NCR Voyix Corporation (VYX) Earnings Call Transcript & Summary

Good day, and welcome to the NCR Investor Update Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Michael Nelson, Vice President of Investor Relations. Please go ahead, sir.

Good afternoon, and thank you for joining our COVID-19 Business Update Call. Joining me on the call today are Mike Hayford, President and CEO; Owen Sullivan, COO; and Andre Fernandez, CFO. We posted a presentation on our Investor Relations website after the market closed today, which we will discuss during this call. Before we get started, let me remind you that our presentation and discussions will include forward-looking statements. These statements reflect our current expectations and beliefs that are subject to risks and uncertainties that could cause actual results to differ materially from those expectations. These risks and uncertainties are described in our presentation and our periodic filings with the SEC, including our annual report. A replay of this call will be available later today on our website, ncr.com. With that, I would now like to turn the call over to Mike.

Thanks, Michael, and thank you, everyone, for joining us today for an update on our business and the actions we are taking regarding the coronavirus pandemic. I'll begin my comments on Slide 3 with an overview of our current operating climate at NCR. First, an update on our global fulfillment center near Nashville, Tennessee, where a tornado hit our site on March 3. At that time, we activated a recovery plan, and we're back up and running in about a week. We shifted shipments out of other facilities. And in roughly 2 weeks, we stood up another warehouse in the Nashville area, and shipments are now back to normal capacity. We believe we will have caught up on our backlog by mid-April. Now turning to the coronavirus. At NCR, we've had a task force in place since January. Originally, it was put in place to focus on China and our supply chain. We then expanded it to include business continuity around the world. The supply chain has held up without any meaningful disruptions during the first quarter. In January, we started through scenario planning on the potential impacts to our business from the coronavirus. We also locked down the manufacturing plants and our call centers and would not allow any outside visitors. We started to do thermal screening of employees to make sure no one had a fever at these sites. We started to create and split shifts. We have taken a lot of precautions that allowed us to preserve continuity in our operations. We went to work from home literally around the world with roughly 20,000 people working from their homes, and it's gone quite well. We have been in close contact with government agencies, and most of NCR businesses -- business offering are designated as essential business in jurisdictions around the world. The team has done an excellent job of getting ahead of this and responding to the coronavirus. Today, we will go through our lines of business as there's probably not a full understanding of what type of businesses we support in each segment. We want to provide background on the different pieces of our business and the size of each relevant component. We will then also provide our assessment of the potential impact from the coronavirus on each component. Owen will start with an overview and the expected impact to each of our business segments, and he'll be followed by Andre. Owen?

Great. Thanks, Mike. Let's begin with our banking segment on Slide 4. Banking revenue represents over half of NCR's total revenue. It's primarily focused on self-service and retail banking, assuring availability of self-service banking is a priority across the globe. This includes installing and maintaining ATMs as well as assuring availability of our digital banking platform. All of these are critical functions for our bank customers and are considered as part of essential infrastructure. Our banking segment is driven by 4 revenue streams. ATM hardware represents 36% of total banking revenue. First quarter ATM production and delivery were strong. We also saw a strong performance against our order plan for the first quarter as we continue to receive ATM orders from around the globe, but we do expect the coronavirus to impact revenue in the near term, most of that is due to logistics and timing. For example, getting equipment across borders throughout Europe will be challenging. However, we believe that given the essential nature of ATM network within the banking environment, ATMs will become an even more critical piece of the bank's self-service channel as we head into the future. ATM break services represents 37% of banking revenue. We have seen almost no impact on this revenue stream thus far. Our field engineers are working in every market that we operate into today. We are successfully working with local governments to make sure that our people and services are considered part of the essential infrastructure. As we moved our support center resources to work-from-home environments, we have been extremely pleased with the performance of our internal systems, processes and coordination as we have seen no impact to our ability to deliver against our service level agreements. As I mentioned, we will likely experience a slight impact from potential installation delays. But we do not expect an impact to our recurring services revenue stream. So we expect ATM break fix, which represents the largest percentage of banking revenue, to hold up and is expected to be strong even during this period. In digital banking, which represents 11% of banking revenue, we see virtually no negative impact to our business. Digital banking is considered part of the critical infrastructure for our customers. It is one of our most resilient services, and we believe there is potential for uptick as banks upgrade their digital banking platforms to meet the needs of their customers' increased usage of online banking services. And finally, our software and professional services, which represents 16% of banking revenue. The revenue has held up relatively well, although site restrictions and bank budget reductions may impact some of our consulting engagements. Overall, we believe our banking business, which is focused on retail, self-service banking, will become even more critical. Likewise, ATMs have become increasingly more critical to that channel strategy. Our near-term issue will be timing and ability to deliver and install ATMs. We expect banking to be a relatively stable business for NCR in 2020. On Slide 5 is our retail segment. Retail is roughly 1/3 of our total revenue and breaks down into 4 markets that we serve. The largest is food, drug and mass merchandising, which represents 70% of our retail business. These retailers are at the heart of what are considered essential services. The demand load for service requirements is as big as we see during our peak holiday season. This is a segment that is not only holding up but is putting significant demand on our support resources, and we are capitalizing. We have been able to realign our resources to meet the demand of our customers. We expect limited negative near-term impact and see opportunities to deliver capabilities such as online ordering, curbside pickup and self-checkout. The trends we are seeing, we expect to be sustainable post this period. Some of the large mass merchandise retailers who have anticipated installing additional self-checkout units in the second quarter have told us that they are just too busy operating their stores as they are resource constrained keeping stores open and servicing their customers. We believe they are making decisions to temporarily delay installations as opposed to canceling orders and projects. In fact, we are seeing new opportunities that reinforce these observations. For example, we are building a touchless self-checkout experience for our customers. Specifically, we updated our self-checkout software to interact with the Walmart Pay app, which enables their customers to check out without touching a self-checkout screen. We delivered a pilot within a week, and Walmart announced plans to offer the completely contact-free checkout in the coming week. Next is department store and specialty retailers, which is roughly 16% of our retail business. Some of these customers already have a significant online presence and continue to operate. There are customers that are facing significant impact with many stores closing temporarily. Again, most of the risk is -- within this market is hardware related. Mitigating some of the risk is the move by many of our DSR customers to move to more online sales. We have some customers that are implementing new projects and new software as they are shifting their business to online. So while some of the brick-and-mortar stores may see an impact, those with a robust online presence are continuing to operate and will likely have a strong year. Our convenience and fuel retailer segment represents roughly 9% of retail revenues. Gas stations and convenience stores are considered critical function. We're not anticipating a significant impact in this market. In fact, you have likely read about this sector doing a significant amount of hiring to meet their demands. There is real opportunity available to us, and we expect these customers to sustain growth. The last market, which is our smallest at roughly 5% of retail revenues, is the small and medium-sized retailers, most of which are one-store locations. Those operations are the most impacted in the short term. As we look at our retail business, and in particular, FDMM, we are seeing strength, solid demand and opportunity to not only service now but to be there on the back end as they address new ways of operating their business. We anticipate self-checkout becomes an even more critical part of their channel strategy. On Slide 6, our hospitality segment, which represents roughly 12% of our revenue. The perception for many investors is that hospitality is significantly challenged, but we really have 2 different types of customers in this group. We have the quick-service restaurants, which are the large enterprise chains, which we remain very busy with addressing drive-through and pickup. And then we have the small business restaurants, which are feeling the greatest impact. Quick-service restaurants are the largest mix at roughly 58% of our hospitality revenue. We expect minimal impact on customer demand. We are, in fact, seeing a slowdown in the expansion of new stores and the remodeling of other stores. But we are seeing their focus on drive-through and pick up and are keeping busy along with them. The small and medium business market, which are restaurants with less than 50 sites, is a segment that is hit hard during these times. We are working with our customers and helping them get through this crisis. We recently launched a program to the SMB segment to help those that have not yet moved to online ordering. We are working with over 200 customers currently and have enabled over 100 sites since the pandemic started. And we think that they will pay long-term dividends for both us and our customers. We are also working on a plan with a partner in the SBA lending space that should provide relief to our small business customers. Table service restaurants, which represent roughly 14% of hospitality revenue, are expected to experience some near-term impacts as they adjust to the current environment. Their online ordering and takeout has increased significantly. We think the sustainability of the customer and their shift to meeting the online ordering demand of consumers will help them greatly get through this crisis. The last market is travel and entertainment, which is roughly 7% of hospitality revenue or less than 1% of our NCR revenue. This market includes airline, sporting venues and theaters, and they are being significantly impacted as most of them are just not operating. In summary, we believe the QSR and TSR markets represent significant opportunity with good growth potential, albeit with some impact in the short term. But we believe we are well positioned for a recovery on the back side of this crisis due to the sustainability and makeup of our client base. We are confident that the functionality and capabilities of our offerings will meet the needs and expectations of our customers. Now moving to Slide 7, which provides an overview of our manufacturing network. We have 2 primary NCR manufacturing plants in Hungary and India as well as a plant in Brazil to support that local market. We also leverage contract manufacturing in Mexico. Additionally, we have our warehousing and distribution facility in Nashville with our partner, CEVA. The facility, as Mike mentioned, was damaged earlier in the quarter but is now fully operational. We made significant progress improving our cost structure over the past 18 months and have been moving to a mostly variable cost structure. We estimate 70% to 80% of our manufacturing costs are now variable, which provides the capability to absorb volume changes with less impact to profitability. We also benefit from the decision to have each facility source the majority of its parts independently, which provides us additional flexibility. We are in a much better position today to weather near-term declines in hardware revenue due to the improvements we have made to our manufacturing network. Andre will now discuss some of the actions we are taking to adjust the current operating environment as well as an update on our debt maturities and liquidity status.

Thanks, Owen. Slide 8 shows our near-term operating goals as well as some of the actions we've taken to date to adjust to the current operating environment. As expected, our primary focus now is on managing cash during these uncertain times. Our goal is to run the business on at least a cash flow neutral basis or better until the end of the crisis. Specifically, we're estimating the cash flow impacts to the company of the potential revenue items that Owen just discussed, along with the cash savings measures we need to enact in order to remain cash flow neutral. Recall, we had already put a team in place earlier this year to lead our $90 million cost-out initiative, and we're already on track in identifying areas of opportunities. Now we have that entire team and many more working on even broader cash-savings opportunities well in excess of this amount. On the operational side, we are sharply reducing our planned capital expenditures, eliminating contractors and curtailed much of our travel over a month ago, even before the crisis and travel restrictions began. We also froze hiring a month ago and announced to our employees back in March earlier that we were not proceeding with merit increases this year. Additionally, as you saw from the 8-K we filed last night, we've announced base salary reductions for members of the NCR leadership team as well as certain other salaried employees. Mike and Frank Martire, our Executive Chairman, have elected to forgo their salaries for the remainder of 2020. Likewise, Owen and I have reduced our salaries by 50% and all employees who participate in NCR incentive programs, which is over 9,000 employees, have lowered their salaries for the year, ranging from 5% to 20%. We'll also benefit from the payroll tax relief that was part of the coronavirus stimulus package signed into law last week. On the nonoperational side, we suspended our share repurchase program and also put on hold our M&A activities in order to free up additional cash. So overall, as you can see, we're taking every measure we can to maintain and to preserve our employee base. Since by doing so, we believe the company will be in a stronger position once we emerge from this crisis. As mentioned previously, our goal is to remain cash flow neutral or better for the duration of the crisis. And we believe these actions will enable our cash flows to hold up in the downside scenario we envision, while additional cash and cost-saving measures that we are working on will provide yet additional protection should the downturn be deeper or more prolonged. Moving on now to Slide 9, which provides an overview of our debt stack. We have a solid balance sheet with sufficient liquidity and, following our debt refinancing last summer, have no significant principal payments until July of 2022 and are well within our covenants. We recently drew down our revolver as a precautionary measure in order to increase our cash position and preserve our financial flexibility in light of the current market uncertainty. We expect to end the first quarter with over $1 billion of cash on the balance sheet. On the leverage side, recall, we ended 2019 with credit facility leverage of approximately 3.1x versus a covenant of 4.75x. Regarding free cash flow, recall the seasonality of our cash flows. Historically, free cash flow for us is typically negative in the first quarter due to the seasonality of our revenue and earnings as well as cash outflows in the first quarter, such as the payment of bonuses and other incentive compensation, the 401(k) match and HSA contributions and this year, 2020 is no exception. Nevertheless, we expect to end the first quarter with credit facility leverage in the mid-3x as expected. In summary, managing cash is our top priority, and we believe we're in a solid financial position to weather the current crisis. With that, I'll turn it back to Mike for closing comments.

Thanks, Andre. In summary, we, as others in the marketplace, are in uncharted waters with the coronavirus pandemic, creating some uncertain times. However, we believe the actions we are taking will allow NCR to weather this challenge and put us in a stronger competitive position coming out of this period. We have built the cash reserve to maximize financial flexibility, we have ample room on our debt covenants and have a variable cost structure with additional levers that we can pull to adjust if we need to, to the current operating climate. Given the uncertainty regarding the length of coronavirus pandemic, we believe it's prudent to withdraw our previous full year 2020 guidance. We're also postponing our Investor Day, which was previously scheduled for May 14. We had originally intended to go over our long-term strategy of shifting our revenue mix to more recurring software and services. While our strategy remains steadfast, given the current environment, we understand investor focuses on our ability to get through the current crisis. The resiliency in our revenue and our business is solid. Within our banking segment, keeping self-service retail banking up and running remains a critical priority around the globe. On the retail side, supporting grocery stores, drug stores and big-box retailers has been very solid. And hospitality is filled with large chains continuing to operate and some of the smaller businesses are seeing an impact. Overall, we believe NCR is on solid footing to weather the current crisis, help our customers survive and prosper to come out the other end in a stronger competitive position. Thank you for your time today. I appreciate you getting on the call with us. And with that, we'll open up to any of your questions. Operator?

[Operator Instructions] We'll take our first question.

Mike?

Yes.

I'm sorry. This is Tim Willi. I didn't realize I was put into the queue, my apologies. Just a question, I guess, trying to think through 2 things, one around the restaurants and the portion you talked about it being significantly impacted. I can't remember, did you -- Andre, did you provide any kind of color as to -- in that sort of 50 and below footprint, what portion of the restaurants or the hospitality that is. I think it's $800 million for the segment, and that was the segment you said is really severely impacted. What -- any way to think through how much of that was, if you said -- I missed it, but I apologize. And then I had a follow-up.

Yes, it's on Slide 6. The small and medium businesses, which are the small restaurants with less than 60 sites, that Owen went through is 25% -- sorry, 21% of hospitality, and hospitality is 12% of NCR. So it's less than 3% of the total there.

Got you. Sorry, yes, I apologize, I don't have the slides in front of me. And then second was just overall, so some other companies that have had to make these kinds of moves and just sort of provide people with updates, other companies I talked to have talked about providing some, I guess, you can say, relief or discounts or sort of rebates around, whether it'd be monthly subscription fees or maintenance or deferring of payments on various types of products and services. I don't recall if you mentioned anything in your comments about making those kinds of moves to help out customers. Anything there worth calling out just in the interim as we get the financial results that, that might cause some noise. Obviously, we'll see the numbers when they come. But just anything to think about that would impact 1Q or maybe even into 2Q thinking about the revenue stream that is just of your own volition, trying to provide to these customers and help them out and take one for the team, so to speak.

Yes, I mean, that's a very good question. So I wouldn't anticipate that in the first quarter. If it is, it would be de minimis at this point. Obviously, we're at the end of the quarter. So we try to get some -- a little bit of color. When you look at the slides, you'll be able to see hospitality where we have the small and medium business and then a little slice in retail where we've had clients who are more severely impacted. Obviously, the restaurant, table service restaurants, who have not done online ordering have more impact and generally smaller ones. I'd say, actually, we're talking very actively with our clients to make sure that we can help them through this. There's a couple of different things Owen mentioned. We have clients who had not set up their environment to do online ordering and to set up in an environment where they could do takeaway or deliveries. And there's a backlog of customers that the team is very actively helping into the hundreds now that the professional services team and our hospitality team is helping them get up and running. So we're doing that. We're also -- Owen referenced we're looking at partnering with some of the small business administration lending entities that are out there to help facilitate access to some of the monies that have been made available with the law that just got passed last Friday. And there's a specific component of that, which helps mitigate salaries for employees, which obviously, a lot of our small businesses are concerned about. So we're actually helping to build up a package to help facilitate that where they can get access to that money, we can get not only information but also get them a partner to do that. And then lastly, we do have some who have shuttered their doors. They just can't operate in this environment who have come to us for windows of can you delay or defer some of the ongoing payments. And the team is working with them to help them get through this window.

And next, we'll go to Dan Perlin with RBC Capital Markets.

Can you hear me?

Yes, Dan.

Okay. I guess a couple of questions. One is, when you guys characterize -- and first of all, thanks for holding the call, these slides are really super helpful. But when you characterize kind of near-term impacts with logistics, which is I think 44% of your business based on the slides, like how much of that is like dead stop? And how much of that is just like slow-going and then you think you'll be able to reaccelerate? The idea is just trying to figure out how deep is this drop to you guys near term? And then can we look through that in kind of a V-shaped potential recovery if that piece of business can come back relatively quickly?

Yes. I'll kind of give you an answer and see if Owen has any more color. So the reference that Owen made to the impact on logistics was a little bit in the banking market, and that's -- so ATMs. And again, I think we tried to emphasize that self-service banking, which is what we do at NCR that entails ATMs and entails digital banking, that's the piece of retail banking that bankers are very focused on right now. And obviously, for obvious reasons, keeping that up and running so that their consumers can get access to the services. The ATM market -- the ATM business, the ability to deploy retail banking via ATMs is probably a little bit more back in vogue or topical right now, and we anticipate that will continue post getting through this coronavirus period. The near-term impacts on logistics are just literally, in some cases, it's getting the equipment to the right place, getting it across borders in a timely fashion. Sometimes it's getting the banks to have the resources ready to get a swap out or get a new ATM installed. And so we don't see the demand. The business side is still continuing to get orders and have demand. It's more just maybe a temporary delay on logistics that we're looking at into the second quarter. But we don't believe that will be a long-term negative impact. It's more of a timing impact. I would say that that's similar, Owen talked about, on the retail side, we've got some large big-box retailers who had plans to put in self-checkout and, quite frankly, are too busy. Their staff is too busy focused on logistics of stocking their stores and getting products out the door and -- are causing some delays. But again, we think self-checkout, similar to the ATM business, is actually, coming out of this, going to be even more important for the retailers. I don't know, Owen, if you want to add any color to that?

No, I'd emphasize it. And Dan, the issue of logistics literally as we're moving products across borders, we've been successful at it. Even last night, as we moved product out of Mexico across the U.S. border into the -- across the Canadian border, it's just a matter of working through these, which are a bit more cumbersome, and they're going to be that way for a bit. So there's truly the logistical issue of moving supplies, moving finished goods around the globe. And we're dealing with that right now. But we're then dealing with it fairly well. We just think that we need to anticipate it's going to be a little bit more cumbersome. But to Mike's point, we are not seeing, especially in the retail side and on the bank side, massive movement or cancellation of projects. In fact, we're seeing backlogs and the order activity stay fairly strong.

Okay. That's good to hear. The other question I had real quick, if I could, is the -- kind of 2 things. Hearing you guys run at cash flow neutral, it's pretty positive but also sounds a little herculean given the seasonality of that business. I heard you say you're going to -- you draw down in the first quarter that keeps you at 3.5% under covenant. So you're good there. I'm trying to understand like what is the operating scenario in which you're assuming that you can manage that throughout the year? Clearly, you said you could do it, but like what is that scenario? Are you assuming kind of trough periods in June quarter and starts to moderately recover? Or how dire of a scenario have you actually built in to allow yourself to run cash flow neutral for quite maybe the better part of 12 months?

Well, I think what we're trying to do, Dan, is call out that in addition to focusing on revenue and earnings, we have to make sure we're very focused on cash during this period of time. I would say first quarter -- Andre called out first quarter is our largest cash use quarter coming out of fourth quarter. So we had a lot of payments that we made. So we're past that window. Our second and third quarter are generally fairly flat anyway, and then we have a big cash inflow, cash positive in the fourth quarter. But we basically -- as we looked at different scenarios going forward and looked at our rev impacts, revenue impacts on various impacts on various products and then, obviously, the earnings impact, which ones had variable costs that will come out, which ones have direct fixed costs that may not come out that quickly, and layer that quarter by quarter, then what the team has done, and as Andre walked through this on his slide, is we've looked at where can we reduce our spend, including even cutting back on some of the capital projects that we had intended to do this year, obviously, suspending the buybacks, eliminating our M&A. So we really just -- we've mapped quarter-to-quarter and said, with these levels of impacts, what are the things that we need to do to reduce our cash spend. And I think getting through second and third quarter into fourth quarter, we feel pretty good about the different scenarios, if you will, that we've mapped out. And Andre, do you want to add any color to that one?

Yes, that's right. I think we've got a plan now in the different scenarios that we're working towards that allow us to stay cash neutral. But I also said, we're continuing to work on other actions even though -- that are beyond this page in the event that it was a sharper or deeper V or perhaps an even longer recession, so we can continue to stay cash neutral.

And Dan, so we have chosen as a management team, and we really feel this is important, that we chose not to take people actions at this stage of uncertainty. We didn't feel it was right to take employees and put them on the street without jobs right now. So we took pay cuts, as you can see, the executive team as well as a lot of other employees who are part of our company incentive plans. But we're trying to preserve as many jobs as we can in the company, and that's why we've taken the other actions we've taken, and we believe we can get through with the scenarios that we've outlined with those other steps. We do have other levers, Owen and Andre alluded to that. We have additional capital projects that we could cut back even further. We've got some projects still going on we'd like to be able to move forward. We've got some other fixed cost we've started to dig into, which will take a little bit more time to get out. We've got SG&A actions we didn't take across the board, and then we've got some other things. So we are looking at what else would we have to do if our scenarios actually -- the outcomes actually came worse. But we feel we can get through second, third and fourth quarter with what we're looking at right now. And you've seen us, quite frankly, build up the cash pile, which is really, therefore, handling uncertainties.

And moving on, we'll go to Katy Huberty with Morgan Stanley.

I have a couple of questions as well. Just to start, when you look at the overall business, what percentage of revenue is recurring today? And maybe could you compare that to the 2009 downturn? And then when you think about those recurring categories, is there any of that revenue that's tied to transactions at your customers that would obviously slow in this environment? Or is that recurring revenue base fairly steady and will be at consistent level?

Yes. So we ended up last year, we were mid-40%, 45%, 46% recurring revenue. It actually probably was a little bit lower than we would have anticipated simply because we had so much ATM business that flowed through last year. Conversely, if you look at our -- what we've already guided for ATMs in 2020, our recurring revenue is going to go up just because we had said ATM sales will be quite strong this year. So think about it maybe roughly half, 50% of our business is recurring. I don't have the number on the top of my head for 2008, 2009, but I suspect it was quite a bit lower back then in terms of the mix. We didn't have -- obviously, we didn't have the Digital Insight business, we didn't have the Aloha business, the hospitality business. We didn't have some of the retail products that drives a high recurring. So I think we have a much higher percentage of recurring revenue today. I'd say the vast majority of that is going to flow through, continue to be paid. I'd say just maybe, as Owen referenced, the very small table service restaurants who maybe don't have the ability to stand up a takeaway and might not be able to pay some of the components on a recurring basis. But for the most part, our customers that we serve, whether they'd be banks, whether they'd be large retailers, big box, convenience, gas stations, et cetera, the quick-service restaurants, those are all up and running, and we would anticipate our recurring revenue streams to stay pretty solid.

Okay. That's helpful. And then I understand there's an element of fixed cost in manufacturing 20% to 30%. And so that will cause some gross margin pressure if revenue falls short. But where you talk about minimal or slight impact, it's really the categories like support and software that carry higher gross margins. So any commentary as to whether we could actually see gross margins rise given the mix shift? Or should we expect there to be a net negative impact because of the lost sales volume?

Yes, I mean, that's a good question. So the service side, whether it's the global services, the break fix or actually professional services, are both holding up really well, and we anticipate those will continue to hold up well during the year. Software, we will have some discretionary software projects. Now we've already shifted to a recurring revenue model, so -- in a lot of cases. So some of that would not have been dropping to cash as much in the past but will have some impacts on discretionary decisions. We factored those in, and then we factored in, as you referenced, Katy, the impact to hardware sales and then how much variable costs we can pull out and minimize the earnings impact. I don't know if I would say right now that our margins would go up. Andre was -- as we look at the models, we really focused on the revenue and maintaining cash flow and earnings. I don't know on margin, whether we have an opinion one way or the other right now.

Yes. I mean I certainly can see -- I could see that scenario. I know where you're going. And Owen talked about -- quite a bit about hardware being impacted, and that's obviously lower margins. So I could see where you could see a mix shift could result in margin increasing. I think what we're looking at is, as you know, the software is very high margin. And so to the extent -- what is the extent to which the software declines as well? Certainly, software that's attached to hardware that goes away will fall through at very high margin. And then we just have to look at some of the other segments of the business. For example, Owen talked about if -- to the extent that there are some delays in any of the consulting engagements, that comes at a pretty good margin. And then what, if anything, is the impact on services, particularly services, if we've got our own labor through which we're contract -- we're doing the service, if there is a service impact there, which we don't think there would be, that could be a slightly higher margin than if we outsource the labor. So I could see that scenario, but I think it's too early to tell at this point.

Moving on, we'll go to Kartik Mehta with Northcoast Research.

Mike, you've made a lot of headway in reducing your kind of losses in hardware. Actually, I think you might have even broke even in 2019. What -- at what level can you still stay breakeven on the hardware side? In essence, what kind of reduction could you have on hardware sales and still stay breakeven with all the cost actions you're taking?

Yes. So we obviously have a more variable model now with the outsourcing that we do with USI and with Jabil. So that helps us as volumes fluctuate. And then we've done, on top of that, a fair amount of dis-consolidating plants. Owen went through the 2 main factories we're building, one in Chennai and one in Budapest, which have the volume going through there. I think we have a much more efficient plant structure today than we had 2 years ago. And then we have -- I think the team has done a nice job even in the plants having some flexibility on variable cost structures around volumes going up and down. And as you probably know, Kartik, a lot of our cost, right, are buying components and then bringing the subassemblies in to build. So this -- by the nature of the products that we build and how we do it, a lot of that's variable, we would always -- if we got to lower and lower layers, there's obviously other steps that we could take to take up more fixed costs. I think right now, we believe that the levels we're talking about, we can take out some costs and minimize the impacts. But we also believe that coming on the backside of this coronavirus, ATMs are going to be, again, an important component in the self-service channel. And we also believe self-checkout in the retail side is going to be an important component. So I don't think we'd want to take too many steps to impair, impact the ability to snap back in terms of capacity. But I think we've got a pretty good plan in place to reduce our cost structure if our revenues go down in a material amount in the plants.

Moving on, we'll go to Brett Huff with Stephens Inc.

Thanks for making this call. And I hope all your colleagues and families are safe.

Thanks, Brett.

Thank you.

Two questions. Number one is -- and I think maybe Mike, you already answered this, but I want to just ask it more pointedly. I wanted -- you went through some of the places where there were risks; in some others, opportunities. Can you guys just put a finer point on this and just tell us where you've seen sort of surprisingly higher demand or encouragingly higher demand, be it new bookings or just your phone is ringing or, et cetera, in a meaningful part of the business?

Yes, I'll kind of give you a high level, and then Owen can maybe fill in the details. And when we say higher-level demand, I think I'll answer in the sense of continued strong demand and holding up maybe better than we anticipated. I think, in general, the financial, the bank markets and the ATMs have continued to be solid. And I think that's around all of our geographies that we operate, the order volumes coming in, the dialogue with the sales teams and then just installs and deliveries. Again, Owen called out, I mean, it's been difficult to get things moved around and get installed logistically, meaning get the labor and get the implementations done. But I think the orders have continued to be good. I think one area that maybe surprised us a little bit is professional services. If you think about our professional services business, they're really augmentations of a team's internal staff. So it's not so much specific projects, although we do some projects. But most of our professional services staff is really helping the retailer or a bank or hospitality to really run their business. And that has continued to be strong. And actually, Mithu Bhargava, who runs that, has been getting requests for additional health because we have the people who can help the customer. So those are the areas that I'd call out is -- the self-checkout is interesting. We've got a lot of demand. It's just, again, people are so busy right now. They can't do the implementation schedules the way some of them had been rolled out. I don't know, Owen, do you have any other areas?

Yes. I would call out a couple of other things that have been really points of surprises. One on the break fix side of the business, the volume that we're dealing with, I mentioned, is equivalent -- in fact, it's greater than the, what we refer to as, the peak season. That's the couple of weeks before Christmas here. Especially in the U.S., our volumes are up substantially. And the result has been not everyone else in the space, our competitors, have been able to deliver the standards and maintain the standards of quality. And I mentioned we moved all of our support center resources to home. And our whole infrastructure, our whole platform has held up tremendously, and our customers are seeing it. So we're getting a high level of request to tackle more. And we think it's going to result in more services growth for our platform, which is outstanding. The other thing that I would say is in the -- both the retail and the hospitality, the validation of investment areas that we have made around the online ordering, the mobile ordering, the whole curbside pickup for the retail. So on the grocery side of the house, we've put those in place. We've had those in place. Some have used them, some have not, the same with the restaurants on the takeout. But we're seeing the volume go up so dramatically. And when I say that -- and in some of these areas, it's up 200%, 300%, 400%. And our view is and our customers' view is this is not going to go away. Just like every other major incident that we've had, whether it was 9/11 or the '08 situation, behaviors change, and these are clearly behaviors that are going to last for a long time. The switches are going to get thrown automatically, and everyone's going to be comfortable doing their own shopping, going into restaurants. And we think we're exceptionally well positioned with the investments we have made, and we're seeing the volume really take hold. So -- and that's resulting what Mike talked about with professional services. So we feel very vindicated on some of the capabilities and competencies that were built into the business and have put in our customers' hands. And that's where we're getting people, more and more of them lined up. So it will be a tough road to hold, but we think there's real opportunity in the areas that we thought were the right investments, and this is now proving us in the markets correct.

Next, we'll hear from Matt Summerville with D.A. Davidson.

It's Matt. Can you guys hear me okay?

Yes.

Yes.

Yes. Okay. So I was curious, if you look at sort of where NCR would have been a couple of years ago, you mentioned 70% to 80% of your manufacturing cost structure being variable. How would that have looked a couple of years ago? And have you seen in your ATM business, if you look over a long period of time, any correlation between NIM compression and ATM spend?

Yes. On -- just I'll go back 3 years ago, just -- and again, just the 3 of us weren't here, so it's a little bit just looking at the changes that we've made in the last -- really started in '18 and '19 in terms of our manufacturing footprint. I would have guessed we have then a much higher component of fixed cost, 3, 4 years ago, building out ATMs and self-checkout. Part of that is we had additional plants. So we had 2 additional plants, 1 over in China, actually, in Beijing area, and then another one in Georgia, that had been shut down subsequently. So we've reduced just the footprint of fixed cost and probably, again, maybe excess capacity that we had at that point in time. So now we run our plants at a much higher utilization with Budapest and Chennai. And then we use Jabil for -- Jabil and USI for the variable kind of ramps up and down. So I think our percent of variable is going to be much higher today than it would have been back then. And the levers and the ability to scale it up and down the volume curves are going to be -- allow us to maintain our profitability much better.

Yes. I would just say the other thing along with cost is the flexibility that this -- the environment now provides us, so as we first started managing the supply chain back in January to make sure we are in good shape. Our supply chain today is much more regionally based. We have the right alternatives, we have the right competitive -- competition within the supply chain. And we have seen that hold up exceptionally well during this point in time as we've had to move and adjust to this virus that has moved across the globe, it's shown the flexibility. Our partners, with CEVA and Jabil, have been phenomenal. And we saw that partnership up in Nashville when we were able to stand up -- in 2 weeks and a day, we were back delivering product out the door after having that 0.5 million square foot facility wiped out. And we think the quality standards are showing as a result of all of those pieces being at play. So clearly, the variable cost piece is a huge asset, but so is the flexibility and so is the whole ecosystem with the combination of our own product and our partner structure. And it's been tested, a good validation.

And our final question will come from Paul Coster with JPMorgan.

This is Paul Chung on for Coster. So I mean you provided some details on some near-term OpEx cuts. So have these cuts actually hit 1Q materially? Or is there more impact in 2Q? And then how should we think about the second half in the context of maybe a possible decline in the virus impact? Just want to get a sense for kind of the magnitude OpEx cuts we should expect this year and then how these measures evolve throughout the year.

Yes. I mean, Paul, I wish we knew. I think we're in the same position that most companies are in terms of trying to have some visibility into the future in dealing with not only -- with the business impact, the business crisis or financial crisis, there is a challenge in running the company, but also we have this health care challenge on top of that, which has a little bit more uncertainty. I would say the first part of your question, we came out of '19 -- we had a really strong '19, we came out of '19 very strong. We entered the first quarter of 2020 with some tailwinds and some momentum. So I would say most of our comments are more focused on the future going forward than they are in first quarter, and we'll obviously report out our first quarter coming up in about a month. But here's how we look at it, and we don't have -- we read all the same information, and we have a lot of activity. Our task force has been monitoring this and literally looking at what happens around the globe, what's happening in China as plants start to come back online. Owen talked about our suppliers. We -- originally, our current task force is focused on finding alternative suppliers outside of China. Now we're going back into China because their plants are up and running, and we can get suppliers in China. So we're trying to predict how this will impact, and it's hitting different countries at different time frames and then how it unwinds where we can get back and start working again collectively. So we really took a hard look at second quarter. We're talking with our sales teams, talking with our line of business heads, talking with our infrastructure delivery, the manufacturing side, the service side, the PS side, and rolled that up. And then what we said is with this impact in second quarter, third quarter, we're going to do a scenario where we think third quarter is similar to second quarter, maybe even slightly down. We think the health care issue will start to improve by then, but the economies will take a little bit of time to come back. So just to be cautious, we plan for a third quarter that was flat to slightly down from second quarter. And then we think business will start to pick up in the fourth quarter, meaning improved from second and third quarter in the fourth quarter heading into 2021. So that was just -- and again, there's no great wisdom there other than we looked at it. We tend to be a little more conservative. So we took a little bit -- we took -- rolled up some business units and Owen and Mike and Andre took those numbers down and said we're going to plan for a worse outcome than our business leaders expect in the third and fourth quarter.

And at this time, I'd like to turn the conference back over to Mr. Mike Hayford for any closing comments.

So I just want to close and thank everybody for joining us today. We hope this was helpful to give you a little visibility into our 3 business lines, dive a little bit deeper into the magnitude. Hopefully, you'll understand that at NCR, as we deploy and service self-service banking, as we deploy and service to critical retailers, grocery stores, convenience stores, drug stores and as we have our restaurants and hospitality side that will continue to operate and deliver food service to take away or drive through, that we really are powering a lot of the commerce that is essential in this time of difficulty, and our business is continuing to support that. So again, thank you all for joining us today. We will talk to you in about a month. We'll get our first quarter call scheduled and give you an update on how first quarter finished. And obviously, we'll have some more insight into the rest of the year at that point in terms of what we see going forward. Thanks again.

And that does conclude today's conference. We'd like to thank everyone for their participation. You may now disconnect.