that has a lot to do with the diversification of our merchant mix and heavy weight towards grocery and consumer goods.
spk13: Got it. Got it. And then thinking about spreads as we hopefully turn the corner here into more positive numbers, you know, how much faster can revenue grow above volume as we get through the pandemic here? I know you mentioned cross-border. I'm sure SMBs, you know, the impact there hurt spreads previously, but all those reversed. I'm just trying to think, you know, the magnitude that revenue could run above volume. Maybe you can give us some thoughts there.
spk02: Yeah, you know, I think we do expect some upward lift in spreads over the remainder of the year, particularly second half, for the two reasons you just alluded to. So, you know, both the SMEs coming back and being a larger percentage of our volume and some level of cross-border activity. That said, I think last year we ended with spreads at 33 basis points, maybe 33.5, something like that. We're not expecting spreads in 21 to get all the way back to those levels. I think you're going to continue to see some level of dilution from just the merchant mix. In a good way, some of the large merchants that we now have on the platform that are producing at high levels, and we expect that to continue. I think we'll continue to see some uplift, but I don't think it's going to get to the same level that we had, say, pre-pandemic in 2019 where we were approaching 34 pips.
spk13: Helpful. Thanks, guys. Thank you.
spk04: Thank you.
spk06: Your final question comes from Michael DelGrasso with CompassPoint.
spk04: Good morning. Thanks for putting me in here. Jim, I'm interested in your comments on competition, particularly in the U.S. and certain ISV channels. 2020 and 2021 has seen a fairly large influx of capital markets activity with smaller players coming public. We're getting a look at profitability or, in some cases, lack thereof of some of these smaller guys. They've been doing this for a while. I guess, could you comment on what you're seeing today and on the competitive dynamic. Have things changed at all with some of these new entrants? Or, you know, we'd just kind of love to hear your overall commentary.
spk12: Okay. Well, and you're speaking specific to the U.S. market or just more generally all markets?
spk04: Particularly the U.S., but, yeah, I mean, we'd be interested for, you know, the U.S.
spk12: as well. I think if I broke it between our tech-enabled direct business on tech-enabled focused more on the B2B and the ISV channel. As Brendan said, it's a very big market. There's still early days, very early days relative to the retail side, traditional retail restaurant type of business. So I don't think in any of the markets, and the U.S. is a very mature market, lots of very strong competitors, I don't think anybody has free reign in terms of competition. I do think it has a lot to do with the distribution that you build, whether that's an old model of feet on the street or that's more the model that we tend to pursue. So I would say on the B2B side, although there's a lot of talk around it, I'm not sure that we're seeing any dramatic increase in competition. And one of the things that we like is some of the earlier investments we made the last several years, as Brendan mentioned, and by name notice, which is a Microsoft integration, and the LEGO, which is an SAP integration. We have some unique capabilities that not everybody will necessarily have. It's not easy to build. and there's not a lot of competitors to go out and buy. So I think on the B2B side, with respect to those two plus Oracle, we have some advantage, first mover advantage, because we have made those investments, as I said. I think on the ISV side, when we bought the Sterling business in 17, it gave us access to a great dealer network that continues to be a very big part of our hospitality play. I think the competition, though, in ISV has definitely changed. More of our competitors have opted to buy software companies. The big guys and smaller guys have made a bet, as well as private equity, that they buy a software company and they get to convert the merchants over and you know, now they've, I guess, got expertise in some specific software, whether it's retail or restaurant. Now, it's not a model that we've pursued. It has created some level of headwind to the extent that we previously had a relationship with that ISV, and then it's acquired. But if you go back and you look at software plays, you know, software is only as good as the investments you make in it. It's constantly changing. There's new entrants coming into the marketplace. And our strategy is, both here in the U.S. and our international markets, is to support all third-party software companies that are in the payment space. And I think with respect to that, we continue to do quite well. I'm not sure that I see a headwind as it relates to that. It has more to do with these software companies. And typically, the ones that are selling are the ones that have hit a wall. And so they're They're selling because they need to sell. They're not selling because their business is vibrant. They're selling because they either haven't made investments or there are bigger competitors that are taking share from them. So we prefer to stay in our lane and support that market as opposed to compete against it. I would say the last piece would be the direct kind of face-to-face business. And, you know, that is what it is. It had a long run for a very long period of time in the U.S. It's still very vibrant outside the U.S., You know, we give a lot of attention to the tech-enabled space, but if you're in Latin America, if you're in Mexico, if you're in Poland or Europe, direct sales through bank referrals are still a very vibrant part of our business. It's one of the reasons why we're the leader in Poland and in Mexico, because we have two very strong financial institutions that continue to refer us thousands of merchants worldwide. new merchants a month. So the direct business outside the U.S. remains very, very strong. I would say, you know, inside the U.S., it is a very mature business. So there it's more of a cash cow to us. And those proceeds, we continue to invest in acquisitions like DeLego and Notice and Sterling, and we'll do more of that here in the U.S. and internationally.
spk04: Great. Super comprehensive. Thank you.
spk06: That concludes the questions. I would now like to turn the call over to Jim Kelly.
spk12: Thank you, operator, and I'd like to thank all of you for joining our call today and your continued interest in Evo.
spk06: This concludes today's conference call. Thank you for participating. You may now disconnect.
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