Cardtronics sets out on troubled waters as CEO signs off

| by Suzanne Cluckey
Cardtronics sets out on troubled waters as CEO signs off

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On the afternoon of Nov. 2, Cardtronics recapped its Q3 results in an earnings call that would be the last — and probably the most downbeat — under Steve Rathgaber's captainship.

After eight years controlling the rudder of the world's largest independent ATM deployer, Rathgaber will step down at the end of 2017 with a solid legacy of growth behind him: 16 acquisitions in markets in the U.S. and abroad and significant organic growth; 24 quarters of double-digit revenue growth and 26 quarters of double-digit adjusted EPS growth. Impressive accomplishments by any measure.

But Rathgaber's legacy will be defined also by what lies in Cardtronics' near future, as his hand-picked successor of two years' tenure, Chief Financial Officer Ed West, steps up to the helm.

After events of 2017, West will need to step carefully if he is to preserve Rathgaber's accomplishments. It will not be a cakewalk.

A trio of troubles

July 2017 marked the beginning of the end of the 10-year relationship between Cardtronics and 7-Eleven. The company is now reportedly halfway through the process of removing 8,000 ATMs from the convenience stores, which are not under contract with FCTI, a California-based ATM deployer owned by Tokyo-based Seven Bank, also the parent company of 7-Eleven.

Transaction processing for ATMs in 7-Eleven stores has been handed off from Cardtronics' wholly owned Allpoint Network to the MoneyPass surcharge-free network operated by Elan, a wholly owned subsidiary of US Bank.

On top of this, Cardtronics has been dealt blows more recently in Australia and the United Kingdom, dominant markets for Direct Cash Payments, the U.K.-based company that Cardtronics acquired in January.

Nine months after that acquisition was finalized, the U.K. Competition and Markets Authority finally approved the $464 million transaction, clearing the way for Cardtronics to integrate DC Payments with its existing U.K. operations.

Within 24 hours of receiving this good news, Cardtronics also received the very bad news that Australia's four largest banks had agreed to end the practice of charging customers for the use of their ATMs. Together these banks account for nearly one-third of the country's total ATM count.

One month later came more bad news, this time from UK Link, operator of the free-to-use ATM network in the United Kingdom.

Link announced plans to slash 20 percent from payments to operators of ATMs on the Link network (essentially, all ATMs in the U.K.)

Adding insult to injury, Houston-based Cardtronics was at the same time beset by damage from Hurricane Harvey, the costliest storm in U.S. history, which struck on Aug. 17, and a 7.1 magnitude earthquake that struck Mexico City a month later, on Sept. 19.

Three key positives

Despite these trials, West found three positives to underscore in Cardtronics Q3 results.

First, he said, Cardtronics experienced a "modest improvement" in growth metrics compared with the company's performance in the first half of the year, when unexpected outages and delays related to software upgrades and the implementation of EMV across its U.S. network took a significant bite out of profits.

The second positive, he said, was the eventual resolution of these operational setbacks, and the company's solid operating execution in the third quarter in the face of unprecedented natural disasters.

"It was rewarding to experience the near-flawless execution of our business continuity plans in this real-life situation," he said.

The third and last positive was the fact that, nothwithstanding earthquake, flood and fallout from the elimination of ATM charges by  Australian banks, the company remained on track to meet its full-year 2017 projections.

Other insights

Despite the 7-Eleven deinstallation, Cardtronics will not lose all of its previous 7-Eleven traffic. Customers of financial institutions that belong to Allpoint but not MoneyPass will very likely seek out another Allpoint ATM for surcharge-free transactions.

Australia accounts for just under 9 percent of Cardtronics revenues, and approximately 80 percent of Australian revenues in the past 9 months were derived from direct charge fees. The Australian banking system does not permit the use of an interchange model.

West said that it's too early to know how the move by Australian banks will affect the country's IADs: "Given how recently this move was made, mass consumer behavior is still adjusting to the changed environment and we therefore do not have a definite view of new run rate of transaction volumes on our ATMs."

But from data the company does have, volume has clearly migrated from direct-charge ATMs to no-charge machines. In such an environment the placement of ATMs becomes highly important.

According to West, about half of the company's Australian placements are in more "protected" locations, such as casinos, or are associated with fixed-revenue arrangements, such as managed service agreements.

The company might find opportunities to develop more management or outsourcing relationships, he said. "Over the longer term, it seems to us that the maintenance by the banks of remote or off branch loss-making ATMs is not economically feasible."

The company will capitalize swiftly on what it sees as a market opportunity to partner with banks in an Allpoint-style mode, West said. "This move by the banks to eliminate the direct charge fee could accelerate the move to a shared infrastructure model and we have been active in engaging with various stakeholders to understand how we can bring a surcharge-free model to the market."

In the U.K., West said, the company has "levers to pull" (one would be the introduction of user fees, presumably) to mitigate the effects of a Link pullback, which could have an impact of approximately $15 million on gross earnings, based on revenues from that market in 2017.

"If this new rate is enacted it will obviously have an impact on our operations, and we will be responding accordingly," he said. "We expect to learn more about the member response and associated Link board action by the end of January."

The way forward

Cardtronics leadership will have a lot of pencil-pushing to do to determine the ongoing impact of 2017 developments on 2018 revenues.

The company also will have to do some creative thinking about ways to work with financial institutions in its key markets — either individually in a managed services context, or collectively in an Allpoint-style surcharge free model.

"This opens up a close but relatively unexplored market opportunity that is even larger than the off-premise ATM market that is our heritage," West said. "This is one of the reasons I firmly believe in the future of Cardtronics."

In his final earnings call remarks, Rathgaber expressed optimism that the company will be able to adapt and evolve through a difficult time of transition.

"A lot has changed in my time at the company, but this strategic opportunity remains intact: Cardtronics is an important component of payments infrastructure in our core markets and provides tremendous value to retailers, financial institutions and, most importantly, consumers by delivering safe, convenient access to cash."

Topics: Distributors / ISO / IAD, Public Companies, Retail / Off-Premises

Companies: Cardtronics

Suzanne Cluckey
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. She is now the editor of and wwwView Suzanne Cluckey's profile on LinkedIn

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