Article

eFunds wants to boost ATM margins

The financial performance of eFunds' ATM Management business was beset by shrinking margins in 2002. The company wants to reverse that trend in '03 under the leadership of Bank of America veteran Kevin Reager, its brand new ATM chief.

February 24, 2003

In many ways,eFunds'new ATM Management business was a microcosm of the retail ATM industry in 2002.

Its financial performance can be summed up in two words: shrinking margins.

Increasing them will be a key challenge for Kevin Reager, the Bank of America veteran who last month joined eFunds Corporation as its ATM chief.

While eFunds' ATM business has been characterized by rapid revenue growth -- driven by the acquisitions of five major ISOs in 18 months -- it has also suffered from low margins. This became clear during a conference call following the company's recent report of its fourth quarter and full year earnings for 2002.

All about the margins

For 2002's fourth quarter, eFunds reported ATM Management revenues of $32.5 million, up 68 percent from $19.3 million in 2001's fourth quarter. However, operating expenses also grew, from $20.1 million in 2001's fourth quarter to $32.5 million in 2002's fourth quarter. Consequently, the resulting income from operations in 2002's fourth quarter was a loss of $85,000.

For the full year, eFunds said its ATM Management revenues were $115.5 million, up from $73.9 million in 2001. However, with operating expenses of $112.7 million for 2002, the resulting income from operations was just $2.8 million.

Kevin Reager is the man leading eFunds' ATM Management business. One of his biggest challenges will be boosting the margins.

Paul Walsh, the company's chief executive, said that negotiations of retention agreements with some of the purchased ISOs -- a one-time expense -- negatively impacted fourth quarter ATM earnings. There was also a dip in fourth-quarter equipment sales, he said.

ATM Management operating margins were 3.7 percent and 3.4 percent for the quarter and nine months ended Sept. 30, 2002. This was down from a margin of 8.7 percent for 2001's third quarter, but an improvement over a margin of 2.4 percent during the first nine months of 2001.

A bright spot, said Walsh, is the speed with which transaction processing is being switched to eFunds' platform. Noting that converting purchased ATM contracts to new processing agreements often takes a year or more, Walsh said he was pleased at eFunds' progress.

The company is now processing transactions for 10,300 of its 16,800 ATMs after switching 5,700 machines in 2002. "We expect to convert the remaining 5,000 over the next 18 months," he said.

The 1,300 eFunds ATMs located in Canada, part of the former Access Cash portfolio, cannot be converted "for a substantial period of time," according to the company's third quarter 2002 earnings report.

New sheriff in town

The focus for the ATM business in 2003, said Walsh during the call, will be on improving margins. "We want to make sure the margins are appropriate. The focus will be less on revenues than it will be on returns," he said.

Walsh believes Reager is the man for the job. During the call, he lauded Reager's understanding of the economies, operational requirements and opportunities of leading an ATM business. "To say that (Reager) is an expert in ATMs would be an understatement," he said.

Both Reager, in an interview with ATMmarketplace, and Walsh, during the call, said that the company's focus has shifted from acquisition to maximizing the value of its existing ATM contracts. It's become more difficult to locate good portfolios at a fair price, Reager said.

The company's ATM buying spree began in late 2001 withAccess Cashand ended in 2002's third quarter with Cash Resources. According to Walsh, eFunds spent $40.6 million in 2001 and some $35 million in 2002 on ISO acquisitions.

Leveraging the network

In today's mature market characterized by intense competition, eFunds hopes to differentiate itself by introducing new products that could be accessed via the company's ATMs, such as prepaid phone top-ups and payroll cards -- two possibilities mentioned by Walsh during the call.

Reager acknowledged that other companies are pursuing similar strategies. However, he believes the key to differentiation will be how effectively new products and services are rolled out across an ATM network.

"It's important to make it as simple as possible for customers to accept your product offers," Reager said. "We view value-added services as key to our long-term account and distributor acquisition and retention."

Another opportunity mentioned by both Reager and Walsh is a branding program similar to eFunds' successful contract with the Co-Op Network, in which eFunds offers surcharge-free ATM access to Co-Op members for a fee.

"We are in discussions to expand that offering to other financial institutions as well as retailers," Walsh said during the call. "It offers a significant financial benefit for both our customers and ourselves."

Branding is a need best served by large ISOs with a significant geographic reach, Reager said. "A guy with 40 machines in southeastern Louisiana is not going to be able to offer a branding solution."

Reager said that the eFunds name will become more dominant in future marketing efforts. Up until now, the company has been promoting its ATM services largely under the name of Access Cash, the Minneapolis ISO it purchased in late 2001.

The cross-sell

The switch may help eFunds capitalize on cross-selling opportunities. According to both Walsh and Reager, eFunds can offer retailers and financial institution products across its four business lines: ATM Management; Decision Support and Risk Management, which provides anti-fraud software and services; Electronic Payments, which includes transaction processing, debit card issuance and other services; and Professional Services, which provides outsourcing of IT and EFT services.

Responding to an analyst's question about which of the business lines offered the most potential for growth in 2003, Walsh noted that the businesses were "not unrelated."

The company believes that there are "significant opportunities that will cut across all four lines of business," he said. "We are going to see changes in the marketplace over the next 18 to 24 months, some of which will provide tremendous opportunities for eFunds, working either alone or with key partners."

Won't be easy

The company expects to encounter major challenges during the same period, however.

It remains under investigation by the Securities and Exchange Commission, an inquiry that was prompted by the accounting of revenues related to the Access Cash purchase. According to Tom Liston, eFunds' chief financial officer, earnings per share would have been up to 10 cents higher for 2003 without the costs eFunds incurred related to the investigation.

There is also a class-action lawsuit pending in U.S. District Court for the Eastern District of Wisconsin, alleging that eFunds and its management issued "a series of false and materially misleading statements" from February of 2001 to October of 2002 that artificially inflated its stock price.

Not to mention the continued sluggish economy. According to a statement eFunds issued with its 2002 earnings: "In this year of transformation, we expect that the full year 2003 diluted earning per share and revenue will be in line with the 2002 reported results."

However, Walsh said during the call, "You can expect to see us depart 2003 with greater momentum than we had entering the year."