Cardtronics plc
Q3 2012 Earnings Call Transcript

Published: 2 Nov 2012

[Operator:]

Good day ladies and gentlemen, and welcome to the Cardtronics Q3 2012 Earnings Conference Call. (Operator instructions.) As a reminder this conference is being recorded. I would now like to introduce your host for today’s conference, Missy Pierce. Ma’am, you may begin.

[Missy Pierce:]

Thanks, Operator. Good afternoon, everyone, and welcome to Cardtronics Q3 Conference Call. Presenting on the call today we have Steve Rathgaber, our Chief Executive Officer; and Chris Brewster, Our Chief Financial Officer. Also on the call today and available for questions we have Mike Clinard, President Global Services; and Rick Updyke, President North America. Steve will begin today’s call with an overview of our Q3 results and an update on some of our key initiatives. Following Steve, Chris will provide additional details on our quarterly and year-to-date results. Our prepared remarks are scheduled to run for about 30 minutes, at which point we’ll open up the call for any questions. Before we get started I’d like to make the following cautionary statement regarding forward-looking information. During this conference 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 those outlined in our reports filed with the SEC. Actual results, events or performance can differ materially. Any forward-looking statements are based on current information only and we assume no obligations to update those statements. In addition, during the course of this call we will reference certain non-GAAP financial measures. Our opinion regarding the usefulness of such measures, together with a reconciliation of such measures, is included in the press release issued this afternoon. I’d like to now turn the call over to Steve Rathgaber, our CEO.

[Steve Rathgaber:]

Thanks, Missy, and good evening everyone. Welcome to our update on Q3. It was another solid quarter for Cardtronics and the business once again performed to our expectations and delivered attractive returns based on the fundamental strength of our deployed ATMs and the underlying business model. Organic revenue growth continued just above the high end of our target range of 10%, and acquisition-related growth delivered the rest of our total 21% revenue growth. We pulled a significant amount of that revenue through the financials with 15% EBITDA growth yielding $0.43 of adjusted net income per diluted share. We were busy in the quarter doing what we usually do to create shareholder value. We installed ATMs in the US, Canada, and the UK associated with the three sales wins we enjoyed earlier in the year. You will recall that we won Valero, 7-11 and Shell respectively. Valero and 7-11 installations are completed and Shell is continuing. Additional branding is completed on the 7-11 piece and is nearing completion on the Valero component. The result is a net addition of over 870 company-owned ATMs for this quarter and the branding of over 1350 new ATM locations in North America, bringing our total branded ATM count near 18,000. All Point added to the performance mix as well. We added over 1650 new All Point locations from Kangaroo Express covering 13 states from Alabama to Virginia and signed more than 30 issuer contracts for All Points. For icing on the revenue cake we enjoyed same ATM growth of 5% for this quarter. Our US multi-year pipelines remain full in terms of counts of ATMs, branding opportunities, and [All Point] opportunities. Our Canadian, Mexican and UK pipelines are also active and healthy. The net of our pipeline story is active or pending bidding on several thousand locations across more than a dozen retailers and banks in four countries. As always, the challenge in managing pipelines is the timing of client decisions. I would also add that we have a sense of increased competition for premium locations. Moving beyond the organic performance we continued to act opportunistically on the acquisition front. Cardtronics acquired a small company, ATM Network, to increase our strategic ATM count, modestly diversify our revenue and risk model, and strengthen our management bench in the merchant own and load model. This deal brought the company ATM count to greater than 61,000. You will recall that this business is very different than our company-owned turnkey business which focuses on larger retailers. In the merchant own and load model, smaller mom & pop-type merchants buy the ATMs from us, thus the “merchant own,” and use their own cash – thus the “merchant load.” We provide a variety of services, enjoy fixed fees and I want to emphasize fixed fees without interchange risk or the cost of cash. And we extract margins complementary to our larger turnkey model. This new team recently attended a major tradeshow with us, and I thought the tradeshow experience would illuminate the value of the Cardtronics’ brand and reputation, as well as the skills of this new part of the Cardtronics family. Last year at this trade show we had no sales and few leads from the merchant own and load segment. This year, two days of energetic selling resulted in 18 signed contracts and over 200 leads to follow up on. Now, I don’t want you to break out your financial models on this because the impact is not major. These are onesie-twosie type ATM deals but they can add up. Think of this as not quite a tailwind, but more of a gentle tail-breeze. Let’s return to the company-owned side of the business and talk investments and strategy. One of the emerging truths about our business is an expanding acknowledgment by our retail clients that Cardtronics ATMs drive in-store retailer sales. Our larger clients are increasingly seeing the link between sales [lists] in stores with Cardtronics ATMs versus stores lacking Cardtronics ATMs. So the Cardtronics model is evolving. Cardtronics is increasingly in the business of building products and executing strategies that will accelerate the growth rate of same-store ATM transaction volumes because more ATM transactions mean more retail sales; and not just with cash purchases, but also with debit and credit card purchases. Everyone in the Cardtronics value circle wins – the retailer with sales, the consumer with convenience, the financial institution with loyalty, and the Cardtronics shareholder as a byproduct of the value created for everyone else in the value circle. So, Cardtronics has been investing in ATMs, products, and people. Specifically we are building and purchasing software products. We are investing in upgrading the ATM fleet to enable use of the software products to enrich the consumer experience and to provide a more robust presentation of the in-store ATM to the consumer. We are hiring more people to sell and service our products to financial institutions in particular, and in selected cases with selected partners we are collecting information that demonstrates the linkage between Cardtronics ATMs and the retailer’s sales results described above. To accomplish our goals we need to execute on two levels. We have to accumulate cardholders into the Cardtronics model and then we have to steer the cardholders for convenience and value to the right ATMs. We build and attract the card base with Cardtronics’ unique collection of offerings, branding services, surcharge-free network deals, general surcharge-paying customers and prepaid cardholders. Then we steer those cardholders to particular retailers, namely our retailers with our ATMs. We accomplish this with tools like our mobile locator search products and our recently-announced fee alert offering. The idea is to help the consumer before, during and after the transaction. Before is done with Locator Search, the mobile application that helps locate ATMs; during is obviously a functional full-service ATM at a convenient retailer; and after is facilitated with our new Fee Alert offering launched in October. Let me take a moment to describe the power of Fee Alert. Fee Alert is a patent-pending product that informs the consumer of free locations that are convenient based on his or her daily ATM usage history. It helps financial institutions proactively tell their customers where they can find free ATM locations, specifically the bank’s own ATMs and select Cardtronics’ ATMs which the bank has contracted with Cardtronics to use under a direct fee structure. If the customer pays a surcharge, the software identifies the closest free ATM to that site based on geocoded addresses. It then notifies the customer via text or bank statement that across the street or down the block they could have done the transaction for free. Imagine a bank or a credit union being able to tell its customer on a statement or in a text message “Next time use the ATM at Retailer X across the street. We provide free access to that ATM for you. If you had used our free ATMs at premier retailer locations you could have saved $12 this month.” This is a powerful message for a bank to deliver to a consumer in these fee [FPB] times. The FI gets to deliver real tangible savings to the consumer, the retailer gets to have his store promoted in the statement or text – which in many cases drives a future sale; Cardtronics gets more volume and stickier relationships with all of its customers; and the transaction is done on a direct fee basis between the FI and Cardtronics, eliminating the risks of network interchange fee reductions. This product is built and ready to roll. We attended several trade shows in October and the FI reaction has been enthusiastic. Adoption will take time but we are excited about this product pairing and the value we can drive for our clients. And this is only part of the product inventory we have in our product pipeline. Some quick thoughts on our other investments

[Chris Brewster:]

Thank you, Steve. To jump right into the numbers, revenue totaled $199 million in the quarter and that represented a 21% increase over prior-year. About 11 points of those 21 points of revenue growth are attributable to acquisitions. We began to cycle on the large EDC acquisition in Q3 2012 but we also added a new smaller acquisition, that being ATM Network, during the quarter. The remaining 10% of revenue growth was organic, driven by multiple elements of our strategy. First we had significant unit expansion compared to the prior year, with three major merchant customer wins early in the year and continued expansion with existing customers. This drove a year-over-year increase in our company-owned unit count of 3300 units, not including acquisitions. Our business continues to generate solid same-store transaction growth with US same-store transactions up 5.3% in the quarter. This was partly driven by prepaid card transactions; that growth has continued with growth of over 25% year-over-year after factoring out acquisition effects. As an aside, a consulting firm that publishes projections for the dollars loaded onto prepaid cards in future years put out a forecast in early October saying that dollars loaded onto the types of prepaid cards with PINs that can be used at ATMs are expected to increase by an average of 23% per year through 2015. So this I think provides some support for the assertion that this transaction driving trend could be expected to continue. Our surcharge-free offerings including bank branding and All Point along with our convenient locations also helped drive transaction growth. Our equipment sales revenue category was essentially flat year-over-year. That flat result was actually somewhat better than we expected as we had anticipated a revenue decline in this part of our business as a result of financial institutions and merchants cycling on their replacement of non-ADA compliant ATMs. We continue to believe that we’ve probably seen the high water mark in this revenue category as the compliance-related upgrades will logically tail off at some point. Turning to gross margins, consolidated gross margin for the quarter was 31.3% which was down 1.9 percentage points from a year ago. The year-over-year margin decrease is primarily attributable to three factors

[Steve Rathgaber:]

Alright, thank you very much. So what you see at Cardtronics is a company on an evolutionary journey. Three years ago we were largely an acquisition machine, aggregating scale and driving out costs. Since then we have developed a robust organic growth engine that is driving 10% organic revenue growth, and now you see the initial results of our effort to invent new products and bring them to market and essentially change the game in important ways for Cardtronics and its customers. This journey will, over time, help us deal with the arbitrary interchange model that challenges our forecasting on occasion, and candidly challenges our general sense of fair minded business practices. But it is worth noting that in spite of the interchange headwind Chris detailed, the strength of our model delivers. We absorbed another $0.02 of [priors] in Q3 and still solidly delivered in our guidance. Journeys imply pathways and pathways sometimes have bumps in them. We will continue to make investments required to improve the customer experience and shareholder value. We know where we’re going and I believe you can see the evidence of our progress. With that, Operator, we would be happy to take any questions.

[Operator:]

Thank you. (Operator instructions.) Our first question comes from Jim Kissane of Credit Suisse. Your line is now open.

[Jim Kissane:]

Hey Steve and Chris. Steve, we definitely appreciate a lot of that commentary on the interchange but maybe can you be a little more specific in terms of what you can do in the short to intermediate term to continue to reduce your exposure to the networks being arbitrary around setting interchange rates? And I think in the last couple calls you talked about some other networks you might be working different types of structures with. Maybe you can give us a little more color on that, thanks.

[Steve Rathgaber:]

Sure. Well, the challenge is to provide a response that is appropriate in the context of inappropriate disclosures in terms of things we’re doing with other folks. So one of the ways we measure the impact of interchange potential to the business is by identifying what percentage of our revenue is exposed. And in past discussions we’ve had numbers that we’ve represented to you in the teams and actually higher I think when we first started tracking it.

[Chris Brewster:]

We’ve had a slide, Jim, in our investor presentation for a while that would say back in 2008 the revenues that we received from the major US networks represented about 21% of total corporate revenues. And then last year that number was down from 21% to about 11%; currently it’s down to about 8% and it’s really just a function in large measure of continuing to do the things we’ve been doing in terms of driving more volume through All Point and working as and when we can in bilaterally negotiated arrangements with financial institutions of other forms, so essentially we have a negotiated interchange rate as opposed to one that is set arbitrarily by a third party. So it’s down at around 8% now and it is the strong desire and certainly the intent of this management team to just continue to drive that lower as rapidly as we can.

[Steve Rathgaber:]

And I would add that I mentioned we signed thirty All Point contracts in the past quarter and that’s all protected interchange. In preceding quarters, some of the larger deals we’ve signed, if memory serves correctly it was about seven – I think seven but it may have been seven out of eight or something like that – where the deals carried interchange protection. So we’re not hostage to an interchange reduction; the FI in effect becomes hostage or the retailer becomes hostage and impacted by that. So there is a balancing act that is going on where we’re trying to spread the risk and negotiate deals that deliver value. The reason I focused so much on Fee Alert in this particular commentary is in part… Well one I think it’s cool, but also the way we intend to leverage the asset is to facilitate access to our ATM fleet on a direct contracted basis so that again, interchange is something we’re unconcerned about. So it is something that in every aspect of the company we’re looking for ways to create and deliver services that range from new products to old products, just writing contracts differently. And that’s essentially how we’re going at it – it’s a lot of things, it’s not one thing.

[Jim Kissane:]

That’s helpful. And Steve, you also talked about the pipeline of potential business being very strong but you also said that you’re seeing increased competition around premium locations. Maybe provide a little more color around that – is it just traditional bank competition or is there any change around that?

[Steve Rathgaber:]

Yeah, I think one of the byproducts of our success is that people are intrigued by opportunities. I think that when certain portfolios become available in certain regions of the country, populace regions and they go out for bid, and they might be a large portfolio that gets broken up into pieces – in some of those pieces in the most attractive areas, you might find six or seven or eight or nine companies coming at it; companies in our space, banks, and (inaudible) that I haven’t even contemplated before. So one of the things that’s intriguing about Cardtronics, although we’re a one-of-a-kind company it doesn’t mean we’re the only company bidding on things. As you know, not all ATM sites are created equal and all I’m suggesting is that for some of the more premium locations there’s more people in the room throwing bids across the table. And I think that’s okay. We have a lot to leverage with our scale and our strengths but it’s just an indication of interest. To me it’s a validation of the significance of the ATM and the value of the ATM for placement at remote convenient location. Jeez, that’s what we do for a living, so even if we don’t win every one the ones we have are essentially becoming more valuable because more and more people are interested in having access to them for reasons of delivering convenience to their customers.

[Jim Kissane:]

One last question for Chris

[Chris Brewster:]

I don’t have it on a revenue basis, Jim. On a transaction basis it’s slightly through 10% currently on the US business. It’s basically a US phenomenon.

[Jim Kissane:]

Excellent, thank you.

[Operator:]

Thank you. Our next question comes from Ramsey El-Assal from Jefferies. Your line is now open.

[Ramsey El-Assal:]

Hi guys. Can you update us on your M&A pipeline? Given your comments about our consensus next year in terms of organic growth, how robust is your M&A pipeline now? Can you give us any color in terms of where you think you might be able to get some deals done between now and then?

[Steve Rathgaber:]

That’s a tough one to answer. I think I’ve said in the past, and I’ll invite Chris to comment here as well, but I’ve said in the past that a month doesn’t go by where some properties aren’t brought to our attention. They’re all kinds of sizes, some of them directly in the space – some of them a little adjacent to the space. Do I think acquisitions are possible next year? Yes. Do I think acquisitions are possible still remaining this year? Yes. Can I say anything more definitive than that? No, because one never knows with these things. But it is not that there is a dearth of opportunities, and I would add that some of the thinking we’re doing – when I said talking about software capabilities and that sort of thing in my comments relative to strategy – is about thinking about different kinds of acquisitions than might have historically been your expectation. Now those don’t lend themselves to the same synergistic opportunities but they’re more about building for the future, and we think those are important as well. So where we’re looking at stuff and I will continue to look at stuff, and I would imagine we’ll close some and choose not to close some, or perhaps maybe even be outbid on some. So that’s the nature, and Chris, I don’t know if there’s anything you would add on that.

[Chris Brewster:]

I think that’s it in a nutshell. I mean we’ve tended to be opportunistic about acquisitions. We certainly try to do transactions that’ll drive value for our shareholders and you know, people certainly know we’re around and we have a reputation for doing what we say we’re going to do and getting deals closed when we commit to them. So we think we stand as a respected and capable acquirer and we will continue to pursue those types of opportunities.

[Ramsey El-Assal:]

I guess the follow-up on that

[Steve Rathgaber:]

Yeah, I think it would be fair to say that we’re more open to those than in past times. I think we’ve demonstrated that openness with a couple of transactions. The rationale for that is not so much that it pours in big bucks, although it becomes a nice little chunk of contribution; but what I like about it increasingly is the fact that typically, like with ATM networks, there is no interchange risk in that deal – it’s all contracted through a fee structure that’s fixed. And as I mentioned, the attractiveness of the merchant own and load is also no cash requirements. So I think it’s a balanced sort of modest risk diversification strategy, if that’s not too big a mouthful, that says we can pick up some good locations, we can bulk up on our ATM count; we can hopefully leverage that ATM count for meaningful negotiations with folks who want to have access to our ATMs and we can reduce some exposure to cash needs and interchange – all of which feels like good stuff so long as we have a quality management operation to do that. And it’s one of the reasons we went after ATM Network, because we believed they brought that to the table. So it feels like a nice little tuck-in strategy that we’ll use as attractive portfolios present themselves, but I wouldn’t want to suggest that we’re just going to do a rollup of everything under the sun there.

[Ramsey El-Assal:]

Okay, great, and one last one. I know you’ve addressed this in the past, and understanding that EMV deadlines may or may not be met, given Mastercard’s recent pretty explicit extension of its mandate to cover ATMs can you give us any color in terms of your existing fleet? Are there any that are already EMV compliant? What is the upgrade process like and how much does it cost? Is there downtime for the machines; is there anything that we need to be factoring in in the next obviously lengthy period of time for you to handle kind of upgrading to EMV?

[Steve Rathgaber:]

Well, I think as it relates to… [coughs] Excuse me, I’m choking on EMV maybe philosophically. As it relates to EMV I can tell you the following

[Ramsey El-Assal:]

That’s fine; that’s actually more than I thought I was going to get on that one. So thanks for taking my questions; I appreciate it.

[Steve Rathgaber:]

You’re welcome.

[Operator:]

Thank you. Our next question comes from Bob Napoli of William Blair. Your line is now open.

[Bob Napoli:]

Thank you, good afternoon. Just on the prepaid cards, the 10% of US transaction – what is the growth rate and how has that changed?

[Chris Brewster:]

Well, as I said in my prepared remarks, the growth rate if you factor out acquisition effects is a little bit over 25% year-over-year in transaction counts. I mean it continues to be, at the risk of stating the obvious it continues to be pretty buoyant and we continue to see adoption at a fairly rapid rate across the major categories that impact us – the bulk of which is coming off of payroll cards and electronic benefits transfer cards.

[Bob Napoli:]

Has that growth rate accelerated, Chris?

[Chris Brewster:]

Well, I’d say as I recall, Bob, three or four quarters ago I think I was saying 20%?

[Bob Napoli:]

That’s what I thought, yeah.

[Chris Brewster:]

It moves around a bit from quarter to quarter, so it’s probably increased a little bit. I’m not sure that it’s increased dramatically.

[Bob Napoli:]

Okay. On the interchange, how are you confident… I mean it seems to have gotten a little bit worse each quarter obviously, and how are you confident, or how confident are you that what we’re seeing in Q4 is as bad as it gets – that there’s not going to be an incremental step down in Q1? And how is that working, Steve? How are people shifting the networks?

[Steve Rathgaber:]

What you have, Bob, is some of the largest banks in the land had had transactions resident on some of the traditional smaller regional networks, and I’m sure in response to market opportunities presented by the global brands they were incented to move volume. So it’s about getting that volume moved from Point A to Point B. As we look at the landscape of the big ticket items that are left that could move, in terms of at least the people that use our ATMs, we’re believing there’s some but not gigantic numbers; and therefore we think we have some sense of what the exposure would be – some pretty good sense, actually. We think in Q4, the remainder of Q4 is very safe because we don’t think that people are going to be swapping bins during retail holiday seasonal times. We think in Q1, is it possible there could be some movement? Well yeah, but is it likely we’ll have a little something in the budget to manage to that? Well yeah, and the question will be again about the guessing game. But the 21% of the revenue is now 8% and that’s part of the journey we’re managing, and in part that number’s getting smaller because it gets lowered on a per-transaction basis. So I don’t want to give the impression that we’ve managed 13 points of that away through our own activities. It’s a combination of things. So I don’t know if that helps you or not.

[Bob Napoli:]

Yes. Thank you. On Hurricane Sandy, do you have ATMs that are down? Are you being hurt, or you kind of suggested I thought, Steve, that you’re benefiting in some way from the hurricane? How many ATMs do you have in that general area and is there any near-term reduction of business?

[Steve Rathgaber:]

So let me comment on that and a couple others. We certainly saw those folks who were prudent drawing cash on the ATMs several days before the arrival of the storm, so to the extent there was a benefit it was that – and that’s a several-day thing, it’s not a game changer. And then at various points in time depending on when you might have talked to us about where the storm was, at one point we had as many as 10,000 of our 61,000 ATMs sort of in the line of sight. At the end of the day as the storm came onshore we sort of saw that number reduced to about 5000 in terms of could have been impacted; but as we’ve worked through the days we’ve got about 2000 ATMs that are nonresponsive that we’re doing outreach on at this point in time, give or take a couple hundred. But as of today even we’re seeing a pretty substantial return of the machinery from our vendors, whether it be cash depots or the service providers – a pretty substantial return of their capabilities to normal, certainly allowing for the fact that there are pockets of geography in that whole landscape that are still quite a mess. But I’m actually pretty pleasantly surprised at where we stand today. Now, what that does to volumes and that sort of thing? I’m a little nervous about lingering impacts just in terms of behavior and people being able to get to work and do what they do. My wife happens to be in our house in New Jersey and still hasn’t left the house after X number of days so she has no power and that sort of thing, and thinks I’m a terrible husband for being here doing an earnings call. [laughter] But putting that aside there are lots of people who have that situation – they’re just not able to get out and about. So I am concerned about a lingering dampening effect on transaction volumes even as I’m hopeful that as people do go out, one of the first things they’re going to want to do is go and get some cash because it’s not clear that all the telephone lines are properly functioning yet; and if you’ve tried to reach people on cell phones that’s very spotty, so that’s going to have an impact on point of sale utilization. And I think that could mean some cash demand. But it’s a big enough mess to do nothing other than speculate about, but I am pleased with the recoveries at the ATM level and I think we’re in better shape than I would have thought we’d be in two days after.

[Bob Napoli:]

And you [filled that] obviously into your guidance for the year on some effect from Sandy then, I guess?

[Steve Rathgaber:]

Well, as Chris mentioned earlier it was a little hard for us to raise the bottom in part on that.

[Bob Napoli:]

Right, that’s right. Okay, and the hiring of I think Rick Davis, AVP of Global Procurement – it seems like an interesting move. I just wondered what your thoughts were around that hiring.

[Steve Rathgaber:]

Well, it’s a very exciting hire actually, and one I was going to try to weave into this earnings call but I was getting a little long in my notes. But I’m glad you asked about it, actually. Rick is a wonderful resource and comes to us with a history of lean process management. I could bore you with some of his résumé details but they’re impressive. And what he is doing for us is taking this entity that has all of these processes we’ve grown up with, all of these vendors that are integral to our service delivery, our uptime availability, our expense infrastructures; and he is bringing the lean process mechanics to that. And the intention is that out of this we will see expense savings; we will see improvement in performance levels, and we believe that it’ll be numbers that contribute and that folks will see it next year and the year after on the bottom line. He’s a very competent guy, he’s a very committed guy and he’s already having an impact on availability and things of that nature, which we were already pretty good at. But he’s helping us narrow the gap of unavailability time that we did have.

[Bob Napoli:]

Thanks; sorry, last question. The premium competition for premium locations, is that on a national basis or is that like for national retailers? Or is it for regional ATM basis, and how much, I mean how many banks are there? Are there large national banks like a JP Morgan that’s looking at doing this? Maybe a little bit more color would be helpful.

[Steve Rathgaber:]

Well, what I can say unequivocally is yes, yes, and yes. It’s national and it’s regional, and it’s banks and it’s non-banks. If you have hot properties in California they’re going to get a lot of attention by banks that are interested in expanding to California. If you have hot properties in Georgia they’re going to get a lot of interest by banks that have eyes on that, and not just banks – other processing-type entities as well that compete with us more classically. So it’s not complicated; it’s just business being business.

[Bob Napoli:]

Thank you.

[Operator:]

Thank you. Our next question comes from Mike Grondahl of Piper Jaffray. Your line is now open.

[Mike Grondahl:]

Yeah, thank you guys. Can you just recap the ATMs you added in the quarter and where they went? And then secondly, you talked about a pretty robust ATM pipeline but also that timing of monetizing that pipeline will be tricky. Any initial stabs at just a range for 2013?

[Chris Brewster:]

I think on the first question, Mike, where ATMs went in the quarter – you can see, if you lay our Q2 earnings release against our Q3 earnings release, there’s a page in there that shows the period-end ATM count with quite a bit of granularity. That won’t answer the question for you by customer but it will answer the question for you through the various segments of our company-owned business, merchant-owned and the international operations, so on and so forth.

[Steve Rathgaber:]

So another way of saying that is a lot of the ATM installs have gone in with our three big customer sites that we mentioned, and that’s multi-country and multi-major retailer. On the second question, I think it is just there’s nothing really additional to offer because in any given situation… I actually love this business. It has a lot of wonderful attributes but one of the ones it doesn’t have that I miss is contracts just expiring, when the customer automatically had to renew by a certain date. This isn’t the kind of stuff where that just happens. So whether a customer is actively saying “You’ve got three weeks to respond to a bid” and then takes three months to look at the bids – it happens all the time except when they take four months, you know? And then when you win the business, all of a sudden there might be a store remodel, or you win a branding deal and then somebody’s trying to figure out the color of the sign – and we install it, and “Gee, that doesn’t look good at nighttime” and you take them all out and order them up again, and another two months pass. So it’s nothing to wine about; it’s just very difficult for me to provide something of value to you there. What I suggest is true is that we have a historical rhythm of activity that occurs year over year. Sometimes it spikes up; sometimes it drifts a little down but it pretty much runs in a range. And I have no reason to think we won’t continue to enjoy that kind of range of activity on an ongoing basis. Coming off our particularly strong 2012 it wouldn’t be unreasonable to expect 2013 to look a little lighter versus a strong 2012, but a constant rhythm nonetheless. Hope that helps.

[Mike Grondahl:]

Yeah, I mean it’s a start.

[Steve Rathgaber:]

[laughter] Okay.

[Operator:]

Thank you. Our next question comes from Ben Oveson of DA Davidson. Your line is now open.

[Ben Oveson:]

Hi guys, I’m in for John Kraft. I just had a quick few questions, one on the interchange headwinds. Thanks for the detail you provided on the mechanisms behind there. I was just kind of wondering, as far as a bank perspective goes, what do they do – whether it’s physically or behind the lines – to try and shift from those higher interchange networks to the lower interchange networks?

[Chris Brewster:]

What do they do?

[Ben Oveson:]

Yeah, do they just flip a switch figuratively or they have to say something?

[Steve Rathgaber:]

Well it’s got two parameter settings; one might be any contracts that are in effect where they have an obligation to maintain certain volumes in certain environments. But once that barrier is freed up because of timing expiration, which we certainly aren’t going to know about, then mechanically it’s about adding bins and routing tables. So if it’s a dramatic increase in volume it’s conceivable phone lines could have to be ordered and that sort of thing to expand capacity, but it’s more often than not loading up bin tables to shift volume. It’s not a six-month super planning cycle type of thing. Someone could be three months into it now and we wouldn’t know.

[Ben Oveson:]

Okay, so it’s mostly just behind the lines; they don’t have to get customers to do anything different?

[Steve Rathgaber:]

No, no. One of the ugly parts about that piece of the network business is stuff moves around pretty easily.

[Ben Oveson:]

And then another question about the competitive pressure you’re seeing in your premium locations, do you think that is a change in attitude of banks? Are they kind of recovered now so they’re starting to think “Oh, we’ve kind of forgot about our ATMs?” Or what’s your thoughts on that?

[Steve Rathgaber:]

Let me just make one other observation on your first question

[Ben Oveson:]

Yeah, that was great. Thank you very much. And then just a quick follow-up to that

[Chris Brewster:]

I’d say very little at this point. Well, I’d put it this way, I’ll modify that to some extent. We gave the numbers as we went through the margin impacts in terms of some margin deterioration that was driven by the fact that the three major new contracts that we put in place earlier this year cranked up at margins that were somewhat under our existing margins in the company-owned business. And I believe that that increment was about 0.6%, so you can think of that as a competitive impact. But I’m not sure if it’s necessarily representative of competitive change in the sense that (inaudible) tend to be attractive to more than one operator.

[Steve Rathgaber:]

And it’s important also to keep in mind that we compete with in-house solutions, right? So sometimes you have to have a reason for somebody to let go of their internal economics that are depreciated, and you’re selling future volume activity and larger sales and all of that sort of thing; but the purchasing guy is pointing to their low cost of fees transaction right now and that’s what makes a ballgame a ballgame. And in other cases you might just be displacing a particularly powerful brand on an ATM and that means the retailer has to take some risk for possibly transitioning to another brand, and that can be accounted for in margin to some degree but isn’t what you would call classic competition – it’s just business fundamentals getting in the way of making a ton of money. You just make good money instead.

[Ben Oveson:]

Thanks very much.

[Operator:]

Thank you. (Operator instructions.) And our next question comes from Gary Prestopino of Barrington Research. Your line is now open.

[Gary Prestopino:]

Hey Steve, hey Chris. Just getting back to this whole thing with interchange, you said that your transactions are getting rerouted from you to lower-cost networks – is that correct? And then you talked about that you’ll be able to hold on to what you have and not really have to lower the prices to be competitive. What gives you the confidence that you can do that if these banks are shifting? I mean are there some required minimums that they have to do with you until the contract’s over?

[Chris Brewster:]

I think what might be helpful there, Steve, is kind of a walk back through sort of the basics of how the transactions flow and how they get routed, and for what reasons routing might change.

[Steve Rathgaber:]

That’s probably a good approach. So when you have a global network versus one of the historically-labeled “regional” networks, our ATM is sitting in the store; a card comes up and uses it, and we then route that transaction to the network that is identified in the bin routing table we’ve received from the networks as an acquirer. We’re obviously, if we could order the world we would prefer to route it to the network that provided the highest payment of interchange to the ATM owner. That interchange comes out of the bank’s pocket so they obviously prefer to go to the lowest cost of interchange which means the lowest revenue to us. And the battle is if they are exclusive or not, if they’re in multiple networks or not. And what we’re saying is, looking at the top major clients that do transactions at our ATMs, there isn’t a lot of volume remaining that could easily be moved that would cause a material impact in interchange. So it isn’t a question of what we control, to try to go back to the root of your question – it’s a question of what is left to be moved. And there is some volume left to be moved. I’m not going to sit here and tell you there’s no exposure, but maybe I’m going to tell you it’s minimal exposure – it could be another haircut on our earnings per share. But as compared to the whole pie of risk of say two years ago or three years ago, it is actively reducing and we’re feeling increasingly good about sizing that exposure and being able to control the movement. And none of that says that there wouldn’t be another interchange movement by the networks just to reset price. But the obvious implication of resetting price, because you have to take into account all the implications on all of your customers – it isn’t that the networks are just sitting there trying to figure out how to get Cardtronics. This is a larger scheme for them in terms of all kinds of routing and we’re just brought along for the ride. But the notion of interchange being reduced or network fees being increased always looms. That’s why it’s a risk factor in all of our reporting. But the notion of interchange that is protected is a number that is increasing in our portfolio, and that is unprotected is decreasing in our portfolio. So I don’t know if that helped or not but it was my attempt.

[Gary Prestopino:]

Okay, thanks.

[Operator:]

Thank you, and at this time I’m not showing any further questions in the queue. I’d like to turn the call back to Steve Rathgaber for any further remarks.

[Steve Rathgaber:]

Well, I would as always thank you all for your interest in Cardtronics, and best wishes to any of those who were negatively impacted by the storm. We hope you’re all okay. So thank you for your interest and we’ll talk to you all soon.

[Operator:]

Ladies and gentlemen, thank you for participating in today’s conference. This concludes today’s program. You may all disconnect. Everyone, have a great day.