Article

Are TRM's woes a sign of the changing times?

Although TRM may have spread itself too thin too fast, the industry is forcing ISOs to change the way they do business, most industry experts agree.

April 19, 2006 by Tracy Kitten — Editor, AMC

Prompted by a recent announcement that auditors are questioning the financial viability of TRM Corp., banking industry analysts also are scrutinizing the Portland, Ore.-based firm. One of the world's largest independent sales organizations in the world, TRM oversees about 22,000 machines in the United States, Canada, the United Kingdom and Germany.

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TRM's recent attempt to expand its overseas operations and costs associated with that proposed expansion have left the company treading in financially-troubled waters, according to analysts and industry insiders. TRM's financial struggles have prompted the 25-year-old firm to abandon its proposal to acquire the ATM portfolio of Travelex UK Ltd.

The proposed $78 million acquisition, which included 1,100 ATMs, of Travelex is now a dead deal, the company said during an earnings call March 30. (Read also, TRM reports increased sales, operating loss.)

Under new leadership

"TRM has experienced a turnover of the entire management team," one investor who works closely with TRM said. "There's a new CEO in place, so they are in transition. We plan to keep a close eye on the new team to see if they can pull the company out of this situation. We would have never thought that this business would report such a big loss for last year."

Kenneth Tepper, who had been the company's president and chief executive since 2002, left TRM March 13, citing "personal reasons." The company's share price fell 14 percent following the announcement, and hasn't recovered.

TRM quickly appointed Jeffrey F. Brotman, the former president of a Philadelphia-based law firm and a certified public accountant, its interim president and CEO. And though the company's stock didn't rebound, industry watchers think TRM's new management shows promise.

Sam Ditzion, president and CEO of Boston-based Tremont Capital Group, an advisory firm that serves the ATM industry, said Brotman's knowledge of the company so far has been positive.

"Within only a few weeks on the job, TRM's new CEO appears to have become extremely knowledgeable about the company, each of the problems it faces, and the industry as a whole," he said. "His direct style on the most recent earnings conference call (March 30) appeared to earn some credibility among investors."

TRM could not be reached for comment, and several of the public company's investors, including Baupost Group Inc., Caxton Associates LLC and HBK Investments, responded with "no comment" replies to ATMmarketplace's inquiries.

Although TRM experienced a boost in ATM sales in 2005, the operating margin for the firm's ATM division dropped to a negative 69.3 percent in the fourth quarter of 2005, down from 6 percent in 4Q '04. For the year, the company's ATM business margin fell 91 percent, from 14.9 percent to 1.4 percent.

The eFunds drag

The company's financial troubles stem from its November 2004 acquisition of the eFunds Corp. ATM portfolio, which included 17,000 ATM contracts. That acquisition made TRM the second-largest ISO in the world, trailing only Cardtronics Inc., which holds a portfolio of more than 26,000 ATMs (Read also, TRM closes eFunds acquisition, now operates largest international ATM network.)

During the March earnings call, TRM's Dan Tierney said the company is "still struggling to make (the eFunds' acquisition) pay off." And "vault-cash costs in the U.S. and theft in the U.K. also had an impact" on the company's profit, he said. "To reduce attrition, we're working with eFunds. eFunds provides a lot of services to that estate."

Brotman said the company does not "believe the magnitude of such costs will continue in 2006," and that TRM is in "ongoing discussions with eFunds" to better "integrate" the portfolios.

"We believe that our gross profit margins going forward will be like what we experienced in the third quarter of the year," Brotman added.

TRM's sink-or-swim status floated to the surface when the company's auditor, PricewaterhouseCoopers LLP, expressed concern about its ability to continue.

Not only had TRM suffered an operating loss for 4Q '05, but concerns cropped up about loan defaults, including those related to a credit facility administered by Bank of America. TRM now has until June 15 to refinance or remedy the defaults.

"TRM has been going through a bit of a perfect storm, but (the company) seems to be taking appropriate actions that could potentially stop the bleeding," Tremont's Ditzion said. "TRM's future will depend on its ability within the next two months to either successfully reduce expenses and refinance debt, or sell all or certain parts of the company."

On the bright side, TRM renewed its ATM co-branding partnership with the Co-Op Network, which includes about 5,500 machines.

What's Important TRM is still struggling to make the eFunds acquisition pay off. TRM's new leadership could help to pull the company from its depths of debt. TRM and other ISOs are facing a changing marketplace, one in which the traditional make-money-from-surcharging model is no longer as viable.

"TRM's outstanding reputation for service and our track record for the highest uptime levels in the industry are important factors to the partnership with Co- Op Network," TRM's Tierney said in a news release. "We provide Co-Op Network with leading pricing and service, and they provide us with increased ATM transaction volume and foot-traffic that translates into money in our merchants' registers."

But negative news continues to loom.

The company announced April 13 that Lance Laifer, TRM's independent director and audit committee chairman, who joined the company's board in 2002, resigned in early April. (Read also, TRM board member resigns .) Other recent challenges facing TRM include threats of sanctions in the U.K.

TRM was told earlier this month that its 4,000 ATMs in the U.K. would be cut from the Link Interchange Network Ltd., unless they're brought into compliance with regulations requiring ISOs (independent ATM deployers in the U.K.) to notify consumers of foreign-use fees. (Read also, Link warns two ATM companies for not complying with fee rules .)

Sign of the times?

But TRM's woes may merely be signs of the changing times, Ditzion and others say.

"The market value of publicly traded ATM companies is falling," one industry investor said. "TRM, Scott Tod, Cardpoint, Global Axcess Corp., they've all felt a loss." (Cardtronics also reported net losses in 2005. Read, Bank Machine acquisition proves profitable for Cardtronics.)

Where 2005 was a year of acquisitions, 2006 will be a year of pulling back or out, and "in 2007, you're going to continue to see margins fall for the ISOs," the investor said.

"In 2006, you'll see more of them pulling back. Can we see TRM recuperate? I would be careful comparing quarter to quarter. If you look at the last six quarters, the analysts have been way off. Over the last six quarters, TRM shares have traded down on every earnings (release)."

During the ATM Industry Association's Conference East in Orlando, Ditzion said the future for ISOs will revolve around branding relationships with financial institutions.

"The bank branding relationship has worked for Cardtronics," he said. "They've been doing this for years and they're starting to get a lot of traction."

Besides, Ditzion said, Cardtronics is trying new things through its acquisition of the Allpoint Network and its deal with Tio Networks to pilot a hybrid ATM program. (Read also, Cardtronics, Info Touch announce hybrid ATM.)

"Cardtronics has recently made small investments in several different companies and ideas, only one of which needs to ultimately work out in order to generate substantial returns," he said.