"It was the best of times, it was the worst of times ... "
For Cardtronics Inc., it really was a Dickensian Q2, as revenue spiked 21 percent year over year in constant currency ... and as the world's largest IAD sustained the greatest blow to its fortunes since — possibly ever.
After several years of uncertainty, Cardtronics got the news in early July that many industry-watchers expected: 7-Eleven will not to renew the U.S. contract with its long-time ATM operator when it expires in 2017.
This leaves two immediate questions:
- "What impact will the loss of 17.5 percent of its income have on the world's largest IAD?"
- "What about non-U.S. 7-11 stores where Cardtronics still operates cash dispensers?"
In its Q2 earnings call last week, the company addressed both questions, but with some delicacy.
To gauge the impact on Cardtronics 2017 earnings, CFO Chris Brewster said, analysts could simply take 17.5 percent multiplied by Cardtronics' full-year guidance of about $1.2 billion to come up with a 7-Eleven revenue estimate that "is pretty close, frankly, to reality — including all transactions and fees, revenues from bank branding, and point revenues relevant to transactions conducted on those units."
Brewster went on to say that the 7-Eleven portfolio in the U.S. is one of the "more mature" Cardtronics estates — one that is growing at a rate below the company's corporate organic growth rate, and well below total growth, including mergers and acquisitions.
However, the company will be losing a high-traffic and possibly high-income account, though Brewster could not be too specific on the subject.
"We acknowledge there's a great deal of interest in the profit margin on this business; This frankly is a more difficult topic for me to broach with you," he told analysts on the call. "For starters it's [7-Eleven's] general policy not to disclose pricing related details on individual contracts. And it's just not a constructive business practice in the competitive marketplace."
Even more importantly, Brewster said, Cardtronics is still working out the details of migrating operations of 7-Eleven ATMs in the U.S. to a new operator — and some of those aspects "have yet to be discussed with a counterparty, much less finalized."
Ultimately, Brewster simply confirmed what most people familiar with the retail ATM business would have guessed:
Due to the scale of the estate and the fact that it is in a convenience store channel that tends to drive above-average ATM volume, this is in an estate that delivers EBITDA margins that are somewhat above our average. And I think this is generally consistent with a view taken by most analysts who have ever thought on what this situation might look like.
So, will the loss of 7-Eleven have an impact on Cardtronics' balance sheet? It's hard to see how it would not — a loss is a loss. But a disastrous loss? CEO Steve Rathgaber sought to reassure earnings call listeners:
For some illuminating perspective — which can be challenging to maintain in the shadow of the 7-Eleven news — our renewal success rate was 99.8 percent through June, which for the avoidance of doubt, is pre the July 6 notification by 7-Eleven. And importantly for long-term value creation, essentially all of these renewals included interest rate and interchange protections that take risk out of our business model and materially reduce the volatility in future earnings without incurring the material cost of interest rate hedges.
In securing nearly 100 percent of renewing contracts through the first half of the year, Rathgaber said, "[W]e contracted long-term value of more than $1.5 billion of generally recurring revenue streams with existing clients who value our services."
Rathgaber pointed to additional positives through the first half of the year that reinforce his confidence in the company's future fortunes (see highlights). One of the most encouraging developments was progress by Cardtronics U.K., which had been a weak spot in in past revenue reports.
Through a steady process of reorganization, acquisitions, and divestiture of noncore elements of acquisitions, Cardtronics' business in the U.K. and Germany has doubled in recent years and now comprises 32 percent of total revenues, Rathgaber said.
Rathgaber underscored success in the U.S. as well, including a new relationship between Cardtronics' Allpoint surcharge-free network and Visa to support the card brand's Plus Alliance surcharge-free offering for issuers.
Cardtronics is the exclusive IAD for the new network, which will include 5,000 Cardtronics-owned and -operated ATMs in the U.S., and further benefit retailers with expanded in-store foot traffic, Rathgaber said.
Additionally, he said, the July acquisition of Columbus Data Services gives Cardtronics "scale and a discrete platform in the merchant-owned segment of the ATM market, which generally operates in less prominently branded locations than our national turnkey business."
The acquisition creates synergies on both sides, Rathgaber said:
I like this space because we can leverage our expertise in a way that is CapEx light and scalable. The plan is to add to CDS's arsenal of value added products by trickling down some of our turnkey products like dynamic currency conversion. This will further differentiate CDS' offering and enhance revenues for their customers and Cardtronics alike. CDS also has issue of processing capabilities and direct connections into all major credit and debit networks in the U.S., extending our capabilities set.
And Cardtronics has more acquisition plans up its sleeve, Rathgaber said. The company's current pipeline includes in-market, new marketplace and value-added market opportunities. "And we have ample firepower on our balance sheet to act."
Cardtronics has been working for the past three years to "grow past 7-Eleven," Rathgaber said in his concluding remarks:
In two more years we will be still further along in the execution of our growth strategies ... We will grow organically with new placements in existing markets; we will grow organically by growing our share of the transaction pie on an absolute and percentage basis. We will grow our international footprint with targeted expansion into meaningful growth markets and we will use our strong cash flow to make acquisitions in our space and adjacent to our space as we see strategic fits. We will grow because we're part of a growing global marketplace in ATM placements and ATM cash withdrawals and we are committed to creating meaningful shareholder value all along the way.
Listen to the earnings call webcast.
transcript excerpts seeking alpha
/ Suzanne’s editorial career has spanned three decades and encompassed all B2B and B2C communications formats. Her award-winning work has appeared in trade and consumer media in the United States and internationally.