Cardtronics plc
Q2 2017 Earnings Call Transcript

Published: 6 Aug 2017

[Operator:]

Good day, ladies and gentlemen, and welcome to the Cardtronics Second Quarter 2017 Earnings Conference Call. At this time, all participants are in a listen-only mode. And later we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this conference is being recorded. I would like to introduce your host for today's conference, Mr. Phil Chin, Executive Vice President of Corporate Development. Sir, you may begin.

[Phillip Chin:]

Thank you. Good afternoon, and welcome to Cardtronics' Second Quarter Conference Call. On the call, we have Steve Rathgaber, Chief Executive Officer; and Ed West, CFO and Chief Operations Officer. We will start with prepared remarks, and then take questions. Before we begin, a cautionary statement regarding forward-looking information. During the course of this call, we will make certain forward-looking statements regarding future events, results or performance. Any forward-looking statements made on this call are subject to risks and uncertainties, including but not limited to events, market conditions and other risks and uncertainties that could cause actual results to differ materially. Please refer to our earnings release and our reports filed with the SEC, including our Form 10-K for the year ended December 31, 2016, or Form 10-Q for the quarter ended June 30, 2017, and other factors set forth from time-to-time in our other filings, including the definitive proxy statement filed on March 31, 2017, which more fully describe forward-looking statements and risk factors and other events that could impact future results. The statements on this call are made as of the date of this call and are based on current information and maybe outdated at the time of any replay of this call. We assume no obligation to update any forward-looking statements made today to reflect events that occur or circumstances that exist after the date on which they were made. In addition, during the course of this call, we will reference certain non-GAAP financial performance measures. Our opinion regarding the usefulness of such measures, together with the reconciliation of such measures, is included in the earnings release issued this afternoon and available on our website. With that, I will turn the call over to Steve.

[Steven Rathgaber:]

Thank you, Phil, and welcome, everyone. I'd like to open today with some general commentary about our business and industry before a discussion of the quarter. We are now halfway through what we have described as a year of transition for Cardtronics. As a reminder, it is the year we complete a major software upgrade across approximately 40,000 ATMs in the U.S. It is the year that we managed the deployment of EMV capability across a fleet of ATMs larger than the number of branch locations of the four largest U.S. banks combined. It is the year we support the deconversion of our largest client. Clearly, a formidable set of challenges by any measure. But it is also the year where we have learned how to take out $35 million of expense, and in the process, improve availability and service. And it is the year where we have acquired, and are now integrating, the largest acquisition in our corporate history, bringing us the strategic asset of scale in both existing and new geographies. It is a year of investing with a focus on building organic growth for the future. We have recruited and deployed a new senior management team of exceptional industry depth and experience. And we are investing to strengthen elements of our core product and service infrastructure. So I feel that we are preparing very well for the next stage of our growth journey. Now it is also a period where the same global industry trends that create unique opportunities for our Company apply some pressure to our own economics. I am speaking of the gradually declining volumes of cash usage that manifest in the form of reduced ATM use. Our thesis has been and remains that gradual declines of cash use and ATM transactions enable a future source of growth for Cardtronics. The cost pressures on financial institution ATMs, in combination with continuing branch closures, present the opportunity for us to consolidate ATM traffic at our convenient locations. And this is a pattern that exists in nearly all of our markets. Cardtronics is mission-critical banking infrastructure, connecting our physical ATM network to the financial institution's digital offerings. We may be seeing some of very early signs of the shift we expect from our recent signings of Allpoint customers. These accounts are performing at or above our expectations, providing conviction for our thesis. We know our mission

[Edward West:]

All right. Thank you, Steve. Two key takeaways from my comments today. First, the second quarter was marked by solid operational execution as we move past the challenges we experienced earlier in the year, resulting from the software issues and related EMV enablement of our U.S. ATM estate, which drove elevated cost in the last two quarters. And second, we remain on track to achieve our guidance for the key profitability metrics for this year. And before I get into the results, one note regarding our segment reporting. As previewed last quarter, we have progressed in the integration of DCPayments business, and we are now reporting the former DCPayments units into our respective geographic reporting segments as opposed to the temporary treatment we applied last quarter. Accordingly, the North American business, the DCPayments is now a part of our North America segment. And the U.K. business is included in our Europe and Africa segment. The Australia and New Zealand business now forms its own new segment. Now let's recap second quarter performance. Total revenue growth was 19% or 22% on a constant currency basis. Substantially all of the revenue in the quarter was attributable to our recent acquisitions, most notably, DCPayments. On an organic constant currency basis, revenue growth was up 1% for the quarter. Organic ATM operating revenues in North America were down 2.5%, while the European segment was up nearly 7% in constant currency terms. Again, all of that excludes DCPayments. The underlying U.S. same-store withdrawal transaction growth was down approximately 3% for the quarter. Again, worse than historical standards. In the U.K., our same-store withdrawal rate was also down 3%. Gross margin in the quarter was 33.1% compared to 35.1% in the prior year. In addition to the U.S. revenue decline, there were two main drivers of this decline. First, our operating costs in the U.S. were up year-over-year as a result of our software and EMV upgrade efforts. As previously mentioned, the software and related EMV delay resulted in higher network chargebacks and maintenance service fees, which adversely impacted margin by approximately 100 basis points. As of today, we are nearly complete with our software and EMV upgrades, so we expect these expenses to moderate in future periods, which is incorporated in the guidance. And second, the DCPayments acquisition has been initially dilutive to gross margin and had a 70 basis points impact in Q2. Adjusted EBITDA in the quarter was $87.7 million, or nearly $91 million on a constant currency basis, up about 11% from last year in constant currency terms. Most of this growth was driven by the DCPayments acquisition, partially offset by the slight revenue decline in the U.S. and higher operating cost. Adjusted EPS was $0.76 for the quarter or $0.79 on a constant currency basis, about flat to the second quarter of 2016. Increased interest and depreciation expense associated with the DCPayments acquisition offset the growth at the adjusted EBITDA level and lower tax expense. Moving on to the balance sheet. Our pro forma net leverage was 2.8 times as of June 30. And at the end of the quarter, we had $184 million drawn on our $400 million credit facility. CapEx in the quarter was $31 million, which – the majority of which related to our fleet upgrade in the recent contract renewals in the U.S. Now turning to guidance. We are maintaining our outlook for the calendar year on our key profitability metrics. Our guidance is as follows

[Operator:]

[Operator Instructions] And our first question comes from Bob Napoli from William Blair. Your line is open.

[Robert Napoli:]

Thank you. Just on same-store sales, the trend, I guess, down 3%, which is an improvement from the first quarter, but what was the trend through the quarter? And if you have a take on July, would be helpful.

[Steven Rathgaber:]

So Bob, this is Steve. Hello.

[Robert Napoli:]

Hi, Steve.

[Steven Rathgaber:]

The trend in the quarter was flat to slightly up towards the end in June. It improved a bit in June, but we don't have full visibility in July yet for the same-store sales, but it isn't obvious that it's improved since then in the month. So its mixed signals right now, but slightly up in the last month of the quarter, but pretty close to the average for the quarter.

[Edward West:]

And I guess Bob, the only comment I would make is as you noted, it did improve Q2 to Q1, but we have to also remember in Q1, you had the benefit of the year-over-year impact from the prior year of the lead day and the Powerball effect. So the difference isn't as substantive as it may appear at the surface.

[Robert Napoli:]

Okay. And then the comment on 2018 EBITDA, I mean, is there – what do you – how much of a stretch, I guess, is the $319 million. And you're using some lower currency conversion rates than there are out there today. Just some comments on 2018 and...?

[Edward West:]

Yes, all right. The stretch is all relative. I think what we're saying is based on what we've seen so far over the last couple of quarters, the current trends in the business on same-store and the level of organic growth, as I have mentioned during the quarter, we had about 1% organic growth for the company. If those trends were to continue and persist and roll forward, it's going to make that level very difficult to achieve from where we sit today. Obviously, when we put the number out there, we had expectations for currency and FX, interest rates, all of that, but we also had the expectations of same-store transaction growth and organic growth. And all we're saying is we need to get back to that before we feel more confident on achieving that figure.

[Robert Napoli:]

And what is your – what level of confidence do you have in organic growth? I mean, closer to the 1% is the visibility that you have ex? I know it's a little confusing with 7-Eleven. But ex 7-Eleven, where do you see organic growth in the back half of the year?

[Edward West:]

Well, based on our current performance right now, with the 1% that we've seen and the current transaction trends, we see that relatively continuing. That can change over time and progress through the quarter, which we'll just provide more update as we get new data points. As Steve said during the call, we've gone through so much over the last six, seven months throughout the organization, the focus, the enablement of EMV, the software, integrating the business. And I can tell you, around the team, the organization, frankly, around the world, we're just energized to be back out and focused externally. And our goal is to get that figure moving again.

[Steven Rathgaber:]

And Bob, if you look at the ATM accounts in terms of placement contracts, that's a nice inventory going in the ground, but it's not all the old-fashioned U.S. kind. There's a lot of Greenfield opportunity there, there's a lot of ramping, it's a mix across different countries, so it's a little bit harder to peg visibility from some of those markets for the growth rates. So we're being cautious. But we're at 2,300 ATM installs halfway through the year – 2,200 ATM installs halfway through the year, and that's sometimes a yearly target. So that feels good. But for that to translate up to significantly higher organic growth, it's just premature for us to declare.

[Robert Napoli:]

Okay, thank you. Appreciate it.

[Steven Rathgaber:]

Thanks Rob.

[Operator:]

And our next question comes from Ramsey El-Assal from Jefferies. Your line is open.

[Damian Wille:]

This is Damian Wille on for Ramsey. Thanks for taking my questions. So I'm hoping you can provide some more color on the CMA inquiry, whether there's any chance that they could resolve prior to the published deadline on October 27?

[Steven Rathgaber:]

Well, this is the process that they have. I think from everything I understand, they do their routines in a fairly rigorous way. We have confidence in the published date of October 27. We're led to believe that if the findings are what we hope them to be in the August announcement we'd be very pleased because we understand things typically don't change between the preliminary and the final, but we won't know until it's official, and it's official on October 27.

[Damian Wille:]

Okay, got it. And kind of in that same vein, are you able to provide any updated thoughts on the DCP synergy realization? Once the CMA inquiry is resolved, how quickly do you think you can start realizing some of those synergies?

[Edward West:]

Well, we've already begun that, the integration efforts between Canada, Mexico and also the corporate activities. Obviously, we haven't done – anything happens in the United Kingdom, where the business has continued to compete. But once all that's resolved, we will be able to begin, hopefully realizing synergies after that. When we first announced the transaction, we anticipated roughly kind of low double-digit synergies. And so far, all the integration efforts that we've done, seen and implemented, we feel very good about the achievement of that, which will kind of begin rolling in later this year into 2018.

[Damian Wille:]

Okay, got it. That's helpful. And last thing for me, on LINK, do you have any idea on timing for a resolution? And second thing on that, what do you think is the likely outcome here? Is this going to like a straight reduction to interchange, or a rule change or modification to LINK rules? Any commentary on that would be helpful. Thanks guys.

[Steven Rathgaber:]

Yes, so difficult to predict on that question. Certainly, there have been good ongoing dialogues between the members involved in a working group to come to a resolution. It is a protracted negotiating process. There is certainly a goal amongst the members to maintain the free-to-use capability, which is very important socially in the United Kingdom. And we believe that, that certainly supports a Cardtronics position. So the process is likely to go on for another several months. The goal all along was to have clarity for the 2018 year. And therefore, just allowing for system modifications and planning and such, one would expect that we might have clarity early in the fourth quarter. But it is a somewhat by definition, bureaucratic process with lots of people that have to see the review after we come to a final recommendation. And I really can't guarantee even a resolution this year. The LINK system has gone on with its traditional method of calculating interchange. And we're not at liberty to disclose that because of obligations of non-disclosure to the organization that stands at the ready to act as an intermediary step, should it be necessary.

[Damian Wille:]

Okay, sure. Thank you.

[Operator:]

And our next question comes from Andrew Jeffrey from SunTrust. Your line is open.

[Andrew Jeffrey:]

Hey, guys. Thanks for taking the question. And appreciate the insight and the commentary on sort of macro trends. Steve, you've been very consistent in talking about secular demand, and clearly, some of the Allpoint wins are encouraging. I wonder if you can just kind of discuss a little bit a couple of things. One, perhaps, what a managed services pipeline, if there is one, might look like and when we might perhaps see the fruits of your labor in that regard. And then also, I wonder – we've seen the two ATM manufacturers, two big ones, report somewhat disappointing results. I wonder how you interpret that in the context of sort of bank strategic decisioning, whether perhaps not buying such expensive ATMs means that indeed, they're looking at alternatives for branch replacement.

[Steven Rathgaber:]

I appreciate the question, Andrew. And so in terms of – starting with pipelines, I think it's fair to say two things about pipelines, and I apologize if they're somewhat repetitious from things previously stated. But we are actively engaged in dialogue in our major markets with quality institutions, brand-named institutions, about opportunities and these dialogues are ongoing. They take various forms, from early-stage, come up to the site in Hatfield and see the configuration we've laid out to help satisfy branch activities; to classic, more informal discussions to more precise RFIs and RFPs that are out and about in various markets. So it is an active marketplace. But you do have to watch the water boil to get the rhythm of this thing. It is not a quick marketplace. And candidly, the bigger the entity and I don't mean to imply that we're dealing with super top sized entities, but the larger the entity, the more complicated the process. We're feeling our way. We're using the time to strengthen our product offering and get more precise. We're using the RFI processes and the engagement with customers to get more clarity about how to package our offering and price our offering. And we think it's time well invested, and we think it's the future. We think it's an important part of the journey. To your second point about the manufacturers results, we think that is a proof point in the sense that folks are thinking twice about investing in infrastructure when there's already an infrastructure expert. And they're also thinking twice about investing in ATMs because they're hoping to see transaction utilization in their branches go down. And that is the opportunity, that is the expense pressure on their sites that are going to either facilitate our operating for them in a much more cost-effective fashion or them continuing to close those sites and letting the traffic flow to where it naturally belongs, it's home at Cardtronics. So that's sort of the thinking. It continues to be our thesis. We believe in it strongly and have no contrary evidence to challenge it.

[Andrew Jeffrey:]

Okay. And the – recognizing and appreciating what's happening with foot traffic and resulting organic revenue growth, can you also comment perhaps on C-store or potential C-store consolidation in the U.S. and how you're thinking about that, as I guess perhaps another risk factor that's floating around out there?

[Steven Rathgaber:]

It's a fair one. It's on our minds. We watch it and from what we read and what we understand, there are several likely acquirers out there. We have historically serviced all of the likely acquirers. Now, we service one less. But the one less that we service, or in the process of unservicing, is certainly been an active acquirer in the past. They've declared publicly in their earnings calls and other dialogue about what their goals and objectives are. Our sense is that they're near completing – for the near-term, achieving those goals and objectives, so we're a little less anxious than we might have been six months ago about that journey. But consolidation will be a factor in our life. There's no question about that. We hope to be the beneficiary with some of our portfolio and we expect to be the loser on occasion, just as we are today with bank consolidation in Allpoint, and classically, vendor – retailer consolidation that has happened in other segments. So consolidation works both ways. We think it can work for us as we go forward. But the ultimate growth is going to come from consolidator of the transactions and that's where we believe we have our strongest footing.

[Andrew Jeffrey:]

Okay, thank you.

[Operator:]

And our next question comes from Tim Willi from Wells Fargo. Your line is open.

[Timothy Willi:]

Thanks and good afternoon. One question on modeling and a question about the business overall, but on the modeling side, Ed, could you talk a bit about given that we're on a rising rate environment, albeit very measured, just refresh sort of our memory around where you're at on the hedging involved cash and any exposure you have to rising rates, no matter how slow it may be?

[Edward West:]

Sure, yes. And it's also included in the Q that we filed today, all there by market. So if you look at – today, we have roughly about – in U.S. dollar equivalent, about just shy of $4 billion in cash in ATMs around the world. Our biggest markets are the U.S., UK and Australia, obviously. We have hedges in each of those markets. Our net exposure in the U.S. is about $1.5 billion. And so a 0.25 point move there is about $0.015 in EPS per 0.25 point move. Our guidance that we've outlined today incorporates the current curve that's in the LIBOR market for the U.S. today. But anything above that, 0.25 point would represent about $0.015 per quarter. United Kingdom, we've actually entered into more hedges there. You'll see in the queue, we're fairly well-hedged, about the equivalent of almost $1.2 billion in the UK. Obviously, just below £1 billion, £900 million plus, of about US$700 million equivalent of that and the LIBOR move there in the UK, 0.25 point is about $0.005 per quarter. And it obviously gets a lot less sensitive the further out we go. So the hedges are all outlined by market in the duration of those out over the next several years. But we have been fairly active to try to dampen and mitigate some of that. At the same time, introducing more and more contract recapture with our key customers and our retail margins, making sure we can also minimize that beyond just hedges.

[Timothy Willi:]

Great, and then Steve, just in terms of the business you referenced some commentary around foot traffic and the Amazon affect. So several years ago, you guys had a pretty heavy R&D pipeline around value-added products, analytics, things of that nature that I think you were holding off on really deploying until you got past the EMV type issues, et cetera. So I'm curious, a, where we're at with just sort of that standalone effort in the cross sales and the opportunities, and then whether or not you feel that what's going on with retail actually elevates those efforts in terms of value to retailers or sort of I guess, diminishes as retailers turn their focus to other areas to deal with their core business?

[Steven Rathgaber:]

Okay. So a couple of observations there, one, yes we had certainly been dealing with the software upgrades as the primary objective, and we can and now turn to more focus on data-driven analytics to help our retailers understand the value of the ATM proposition. I believe that Cardtronics is a collection of contrarian things and we become more important to the retailer each time they get more pressure from the Amazons of the world, which I guess, is Amazon. There's only sort of one, I guess, Alibaba's out there, too, but not so much impacting our U.S. retailers. Anyhow, the moral of the story on that is we believe that as we are able to demonstrate through data analytics, the value of our foot traffic contribution that we ought to be able to turn the dialogue to a model of store sales impact versus merchant commission impact. That has been a goal of mine for a long, long time, at least in principle. It is taking a long time to get there because the wheel turns slowly on changing these kinds of models. But as we can focus more on data driven analytics, we can focus more on the value we're delivering for the retailer and that should allow us to be recognized for more than our ability to contribute merchant commissions. So fingers and toes are crossed, believing we can have an impact there in the coming months.

[Timothy Willi:]

Great. And then just one last one, if I could, just on M&A, I'm curious about, I think it was last year, you talked about new markets you were going to enter, you were successful with that, I believe, going in places like Spain, Poland, if I remember correctly, maybe there's some others. Now that you've sort of past a lot of sort of the noise that was discussed, can you give us any just sort of thought process about organic market entry? And then if there's actually opportunities, M&A-wise, that wouldn't necessarily stretch the balance sheet that could also take you into new geographies?

[Steven Rathgaber:]

So I would answer that in the following way. The entries where we've been happiest have been the entries where we've acquired in as opposed to our de novo sort of buy-in. The de novo entries are slow and long because you're learning about the local elements of the market as well as meeting the new customers, as well as building out the infrastructure. So we have had good progress in ATM placements. We've hired well in terms of the people that we're interfacing within these markets. We did a press release recently on a gentleman by the name of Marc Terry who will be joining as our European and Australian Managing Director on the commercial side of the house for Cardtronics. And he comes with an extensive background from companies like ACI and FIS, with banking relationships in multiple countries in that region. And that's part of our muscling up to have the right talent in place to take advantage of those markets. Places like South Africa, where we've recently acquired in, provide great promise. We're very pleased with what we see there. The model that has evolved here in the U.S. is very highly – is thought very highly of in that part of the world and we think there's great opportunity there. The European theater is slower and harder. It's harder because of the complexities of the cultures. It's harder because of some of the legalities one has to navigate. But it's slow and steady wins the race, if you will, in those sort of markets. So those are proceeding, but I wouldn't characterize any of the European markets on the Mainland as anything I would call barnburners at this point in time. But it's slow and steady progress and we continue to be particularly optimistic about the possibilities in Germany and in Spain. Poland is a bit more a struggle, but we're making some headway there as well. So places like Australia, which we've moved into as part of the DCPayments acquisition, while a challenging market because of the tap and go status, is also a great market in terms of the scale we instantly acquired, and that gives us an opportunity to sit at the table with the banks and have a meaningful discussion about how we can serve them. And we think that's exciting and we look forward to exploring more of that.

[Edward West:]

I would only add that – just our central focus is on those markets and continuing to build there and drive more penetration and organic growth in those markets versus exploring new ones, and it's going deeper within.

[Steven Rathgaber:]

We found an acquisition in those markets maybe, an acquisition out of those markets, probably not right now.

[Timothy Willi:]

Great. That’s very helpful. Thank you very much.

[Operator:]

And our next question comes from Kartik Mehta from Northcoast Research.

[Kartik Mehta:]

Thanks. Steve, I wanted to ask you about your ability to achieve the 6% to 8% organic revenue growth long term for the company. Obviously, you've said right now in the short-term, a couple of struggles, but you seemed very positive on your outlook for the industry. And I was wondering your thoughts on when you might be able to achieve that and what it will take?

[Steven Rathgaber:]

Well, Kartik, I appreciate the question. It has been and is my objective. And the reason I believe it is possible is because if you look at the transaction volumes that are out there, our share of those transaction volumes is very small. We're just not owning major pieces of the transaction share market. ATMs, we have a bigger share. If the consolidation opportunities, even with declining volumes, happen as we hope and expect they can happen, that should be the basis, mathematically, for transaction share growth at meaningful values of interchange and exchange. And if we are able to layer on top of that, continued Allpoint expansion of middle market customers, and higher-end customers and our traditional smaller guys; and if we are able to continue to develop muscle for extracting and shifting the transaction share within the Allpoint customer base; add to that, migrating upwards to the ATM traffic, the ATM placements opportunity in branches that will use our scale and efficiency to save the banks' money and to shift those ATMs to our processing platform, those are the components for a 6% organic growth rate. Now if we're losing 6% out of the same-store sales, that certainly puts pressure on it. If we are flat, that's certainly much more visible in terms of its potential. But I think what we've declared today as candidly as we can is that some of the trends that we're seeing cause us to look a little more carefully at the possibilities of that. But as I sit here today, I believe this business can and should do that because the componentry is there; the mathematical pieces are there; the scale that we have no, one can touch, and we have to execute. We can't just expect to sit here and have it come at us, but I believe the components are there. Easy? No, not easy. Harder than five years ago? Yes. I think it is because they're more complex sales. They take different kinds of skills than we've had. Mathematically possible from the environmentals I see? Yes.

[Kartik Mehta:]

And then Steve, I think in Australia, you're referring to contactless payments and it must obviously been having an impact on low-value transactions. And I believe that's what you're referring to as the headwind in the ATM business. And if that's correct, do you think – is that a possibility of what might be happening in the UK as contactless payments become a bigger part of the payment ecosystem there?

[Steven Rathgaber:]

Absolutely. That's the pressures that we think can be positive for Cardtronics in Australia. First of all, we have two different markets. In Australia, we've got a surcharge market by and large. There is some sort of charge-free activities that's very limited. And in a surcharge market, tap and go is particularly painful, okay. We think some of our opportunities in Australia relate to providing some of the same surcharge-free infrastructure at a fair value exchange that we've enjoyed success with in places like the U.S. Having said that, in the UK, we have largely a free-to-use market. Only 2% of the transactions in the UK are pay-to-use. So the incentive to migrate away from cash, because of the expense of either foreign fees from the bank or surcharging from the ATM provider, are nonexistent in the UK environment. That makes for a much more fertile environment for continuing cash or for a less accelerated decline, if you will, in the use of cash. Nevertheless, tap and go has taken a bite out of the cash utilization. We think it is a force to be reckoned with. And we expect that because of that bite, that we're seeing bank ATMs in the branches less productive than ever before. We think that pressure is going to cause banks to continue to whittle down branch count and whittle down ATM count of their branch sites; we think the math on that shifts volume in our direction; and we think that enhances our margins over time because it's largely on existing infrastructure rather than new placements. So the UK environment and the Australian environment are fascinating laboratories to see the future in that might come someday to the United States. But two different models. We're going to need two different kinds of analytics to support them, two different value prepositions. But ultimately, we believe the endgame for all of them is convergence around the Cardtronics ATM.

[Kartik Mehta:]

And this is the last question. Obviously, soon Windows 10, even though it's a January 2020 event, Windows 10 will be upon us. And I'm wondering, as you look at your fleet, since it's such a large fleet, when do you have to start investing in your machines to get them ready for Windows 10 and what type of outplay that might require?

[Steven Rathgaber:]

So Kartik, that's a long in front of us journey despite the 2020 date. If you look back over the journey of Microsoft's Windows releases from – going back to XP days, you'll see that there is a fairly extended sequence of events that has to happen, ranging from what the manufacturers have to do to incorporate the capability of the new upgrade into their code and making that available in turn. And that, if you follow the history of these kinds of upgrades, is a fairly elongated life cycle past the original dates that are discussed. There are often arrangements for acquiring additional maintenance and support of the prior releases for extended periods of time. So when we think about a Windows 10 event, particularly coming off the period of change we've just gone through, we think about a period out on the future, where we could, quite frankly, have, by that point in time, a software capability that doesn't even require the use of Windows. Not declaring we would have that, but we have time to sort those kinds of things out. One of the key critical success factors for Cardtronics going forward is to the extent that the classic ATM placement has a certain commodity element associated with it, we are going to relentlessly focus on ripping out cost. And ripping out cost from our business means finding simpler ways to do things, including simplifying the software stack over time to eliminate things like being forced to upgrade by other manufacturers' requirement. So we're on a journey to continue to grab more and more control of our own destiny. Having said that, I welcome a slight spell of relief from any major software modifications in the coming year or two.

[Kartik Mehta:]

Thank you very much. Appreciated.

[Operator:]

[Operator Instructions] And our next question comes from David Ridley-Lane from Bank of America Merrill Lynch. Your line is open.

[David Ridley-Lane:]

I've been asked a couple of times by investors with the non-recurring OpEx cost for you would be for compliance and EMV-related spending this year?

[Edward West:]

So when we talked about on the operating expenditures during the first quarter and the second quarter, we had elevated costs in the OpEx gross margin category, roughly $5 million in Q1 and about $4 million in Q2. And that is a composition of both the chargebacks as a result of the fraud that occurred on a MasterCard chip-enabled card, as well as the maintenance cost associated with the EMV during the period of time and also all the activity on the other software changes and bugs. So we expect that $5 million in Q1 and the $4 million in Q2 to be more one-time in nature and transitory.

[David Ridley-Lane:]

And you see a little bit more in the third quarter, but marginally, that would be behind you by the fourth quarter?

[Edward West:]

Yes. As I mentioned, that's ebbing down. We are substantially complete with the EMV and stabilizing the software and rolling that out in the changes, there's obviously, some hangover cost there. But that's incorporated into our guidance and it will be – we believe, a fair amount lower than what we've been seeing.

[David Ridley-Lane:]

Got it.

[Steven Rathgaber:]

From the last ATM conversion, that's literally six months from the transactions of that, but non-material, we suspect, by the fourth quarter.

[Edward West:]

Referring to the fraud chargeback.

[David Ridley-Lane:]

Yes. And then curious, as you've been adding larger financial institutions into the Allpoint Network, have you seen the same dynamics of higher usage among those Allpoint cardholders? Are they even historically seen among cardholders of smaller banks?

[Steven Rathgaber:]

I would say that the answer is yes. It's what I was alluding to in my commentary, my prepared remarks, that we're pleased with the early readings on Allpoint from some of the larger players we announced along the way. And candidly, they haven't fully engaged with their whole rollouts. So the trail sign's early, but we like what we're seeing. We're not disappointed. It's meeting or exceeding expectations so far, and that's a nice slice of news.

[David Ridley-Lane:]

Got it. And then on timing of the synergies around direct cash, assuming the October resolution in the UK goes as planned, how quickly could you realize the cost synergies in the UK?

[Edward West:]

We expect to begin that, obviously, as soon – or after once we know what the state of the union is. And so I would say, would begin sometime, hopefully in Q1 of 2018, and then kind of phase in from there. Those synergies would be more – we've already gone through, begun implementing all the corporate, as I mentioned earlier, Canada and Mexico, which are smaller. The synergies in the United Kingdom would be more operationally intensive.

[David Ridley-Lane:]

Understood. Thank you very much.

[Steven Rathgaber:]

Thank you.

[Operator:]

And our next question comes from Gary Prestopino from Barrington Research. Your line is open.

[Gary Prestopino:]

Yes. I was wondering on – are there any market metrics that you could share with us on same-store in the quarter versus where you were?

[Steven Rathgaber:]

There are market metrics that we look at just in the ordinary course of the retailers' environments. So we just go out to the Internet and hack away until we find some good reporting from various retail associations and that sort of thing. And we use those trends to sort of face-off against our own to see how they're looking. And it's a mixed bag. We talk with our retailers directly about what they're experiencing same-store. Oftentimes, we're pleased to learn that if there's been a decline in ATM usage, it's way superior to what the retailer might be experiencing. So the ATM seems to be, at least from our anecdotal one-on-one discussions with various retailers, a more durable asset in the store in terms of foot traffic. But overall, we do look at broader industry segment same-store activities and we watch and we see how we pattern against that.

[Gary Prestopino:]

Okay. And then what about with the FIs that you're talking to, are – especially maybe some of the smaller midsized ones, are they seeing declining same-store transactions as well?

[Steven Rathgaber:]

Yes. So that's a mix of outcomes, talking about the FIs. So if you look, for example, in the UK from published data by length, you'll see that activity flowing to the remote ATMs, which would include Cardtronics, is up versus the branch. The branches are having steeper declines in their transaction activity. And the beauty of that, in my mind, is that in a largely free-to-use environment, the customer speaks with choosing the most convenient location, which is us and one or two other competitors in the UK. So that is, I would call it a sort of standard view of what's happening to branch ATMs. Having said that, there are a handful of very large banks in the U.S. who have made a very determined effort to move traffic from the counter, the teller window, to the ATM. And we're seeing a period of increase in their branch ATMs for deposit activity and the cash withdrawals that used to happen at the teller window as they sort of stir their customers somewhat aggressively to the ATM locations. Now we even like that because that says that those customers are being trained to use ATMs. And a customer trained to use an ATM will ultimately choose convenience. So that's sort of a split story there depending on the profile of the institution and how aggressively it's managing its branch closure strategy and its digital transformation strategy. Does that help or does that confuse?

[Gary Prestopino:]

No. No, that helps. Thank you. End of Q&A

[Operator:]

And at this time, I'm showing no further questions. Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program. You may now disconnect. Everyone, have a great day.

[Steven Rathgaber:]

Thank you.

[Edward West:]

Thank you very much.