NCR Voyix Corporation (VYX) Earnings Call Transcript & Summary

Good morning, everyone. I'm Katy Huberty, IT hardware analyst at Morgan Stanley, and I'm really looking forward to hosting this discussion with the CFO of NCR, Tim Oliver. NCR is one of the most interesting and we think mispriced reopening stories. And Tim joined NCR in the middle of last year and has led the acquisition of Cardtronics, which will pull forward the company's long-term financial targets by 2 years. Thank you, Tim, for joining us. We're going to run this as a Q&A session. You can submit questions on the webcast portal. But before we begin, I just need to point out that you can view [email protected]/research disclosures. If you have any questions, please don't hesitate to reach out to your Morgan Stanley sales representative. So Tim, thank you again for joining us.

Completely my pleasure. I have my IR team here, Michael Nelson, our Treasurer; and Shama from the IR team, are either excited me -- to help me through this.

Great. Perfect. Thank you all for joining us. So I want to start out with the retail and hospitality segment because, as I said, NCR is a very interesting vaccine reopening play, particularly as it relates to these 2 segments. Over the last 12-plus months, CapEx in these categories was paused because even some of the companies that were doing very well during the pandemic really battened down the hatches to protect their customers and their employees from a health perspective. And really didn't want to create incremental disruption as they addressed, in many cases, elevated volumes, but in some cases, depressed volumes in the their stores. So talk about what signals you see today that demand will return. And should we think about this as a robust recovery, like, after the Global Financial Crisis, where you saw several years of high single-digit revenue growth?

Yes. I think it's more of a protracted recovery. I don't -- this will be a thoughtful investment back into their physical plant. We saw capital spending get rained in. We saw OpEx get rained in as well as, as folks really focus their spending on things that deliver immediate value, like the shift in the way that they delivered food or product to their customer set. And so if you think about our footprint in the retail space, we're about 70% in mass-merchant food and drug. So those folks were open. They're incredibly busy, and they couldn't afford to take a line down to do anything. They don't want us to touch their software, like, "Let us get through the day, and we'll get back to you." The other 30% are now, they paused everything to get through it or you think about convenience stores and gas stations alike. They just went on hold and live to fight another day. On the hospitality side, more impact, for sure, on the SMB side. They make up 20%, 25% maybe of our revenue is the SMB. I think 30 restaurants are smaller. And then the big guys, kind of, similar to the big retailers did really well. Our Starbucks and McDonald's and Wendy's customers, they were killing it. And they, too, had very little time to invest in plant, the physical plants. Certainly, no new stores, right? They put new stores on hold, which is helpful to us when they open new stores. And they just start talking about what can you do for me from a software perspective, "Help me process orders different than otherwise would coming out of that." Now we're starting to see each of those 2 kind of institutionalize those changes they made to the way they go about their business, they were successful getting through. On the retail side, our big enterprise customers are absolutely now starting to spend. They're accelerating their spend on SCO. SCO was up dramatically in the first quarter, be up dramatically in the second quarter. I think that's a little pent-up demand, but I agree with you that, that we see a double-digit kind of low teens growth rate in that space for many years to come as we go through -- we've got 1.5 million lanes out there, not nearly enough of them are smart lanes and not nearly enough from our against go. And as those convert, deem to be more versatile, or to be truly, let's call it, Platform lanes for us in our Emerald system. That's enormous upside for us, but it's going to play out over time. On the hospitality side, a little bit different story there. Our big customers, let's call them, our enterprise customers, they are absolutely starting to open new stores again. And they are looking at a refresh cycle and their hardware set. They will have resident software in it, where they were more likely to see to sell to them as a solution than it's hardware, but that's coming, and that's going to be important over the next couple of years. We've not seen an immediate investment from them, but the planning, the strategic thinking, the change to their store footprint has already started. And on the SMB side, you had a lot of folks fail, right? A lot of folks failed. And what we're seeing now is those who lived through this, had a business model that was successful, they collected a lot of money from the federal government as they went through this, and they're now investing in new stores. So those who've failed, they're going to be replaced by those who are successful. We're seeing new stores open. And we're at now at 150 stores converting a week onto our new platform, which doesn't seem like a lot when your installed base is over 100,000. But this is the newest, freshest technology and 100 stores a week for us, going to 150, I think, by next week or next month, pretty big deal.

Yes. You mentioned SCO, and one of the -- sounds like lasting impacts of the pandemic that we're seeing in the macro data right now is labor shortages and wage increases. And so I was telling Michael last week that I went to a New York City drugstore, large 2-story drugstore, and they didn't have one man checkout lane. You had to use checkout. And that's how they are addressing this labor shortage and the wage increases. So what are some of the other secular trends that are post pandemic?

Yes. self-checkout surely is a big deal. And it's -- we've been telling our customers that for a while, we'd be pushing the idea. Now we're getting pulled. Right now, our retailers are saying, we need your help. We can't get labor. The labor we get isn't skilled enough. Our customers aren't satisfied with the rates at which we can put people through the cash registers. How do I make sure that we check people out faster and more efficiently? I was on the phone with the CFO of a very large retailer and processing maybe more than 12,000 stores last week, and he said, "We've had it, right? Up until this point, we've been resistant to self-checkout. But we can't get good people, we can't get the right people. The people, we actually need them on the road delivering stuff for us because people don't want to come into the store sometimes." And those folks need to be out delivering. We were terribly worried about shrinkage and loss to the best. And you now convinced us that the technology that allow us to do facial recognition into [ tell a banana ] from a set of batteries and everything that we can limit our loss pretty dramatically. You've convinced this as a customer experience can be a good one, right? That every time somebody buys a bottle of wine, they don't need to have somebody come over and prove out that they're old enough. Our facial recognition can tell whether someone's over the age of 25. And so all of a sudden, they're pulling these technology and asking us to do more. I think it's -- we knew it was coming. I didn't know we knew it was coming this fast. So this individual said to me, "I need to change the whole layout of my checkout. It's clearly not efficient. The old way of lanes like this is not -- I need more open space, more ability to check out quicker and in different configurations." So I think it was a great conversation. It's going to take them a while, right? This is going to be several years for them to get this done and start with their flagship stores and move through. I think the idea of simplification of the store experience for the customer also goes through to the store itself. They don't want to deal with 6 or 8 or 10 or one of our customers that I have 17 vendors in the IT side. I can't have that anymore. Any one throat to choke. I need one person to go to who's going to run the store for me and make sure that whatever software I need, either they have it and can write it for me can solve that problem or they know where to get it. And they can tie it in very seamlessly with my point-of-sale system. And so I think that's a trend that's going to continue running their stores, what they want to do. They don't want to have to manage a bunch of vendors on the software side. And I think with Cardtronics coming on board, the trend of making the physical transaction less disruptive to the store is going to be a big deal. We -- as you know, we bought Cardtronics, we didn't buy an ATM company. We bought a company that allows physical transactions to take place and take place where the customer wants those to happen. And you pay by the drink or you pay by the transaction. So we think that closing the cash cycle inside of the store from the ATM through to the SCO machine and then back around is going to take a lot of hassle. I'd imagine, virtual vaulting of cash inside of the store. You never have [indiscernible] come. We just keep the cash in that store. We vault it virtually. It's an accessible tier bank balance at night, and we just keep it inside your stores. So 3 trends in retail we see. On the hospitality side, buy a table. So order from table, pay at table is absolutely going to come. Think about not needing any -- to have any waiters or waitresses in your restaurant, just simply having runners. The customer prefers -- so in our app, you can send your drink order and your food order directly to the bar and directly to the kitchen. It goes into the kitchen system that we run. It gets produced and it gets sent to your table. And there's no mistakes because there's no translation issues between your wait staff and your kitchen. It comes out quickly, and the customer just hits a button and pays to the table and they move on with life. It saves a lot of labor. It also makes the customer experience one that's pretty terrific.

And so investors are trying to understand and get comfortable with the longer-term growth story. Are some of these growth categories, like SCO and Emerald and Retail and Aloha, Essential Software in your hospitality business, are those large enough now to offset any longer-term pressure you might see in the traditional point-of-sale business? And what percentage of retail and hospitality revenue comes from these growth categories?

Yes. So on the retail side, SCO makes up about 40% of our total revenue, and that's increasing, as you know, at a pretty dramatic rate. It's growing much faster than the rest of retail. So it's going to make up more than half of it in short order. SCO is about -- right now about half hardware, half software and services. So think about half of that being recurring revenue and not tied to a replacement cycle, and that's increasing as well. So as SCO continues to grow, our software and services part of that SCO will grow very rapidly. I'd say the newer story is Emerald, right? That's our platform solution set for SCO lanes for stores to run the store. That's in its infancy. It's a new product set. We're only about with 5,000 lanes now. 5,000 lanes out over 1.5 million lanes, it's growing like a weed. We're up around 50-so percent. It will continue to grow very rapidly. It has to grow geometrically. And it will become a much bigger percentage of the total SCO sales will be Emerald over time. But the SCO dynamic is one that is going to be very healthy for the long haul. And for us, the question is how much of that SCO rollout can we make sure is on the Emerald platform or can we upgrade the Emerald platform and double or triple the revenue we'd otherwise generate from that SCO lane. On the hospitality side, we made a pretty major investment in that business over the last couple of years. It was a dated product set that needed to be invested in on the SMB side, in particular. So SMB making up 20% of our revenue. We had some pretty sharp competitors, right, and Toast and others who jumped into the space because we, frankly, didn't do a good job. We're taking back a rightful share there. We're winning again. And I think our product there, our cloud-based product is as good as anybody's and is as feature-rich, as I just described as any. So I -- we're going to take back share there. The enterprise level is going to -- in the hospitality side, it's going to look a lot like retail. They're very similar, right? It's hard to tell -- they're selling different products, but fundamentally, a McDonald's or a big grocery store, not that different in solutions. So they have some of the similar challenges. And so you're going to see some overlap in the platform layer that we write between those organizations. In fact, some have both grocery stores and food sales and think about some of the groceries with whole foods, we do both their restaurant side and their retail side.

Right. You brought up toast, which, as you pointed out, can compete in the 20% of your hospitality business, that's SMB. I often get asked about some of the start-ups like Toast and Light Speed. How much of a risk is that competitive environment to your larger retail and restaurant customers? I mean, are there instances where the startups have been able to penetrate your more established large customers? Or is it really just isolated to SMB.

No. It's not been their focus. They're not robust enough. Their systems aren't scalable enough. The customers don't want to take that risk. If we -- Toast cut headcount by half going through the pandemic great. We didn't lay off a single person. We let our customers not pay us for a while to get them through the cycle. We have the ability to -- with the scale and size we have to help them through this stuff and be a good partner through, even in a pandemic cycle. So no, I don't think any -- that's a threat. I think we'll bump into each other, Katy, is when you get above, say, above 10 stores, 10 restaurants and you get to, say, 50 or even 100. That's a space we've been spending a lot of time trying to make sure that our Aloha Essentials solution is very appropriate to that space, and it's priced appropriately there. Below $50 million you're probably leading with payments like they are. We add those 100 people to go chase down those accounts. They turn over like crazy, those stores -- those restaurants fail very frequently, right, that the affiliate is very high. So you're always grinding in that SMB space below 50 -- below 10 restaurants. And it's just a fight -- we'll keep fighting that fight. It won't be core to our growth strategy of the total company, but it's important that we compete and win there. Because look some of those folks, who have 10 stores become 50 and ultimately become more than that, I think, [indiscernible] or somebody like that.

Right. Exactly. And the other concern I hear is just about attrition as some retailers and restaurants may have to permanently close. You mentioned some examples in the restaurant space. What are you seeing in terms of just the puts and takes around the customer attrition in the overall retail and restaurant footprint? And what are your plans to go out and win net new business in those areas?

Yes. So that will be in the low end, right? That will be the SMB market where that mostly takes place. We've not had any major failures to speak of that way from a credit perspective. The performance of our credit portfolio is much better than I thought. We reserved a lot more going through this than I thought. So the failure rate wasn't as bad. I think the federal government's programs did help a lot in the restaurant space. We did -- our attrition rate going through the pandemic was outpacing our new adds -- new store adds and new location adds through about really about November, right? And we started to turned the corner and started to go out within hospitality. In hospitality, yes, I'm sorry, I'm talking restaurants. So those restaurant attrition rates abated a bit as the year played out. We started to add more than we were losing. And when I think about attrition, it's for 2 reasons, I mean they're losing, right, to a Toast or somebody else there, I'm losing the competition or they're going out of business. Now we're seeing those folks who got through, start thinking about how they're going to add more stores, open more stores, get bigger. I talk to an individual runs 5 sandwich shops the other day, and I have asked him how he was doing. He said, "You know what, I've never been better. I found out how to make money in a pandemic. The federal government, I just did my taxes, I get $900,000 coming to me. I've never had $900,000 and I'm going to go open 5 more stores." And so he's going to go find all of those patients that were closed, and he's going to open 5 more and will be there to help them.

Interesting. So shifting to the other half of your business, which is banking. A lot of times, investors think about this as really an ATM hardware business, but it's more than that as you move towards ATM as a service, and you also have a digital banking software segment. But I want to start with ATM hardware. You have taken an arguably cautious approach and assumed really no growth in that segment. You do have some competitors in the market that are guiding to more of a robust ATM CapEx cycle. Can you just talk about how you're approaching the forecast? Is that conservatism? And is there a possibility that we do get some refresh, especially as we come up on easy comps that could be incremental to your guidance?

Yes. And we're conservative for a couple of reasons, right? First, that's not what's going to drive our valuation. Before I'm looking at us to sell more hardware. We sell about $500 million of hardware a quarter as a company across all of our segments. And we want to make sure we do that profitably. And we don't always sell it as hardware, right? We sell it as solutions increasingly. And so it's not really easy to tell what revenue comes from hardware or not. I just left a meeting with Adrian, who runs our supply chain and all of our manufacturing processes. We have no delays. Our plans are full. We were profitable at a hardware level last week, which is -- I mean, we look -- now you used to ask us all the time are you guys profitable on hardware. We asked ourself the same question, and we can be at $500 million. And so that was our goal, to figure out size of our supply chain or manufacturing footprint to make sure that we can produce hardware profitably at these current levels. Now I suspect there will be -- and ATM hardware is very lumpy. We have an underlying base of smallish banks that buy from us, and that tends to be $200 million and $250 million of revenue a quarter relatively sustainably. And then there's the big orders from particularly for us, large U.S. banks that come through in refresh cycles, and they skew us any 1 quarter earning 2 quarters in a row, much higher than that. We'll call those out when they happen. You'll know that the competitions are underway. We'll let you know that. We -- I think there are 2 or 3 reasonably large transactions that are being competed now that would cause us to have a little bit higher ATM hardware sales in the second half of the year, but we'll call it that much you know about the time. And I will tell you that they're not sustainable, right, in the next quarter we expected. So we'll forecast best we can what ATM hardware sales will do. And then we'll try not to talk about for too terribly long because it's just not what's going to drive value or long-term growth for us. And when we get to ATM-as-a service, you're not going to be able to tell whether we sold another ATM itself or whether we just have more machines in service, and we're generating more transaction fees.

Right. Yes, that makes perfect sense. And similar to what we talked about on restaurant, attrition and closures, one of the concerns around ATMs of investors is that banks are looking to consolidate branches, and they think about ATMs in those branches that may come out of the installed base. But the reality is most banks want to leave behind access to an ATM, either in an as a service contract or oftentimes in higher function ATMs, which are called ITMs, where you can even do a video conference with a teller and talk about your mortgage, your auto loan. And so is there the potential that as and if bank branch consolidation picks up, that we actually see an ASP uplift in the ATM category towards these more fully featured devices?

I think you'll see a bifurcation, Katy. I think you'll see branded bank machines that are very capable, ITM machines. They'll have security built into them. They're going to be in the locations of probably our branches, right? But my kids will probably never go into branch. They tend to -- they use their phone and then they need a physical transaction, they'll find an ITM somewhere and get that done. I think then those would be very customized. They'll be very well branded by our bank customers. We're likely to want to make those ourselves, right? Those will be very profitable, very good machines, very capable machines. I think outside of that network then, they're probably going to want machines that aren't quite as expensive and may not need to be branded, and he'd been to Cardtronics. We can extend their network by branding an NCR or branding an Allpoint or whatever it might be. Those machines will be our spec. They'll be identical to one another, will be very inexpensive to manufacture. Because of that, we'll have plenty of places to put them, and we will be able to allow those bank customers access to that network reasonably and inexpensively for the banks. And so I think it's going to bifurcate, you're going to have the machines that are branded NCR or branded Allpoint. Once we get the Cardtronics still down in a well-placed expensive machines called ITMs or capable ATMs, maybe even headless ATMs, right, that you interacted and there's no screen on the interactor on your phone, but has evolved in the future. And our bank's customers right now are going through pretty deep strategic reviews about not just branches, but their next step is then their machines, their ATM machines and how do we place those in such a way that we're still a branded bank. It's in the absence of a branch, what branch you're bank, right, in the absence of a branch in the communities that people live in. It's hard to know with one bank from another.

Right. And then shifting to digital banking software. This is where much of the growth should come from in future years. You did go through a period over the last several years where there was some customer churn and you've stabilized the customer base and are now growing it. Just talk about the pipeline today in digital banking and where you see the growth of that business?

Yes, much better. Hard for us to talk about when we're in 2018 and 2019, we were losing customers. We were losing share. And late early 2019, we turned it around in mid-2019. And these are customers that Mike Hayford knows very well. When he and I worked at Metavante, they were our customers, right? We ran their court systems. So we know how to approach these customers. They're coming back. We're doing well. We had 11 wins last quarter, some important ones. I think we'll have some more wins to talk about as the year plays out. And we now are lapping the customers who are being -- who left us in 2018 to 2019. It takes 9 to 12 months for those customers to roll off. It takes 9 to 12 months for new customers to roll on, and we're starting to now finally to start to see the growth that we expected to see in this business. It will be a double-digit grower very soon.

Great. Now I want to shift to the Cardtronics acquisition, which you just mentioned around ATM as a service. And this is one of the reasons why we say NCR is one of the most interesting mispriced assets that we cover because if you look at consensus numbers, it really reflects core NCR, but you have this acquisition, which should close over the next couple of months that will drive significant accretion in 2022. You've talked about 20% to 25% accretion just coming from cost synergies. But there's also an upside opportunity from revenue synergies. You've talked about 100 to 200 basis points. Help us understand where some of those revenue synergies may come from and where you might see revenue upside first and where some of the revenue upside is most significant?

Yes. And the cost is easy, right? We've laid out a number of $120 million in cost. It's a very low percentage of the total cost structure of the 2 companies. And so we'll just go get that done. It's -- you'll just have one publicly traded company instead of two. There's obvious place to go get that cost out. But on the revenue side, I think there's 2 of our business will be impacted. Hospitality will not be. I think both retail and banking will be impacted pretty dramatically. Cardtronics already has 280,000 machines that it runs as a service. 80,000 those they run for other people as a service and 200,000 of their own machine they run themselves. So when you think about as a service, they know how to price it, which is sometimes the most difficult thing to do. The pricing model that works for both sides of the transaction, particularly to transition away from ownership to as a service. And they have a service network that's pretty terrific. They also know how to keep their product set, have a very few SKUs that makes it easy to service them. And they've done a great job. When you think about our real estate in terms of retailers, we have an awful lot of places we could put ATMs on the Allpoint network. It will be very helpful both to our retailers to get people, make it one-stop shop, if you will and also to grow that fleet for that. We have banking customers today, lots of them that we sell ATMs for we drive those ATMs. We have software layers over the top of them. There's no reason why those bank customers have to own those machines. They easily have us service those machines as well. So transition to existing fleet of ATM slowly to an as-a-service product set, which means then that our servicing costs get lower. The complexity of the machines in terms of customization can come down, and we can really run a much more efficient service solution for our customers in aggregate. I love where ATM-as-a-service could go. I think the growth both of their existing model and the transition of our customers to a model it someone like theirs could be very, very powerful for us in short order. And we're seeing, because of the transaction and the pandemic, a lot of our customers accelerate forward their thinking about as a service from an ATM perspective and whether or not they consider it. And I'd tell you that even our very, very large bank customers right now are absolutely considering it. And that would not have been a nonstarter just 18 months ago. On the retail side, as I said before, I think, first, we can put more machines in our retailers, and we can help negotiate down some of the cost of putting the machines there to make it more profitable for both the retailer and for us as Cardtronics. So we're excited about that. But then once that is done, the idea of closing the cash move within the store and allowing cash to move from ATM to SCO machine and never leave the store and reset at nighttime and start back over again and never have a truck have to come and deliver cash and take cash away is a big deal. And the ability to have these stores have access to that cash in their bank account overnight, even though it's sitting at a vault inside the store inside our machine is powerful. And the more we talk to -- we were at a retailer in a grocery store in Texas, and he brought it up, not us. He said, "Look, I hate the hassle of physical transactions, but many, many of my customers come in here, they take their paycheck. They put in that machine over there, they take the cash out and they walk over and they buy groceries and they put it through the machine. They leave with the access cash. Then I have to service those both of those machines. If you can link those for me, I'd love it. I don't want to deal with physical transactions, but more than 1/3 of our transactions are physical. And I'd like to pay one person to take care of all that for me." We think that's a huge opportunity, and we're working through some of the technologies independently. We're not allowed to work together yet. So there's still some regulatory approvals going on. But we're very anxious to get into labs with our new partners at Cardtronics and start to solve that. We started talking to some of our banks about it, and they love it because you think about their ability to put their machine in the store and then get all those deposits on their books, they become a very, very intimate banking partner with their retailers. So those are probably the 2 that we're most excited about. The Allpoint network is exciting to. Mike Hayford and I both owned a network before, they're great. They could be money machines. It's -- they get 60 million cards on that system already. So the more transactions we can put through our payment system and put across that network, that could generate a lot of revenue, too. That's probably third on the list, but it's and then probably the least well thought out at this point, but we do believe there's opportunity there as well.

That's great. So we're running out of time, but I do want to ask one more question because we talked about the cyclical recovery in CapEx, particularly in retail and hospitality, some of the secular trends like SCO, the significant revenue synergies that really isn't in Street pro forma models yet. And one of the other elements we didn't touch on is the fact that the leadership team at NCR is mostly new over the past 3 years, and you've done a lot of work around the cost structure and driving free cash flow levels but also free cash flow linearity. So there's a lot to like about the story. But on a pro forma basis, the stock is trying to get 10x next year's numbers, which doesn't feel like the right multiple. And so at the Analyst Day in December, Mike talked about potentially considering other paths to unlock value. And I think one of the obvious ones is to potentially look at separating this into maybe 2 businesses, banking and retail and hospitality. I'm sure there's other variations on that. But just help investors understand that, that consideration of strategic alternatives. And are there any dissynergies, if you were forced to take some strategic actions, so that you can get this business to the right valuation multiple.

Yes. I've been on both sides of this coin. I was at [ Alexco ], Honeywell when the cult of management and the conglomerate was a good thing. I then went to Rockwell, we broke up, and just kidding, it's not a good thing anymore. Look, I think we carry a discount because people don't understand all the pieces. It's hard to know who we are, and we're not happy about that. I think there's some parts of a company that have tremendous value, at least relative to their pure-play peers, and that's frustrating to us. We're not here to build a conglomerate. We want all of these business to be successful on to themselves. If we can't get that value and we're causing strategic issues for those businesses, by causing them, let's say, they have to make money when their peers don't have to or they have to generate cash flow and their peers don't have to, we are under investing because we don't have access to the equity market, we need to let those businesses to do what they can do and liberate value that way. I think, in the interim, we need to make sure that the outset world can see those business as well. So what we do from a resegmentation perspective, coming out of the Cardtronics acquisition, is going to be superimportant. We try to decipher to give you a little more visibility to what the pieces are that should have more value attached to them, I think that's been helping. We need to do that even more. We're probably going to have more segments that I'd like, but just because I want to make them very clear to people and let them decide whether or not they have good value here or takes more value in some other way. Michael owns some of the parts model that he updates every month. And it doesn't frustrate us any less every month he brings it forward. So yes, look, it's -- I don't think it's the model, right? I think we're making good progress. The story is getting cleaner. People are understanding it better. But yes, if we need -- it's never far from our mind that some of our pieces could be more valuable perhaps by themselves.

Right. That's a perfect place to end. Thank you, all 3 of you for your time. And for those listening in, if you have any follow-ups, please don't hesitate to reach out to myself or Michael Nelson. Happy to help with any questions. Have a good day, everyone.

Always a pleasure. Thanks, Katy.

Thank you.