Cardtronics Looks to Market Its In-House Processing Platform

With its U.S. operations holding up despite the economic slowdown, non-bank ATM network operator Cardtronics Inc. is eyeing opportunities as a third-party ATM processor. Cardtronics executives said at a conference call with analysts on Tuesday morning that the conversion of the network's nearly 33,000 ATMs to a new in-house processing platform is nearly done. The major exception is a group of about 3,500 ATMs among the 5,000-plus machines Cardtronics bought in July 2007 from convenience-store operator 7-Eleven Inc. A separate processor handles transactions from that group under a contract that doesn't expire until the end of 2009, chief financial officer J. Chris Brewster said. Even so, Houston-based Cardtronics is looking to leverage its new platform outside its own network. Chief executive Jack M. Antonini said one client already uses the system. “We think that we have some unique opportunities there,” he said in response to an analyst's question. “We see that there's demand from financial institutions that we talk to for some kind of specialized support there, frankly to have something that's a little more customizable rather than more of the cookie-cutter kind of solutions that typically are provided by the processors.” Antonini wouldn't give details about who or how many entities Cardtronics may approach, but said, “That has become a focus of ours from a strategic perspective.” Regarding other initiatives, Cardtronics didn't report any major signings for its bank-branding program in the second quarter, though Antonini said, “there continues to be significant activity going on behind the scenes.” He said 230 ATMs came into the program in the second quarter, the majority from one financial institution that already is a Cardtronics client. The sales cycle for booking new branding clients has become longer, something that could be a reflection of the credit and economic conditions financial institutions currently face, according to Antonini, though he said that hasn't hurt financial results. A new branding partner with 300 locations will be announced at an undisclosed date. Under the branding arrangements, Cardtronics owns the ATMs but a bank partner puts its name on them and its customers aren't surcharged as they normally would be. Instead, the bank partner pays Cardtronics fees in lieu of surcharges. About 10,000 ATMs representing 30% of Cardtronics' owned or managed fleet of 32,801 machines in the second quarter are in the branding program. Meanwhile, the so-called Vcoms, the approximately 2,200 advanced-function machines Cardtronics acquired as part of the 7-Eleven fleet, are headed toward profitability. Antonini drew a distinction between the machines' regular ATM functions and what he said are the advanced functions such as check cashing, money transfers, and imaged deposits. The Vcoms' losses originated with the advanced functions. Those losses were about $10 million on an annualized basis a year ago, but were down to $1.3 million in the first quarter and $600,000 in the second. Cardtronics now expects a small profit in 2009's first or second quarter. As regular ATMs, the Vcoms “are actually quite profitable already,” Antonini said. “So as we continue to improve the results from the advanced-functionality offerings, the Vcom units will become even more profitable.” Bolstered by the 7-Eleven acquisition, Cardtronics handled 89.8 million transactions in the second quarter, up 84% from 48.7 million in 2007's second quarter. Average monthly cash withdrawal transactions per machine rose 38% to 597 versus 432 in the year-earlier period. Per-machine average monthly operating revenues hit $1,235 while gross profits were $301, up 28% and 31% respectively. Executives attributed the improvements mostly to the 7-Eleven acquisition, but also said the so-called legacy portfolio in the U.S. performed better than expected. In fact, the first decline in the average size of a U.S. withdrawal transaction in years?a number he didn't disclose?caused operating costs to fall because the ATMs needed less cash, according to Michael H. Clinard, Cardtronics' president of Global Services. The second-quarter fleet breakdown was: U.S. company-owned, 12,390; U.S. merchant-owned, 10,720; U.S. 7-Eleven, 5,697; United Kingdom, 2,413, and Mexico, 1,581. In 2007's second quarter, just before the 7-Eleven acquisition, Cardtronics had 25,484 transaction machines. The number of U.S. merchant-owned ATMs has declined from 11,706, or 8%, as retailers culled low-volume machines or decided not to pay for upgrades to the Triple-DES security platform. Cardtronics' revenues rose 64% to $127 million in the second quarter from $77.2 million a year earlier. The company lost $3.38 million on depreciation and amortization costs related to the 7-Eleven acquisition and new ATM deployments, debt expenses, and a $1.9 million one-time charge involving the U.K. operations. Cardtronics reported a loss of $5.62 million in 2007's second quarter.