NCR Voyix Corporation (VYX) Earnings Call Transcript & Summary

My name is Dan Perlin. I head up the Payments Processing and IT Services Practice here at RBC. And our next presenting company is NCR. We're very excited to have them with us today. And from the company, we have Mike Hayford. Mike is the Chief Executive Officer of the company, has been really the pivotal part for the strategic shift of the organization over the past couple of years. So we're delighted to have -- have him back as a friend to RBC. So Mike, thanks so much for being here today. Really appreciate it.

Thanks, Dan.

I wanted to just start with a bit of reflection, kind of given where we are in the state of the world. And what I mean by that is kind of like reflecting back on where NCR was or really is today versus kind of where it was prior to the pandemic. And to that end, how far off pace do you think maybe the organization is relative to your original kind of strategic plan?

Yes. It's a little easier maybe today and what is it, November, end of the year to reflect back. And as I talk to different executives, in mid-March when we all kind of scrambled, it was kind of sort of work-from-home, and we were all in a sprint and you were kind of focused on them, just getting taking care of your employees, taking care of your customers, very much taking care of the safety and security. But we entered -- we kind of stabilized things in 2018. We had a real solid 2019, we have about 8% growth in 2019. But more important than the growth that we had in 2019, we started to make investments and build out our products, our digital products. We really turned around our digital banking product in our addressable marketplace. We made great strides in our cloud-based retail product called Emerald. We made great strides in our Aloha Cloud product for the restaurant marketplace. So we did a lot of things in '19. We entered 2020 with a lot of momentum and really started strong, and then wham you get a hit by this. And we went into defense mode in the first half of the year, just trying to protect our company, protect our balance sheet, protect our employees. And so we can kind of crawl back now and say, "Where are we?" and it's hard to judge, but if you take away the COVID impacts that hit some of our banking business, you take away the restaurant impacts that we've had, you take away some of the other ancillary services that we've had in terms of businesses like the travel business or the Venues business. And you look at it and say, if we didn't have those, I think we would have felt pretty darn good about the progress in 2020. I tell you one thing we refuse to do is, we refuse to sacrifice the long-term strategy, long-term vision, the long-term investments for the short term. So we continued to make investments in digital banking. We continued to make investments in our Aloha product and our Emerald product, in our payments and our digital connected services and our ATM as-a-service. So we had a whole -- we had 7 different initiatives that we stayed very focused on making progress in 2020. So I think if you stripped away the numbers and the challenges of COVID, we would stay behind the closed doors, we feel pretty good about our progress this year.

Yes. One of the things I thought was encouraging coming out of the quarter was, and you hear it again today in your demeanor is that you are pivoting back to kind of growth mode? And I'm just wondering, you touched on a little bit. I'm thinking about maybe more specific proof points to kind of illustrate that you've made this kind of this move? And maybe how that might set you up as we start to think about teeing up 2021?

Yes. We really -- we said it at the mid-year point. So again, in the -- really the whole second quarter, right, the end of the first quarter, the second quarter, we -- and I think a lot of companies were in our place. It just -- you didn't know what was going to happen. We didn't know how deep, how bad the impact is going to be. How long it might be. I think it's turned out to be maybe even a little longer than everybody anticipated, but I don't think it's -- the depth and the impact did not get quite as bad as maybe -- well certainly not as bad as we had feared. So midyear, we just said, listen, we want to focus going forward. Owen Sullivan, our COO, keeps telling the team, we can't let COVID be the excuse for not getting something done, not going out and taking care of a customer, not calling a customer, not doing a sales call, not winning a deal, not converting somebody. So that was really the sense of the second half. And all these things I talked about, we made progress on our Aloha Essentials, our bundling product in a market where restaurants are going out of business, we met our third quarter plan for new sales in the SMB space for restaurants. And when Dirk Izzo told us that I made him stop because I said, you got to be wrong, I made him repeat it. So he got out, we got up, a lot of virtual calls, but we're able to, in some instances, get to restaurants in person to make sales calls. We had success with our Emerald product, our cloud-based retail product, bringing our pilots along, and then also having some sales success. We made progress with digital banking. We made progress with what we're doing with the software stack on top of ATM. So we look at in the second half of this year, making that progress. We told the team, we want the second half to have revenue growth over the first half. So that was our goal. And we had a really solid third quarter. We still feel pretty good about the fourth quarter where it's going to end up. And as we said on the third quarter call, we don't expect a big spike. We don't expect as much seasonal spike as we've had in other years, but we still expect to make really good progress in the fourth quarter, not only some metrics that we can see, but also underneath the covers investments and progress on our strategic projects.

Yes. So you mentioned the lack of kind of seasonal spike there. And I think just by way of review, it would be helpful to kind of tell us again why maybe it's a little more muted than what we might have seen in the past. Is that a function of just the client mix? Is it a shift of demand? Is it type of products that's being implemented? Just helping us understand why maybe there wouldn't be a seasonal bump?

Yes. I'd say 3 things. One, which is really more of a management action. We would like to take the seasonality and the spikes out of our business. And when you start to move away from selling perpetual software, when you start to move away from kind of selling at the end of the quarter, special deals, and you say, we're not going to discount that extra 10% to get a deal this quarter, we'll wait until next quarter. One of the benefits in 2020 is we didn't have quarterly goals per se because we were challenged with our numbers. So we said we're no longer going to drive quarter-to-quarter. It helped us smooth some things out. And those are actions that we took on purpose. The second thing is we have some crazy comps. We had a really solid fourth quarter last year particularly on the ATM sales. So it's going to be hard to replicate that. And then lastly, the market, particularly around ATMs, we see a lot of banks who are still very, very committed to the ATM as a strategic asset in how they deliver retail banking. But they're waiting too to see the economic impact of COVID. And so they kind of held back on some of the capital expenditures. We think that's more of a temporal, but it is impacting us in 2020, and we think it's going to impact us in the fourth quarter. So our ATM sales won't spike. SCO has been a little interesting. It's been different because a lot of our self-checkout clients all year-long have been so busy. It's been hard for them to do their normal refreshes, they're still going where they might have a 16 lane store, and they might have 4 self-checkout and 12 assisted. They might be going -- their plan might have been to go to 8 and 8, and it might have been disrupted this year just because of the pace of business. And then you get into the fourth quarter with retailers and they're very focused on peak period post Thanksgiving. So I think those things really hit our fourth quarter. We don't see those as long-term negative impacts, but more of a maybe while year-over-year, we didn't get quite as much spike coming here this quarter.

No. That makes total sense. When we look at the EBITDA in the quarter, margins did expand sequentially and year-over-year. So that was really good to see. I think one of the things that we're kind of grappling with -- from investor questions is really what are kind of additional costs that are going to have to creep back into the model in order to kind of pivot back to growth? Or is like incremental margin capability just a function of better revenue growth, and that should be enough to continue to see some expansion as we think about next year?

Yes. So we had some things in 2020. And obviously, some things that hit in the third quarter that would benefit that I'd call them not permanent cost reductions, but short-term cost reductions. Actions that we took in 2020 to reduce our cost, maybe discretionary costs, maybe some other -- we obviously focused on cash management in 2020 as well. I'll give you a really good example of a temporary cost savings that would be Mike's salary. So in 2020, I don't get paid. So we're saving money on my salary. And I told the team, I don't think that's going to be a permanent fixture of our savings going forward. So while we have some things that were savings in 2020, we know some of those -- we have to spend money coming back, whether it's compensation for Mike or others who also gave up some money, whether it's incentives. We -- we're not going to be able to tail our incentives because we didn't tail our targets. We didn't travel. So there are some things like that. So we actually took some actions to make some permanent cost saves. We had started to do that at the beginning of the year, we held back on that. We had announced a $90 million permanent cost save. We're doing that now in the fourth quarter. So going forward, we'll have those costs out. We talk about an outlook for next year that maybe isn't as optimistic as some of our competitors, simply because we want to look on the hardware side -- because we want to look at the hardware side and say, we can still operate, make money at a different level. We hope the ATM market, as an example, comes back stronger than we anticipate, but we say we can operate at this level, about 250 in the quarter. And make money if we readjust our cost structure. So we're doing all those things. So then 2020, we can focus on earnings, we can focus on earnings margin, books and cash flow, even if we don't bounce back to pre-COVID revenue numbers.

Okay. So are you saying that the cost initiatives that you think you've already put in place and already actioned are enough to take margins higher, assuming we have some normalcy into next year? Or are you suggesting that you stand ready to take additional cost measures if necessary?

But I'd say -- so we have an outlook for next year based on -- we make an assumption, right, and we make an assumption with what happens with COVID, what happens with customers. We are a lot smarter now than we were back in March when COVID first hit. We're lot smarter on the impacts to our client base. We're a lot smarter to what they will continue to spend money on and what our revenue mix looks like. So I think the steps that we've already taken, the steps we've taken into the fourth quarter, heading into '21 will get us to better margins in '21 based on our outlook. On top of that, we look at -- we've stated that we want to get to a 20% EBITDA margin over the next number of years. And we know that some of that margin improvement is going to come from shifting the mix from about 67 or about 2/3 software and services last year to our goal of 80. Because software services drives a higher margin. We know that our margin will go up. But we also know we had to take some costs out. We took some costs out now. We also have plans going forward. But how do we just keep getting more efficient and more effective, whether it's our hardware platform, where it's how we do our services around the globe, whether it's our corporate cost structure. So we've got ongoing plans led by Tim Oliver, our CFO; and Adrian Button. Adrian runs we call the lean factory now. So he has responsibility for all the hardware manufacturing, deployment, all these services around the globe. And he's got 2 goals, his #1 goal is quality, customer quality and #2 goal is to do it as cost effectively as he can. And he believes he has the opportunity to in a quality fashion delivered at lower cost. So he'll keep finding ways to save money going forward. As part of that, how do we get to 20% EBITDA margin, which for us is a very important goal.

Yes. No, it's a -- I mean, I don't think it's ambitional. It certainly seems like it's within your reach. So it's good to hear that you can have margin expansion with kind of the cost initiatives underway. The other thing that was I think most impressive, quite frankly, was just the free cash flow. And the question there is, because in the quarter, it was very strong. Year-to-date was even more impressive. And this has been an area where it's been very kind of skewed, right? It's very bifurcated for you guys in the tails of the year. So the question is, in this process of mix shifting and transitioning the business and doing all the things you've been describing, is it possible that we could get some more linearity around your free cash flows?

Well, yes, Dan. Because you couldn't get less linearity than what we had. So last year, for the first 3 quarters, we were negative cash flow, we are minus about $21 million. And we made it all up in the fourth quarter. This year, 2, 3 quarters, we were plus $299 million, about $300 million of positive cash flow. And so yes, I mean, clearly, that linearity is important to us. We had maybe found in some practices. Having all your cash flow come in the last quarter of the year is not really where we want to be. So I'll say -- so we did some things this year that were very aggressive that we needed to do in COVID, where we set up a cash power, we assigned somebody literally every minute, every day to track cash coming in the door, going out the door and how we manage. It actually helped us identify some things that maybe we hadn't been doing as well as we should. So there's some long-term practices that got better. We've made a conscious effort, as I said before to kind of to minimize seasonality, not only on how we operate, how we spend money, how we manage our inventory, but also how we book revenues and bring customers in, getting them off that end of quarter, blue light special, if you will, where we give them a special deal. So some of that predictability, we believe, will carry into 2021. I don't know if we'll be quite as linear in '21 as we were in 2020. 2020 is going to end up to be a really solid linear cash flow year. We feel pretty good about that. If we have some spikes next year in the revenue model that may drive a little bit, but we will certainly be more linear in '21 than we were in '19.

That's good. That's really good to hear. Let's pivot a little bit and talk about some of the other areas of demand that you're seeing. You hinted on this a little bit. But when we think about banking, it does seem as though digital banking, digital insight and D3 are really high watermark, so to speak, for you guys right now. So maybe can you just give us a sense of what your clients are asking for, kind of the duration of implementation for these? Just anything that would enable us to kind of get rooted in what I think the growth trajectory might look like next year for these areas.