Article

Bank branding, foreign markets a target for Cardtronics

The world's largest ISO posted record EBITDA this week — a reminder that sometimes it is possible to turn the tide.

August 5, 2009 by Tracy Kitten — Editor, AMC

Cardtronics Inc. is careful not to say too much about its managerial restructuring, but it's happy to talk about its bank-branding profitability.

The Houston-based ATM ISO still searches for a new CEO, but direction from the top does not appear to be wavering.

Cardtronics reported record EBITDA of $27.9 million during the second quarter of 2009 — a marked improvement from last year, when the company reported net losses of $3.6 million for Q2 and $5 million for Q1.The company reported a $4.6 million net loss in 1Q 2007, too.

2009 is shaping to be one of Cardtronics' best.

While revenue for the quarter was down slightly, from $127 million in Q2 2008 to $125 million in Q2 2009, net income was up $6.1 million year over year. The company's net income for the quarter came in at $2.5 million (6 cents per share), up from the $3.6 million net loss (a loss of 9 cents per share) reported in Q2 '08.

For the year, Cardtronics is ahead of projections but still has a way to go before it can call the year profitable. The company reported a net loss of $2.5 million (a loss of 7 cents per share) for the first half the year — an improvement from the $8.5 million net loss (a loss of 22 cents per share) reported during the same period a year earlier.

The financial turnaround may have a little to do with departed CEO Jack Antoniniand a lot to do with a strategic focus on bank branding and high-transacting merchant placements.

Chris Brewster, Cardtronics' chief financial officer, says Cardtronics' move into foreign markets (the United Kingdom and Mexico), in addition to its growing strength in branding, even with the Citi-branded Vcom line at 7-Eleven, has helped the company turn the corner.

"We do not break out the profitability and margin on the Vcom portfolio, but we can say that the program has improved significantly since being taken over by Cardtronics," Brewer said.

Cardtronics acquired the 7-Eleven portfolio of 5,500 ATMs and Vcom multifunction financial kiosks in 2007.

"Citi branding, as with all our bank-branding deals, provides a level of fixed fee income each month," Brewer said, adding that Cardtronics' branding program "plays an important role in the profitability of each branded ATM. Also, branded ATMs generally enjoy higher transaction counts."

The advanced-function Vcom machines offer cash withdrawals, check cashing, funds transfer, bill payment and deposits for Citi customers. To date, Cardtronics operates some 2,200 Vcom terminals at various 7-Eleven locations.

The Vcom platform, Brewer says, offers a variety of targeted transactions that vary from market to market, depending on demographics. In a nutshell, the placements are strategic — likely a Cardtronics' nuance that 7-Eleven was never able to master on its own.

Sam Ditzion, the CEO of Boston-based ATM consulting firm Tremont Capital Group, says Cardtronics is quickly ascending in the bank branding space.

"In the non-bank ATM operator segment, Cardtronics has been the industry leader at branding its existing real estate with bank names. Adding Citibank deposit acceptance capabilities at many of its 7-Eleven Vcom locations is another example of Cardtronics trying to leverage existing real estate to generate incremental income."

Taking branding and retail deployments to a new level

If branding deals are Cardtronics' bread, high-transacting retail placements are its butter. Cardtronics has ATM deals with national merchants, including 7-Eleven, CVS, Safeway, Target and Walgreen Co. The company's retail expertise and its expansion into foreign markets as well as the launch of in-house armored and transaction processing services have positively impacted the bottom line.

During an investors call Aug. 5, Cardtronics' president of global development, Rick Updyke, said several factors have contributed to the company's financial success.

"Bank and network branding offerings continue to drive more traffic to our locations," he said. "Our relations with key retailers offer convenience. We see consumers shifting from plastic to cash, because of limited credit or a need to control spending. And the increase in unemployed consumers who use debit cards for benefits has improved our transactions."

Updyke said Cardtronics has seen a noticeable increase in the number of ATM transactions conducted with prepaid or stored-value benefits cards. The Allpoint surcharge-free ATM network, which Cardtronics acquired in December 2005, recently signed a bank deal to add 2.4 million customers.

"We think of the Allpoint network as a key component of our growth strategy," Updyke said.

Cardtronics' foreign investments also show promise, especially in the United Kingdom, where the company operates U.K. ISO Bank Machine Ltd.Cardtronics has 162 employees in the United Kingdom and Mexico, and 289 in the United States. And while the U.K. market is proving fertile ground for Cardtronics, as competitors in the market continue to fall from view, business in Mexico is growing.

Cardtronics has more than 2,100 ATM deployments in Mexico and is focusing attention on turnkey placements in resort and border areas, as well as with major multiunit retailers. (The company manages 33,000 ATMs across all 50 U.S. states.)

Mike Clinard, Cardtronics' president of global services, said Cardtronics' U.K.-based armored business is expected to deliver $8 million in cash-in-transit expenses in 2010.

"We've partnered with other business providers to reduce expenses," he said. "With our internal CIT operation in the U.K., we're on track to have nearly 1,000 locations converted this year, and we're still expecting to experience significant cost savings as a result of our cash-in-transit operation in the U.K."

Those new CIT arrangements and increased transaction volumes in the U.K. have proved a positive combination for Cardtronics' European operations. And the company's in-house processing also is showing positive results.

"We are seeing the benefit of growth investments we made previously," Brewer said. "Also, Cardtronics has made a concerted effort over the last 12 or so months to squeeze costs out of our system. We have moved the majority of our ATMs onto our in-house EFT processing platform, reducing per-transaction processing costs. We have negotiated cost savings with a variety of our vendors. We have right-sized our staffing and fixed costs."

So what about the new CEO? How could a leader impact the corporate vision?

Chairman and interim CEO Fred Lummis says Cardtronics will wait to find the right fit.

"I've been here for five months and there's nobody more motivated than I am to find the right person," Lummis half-jokingly told an analyst during the call. "We are looking for someone with payments experience; not necessarily ATMs, but with banking and processing experience. We're also looking for a leader — someone who has probably run his own business before."

The corporate focus to deploy ATMs in traditional and non-traditional retail locations; to offer more managed services for financial institutions; and to explore growth strategies in adjacent businesses will not be impacted by the new corporate leader, whoever he or she is.

"We have built a service-oriented company," Brewer said. "We have also put a large amount of effort in building our scale, which is helping us drive down costs across our portfolio; but we have expanded judiciously, taking only the deals that we felt could grow the business profitably."