Climbing out of a hole: Cardtronics Q4 and full-year earnings

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Looking at Cardtronics’ performance through 2018, what comes to mind is that it could have been a lot worse.

Looking at the performance of the world’s largest independent ATM deployer in Q4, what comes to mind is that it might be getting better. That certainly is CEO Ed West’s take.

In case you’ve forgotten, 2018 saw Cardtronics complete the roll-off of 7-Eleven, a longstanding retail partner and the company’s largest retail account in the U.S. Between surcharge, interchange, processing fees and bank co-branding, the account represented 30 percent of Cardtronics’ U.S. revenues.

Moving past 7-Eleven

So, it must have been with some satisfaction that West was able to report during last week’s Q4 and full-year earnings call that Cardtronics achieved a 6 percent increase in same-store cash withdrawals and ATM operating revenue growth of 5 percent in North America for the full year, an improvement from a loss of 2 percent in 2017, excluding 7-Eleven, West said.

In Q4, U.S. revenues were up 4 percent (excluding 7-Eleven), led by double-digit growth in surcharge-free transactions on the Allpoint Network and bank branding initiatives.

West told analysts on the call that the company expects to continue to improve its fortunes in the U.S. market during 2019, with “durable organic revenue growth.”

“This year, we expect to move past the negative headwinds, the ones that we were all way too familiar with during the first half of [2018],” he said.

Link delivers a blow

Headwinds persist overseas, though. Cardtronics’ U.K. operations — which account for 80 percent of its Europe and Africa segment — were hard hit by the first in a pair of 5 percent interchange reductions imposed by the Link Network, which supports the vast majority of ATMs in the U.K. The first reduction of percent was implemented in July; the second took effect last month.

Double-digit increases in the company’s business in Germany, Spain and South Africa were not enough to make up for the impact of the 5 percent exchange cut and a 2 percent drop in same store sales, which together reduced U.K. revenues by 7 percent. Overall, the segment declined 3 percent in constant currency in Q4.

In response to the Link cuts, Cardtronics has removed more than 3,000 ATMs from its U.K. estate and has converted 500 from free-to-use to pay-to-use. Another 3,500 are in transition from free to paid, West said.

Look for the silver lining

“These changes we are making will mitigate some, but not all of the impact from this pricing change,” West said. “That said, even with these U.K. headwinds, we see a path where the growth countries of Germany, Spain and South Africa will largely offset the current negative impact to revenues in the U.K. this year. We believe there are opportunities for growth in the U.K. once the market stabilizes.”

Australia was another pain point for Cardtronics in 2018. Banks there eliminated direct charges on ATM transactions in the fall of 2017. As a result, year-over-year revenues declined 8 percent on a constant-currency basis in Q4 — which was still the company’s best quarter in 2018 in that market.

West saw a silver lining in Australia, though.

“Market dynamics look to be headed in the right direction for us as banks continue to close branches and remove ATMs,” he said. “The bank ATMs are now more expensive for them to operate due to the removal of the revenue. Over time, this dynamic should be a positive one for us.”

A positive outlook

Cardtronics Chief Financial Officer Gary Ferrera said that despite revenue headwinds, the company beat its own expectations in Q4, pushing the company above the upper range of its full-year 2018 guidance for revenue, adjusted EBITDA and adjusted net income per diluted share.

Ferrera said the company increased its free cash flow 60 percent for the full year — from $73.8 million in 2017 to $118 million in 2018 — and used the money to pay down debt.

Debt reduction will continue to be a major objective in 2019, as will capital expenditures — largely for new ATM placements, IT infrastructure and ATM lifecycle replacements — aimed at creating growth in 2020 and beyond.

Ferrara concluded by cautioning that Q1 and Q2 of 2019 would reflect the company’s ongoing challenges, but that Q3 and Q4 should finally produce positive growth in EBITDA.

“Based on what we know today, we believe this projected stronger second half is a good indicator of future growth, as we lack many of the headwinds of 2018 and early 2019,” he said.

West concluded the call saying that 2018, while challenging, “was an important year for the company. By transitioning Allpoint and bank branding off of our largest customer in 2017, who previously represented about 30 percent of our revenues in the U.S., and recapturing a significant percentage of the transactions and traffic on our remaining estate, we clearly proved the strength, durability and value that our network and scale offers to both retailers and FIs.

“We have been relentlessly focused on our key priorities and are encouraged about the momentum that we are seeing in the business. I would like to thank all of our employees for their dedication this past year to help transform Cardtronics and position us for the future.”

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