NCR Voyix Corporation (VYX) Earnings Call Transcript & Summary

So good morning, everyone, and welcome to the Bank of America Leveraged Finance Conference and to our session with NCR. So I'm Ana Goshko. I'm the credit analyst covering technology and [ telecom ], and I will be moderating our discussion today. And we're very pleased to have with us Tim Oliver, NCR's Chief Financial Officer; and Michael Nelson, NCR's Vice President of Investor Relations and Treasurer. So with that, let's get started. A quick note to the audience. You have a tool through which you can submit questions. So if have any throughout the course of our discussion, please feel free to send those along, and I will check those and try to include them, if not covered.

And with that, as -- by way of introduction, Tim, just having joined NCR in June, would you like to make any introductory comments on what your experiences and impressions of the company have been to date?

Yes, sure. Happy to do it. I think to let people know, these red armbands mean we've been tested so we can be within 6 feet of each other without masks. And we're in our headquarters here in Atlanta, and we're trying to operate as normally as possible. I came to NCR the first week that Mike accepted the job as CEO. Mike and I had worked together in the past. And I got a tour of the building, I met a lot of folks. And I think what's most surprising for me -- first, I'm really glad he called me back 2 years later and asked me to go join or else I wouldn't be here. I'm thrilled to get to work with him again. Being frank, Mike Hayford is [ one of ] my favorite people on the planet. So much has changed in the 2 years since he's been here and since I was last in this building. It's hard to imagine. And I think the pandemic had made it a little more difficult to see how much has really changed externally. The product set is entirely refreshed, and it's much more competitive than it was. I'd say it was a little bit under-invested in, in many parts, particularly those areas we expect to grow most quickly. The team is new. The team is energized. The team is aligned. Mike's direct reports interoperate as well as any team I've been around. The Board has been refreshed and has 4 or 5 new Board members on it since I was here. And the culture of the place is incredibly dynamic. It doesn't feel like the old hardware company anymore. It feels an awful lot like a technology company that happens to live across the street from one of the finest technology universities on the planet with a lot of young, early-career folks joining the organization and making it a much more dynamic place. So I'm thrilled that it's worked out this way that I'm here now. I think my timing is terrific. I mean we're now focused a little bit less on the technology refresh and some of the heavy lifting, just getting us back to where we could compete hard. Now we're ready to compete. We're ready to grow. And I think the shift away from hardware towards software and then toward services required us to get more cost effective in our manufacturing plant, which is something I've done for a very long time, I think people know that, making productivity and continuous improvement part of the culture now that the technology side is, let's call it, refreshed. And so no negative surprises, all good surprises. And I'm happy to be here.

Okay. Great. Okay. So I think our plan is to touch upon each of the company's 3 end market segments. And then because this is a debt conference, we definitely want to touch on the debt structure topic as well. But -- so starting with banking, which is NCR's largest end market. You've had some kind of positive tailwinds within the pandemic and this period that we're in but also some challenges. But starting on the positive front, so the digital banking business. You've had a couple of quarters of positive user growth. What's driving that? And how should we think about the opportunity?

Well, like all of our segments, right, the COVID environment has driven an adoption of digital technologies that's much more rapid than other ones had been the case, I think. Some would say it's pulled forward 3 or 4 years' worth of change into a singular 6-month period. So it's not surprising to me that our digital banking business is growing. It's not growing only because the number of users are growing. It's growing because we're winning new accounts, which is something we needed to do. We've been -- our technology had not been invested in. We did an acquisition. We invested in technology. And now we've got a platform that's ready to compete and compete hard. We're starting to take back some accounts we lost. We're starting to win new accounts. And folks who hadn't used digital banking in the past, they're starting to use it. So our user growth rate is about 12%. We're north of 21 million users at this point, and we expect it to grow. Also, those users are more intensive users as well. We're seeing more activity per user on the digital banking business.

Yes. I will just add that we've had a significant turnaround in that business over the last really 2 years since Mike Hayford came onboard. Prior to that, quite frankly, digital banking, we had under-invested in the platform, we had gotten rid of our direct go-to-market sales team, and that was a business that was in decline for a period of time. We brought in a leader, Doug Brown, to run that business. We reinvested in the platform and improved all the features, functionality and really started to turn that business around, I'd say, in 2019, where we actually went from losing customers to adding customers, and now we're seeing that growth start to accelerate. And certainly, with all of the changes that we're seeing amongst -- within the current COVID environment with the acceleration towards digital transformation and more consumers just using and adopting digital banking platform, that's been an additional tailwind to our business. But this is something that we've been working on turning around for the last 2 years, and we're really starting to see that bear fruit.

Okay. Good to hear. So on the more challenging side, the company has highlighted that banks' capital spending plans have been on hold amid the pandemic for ATMs in particular. Is there any sign of a thaw potentially with the recent news on the vaccine rollout pending and also a rally on bank stocks? And if not, what do you think needs to happen for spending to be unfrozen?

Unlike the markets, I don't think a lot of CEOs or CFOs have claimed victory on COVID yet, so I'm not sure that we've seen much in the way of change from a spending perspective. That said, when we talked about the pause in ATM or let's say, a linear, flat level of ATM sales going forward, it wasn't so much about banks not wanting to spend but spending in other places and trying to figure out what their ATM footprint would look like in the future. So they are spending, but they are directed more to the digital side of their bank than the hardware side. They can extend the life cycle of the hardware a little longer, the refresh cycle, delaying kicking the can a bit and invest in other places. Where we are -- we did see that their CapEx budgets did get constrained a little bit as their future was a little uncertain. We are seeing modest signs that the banks started to think about spending more as we get into next year. We're not seeing the end-of-year budget flush, the "spend it or lose it" mentality that we've seen in the past where people go and buy a bunch of ATMs at the end of the year and put them into storage and wait to install them. So we're not seeing that happening. But I think our banks are healthy. I think more time is being spent figuring out what does the ATM do for them in the future; how robust a machine do they need; what capability do they need on that machine; when branches start to go away, how many more machines do I need and what those machines need to do for me. So we're -- it's more of a strategic pause in some of the bigger institutions than actually a capital losses.

Yes. I would just add to that. I think within the banking segment, we're seeing somewhat of a bifurcated market where, on the ATM hardware side, the banks are evaluating their branch footprint, they're evaluating how many ATMs they need, whether they need to redeploy them off prem, college campuses, office, parks, right? So there's a little bit of a pause, I'd say, as they evaluate their real estate footprint. However, the area that they continue to make strategic investments in is on the software platform. And that's something that we're seeing in not only on the digital banking side that we just talked about on some of the other strategic software solutions that we sell that are unattached or unrelated to an ATM hardware sale. And that's where we're seeing the banks continue to make strategic investments. There are areas such as security, enterprise monitoring, transaction processing, remote check deposit capture, ATM multi-vendor application software. So they really continue to invest in those strategic software areas. And I mean, as an example, we recently had a top 5 U.S. bank buying one of our ATM application software to roll out. They wanted to modernize their entire software stack. They rolled out our Activate Enterprise across their entire fleet of ATMs. This is a large bank that has a multi-vendor ATM hardware approach where they took our software and deployed it across both our ATMs and our competitor ATMs, their entire fleet of ATMs. And that is an example of a sale that had no hardware attached to it whatsoever but the bank was making a strategic investment into their software platform. So I think we're seeing a little bit of a bifurcation within the banking segment around the strategic investments on the software platform and then really reevaluating their ATM footprint.

So Ana, that's Michael and Tim telling you that we spend far less time worrying about the ATM hardware sales than the outside world does. I mean it's less than 15% of our revenue base. It's one of our least profitable revenue streams. We spent all our time worrying about stuff we just talked about. So we're hoping that the conversation will -- in the future, will start to go in that direction.

Okay. Great. Well, that was perfect because you preempted my next question, so it was highly efficient. So let's move on to retail. So in the third quarter, your retail revenue and the adjusted operating income really grew notably year-over-year and despite a fulfillment of delayed self-checkout. So I have a couple of questions on this. Let me kind of throw them out at you all at once. So one, are you caught up on those? Is there any sort of pent-up refresh demand for self-checkout that's still pending? And then to what degree are you seeing any headwinds similar to what you're seeing on the banking side, from -- kind of frozen budgets on the retail side?

Go ahead.

Yes. Retail, so the last one first. The retail business is looking very good. We're -- about 70% of what we do is big box, drugstores, grocery. All are doing really well in this environment. So no issues there from a budgeting perspective. The timing issue is around when they can install sometimes so in a very busy season like now, the holiday season or at the onset of COVID when they were very busy selling toilet paper so fast they couldn't take lines down, so we had some issues getting into stores to get installs done. But the demand is still very robust, and it looks to be -- from a backlog or an outlook perspective, it looks to be sustainably strong. So we're going to talk about -- we've got an Investor Day here on Thursday. We're going to talk about the outlook for demand and scope over the longer haul. But it looks like -- external sources say 8% to 9% unit growth over the next several years is very likely when it comes to scope. So we feel good about the retail business. And I think the -- much like Michael described on the banking side, we're moderately entertained by hardware sales. We're much more excited about the software and services portion of our retail business. And that's got to grow as well. It's got to grow maybe as quickly as the hardware business, and we're working on that. So we've got a new cloud-based retail platform. We go from point of sale all the way through to the back office. We call it Emerald. That's a focus for us currently.

Yes. If I could add a little color around that on both self-checkout and Emerald. So I think one of the key pieces that I think investors often lose sight of is, in self-checkout, we're the #1 global market share leader in self-checkout and really the -- one of competitive differentiations for our self-checkout units is actually the software, it's the software that runs the self-checkout unit. So similarly to ATM, when we sell a self-checkout unit, we bundle it with software and services. On the software side, a year ago, we made an acquisition of a company called StopLift. That was a -- uses AI and machine learning to try to detect fraudulent activity. So the biggest hurdle to self-checkout adoption is shrinkage. So the StopLift acquisition has helped us further deepen penetration of really -- think about smaller grocery stores, retailers where shrinkage was the biggest hurdle to self-checkout adoption. We have another software solution called Picklist Assist. Anyone that's ever been to a grocery store and tried to scan produce know how frustrating it is to try to find a green apple and scrolling through 20 different things. Picklist Assist will recognize -- use the counter to recognize what it is that you're putting on the scale and maybe give you 2 options instead of 20. So again, it's the software that's driving increased adoption of self-check, obviously, in addition to changing consumer preferences of wanting to use self-checkout and reduce the interaction with a human. On the other side -- so within retail, there's really 2 pieces. There's the self-checkout piece and then the rest of our business, which is really enterprise software. And as Tim alluded to, we recently launched Emerald, our next-generation retail point-of-sale software solution. And really, what we think is, as we are seeing consumer preferences shift with the acceleration of digital transformation, that is putting pressure on the retailers to upgrade their solutions, right, to address the shift in consumer behavior, whether it's mobile ordering, curbside pickup, delivery. So we think that this is actually going to lead to a significant upgrade cycle for retail software. And NCR has the largest installed base of retail software in the world. And that's where we think Emerald really fits in. Emerald also being a pure subscription-based solution, charged by the lane, by the month. And we really do think that there's an opportunity here for a significant refresh cycle, upgrade cycle for retail software and well positioned with the general products.

Okay. Great. So hospitality, of your 3 major end markets, the smallest one but potentially the one that's been most impacted by COVID, given how tough the restaurant industry has been. Can you just provide an update for what you're seeing in this segment?

Yes. So 60% of our business is quick serve. They are doing -- that business obviously does well. And only about a little more than 10% of our businesses would be -- or customers would be in that small- to medium-sized businesses. So those who wouldn't be able to weather the storm. So that's why we're seeing our customers hold up well. Obviously, the return to some lockdowns and things is mildly concerning, though most of our customers have figured out how to operate in this environment. They've done well so -- for several months. We don't think this will be a big deal. And as you've seen in Europe, the new lockdowns are very different than the previous ones, and people are continuing to actually operate stores and things. Aloha Essentials is our new product set there. It's rolled out. It's doing very well. They've operated strong. It is a bundled solution. You don't buy hardware from us anymore, you don't buy services. You buy a solution from us that's all encompassing. That's going well. It's selling particularly in an environment where CapEx might be hard for some of our restaurant customers. It's not necessarily needed here. So we feel really good about where this business is going despite the fact that it's -- admittedly, it's a difficult environment in the last quarter. Our net locations went up, meaning that our attrition rate, both competitively and for failure, was actually lower than our new wins. So this business feels like it's got legs. And then as you said, it's the smallest but I think it has the opportunity to be our fastest grower over the next several years.

Okay. Great. So switching to more kind of financial focused and just kind of core operational topic, so software. So the transition from perpetual to term and subscription has been a headwind for you guys, both from revenue and kind of EBITDA kind of recognition standpoint. What has been the impact year-to-date? What segments is this most pronounced in? And when do you think you'll be able to kind of push through that so that the impact will be tailing off?

Yes. Very admittedly, it has an impact, but we believe a good investment in the future, converting those to much more valuable EBITDA numbers as they recur. Beginning of the year, we said $120 million of impact for the year. Even though we're in a lower revenue environment, I still think we'll be close to that number. It -- that part of our business hasn't been as impacted by COVID. So I think we'll be right on that $120 million-ish number for the year. The net impact should start to tail off in about 2.5 to 3 years from inception of the effort in that most of the contracts we're signing have 4-year lives on average. So the crossover point would be 2 and 3 years beyond the point that we've launched those efforts, and those efforts have been started probably in 2019 in earnest. They've been a little bit different depending on which sector we're in, which segment we're in. But I don't think that we're -- that will become far less of an issue in 2021 in terms of the net effect, right, year-over-year effect. I think once you get out to '22 and '23, we're not talking about it very much. The only thing that might change that is that ATM as a service really takes off. But if, in fact, it happens, you'll love it because the profitability of that business will be much, much better. The revenue per ATM machine will be much higher. And so I think we're getting out to the point where the impact would be -- fall down a list of causal descriptions in any quarter as to performance.

Yes. I'll put in a little plug for our Investor Day on Thursday. I've seen Tim's presentation, and I know he's going to take a much deeper dive into the transition and the impact of recurring revenue on the model over the next -- over the forecast period. So we will take a deep dive into that on Thursday. And you asked the question also about what segment has it been most impacted on. And clearly, that has been banking. By far and away, the biggest impact has been banking. I mentioned earlier all of those different software solutions that the banks are buying from NCR. All of those are on a recurring revenue basis, subscription. Actually, we even transitioned the ATM software to a recurring revenue stream. So clearly, the biggest impact has been on banking. Actually, in the third quarter, we had almost 250 different banking deals that were sold on a recurring revenue model that previously would have been sold as an upfront perpetual license. That's a pretty significant impact. So banking is clearly the leader amongst our segments today.