NCR Voyix Corporation (VYX) Earnings Call Transcript & Summary

Hi, Good afternoon. My name is Charles Nabhan as a member of the fintech transaction processing and payments team at Wells Fargo, along with Tim Willi. I'd like to welcome you to the conference, and thank you for joining us. With me today is NCR's new CFO; Tim Oliver as well as Michael Nelson, who is the Head of IR. Gentlemen, thank you for joining us this week. We have a lot to talk about. So I'll just dive into the questions. Just as a heads-up, though, we will not be doing Q&A at the end. But if you do have any -- if investors have any questions during the session, feel free to e-mail me. My e-mail address is charles.j.nabhan@wellsfargo. I'll try to get to them if I can, time permitting. So with that, I'll dive in.

I wanted to start with the restaurant industry. There's been some misconceptions around NCR's positioning in the market over the past year through the pandemic. So with that in mind, I was hoping you could discuss how NCR is positioned in terms of size and type of client within the restaurant industry.

Sure. Misconceptions? How?

As far as -- there's been some -- obviously, the concerns around small businesses as well as exposure to smaller restaurants, which may not necessarily be a significant exposure to...?

Yes. So we're at 60% of our restaurant depicture, which means they have done very well during this pandemic. And I think it's around -- 12%, 13% of our business is in the small and medium size, so think 20 or 30 stores or less -- restaurants or less in the chain, that's about 12% or 14% of our business. We skew to the high end. We skew to the quick serve. But for the most part, our customers have been very, very well.

Got it. Got it. And within restaurant as well as hospitality, you've done a lot of work on product, and I was hoping you could just walk us through that journey? And in terms of your positioning in product, talk about how product sales have been pre- and postpandemic as well as the outlook for some of your newer strategies in terms of product bundling as you approach the restaurant hospitality industry.

Yes. Your point is well taken. In that, a lot of our technology offerings, if you go back 2 years ago when Mike just arrived, they were long in the tube, or frankly, not competitive. And whether it's in digital banking where these investments came or money involved through acquisition, you would be questioning our product offering or in the restaurant space where our Aloha Essentials pack is now ready, it is starting winning again, taking back some rightful share. Or if in the retail space, where we've launched Emerald, which is the next-gen platform for our retail customers that will rail off their lanes and tie into their inventory into the back office. All of those investments are now nearly complete. There's still functionality getting added to them. But the timing of those was such that we completed them coming into the pandemic. So none of them had much traction prior to the pandemic. We were still getting those things ready for market, so to speak, and getting us back to being competitive. They became ready during the pandemic, and we're seeing nice uptake now. But most of our growth story from here is around those technologies. It's around our digital banking platforms being robust and growing, again, taking back customers that we had lost and growing beyond that. It's around Aloha Essentials becoming, again, the premier offering for restaurants and allowing us to take back share there. And then on the retail side, we continue to grow our SCO business, but more importantly, in the SCO hardware to wrap a software layer and a service layer around the SCO that allows us to make more money per lane, get paid a monthly subscription beyond those lanes rather than just selling hardware into it. So more lanes, more revenue per lane and longer-term confidence.

And maybe -- let me provide a little color around the hospitality business that you mentioned. For those that aren't familiar -- so for us, hospitality really is restaurants. So it's about 94% of our hospitality business is restaurants. So that's really the exposure, as Tim said, it's about 60% of our large quick service is restaurants. So one of the things that we've seen during the pandemic is there's obviously been a big push in demand for things like take-out, curbside pickup, delivery. We've launched that with our customers. We've launched things like even at the table service restaurants using a QR code with your smartphone to pull up the menu. Not only can you pull up the menu, you could actually order on your device, it goes straight to the kitchen, straight to the bar. You could pay on your mobile device, right, so a seamless transaction. Literally, the customer does not have to interact with anyone at all. Now that's something that we launched during the pandemic, and we're seeing some really nice traction on. Tim mentioned Aloha Essentials, the bundled solution of software services, hardware and payments, right? So payment is another really big opportunity really across both hospitality and retail. We're now starting to bundle payments into our bundled solutions and looking to collect a click for every transaction that goes through our point-of-sale terminals. Again, one of the things that I think is lost a little bit is when we talk about our restaurant business, our retail business, the cornerstone, it's the software that essentially is the ERP system that runs the entire restaurant, that runs the retail store. So it's really critical for our customers to be able to run their environment as well as to adapt the change in consumer preferences, particularly as you see there's an accelerated shift for more visual transformation.

Got it. Got it. And just staying on that topic, it's been -- it's obviously been positive that you're skewed more towards some of the quick service restaurants within that business. But some of your competitors have not been as fortunate through the pandemic. Could you talk about the competitive landscape and how that's changed over the past year?

Yes. So you are talking about the competitor who admitted that they weren't going to compete or couldn't compete with the high end. And I think that's what also differentiates. We are completely scalable, meaning our Aloha package can serve organizations that have 10,000 sites or an organization that has 2 sites and you get the same -- you can get as much functionality out of that as you want. Look, the competitive landscape is tough. I mean it's not -- there are several people who do what we do. We have a bigger installed base than anybody. Our product set is more robust, and we can wrap professional services or other solutions around our product set that others can't do. As for instance, if QDOBA needs to adapt to an environment where people are ordering off their phone or ordering remotely rather than walking through that line and picking, pointing at what you want, you need to create the ability in their software set for the customer to have that same experience and to be able to, in essence, point at what they want on their phone and have it appear in their order. It's those kind of things that we can do for our customers. The ability to [Technical Difficulty] -- I guess I'm getting some even feedback. So did you get an echo there, Charles? It went away. So not just to shoot the QR code, you probably been to a restaurants to shoot the QR code and it brings the menu up on your phone, you still need to talk to the waiter to then order your food. Our application allows you to shoot that QR code, it brings up a live menu, you order from the menu, your order goes straight to the kitchen, and there's no interaction with the waiter. That food gets delivered to your table, the way you ordered it, with your comments directly to the chef, and you hit a button and pay and you never have to interact with anybody who's there. So we're trying very hard to bring new functionality to our customers through that offering. I'm not sure our competitors that they know they can't do it. They certainly can't do as quickly as we can do it.

And I'll add an interesting data point just so that it speaks to the competitive environment. So in the third quarter, without a doubt, difficult environment with COVID in the restaurant industry, right? The restaurant group, led by Dirk Izzo, actually exceeded their plan for the number of new Aloha Essentials net-new sites that they signed in the quarter that beat their plan that was started at the beginning of the year. What does that mean? Right, that means that they actually signed -- first of all, signed more customers than they lost, and actually, signed more than what was originally planned at the beginning of the year. I think that speaks to the competitive positioning of how we feel like we're very well positioned and actually are in a position to now take share and start to really accelerate growth in that business.

To be clear, Charles, we enable those other folks to grow, right? Our lack of investment, our lack of customer focus, in fact, we disappointed too many customers. As you know, our customer satisfaction rankings were not high in 2018. Those have all improved now, and we've got to go back and fight to get back to share that we allowed others to take from us.

Got it. Got it. And sort of keeping with that theme and switching gears to digital banking. That's a business that was acquired several years ago, Digital Insight and has been very much revitalized under new leadership. Could you talk about some of the drivers of that growth over the past year or so, such as retention as well as your product road map? I know you did an acquisition in that area as well. So that's -- I think that's an area that has been very positive for you. So I was hoping you could elaborate on that as well.

It's a supremely valuable business, right? And you can see that in some of the folks who are pure plays away from us that the valuation put on those businesses might even exceed the value of our company right now. Our digital banking business is large. It's very profitable. It's very free cash flow positive, and it's growing at a decent rate. You are right, we had -- we did an acquisition that was important. It broadened out our customer set pretty dramatically. At the same time, we also invested back into our existing platform a considerable amount of money to get that up to speed. Not so different than what we described in Aloha. We needed to invest. We had neglected a very good technology actually until we neglected it. It's now back up to the above par and ready to compete. So that business is poised for growth as well. We'll share our growth rate and our margin rate with you. We'll break that business out by itself from the rest of banking in 2 days' time at our conference and help -- in the future, help you understand whether that business is being successful or not will give you the banking success. Success comes in a couple of different ways there, right? It comes both from winning accounts and we've talked about losing accounts in 2018, gaining 18 accounts back in 2019, gaining at least that many already this year with more to come before this year closes out. We're winning in the marketplace. We're taking back new accounts. Secondly, the number of accounts is growing. We've discussed in the last 2 quarters our -- in each of the last 2 quarters, we're up 12% year-over-year in utilization of -- by our customers of our digital banking solution. And those who have already adopted digital banking are using it more, the number of transactions taking place are ever higher. So a lot of ways to grow. There are tangential spaces as well that we -- our digital banking platform can move into and intends to move into, such that we capture more share of wallet with those customers while we're there. So there's no shortage of opportunity in digital banking. And we're very, very excited about it.

Got it. So within the ATM business, results have been somewhat lumpy over the past couple of years. But as we get some visibility into next year with the vaccine and the outlook for banking, presumably improving, could you talk about some of the conversations you're having with bankers in terms of ATM outsourcing and self-service banking?

Yes, sure. And remember that ATM hardware makes up $900 million of total company revenue currently. It's our least -- one of our least profitable lines of business. We don't dislike hardware, but that's where we are. So what we're much more excited about are the services in software and solutions to get wrapped around those ATM. What we did say last quarter is -- and you're right, it's lumpy. Charles, it's a business where when you get a large order from a major customer, you have some pretty significant revenue upticks. In fact, we were comping in the third quarter of this year to a 60% year-over-year growth rate. So there is nothing we could have done to comp well to that. And the fourth quarter is going to look, as we said, more like the third in terms of total revenue for ATMs. We're going to presume that ATM hardware revenue stays about where it is, that it's a $900 million business a year over the next several years. The -- there was a delay in some implementations of new machines, some orders of new machines frozen a little bit, I think, by the technology shift that our big bank customers expect coming out of COVID, meaning, not so much you're going to need fewer ATMs but what types of machines you're going to use, what capabilities you're going to need in those machines, where are they going to be placed, so what types of units will you need when you start to neck-down your branch infrastructure. I think the ITM will become more important. The interplay -- the interface with the bank is going to become more important. The front door to the bank is likely to be your phone, right? But our ATMs enable that phone to be much more powerful than it's been in the past. So I think that bank spending will get better next year. We don't expect to spend it or lose it capital mentality at the end of this year where people order a bunch of ATMs to absorb the rest of their CapEx budget for the year. We're not planning on that -- we actually know that. So we're not planning on that in the guidance that we gave. And I think as the next year plays out, we expect slow, steady improvement in our end markets and maybe the ATMs follow. But what we will do is rightsize our physical plants, such that we have capacity only to serve that baseline need in ATMs, and we'll use our outsourced providers to help us shave those peaks, if you will, as they come. That means we can make good money, fair money on ATMs again. As you know, we've lost money in those in the past. We're back to the point now where we're making a little bit of money in ATMs on hardware, fully absorbed, making money. And we expect next year on a fully absorbed basis to be able to -- going forward to be able to do the same thing.

If I could add, I think what's important really around the ATM market is, when we speak to our bank customers, they indicate to us that ATMs remain a critical part to their self-directed retail banking channel. Right? And really, what they are looking to do is, they are looking to -- they are evaluating their bank, their branch footprint, right? How many branches they need, where it's going to be? But one thing that is clear is that ATMs and ITMs are a critical piece to that. So what they are really looking to do is where do they want to deploy those ATMs and ITMs, that's really what's being evaluated. However, what they do continue to invest in and they are making strategic investments is the software, the software across our entire fleet of ATMs, and we've seen some nice tailwinds in the -- in our banking software business that so independent of a new ATM sell. Things like security, enterprise monitoring, transaction processing, remote check deposit capture software, those are the investments that they are making. In the third quarter, we announced that we had a top 5 U.S. bank that bought our Activate Enterprise, our new ATM multi-vendor software and deployed it across their entire fleet of ATMs, both our ATMs and competitor ATMs. And that deal did not include any new ATM hardware at all. So you really -- they are making investments to upgrade the software stack. Those are investments they continue to make. We want to own the software. If hardware picks up, that's fine, we'll take it, but we're really focused on the software, and that's where the bank is really continuing to make strategic investments.

Can I interrupt you for a second. I realize people are going to see we are not 6 feet apart. I want to let you know, we were in a bubble here. So NCR created a bubble for this week, and we get tested every week. We were tested an hour ago.

Our Investor Day is in 2 days, so we've been prepping for Investor Day and created a little bubble here. Hope everyone joins our Investor Day.

So don't worry about it. We will be all right.

Got it. And just to stay on that topic and thinking about it on a high level as it pertains to one of your key initiatives, which is building recurring revenue. Is it fair to say as you build that software base, there's contracts, that's recurring revenue, that's based on contract. So that is -- I think sometimes it's underappreciated that that's actually -- that business is actually a tailwind to recurring revenue as it grows. Is that a fair way of thinking about it?

Yes. I think that is. So we've talked a lot about wanting our revenue to be more recurring and moving at least 60% of our revenue ultimately to be recurring revenue. There's a lot of good things that came back. It's much more predictable. It's much more valuable revenue. And it's really the way we should be recognizing revenue or generating revenue because we are a solution provider, right, not just a hardware provider. Now the way we compensated salespeople in the past for a variety of reasons, we used to take a lot of revenue upfront with the hardware sale. That's not the case going forward. The banking business was a little bit ahead of our other 2 segments in terms of selling on a recurring basis. So they get started about a year earlier. You can't buy software from us now on a perpetual license fee. You must sign up for a contract over a period of time. And with that license comes to support comes both a service and a maintenance package.

Yes. So in regard to banking software, in the third quarter, we had almost 250 different banking deals sold as a recurring revenue stream that previously would have been sold as an upfront perpetual license, right? So that makes that revenue obviously a lot stickier, a lot longer. It has a long tail to it. It's profitable. But we've made that switch, particularly within the banking segment and that high number of deals that are now recurring revenue.

Or let me try it in a different way. About half of our banking business is neither ATM hardware or digital banking. So it's everything else, right? It's all the other software and solutions. Of that half, 70% of that is already on a recurring basis. So they really have made significant progress in that business toward becoming more recurring.

Got it. I want to switch gears to the cost side and margin. You've done a lot of work on the cost structure of the business, not just in manufacturing hardware just across the businesses. And we saw that in the third quarter when EBITDA margin expanded 220 bps sequentially. Could you talk about some of the work that you've done on the cost structure as well as your path to achieving 20%.

Yes. So we've done the work. You've not seen the benefit of the work yet. And here is the reason, before I got here back in 2019, we had to take a bunch of costs out, just to offset some legacy costs that were coming on like this building to happen to be in. So there was significant cost action then, but it got obfuscated by this -- that wave of cost coming forward. Now we came into this year telling you we take out $90 million of cost and get on more of a regular continuous improvement cycle of rightsizing our cost structure. I think we've described it as a target-rich environment, and in fact, it is. We have an expensive cost structure. This year, COVID got in the way and caused us not to take more permanent cost-out actions, which are primarily people costs for us and to make it more temporary. We're now back on -- once we saw the light at the end of the tunnel for COVID, we started to convert those temporary costs out to more permanent actions. And you saw -- to your point, you saw in the third quarter, the benefit of those temporary cost actions. And we committed at the end of the quarter to say, "Those temporary, we're going to have to pay our executive team again. I mean they can only go so long getting paid 0." So those temporary actions will be replaced by more permanent actions that are underway and will be completed by 12/31. Those actions, I think we said there will be at least $90 million of annual run rate cost-out by 12/31. We'll give an update on where we are against that in a couple of days' time. And we also talked about going further in 2021. So think about that first $90 million being the indirect layer, by going after the indirect overhead but more the non-product or service direct cost. 2021 is going to be all about squeezing more cost out of our physical plant for manufacturing purposes, getting our throughput yields higher, making better use of Jabil and our outside contractors and getting significant cost out of our service footprint. The number -- we don't take a lot of dollars out of each of our calls every year, truck rolls every year, to save significant money. I mean we know that every truck roll costs us around $250 for a fix. Take $10 out every one, and it's a beautiful thing. So we're going to look very, very hard at those, what I'll call, more structural direct costs out in 2021.

Self-checkout has been one of the -- under the radar aspects of the story. And presumably, the pandemic, if there's been any silver lining, it's driven demand for some of those capabilities. So I was wondering if you could talk about that a little bit? And what you're seeing in terms of demand from some of your customers in terms of self-checkout, I know you talked a little bit about curbside within the restaurant industry, but it obviously applies to your retail client within grocery and other verticals as well?

Yes, it's terrific, right? I mean it's terrific. It's the big box retailers. The grocery stores have come on board. And you can imagine it's going to work its way downstream. I suspect it'll be convenience stores ultimately using self-checkout. The capability we built into our self-checkout platform is very exciting. The #1 reason people don't want to use self-checkout is because they have shrinkage, they have lost. And -- or the customer doesn't like to use them. They don't like using because the machines can't tell an apple from a banana. Or you go to buy beer and you have to have somebody come over because they don't know whether you're '21 or not, right? The functionality we're building into our self-checkout software package now allows the machine to tell the difference between an apple and a banana with visual system -- visual AI and it allows visioning of the human face to determine age such that you don't need to come over and check my ID when I buy beer. So that makes it a more convenient experience for the person checking out, and it also derisks the installation of self-checkout for those vendors. It's a good business for us, and it's growing. The -- I think the hardware unit business will grow 8% to 10% for the foreseeable future. We think it's a -- the 5-year growth cycle is likely to be an 8% to 10% growth rate in units over time. As you go down, scale to the convenience stores and stuff, I suspect the price points on some of those may come down, but still a very good growth dynamic. But more importantly for us, so we don't want to just put the machine in the lane. We want to own the lane. We want to run that lane for you. We want to have our platform run all of your links. If you go to a Walmart over the holiday season, we know whether the lanes are up and running because we have responsibility to make sure that they are. So those self-checked out lanes, I can tell you right now, are at 99.995% uptime at Walmart because we track it, and we're responsible for it. So it's a great business. More importantly, it gets us closer to our customer. It allows us to demonstrate our really terrific technology and to wrap our professional services around it to help people take better advantage of the technology.

Got it. And M&A has been a part of that business in the past, which was put on hold earlier in the year. But last quarter, you talked about getting that strategy -- getting the M&A strategy up and running again, which really reflects your degree of comfort with the operating environment. So with that, could you talk about the M&A -- your M&A strategy going forward, not just from self-checkout but just across the businesses?

So we are less uncertain. Right? So we said that last quarter. We don't know when this pandemic will be over. We're not going to call the bottom here on the pandemic. But it does feel like all of our customers have figured out how to operate in this environment just like we have. And so if this has to perpetuate a little longer, we're comfortable operating this environment. We've proven to ourselves and through our results that we can generate free cash flow in this environment to be profitable. So we can then turn our attention back to strategy. I'd say that the acquisition pipeline is strong. The expectations for value haven't yet come together. We're still -- let's just say that the expectations of sellers didn't come down with the pandemic, even though their forward curve on revenue and profitability might have, and so we're still trying to find our way through where valuations are. But the pipeline is robust. Look in the past, they've been bolt-on technologies, right? We've made the decision to buy technology when we could get it faster and with higher EBITDA generation by buying it. We do the make-by-decision on most of those, and it's really about time lag. We can write any code, but if somebody far enough ahead that the time we save 18 months or 24 months is worth it in terms of pulling that EBITDA curve forward, that's a decision we look at every day and we know what the cost is. So we can -- we know what the walk-away point is for those technologies. We've also spent some time looking at services businesses. The nice thing about having a balance in your portfolio of acquisitions is the ones I just described come with no revenue, and they just come with a need for further investment. A services business fits nicely on to what we've already got. It expands our capabilities for our customers and delivers revenue right out of the gate and balances out the portfolio. And then lastly, in the hospitality space, we have done several smallest deals to bring distributors on board that we take in-house, and it's actually very accretive very quickly.

Got it. Got it. So we have a couple of minutes left. So I'll just end with a quick one for you, Tim, here. You're fairly new to the business, though you do have some experience with the management team working with them in the past. Could you talk about some of the observations that you've made and the perspective you've brought to NCR. And maybe if given your fresh set of eyes on the business, any changes we could anticipate in the strategy?

I think you could see seldom in our Investor Day meeting. I've only been through one earnings release, and I thought we did a damn good job and executed well, and our stock went the wrong direction. And I went to Mike's office with Owen and found him at the table and had a bit of a [indiscernible], and I said, "How do you guys live this way?" And they've done 10 earnings releases where we didn't get credit for execution. A lot of good work has been done in the last few years. We're on a terrific path in 2019. 2020 will be a breakout year for NCR, and we -- and the pandemic hit us. We'll get back on that path, where I think we're back on it already. To a certain extent, the pandemic bought us a little time to get our product set ready to go. But the amount of change has taken place in 2 years. I was here that Mike's first week in the job. I toured the building, I met people. I watched the technology work. Mike and I talked a lot about his strategy. And what he got accomplished in these last 2 years is remarkable. Now the business is poised for growth finally. And we can work -- not a lot of companies can do both grow and get more productivity out at the same time. It's a pretty tricky thing to do. I think we're actually at that point where we can do both at the same time, which, as you know, will drive really nice EBITDA expansion. So I'm thrilled to be here. I think my timing is excellent. I told Michael, today, the stock price has doubled since I got here, so it must be me. And -- but this is -- people only started to realize that this business under the covers. We have to do a better job of describing it. We get that under the cover. This is a very, very good business.

Got it. Okay. Well, as most of you are aware, NCR is having an Analyst Day on Thursday. So definitely expect more detail on some of the topics we discussed. And I appreciate the time that you guys provided this afternoon and this week. And thanks, everybody, for joining us.

Well, Chuck, thank you.

Yes.