NCR Voyix Corporation (VYX) Earnings Call Transcript & Summary

Hello, everybody. Good morning. Thank you for attending the Oppenheimer Tech Conference. I'm Ian Zaffino. I am the equity research analyst that covers NCR. I have an outperform rating on the stock, a $40 price target, been pretty bullish on this stock for some time now. And I think these guys have done a very good job. So joining us today from the company will be Michael Hayford, who is the company's President and CEO. Michael, thank you for joining.

Ian.

And the way we'll operate this is we'll do it as a fireside chat. But there is a dashboard, so I'd love to make this more interactive. If you have any questions, please enter them into the dashboard. You could also just send me a simple email at ian.zaffino@opco.com. And either way, I will get that question answered for you or at least I'll ask the question. And we will go from there. So again, Michael, thank you for joining.

There was some big news today. I guess you got approval from the U.K. on the Cardtronics acquisition. Maybe just walk us through that process. I think in January, you announced that deal. So I believe it's just one of the final steps here. So just give us a little bit of color there as far as Cardtronics and what we should expect as investors and analysts.

Yes. A very good news. And it is the final step. So we had received all other regulatory approvals from the markets that we operate with Cardtronics. And then obviously, we had closed at the end of June. So this was the last step. We had a -- the scheduled date for them to get back in Phase 1 was today, August 10. So process-wise, it's a fairly detailed process we went through that with them, we answered questions, had a lot of interaction, and today was the day. We were hopeful for this outcome, but you can never predict. So they came out and approved with no conditions, no remedies needed. So at this point, we are in the process of executing. We'll start executing today the integration plan. We had put the plan together over the prior -- up until close date, we worked with them jointly on an integration plan. So we're going to start pulling, executing. We've got a joint schedule team. Next week, we'll talk about the structure and how we go forward. So exciting for us, again, because you -- we felt really good about the outcome. We felt really good about our case. We feel really good about where we were positioned. Even with the dialogue with CMA, the markets authority over in the U.K. But you just don't know what they might do, so we were very pleased with that outcome.

Okay. Good, good, good. Again, congratulations. So great news there. Can we actually just then turn our focus to Banking. You talked basically software and services revenues. They both increased, call it, high double digits or so despite an ATM machine or hardware decline. Why is this business growing so fast? I mean what's going on in Banking software and services? What type of software solutions are you basically offering that are not attached? And what kind of should we expect going forward?

Yes. I'll start with -- the team has done a very nice job over the last 3 years of transitioning to recurring revenue streams. And so when we get into a quarter like this where we don't have a little uplift from ATM licenses, ATM software that goes with the hybrid sale, our baseline is very strong. So any additional sales, any additional volumes will come through as growth. We were led by -- Digital Banking had a very solid quarter really across the board with some up-sells, some volume gains and then some new clients coming onboard and then some sales wins that won't be onboard and were not in the revenue, but will come onboard in future quarters. They've got a book of software prior to the Authentic. Authentic is a payments transaction software. Historically, that had been upfront subscription -- or sorry, not subscription, but a perpetual license. We've transitioned that to subscription. That continues to do well in the market. We've got a product called CSP. CSP is a infrastructure layer that will connect all the channels. So we've a number of large clients who put it in, and they literally use it in one of these to rebuild their branch platform, but then connect it with digital banking, connect it with ATMs and ITMs, so they have a common experience. So that's continuing to get traction with some of the clients. We package that up and sell that as part of the retail brand -- retail branch or retail banking strategy with an ATM, with Digital Banking and with what customers do in the branch. So that has continued to perform. So the team really, across the board, has done a nice job. They've had headwinds over the last 2 years really because they have taken current quarter revenue streams that would have been booked upfront and they've moved them, so now we're looking at the benefits of some of that coming back up on the balance sheet. I think as Tim shared on the call that at the end -- towards the end of this year, I think it might be the third quarter, we'll flip around where the revenue coming off the balance sheet is greater than the headwinds from deals that we're doing in the current quarter. So Banking has done a great job with software and with the services they delivered, tied in software the professional services.

Okay. Great, great. Sticking on Banking for the moment, Digital Banking, I think revenues are up about 8%. You signed about 8 new deals in the quarter. What are you expecting as far as exiting the year as far as growth rates? Is it a double-digit growth rate? Can you sustain double-digit growth rate? What's driving that and maybe work into the discussion Terafina and how that is kind of your entry solution?

Yes. So Digital Banking, we've talked about, we're trying to bring it back from maybe struggling a little bit 3 years ago when we got here. We built a team and really focused on going out to market, making a lot of investments in product and then some basics, like this improving, taking care of our customers, thinking about how with their -- our customer -- improving our customer set. So we had said last year in our December Investor Day that we felt we could get Digital Banking to double digits. We felt that we could do that in 2022. Obviously, we're pretty close to that with 8%, and I think we'll come close to exiting at a double-digit run rate. So going into '22, we still feel really good about north of 10%. We think that's sustainable. We think that market -- if you think about Digital Banking, it is retail banking today. In the past, retail banking would start with a branch and then everything would come up the branch. So you attach an ATM to a branch or you attach ATM -- even if it's off-prem, it would be tied to the branch structure, the branch management team. You would actually tie Digital Banking on to the branch structure and the organization in the bank. Today, those are all flipped around. All the big banks have flipped it. So they have a head of digital. Most of the regional and smaller banks are following suit. So if you think about it as a retail consumer, it really is digital banking, mobile banking that as the bank thinks about delivering to us, that's where they start. And then they will attach an ATM as part of the channel. ATM typically comes second before you go to ATM, before you go to a branch and then the branch networks are being maybe more rationalized and downsized in most of the banking. So for Digital Banking and what we offer, not only the Digital Banking experience, but also the ability to integrate Digital Banking with an ATM, with an ITM, with the branch and do that with that CSP platform I talked about, we think that market is going to continue to spend. We've seen a spending hold very strong during the last 18 months. Even when high risk spending went down a bit, the software spending has continued to be very strong. So we would feel really good about the double-digit number going into '22. The -- you mentioned Terafina and stuff, how do we continue to grow? Simple formula, we've got to get new customers, we've got to get new users signed up. So at a bank or a credit union, not only get bank signed up, but then get the users active. We have programs to do that. And then sell more product to that entity. So sell them mobile banking, sell them digital banking. The Terafina is a great add-on product. It literally brings a user-driven, a user-centric capability to the originations. So it'll do originations of transaction accounts like deposit accounts or savings accounts. It'll do originations for installment lending. It can even do simple mortgage originations. It'll do that again as a retail consumer on a mobile device, on a laptop. But it also set up, it can do that in the branch, it can do that in a call center. So it's a great product to know the channels. And again, as people -- banks roll out their retail strategy, that's a big piece of it. The what to deliver if digital is your primary channel, what you deliver in digital has to be a full experience of what you used to do in a retail brand. So origination is a big driver or a big need right now for the bank. So that product has done a great job of going in upselling. We're still upselling products like check image capture. We have a password product, which is a leader out there. So just adding on more products to make it more simple for a bank to interact really with mobile or digital banking.

Okay. Good, good, good. So now that we're still on banking, there's a couple of questions in the audience. So I'll just read them aloud. So basically, it says with the CMA approval out of the way, what else can you share about accretion, synergy opportunities, potential pockets of upside relative to your original expectations?

Yes. So the -- we had talked about 2 sides of synergy. One is the cost savings. The cost savings, we -- while we couldn't start executing the savings action plans until we got this last approval, we still did all the planning. So when we had announced the deal, we said we'll work in 2021. We'll put the 2 companies together. We'll drive out the costs where we have the opportunity to take out the costs. And then heading into '22, we expected to have north of $100 million of costs taken out. We still expect to meet the time lines. The CMA approval was a process. It was a little different than we normally see till we get ahead of close. This is how we expected it to happen, this way the deal took place. So we'll start executing on integration. The organization and the teams, I'd say, the excitement of when we were working on putting the -- what we can do together. I guess the biggest excitement was on the product capabilities and go-to-market. We haven't been able to do that yet. So I think now, as we started doing that, our teams will be very energized. On the rev side, and that's really going to drive the revenue, so the revenue on the bank side with ATM service really outsourcing maybe community bank or regional bank, what they do for their ATM footprint. We don't operate ATMs today. We, NCR, historically have not operated ATMs. We build them, we deliver them and sell software and services. Our clients operate more ATMs than anybody else that we know of in the world. And so combined, we've got an integrated offering that we believe going to the market will be very, very well received. So that's what's going to drive a fair chunk of the early synergy revenue growth. And then we also believe that on the retail side, with our retail footprint, with their retail footprint and their products that they bring to what we have today and think of a thing simple as, I call it, financial kiosk. Historically, it's been a -- they've used the ATM really to dispense cash. But now we look at what else can you do at a kiosk, you can pay bills, you can pay utility bills, you can make deposits. Deposit offering is something that I believe Cardtronics has recently rolled out that's having a lot of traction and success. And then you just saw we did a LibertyX deal, a cryptocurrency deal. So really taking to people who may not have access to buy cryptocurrency. It's set up for bitcoin today. I can go to an ATM, I can buy bitcoin. And then I can use that bitcoin to maybe pay somebody else with bitcoin or even transfer money to another country. So there's some things that we can continue -- can start to do, leveraging what they've done already with financial kiosk or financial access in a drug store or a grocery store or big box store.

Okay. Good. And then another question from the audience would be how much conservatism is built into that Cardtronics margin guide? The proxy said 23%, but the guide is 28%. What's showing in that delta? Could it actually exceed 28%?

Yes. They came in -- as we said in our earnings call, they came in very strong in the second quarter, a better margin than we expected, better earnings than we expected. Revenue was a little solid. It wasn't -- it -- what happened is the revenue came in areas that were more proprietary products with higher margins. So that was a very pleasant surprise. I think going through the rest of the year, we -- based on what we can see, we'll learn a lot more. Starting today, we'll be able to get under the covers a little bit more. But -- and that bodes well for going forward in terms of what products are being used in a market today, which is not, quite frankly, fully opened yet for them. So they still have challenges in the U.K. They have challenges in Canada with some of their offerings. Just because of the pandemic, they haven't been as open as maybe some of the states have in the U.S. So while the U.S. obviously performed, we still think there's opportunities in the U.K. and Canada. I think the full year outlook -- at this point, that's what we have and what we know. I think that will be a good look at what it is. It obviously says they're running a little bit higher level than we anticipated when we did the deal. So I think as we get into it and get ready for 2022, we can look at, is there more opportunity driven by maybe the pandemic ending, driven by [ monocratics ]. And again, that mix that they saw in the second quarter, is that going to continue forward and drive a really strong EBITDA margin?

Okay. Good. And then one other question would be on the $40 million of pressure that you guys had talked about, what's the breakout between parts and logistics?

Yes. It's about half and half. That's what we've been seeing. And so it's supply chain and then logistics. So we look at the logistics side and say it's just -- it's costly, right, even just to load up a shipping crate. The costs are up. It's challenging. Some of the supply chain have been stretched or, in some cases, broken. So you can't have the reliability. That causes us to do some expedite. So the cost of moving the finished goods around has been more expensive. And then the other half is just the supply chain and the supply cost. We did -- the team did an awesome job in second quarter, continuing to get the supply components. We've had some competitors who struggled to get revenue numbers, because they couldn't get their supplies in the door. So while it cost us -- on the cost side, we made a decision, we said we're going to make sure we get our hardware out the door, we want to take care of our customers. We think that's more important than maybe squeezing out the last penny of costs. We said going forward, we'll do that in the second half of the year. The transportation costs, we look at that and say we think it's temporal. We think that when things come back to normal, in particular the need to expedites will come out to '22. We do not expect that to carry into '22. The supply chain cost, a little bit harder to predict. The one thing that we did share in the call, we believe we can pass on some of those costs in a price increase. And it's pretty clear that our competitors out there have the same supply cost issues. And so they have the same pressure to bump up their costs. So we think competitively, moving our cost in line with our supply cost would be able to stick. And so we're able to recap the supply side. So we think it's more of a 2021 issue. We'll watch going into 2022. But right now, we've just got to -- we've got to cover the supply cost for the transportation for us and make sure we get our sales out to our customers and keep them satisfied.

Right. And then, I guess, also the synergies you talked about, maybe you could offset some of that headwind.

Yes. And then the team is looking at ways -- they're always looking at ways to be more efficient, particularly on the manufacturing and the delivery side. But what other levers do we have? Obviously, we're always looking. So impact on the cost, I was like it's where you can pull some cost savings and what you can do to recapture that. But again, we look at -- even with those cost impacts, we look at the numbers we gave for the full year. And quite frankly, the EBITDA number we shared first year attainment and second year outlook was still quite a bit higher than what the Street had us at going into our call. It was about $100 million higher than what the Street had us. So we exceeded the second quarter numbers. We gave an outlook for the full year that exceeded what the Street had for a full year outlook. And I think got lost in the noise that we absorbed some costs as part of that. But those costs are in that outlook that we shared. So we feel pretty good -- and we feel really good about second quarter and we feel really good about the full year in terms of where we're going to end up. Had we anticipated being as strong at the start of the year, we would have been pretty excited. So we're sitting here at NCR as a team executing on our day-to-day transactions, hitting the financial numbers, delivering for our customers, improving our customer set, but we're also having a lot of success with our strategic initiatives. So we're in the middle of a really good second quarter, a really good year. And we'll keep hammering away. We're a little surprised at the reaction we got in the market. But the team feels, execution-wise, we're doing really good.

Great, great, great. All right. So putting Banking to rest now. Maybe we shift on to Retail. Self-checkout was up, I think, 40% plus or so last quarter. What's driving that? And how should we think about growth rates going forward?