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Cardtronics Inc  (NASDAQ:CATM)
Q3 2018 Earnings Conference Call
Nov. 01, 2018, 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, ladies and gentlemen, and welcome to the Cardtronics Third Quarter 2018 Earnings Conference Call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. (Operator Instruction) And as a reminder, this conference is being recorded.

I would now like to introduce your host for today's conference, Mr. Brad Conrad, Executive Vice President and Treasurer. You may begin.

Brad Conrad -- Executive Vice President and Treasurer

Thank you. Good afternoon and welcome to Cardtronics Third Quarter 2018 Conference Call. On the call today we have Ed West, Chief Executive Officer and Gary Ferrera, Chief Financial Officer. We will start with prepared remarks and then take questions.

Before we begin, a cautionary statement regarding forward-looking information. During the course of this call, we will make certain forward-looking statements regarding future events, results or performance. Any forward-looking statements made on this call are subject to risks and uncertainties, including but not limited to events, market conditions and other risks and uncertainties that could cause actual results to differ materially. Please refer to our earnings release and our reports filed with the SEC, including our Form 10-K for the year ended December 31, 2017, which describe forward-looking statements and risk factors and other events that could impact future results and other factors that could impact our business.

The statements on this call are made as of the date of this call and are based on current information and may be outdated at the time of any replay of this call. We assume no obligation to update any forward-looking statements made today to reflect events that occur or circumstances that exist after the date on which they are made.

In addition, during the course of this call, we will reference certain non-GAAP financial performance measures. Our opinion regarding the usefulness of such measures, together with a reconciliation of such measures to the nearest GAAP measure is included in the earnings release issued this afternoon and available on our website. We've also posted supplemental investor materials regarding the third quarter results on our website.

With that I will turn the call over to Ed.

Edward H. West -- Chief Executive Officer

Thank you, Brad, and welcome everyone. My remarks today will focus on three key takeaways from the quarter. First, we are executing on the priorities that we outlined at the beginning of the year and the results are showing up in our operational and financial performance. Most notably in free cash flow generation. We have already generated more cash in the first nine months of this year versus all of 2017. Second, our transaction-driving initiatives in the US are building momentum and our unparalleled network is gaining strength. This is evidenced by returning to organic growth in our largest market, the US. And third, our dialog with financial institutions is becoming more strategic and as leading financial institutions increasingly see our platform as a vehicle to deliver customer growth, enhanced experience and business efficiency, Cardtronics is evolving into a solution provider.

I'll start my comments today with North America, where we had another good quarter. Excluding 7-Eleven, ATM operating revenues in North America were up 3% on a constant currency basis. This was a result of executing our priorities and pushing the segment to the organic growth this year from a negative rate of 2% in 2017, while at the same time improving margins when 7-Eleven is excluded from the results. Recent performance was driven by a combination of US same-store transaction growth and growth in network and bank branding revenues. Year-over-year growth in same-store withdraws in the US was approximately 6% for the quarter, driven by double-digit growth in surcharge free withdrawals, led by Allpoint. When normalizing for other program changes, the growth rate was approximately 4%.

This Allpoint-driven transaction growth is being fueled by continued growth from adding new financial institutions to the network, as well as increasing awareness and usage by the existing customer base. In total, same store surcharge free transaction growth at our core retailers accounted for over 3 million incremental transactions during the quarter. Our network is delivering millions of consumers, which makes for happier retailers. We saw growth across all of our key retail segments, including pharmacy, grocery and convenience. Again, this is a testament to the power of our network and deepening relationships with financial institutions and retailers.

On that note, I'd like to give you an example of one of the drivers of the transaction growth and deepening key customer relationships. We recently expanded our long-term partnership with Capital One during the quarter to include three additional markets in California. Beginning in 2015, this relationship now includes more than 300 Capital One branded and deposit-taking locations across the country at one of our top retail partners, Target. This is in addition to our long-standing Allpoint relationship where we've seen significant transaction growth with volumes rising at every major retailer within Allpoint in 2018. Capital One is a great partner and an example of a major bank that values our network of locations to provide ATM and deposit solutions to their customers.

Our leading surcharge free network at convenient ATMs continues to appeal to financial Institutions of all sizes. We added 26 new participating financial institutions to Allpoint during the quarter, enabling an additional 400,000 cardholders with surcharge free ATM access, Allpoint is also experiencing expanded interest from the growth of digital-only banks and platforms, looking for nationwide cash access to complement their digital customer experience. We recently signed an agreement with MoneyLion, a growing digital consumer platform and we expect to see additional new business and transactions in this segment going forward. Several of the markets largest direct retail banks and digital financial platforms, like Capital One 360, USAA, Ally and Finn By Chase already leverage the power of all Allpoint's nationwide surcharge free access.

We also continue to see demand in our core branding product. Earlier in the quarter, we initiated a branding relationship with Bank of the West, one of the largest banks in the nation, branding over 140 ATMs in select Walgreens locations in California and Colorado. We also began a branding relationship with the First National Bank of Omaha, a leading Midwest institution and a bank with the largest deposit base in Nebraska. First National Bank of Omaha is branding 146 ATMs in retail stores, such as Costco, CVS, Target and Walgreens to name a few. ]

Our managed services solutions continue to build as FIs look to focus their resources on their core priorities. With our strong track record of managing both cash dispense and deposit ATMs for some of the largest FIs in North America, there is a growing interest and activity in the managed services space and we now have over 2,500 managed services ATMs under contract with FIs in North America, demonstrating the trust that they have in our platform and our service delivery capabilities. And that number is over 3,600 when you include our managed services ATMs in Australia with financial institutions, such as HSBC.

Now let me spend a few minutes on our Europe and Africa segment. Revenues in the segment were down 4% this past quarter. This reduction was in line with our expectations and was driven by the previously mentioned interchange reduction in ATM removals in the United Kingdom. We also experienced a same-store transaction decline of 4% in the UK for the quarter, which was actually a little better than the market. If you normalize for the interchange reduction that began in July in the ATMs we removed, our revenues in the Europe and Africa segment would have been about flat for the quarter. Obviously, the UK is a headwind for us now and next year, given the changes initiated by LINK, but we will muscle through this over time with operational and product enhancements, just as we have in the US. We've seen positive results in some of our pilots where we switched ATMs from free to use to pay to use. We are currently evaluating shifting up to 4,000 additional ATMs to pay to use next year, after the next currently scheduled interchange rate reduction takes effect. We will continue to monitor the profitability of all ATMs with an eye toward moving locations, modifying pricing strategies, lowering costs and maximizing return on capital.

Outside of the UK, we continue to see significant growth in our Germany, Spain, and South Africa businesses. Each of these businesses once grew at double digit rates this past quarter. In Germany, we are in the process rolling out ATMs at Total locations that we talked about last quarter, and that new relationship, along with other growth opportunities will continue growth in this market for the next several quarters. We are also seeing increased interest with banks in this market to potentially leverage our network to provide branding and surcharge free services to their customers. Spain continues to grow nicely, primarily at tourist locations. Our team there is really performing well and the new sites we're adding are contributing quickly to profits.

Our business in South Africa continues to grow rapidly with new premier retailers and financial institution partners. During the quarter, we added a new relationship with Massmart, a division of Walmart in South Africa's second largest retailer where we are installing our machines in 381 of their stores. We also continue to grow with ShopRite, Africa's largest food retailer, where we have already installed 212 new ATMs and have plans to add another 150 throughout 2019. On the financial institution side, we commenced a relationship with Old Mutual, one of Africa's leading financial services firms. As a result of initial successful pilot, we're now installing machines in all Old Mutual branches. We can see a fairly long runway of double-digit growth in this market.

In summary, we are excited about the many new commercial wins at our Europe and Africa growth markets and expect to have more announcements in the coming periods.

Regarding our Australia and New Zealand markets, revenues were down about 10% for the quarter on a constant currency basis, which is fairly consistent with the first six months results. Not dissimilar to the UK, we are muscling through the headwinds, but believe our large network, scale and operational capabilities will prove to be a strong asset for this country as banks rethink their physical footprints. Our data suggests over 1,000 ATMs have been removed over the past year and over time we should be able to capture transaction share and build business via our leading presence and future product enhancements.

In summary, we had a solid quarter operationally, marked by growth in free cash flow and continued organic growth in North America. Our unparalleled network has had a history of driving store traffic at leading retailers and we are now only beginning to capture the opportunity as a solution provider for financial institutions. As we sharpen our value proposition and sales effectiveness, FIs are beginning to recognize the significance of our network as a means to grow customers, improve engagement and drive efficiencies. Our confidence is growing and we are looking forward to sharing those with you and providing an update on our products and longer-term business plans at Investor Day late in the first quarter of next year.

And Gary, over to you.

Gary W. Ferrera -- Chief Financial Officer

Thanks, Ed and welcome everyone. Before I recap the third-quarter results, I'd like to highlight a couple of factors that are impacting comparability to the prior year in the current quarter. First, while the 7-Eleven deconversion began in Q3 of 2017, the majority of the 8,000 7-Eleven ATMs continued to operate on our platform during the third quarter of 2017. This is not new news, but just a reminder when looking at the results on an as reported basis.

Also, as previously discussed in July 1 of this year, the first scheduled 5% reduction to the LINK interchange rate in the UK became effective. This rate change adversely impacted adjusted EBITDA in the third quarter by approximately $3 million and is particularly significant when looking at the year-over-year results in our Europe and Africa segment. As a reminder, there will be a similar EBITDA headwind of approximately $3 million in Q4. The second 5% reduction is expected to take effect on January 1, and when combined with the recent reduction, we would expect it to be a year-over-year headwind in 2019 of approximately $15 million to $17 million. This will obviously be more heavily weighted to the first half of the year, as the first rate reduction became effective on July 1st of 2018.

Now with that background, let me recap the quarter. Starting with the top line, consolidated revenue was $340.2 million for the quarter, down 15% as reported. Adjusting for the impact of 7-Eleven and on a constant currency basis, total revenue was down 1%. Growth in our North America ATM operating revenues excluding 7-Eleven was primarily offset by declines in the UK and Australia.

Moving down the income statement, our consolidated adjusted gross margin for the quarter declined 160 basis points to 33.7% compared to 35.3% in Q3, 2017. The combination of the loss of a high margin 7-Eleven account in the US and the UK LINK interchange rate reduction drove the year-over-year decline. And we were able to partially offset this decline through operating efficiencies. We estimate that the combined impact of these two factors accounted for effectively all of the year-over-year margin decrease.

SG&A expenses were down approximately 9% for the quarter. We continue to optimize discretionary spending, but remain committed to investing in new product development. Additionally, we continue to invest in our infrastructure, and in particular, areas such as information security to ensure we continually maintain top tier security, which of course is fundamental for our business and growth strategy.

Adjusted EBITDA for the third quarter was $77.4 million, down 23% from Q3 2017, and of course, impacted by 7-Eleven and the LINK interchange reduction in the UK. Excluding the impact of 7-Eleven, we estimate that adjusted EBITDA would have been up in the quarter even with the LINK interchange reduction.

Moving to capital expenditures. Third quarter 2018 CapEx was $26.7 million and primarily consisted of new ATM placements, ERP investment, office re locations as part of our office footprint rationalization and security upgrades. Our total spend for the first nine months of the year was $73.4 million, down from $111.4 million in the same period last year. We continue to estimate that we will end the year with approximately $115 million in total CapEx.

Adjusted free cash flow for the quarter was $47.8 million, up from $38.1 million in Q3 2017. Adjusted free cash flow of $85.5 million for the nine months ended September 30, 2018, exceeds our cash flow of $52.9 million for the same period last year. More importantly, the cash flow for the first nine months of 2018 already exceeds the amount generated for all of 2017.

Moving to the balance sheet, our net leverage ratio for the quarter was 2.7 times, a slight uptick from 2.6 times in Q2. This leverage ratio calculation uses the same definition as the total net leverage ratio covenant in our revolving credit facility. The slight uptick in total net leverage was expected due to the 7-Eleven deconversion. However, this was mostly offset by a reduction in net debt outstanding, as we paid down $46 million on our revolving credit facility this quarter. Outstanding borrowings on our $400 million revolving credit facility at the end of September now total just $31 million. We continue to have healthy headroom on all of our covenants in our outstanding debt agreements. Early next year in conjunction with our Investor Day, we plan to give additional guidance on capital allocation priorities.

Our GAAP tax rate for the quarter was 47% on pre-tax GAAP net income of $16.6 million. This rate continues to be negatively impacted by certain elements of recent US tax reform, particularly interest deduction limitations, which have a disproportionate impact on the rate at lower income levels. And we are currently evaluating opportunities to minimize this impact. We continue to expect a longer term GAAP tax rate in the mid-20s range, which is what our current non-GAAP tax rate reflects.

One other matter that we had mentioned previously was the upgrade of our ERP system. I am pleased to announce that we went live with the new platform in Q3 with our UK operation and globally for human resources. We're on track with where we expected to be at this time and are planning to go live with most of our North American operations in 2019.

Now let me turn to our outlook for the year. The third quarter results were again solid and better than we anticipated. Our US operations, in particular, were stronger than expected on both the top and bottom line. Additionally, Australia continued to perform a little better than our previous expectations and SG&A spend is also slightly lower than anticipated. As a result, we are raising our full year outlook and narrowing our ranges. We now expect the following: Revenues of $1.31 billion to $1.34 billion, up $30 million at the bottom end and up $20 million at the top end of the range. Adjusted EBITDA in a range of $283 million to $290 million, up $13 million at the bottom end and $10 million at the top end of the range. And adjusted EPS now at a range of $2 to $2.05.

This guidance implies that the fourth quarter would show the weakest quarterly comparison relative to the prior year. So we thought we should provide greater detail, but first, to put things into perspective, I will discuss the seasonality of our business.

Typically, we expect our revenues to be strongest in Q2 and Q3 as consumers in our largest markets are out transacting in greater numbers during the summer months. And Q4 results should be -- should normally be a little higher than Q1 due to the holiday shopping season. However, as we mentioned on previous calls, adjusted EBITDA of $68.6 million in Q1 of 2018 was favorably impacted by approximately $6 million due to the combination of favorable property tax treatment and a currency tailwind. While Q1 had these favorable tailwinds, Q4 2018 is expected to have a similarly sized unfavorable impact due to the approximately $3 million hit from the 5% reduction at LINK interchange fees, as well as what has now become a currency headwind, which we are forecasting at approximately $2 million.

Additionally, there are several items expected to impact Q4 that will unfavorably impact EBITDA versus the prior year. These items cut across several P&L lines in both cost of sales and SG&A. The largest of these impacts relates to the timing of insurance recoveries from natural disasters in Q4 of last year, along with overall risk -- I mean overall insurance and risk management changes. We are also expecting higher year-over-year maintenance costs due to vendor credits received in Q4 of 2017, as well as slightly higher SG&A spending related to our growth initiatives.

One final note regarding interest rates. While rates are continuing to rise across most of our markets, we don't see that being a material headwind for us in Q4 or into 2019, primarily due to hedges that we have in place along with contractual rights and other operational levers.

With that let me turn it back over to Ed for some final comments.

Edward H. West -- Chief Executive Officer

Thanks, Gary. Before turning the call over to the operator for questions, I would like to take a minute to thank Dennis Lynch for his decade of service on our Board of Directors, serving as Chairman for the last eight years. He has done an absolutely exemplary job overseeing 300-plus-percent growth and was instrumental in shepherding the CEO transition this past year. I'm also pleased to have the honor to work with Mark Rossi in his new role as Chairman of the Board. Mark has been a terrific Board Member for the last eight years and brings a strong investor mindset to the Chairman role with this background of both founding and building a private equity firm and previously serving as President of Prudential Equity Investors.

Operator, I would like to turn it over to you to open up for Q&A session.

Questions and Answers:

Operator

(Operator Instructions) Our first question comes from the line of Tim Willi of Wells Fargo. Your line is open.

Tim Willi -- Wells Fargo -- Analyst

Hi, thanks and good afternoon. A couple of questions. Number one, just sort of going back to the managed services comments, you may at least have 2,500 banks in the US who are now I guess working with you -- 2,500 ATMs across banks. I am curious when you think about your sales and marketing resources and go-to-market with that effort, could you just sort of talk about where you're at or where you think you can still go in terms of the manpower and the energy behind growing that aspect of the business?

Edward H. West -- Chief Executive Officer

Sure, thanks and good afternoon. And the managed services is yet one solution that we have to offer and as I mentioned in my comments previously, I think we have a very unique proposition to offer in our conversations on comprehensive solutions for financial institutions. Frankly, whether it's growing our customer base, getting more engagement with their customers, but also driving efficiencies and managed services could be an efficiency opportunity, as you know. On the managed services, we have about 2,500 in the US, a long history of that we've been adding more earlier this year. I would say that particular product is probably at the earlier stage of opportunity as banks continue to kind of step back and of all sizes step back, rethinking their priority on where they want to put their capital and frankly investments in other digital opportunities and letting someone like ourselves, who is the largest ATM operator in the world, and the scale and efficiency we can bring forth and operating knowledge to deliver result there. But I would say, for us, I think where there is even more value creation opportunity is really that shared infrastructure that we have and bringing forth solutions -- surcharge free solutions like Allpoint, surcharge free solutions in branding and going to key retailers where America shops day in day out already and leveraging that infrastructure, both for the benefits for the financial institutions and their customers, I think is yet another combined opportunity.

Tim Willi -- Wells Fargo -- Analyst

So would you say in terms of like actually getting that message out to the market, I guess I'm curious when you think about whether it's awareness of Allpoint to consumers, whether it's you around sort of feet on the street sales people that are going out and calling on banks or calling on these partners, is that an area where, as you think about your spending associated with growth initiatives that the resources allocated to this, these types of products and services, you would expect to very deliberately grow that headcount, that sales force whatever, 20%, 30%, 40%, or do you feel like you have the right sort of resources behind it and now it's just making them more productive and letting the message begin to resonate a lot more into the end market?

Edward H. West -- Chief Executive Officer

Based on the conversations we're having, we will be investing more as we seize the opportunity and we believe we're at the early stages of that as we both refine our value proposition, the sales force effectiveness, the product, that solution. We're just having much more, as I mentioned, strategic conversations with financial institutions. So, we see more of an investment there, combined with more investment and frankly, we're accelerating some of that this quarter, based on some of the dialog in various products and we really look forward to showcasing some of that early next year.

Tim Willi -- Wells Fargo -- Analyst

Great. And then my second question was on international. Again you referenced Spain, Germany, South Africa as markets where you're seeing very nice progress, growth et cetera. Is anything -- are there any new geographies whereas you've sort of gotten more success in those three and et cetera that are on the drawing board? I know you pulled back from some markets where the returns on capital, etcetera, just didn't look like they were going to quite hit your hurdles, but are there other markets where they share the same kind of characteristics of a Spain, a South Africa or a Germany where you feel pretty confident about taking the business model into some new geographies?

Edward H. West -- Chief Executive Officer

There are, but our absolute focus right now is in the markets where we are investing in the product, our capabilities, skills and driving resources there and improving our overall results and cash flow. I think it just really ties back to, and it's in the supplement that we put out there, there is priorities that we outlined for the Company this year and we are front and center focused on that and executing on those priorities and delivering the results.

Tim Willi -- Wells Fargo -- Analyst

Great. That's all I had. Thanks so much.

Edward H. West -- Chief Executive Officer

All right, thank you.

Operator

Thank you. And our next question comes from the line of Andrew Jeffrey of SunTrust. Your line is open.

Andrew Jeffrey -- SunTrust -- Analyst

Hey guys, thanks for taking the question. Ed, when I look at your US performance in particular, it was considerably stronger than what I was anticipating and I know you ran through some of the drivers. I wonder if you could just maybe unpack it a little more for us, Allpoint, in all of its sort of monetization forms, same-store sales, whether there was maybe some higher contribution from branding and whether there is a cyclical aspect to any of this too. I'm just trying to understand the variance and obviously the comparability to a year ago kind of makes the numbers look wanting. So, any color or help there would be great.

Edward H. West -- Chief Executive Officer

Sure. And thanks, Andrew, and good afternoon. Your point is right, it exceeded our expectations and I think also, which kind of fuels some of our enthusiasm about the business and what we're seeing. It was across the board there in the North America segment, where Allpoint, the growth -- we have double-digit surcharge free growth, largely driven, the largest component on that was growth in Allpoint. And I think one of the points, as I mentioned, is really important to note that I mentioned in my previous comments, is that growth is not just from adding new financial institutions to Allpoint, but also better engagement with our current customers of an awareness and transaction driving, working with both the retailers and the financial institutions on a very close basis and making sure there is awareness of what they have, what's in their wallet, their ability to use that, whether they're walking into a retailer, maybe out at the gas pump see signage or on a digital platform from the bank, giving awareness to their customers. So that's been part of the growth as well. And we feel like we're at the early stages of that. But the growth was across the platform, all retailers benefited from it.

There was growth in the bank branding. As I noted, we had already announced Bank of the West, but then also having First National Bank of Omaha come on and others will lead to more growth going forward. So that line item was up. But we also saw a surcharge, surcharge continue to be a little bit better than we anticipated. It was down slightly, but still better than we anticipated. Again, I believe that's from a really strong economy, benefiting all socioeconomic levels in the country and we've clearly seen the benefit of that across our retailers. So Andrew, it's across the board on most fronts. And then also ongoing kind of cost management in the business.

Andrew Jeffrey -- SunTrust -- Analyst

Okay, I appreciate the color on that. And then as a follow-up, I don't think DCC in Europe has really been a focus of the Company and with Visa's announcement now that it will introduce DCC next year, is that something you're thinking about and can that be a driver for Cardtronics?

Edward H. West -- Chief Executive Officer

Yes. So yes, we are thinking about it and we believe that will be a positive with the changes with Visa. But I think it's -- well, first of all, as we've talked about before and in our Q, DCC overall is about 2%, represents right around 2% of our revenues. So your point is not that significant. And you also need to look at our platform. We are mostly domestic in the markets that we serve and most of the customers are domestic versus high concentration of tourism. But that doesn't mean that we don't have that opportunity. So I think it will be a benefit, it is a focus and I think we'll see some benefit from that. I think it's also important that -- to note that there are -- Visa did put forth some changes in both interchange, as well as acquirer fees that mitigates some of those potential benefits, but net-net, it will be a positive. We'll talk more about that next year.

Andrew Jeffrey -- SunTrust -- Analyst

Terrific, thank you.

Edward H. West -- Chief Executive Officer

Thank you.

Operator

Thank you. Our next question is from the line of Kartik Mehta of Northcoast Research. Your line is open.

Kartik Mehta -- Northcoast Research -- Analyst

Good evening. I know one of the focus for Cardtronics has been outsourcing. And I'm wondering if -- what size of financial institutions you're currently focused on in terms of outsourcing opportunities?

Edward H. West -- Chief Executive Officer

Good afternoon, Kartik. So on the outsourcing, I think you're referring specifically to the managed services solution. That's where we talked about. I would say, obviously there's benefit. And as I've mentioned in my discussion earlier, we're -- over 3,600 ATMs are currently we're providing services to, which range from some of the largest banks in the world to some of the smallest. So it's across the full spectrum. We're -- probably banks with a -- just a handful of locations, probably less of a focus, just due to pure scale and opportunity, but it's across the spectrum. And we really need to focus on where there is a willingness and ready to make a decision and see the benefits of doing that. So that's just really from a sales team, and just making sure we're prioritizing where there's the openness and willingness and more of a burning need.

Kartik Mehta -- Northcoast Research -- Analyst

So is Windows 10 a catalyst in this or have you seen an increase in demand, or just what financial institutions want to do because of that, or is it some other driver?

Edward H. West -- Chief Executive Officer

I think that's one. I mean there's a lot of questions around that on Windows 10 and people using that, because they know that yet again they've got to make another investment, another investment in software, another upgrade and Windows 10 is just another brick on the load as a financial institution may be considering it. So in that opportunity, yes. We take that on, handle that and we're a solution to that pending issue and obviously the manufacturers put that out there, and making sure that's front and center in folks face.

Kartik Mehta -- Northcoast Research -- Analyst

And then just one last question Ed. From what I understand, I think LINK approved a small interchange increase, because of what's happening to interest rates, I believe will go into effect as of November 1. What's the benefit of that for you in terms of offsetting some of the decrease that they've put forth?

Edward H. West -- Chief Executive Officer

Gary, do you want to --

Gary W. Ferrera -- Chief Financial Officer

Yes, Kartik, it's not a material number, I did see your report mentioning that, but we're not talking large numbers here at this time.

Kartik Mehta -- Northcoast Research -- Analyst

Thank you very much, appreciate it.

Edward H. West -- Chief Executive Officer

Thank you Kartik.

Operator

Thank you. Our next question is from the line of Robert Napoli of William Blair. Your line is open.

Robert Napoli -- William Blair -- Analyst

Thank you. Good afternoon Ed, Gary, Brad, team. Nice job on the quarter. Good execution and nice to see. Can you -- what is the mix -- can you remind me what the mix is between, when you look at the bank branding and surcharge free, the Allpoint network of that revenue stream, now much -- can you give an idea of how much is which?

Edward H. West -- Chief Executive Officer

We haven't talked specifically about the breakdown in that. But they're both in there and growing and that's why you see that the revenue growth in that category kind of standing out a little bit. We're just seeing nice interest and attraction in those two areas. And obviously, some of the transactions and the benefit also show up in interchange as well. It's not all in that category. Some interchange, because obviously from an Allpoint transaction.

Gary W. Ferrera -- Chief Financial Officer

That's why we don't kind of break it out easily in a page, it's spread across a couple of different line items.

Robert Napoli -- William Blair -- Analyst

Okay, thank you. And then just on the managed services part of your business, how -- do you need to -- in order to become much larger in that business, is there significant investment that you need to make in your current technology or what do you need to upgrade as you look to become more of managed services for banks and other financial institutions?

Edward H. West -- Chief Executive Officer

Yes, we've been investing this past year on that from a financial institution standpoint. I think we will continue on that path. I don't -- there's really nothing, there is like some large bulk item, is really just growing with scale and having the capability, the locations, time zones, awareness, obviously, it's 24/7, direct awareness and responsiveness, information security. We've actually been investing a fair amount there in this past year, continuing to have that where banks review that. Obviously, we'll go through lots of audits with financial institutions all over the world, which is a positive. So I just think -- just be ongoing investments that scale with the business and over time that will hopefully continue to add scale to our operation.

Robert Napoli -- William Blair -- Analyst

And then maybe last question. I know you have an Investor Day coming up and earnings, but just any type of thoughts around long-term outlook or what the right -- what the growth rate should be of this Company and should we expect to see more -- a lot more growth coming from non-asset intensive parts of the business, less ATMs, physical owned ATMs added as a part of that outlook?

Edward H. West -- Chief Executive Officer

Yeah, it's a great question. Right now, obviously, we're focused on executing and really look forward to talking more about that at Investor Day and recognize wanting to have some long-term targets, what the economic model looks like, the product mix and how that looks different going forward. And so we'll go into some detail at that discussion, but it would be premature to kind of go into that today.

Robert Napoli -- William Blair -- Analyst

Thanks, Ed.

Edward H. West -- Chief Executive Officer

Thank you.

Operator

(Operator Instructions) Our next question comes from the line of the Reggie Smith of JPMorgan. Your line is open.

Reggie Smith -- JPMorgan -- Analyst

Hey. Good evening guys.

Edward H. West -- Chief Executive Officer

Good evening, Reggie.

Reggie Smith -- JPMorgan -- Analyst

Congrats on the quarter.

Edward H. West -- Chief Executive Officer

Thank you.

Reggie Smith -- JPMorgan -- Analyst

Yes. I appreciate the color on the managed services numbers. I guess my question kind of reconciles that 3,000 ATM figures you provided for managed services with the -- call it 138,000 ATMs shown in the supplement and just trying to figure out what the delta -- that's a US figure, North America figure. What's the delta there, are those just processing relationships?

Edward H. West -- Chief Executive Officer

You nailed it, so they're all in there. The lion's share of that is the processing only, where we process for whether it's a financial institution, retailers, lots of other institutions, for many dealers around -- predominantly out of the US.

Reggie Smith -- JPMorgan -- Analyst

Got it. So thinking about -- I look at that number and I (inaudible) so small. Kind of what's -- what would be the issue, or is it is something that you're targeting to literally do more managed services with those 135,000 ATMs which you are already processing, or like is that the more immediate opportunity, or is the managed piece more on the big bank opportunity? I had to think about that.

Edward H. West -- Chief Executive Officer

Yes, the managed services opportunity, the comprehensive solution, I think that you're thinking about in terms of outsourcing versus what the Company has historically called in that category, which is the processing, which is for independents, for dealers, through CDS, I would say on the growth area around your -- where you're thinking is around managed services with financial institutions. And so we would look at as a comprehensive solution for them to -- where we can handle or manage their off-premise, their on-premise, or complement that also with branding presence, with surcharge free and then managed services just may be one solution for them as they want to probably keep some of the ATMs directly versus in addition to or in addition, participating in our shared infrastructure.

Reggie Smith -- JPMorgan -- Analyst

Got it. So the 3,000 that you talked about kind of --

Edward H. West -- Chief Executive Officer

Reggie, you still there?

Reggie Smith -- JPMorgan -- Analyst

Yeah. Can you hear me?

Edward H. West -- Chief Executive Officer

There you are, yes.

Reggie Smith -- JPMorgan -- Analyst

Yeah, sorry. And so I guess the 3,000 ATMs that you have tonight (ph) look more like -- what you just talked about with the banks, where it's more of an outsourced type?

Edward H. West -- Chief Executive Officer

Yes, it's accurate, for banks and credit unions on either on-premise, off-premise location, or even an ATM that they (technical difficulty) a core customer of theirs that will operate for them. So -- but it's predominantly that bank on either on-premise or off-premise.

Reggie Smith -- JPMorgan -- Analyst

Understood. Okay, thank you. And then I guess a follow-up question, just kind of looking at -- you guys provide as best you can, like a clean revenue growth number, organic FX-neutral and it's been kind of bumping around in the low single digit range. I know obviously you are not ready to give '19 guidance or long-term outlook. But, like, what are the things we should be thinking about? I mean is that a fair run rate you think, a jumping-off point, because I guess we're going to start to annualize 7-Eleven fully pretty soon. It's just -- is that a fair run rate to kind of think about the business?

Gary W. Ferrera -- Chief Financial Officer

Yeah, Reggie. It's Gary. As Ed said, we've got an Investor Day coming up in the spring. And we've been pretty clear about that we would give this year's guidance and focus on and getting things straight here and operational and we'll give more guidance in the future. As you can see, it's been doing well the last couple of quarters, but it has bounced around a little bit and I think it will take us a little bit long before we're comfortable putting in the long-term guidance on that.

Reggie Smith -- JPMorgan -- Analyst

That makes sense. Okay. And then if i get one last in. Thinking about gross margins, obviously you guys are trying to (inaudible) your managed services, and 7-Eleven rolled off with higher gross margins. What can you do at this point, or should we think about the mix gradually raising that gross margin profile, kind of where you think that number can go or settle?

Gary W. Ferrera -- Chief Financial Officer

Well, remember, we've got a couple of headwinds that would be impacting gross margin or EBITDA margin. We've got the situation with LINK, which as I mentioned, this year is about $3 million a quarter, and you're going to have -- had two quarters in this year, it will rise again in January 1. So there's going to be another 5% increase there. So that's another -- when you hit Q1 of next year, that's going to be $6 million year-over-year impact. And in Q2 $6 million, and then obviously you're rolling into what happened in the previous year. So that is a big headwind next year. And we've had some tailwinds this year, obviously with FX and previously mentioned in the first half of the year, about $6 million, just do with some property tax reversal. So going into the first half of next year, there is a couple of headwinds. But on the flip side, once we get more comfortable with what the growth rates are that we can talk to you about, that's what we'll talk about when we get to the Analyst Day.

Reggie Smith -- JPMorgan -- Analyst

Perfect, thank you. Congrats on the quarter guys.

Edward H. West -- Chief Executive Officer

Thank you very much, Reggie.

Operator

Thank you. And at this time there are no further questions, I'd like to turn the conference back over to Mr. Edward, CEO for closing remarks.

Edward H. West -- Chief Executive Officer

Great. Well, thank you all very much. We appreciate your support and look forward to meeting with you after the 1st of the year. And again, one last time, I like to thank Dennis Lynch for his exemplary service to both the Company, the Board of Directors and the shareholders of Cardtronics. Thank you very much and have a great day.

Operator

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program. You may now disconnect. Everyone have a great day.

Duration: 47 minutes

Call participants:

Brad Conrad -- Executive Vice President and Treasurer

Edward H. West -- Chief Executive Officer

Gary W. Ferrera -- Chief Financial Officer

Tim Willi -- Wells Fargo -- Analyst

Andrew Jeffrey -- SunTrust -- Analyst

Kartik Mehta -- Northcoast Research -- Analyst

Robert Napoli -- William Blair -- Analyst

Reggie Smith -- JPMorgan -- Analyst

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