NCR Voyix Corporation (VYX) Earnings Call Transcript & Summary

Welcome, everyone. I'm Katy Huberty, IT hardware analyst at Morgan Stanley, and I'm really excited to be joined by NCR's CEO, Mike Hayford, today. During his tenure, Mike has made significant changes to turn around the company and most recently laid out a clear set of financial targets with a time line that is accelerated by the recently announced Cardtronics acquisition. Before we begin the discussion, please see the Morgan Stanley research disclosure website at www.morganstanley.com/researchdisclosures. And if you have any questions, please reach out to your Morgan Stanley sales rep. With that, thank you so much for joining us, Mike.

Well, thank you, Katy. Thanks for having me.

I want to start out by getting your thoughts on demand or CapEx recovery over the next year, which has been a big topic of discussion at this conference. For those that aren't as familiar with the business, about half of your revenue comes from banking customers and the other half from retail and hospitality customers. And given these are cyclical end markets, after the last significant CapEx freeze, NCR's hardware revenue grew high single digits in 2010, and that was followed by multiple years of growth. And so the question is whether there's any reason that we won't, at some point, see a similar revenue recovery post-vaccine as your customers reopen all their physical locations and return to normal foot traffic?

Yes. I think the general concept that people are going to get more comfortable and start to loosen up their capital spending, I think, is very valid. It's a little hard to predict, right, when the pandemic is going to end. Although we do believe that as you look at the year unfolding, we do think that sometime this year, maybe midyear, maybe third quarter, people will get back to normal. We would view the uptick, hitting retail and hitting hospitality as people go out and use restaurants, people go back to retailers, is kind of unfolding and then maybe thawing out those markets a little bit. There's different drivers in all the businesses that we operate in. I think banking, banking has continue to put money in the digital channel as they continue to move the retail, we are 100% focused on the retail side of banking. So as they continue to move their retail customers out of the branch, either into mobile or into a footprint that they direct them to an ATM or ITM, they've done the digital side this year, they've pulled back a little bit on the ATM and ITM. So we would expect that to recover as they -- the banks are looking and saying, if we get to the end of the pandemic, we don't have any more sustained losses in business, small businesses, consumers where they have more write-offs and they start to see a little bit better spread on the interest margin. I think they'll start loosening up the purse strings, and we would hope that we would see them a little more spending on some of the more capital-intensive products.

So retail and hospitality maybe come back first and banking may take a little bit longer, given some of the other factors impacting their business?

I think so. And I'd tell you, the retail, we've got a couple of different dynamics. One is in some of our businesses, they were so busy last year with the pandemic and the volume that was going through. For example, some of our large clients who wanted to install more lanes in self-checkout, really had to defer those plans because they simply didn't want to shut lanes down, they were so busy. On the other hand, we had retailers who were, quite frankly, shut down or very reduced in volumes. But the other dynamic that's happening is coming out of the pandemic, people do want to use more self-checkout. They don't want somebody else to pick their items and rather scan them. We're seeing that in down level from the big-box stores and to some of the smaller grocery stores and then into the convenience stores. And then they're also struggling with cost of labor. So if you think about convenience store, mainly gas stations in which we have a pretty big marketplace, they are struggling now with how much can they pay for their staff. And so how can they make it more efficient. So we're starting to see a pickup there in addition to just kind of a little bit of -- and then hospitality is the ones that I mean -- to the restaurants that made it through. We're continuing to see some momentum as we go out to our customers and trying to transition them from being Aloha maintenance stream and the support team into bundle essentials with a payment attached to it. That's happening, and actually, quite frankly, in 2020, that business held up a little better than we anticipated, given how hard the SMB restaurants have been hit. On the enterprise side, that was again, where the enterprise restaurants say, they all couldn't go to the refresh because they were so busy with the drive-thrus and the focus. So I think the restaurants will come back. There's a number of restaurants that went out of business. Somebody is going to open up that space, and we hope to get our share of those new restaurants as they come on board, which will be latter portion of this year into next year. So we've been around a long time. We're going to play the long game in the restaurants. And we're -- I would say we feel good about how at least to this point -- I don't want to say the pandemics over, but to this point, where we start to see light at the end of the tunnel, that we got to this point in really good shape with our customers, got here with really good shape with our products and then the momentum on some of our new initiatives.

So when we put that in context of your 5% revenue growth guidance for this year and assuming sequential improvements as you move through 2021, does that fully account for a CapEx recovery? Or if there's a robust comeback in CapEx and hardware spending, would that be incremental to your guidance?

Yes. You want a new guidance number. I would say -- so we looked at the 2021 plans. And I think as we shared at our earnings call, as we look at planning for 2021, we now feel like we kind of understand and it's a little different in every different geography, in every different country around the globe, and it's actually quite frankly different in some of the states in the U.S., just kind of how much activity is going on and what does that mean for our business. I think a year ago, in March and into early April, when the pandemic hit, I think the investors and we were a little nervous about our business, but I think investors were even more nervous than really the impact was. And again, the impact was not nearly as bad as we had feared. But as we look at planning for '21, we said a thawing in the second quarter, the vaccines rolling out. We think people will go back to normal. But we don't anticipate a big hop. So we say a kind of a CapEx unfreeze or spend. If we get a big spend, that's going to be incremental to what we laid out. We laid out kind of a thawing, starting the second quarter heading in -- really hitting second half of the year. And if it's -- if we're surprised, I think we'll be surprised on the upside. We did not want to have a situation where if it drag on longer, we'd be surprised on the downside. So we gave guidance on a kind of -- I don't know if there's normalized kind of pandemic thought, if it goes faster, we'll be pleasantly surprised.

And given some of the digital transformation trends that you talked about, in banking as well as in retail, self-checkout, in restaurants with online ordering and pickup, is there an argument that your addressable market or the level of spending in your markets will actually be larger post-COVID than what you were thinking pre-COVID?

Well, I -- so pre- or post-COVID, COVID kind of -- that almost -- you said my tenure, it may have seemed like I've been here a long time and I don't like to think of tenure. I think our strategy is exactly along that line. So we look at a restaurant, we look at a retailer, we look at a bank, and we say, we want a larger TAM within an individual institution. So what are more things we can do, and that's really the goal within restaurant space, with Aloha Essentials bundle up and bring as much technology to bear as we can and attach the payment. Same on the retail. In the banking space, with the combination with Cardtronics, what we can do just with what an institution does today with ATMs, we think that TAM is 2 to 3x bigger than just what we've been historically doing selling individual ATM, selling a break/fix service, a footprint selling some software. And then obviously -- and then doing what we're doing in digital banking. So on the ATM side, with ATM as a Service, we think the TAM will increase. Meaning, a bank will basically outsource that function to someone like us, and that will give us access to get more business. On the digital side, we would expect to see continued investment. We just went out, bought a company called Terafina to really help with online origination, because, again, you start to think about what a bank is doing. They're really -- the mobile device and the laptop device is really their retail bank. And if they have to send somebody to physical location, they send them out to ATM or ITM. And then worst case, they send them to a branch. But they need to connect less channels. So we see all that being very important. And again, our book of business is really focused on that, managing the channels for self-directed experience for retail bank customer.

Now I mentioned in the beginning that you've laid out very clear financial targets. And part of that is mid-single-digit revenue growth, but also increasing mix of software and services and recurring revenues and ultimately driving 20% EBITDA margins. As you approach that financial model, how do you think the market should value NCR differently?

Well, higher? I -- so we laid out some very specific goals. The strategy is fairly straightforward. We think that a software and service-based company versus a prior book company is more sustainable in today's world. And quite frankly, we think we have -- the ATMs are a very unique piece of hardware, self-checkout is a very unique piece of hardware. But the real value of both of the ATM, if you look at our new ATM, it's flashy, it looks like an iPad and it -- and it really is that user interface, it's the software that's important, in addition to being safe. Same with SCO. All this challenge all of you watching, go to Whole Foods and use the SCO there, that's an NCR system with an NCR software, and then go to another grocery store and use one of our other competitors, self-checkout, it can be really frustrating if you don't have a good user experience. So we really are focused on the software. We're focused on the service. We're focused on bundling. And then we've talked about recurring revenue. The more recurring revenue, the more predictability on the revenue stream, the more predictability in the earnings stream, we think that builds a strong and long-term company. And clearly, we're not happy at our margins where they are. So we've sort of target of getting that to 20%. The 20% quite frankly, if you get to a mix shift in more to software and services, which are higher-margin for us, that's going to take care of a big chunk of the margin expansion. And then we've done some things like last year, we did some cost cutting, cost management, took out $150 million of runway savings that will start to come into play in 2021. And then as we talked about Cardtronics, we've also identified some synergistic cost savings. So we'll get the -- well, not with Cardtronics, we'll get 3 different levers. Cardtronics runs at a higher-margin than we do today, so that will bump up our margin. We've got additional synergy of cost savings in there and then just continue to execute on the plan to shift the mix, we'll end up at the 20% EBITDA margin. We think a little sooner than we had originally anticipated as much as 2 years earlier. Somebody asked me earlier, what would be the one goal, so Tim Oliver, our CFO says, Mike, you've got to reset your goal, you're going to be -- we're going to get there too soon. I say the one goal I'd like to see higher is the 60% -- I grew up in a business where we were 85% to 92%. Remember 1 year, we had our revenue plan in the bag by mid-February. So I like that the predictability of recurring revenue streams. I like the subscription, the fees that we get that are planned out and already not quite booked, but we have the predictability. So if there was one I was going to say, I'd like to get to 60% and higher. I think the 20% over time will get higher just as we get more and more software, a focus, higher-margin business, more SaaS-based. But the recurring revenue is kind of an important goal for us.

Yes. I certainly think that if you can get above 60% recurring revenue in the multiple has a long ways to run. I mean the reason I asked about valuation is because you've noted that if the market doesn't credit you for those financial targets that you're willing to consider different strategic alternatives to unlock value. So the natural follow-up is what pass exists to unlock value other than just executing on your plan? And I think a lot of people think about these segments as potentially being broken up over time. Is it possible to do -- are there synergies that you lose if this business were 2 or 3 separate companies? Or is that a possible path longer term?

Yes. Well, first of all, I haven't given up on the market's ability to value us properly. I do think that where we trade today, I look at some of the companies that do vertical business services, like where I came from in the banking industry, and we're really trying to do that more share of wallet, more embedded. So you don't have to -- you price that on every different component, long-term contracts because over time, you're going to drive more revenue, more margin. So if you think about in the restaurant space, we think we can do that in the retail space. We think we can do that. There's synergy between restaurant and retail because some of the capabilities, rolling feet on the street, so rolling a truck to fix a piece of hardware, rolling a truck or rolling a team to install a restaurant or in a grocery store is a little bit the same function. It's a different POS. It's a different piece of software. It's a different piece of hardware. But it's the same function to implement sales support. We obviously want to attach payments, the payment environment is the same on the back end of bulk of those. So there's a fair amount of synergy in the commerce side, in retail and hospitality. And then you get to the banking side and banking, the digital banking, ATM environment, the IT environment and what we're doing with our CSP, which is connecting infrastructure platform. Those all fit together. Could you see pieces? I'd tell you, for us, it's frustrating, watching some of the hospitality brands and names who are smaller than us, they're getting very much valued on growth, and we're very focused on getting back to growth by expanding share of wallet in the markets that we play. But those valuations are obviously not being reflected in our stock price on some of the names in the hospitality side. Digital banking will be the same thing. We have a very large scale. We think it's a very complete product feature function platform. It's been in the industry. It's winning today. We just announced a couple of deals on the last call, some pretty big banks who had chosen us to be the digital banking player. With the front-end with Terafina, we can do the origination, we think we have a very complete offering, but yet some stand-alone digital banking competitors get quite a bit higher value. So we watch that, and we're very cognizant of if we can't continue to get our pieces back, we disclosed a little bit more around hospitality. We disclosed some metrics around what we're doing in the retail space, kind of next-gen with the platform subscription-based model. And then we disclosed some data around digital banking, a little bit information on payments. If we can't continue to get those on track, continue to get some growth, continue to get some more transparency, so people can see it and then value us, and I think we had mentioned before that we will continue to focus on that. There are some things that are a little easier as you talk about how do you -- how would you monetize, I'm not a big proponent of breaking up all the components, I think, that gets really, really hard and complicated. But are there some pieces that you could look at and say, wow, that on the stand-alone might have access to more capital. The biggest concern I have is if we don't have access to capital at the rate that some of our competitors do, we won't be able to reinvest, we won't be able to continue M&A. So I think we're going to make great progress in 2021. I think the market is going to catch up and start to value us more appropriately. But clearly, we will keep watching if it doesn't do that.

And as you mentioned, a key to delivering your targets is traction in your bundled software and services offerings in some of your businesses. I know you and I talked after the quarter about the fact that you actually were ahead of your plan on transitioning to ratable revenue, even during a COVID year, which is certainly encouraging, but Aloha Essentials in the hospitality space and Emerald in the retail space are 2 of those offerings. Just talk about what traction you're seeing in those products and attach rates in the market?

Yes. So -- and they're a little different. So Aloha -- Aloha's out there, the installed base that has Aloha, which is very large, both in the SMB side as well as the enterprise side. A big piece of that product today is already cloud. We're continuing to invest and take the whole thing into the cloud. But in the meantime, we're bundling. So we're going in with Aloha, we've rolled out some new products last year that are quite really interesting and very topical with our clients. So order at table. So with our product, when you walk in and scan a QR code for a table on your device, so on your mobile device, it's not just the menu. It's actually live. So you can walk into a restaurant and think about like a big restaurant, where there's lot, and you can actually order your drink or you can order an appetizer, and you can order Buffalo wings. And then it goes right to -- it goes literally right to the kitchen on the Aloha system, and they'll start making and they kind of run or bring it out even before your wait step comes to your table. We do the same thing at the end of the day. So at the end of the day, at the end of your meal, instead of giving your card and waiting, they bring in your check, there's a QR code on the check, you scan it and top-up an NCR app and you can just pay at table, integrate that either to our system or a third-party payment provider that you have today. So when you look at bundling that together, we bundle our front-end system, our mobile ordering system, and we walk into a restaurant, and we say, we'll file this together. If we need to refresh your hardware, in some cases, we'll charge you a monthly fee. And oh, by the way, we're going to attach payments and make the payment consistent not only with mobile ordering, but also in the restaurant because many times they're not today. And if you order mobile and you pay and you get to the restaurant, and you want to add something or something is not right, it's 2 different system. So we think we have a really, really solid integrated bundled product. And again, the market last year, in a very difficult year, the team did a lot better than I would have ever anticipated going on selling those bundled offerings. So we're sharing that on our quarterly calls. But that's really bounding and growing market with extensions to Aloha. And then in the retail space, Emerald is really next-gen by the lane technology that you can go in and run your store. We started last year, 2020. We do own -- and I do every 2-week focused meetings on all these major initiatives. The focus last was getting a product to the market and getting out and selling because we had been challenged for a couple of years with the [ Nexen ] product. I just literally went on a sales call a couple of weeks ago, we went out to Texas and worked with the client and got them signed up. But it's now taken off to the point where now our conversations are around capacity to convert and implement. And so it's shifting a business that historically had been selling POS hardware, selling POS software, selling a support model, selling [ biolane ], a subscription, and we haven't -- we've got the technology that we haven't started doing it, but we'll start attaching payments at retailers as well. We have to add a couple of functions to that. But we'll get to the point where that's bundled. And we bought a company, Freshop, that does the front-end mobile ordering for grocery stores and big box as well. So we'll start bundling all that together to the multiple channels, whether you order for delivery, order for curbside, or walk in the store, self-checkout or assisted, we can bundle that together on the retail side. So we share lanes. We call it lanes because it really is a little bit more than just Emerald. It's really kind of a product mixture that we bundle to really run a lane. And so we're sharing them, how much progress we have on a quarterly basis.

And then in the banking segment, digital banking is not so much of an attach, it's more of a stand-alone offering. It has required some investment over the last 18 months or so to stabilize the customer base and return that segment to growth. But last quarter, you did grow 4%, you said registered users are up 12%. You signed 5 new customers. Should we expect that digital banking momentum to continue or even accelerate as you go through 2021?

Yes. I mean we also announced a couple of very large deals that we won with the D3 platform. Interestingly enough, those were D3/Terafina before we had completed the Terafina acquisition, which gave us online account opening. So -- yes, I mean we talked about we had some challenges in digital banking going back, maybe for a number of years. In 2018, we put a new management team in that business. A lot of us that came in to NCR, have a big -- obviously, a long history in banking technology and in digital banking. And so we have a very strong focus. We stem the tide of losses. We started adding more than we're losing. We had a really good 2019 into 2020. And so we do expect to get continued growth in '21. I think we said we'd like to get up closer to 10% growth in that business. We've got a number of initiatives where we think we can start moving that direction into '21, into '22. But digital banking in terms of retail banking and the ability to execute that for our customer or our prospects still -- that is what retail banking us these days. So we're excited about the product and platform. We've done a much better job of supporting our clients. We've done a much better job of engaging in the market and all the influencers who work with the banks to select their vendor. And we feel pretty good about our share of winning, especially in that kind of mid-tier, those bigger banks who are picking us today for D3.

That's great. So we talked about the cyclical nature of your end markets and the potential CapEx recovery and the success you've had with some of the new growth drivers in software and services. The last thing I want to touch on, we only have a few minutes left, is the Cardtronics acquisition, which is really important because I think when this was first announced, investors were a little confused and you saw it as doubling down at ATMs, but the reality is it's not an ATM hardware business. It's ATM outsourcing and payments. And you've outlined really significant cost synergies, as you mentioned earlier, such that it's 20%-plus accretive next year, and that doesn't even include revenue synergies. And so you pull all that together and it pulls forward these targets of 80% software and services mix, 60% revenue, recurring revenue mix and 20% EBITDA margin. So just like to summarize what this is, what I want to get from you is because I think the cost synergies are pretty well understood. And I think investors believe that. Talk a little bit about where there might be upside from revenue synergies that none of us are baking into the model and some of the cross-selling opportunities between Cardtronics and NCR.

Yes. One quick comment on the timing when people look at and say, wow, that's kind of like, all of a sudden, you were doing a deal. You just did Investor Day, next thing we know, you're doing a large deal. And like why didn't you share it at Investor Day? Well, we obviously didn't know that there was anything going on. We learned about it reading the paper, like others did when Apollo put in their bid, they announced their bid. It's a company that, as you said, helps us de-risk our reliance in ATM hardware. And so when that opportunity came up, we jumped in and said, we would like to try to participate in that deal. So it came up in December, we participated. For us, the strategic fit is, if you think about ATM as a Service, which is our name for going to a bank and basically outsourcing that stack, if it really moves us from providing component parts to providing a full service, a service-on-a-subscription basis. So it gets to be recurring. It gets to be a service base. It changes the TAM, we think 2 to 3x besides just selling the component, meaning the bank has to do all those other things themselves. They have to -- we don't drive a single ATM today. We -- NCR do not drive a single ATM today. Cardtronics drives 275,000 ATMs. They own and deploy 75,000 ATM. So they have a capability to drive them. They can acquire the transaction. They have a network, offering network to switch the transaction. They have 60 million cards that are plugged on the debit side. So that capability, we think, will change that ATM business to be a subscription business and actually allow that to grow as a book of business. So that's the #1 synergy in terms of rev that we think will come with the fastest that we're focusing. The second one is on a retailer, we still think there's going to be a segment of the population that uses cash. As I talked after we announced a deal with retailers with grocery stores, with convenience stores, what they tell me is like, Mike, 25% to 35% of our payment are still -- our daily take is still cash. It's very difficult to manage. You, combined with Cardtronics, have the ability to come in and help us very effectively manage the cash, the cash management, electronic black box, and then actually, as you look at Cardtronics, what they do today, they actually provide programs for those retailers. So we think that has potential to be even bigger than ATM as a Service. It's going to take a little bit more time to ramp that up. With our footprint in retail, retailers in their footprint, we have a pretty good base to go sell to. And then the third piece is really connecting it with payments, that ability to go into the search ad free network to a community bank and say, your fleet of 150 ATMs outsource that to us, put them in our pool of 75 surcharge-free ATM. It gives us a really effective tool to sell to take and move towards ATM as a Service. And then we also think we can use that network to accelerate our payment acquiring business with JetPay because we have a more cost effective. It's basically cost of goods sold to build a [ rider on rails ] on the debit side versus being somebody else. So those 3 areas are where we have the focus on the revenue synergy. And you're exactly right. The cost will get out. We'll get them out quickly. And then the real upside is the rev synergy. A deal like this, that was a strategic fit, financially accretive day 1 and an upside, it was actually a great opportunity for us.

And just remind us what has to get done to close the deal? And is mid-year still the right timing?

We're still targeting midyear. We've got -- it's basically regulatory approvals. We have 4 major jurisdictions that we have to get through and where we've got them filed. And it's just working through those and then get closed. And then once we get closed -- so in the meantime, we're doing integration tasks jointly with them. We can do that. Until we get approval, we can't really go to market, obviously, together. But I think right now, we're literally midyear, end of June, early July.

Okay. That's great. Lots to look forward to this year. I really appreciate you joining us today. Thank you.

Thanks for having me, Katy.

Have a good day, everyone.