Cardtronics, Inc. Q1 2008 Earnings Call Transcript

| About: Cardtronics, Inc. (CATM)

Cardtronics, Inc. (NASDAQ:CATM)

Q1 2008 Earnings Call

May 8, 2008 8:30 am ET

Executives

Melissa Schultz

Jack Antonini – President, Chief Executive Officer & Director

Michael H. Clinard – Chief Operating Officer

J. Chris Brewster – Chief Financial Officer

Analysts

Franco Turrinelli – William Blair & Company

Christopher Mammone – Deutsche Bank Securities

Cynthia Houlton – RBC Capital Markets

Robert P. Napoli – Piper Jaffray

Reginald L. Smith – J.P. Morgan Securities

Operator

Welcome everyone to the Cardtronics first quarter 2008 earnings conference call. (Operator Instructions) I'd now like to turn the call over the Melissa Schultz of Cardtronics.

Melissa Schultz

Welcome to the Cardtronics first quarter 2008 earnings conference call. Participating in our call today are Jack Antonini, our Chief Executive Officer, Chris Brewster, our Chief Financial Officer, and Mike Clinard, our Chief Operating Officer.

Today's call will follow our traditional format. First, Jack will discuss this quarter's financial results and key highlights. Mike will then provide an overview of our operations and an update on some of our operational initiatives and finally, Chris will provide additional information on our financial results as well as an update on our expectations for the rest of 2008. Their remarks are scheduled to run for about 20 minutes at which point we'll open the call up for questions that the listeners may have.

Before we get started, I'd like to make the following 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 those outlined in our reports filed with the Securities and Exchange Commission and actual events, results or performance may differ materially.

Any forward-looking statements are based on current information only and we assume no obligation to update those statements. In addition, during the course of this call management of the company will reference certain non-GAAP financial performance measures. Management's opinion regarding the usefulness of such measures together with the reconciliation of such measures is included in the company's filing on Form 8-K this morning with the Securities and Exchange Commission.

Now I'd like to turn the call over to Jack Antonini, our CEO.

Jack Antonini

For the most recent quarter our adjusted EBITDA which is earnings before interest, taxes, depreciation and amortization adjusted for certain non-cash and non-recurring items totaled $19 million an increase of 60% over the $11.9 million of adjusted EBITDA that we reported in the first quarter of 2007. The majority of this increase is attributable to our acquisition of ATM and self-service advanced functionality kiosk business of 7-Eleven in July of 2007.

Adjusted net income which is adjusted EBITDA less interest, depreciation and normalized taxes totaled $1.5 million or $0.04 per share which is consistent with our expectations for the quarter. As usual, Chris Brewster our CFO, will discuss our financial results in more detail a little bit later in the call as well as our expectations for the remainder of 2008.

As we noted in our press release this morning the first quarter was a solid one for Cardtronics. We made progress on many of our key initiatives including our bank branding and surcharge-free offerings and our growth plans in the United Kingdom and Mexico. In addition we made notable progress to create a profitable business in the advanced functionality or Vcom business that we acquired from 7-Eleven. Finally, we met some critical operational benchmarks that we set for ourselves at the beginning of the year including the conversion of an additional 7,000 ATMs to our electronic funds transfer or EFT processing platform and the completion of our Triple-DES security upgrade efforts.

On the bank branding front we currently have over 9,500 ATMs operating with bank brands on them. During the first quarter we announced another bank branding agreement with Washington Mutual covering 425 CVS stores located throughout Arizona and California. In fact this deal is indicative of what we continue to see with this portion of our business, continued strong interest from many of our existing branding partners which really speak to the value that we provide to financial institutions through this program.

With regard to our surcharge-free network offerings we continue to set the standard for the industry. The recent additions of partners such as STAR SF the surcharge-free network of First Data Corp's STAR network and Credit Union 24 a national credit union owned and point of sale and ATM network. The Allpoint network has become the surcharge-free ATM network of choice in the United States.

The addition of these new partners which at one point were considered to be competitors of ours clearly demonstrates the value of the Allpoint network and our premier retail locations. As further evidence of this trend for other networks to provide surcharge-free ATM access through Cardtronics' ATMs, Co-op Financial Services which is the largest credit union owned EFT network and processor recently signed agreements to allow its members to utilize Cardtronics' ATMs located in 350 Costco stores across the country and all the Florida Walgreens stores on a surcharge-free basis. Because of our coast-to-coast coverage and premier retail locations we're finding that other surcharge-free networks are now seeking to partner with us rather than try to compete directly with us. We feel that this trend bodes very well for the continued success and growth of our surcharge-free network offerings.

In terms of our international growth efforts we continue to make very good progress during the first quarter rolling out over 250 new ATMs in the United Kingdom and Mexico. As a result of these additional deployments our average number of transacting ATMs in the UK increased by over 9% from 2,060 ATMs during the fourth quarter of 2007 to 2,252 during the first quarter. In addition, the average number of ATMs that we had transacting in Mexico increased by over 6% from 1,191 ATMs in the fourth quarter to 1,422 ATMs during the first quarter of 2008.

In the United States the average number of transacting ATMs increased slightly when compared to the fourth quarter of 2007. However, when you exclude the net decline in efforts transacting merchant-owned ATMs during the quarter of 445 which is largely due to completing our Triple-DES compliance efforts, the average number of transacting ATMs in the US increased by over 510 when compared to the fourth quarter of 2007. This increase was largely due to the initial deployment of new company-owned ATMs in Safeway locations throughout the United States, a deal that we announced back in January.

Turning to our advanced-functionality Vcom business we completed most of our cost reduction efforts relayed in this business during the last two quarters primarily through a combination of contract renegotiations and by bringing a number of previously outsourced functions in-house. As discussed in our year-end earnings call we estimate that those efforts will produce over $6 million in annual cost savings.

During the first quarter we also made significant progress in terms of relocating Vcom units to concentrate them in 13 selected major metro areas in the US. Once these relocation efforts are completed which should happen in the third quarter of the year, at least 90% of the 7-Eleven stores in these selected markets will have a Vcom unit.

We believe that a more ubiquitous presence will allow us to better leverage the advertising programs to create awareness and promote the availability of the advance functionality financial services to consumers within these markets. We expect that this along with the addition of new services and partners will result in increased advanced-functionality transactions and revenue being conducted on those machines.

During the first quarter the Vcom business generated an operating loss of $1.3 million which is an improvement over the $2.9 million loss generated during the prior quarter or the fourth quarter of last year and slightly better than our expectations for the quarter. We began the process of promoting certain advanced-functionality financial services in selected markets during the fourth quarter of last year and the first quarter of this year with positive results.

However, ongoing relocation efforts have made it difficult to effectively measure the total degree of success associated with these efforts. We continue to believe that the completion of our relocation efforts and the addition of new services and partners will result in continued improvement of the financial results in this aspect of our business. Along those lines we'll formally be rolling out remote deposit capture services for millions of Co-op Financial Services customers starting next week in all of our advance functionality locations.

Finally I'm pleased to report that we officially completed our Triple-DES compliance efforts on March 31 which Mike will provide additional details on in just a moment. This was an extremely challenging and time-consuming project given the size of our ATM fleet located in all 50 states so we're very glad to have it behind us so that now we can focus all of our efforts and attention on our growth initiative.

One last achievement to note, we have converted an additional 7,000 ATMs to our in-house processing switch during the first quarter including the Vcom units from 7-Eleven and all of our ATMs located in the United Kingdom bringing the total number of ATMs that we're now processing to over 20,000.

In closing, we made significant progress during the first quarter and we're well positioned to achieve the goals that we set at the beginning of the year. At this point I'll turn the call over to Mike Clinard, our Chief Operating Officer, who will provide you with some additional details on our operations during the most recent quarter.

Michael H. Clinard

As we noted in the press release during the first quarter of 2008 a number of our key operating metrics demonstrated significant improvement over the first quarter of 2007. You can find these statistics on the key operating metrics page of the press release. As you will see, the average number of transacting machines, overall transaction levels and per ATM per month metrics were substantially higher during the most recent quarter when compared to the same period last year. The majority of this growth can be attributed to the 7-Eleven acquisition and growth in our international operations. In addition, our bank branding and surcharge-free offerings helped fuel some of the transaction growth seen in our domestic portfolio.

Now I'd like to briefly discuss the progress we've made on two of our key operating initiatives: our EFT processing operations; and our Triple-DES upgrade efforts. As Jack mentioned, we continue to make great progress during the most recent quarter in converting our ATM portfolio from third party processor platforms to our own in-house processing platform. In addition to allowing us to better control processing costs, this move will allow us to control the ATM screen flow and the user experience which will in turn provide us the ability to provide customized branding and one-to-one messaging at our ATMs.

At the end of 2007 we were processing transactions for over 13,000 company and merchant-owned ATMs in our portfolio and at the end of the first quarter of 2008 that number stood at over 20,000 including 2,300 plus ATMs that we operate in the United Kingdom and over 2,200 advanced-functionality Vcom units. We're very happy with the progress we made during the most recent quarter and we're on track to be processing transactions for all our ATMs by the end of this year.

Turning now to Triple-DES as we mentioned before all ATMs must now be compliant with the latest data encryption standard known as Triple-DES. As Jack noted earlier, as of March 31 we officially completed all of our efforts in this regard. Additionally the upgrade efforts for our merchant-owned [estate] ended up much better than we originally anticipated.

We initially expected to lose somewhere in the neighborhood of 1,000 ATMs during the upgrade process simply due to merchants choosing not to upgrade or replace their ATMs and when it was all said and done we only ended up losing roughly 525 locations. Most of those were low transacting and low margin ATMs. Given the logistical challenges and capital intensive nature of this upgrade process we're very happy to have the Triple-DES conversion behind us. It was a significant and time-consuming project for the entire operations team, in fact the entire company, and with it formally behind us we're now able to focus all our energies on achieving our 2008 initiatives.

I'd now like to turn the call over the Chris Brewster, our CFO, who will provide some additional details on our financial results for the quarter.

J. Chris Brewster

As you see in the press release, our consolidated adjusted EBITDA totaled $19 million for the first quarter. That was a little bit better than what we had expected although the mix of where that came from was a little different than what we'd planned and I'll go into that in a little more detail in just a minute. You may recall from our year-end conference call that the first quarter is seasonally our softest quarter and our third quarter is typically our strongest quarter and based on what we know at this point I'd expect that trend to repeat itself in 2008 which should mean that earnings for the quarter we just completed, the first quarter, should reflect the low point for the year.

For the first quarter we had nice growth and revenues primarily as a result of the 7-Eleven acquisition although both our UK and Mexico operations showed significant revenue growth and we also showed significant growth in our domestic bank branding and surcharge-free programs. Our overall growth margin percentage of 22.6% was on our expectations relatively consistent with the first quarter of last year despite the losses that we incurred in the first quarter of this year as related to our advanced-functionality or Vcom business that were not in the first quarter of 2007 because didn't own that business then.

If you exclude those losses, our gross margin would have been up about 100 basis points. As we discussed previously we expect those advanced-functionality losses to diminish considerably over the course of 2008. However, I'd also tell you that because of our relocation efforts, some of which were delayed because of the Triple-DES upgrade process that Mike just alluded to, our expectation of achieving profitability in the advanced-functionality business may be delayed perhaps by a quarter or two. Despite this revision I think we're comfortable saying that the potential negative impact of this business on our operating results should be minimal by the end of this year.

Earlier I said our consolidated results were in line or a little better than our expectations but the mix of those results was somewhat different than what we'd expected particularly the revenues and margins in our UK business were somewhat lower than expected during the quarter while the revenues and margins in our US business were somewhat higher than what we anticipated during the quarter.

Taking the UK first, we continue to be somewhat negatively impacted by service issues that have been caused by the merger of two of the UK armored car providers during the latter part of 2007. You may recall that we spoke about this issue on our year-end earnings call and at the time we expected the issue to get progressively better over the course of 2008. Unfortunately these service disruptions actually worsened during the first quarter of 2008 resulting in a considerable increase in the number of machines that were down due to their being out of cash. This negatively impacted transaction counts and of course that negatively impacts revenues.

To counteract these issues we were forced to maintain somewhat higher cash levels in our ATMs in the UK thus resulting in higher-than-anticipated vault cash costs. The net result of all of this was that our UK revenues and margins were lower than originally anticipated and to be a little bit more specific, gross margins in the UK have typically run in the high 20s as a percent of revenue and in the first quarter they were in the high teens.

While we are continuing to experience some service disruptions at this point and we expect this to continue through May and June, we are hopeful that we won't see the same level of issues during the second quarter that we saw in the first quarter, and the good news on this point is that the problem is one that will get fixed. People do know how to reliably provide armored car so we're confident that it will get fixed, and when it does the UK margins should improve.

Additionally we've been planning now for some time to transition a part of our cash management and armored car need to the UK to our own in-house armored car and cash management operation, and I'm pleased to announce that we're pretty close to making that a reality. The initial driver behind this project was to bring modern supply chain methods to the armored car activities with the objective of substantially reducing vault cash balances and rental expense.

In the US and UK armored car operation services typically run on a fixed route schedule which means from our perspective that we have to forecast a given machine's cash needs for as long as a month into the future and consequently we have to load extra cash into the machine to handle unpredictable spikes in demand. We're getting into the armored car business in the UK primarily to implement adjusted time delivery methodology where a given machine is refilled just before it runs out of cash rather than on a fixed schedule.

However, it is fortuitous that this project is approaching reality at this time. Our UK team has spent the better part of the last year planning and building up a team of armored car and security personnel to create this operation. We've gone through all of the necessary planning stages including the identification and leasing and build out of a secure operation center, the purchase of state-of-the-art armored vehicles, and the implementation of what we think will be the industry's leading security measures.

We've coordinated all of these efforts with local law enforcement agencies and our insurance and financial institution partners all of whom have reviewed and approved our detailed business plan. We expect this operation to formally commence operations in the third quarter of this year with the servicing of about 300 of our London area UK ATM locations. I can assure you that we've been extremely methodical in the planning of this operation and will continue to apply the same level of care and diligence as we bring it up and running.

Turning to the US side of the business, our results were better than we anticipated in the states due primarily to higher than expected surcharge transaction levels and somewhat better than expected revenue and margin growth in our surcharge-free offerings. As Mike mentioned earlier there were fewer machine losses, less attrition than we expected from the Triple-DES upgrade project so that additional machine count relative to what we had planned helped the bottom line a bit for the quarter.

Last, we benefited a bit from lower than expected interest rates during the quarter and that's irrelevant to us because most of our vault cash is priced to us on a spread over floating interest rate. 75% of our US vault cash is hedged with interest rate swaps but 25% of it is not hedged so we saw somewhat below plan rental costs for that vault cash. Other operating costs at SG&A were well controlled so the overall result of that was performance better than our expectations in the US and performance that was somewhat better than expectations for the company as a whole.

For the quarter, moving down the P&L, adjusted net income totaled $1.5 million or $0.04 a share. That's up from an adjusted net loss of $300,000 or a $0.02 loss than the first quarter of 2007. The year-over-year increase in adjusted net income can basically be attributed to the same factors that we've already discussed, partly to the 7-Eleven acquisition and partly to growth in other areas of our business.

Turning to the balance sheet for a moment, total debt at the end of March stood at just about $346 million and the components of that were $296 million of senior subordinated notes net of the issuance discounts, $8.5 million of debt related to our Mexico operations on equipment financing lines down there, $39.5 million of senior debt outstanding under our revolver, and about $1.7 million of capital leases, so total debt is up by roughly $35 million from the level that it sat at the end of the fourth quarter.

Now I will quickly tell you that we always expect debt to increase in the first quarter of the year for a number of reasons. One is that it is seasonally our softest quarter from an operating perspective so operating cash is somewhat lower. Secondly we have semi-annual bond interest payments of about $14 million that occur in February and August so that causes a cash drain in those two quarters and we also have certain contracts on which we pay annually at the beginning of the year. And there are various other smaller factors; for example, we pay our management bonuses annually in the first quarter and all of those items also impact first quarter cash flow. The net net of all of that is that we typically see a significant outflow of cash in the first quarter and this normalizes itself over the rest of the year.

Now we understand these facts about our business. We take them into consideration in our forecasting and consequently we expect the debt to rise in the first quarter. The increase was a little bit larger than we expected for reasons related to all of the project activity that we had going on right at year end, particularly the Triple-DES upgrade, the Safeway installation that Jack mentioned, and the rapid growth in Mexico and the UK, and from a forecasting perspective we had some difficulty in projecting precisely when we would pay for certain of those capital items that is, whether they would hit in December ‘07 or in early 2008.

Now despite the fact that total debt was a little bit higher than what we had projected interest rates have been slightly lower than we had anticipated so the overall interest expense bill for the quarter was basically right in line with what we expected. Assuming no acquisition I would expect our debt at the end of March to be the high watermark for the year with that coming down in subsequent quarters as operating cash flow improves and we put some distance between ourselves and first quarter working capital effects that we talked about a moment ago.

Turning to guidance, basically we continue to be comfortable that the guidance we provided on our year-end earnings call is still valid and applicable. Just to reiterate that we're expecting total revenues in the range of $480 to $505 million, overall gross margins of around 24.5% compared to about 22.5% last year, adjusted EBITDA in the range of $86 to $90 million, depreciation and accretion expense of $38 to $39 million, interest expense in the range of $29 to $30 million, and adjusted net income of around $0.30 to $0.35 per diluted share and that's based on a share count of 39.5 to 40 million diluted shares outstanding.

Also as we've said previously the figures that I just mentioned to you include about $3 to $5 million of estimated losses associated with the Vcom advanced-functionality operations. In terms of capital expenditures we continue to expect to spend around $48 to $50 million. The interest expense guidance has also not changed as we're enjoying somewhat below plan interest rates on our revolving line of credit that would offset slightly higher than anticipated debt levels.

So I'd say in summary, we were pleased with the progress that we've made so far in 2008; we're very gratified to get significant project, particularly the Triple-DES project, behind us we're pleased about the progress we've made on moving over to our in-house processing switch; and we think we're on track to meet the goals that we've set for ourselves at the beginning of the year.

Operator that concludes our prepared remarks and we'd like to now take any questions that listeners on the line may have.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Franco Turrinelli – William Blair & Company.

Franco Turrinelli – William Blair & Company

Chris, I think you mentioned that US surcharge levels were above your expectations. I wasn't clear if you meant that the amount of the surcharge was higher or if it was just a higher number of surcharge transactions.

J. Chris Brewster

Transactions, Franco.

Franco Turrinelli – William Blair & Company

Obviously there's been a lot going on with the level of surcharges. I'm wondering if you can just give us an update on what's happening at your ATM machines.

J. Chris Brewster

I presume what you're referring to is the fact that a number of the major banks have raised the surcharge that they would charge folks who are not their customers to use their machines typically from a level from around $2.00 up to $3.00. Under the household name big banks have gone to that $3.00 level over the last six months or so.

We have not made any moves that extreme. We'd be concerned about impacting our transaction counts negatively if we did that and I'd say the trend in surcharge levels in our company currently parallels what we have seen in the past which is a relatively moderate upper drift, if you will.

Franco Turrinelli – William Blair & Company

Any thought that the higher bank surcharges are pushing people towards ATMs such as yours which actually have lower transaction fees? Is there any opportunity for you to advertise all those lower fees from the banks?

J. Chris Brewster

On the first point, and I'll ask Jack to weigh in on this one as well, on the first point obviously it's hard to tell in terms of exactly what's driving people to our machines but my personal opinion is that most people would not pay a $3.00 fee in this country unless they didn't have much of a choice and logic would tell me that's probably driving some transactions our way.

Jack Antonini

I would guess that that's probably right Chris. The other thing I think may be driving transactions our way, Franco, is the price of gasoline frankly. You can't drive as far and justify it to be able to get a free transaction anymore so if you happen to be at one of the many C stores or gas stations that we have machines at, which number in the thousands, it's actually less expensive to go ahead and pay $1.50 or $2.00 and get your cash than to drive somewhere. If you're driving more than five or ten miles to try to get your free transaction, it's hardly worth it anymore with the price of gas.

Franco Turrinelli – William Blair & Company

Chris I heard what you were saying about maybe pushing profitability a little back. I'm assuming though that your view of the total cumulative losses that potentially could be incurred by the Vcom machines is unchanged?

J. Chris Brewster

That's correct Franco. We're really talking about fairly small movements around the edges here. We had anticipated earning what I'd call a pretty small profit at the EBITDA line in the second half based on certain delays we've had, primarily in a project that's focused on focusing these machines in the short list of specific markets as opposed to having them spread broadly over the landscape.

The current projection as opposed to showing a small profit in the back half shows a small loss in the back half. We had a considerably reduced loss from prior year levels in the first quarter and the overall guidance in terms of what we expect out of Vcom for the year hasn't changed. There's been some good news on the business development side of that operation with regard to some new product offerings. We continue to work hard on it and continue to have a sense of optimism about it.

Franco Turrinelli – William Blair & Company

Obviously the Vcom machines are a drain on resources in the sense of management attention and capital and all those things. Just remind us again of what you see of the opportunity here and why this remains an attractive investment to you.

Jack Antonini

I'd say basically when you look at the types of functionality that's available we think that there's some significant upside there. We think that there's a lot of potential for self service in these different areas whether it's cashing checks, transferring money, the ability to pay bills, to do basic transactions like that that people have historically had to do in an assisted manner for the under bank or they try to do from a PC or things like that and there's a very little percentage of the population Franco that just don't have that kind of access.

So the challenge that we had with the business was it was spread out all over the place you didn't have full market concentration where it was easy to communicate that in the market. Where we've been able to communicate it, we did that in a couple of different markets that we started in the fourth quarter, we eventually had very good results.

The other thing that we think will make a big difference is we're expanding the partners that are providing services and we're in fairly advanced discussions frankly to be able to do that. That will increase the profitability of the transactions as well as increase the level and types of transactions that we can do so we basically see it as a way to expand self-service transactions and what we can do for customers, we think that it's something that we'll be able to get to profitability.

The timing of it frankly is really just because of the resources it took to complete Triple-DES and some other implementations like Safeway that frankly we weren't anticipating at the time that we were doing the acquisition of 7-Eleven portfolio including the Vcoms. So that just slowed our relocation efforts a bit and that has delayed the awareness creation in the specific markets that we're going in.

We basically see it as a chance to prove up these areas and the biggest one frankly, which I didn't even mention, is image deposit and that is something that there is a lot of competition going on in the banking industry. Bank of America has already installed some 2,500 image deposit ATM machines. They said they're going to do another 10,000. Chase I think announced in the fourth quarter they were installing around 900 of these machines with plans over the next two or three years to ultimately have 5,000 installed, Wells Fargo has installed about 1,200. It's an area that has a lot of banks very interested because it's a cost saver and it's a significant convenience improvement for the customer.

FFCC which has 1,100 credit unions and Co-op which is going to go live next week, which between the two of them they have around 30 million, customers of these credit unions will now be able to make deposits 24 hours a day whenever it's convenient for them at over 2,200 Vcom machines. We're thinking that as these get kicked off and we've got another large bank in the queue, those kinds of things will really make a difference in terms of the transactions that we can do and therefore the profitability that these machines will generate. A lot of things going on with it.

We think that once we get these things done it will be profitable it will be something that we can continue to grow, and if it continues to grow nicely then it's something that we could potentially expand. At least in the interim we learn which components really make sense and we don't have to deploy the large Vcom solution everywhere but we can deploy less expensive solutions from a CapEx perspective that would allow us to be able to take advantage of the division of self-service features.

So that's why we're continuing to focus on it. It's a relatively small team frankly that is managing it because it's already up and running, it's folks that came over from 7-Eleven and they're making very good progress on it. And frankly, even saying that we may delay profitability by a quarter or two is kind of our worst-case scenario. If any of the things we have in the works come together, it actually would improve from that. That's kind of our worst-case plan.

Franco Turrinelli – William Blair & Company

Any update on serving other international countries as a possibility.

Jack Antonini

We're continuing to work on that Franco. We mentioned during the first quarter call that it's an area of great focus for us. It's frankly our number one strategic priority and we're in fairly deep discussion in two or three markets right now. They take a little time just to work through the details frankly so it's hard to predict exactly when we'll conclude those but I think we're making good progress in our international expansion efforts and look forward to being able to make some announcements hopefully in the not too distant future about new areas that we're expanding.

Operator

Your next question comes from Christopher Mammone – Deutsche Bank Securities.

Christopher Mammone – Deutsche Bank Securities

Quickly on Vcom, the losses on Vcom this quarter were certainly less than we had expected and even though you're delaying the breakeven point by one or two quarters, is it safe to assume that the level of losses that we saw this quarter will moderate going forward? The losses will be smaller going forward?

J. Chris Brewster

I think the only thing that would be likely to make them any higher Chris would be marketing spend that we've got the cost side pretty well knocked down. We expect progress on it in terms of just the day to day keep the doors open operating costs. I think the revenue side should have an upward slope to it. The only thing that might make them worse would be some marketing spend.

But having said all that, my expectation would be that the quarterly losses on a go-forward basis certainly in the back half of the year would be significantly better than in the first quarter, in the second quarter probably pretty similar to what we saw in the first quarter. I don't have any reasons to think that they would go up significantly from what we saw in the first quarter.

Christopher Mammone - Deutsche Bank Securities

Could you confirm for me, if you strip out the revenues from 7-Eleven that has its own organic revenue growth, in this quarter would have been close to 12%. Is that right?

J. Chris Brewster

Frankly I'd probably want to do some calculating on that. I haven't calculated it in exactly that fashion. Intuitively it sounds close but I think I'd go and run the numbers rigorously before I saluted that.

Christopher Mammone – Deutsche Bank Securities

Do you have what that would have been in the fourth quarter? An organic growth number?

J. Chris Brewster

I'll have to run that for you Chris and get back to you.

Christopher Mammone – Deutsche Bank Securities

In the UK business, thanks for all the color on the armored car pursuits, is that though going to change the market profile of that business for the longer term?

J. Chris Brewster

I don't see why it would. As I said, to the extent that there's any good news in all of that it's the problem which is eminently fixable and once it gets fixed I would expect to see a pretty significant improvement in margins there against what we saw in the first quarter.

Christopher Mammone – Deutsche Bank Securities

Conducting the armored services in-house you think will be a longer-term benefit to margins?

J. Chris Brewster

That's right. What drove that project really was cost. That is in a particularly dense area like greater London. Not only did we think we could take advantage of that density and run a lower cost basic operation than an outside service provider was doing for us. We also thought we could drop our vault cash balances pretty significantly by going to that adjusted time methodology. I think that should be helpful to us on the cost and margin side.

Chris if I could come back to one of your earlier questions for just a second, you were asking a question around organic growth. We did do some work here in the last couple of days where we, and you'll see it in the 10-Q where we basically took the company and pro forma'd in the 7-Eleven for the first quarter of 2007 and then compared those revenue results to what we actually recorded in 2008.

You have to do a little bit of normalizing with that for example, 7-Eleven was amortizing off some up front placement fee revenues that they had in their numbers in the first quarter of ‘07 and you have to normalize that out. But on a fair minded basis our revenues were just under 10% year-over-year from the first quarter of last year to the first quarter this year, and since we're pro forming in 7-Eleven there's no acquisitions in that growth figure and I think it's logically regarded as pure organic growth.

Operator

Your next question comes from Cynthia Houlton – RBC Capital Markets.

Cynthia Houlton – RBC Capital Markets

Can you give us an update on your thoughts and what you're seeing in Mexico? And then also just your M&A pipeline to what you're seeing in that landscape or if there is anything that you're looking at and what would be most interesting?

Michael H. Clinard

I'd say Mexico is a two-pronged approach. We continue to deploy a lot of company-owned ATMs in major retailers mostly in Oxo, the largest chain convenience store in Latin America. We install anywhere from 50 to 75 new ATMs in Oxo per month. And the on the other side is the second-pronged approach which would be not selling ATMs to merchants but selling ATMs through distributors who have relationships on a local basis with the small mom and pop retailers in their markets.

We have a significant distributor or what we call dealer channel and they own the machine, they have the relationship with the merchant, and mostly those dealers are in the resort towns, the coastal area resort towns like Cabo, Acapulco, Cancun, and typically they have relationships with the high end resorts or hotels. We continue to grow, see great results, we're seeing transaction volumes pretty much as expected, and we expect that to continue throughout the year.

Cynthia Houlton – RBC Capital Markets

Could you, before we move on, just update on the contribution and profits or expectations from that business? I know it's still fairly small.

J. Chris Brewster

We had a chief profitability on the EBITDA line, it's not millions of dollars, it's more like 10s or 100s of thousands at the moment but it's growing nicely. Broadly, the characteristics of our P&L there, the typical surcharge in Mexico is a little bit under the United States levels, typically it's either 10 pesos or 15 pesos. The exchange rate is about 11 to 1 so it's around $1.00 or $1.50. Merchant fees, the proportion of that the merchant takes is typically lower. The percentage gross margins we think on a mature machine will not be much different.

Although the revenue will be lower, the percentage margins are probably a little higher than the states and the dollar margins about the same as the states once these machines achieve maturity. It's a little less revenue per machine than the US, similar profitability per machine, and a little bit higher margins once you reach maturity. Now I would also say that the margins are lower than US margins at the moment because we've got so many new machines down there that are still ramping. I think the next part of your question was M&A pipeline?

Cynthia Houlton – RBC Capital Markets

Just maybe what you're seeing and if anything is changing in terms of what you're looking at in terms of the international landscape or if activities increased or not given the economic environment?

Jack Antonini

Basically when you look at our M&A pipeline, because of our successful acquisition history, we pretty much see any deal that's available in the market but frankly our focus is really on international at this point. So our time is being spent really looking at two or three deals in a couple of international markets that we're finding to be pretty attractive. They are markets in which ATM penetration is relatively low, ATM transactions are growing very nicely, and we think there is a lot of growth potential in those markets. That's really where our focus is at this point in time and I would expect it to continue to be there for the foreseeable future.

Operator

Your next question comes from Robert P. Napoli – Piper Jaffray.

Robert P. Napoli – Piper Jaffray

The CapEx in the quarter was $26 million; your plan for the year is $48 to $50 million. Obviously you're half-way there in the first quarter. Is it typical that seasonally in the first quarter you would be installing more ATMs in the slowest quarter of the year? Is that the way we should think about it long term or was this an unusual CapEx quarter?

Jack Antonini

I'd say it's pretty unusual. It would not be typical for the fourth and first quarters to be the high watermark because typically some of the big multi-unit retailers really don't want to let us in their stores in the back half of the fourth quarter particularly because they're trying to get everything set for the holiday selling season and stuff like that.

I think it was pretty much a unique set of circumstances had in late ‘07 where we won the Safeway contract so we were installing machines as we were coming across year end; we were in the throes of polishing off the Triple-DES project which drove a certain amount of capital expenditure; and we were also active in other general growth over in the UK and down in Mexico.

In our planning we had anticipated that hitting in the fourth quarter, some of it slopped over into the first quarter of ‘08 and that's part of what made the CapEx number so high. As we said, current expectation is that we would be able to come in around the guidance we articulated for the full year which obviously implies that the first quarter is very much a high watermark on CapEx.

Robert P. Napoli – Piper Jaffray

Is there upward pressure Chris on the price per machine?

Jack Antonini

No. I'll turn to Mike on that one but in certain sectors it's probably more downward.

Michael H. Clinard

Yes. I'd say it was the last year and a half to two years in which we've been installing really the same ATM, the price has been relatively flat.

Jack Antonini

I'll tell you what we have seen Bob is a bit of a mix shift over in the UK in the sense that you may recall, to make the world in blacks and whites for the benefit of brevity, what we would typically do in the states and what they typically did in volume in the UK in the past is drop an ATM in the middle of a convenience store, that's a pretty inexpensive installation and the capital costs for that equipment are not that high.

Our mix in the UK has shifted a lot toward the installation of through-the-wall ATMs so basically the business end of the machine is facing all the foot traffic on the sidewalk so it's operative 24 hours a day and has tremendous traffic flow going by it. The good news is that those machines run much higher transaction volumes and revenues per machine but they're also somewhat more capital intensive. That mix shift in the UK in many ways is beneficial but has put some upward pressure on our CapEx figures.

Robert P. Napoli - Piper Jaffray

Taking the processing in-house and processing for 20,000 ATMs is a pretty good scale. You did sign a third party processing deal, are there opportunities for you and Jack as you are looking at additional countries, is it solely as an owner of ATMs or are you looking at additional processing deals. Can you compete with the likes of Euronet and third party processing of ATMs?

Michael H. Clinard

In terms of whether or not we can compete and what we can do in processing on an international basis, I think that the real key there frankly is depending upon the folks that we would processing for, what they're looking for. The real thing that we're doing on the processing side is the ability to customize the ability to present screens uniquely, be able to do customer preferences, things like that is really what drove us on the processing side.

It's also a way that we've been able to save money which wasn't really how we started that process but it has resulted in that. We think that depending upon what the goals are for the ATM operator that we would process for, we could potentially provide a service level that would go beyond what the typical large processors do today because they're focus frankly is pretty much a cookie cutter solution where they run large volumes at a low cost over their platform. We provide more of a customized and a high service solution if you will, so from that perspective that there may be some of those types of opportunities.

And the other part of your question that you're asking, from an international perspective are we able to look at deals that would either be more processing oriented or less capital intensive. We are actually seeing some of those opportunities out there from international perspectives. I think that if we do see both processing type opportunities or ways to be able to expand in the processing space potentially, although that is not a high priority for us but it is something that is more opportunistic but we do see international growth opportunities that would be less capital intensive that we'd be able to take advantage of as well.

Robert P. Napoli – Piper Jaffray

With regards to the transactions, I was surprised by the quarter-over-quarter growth in transactions this quarter. Versus your plan, and I know you reiterated all the lines of your guidance and sitting here today after looking at the first quarter, the hurdles to hit your guidance look a little bit lower to me at least than they did a quarter ago with a potential upside maybe, but the transactions, was that a surprise to you that they were up that much quarter-over-quarter in typically the slower first quarter?

J. Chris Brewster?

Are you speaking sequentially or year-over-year?

Robert P. Napoli – Piper Jaffray

Quarter-over-quarter sequentially, your transactions I think were up from 79 million to 83 million. Is that right? Or am I looking at it wrong? Yes, 80 million transactions in the fourth quarter and 83 million in the first quarter.

J. Chris Brewster

Part of what you're seeing at work there is just, I wouldn't call it a surprise. It was a little better than we had anticipated but probably for a couple of reasons. One, as Mike said, we anticipated losing about 1,000 machines very late in the fourth quarter and early in the first quarter due to the Triple-DES upgrade and the actual outcome was about half that, it was about 500 units. So that was an upside.

When you just think about it sequentially we were continuing to install a fair number of new machines late in the fourth quarter and in the first quarter which drove transaction counts. And I'd also say that just on a per machine basis we were a little better than we thought we would be. I don't want to paint this with too bright of colors but perhaps we planned for some effect of a possible recession that we didn't see in the actuals in a significant way.

Jack Antonini

When you look in the US for example, those 500 or so machines that did go away, they were low transaction, low margin machines and they were replaced by Safeway machines that are high transacting and good margin so we had that offset. So the number of machines in the US didn't change a lot but putting them into Safeway stores as opposed to low transacting C stores or other locations that frankly probably shouldn't have had an ATM in the first place, we saw an immediate pick up in transactions there.

The other side of that was the surcharge-free growth. We had a pretty substantial increase in participating financial institutions in our surcharge-free program, a lot of that kicked in late in the fourth quarter so as it rolled into the first quarter, we had a full impact or a full quarter if you will of surcharge-free participation, particularly the STAR and CU 24 agreement so that helped to increase the number of transactions as well. Those two things were also a factor in the sequential growth.

Robert P. Napoli – Piper Jaffray

Can you give a little more color on the revenue growth in surcharge-free and bank branding and the percentage of the revenues today that they would represent?

J. Chris Brewster

If you take bank branding and network branding which we call it, which is basically the Allpoint surcharge-free operation in the main, that in round numbers would be in the range of 7.5% of revenue at the moment.

Robert P. Napoli – Piper Jaffray

And the growth in that revenue stream?

J. Chris Brewster

It's about 30% per M.

Robert P. Napoli – Piper Jaffray

Do you have the number of ATMs that are bank branded?

J. Chris Brewster

It's about 9,500.

Jack Antonini

Yes. 9,500 that actually have the brand on them today. We've got a number more that are in the pipeline and process of being branded. If you take what's already under contract, it's over 10,000 but we're still in the process of getting the brands on the machines and things like that. So at the end of the first quarter actual branded machines were probably around 9,500 but they're continuing to grow nicely.

Robert P. Napoli – Piper Jaffray

One of the bank brands that you do have is with Washington Mutual. They're in the news a lot and in rumors from time-to-time of being acquired. When a bank that you have under contract is acquired, if it's acquired by a bank that has a big ATM network of their own, is that contract at risk or does it withstand or is there a change of control or anything like that in those agreements?

Jack Antonini

The way that they're written right now, and I can't really speak to any individual contract, they're all a little bit different, the vast majority of the branding contracts survive in the event of a merger acquisition or change of control. There is a re-price opportunity because upon that merger, if it results in a lot more customers being able to use the machines on a surcharge-free basis, we actually have the opportunity to re-price for that. But basically the way that the contracts are predominantly written, they don't go away on a change of control.

Operator

Your next question comes from Reginald L. Smith – J.P. Morgan Securities.

Reginald L. Smith – J.P. Morgan Securities

It sounds like you're getting closer to rolling out your foreign end marketing initiatives. How should we think about the events for revenue opportunity there? Is this something that you're going to market to your bank branding partners or is there an opportunity to maybe do some advertising for retailers that might be in the near vicinity of the ATM and how would the revenues work for that?

Michael H. Clinard

I would expect early on it's going to be aimed more towards our bank partners but we do see interest frankly from some of the retailers having interest in doing some additional advertising and we think that there is pretty good potential there. The revenue early on, because it's in such an early stage frankly will be relatively small while we work through this and try to see what the overall appetite is and how it will grow but we do have some pretty good hopes for it and we're just at that point where we're getting ready to start doing that. It's something that represents a nice opportunity for us, still a little early and hard to gauge at this point on how big it will be and what revenue it could be but it is something that is a new revenue opportunity for us.

Reginald L. Smith – J.P. Morgan Securities

Just trying to tighten up our Vcom model, it looks like the expenses were down quite a bit sequentially but it sounds you might have taken your foot off the gas in the marketing. Trying to model that out, how should we think about revenues for the full year and the eventual increase in expenses there? Is this a good run rate, the 1Q number? Or how should that ramp up on the expense side?

J. Chris Brewster

On the expense side, the only meaningful variable would be marketing expenses to the extent that we've started to put some significant advertising dollars behind the Vcom effort. The other operating expenses are pretty much fixed. They won't be highly variable with increasing transaction counts and should be pretty stable. I think broadly speaking you're seeing a run rate here on the expense side.

Reginald L. Smith – J.P. Morgan Securities

And revenue expectations for the year in Vcom?

J. Chris Brewster

Not double digits in terms of millions. It's still going to be a pretty small piece of our overall revenue. We're hoping that it pushes past 1% of revenue by some margin but I don't see it being 2% or 3% of revenue, not in 2008. But on a go-forward basis obviously we're putting a fair amount of effort into it and hope that it will be significant.

Reginald L. Smith – J.P. Morgan Securities

Just to be clear, it sounds like $2.3 million is the basic expenses and as you ramp up marketing you grow from there on the expense side?

J. Chris Brewster

That's probably a reasonable view of it. There may be a little in gains to be made on the expense side yet to come absent significant marketing spend.

Reginald L. Smith – J.P. Morgan Securities

Moving to the UK armored car initiative, I didn't realize you were doing that. When you first talked about it my first thought is I looked at the number of ATMs you have in the UK and then I looked at the number you have in the United States and I was concerned about the scale there but here in the densely populated, I can understand the rationale there but moving to the CapEx, what does this cost you to start up? Is a chunk of your CapEx going towards buying the armored cars or what are the expenses associated with building out this business?

J. Chris Brewster

Well, as I recall, I think to cover that greater London area it takes a grand total of three or four vehicles and the CapEx for the vehicles and the operating center and everything else from memory was around a million bucks. It wasn't a huge number. It's always been somewhat frustrating to us with the fact that the armored car providers tend to operate on rigid schedules which means that we have to be just very, very good forecasters to try keep our cash balances down in the machines and the reality is that with a given machine there's going to be variability. And we think if we can really crack the code on servicing those machines on a just-in-time basis, we could see some pretty significant reductions in our vault cash levels and vault cash rental expense.

Reginald L. Smith – J.P. Morgan Securities

Is it take away there that the armored car operators in the United States are just more efficient than the ones in the UK and you're going to try to take some of the strategies that are being used in the US and move them over to the UK?

J. Chris Brewster

Put it this way, the armored car guys in the states are generally operating on fixed schedules. On that basis they provide pretty good levels of service. Generally we'd like better but generally speaking we're not unhappy with the service levels we get from the armored providers in the states. This is an area we would walk pretty carefully and walk for a while before we choose to try and run and maybe to be more forthcoming, there's no current plan to get into the armored car business in the United States.

Jack Antonini

Another way of looking at it Reggie is, in the UK because the ATMs do a lot more transactions it's a much better opportunity for us to improve cash utilization by doing this little test if you will. I'm only talking about testing a few hundred sites with our in-house operation but our thesis is that we can improve cash utilization significantly, reduce our vault cash cost significantly, instead of having to predict exactly when these high volume machines are going to be done and how frequently we need to refill them with cash, we get a little bit more flexibility with this in-house model that we're going to try. We thought that was the right market in which to try it and we have our own service engineers there to be able to make sure that we don't have any issues and things and it's just a better place for us to be able to test this idea.

Reginald L. Smith – J.P. Morgan Securities

As far as the armored car expenses, are you exposed at all to rising fuel prices there or like fuel surcharges or anything like that? I believe UCA which is a similar type of company had an issue with that in the past. Just curious there.

Michael H. Clinard

Fuel charges or fuel expenses is obviously an expense to that business and it's been forecasted within the model. When we compare the expenses that we have in our own in-house armored model in the UK compared to what pay today with those third parties, there's a huge difference there.

Reginald L. Smith – J.P. Morgan Securities

No. I was actually more focused on the United States. You outsource the armored car stuff in the US, right?

Michael H. Clinard

Yes. We do pay fuel surcharges today in most of our agreements with our armored carriers.

Reginald L. Smith – J.P. Morgan Securities

But there's no spike there or any concern?

J. Chris Brewster

No. Is it fair to say Mike that the fuel charge component of the bill is not a significant component of the bill?

Michael H. Clinard

That's true and I would say we've been paying fuel surcharges and they can't increase it really any more than they've already charged us. So I'd say it's pretty fixed as far as the percentage that we pay.

Reginald L. Smith – J.P. Morgan Securities

Lastly, if I could get revenues by geographic region if you've got that in front of you?

J. Chris Brewster

Obviously that will be in the segment reporting in the 10-Q. We'll call these approximate figures at the moment. $100 million in the US, about $17.6 million in the UK, and Mexico's about $2.6 million.

We'd like to say we appreciate everybody's attendance and attention and look forward to speaking to you to talk about the second quarter results.

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