Cardtronics Inc., the largest deployer of merchant automated teller machines, shifted into the red in the second quarter, in part due to higher expenses for cash and its move to bring transaction processing in-house.
The Houston company on Friday reported a loss of $5.6 million, compared with net income of $800,000 a year earlier. Revenue grew 5.3%, to $77.2 million. Related Links
The company also said that it had signed nine ATM branding agreements with banks but that the strength of that business line was a factor in its rising cost of storing cash. With the closing last month of its purchase of 7-Eleven Inc.'s ATM portfolio, Cardtronics now has the second-largest network of ATMs bearing banks' names, with 9,500 machines, second to Bank of America Corp.'s nearly 17,000 ATMs.
Chris Brewster, Cardtronics' chief financial officer, said during a conference call Friday to discuss the results that the cost of storing and delivering cash grew by $850,000. One reason for the shift, he said, was that the average withdrawal size rose 6%, "which means that you have to have about 6% more cash in those machines."
He also noted that cash costs for bank-branded ATMs can be higher than for machines with no financial company affiliation because banks' marketing can affect use, making it hard to predict how much money each machine will need.
"For example, in the Duane Reade machines in New York, we put the [JPMorgan] Chase brand on those machines over two years ago, and they're still ramping," he said. "It's hard to project how much cash you should put in a machine on a given load because they're still ramping up. And for customer relationship reasons, we're just not interested in seeing those machines run out of cash."
But Mr. Brewster said that he expects the company's forecasting for its bank-branded ATMs to improve in the next six months.
Cardtronics is moving its ATM processing work in-house, which drove up expenses in the quarter. Jack Antonini, Cardtronics' chief executive, said during the call, "The completion of these conversions at the current pace has really been a companywide focus, as in-house processing is critical to our strategic initiatives to offer additional ATM solutions to financial institutions."
The company said requirements in the Sarbanes-Oxley Act to publicly disclose its earnings also boosted its administrative costs. Cardtronics is not a publicly traded company but must report its earnings because it has public debt.
The company's revenue gains came largely from its U.K. operations; revenue in the United States dipped slightly.
Mr. Brewster said the U.K. unit took a charge of $380,000 related to a spate of fraudulent credit card withdrawals. Though issuing banks are usually responsible for covering such losses, a "quirk in the network rules" makes it look as though "we're going to be forced to eat many of those fraudulent transactions," he said.
The company revised its full-year 2007 guidance to factor in the 7-Eleven acquisition. Cardtronics said it expects revenue of $370 million to $390 million and gross profits of $87 million to $92 million.
These amounts exclude revenue and losses from the 2,000 Vcom machines that were included in the 7-Eleven portfolio. These kiosks perform normal ATM functions as well as several other financial services, such as check cashing, money transfers, and bill payment.
Cardtronics said it expects to lose $4 million to $5 million on the Vcom operation by yearend. If cumulative losses for the Vcom machines reach $10 million, it would shut down their advanced capabilities and use them as standard ATMs, the company has said.
Tim Sloane, the director for debit advisory services at Mercator Advisory Group Inc. in Waltham, Mass., said that when deployers of merchant ATMs began seeking out smaller merchants to host their ATMs they often handed off the task of vaulting cash to the merchants in order to reduce costs. But bank-branding deals require the ATM operator to assume the vaulting duties.
"Where you're branding that ATM with a bank brand, you need to manage that cash much more closely" to make sure the machines do not run out, he said. Branding deals generate more revenue for ATM operators, but they also raise costs, he said. The contracts are likely to have performance requirements "that would make it prohibitive to let them run out" of money.
