EVO Payments' (EVOP) CEO Jim Kelly on Q3 2018 Results - Earnings Call Transcript

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About: Evo Payments (EVOP)
by: SA Transcripts

EVO Payments, Inc. (NASDAQ:EVOP) Q3 2018 Earnings Conference Call November 7, 2018 10:00 PM ET

Executives

Ed O'Hare – Senior Vice President, Investor Relations

Jim Kelly – Chief Executive Officer

Kevin Hodges – Chief Financial Officer

Brendan Tansill – President-North America

Darren Wilson – President-International

Analysts

Tien-tsin Huang – JP Morgan

Bryan Keane – Deutsche Bank

Andrew Jeffrey – SunTrust

Georgios Mihalos – Cowen

Bob Napoli – William Blair

Ashwin Shirvaikar – Citi

James Schneider – Goldman Sachs

Amit Singh – Bank of America Merrill Lynch

Ken Suchoski – Autonomous Research

Chris Brendler – Buckingham Research

Operator

Good morning and welcome to EVO Payments Third Quarter 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 be given at that time. [Operator Instructions] As a reminder, this conference call may be recorded.

I would now turn the conference over to Ed O'Hare, Senior Vice President, Investor Relations. You may begin.

Ed O'Hare

Good morning and welcome to EVO Payments third 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 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 which are 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.

Today we will discuss our third quarter 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.

Jim Kelly

Thanks Ed. Good morning and thank you for joining us for our third quarter earnings call. We are pleased to report another solid quarter as the company delivered 11% constant currency revenue growth resulting in 13% constant currency adjusted EBITDA growth. These accomplishments are the result of strong transaction and merchant growth trends within our U.S. and European tech-enabled channel coupled with continued high growth from our direct divisions in Mexico and across Europe.

Our strategy preparing this growth remains the same. First, we invest in new and existing high-growth markets and sales channels by building long-term distribution through alliances with leading financial institutions, ISVs, B2B relationships, and e-commerce partners. Next, we develop leading products and service solutions that meet our customer needs. And then finally we have a laser focus on operating leverage and efficiency.

In executing this strategy, we continue to focus on expanding our in-house tech-enabled product capabilities to support the strong growth coming from our U.S. and European ISV relationships and our U.S. software dealer network. In the third quarter we added 150 new ISV and dealer relationships across North America and Europe along with key vertical markets including hospitality, unattended retail and field services. We also relocated our former Sterling ISV division offices into a new Tampa-based facility.

During the quarter, reported revenue from our U.S. and European tech-enabled divisions grew 15% and 20% respectively. European growth was propelled by our new and existing ISV partners, primarily in Poland, Spain and the UK. We remain very positive about the growth we have sustained in our European markets and believe Mexico will also continue this trend in 2019 following the recent launches of our Snap platform and e-commerce gateway. Both platforms are our merchants and partners access to EVO's many markets through a single seamless integration.

Turning to our direct channel, we continued solid constant currency revenue growth in the third quarter in our largest international markets including Mexico at 21%; Poland at 19%; Spain at 12% and Ireland and the UK at 24% compared to the prior year period. This growth is a result of our strong long-term exclusive bank partnerships, focused execution, our sales and operation teams and the product solutions we've developed to meet our customer needs.

Unlike our U.S. markets where our focus is primarily small to medium-sized businesses, our international acquiring markets benefit from a broad mix of merchants including large national and multinational businesses and organizations. This wide array of merchants reflects the customer-base of our leading bank partners, who generally have a broad range of customers.

Moving to our integration efforts, we are pleased to announce that we have completed two merchant portfolio migrations totaling approximately 40,000 merchants since our last call. The first is the ongoing migration of our Banco Popular portfolio in Spain. We have now converted over half of the portfolio to our European processing platform. This re-hosting effort will allow us to offer our merchants an array of proprietary products which were previously unavailable on the legacy system, reduce our processing cost by leveraging our in-house European platform and provide better control over merchant pricing. We anticipate the remaining Popular merchants will migrate during the first half of 2019.

The second portfolio migration occurred here in the U.S. as the result of the Sterling acquisition. We have now completed the full integration of Sterling into EVO which will provide our ISV and B2B business units and their customers access to additional solutions not found on the legacy Sterling platform and to lower our operating costs.

In addition to the two platform migrations, we announced the consolidation of our German administrative accounting and IT functions into Warsaw. Previously we had migrated the German systems into our European data center. However, the support functions remained in Cologne. The German office will now align with the structure and strategy of our other European markets where we have merchant-facing activities in country. The migration is expected to be completed in 2019 with savings to be realized beginning in mid-2019 and fully in 2020.

Finally, I'd like to share an update on the three acquisitions we made since the last call before discussing the bank joint venture and alliance we announced yesterday. The first acquisition announced at the end of September was Federated Payments, a minority-owned subsidiary of EVO from 1999. EVO was the initial investor in Federated and had supported its processing and growth strategy since its inception. This acquisition followed seven previous EVO subsidiary buyouts made over the last five years.

As such, integration efforts are limited and we are gaining synergies quickly by eliminating duplicate support services. Today we have completed the integration of the sales team and will relocate the staff into our existing New York facility by January. By year-end we will have migrated Federated support services to our Dallas offices.

Then on the technology side, we made two acquisitions. The first, Galaxy Pay, will provide us in-house gift card and other solutions designed to better support our ISV and direct groups domestically. Prior to this acquisition, we relied on third parties. The second tech-related acquisition was ClearONE, an ISV integrator with capabilities very similar to our Snap platform. This acquisition will integrate into Snap for connectivity allowing its ISV European partners access to our global markets.

ClearONE also provides EVO with over 100 new ISV relationships from which to market. The ClearONE platform currently has POS integrations to merchants that include Burger King, Nespresso, Lacoste, and Sunglass Hut, just to name a few. The integration of ClearONE will also bolster EVO's ISV technology team in Europe to ensure we are supporting the unique needs of each country in which we operate.

Finally, last night we announced a new 10-year bank alliance and JV with EuroBic in Portugal. This alliance includes an exclusive referral agreement in which EuroBic will refer merchants to the JV from the bank network of 200 branches and its corporate and treasury management groups. Once finalized, EuroBic's merchants will migrate to a European platform enabling us to provide them with our market-leading solutions. Pending regulatory approvals, we estimate the transaction to be finalized by the middle of 2019.

Beyond these announced transactions, we remain committed to sourcing new opportunities with financial institutions and tech-enabling partners in existing and new markets and regions. Overall, we are pleased with our results and remain very excited about the future growth of the company.

Kevin will now cover the financials in more detail. Kevin?

Kevin Hodges

Thank you Jim and good morning everyone. EVO delivered another strong quarter with results in-line with our expectations. For the period we reported revenue growth of 9% compared to the prior year or 11% on a currency-neutral basis with acquisitions contributing to 1% of that growth. For the third quarter adjusted EBITDA on a currency-neutral basis increased 13% to $38.4 million compared to $34 million in the prior year.

Currency-neutral adjusted EBITDA margin increased 40 basis points in the quarter. Pro forma adjusted net income was $14.2 million for the quarter, reflecting growth of 98%. Our adjusted results exclude share-based compensation cost, restructuring cost, acquisition-related intangible amortization, M&A transaction and integration-related items.

Looking at our North America segment, revenue in the quarter increased 6% over the prior year period on a reported basis and 8% on a currency-neutral basis. Within the segment, our U.S. tech-enabled division grew 15% compared to the prior year period and represented 52% of our U.S. revenue. Growth in North America was also propelled by 21% growth in the direct division in Mexico.

The high growth in Mexico was impacted by strong consumer spending following the July presidential election coupled with earthquake-related softness in the prior year. These increases were mitigated by an expected 9% decline in the U.S. direct and traditional divisions. On a currency-neutral basis, our revenue per transaction in North America increased 3% in the quarter. Segment adjusted EBITDA for the quarter was $25.2 million, an increase of 10% on a currency-neutral basis. North America adjusted EBITDA margin improved 64 basis points in the quarter. This improvement reflects the benefit of our operating efforts resulting from integration efficiencies.

Turning to Europe, we saw strong performance out of this segment as well. Segment revenue in the quarter grew 13% over the prior year period on a reported basis and 15% on a currency-neutral basis. Our revenue per transaction in Europe decreased 6% in the quarter due to the growing number of large merchants performing well in the market. We saw third quarter European tech-enabled revenue grow 20% versus the prior year, predominantly driven by activities in Poland.

Segment adjusted EBITDA for the quarter was $18.9 million, an increase of 12% on an adjusted basis and an increase of 14% on a currency-neutral basis. For the quarter adjusted EBITDA margin was 28.9% which was flat compared to the prior year. As discussed last quarter we made investments in the prior year which have begun annualizing in the second half of 2018. Absent these cost, adjusted EBITDA margins would have increased 300 basis points to 32.1%.

Turning to our corporate expenses, adjusted corporate expenses grew $0.3 million to $5.6 million for the quarter due to expenditures related to our additional public company cost including audit fees, DNO insurance and other related items. Our adjusted results exclude $2 million of net expenses which includes $4.7 million related to M&A transaction and integration cost; $3.9 million due to employee termination expenses; and $2 million attributable to share-based compensation expenses totaling $10.7 million.

Offsetting these expenses is a gain of $8.7 million related to the Federated acquisition. Consolidated net loss attributable to EVO Payments Inc. was $27.4 million for the quarter, resulting in a $1.51 of basic and diluted loss per class A share. On a pro forma basis, reflecting adjustments described in our press release and all share classes, pro forma adjusted net income per share was $0.17. At the end of the quarter our basic share count was 18.2 million which represents the weighted average class A common stock outstanding. Including all share classes and diluted securities we had 82.4 million shares outstanding.

In the third quarter we spent $13 million in capital expenditures of which $5.4 million was related to point-of-sale terminals mainly in Poland and Mexico. In this quarter we successfully completed a follow-on offering of 8 million shares of class A common stock, including 7 million shares sold by existing shareholders and 1 million new shares. Proceeds to the company of approximately $25 million from the new share issuance were used to pay down existing debt on our credit facility.

We ended the quarter with net leverage of 4.6x adjusted EBITDA. As you may recall we were at 6.4x adjusted EBITDA prior to the IPO. In addition due to our refinancing and debt pay down activities, interest expense declined 34% in the quarter. Free cash flow described as adjusted EBITDA less capital expenditures less net interest expense was $15.3 million, an increase of 67% over the prior year period.

As Jim mentioned earlier in the call we announced the signing of a 10-year bank alliance and joint venture with EuroBic in Portugal. EVO owned just over 50% of the joint venture and will have operational control and will consolidate the JV's financial statements. For 2018, we are updating our guidance based on recent trends, completed acquisitions and changes in FX.

We now expect revenue to range from $561 million to $567 million reflecting growth of 11% to 12% over 2017 reported results and 10% to 11% over currency-neutral 2017 results. Adjusted EBITDA is now expected to be in a range of $143 million to $146 million reflecting growth of 12% to 14% over 2017 adjusted EBITDA, and 11% to 13% over currency-neutral 2017 adjusted EBITDA. Adjusted EBITDA margin is now expected to range from 25.5% to 25.7%, reflecting growth of 25 basis points to 45 basis points over 2017 currency-neutral results.

We expect adjusted EBITDA margins to continue to improve as we annualize certain cost related to investments in our European segment. Excluding these investments, year-over-year margins would have increased 95 basis points to 115 basis points. Net loss attributable EVO per share is now expected to be at a range at $0.59 to $0.53 and pro forma adjusted net income is expected to range from $0.47 to $0.52 per adjusted diluted share. The class A shares outstanding in the number of fully diluted pro forma shares include the increase from our secondary offering.

We are very pleased with our third quarter results. I will now turn the call back over to Jim.

Jim Kelly

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

Question-and-Answer Session

Operator

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

Tien-tsin Huang

Thanks. Good morning. Good quarter. I wanted to ask on the outlook first. With a lot of moving pieces with FX and acquisitions, can you attribute those factors and what drove the guidance for vision, if you could break it up for us a little bit?

Jim Kelly

Maybe Kevin, I will do this together. I think you can see from what we've outlined for both segments that we are pleased with the performance on the top line and bottom line for the business units as we described. I think the biggest variable because 65% of our revenue is outside the U.S., the election just occurred last night, it's still early to see what the effects is going to be on currency although I understand maybe the euro just strengthened a little bit this morning.

So that – fortunately or unfortunately that's probably our biggest unknown is where the FX goes. It has been strengthening dollar more recently. When we went public it was much less – much less about the dollar. The dollar had weakened against the currency going into the IPO. So I think the core business itself we're still very good. Europe is having a very, very strong year. Mexico is having a very strong year. Our ISV business, our B2B business, the tech-enabled group continues to do well.

We have some work to do still, but we are starting to see some efforts that were put in place this year to help turn our US direct business. As we said in the prepared comments, Spain is doing well at 12% growth and then the acquisitions that we've made in the quarter both in the tech side and then just the strategic moving into a new market, Portugal, the core business we feel great about. Yes, the FX out of our control, but we feel like that will sort itself out over time. Kevin, do you want to update anymore?

Kevin Hodges

Yes, I mean, I think as Jim said it's sort of the over-performance we've been seeing coupled with the acquisitions, primarily the Federated acquisition that we completed at the end of the third quarter. All that over-performance is offset by just the FX trend that we're witnessing over the past couple of weeks.

Tien-tsin Huang

And then this is my quick follow-up to maybe for you, Jim, just on the Portugal JV of EuroBic. How impactful do you think this could be in the midterm if you put your efforts into it? How do you see that evolving? And maybe a quick update on how the pipeline is maybe evolving for you with future deals?

Jim Kelly

Sure. So Portugal, the bank is a privately held bank, so we were limited on financial disclosure. I would just – I've done this many times previously when meeting with investors, we described the M&A opportunities for the company in terms of – baseball terms of single, doubles, triples and I think this is solid single to double. There is a very – a market that is largely untapped by competitors like ours globalized in with Wakaisha, I think a year ago through the Wakaisha JV, but we feel that the business itself is already growing at 14% transaction growth, it's got 20,000-odd merchants.

The bank in particular through the last – through the process, it was a competitive process, and then it was the normal process again in the contracts taken care of, but they are very engaged in a launch. Sometimes after you buy of these things just there's a bit of a low as everybody retrenches and gets the work done that they had been putting on hold. But in the case of this bank they're very excited about integrating to our platform, getting the merchants moved from the central processor to our platform, those are all very good sites – signs, excuse me.

So I think for the region which for us would be Spain, we now would have four relationships between the two in Spain plus the acquisition we just made with ClearONE and now EuroBic. So I think for the region it's going to be a great boost for us. Overall, I wouldn't say it's overly material. Otherwise we would have disclosed all the pertinent information, but we're very excited about our DCC capabilities, about e-com that will bring to the market through the IPG acquisition we made last year.

And ClearONE is already in the market. As I mentioned Burger King, they have a number of franchises across the peninsula that cover both regions. So the timing really worked very well for us having IPG – excuse me, having the ClearONE together with Portugal happen essentially at the same time.

Operator

Thank you. Our next question comes from the line of Bryan Keane of Deutsche Bank. Your line is now open.

Bryan Keane

Hi, guys. I just want to ask about some of the investments that you wind down in Europe and some of the platform consolidations, just on the exact timing on that and where we will have exactly when will the margin start to rise as a result of those going away?

Jim Kelly

Well, unfortunately as we continue to buy we continue to have to convert, so I'm not sure, Bryan, it ever really ends. So we'll continue to see it move up. The largest one – I guess the largest two, one is really not a platform consolidation, but as I mentioned and Kevin covered in his comments, Germany which was really our first transaction, we migrated systems to Poland, but we never took the – made the effort because of other things that we're working on to move the administrative functions.

Our strategy in Europe is really hub and spoke to move the – essentially the back office, non-customer facing and the processing product development out of Poland and then countries like Spain, Ireland, UK, now Portugal, they would be customer-facing sales and customer service. So Germany is – as I described we'll see part of the effect next year, full effect the year after.

That is a fairly significant – I think there's something in the neighborhood of 40 FTE that will exit the business as a result of that consolidation without an incremental add in Poland. And then on the processing side, as I mentioned we moved – we've been moving the Popular portfolio in waves as opposed to doing them all at the same time. There's a number of systemic reasons why we've chosen to go that direction.

So I think we've moved about two-third of that portfolio, we have about one-third to go. We're about to start the migration. Unfortunately a different platform in Spain, but we're about to migrate the Liberbank portfolio which is another 20,000 merchants. That will pick up steam I would say by the end of – by the beginning of the summer, so maybe by the end of 2019.

And then Portugal – we don't know exactly when Portugal will close, but we're guessing right now since there's not been a lot of these transactions in the country by summer, but as I mentioned earlier they're very engaged, so we could probably have that done within say 12 months which is generally what it takes start to finish once we have the requirements to get a migration done.

So I think what – from an investor standpoint I think you'll just see continued movement up as we said we went public 50 basis points to 75 basis points, now that takes into account primarily just the growth of the business, but it's going to be aided from time to time by these conversions. And then in the U.S. we just completed about two weekends ago the Sterling migration and we'll start to see the benefit of that in the fourth quarter, a little bit in I guess November/December and then you'll see the full effect next year. As Kevin mentioned in his comments, we would have seen a 300 basis point improvement in Europe had it not been some pre-IPO investments we made in the European infrastructure.

Kevin Hodges

And those investments, we started to see those annualize. Year-over-year European margin was flat in the quarter and then as we annualize those, we'll see that margin expand in the fourth quarter.

Jim Kelly

But we'll continue as I mentioned – and I don't know if I finished Tien-tsin's last question, we'll continue to make investments on the two fronts that we're most focused on, financial institutions outside the United States for the reasons we've stated in the past. And then tech-enabling type of transactions similar to what we did with ClearONE where we're not entering the software development business, but we're working with people that enabled those point of sale solution.

So we'll continue to see margin improvement because our strategy is to also leverage the fixed infrastructure. We own and process our platforms in-house, so we get the benefit of moving them as quickly as possible and as I said it's a laser focus with the company to drive those margins up.

Bryan Keane

Got it. That's helpful. And then I was just going to ask on revenue per transaction in Europe had declined about 6%. Anything to call out there or is that just mix of the business?

Jim Kelly

Yes, I think if you remember when we were together a couple of months ago on your conference, that was a question that came up and I didn't really give you a good answer. I kind of push it to the side, but I appreciate the question and understand given the amount of information we have available in the market, that is a question. And so we in the script this time and going forward will talk about it and it is - it's just simply mix. We have a different portfolio outside the United States going to inside the United States.

Inside the United States it's predominantly an SME, there are 7 million merchants in the U.S. We don't align with large financial institutions, we have one, Deutsche Bank, but Deutsche Bank is not a material player in the retail business in the United States, but outside the U.S., for example in Mexico, Cosco is one of our customers; Soriano, a number of big retailers the same in Europe where we have I think four of the five top petro companies in Poland, and therefore as those companies – as the economy – as they grow, it will make it look like our margins – our revenue per transaction sort of comes down, it's just simply a mix, it's not a systemic issue with the business, but the guy who runs Europe is in front of me, so I know you want to add something there.

Darren Wilson

Also we're just seeing a huge continued growth from cash to card and especially contactless digital payments. So obviously the average transaction for contactless is capped at EUR 30 or GBP 30 in the market. So that growth in contactless in terms of smaller transaction values is also just having effect in the mix as well.

Bryan Keane

Okay. Got it. Congrats on the strong quarter.

Jim Kelly

Thank you.

Operator

Thank you. Our next question comes from Andrew Jeffrey with SunTrust. Your line is now open.

Andrew Jeffrey

Hi. Good morning, guys. Thanks for taking the question. Jim, can you elaborate a little bit on the Sterling integration now that it's complete and how you think that could potentially – if you think it potentially accelerates U.S. tech-enabled growth which I know has been very good, but I wonder if you could just dig in a little bit on the benefit of having that done now?

Jim Kelly

Sure. So the – Sterling to some extent was very unique for us because we typically don't buy our competitors, I don't look at buying a financial institution portfolio, merchant accounts is really competitor, it's typically like in the case of Portugal, it's a brand new country for us. Sterling was a business very similar to ours in terms of its make-up. It didn't have a full suite of product solutions, so it only had a back-end, did not have front-end processing, but if you lined up their headcount and functions against ours, there was a lot of overlap.

And so Brendan who runs North America and the team very aggressively early aligned the functions that were entirely redundant and then the piece that was left to be done was what I described earlier being the processing side of it. That is just finished. And I – clearly it is going to be a benefit because the first is that we were running an ISV business before we bought Sterling.

So we had our group of salespeople and merchants and ISVs, and they were all integrated through Snap and through the rest of EVO's infrastructure, and that's how we did business. So we had a team of people supporting – I don't know how many thousand, but a significant number for our size relationships. Then Sterling went to market through a network of dealers, some direct, but predominantly dealers and they went to market with a whole different set of boarding systems and processes, et cetera.

So what we've been able to do now is to marginize it to one set of how we go to market and that set is based around EVO's infrastructure. So eliminates a bunch of cost, but it also makes available to Sterling's customers a broader set of reporting tools or processes that were not available and it gives a different level of focus than I think was there previously just given EVO's strategy over the last five years to make this a material part of our business, it's now over 52% of our U.S. businesses tech-enabled three years ago, was never even close to that.

So we just – the integration has just happened, so we'll have to see how that plays out into the next year, but our relationship with the dealer network in particular, there's a new facility that I mentioned previously Sterling was a parentally-held company and there was not a lot of spend on physical plants and infrastructure. They're in a brand new building actually, we just hosted a dealer forum for one of our larger ISV relationships last weekend and Monday, Tuesday, very well attended, very well-received and our interest is to provide high-quality service to this segment as opposed to just the lowest pricing in the market.

Andrew Jeffrey

Okay. Thank you for that. And could you just comment quickly on how you expect the legacy U.S. business to perform over the next 12 months, do you start to see those decline today?

Jim Kelly

Yes, this – so the 48% of the U.S. businesses was here at EVO when I joined in – whatever I joined, 2011, 2012. And for a very long period of time it's been a very fast growing business, but as the market is matured and ISVs have become front and center in the U.S. and the pool of merchants that are addressable for just kind of traditional terminal and point-of-sale, not ISV, has gotten smaller and maybe the competitors have left its – I think it's become a more difficult market for everybody who plays in it. Having said that though, our U.S. business is a combination of a number of business units that was started by EVO, Federated being an example of one that we just acquired and we had made seven other acquisitions.

So when we look at our direct business, I really look at it as the seven different businesses. Not all the owners of those business – initial investors in those businesses are still with us, but that's how we look at. We have made some personnel changes, we've rearranged the deck a little bit and several of those business – I would say half of those businesses are growing some in the high single to double digits, others in the mid single-digits. Unfortunately, a large segment of our direct business and again of the 48% about half or two-third of it is what we call direct and then a third is called traditional.

So we think the direct – I think the direct business will return to growth, whether it happens in 2019 or 2020 I think there's a very good chance we could see the decline that we've seen to-date abate because there's still 65% of 7 million merchants out there that need to be serviced, and we're not that large in the U.S., so – and we have the data to show us that some of our acquired business units are growing and growing very well. So I think part of it has been execution on our part and we can fix that.

On the traditional piece that is in a low-teen decline and that largely represents merchants – a portfolio of merchants who were referred to us by businesses that no longer do business with EVO. So that is a runoff business, it's very profitable, so we're not going to close it, but I don't see that changing. I think the course is basically normal attrition. So the direct business which again is two-third of the 48%, we see that – right now it's mid-single-digits decline, we see that returning to growth coming out of 2019 into 2020, maybe a little bit earlier than that. And then the traditional business will continue to be a decline and at some point as EVO just gets that much bigger, we probably won't need to talk about it any longer.

Andrew Jeffrey

Very helpful. Thank you.

Operator

Thank you. Our next question comes from Georgios Mihalos of Cowen. Your line is now open.

Georgios Mihalos

Good morning, guys, and congrats on a very nice quarter. I just wanted to start off with the strength that you saw in Europe again. Relative to your expectations, was there a specific region that outperformed that kind of led that upside? And then tied to that, when you look at some of these growth rates, I think Poland high teens; Spain low teens; UK over 20%, is there anything there that will – is running off over the near term that will cause those growth rates to maybe come in?

Jim Kelly

So one of the reasons we broke it out was just for that reason is to show you how strong Europe is and it's not localized, it just pulled it now, we told you in the beginning of the year that Poland was benefiting from this they call it terminalization of fiscalization where everybody which supposedly 600,000 terminals would be placed in the next three years and we're 42% of the market and we're holding shares that program is rolled out. That has slowed. So 19% growth in Poland will still – will probably abate somewhat to the mid-teens where it has been historically.

When you're 42% of the market, it's hard to grow faster than the market, but right now there's an anomaly that should be in the market for several years. UK, Ireland, these are relative to Poland's smaller businesses, but the execution there by the guys that run it, Andy and Bryan respectively, they have just executed extremely well. Remember but we only launched as a startup in 2013 – 2014, Ireland and we are today 25% of the market. We didn't have a back-book, it wasn't like Portugal where we bought a business, that business was run by Elavon, we replaced Elavon with Bank of Ireland.

So it's really been execution. I don't see Ireland slowing down anytime soon. In the UK we only see that accelerating that business is almost entirely focused on ISV penetration in the UK market. We have exported some of our U.S. ISVs to that market. And ClearONE will also help propel that. I guess the one market was a challenge going into this year and the end of last year was Spain given the sale of Popular and the fact that Popular's business had declined pretty substantially prior to the sale.

I think the turnaround, if you want to call it that, we had a very positive sales launch with Santander in the spring called 1,2,3, they opened up – you open an account at Santander was easy as 1,2,3 and our part of the program was holding deposits and part of that program was participating with and acquiring a terminal. So we're very pleased at the execution there and at the same time the guy who runs that business, Jaime Domingo, also made three acquisitions: ClearONE, Liberbank, and now Portugal.

So I think Europe sets up really good for next year. And one market out of the U.S. which was Mexico also had a very, very strong 20% growth. That's a very under-penetrated market, 20%. So we again see that market continuing to do well. I think it was a little bit better than normal because we had the – not hurricane.

Kevin Hodges

Earthquake-related softness in the prior year.

Jim Kelly

The year before, so that should be a 12% to 15% growing market, but we're just having to benefit going into this year. So across the board we feel really good about everybody.

Georgios Mihalos

That's great color. I appreciate it. And maybe just to shift gears little bit to the U.S., I know a lot of a hospitality focus with some of the acquisitions, Sterling and the like. Just curious what you're seeing competitively that's a vertical that a lot more of your competitors and your peers have been talking about, just curious if you see anything different in the marketplace there? And again congrats on the quarter.

Kevin Hodges

Thank you. I'm going to actually ask Brendan who's with me as well, he runs North America, that business he reports and Jim.

Brendan Tansill

Yes. George, thanks for the question. We have not seen any materially different behavior from any of our competitors. Sterling, as you highlight in your preamble is – continues to be largely focused on hospitality, but I can tell you it's a huge source of emphasis of all of us to diversify away from hospitality and focus on a number of other verticals. Throughout the balance of EVO's business, setting aside Sterling though, you would see that we are entirely diversified with no real concentration in any one vertical specifically that would apply to e-commerce, I guess e-commerce would largely be SME retail.

The B2B business is entirely diversified and then as I say the legacy EVO direct business is largely diversified I suppose with some concentration in SME retail. But in terms of the path forward, clearly on the ISV channel we are trying to get away from the restaurant hospitality sector just because as you point out that's the most mature segment in the market and there is a lot of areas that we see tremendous growth opportunities.

Operator

Thank you. Our next question comes from the line of Bob Napoli of William Blair. Your line is now open.

Bob Napoli

Thank you and good morning. Hey, Jim and team, Kevin. The U.S. business, could you remind me what size the traditional or the direct and the combination is of the North America business today?

Jim Kelly

The U.S. it's 48% and of that 48%, two-third is direct. That's a business that we directly solicit with our employees, customers.

Bob Napoli

And Mexico is about 20% of the company?

Jim Kelly

No, that's U.S. And then Mexico, Mexico and the U.S. are about 50/50, pretty close, depending on where the peso goes in total revenue. And Mexico is almost all direct. There is some very – there's some e-commerce, it's very small or just launching our platform now this quarter, fourth quarter. And on the ISV front, big expectations for growth coming into 2019 because it exists there too, we just haven't yet found the right model to be successful, yes.

Bob Napoli

Thank you. And then I mean you guys have been awful active on the M&A front. First of all, what are your thoughts around – I mean do you continue to have a pipeline and you are comfortable as you mentioned your leverage has come down substantially from prior to the IPO. You do have a target of lower leverage, but I think the market probably once you – we like to see you do good deals. What are the – are you – do you have a pipeline? Should we expect to continue to see these smaller tuck-in deals and just how competitive are those bank partnerships?

Jim Kelly

Okay. So as I mentioned in my comments and that was the reason I did, I know we have – we've got a lot of things this quarter, I mean many of these were in play when we went public, so we knew this was coming. We just didn't know – we just never know when exactly that it's going to close. I guess I divide it as we look at it as bank partners and then on the tech side. For bank partnerships, they come as – depending on what's going on in the world, so raising capital banks will look to sell and that's what EVO benefited from in – post the crisis and say that's 2011, 2012, 2013, 2014 time period.

Today it's more about what do you have to offer us, how can you help our business be more relevant or more defensive on the competitive front from e-commerce, ISV et cetera. So we probably like others, but more still staying a very active audience pipeline, however you want to describe it, we're not just in the regions that we currently fit which would be Europe, but South America continues to be a very big focus of ours because I think it's ready, it's ready this year, it's ready next year.

I don't know exactly when it's going to be ready for us, but we are going to be there and we're going to put our best foot forward to try and build relationships with financial institutions to move into the market because it gives us a resources people, it gives us merchant accounts to start, it gives us a bank brand to work from as opposed to trying to move into a new market under the name EVO.

And then Asia-Pacific, we haven't yet moved into that market, but we have continued to look in the region and I think that region as well we'll see some opportunities in the coming year or so. But in terms of the company strategy, I would say half of what we do the managers who run the company from the GMs in the countries to Darren and Brendan, myself; David Goldman who runs M&A for us; Kevin, that's part of our job. Half of our job is to look for those opportunities.

For investors it's a very – return because we have the ability to take a look at the back-book and see how it's priced. Lots of times we find merchants priced at a loss. As I've said on the call, we have the synergies that come from moving the processing from legacy system onto our system. And then we have a very deep bench of people, products to be able to launch into market and compete against our competitors.

Bob Napoli

Great. Thank you. Appreciate it. Solid quarter and great answer.

Jim Kelly

Thank you.

Kevin Hodges

Thanks Bob.

Operator

Thank you. Our next question comes from Ashwin Shirvaikar of Citi. Your line is now open.

Ashwin Shirvaikar

Hey, Jim. Hi, Kevin. Good morning. I guess my first question is with regards to tech-enabled growth in other countries. Obviously you have traction in the U.S. Quantitatively is tech-enabled growth in other countries different in the sense that you have to make more acquisitions like do an acquisition to roll out within Europe or other geographies? Could you comment on that?

Jim Kelly

I'll start and I'd like Darren to kind of pick this up since he lives in a market that's evolving into the ISV world. So yes, in the U.S., 10 years ago nobody was really paying attention to this other than Mercury, maybe Sterling and a few others and now everybody is. It is front and center on everybody's roadmap. I think outside the U.S. and Europe as for instance, even a market like the UK, it is still very, very early stages, it's not something that's going to be super material, but it is going to be super relevant.

A company like ClearONE, as we said in the comments, ClearONE gives us access to 100 integrations overnight. We have the ability unlike our competitors in Spain for instance to deposit merchant receipts into any bank. So we're not – even though we have an exclusive relationship where Santander has to refer business to us for the next 10 years, we don't have to deposit the merchants' receipts into the Santander account or the Popular account, we could put them into BBVA or Sabadell or any other bank in the market. And that's very powerful for an ISV because an ISV is not necessarily aligned to a bank, it's aligned to their own interest.

So to find a company like ClearONE who wants to join – the teams joined, I was just talking to the GM of Spain this morning and we're talking about space in the office for the team that's relatively small compared to Spain which is almost 100 people for us, but it's going to give us access to 100 different point of sales that are relevant in Spanish and Portuguese market that we can then market to their customers. So we can offer them services and products that don't otherwise exist.

So it is part of our strategy to find companies like ClearONE because they've already done the legwork to build those relationships. As I said on our last call, we're not in the software business, we have hundreds of developers here, but they build products and capabilities to enable other people. So we're in our swim lane, we're not in somebody else's swim lane and if we can find companies like ClearONE that will help enable our – developing our relationships with ISVs and then be a good partner to them, then we're going to see I think outsized growth in the market. With that, Darren?

Darren Wilson

Thanks, Jim. Hi, Ashwin. Yes, the – each European market is obviously moving at a different pace on kind of the ISV world or tech-enabled world. So we're just seeking to capitalize on every opportunity aligned to the market run-rate. That said, when we look at the stable of solutions we have with EVO, with EVO Snap, with the ClearONE acquisition, with Notice and the accelerated great work that the IPG commerce team is doing as well in terms of integrating all those tech-enabled solutions is then finding the white space or the integration opportunity.

If it's an ISV that's already in the U.S. that we partnered with and wants to go into Europe, we're integrating, we're leveraging a U.S. solutions to deploy quick into market and we've had that great success in the UK already. What ClearONE gives us, as Jim has already alluded to, the 100 European integration that that also integrated into Snap gives us the slow back across pond into North America.

So – and equally with the e-commerce integration gives us the full omni-channel reach and we also will be looking to exploit the white space in the government or B2B type verticals as well. So I think we have a good product set. That said, we continue to look at the integration opportunities in each market. Poland historically has been kind of host-to-host integration, so a large corporate integrating into our platform, but as we see Poland being a very digital-focused market, we see the ISV landscape, tech-enabled landscape being a huge opportunity there too. So each market will move at a different pace, but we're well set up with the right assets to leverage the opportunity in each country.

Ashwin Shirvaikar

Got it. That's very useful. And sticking with Europe, can you talk about the benefit from the DCC pricing change?

Darren Wilson

So the DCC pricing change in terms of ATMs, you're specifically asking on?

Ashwin Shirvaikar

Right. I mean what's your approach going to be in terms of rolling it out, any comments on timing?

Darren Wilson

Sure. So we support the ATM acquisition through our German business, so we have multiple partners Pan Europe, but we leverage or we supply ATM services to. That's not the filling, supplying of the ATM machines, but actually supporting the international card transactions. So what we're focused on leveraging DCC specifically on Europe-focused cards, the international opportunity gives additional bandwidth and upside.

So we'll be live on go live date of the pricing changes to leverage those opportunities. We'll always capitalize on scheme change of that nature. There's also some scheme changes in terms of e-commerce pricing schedule for the 1st of April and similarly we're well-placed to leverage on the upside opportunity on the e-commerce channel as well. So we do see upsides from both these pricing opportunities.

Ashwin Shirvaikar

Okay. Great. Thank you.

Jim Kelly

We'll see you Tuesday, Ashwin.

Ashwin Shirvaikar

See you Tuesday. Yes. Thanks, Jim.

Operator

Thank you. Our next question comes from the line of James Schneider of Goldman Sachs. Your line is now open.

James Schneider

Good morning. Thanks for taking my question. Jim, maybe if you could just touch on the EuroBic acquisition for – or the JV for a second. Can you maybe comment on broadly speaking number 1, the kind of merchants and businesses they're touching now and how that compare with the rest your European business in terms of size of merchants? And then talk a little bit about the potential to kind of insert technology into that channel or whether it's going to be remain more of like a traditional market for now?

Jim Kelly

So they are – so EuroBic I think is like number nine or 10 in the market in terms of size, but on the acquiring side, they are number six. Their focus is SME, they like to go upscale, they don't have the products to be able to do that. So a keen focus there, as I mentioned they're already encouraging us to get integrated so that they can for new merchants start to sell the Polish platform, all the stuff that Darren has been talking about, that all resides on one platform and through Snap we're able to distribute that to multiple markets.

So think of kind of tentacles, we've got tentacles that go into Snap and now to ClearONE. That all go back to any of the three hosts. The one they'd be more interested is – where we'd be leveraging is out of Poland. So it will be larger merchants. They're not necessarily going to compete against the biggest banks in the market just given their size, but I think they would like to get bigger than where they are, continue to fill out the growth, their growth is the teams which is outpacing most of the market and we're excited to just be in a new market and in a new market where we can leverage our resources from Spain.

So now this is now the hub and spoke analogy I – or description I gave you before, this will be a satellite effectively with really just sales that will be in the market. So from a earnings standpoint, I think this will be a very accretive transaction. We'll get a chance to look at the back-book as we do in all these transactions and amazingly we find a lot of the portfolio is priced without a real understanding of interchange and we fix that and that's immediate accretion to the JV.

James Schneider

Thanks. That's helpful. And then maybe a follow-up on margins. You addressed a couple of other questions with respect to platform integrations and like and I think you noted that were it not for the European investments, you'd be doing in the range of 100 basis points of EBITDA margin this year. So I guess my question is as you go forward into 2019, is there opportunity where you could potentially over drive margins above the 50 basis points to 75 basis points long-term outlook you've mentioned before?

Jim Kelly

I think in a word, yes. We gave expectations of 50 basis points to 75 basis points that's kind of normal run-rate of just the leverage model of the – of our industry, not unique to us, but we benefit because we try to control as much of our cost as the acquisition I mentioned, Galaxy Pay was a tiny little company, but it brings in a service that we otherwise paying by the drink, we don't have to do that any longer.

And to – I forgot who asked the question, but one of the earlier questions as well around the leverage that comes out of these acquisitions, now that's another reason that we do them. So I would like to see that we're driving margins up 50 basis points-75 basis points, but I would say for next year we should be able to do better than that.

James Schneider

Great. Thank you very much.

Jim Kelly

Yes.

Operator

Thank you. Our next question comes from the line of Jason Kupferberg of Bank of America Merrill Lynch. Your line is now open.

Amit Singh

Hi, guys. This is actually Amit Singh from Bank of America Merrill Lynch. So just quickly, for this quarter what was the organic constant-currency revenue growth in North America and Europe?

Jim Kelly

Kevin hasn't had a chance to talk, so I'll let Kevin talk.

Kevin Hodges

Hey, Amit, how are you? So overall constant currency organic, it's about 10%. We haven't broken it out by segment really because the acquisitions were small enough to where they didn't make a material change to the growth rates.

Amit Singh

Okay. Okay. And then as we look for the full – look at the full year and one of the question that was asked earlier, what are you expecting ClearONE and Galaxy Pay to contribute to the full year? And also I know like EuroBic is expected to close next year, but how should we think about it on revenue-wise on an annualized basis?

Jim Kelly

That's a really good question. I think what we intend to do is as we come out with guidance for next year we'll include the impacts of those businesses. Galaxy Pay is not going to be material – is not going to be noticeable once we close Portugal, that's going to have an impact to Europe revenue and earnings growth, it is of size that will matter. I think on ClearONE, ClearONE as it currently sits is not material business.

The opportunity there is they have customers across those 100 ISVs, plus they give us the opportunity to market to all those ISVs. So I think what you would see with business acquisition like ClearONE because I don't think that will be the last that we ever do is an acceleration of revenue growth because of the share shift away from traditional terminals to integrated. Just stylistically, I'd rather just put it all in the guidance instead of try to parse it out in pieces.

Amit Singh

Okay. Okay. Perfect. If I can just sneak one more in and related to the question that was asked earlier, as we are thinking into next year I know the guidance is not provided this quarter, but based on the talks that you've had about growth in various geographies, I mean is it safe to assume that you can maintain this type of double-digit top line growth going into next year? And then related to margins, I know you talked about you can exceed your margin target for next year, but you continue doing investments and executing on M&A. Could that have a negative impact on margin next year as well?

Jim Kelly

Well, just the way we report on a cash basis as everybody else does, the acquisitions don't have that same type of effect on margin, so I can say they're all going to be accretive out of the box, but most of them tend to be pretty accretive if not very accretive. I think your first question though we'll give guidance next year once we get to next year. We're going to finish up this year, we gave guidance for the balance of this year. I think that at this point that's what we're comfortable with talking about.

Amit Singh

All right. Thank you very much.

Jim Kelly

Yes. Thank you very much.

Operator

Thank you. Our next question comes from the line of Ken Suchoski of Autonomous Research. Your line is now open.

Ken Suchoski

Thanks. Just going back to the U.S. direct channel, you said that you may be able to start growing this business in 2019 or 2020.

Jim Kelly

Yes.

Ken Suchoski

Can you talk about some of the specific actions you're taking to improve the growth in that channel?

Jim Kelly

Sure. So as I mentioned, again, just to give you a story of the math, this is U.S. direct so the U.S. tech-enabled is 52% and then the U.S. direct and traditional combined are 48% and this is roughly direct is two-third of the 48%. So in that two-third we have a portfolio of businesses that were really what is – what was EVO before 2010 and we have mix of businesses that have consistently performed very well meaning high single to low double-digit growth, traditional, doing the same thing as the others in that portfolio and a group of portfolios.

The largest piece in that portfolio, the performance has been poor for a number of years and we made some changes – management changes, we realigned some of the business to get better focus on fixing the performance in that business and we're starting to see that. We've brought in a very talented woman, Lauren, who's done a very good job but been here for a very short period of time. Put a lot of energy and resources to it.

And we have the empirical data to say that others in our organization are performing in the same market potentially doing the same thing. So we're seeing a turn, we believe that turn will materialize 2019-2020. Yes, it's not a material piece of our business, it's like two-third of 48% of the U.S. which is, what's it, 30% of the entire company. So you're talking about a relatively small piece, but we don't want anything to slow our growth and this one right now is slowing the overall growth of the business, so it is a focus of the company, it's not the only focus, but it is – it's getting a number of people's attention including mine and Brendan.

Ken Suchoski

Makes sense. And just a question on the CapEx. It's been running around 8% to 9% and it looks like POS CapEx has been 4% to 5%. How do you guys expect the POS CapEx to trend over time just given the Polish terminalization initiative is going to continue for the next two to three years?

Jim Kelly

Yes, I think that one's hard to – this was – this is not a law, this is a – what would you call it, mandate?

Darren Wilson

Mandate.

Jim Kelly

A mandate. I don't know what a mandate – what it really means.

Darren Wilson

Indication.

Jim Kelly

People should do it, but you don't go to jail if you don't do it. So we'll see how that rolls out if that rolls out and CapEx will continue to – it's going to be in that range, but that range is also going to move up every time we do an acquisition in a market outside the United States that's related to a bank portfolio because the model is the model whether we don't necessarily like that model, we'd rather sell the terminals than own them and rent them, but that's – it is a high return, it's just not something we prefer to do.

So I don't see – I personally don't see that going the other direction any time soon whether Poland changes or not because we're going to do more – more bank portfolio acquisitions is my feeling and those generally will be outside the United States, if not exclusively outside the United States and therefore we're going to have to deal with this terminal model.

Ken Suchoski

Got it. Thanks a lot, guys.

Jim Kelly

All right. Thank you.

Operator

Thank you. The next question comes from the line of Chris Brendler of Buckingham Research. Your line is now open.

Chris Brendler

Hi. Thanks for taking my questions and congrats on the results. I just wanted to ask on the U.S. side, do you have the pieces you need, in terms of M&A…

Jim Kelly

Chris? Chris?

Chris Brendler

Yes?

Jim Kelly

You're breaking up, so if you could start that over again?

Chris Brendler

Sorry, just a question quickly on M&A in the U.S. Is there any pieces you need there or do you feel like you have the platform and the products that you're comfortable with as you attack the tech strategy in the U.S.?

Brendan Tansill

Yes, Thanks for the question, Chris. I think need is probably not applicable. I think we're very comfortable with where we sit from a technology perspective. What we opportunistically look at situations where we can enhance our distribution capabilities if there were something that's analogous to Sterling that became available, yes, would we seriously consider that, perhaps. But in terms of the integration capabilities that we have here resident in the U.S., the Snap platform; the developers that we have in Denver, Colorado; our gateway capabilities which we're bringing to market; we're very comfortable that the capabilities there will put us at or above par in terms of addressing the e-commerce channel.

And then in terms of the direct channel as Jim mentioned, the capabilities that we've augmented there are largely around personnel and leadership and putting folks in a shared office space with shared leadership and accountability. So in terms of need, no, but as you can see through the course of the quarter I think we announced three acquisitions, we're consistently opportunistic and if something pops up, we'll definitely be at the front of the line to look under the hood.

Chris Brendler

And then quickly, does ClearONE have any applications in the U.S.?

Brendan Tansill

No.

Chris Brendler

Could you bring that technology to the U.S.? Is it distributed over European platform?

Jim Kelly

We really have the technology via Snap. All of these is an enabling technology, think of it as like a power strip, people plug into it and they're plugged into the national processor currently in Spain and Portugal. So I don't know that – actually the teams are sitting together as we speak in Madrid, so I'll learn more once the CIO and the guy who runs Snap come out of that meeting. There's always some benefit from somebody's new platform for us and we cross-pollinate very well at the company. So the idea is we're stronger together, so nobody's out as an island, we all work as a team to find the best solution for our customers for the market and most efficient.

Chris Brendler

Great. Thanks for taking my questions.

Jim Kelly

Thank you. Operator, I think that's the last call.

Operator

That is all the questions I have for you today. I'd like to hand the call back over to Jim Kelly for any closing remarks.

Jim Kelly

All right. Thank you operator and I want to thank all of you for joining us this morning. We greatly appreciate your continued interest in EVO.

Operator

Ladies and gentlemen, thank you for participating in today's conference. That does conclude today's program. You may all disconnect. Everyone have a great day.