NCR Voyix Corporation (VYX) Earnings Call Transcript & Summary

Well, thank you, everyone, and welcome back and good morning even still. My name is Dan Perlin. I head up the payments processing and IT services practice here at RBC. And I'm delighted to have joining us Mike Hayford. Mike is the CEO of NCR. And so, Mike, thank you for taking the time out of your schedule and joining us today. Really appreciate it.

Thank you, Dan.

So what I thought we would do at a high level is start off, if you wouldn't mind, giving us kind of what you see as kind of the more recent trends, maybe even if it's just directionally, kind of what you've seen through May and into June and maybe how that might have improved some since you last reported earnings.

Yes. Dan, so I'll kind of give a macro level of what we see and maybe a little bit by segments as they are operating a little differently. And probably, the one I'll start with is the restaurants, the hospitality, which really was hit the hardest, particularly table service restaurants, eat-in restaurants. Quick-service restaurants continue to, I'd say, do in general well or very well where we actually saw a number of quick-service restaurant chains have Aprils that were stronger in 2020 than in 2019. And so they continue to do well, again, a little bit by region. Restaurants opening up down where I have a home in Florida last Friday, everything was opened to full occupancy. So not only just dine-in. Other regions are still more kind of cautiously opening up, but we are seeing restaurants open up beyond this carryout to do dining at the restaurant. And in some cases, it's dining outdoors, some cases, it's limited dining. I think from a business perspective, what's been interesting is people have been receptive to coming back to eat. I was sharing with our team earlier today on our daily call, actually made our first -- I went with our head of sales and did our first visit to a customer yesterday. We came out and visited a customer in Denver and just had an in-person visit and dialogue around what they're seeing, what's happening. And as part of that, I stopped at 3 different restaurants in the area. And people -- so the willingness of people to come back out, sit at a restaurant, whether it's outdoors, whether it's indoors with spacing, is actually fairly encouraging. And we see a lot of restaurants opening their doors. We're starting to see small business come back in places, again, like Florida where they lifted restrictions. The doors are open, and small boutiques and small businesses are opening up. Stores are starting to open up. I think we saw a number of large chains start to open up even a couple of weeks ago. I feel actually had to take a few steps back due to some of the social unrest. But in general, we're starting to see a thawing. And then banking, the activity in banking has really been self-serve. A lot of activity on the digital bank side, transaction volumes, adoption rates and then disuse of other channels outside of the branch.

Okay. So banks are starting to thaw. It sounds like trends are better than what we heard maybe out of the last call. And it sounds like it's so fluid, it's almost day by day, but that's pretty encouraging to hear that you're actually on a physical sales call. So that's the first one we've heard of that. So that's good to hear. I do want to touch on your supply chain for a second. I'm just wondering, are you now back to kind of operational, I should say, normalized levels? Kind of you had a dual shock with COVID and then also the tornado damage to one of the distribution centers. I'm just wondering if you're back to kind of full operations there.

Yes. Dan, we are actually -- we had a -- I'm trying to remember the date, I think it was the second week in May where Adrian Button, who runs manufacturing, has all the supply chain activities reporting to him, reported that for the first time -- so this is kind of the second week of May, first time for the year 2020 all of our suppliers are up and running. All of our supply chains were open. And again, starting in January, we opened up additional supply chains as China started to get hit by COVID-19. So that has not been a conversation that we've had literally, well, for over a month now in terms of being concerned about supply chains. We obviously have stood up and recovered from the tornado in Nashville, with the help of CEVA, we stood up another warehouse in the Nashville area. We did some changes to our distribution. So we have a little bit more flexibilities in different locations when we bring products across the border and then how we distribute them. So we don't have quite as much concentration in Nashville. But everything is up from that perspective and operating quite well.

That's great. That's great. Right. So let's run through the businesses. So you touched on them a little bit, but I want to go in a little deeper detail if we could. So let's start with banking. And at a high level, what I'm interested in is kind of what are you seeing in terms of the health of your banking clients, so the portfolio with which you serve those clients. How do they seem to be responding to this? Are they nervous? Are they concerned about credit books? Or are they just overall healthy?

I would say, right now, pretty good. I think for a little bit everybody but certainly banks as well in April, right, and cut the initial shock wave, everybody shelter-in-place literally all over the globe. So this hit us all over Europe and Asia, obviously, in the U.S. And I think the bankers were worried. I think the bankers are still maybe a little concerned about what happens as unemployment rates have spiked, as restaurants can't open and small businesses were closed. What does that mean to people's ability to pay back loans? I do think the Fed has done a number of things to help mitigate some of the concern, particularly around some of the given debt instruments and taken some pressure off the banks. So I would say, whereas in April, conversations with the banks, willingness to spend capital, willingness to move forward on projects was a little bit of a -- maybe we want to see a little bit more, a little more clarity before we move forward. I think we're seeing banks make decisions to say we're going to start to get back on our path. So I think we're seeing good feedback, good signs from banks right now.

Okay. That's good. On the ATM hardware and even on the break-and-fix side of the business, I know that there had been some, call it, logistical issues in terms of installations, in particular, on the ATM side. Are those now starting to thaw, those behind us? Has that started to open up again?

Yes. I think certainly some of that. So some of those early implementation logistics issues were things like in Europe, they actually took, I don't know, more hires. But if you think about it, in the U.S. where people started to limit travel or not have as much ability to move around, it was more kind of a shelter-in-place driven by regional, but you didn't have the restrictions of traveling across state lines. In Europe, we had difficulty moving from our plants in Budapest into Germany for a window of time. And we have pretty good luck just with getting essential credentials to everybody, but that's what hurt us a little bit in -- certainly, in April, just in terms of -- and so I don't think we have much of that anymore. I think commerce and the ability to move across states and countries has been resolved. I do think there's probably a little bit with banks. Everybody is working from home still for the most part, and branches are generally closed in a lot of cases where they're just not open for doing an upgrade or doing a change. So maybe a little bit, but I don't think it's as much logistics as it's just getting back to the work and just the pace of how fast they're going to get ramped up again.

Okay. That's good to hear. The -- how does the order book look? I think when we had talked last, it was really more things were just getting pushed off versus seeing cancellations. Is that still the trend? And has that even improved some?

Yes. I think that's still the trend. What we're seeing now, it's kind of logical, right? As you think about starting in mid-March and then certainly April and May, and maybe things starting to thaw. And when we talk about things starting to thaw, whether it's different types of restaurants or stores, people are starting to come up. But it's not -- I wouldn't call it back to normal. So you have situations where some large chains who might have expected or planned to open up additional stores or additional restaurants during the year, their numbers are going to be down simply because they took a 3-month pause because they could not and then maybe aren't going to be quite as aggressive moving forward. So you're going to see some of that. So -- and we expect that just to be a little bit deferred out into next year. We had a series that we called out on the last call, a handful of customers who were, quite frankly, so busy because they stayed open during a lot of the shutdowns that they were not able to do some of the upgrades to stores and infrastructure that they had planned to do. We expect most of that. I think we talked about pushing that back into third and fourth quarter of this year. So we still see that happening. I don't think we have any indication yet where plans that people have had that the orders aren't going to come through as opposed to they're going to be deferred. We're still watching like everybody else on the small restaurant side, which is a small part of our business, table service and small business. How many of those come back, or how many -- quite frankly, the question is how many don't come back. And right now, we simply don't have that visibility the same as anybody else out there.

Okay. If we stay back on banking for a second, we get a lot of questions. Bank branches remain closed in a lot of places. Some, as banks kind of reimagine what they want to do, probably decide not to even reopen some of those back up. So how does that -- how do you respond to that in terms of your ATM business? Is that a real threat? Or is there opportunities embedded in some of that transition?

Yes. I think we still view that relatively positively. What we've seen in the past when banks look at a region or a footprint in a community and shut down branches, they leave a ATM or functioning ATM behind that can do some of the capabilities. So we still think there will be a need for the ability to have a footprint to do virtual banking and the ATM or the ITM is kind of an important aspect of that. I think if nothing else, the COVID crisis and literally the shutdowns that we had for up to 2 months here are going to accelerate the shift forward that we had started to see and anticipate happening, which is retail banking is digital banking. And to the extent that you can do most of your transactions with your mobile device, then what else do you need to do? What else do you need to touch? And most other physical activities can be done for consumers and small business with a ATM or in many cases, an ITM where you can actually talk to somebody at the central center and then really minimize the amount of brick-and-mortar. So I think we'll see that trend accelerate, maybe move a little faster. What might have taken 4 or 5 years is now going to take 2 -- 1 or 2 years.

Okay. And so that plays into this pivot to more cashless transactions as consumers are a lot more concerned about maybe how they transact and maybe not wanting cash. Your point is for the people who are going to continue to use that, the ATM is going to be a big part of it, but the strategy is going to pivot more towards digital banking. I mean is that the right way to think about it?

Yes. I think for -- again, for consumer, retail banking and small biz banking, the push has been on for years, and I think this accelerated it. I think the -- we're seeing -- we haven't seen the account volume pick up, but we anticipate that account volume or our digital banking customers will improve, grow at a more accelerated pace as they see adoption going forward simply because people couldn't get to a bank or a branch or weren't in a position to conduct the banking that way. So we expect digital banking, the capabilities, the functions of digital banking continue to enhance the experience, gets better and better. And then the ability to integrate that and connect it to some of the things you might do at an ATM or need to do at an ATM, like deposit checks if you're a small business or get cash, there's still -- the cash numbers are still -- widely, cash is going away. Cash is going away. Cash is going away. The bottom line is the numbers still have been growing year-over-year. So '19 had more cash in the business than -- in the environment, in the marketplace globally than it did in '18. So cash has not gone away yet. Certain consumers use less cash, and -- but others still -- there's still a need for that. Most of our ATMs are what I call more of a full function and actually really function as an automated teller and are much more full function than just a cash dispenser. So we're not quite as tied to a pure cash environment as much as, I'd call it, self-service banking.

Okay. Maybe since you're on that same vein, because we do get a lot of questions around this cash, this depth of cash, like, what are -- maybe tease out some of the examples of what that ATM or that ITM would be doing that's going to provide support for those consumers who really aren't there for the cash, right? They're using it for other means.

Yes. I mean the typical things are you're going to -- small business is still using it to deposit checks. And a lot of the activity is how many items you clear through there. Consumers still conduct a transaction at an ITM where they interact with somebody in a -- typically, you would go through and deposit something or have a question that you go through a drive-through. You do that with an interactive teller device now. We've seen much more in Europe probably than we have in the States where they've really augmented what you do with an ATM to the extent that some parts of the population don't have the ability to do everything in automated online fashion at home. Some of the -- we were at a bank in Istanbul, Turkey, where the walk-up traffic just to pay utility bills was quite high. In the next situation, people are, in some cases, using cash to pay utility bills. In other cases, they were just paying them with the device. They actually had devices that would cut you a credit or debit card real-time right there. So there's a number -- and again, if you think about what a person needs to go to teller line for, most of those functions can be pushed to an ATM. And I think a lot of the activity is going to be not just business consumer but also small biz customers.

Yes. No, that makes sense. Are you seeing any discernible uptick in demand for the digital banking product? And that would be inclusive of Digital Insight and D3.

Yes. We just went through a review of that actually literally yesterday. We talked about a little bit the overall climate in banks just a few minutes ago. And in April, banks were kind of maybe sitting and waiting like everybody else. What's going to happen? How long is this going to be? What's the depth? What impact is it going to have in our balance sheets and our capital? So we saw that in April, a little bit into May. I think, right now, we would say there's a fair amount of activity going on in digital banking and interest. And again, if you're a bank and you're looking at what's happening and you maybe hadn't been pushing quite as fast and as far on digital banking capabilities or view that channel as your primary channel, maybe you view that as ancillary to the branches, I think that's shifting and accelerating. So I think we're pretty encouraged by what's going to happen in digital banking this year. I think the banks are back to, out of necessity, looking at that channel and making the decisions they need to make. And so we expect that to be solid in 2020. When I say solid, where other businesses are impacted negatively, we expect digital banking to have a positive impact.

Okay. That's encouraging to hear. One of the things that I want to make sure we're clear on is just reminding us kind of the difference of attack for Digital Insight and D3 and kind of where they live in the value chain of improving a bank's digital customer experience but also improving some of the efficiencies in the back office.

Yes. It is -- I'd say it's primarily a size -- kind of size and scale and, if you will, the architecture or openness. So with Digital Insight, smaller banks, credit unions, and that -- and when I say smaller, not necessarily small. I think our largest one in there is maybe $10 billion to $15 billion in asset size, so a fairly decent size. It's a single code line platform. It's very leverageable, scalable. It's a very good cost structure. It tends to have really good feature function improvement because once we put something in that a particular customer wants, everybody else gets that feature that function. And so the customers that are on it get together and decide the product road maps, and they like the fact that it moves forward very quickly and they don't have to do -- the upgrades are very straightforward, very simple for those banks that use it. So it's not only a great platform in that segment of the market, it's the best platform out there in terms of capability, feature function and ability to move forward with enhancements and upgrades on a very frequent basis. And D3 is really made for larger institutions. We've really targeted that at the $30 billion and above segment of the market. It's got an architecture platform that's more extensible, so the banks can do some piece -- more components themselves that they choose. We do it. It's a -- we have some clients that we hosted for others, hosted or run on the cloud themselves. It's -- for us, it's a comp-based fee either way. So it's a question whether we run it for you. And it gives a little bit more extensibility, a little bit more customization for those banks who desire that.

Yes. Okay. It sounds like you're attacking the market in a lot of different ways there by bank size. It's encouraging to hear. If we pivot to retail for a second, you talked about a little bit of the implementation and installed delays. What I'm wondering is how you're addressing some of the major shifts to really contactless in the retail environment. And you had mentioned some of those on the last earnings call, but I thought it would be helpful again to just get an updated view of what you guys are rolling out kind of quickly to address those needs.

Yes. I actually did a call on Monday to close the market with Bloomberg. I did a short interview with them in a segment that was called Contactless Commerce. And I talked about, literally, so when this thing hit, we brought the team together and say, let's innovate, how can we do this? And we really focused on if you want -- if you have something that's a physical activity, say, in ATM or in the retail space, the self-checkout device or even the ability to conduct a transaction in a convenience store or at a gas station pump or in a supermarket, how do you do that where people feel comfortable? And what we conclude is what they feel comfortable doing is touching their mobile device. They touch their mobile device, they can keep it clean. So we move to make sure that we can integrate a mobile device, whether it's an app, or in some cases, not even an app, just we'll top up a connectivity to a web, a browser-based application that you don't have to have anything on your device. And then we can interact with the device. So we did that with Walmart very quickly using their app. We integrated it to our self-checkout device. So you can go scan your items. You don't have to touch anything. You scan them in the self-checkout. And then instead of actually having to touch the self-checkout device, you actually use your mobile device and complete the transaction, including putting the payment. We've taken that into our retail products. We talked about there's a gas station convenience chain in the Midwest based in Iowa called Kum & Go, and we worked with them so that you can -- instead of touching the pump and the pump head and here's the gas that I want, here's my ZIP code number and I'm using a credit card versus a debit, you do all that in your mobile device. And so then you only have to touch, obviously, the -- you have to pump your own gas, but they can have the plastic glove. And you can't use a plastic glove to touch the screen. So literally moving all that touch activity off of the device that others may be using and putting it onto your mobile device. And so that's been extremely well received. And it's one of the things where you go, are people, once COVID is done, going to say we don't care about it anymore? We think the trend in the movement -- first of all, everybody is getting self-trained to be more reliant and use their device, use their apps, use their mobile device. And so that's the focus we did is make commerce contactless, not only retail but also ATMs and also the restaurant, hospitality space. We've done some very interesting things.

And this is a technology that's overlaid that would fit with inside the software ultimately for self-checkout and obviously pay the pump in this example?

Yes. And we have to -- so if we control the software, in some cases, we control the software running at the pump. Sometimes it's just the POS. Sometimes it's -- in self-checkout, we have the hardware and the software. In other cases, we don't have everything. So we've had a number of different opportunities in technologies that we can use. Sometimes they're a little more integrated into an app. As I said, sometimes, you get to the device. In one of our applications, we actually throw out a small WiFi signal, and it pops up an Internet connectivity that we've wrapped a little security around it. And then you use your device, but there's no other software in there. It's just we connect into the hardware and make that happen. So you don't have to be running our software, and you don't have to be running our app on your phone. So that's been actually -- we did one -- we have one prototype up and running, where we actually put -- I don't know if you've ever seen the movie E.T. So back in my era, the movie E.T where you put the finger. So I actually demoed this a couple of weeks ago in our all-hands webcast where we put a screen that actually has a light shield in front of a POS screen at like a grocery store. And you don't actually touch the screen then. You just point and it catches your finger and it uses your finger as a pointer, but you keep it about an inch away from the screen. So there's different technologies that we can use. We rolled out a microbiological film that actually, when you still have to touch things, it protects it up to 6 months from bacteria and viruses. So there's a whole series of things we've done really to make interacting with devices safe.

That's great. You've talked a lot about hospitality already, so I won't necessarily go for the update there. But I do want to talk about the shift in the revenue model to more of a recurring model. And in particular, maybe you could give us an update on what you're doing around Aloha Essentials and the bundle there and if you're seeing -- has that started to thaw? I know you throw them back up there.

Yes. So on one hand, you would think table service restaurants, that's going to be a tough business, which it is a little challenging for us. On the other hand, if you think about the shift that we made into the product that we're offering, so when we walk in the door, we say, "Here's a full suite. We can run your whole restaurant for you. We can bring in the hardware. We've got all the technology, all the software. We'll install it for you. We'll support it for you, and we'll integrate the payments and do the payment transactions for you. And we'll do that on a month-to-month basis." So effectively, what we do, any upfront costs that we have, we bake into the deal. When we ask you to sign 3 or 4 or 5, we try to get a 5-year deal on those transactions. And we're sitting down with the team a few weeks ago and just talked about what kind of success we have. And even in a month like April where not very many restaurants were opened, we actually had pretty good success selling essentials. And what it is, is a restaurant's willingness and looks at the offering, the simplicity and then the ease of getting into an Aloha product, which, quite frankly, we did our research, the biggest impediment we had is we love Aloha, it's the Mercedes of all the solutions out there, but it's just so expensive to get in. And so we've really addressed that. You can get into an Aloha suite essentials in a very cost-effective way. And so we've actually, even in the depths of this thing, which would be April, continued to make progress. Our salespeople can't be out on the street, so it's a little bit different. But we're pretty encouraged by what we expect to happen with that this year.

Okay. And then the shift in the revenue model, it was also a big part of the banking segment. Is that also progressing? And are you seeing, again, kind of green shoots that would lead you to believe that, that transition is also occurring?

Yes. As a matter of fact, one of the things we did this year is we continued the shift on products like our Authentic switch. We continue to shift on our CxP product, which is an integration layer product. We continue to shift on our activated enterprise product, which is the ATM suite. And we were a little concerned in May -- March and April, as we start focusing on our cash flow and what we're going to do because these things really -- they hit into cash flow as well. So the strategic drive for us was let's keep moving towards the shift to recurring. Our caution was, is that going to be too much into cash? And quite frankly, we've been able to do it. Again, it's been a great sales tool. The team has continued to push, and that pushed the recurring that -- we did that review yesterday as well with the team. I think that's going as well as we had planned. The total numbers are going to be more a factor of total numbers of the company, but I think the recurring side is actually holding up quite well, and we've been able to maintain that ongoing shift. So the ATM software that used to go when we sold a piece of hardware, we would book a upfront stack of software, and we called that attached software at one point and all those things went as perpetual license, now those are all being spread over a multiyear contract. And that's just -- it has a negative impact obviously this year and it will have negative impact next year, but it's starting going forward and we probably think the crossover point is in '22. For now, it's going to be a tailwind as we're booking those monthly fees.

Got it. So just in the last 30 seconds, you talked about cash flow. You've talked about running that business quarter-to-quarter kind of cash flow neutral. Is that more for the next couple of quarters? And would you expect the traditional ramp in the fourth quarter? Or are you suggesting you want to kind of continue to manage that until you see a more normalized world?

Well, I mean we really said for the year, we wanted to be in a position where we maintain liquidity. And you saw us when there was not visibility to the depth or the length of this pull, pull some money and put it in the balance sheet. We've been very focused month-to-month, quarter-to-quarter on managing that. Fourth quarter is always a pretty heavy cash inflow quarter. I think we'll continue to watch. We released some capital literally this week that we had pulled back on and put that back up in the market to invest in some of the products. And a lot of things, like in hospitality, we literally built a product where you walk in the restaurant, you scan a QR code, the menu at the restaurant pops up on your phone. And you can order on your phone, you don't have to touch them in, you don't have to touch anything in the store. And then when you're done, you can pay with your phone at your table by just entering, and it pops up through a website and there's a payment through into your mobile payment. So there's all these capabilities that we've rolled out that I think are starting to take off. And as we look at investment versus cash flow, we'll keep looking at it literally month-to-month. And if we start to see visibility where we're going to get through the year, which I think we're encouraged so far, we have not seen anything more negative -- I say more negative, things are playing out at least as well as we anticipated. We're a little -- probably even more encouraged today than it was a month ago, than it was a month before that. And we will continue to look at opportunities where we can spend some money, make investments to make sure our products are getting ahead of the competition this year.

That's great. Mike, that was a fantastic update. Thank you so much for participating again today, and I hope you can stay safe and healthy. So thank you again.

Thanks, Dan.

Take care.