The air crackled with anticipation as EVERTEC, the payment processing powerhouse, delivered their Q1 2024 earnings call. Analysts, eager to dissect the numbers, honed in on the performance of Sinqia, the Brazilian software giant EVERTEC acquired just a few months prior. Was it living up to the hype? Was it accretive? Would it reignite the double-digit growth engine that once propelled it forward?

Amidst the flurry of questions, a crucial detail slipped past the keenest of observers. CEO Mac Schuessler, with subtle yet deliberate phrasing, revealed a hidden lever within Sinqia, one poised to unleash a wave of profitability in the years to come – contract repricing.

The revelation, almost whispered between the lines of operational updates and integration plans, paints a picture of untapped potential. Sinqia, it seems, has been a sleeping giant, its value obscured by years of rapid acquisitions and the ensuing integration complexities. Now, under EVERTEC's steady hand, a meticulous examination of their extensive client contracts is underway, revealing a treasure trove of outdated pricing agreements ripe for renegotiation.

This 'margin optimization' initiative, as Schuessler termed it, wasn't just a casual aside. It was a strategically placed breadcrumb, a hint at a future profit surge that could dwarf any immediate accretion concerns. Think about it – a company boasting nearly 1,000 clients in a booming tech market like Brazil, bound by contracts that haven't been revisited in years. The potential magnitude of this repricing initiative is staggering.

"Let's look at some back-of-the-envelope calculations to illustrate the point. If Sinqia contributes roughly 40% to EVERTEC's LATAM segment revenue (based on guidance figures), their estimated 2024 revenue stands around $300 million. Assuming even a modest 5% average price increase across their contracts, we're looking at a potential $15 million revenue uplift, directly translating to an additional $6 million in adjusted EBITDA, assuming a 40% contribution margin. This alone would significantly shift Sinqia's accretion profile from neutral to solidly positive."

But the true power of this lever lies in its compounding effect over time. As EVERTEC modernizes Sinqia's platforms, delivering enhanced features and customized solutions, their justification for pricing increases strengthens. Each successful implementation becomes a stepping stone for higher fees, fueling a virtuous cycle of revenue growth and expanding margins.

It's a strategy EVERTEC has mastered before. Their previous acquisitions, PayGroup and Place2Pay, started with lower margins than their respective segments. Yet, through operational discipline and strategic repricing, EVERTEC methodically boosted margins, unlocking significant shareholder value.

Projected Adjusted EBITDA Growth from Contract Repricing

The following chart illustrates the potential impact of the contract repricing initiative on Sinqia's adjusted EBITDA over the next three years, assuming a conservative 5% average annual price increase.

The evidence suggests that EVERTEC is employing the same playbook with Sinqia. While 2024 will be a year of integration and focused execution, laying the groundwork for future growth, the seeds of a profit explosion are being sown. The repricing lever, barely noticed by the market, will likely drive a significant margin expansion in the coming years.

Analysts, focused on immediate accretion figures, may be missing the bigger picture. EVERTEC isn't just buying a Brazilian software company; they're acquiring a profit engine waiting to be ignited. The contract repricing initiative, though subtle in its unveiling, is the spark that could set Sinqia, and ultimately EVERTEC, on a path to explosive growth and market dominance.

"Fun Fact: Did you know that EVERTEC is the exclusive provider of payment processing services for the Puerto Rican government? This reflects the company's deep roots and dominant position on the island."