Cardtronics shares get a haircut in a 'transitional year'
Last week, Cardtronics released financials for the fourth quarter of 2016. The numbers were good — revenues beat analysts' expectations by $1 million, even.
The company raked in total revenues of $309.8 million, up 2 percent from $303.3 million for the same quarter in 2015 (or, on a constant currency basis, up 8 percent); ATM operating revenues came in at $294.7 million, a year-over-year increase of 1 percent (7 percent constant currency); gross margin was consistent year over year, at 35.5 percent; and GAAP net income, adjusted net income and adjusted EBITDA were all improved from Q4 2015.
As CEO Steve Rathgaber said during the earnings call, "We've had another solid quarter that contributed nicely to another full year of double-digit top- and bottom-line growth when adjusted for currency movements. We've also had some meaningful business wins to close the year and set the stage for the future."
So, with all of this going right, why did Cardtronics stock dump 10 percent of its value following the earnings call?
We'll get to that momentarily. But first, a look at Q4 highlights that Rathgaber checked off during the call:
nearly 900 new ATM retail placements contracted during the quarter, yielding total organic unit adds in 2016 of nearly 3,400, comfortably within the 2,500 to 4,000 range the company aims for;
31 new Allpoint signings by financial institutions during the quarter, delivering 1.1 million cards and bringing the 2016 total to 102 new FIs and more than 10.4 million cards;
- the long-term renewal of Canadian 7-Eleven business, accompanied by the renewal of an agreement with Scotiabank to brand Cardtronics ATMs in those stores;
- the renewal of Shell Oil in the U.K.;
- the renewal and expansion of an agreement with Walgreen's (including Duane Reade stores);
- an agreement with Citibank to brand 1,900 ATMs across multiple retailers, including Walgreens, Duane Reade, and others;
- participation by Citibank in the Allpoint Network; and
- expanded branding relationships with two major FIs — BMO Harris and TD Bank.
But (and here's that promised "why") looming over all of this is the fact that, in July, the long-running relationship between Cardtronics and 7-Eleven stores in the U.S. will end.
In July, the company will and the company will begin the arduous process of deinstalling its ATMs in the chain's convenience stores across the country, a process that is expected to continue for several months
When deinstallation is complete late in the year, the company will have lost income from 8,000 productive ATMs that deliver the unusually high profit margin of 45 percent, which compares with the company's overall average of 36 percent.
More suddenly, Cardtronics will lose the Allpoint Network earnings for those 8,000 ATMs, which will end immediately upon the expiration of the contract with 7-Eleven.
The income from 7-Eleven ATMs makes up 18 percent of Cardtronics consolidated revenues. So it's no surprise that investors got spooked.
The company is taking steps to mitigate the loss, though. The addition of a behemoth like Citibank to the Allpoint network will help to replace a portion of the "tens of millions" of same-store transactions lost from 7-Eleven, Cardtronics Chief Financial Officer Edward H. West pointed out during the call.
The company also expects to turn its recent and largest-ever acquisition, DCPayments, into an aggressive growth machine in Australia, North America and the U.K.
"We see growth potential in that business because we're engaging a business that has had a culture more of maintenance than growth," Rathgaber said. "And we're just bringing a different mindset to the countries that they're operating in."
But it won't happen overnight. The deal is currently under review by the U.K. Competition & Markets Authority, and integration of the DCPayments (which is still integrating its own recent acquisition, Australia's Cash Connect) will not commence until the CMA has finished its investigation.
In the meantime, West said that Cardtronics is working on trimming cost "from both an operational standpoint as well as an overhead standpoint where we would expect a run rate of those savings and efficiencies and implementations to benefit about $35 million."
And finally, Cardtronics will no longer have the costs of maintaining and operating 8,000 ATMs, which West estimated at $120 million.
Cardtronics is also experiencing greater expense than expected as it migrates tens of thousands of U.S. ATMs to EMV.
And, for what it's worth, this is just as difficult a task for the world's largest ATM deployer as it is for an independent operator who owns a couple hundred machines.
Like many deployers, Cardtronics decided that as long as it was rolling out EMV, it might as well use those machine touches to take care of some software upgrades that will provide additional security, functionality and remote management capability.
But after the rollout had begun, the company discovered some issues with the software upgrade, "So we had to turn it back, rectify the software and then get it back out into the field," he said. "This delayed the overall software and EMV upgrade efforts and we're now tracking to complete the software and EMV upgrade in the third quarter of this year."
Unexpected downtime due to the software issue shaved one or two points off the company's same-store transaction volumes in Q4. And, because of the delay in implementation, the company missed the MasterCard liability shift for ATMs and will be obliged to eat costs for fraudulent card transactions for a few months.
All of this has been figured into the company's outlook for 2017, which Rathgaber said will be a "transitional year." For shareholders, this translates to a year-over-year reduction of 8–14 percent in non-GAAP earnings per share — from $3.26 in 2016 to somewhere in the range of $2.80 to –$3 in 2017.
Not that Rathgaber expects this to set a new trend for Cardtronics. As he told analysts on the earnings call:
What we have conviction around is that once we are through this transition year, Cardtronics will be in a strong position to seize the growth opportunities that we see ahead of us, including retail ATM placements around the globe, growth of FI relationships with the Allpoint Network, and growth of FI relationships with our in-branch outsourcing solutions.
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 ATMmarketplace.com and BlockChainTechNews.com www