NCR Voyix Corporation (VYX) Earnings Call Transcript & Summary

Good morning, everyone. Thank you for joining us today. I'm Matt Summerville, the analyst at D.A. Davidson that follows NCR. With us today is Mike Hayford, NCR's CEO; as well as Michael Nelson, VP, Treasurer and IR. The format of today's meeting will basically be interactive Q&A. You can submit questions through the webcast or feel free to e-mail me [email protected]. I will try and monitor my e-mail. But first, Mike, I just want to take a step back for maybe a second and start off maybe with a 1,000-foot view on how NCR is feeling about the core business, demand trends, customer confidence to commit to capital outlays and technology upgrades and where you might be most concerned as we look forward.

Yes. Thanks, Matt. Yes, just from a macro level, and again, just look at our first half of the year, including the second quarter. Second quarter, I think we have about 13% growth year-over-year. So pretty strong bounce back from 2020. It really hit all of our segments, all 3 segments had a very strong second quarter, led by a strong rebound in hospitality. Hospitality, obviously, was hurt the most by pandemic last year. So had a good recovery. SMB recovery and hospitality as well as enterprise. Enterprise, probably a fair amount of activity to set on entities spending money that they didn't spend last year on either opening new franchisees or refreshing stores. So in the enterprise space, there's a lot of recovery action -- deferred action from last year. SMB has just come -- getting back -- new restaurants, hoping at the restaurants refirming maybe their technology that they had not done. Retail, strong retail led by self-checkout. Self-checkout, a long-term trend, but accelerated by the pandemic, accelerated by the need to self-service. And then quite frankly, the biggest driver right now is labor. Many times the cost of labor, but more likely, right now, the access and ability to staff labor and grocery towards big box stores and convenience fuel retail stores. So the challenge for now everybody is having is labor and that's starting self-checkout. There's also, we think, early stages, a refresh cycle in the retail space, refreshing the POS system, which is really kind of the heart and soul of operating retailer and needing to do that because all the different channels and avenues that you interact with a retailer, whether it's physical, whether it's self-pick, whether it's self-serve, whether it's online, whether it's delivery. So all those have expanded, really driving the need for institutions to upgrade their POS. We're seeing a fair amount of that. You see that in our metrics on platform lanes. And then banking, banking really solid, digital banking had a really good second quarter, with a lot of add-on cross-sales as well as some new logos signed. Continued momentum in second half year in digital banking. ATM, probably the only area that we haven't seen a bounce back yet. I'd say we're starting to see a little bit of warming in terms of entity starting to look at their footprints, but we haven't really seen the pickup in sales and orders and revenue hitting the books yet through the second quarter.

Got it. Speaking to the banking business, why don't we spend a minute discussing the Cardtronics acquisition. Obviously, closing here within the last several weeks. I'm sure you've gotten at least some degree of pushback around optically how it seems like NCR is effectively doubling down on a banking vertical facing long-term secular pressure. So what gives you comfort and confidence that the CATM deal can sustainably generate organic growth kind of on an as-is basis and then how you feel about your ability to extract revenue synergies from the deal.

Yes. Cardtronics for us, quite frankly, is really a derisking strategy to derisk our ATM business. Our ATM business is still a very large business. Our traditional in-store business is building ATMs, building equipment, building software on top of that and then providing services on the hardware. That's been our traditional business in that segment. We are the largest provider in the last couple of years of sending out full function ATMs marketplace, providing service and support. But we don't run -- NCR doesn't run a single ATM. Cardtronics runs more ATMs around the globe than anybody else, including all the large FIs. So what we see as an opportunity, we would look at it as an opportunity for us to stabilize and grow that segment of the business in the context would be entities are still very focused on ATM channel -- physical channel that is a low-cost self-service channel for their customers. You see them being FIs all around the globe, looking and rationalizing their branch footprint, investing heavily in their digital side and then using the ATM as a physical step point from digital to a physical point being an ATM or an ITM. We see that happening literally, not just in the U.S., but again, Europe, Asia, all across the globe. Our play is as a scale provider vertically integrated to provide all the capabilities, you need to offer that, offer an ATM or an ITM to your customer base. We think we can go to market and do that. We think community-based credit unions or regional banks, even some of the larger banks are going to continue to look at that footprint and say, can somebody do it more cost effectively, can somebody do it more effectively in terms of delivering and deploying devices and supporting the software. And we think clearly we can be the player that does that. We think that does 2 things. We turn to that business, our ATM business into a growing business as we see more entities outsourced. And it shifts it from a -- right now, we sell hardware upfront, we sell some software attached to that front part of the time. A lot of that software has already shifted to a subscription model. But we see that whole model then shifting to a subscription recurring model on a monthly or transaction basis model from a transaction model the way it is today. So we think it shifts model to a better place and it drives the growth -- over the next 5 to 10 years for us.

As you look at the deal, just sticking with Cardtronics for a moment, have you been able to do any sort of analytics around Cardtronics-only customers versus NCR-only customers and the ability to cross-sell? Have you been able to come up with sort of a TAM of sorts that can be born out of this deal just in terms of how you think about the revenue synergy opportunity here?

Yes. I'd say, absolutely. So 2 ways. One is with banks. So FI. So looking at the footprint we have, again, whether it's credit unions building societies, whether it's small banks or regional banks that we might have today as NCR and the opportunity to go in and cross-sell, I mean, we call it ATM-as-a-service. The cross-sell ability to operate full stack, leveraging the capabilities that Cardtronics has. So we look at a traditional TAM say, a $5 billion community bank that we look at how many ATMs they would be deploying, what the hardware revenue would be to us. The software revenue, the service revenue on top of that in a traditional sense. We think it's 2 to 3x for -- coupling with Cardtronics, doing a full stack of service model as well as integrating in with their off point network. So we think it extends the TAM, particularly in the low end of the market dramatically. And then it gets us into the model. I'd say with the big things, the predominant activity literally around the globe has been off-prem. So going into larger banks and providing a program for them to support their off-prem ATMs, support some branding that we can do, leveraging ATMs that we have, Fortinet and CNET regions. So we've looked at it from that perspective into FIs. And then we looked at it in retailers. So retailers, what can we do in terms of a program where we provide a financial kiosk, put a device in a retailer drugstore, a grocery story, a big box store and drive traffic to that device. Historically, might have been a cash out, going forward, it might be cash out, it might be cash in, it might be loading crypto, it might be paying utility bill. So it's basically that connectivity between physical and digital where there's not a lot of other places to go today. So we think in the retail side, that offering, which retailers love because it brings some foot traffic, it provides a service that they may be providing in a service desk today that they can do it at a lower cost and it provides a transaction-based business to us. So we've looked at where we have strong relationships with retailers that maybe Cardtronics hasn't penetrated and vice versa and looked at where it's basically an opportunity for us to cross-sell into existing relationships. The overlap, overlap meaning where maybe Cardtronics has some really good relationships in retailers that we haven't had success in the past and vice versa. What we have is actually quite good. So we think those relationships are going to start to pay off this cross-selling and going into those entities.

Got it. I want to make sure we spend a minute talking about what you're currently seeing from a supply chain, logistics, material, freight standpoint, how your business has been impacted in terms of revenue and profits to date and whether or not you feel that situation is stabilizing, getting worse, starting to get better. So if you could address that, that would be great.

Yes. We called out on the second quarter call, some thoughts we incurred in the first half of the year and then even some additional costs that we anticipate in the second half. So I'd characterize it as more of the same, what we saw, particularly in the second quarter. So I don't know if I'd characterize it as getting worse. I wouldn't view it as getting better at this stage. Supply chain hits us in 2 ways. One is just the access and the cost of obtaining supplies. We did a really nice job in the second quarter. We had some accelerated costs or higher costs. But we were able to meet our commitments on delivery. And you saw our POS numbers spiked, our SCO number spiked in a couple instances where we got some orders that others couldn't fulfill. So the cost was a little higher, but it was important for us to fulfill orders for our clients, with long-term clients. The second half of that is just transportation so something simple like just the container cost has gone up dramatically over the last 12 months, but probably more impactful is then to expedite, having a pretty faster access pass than slower container shipping. So that hit the second quarter. We anticipated hit in third and fourth quarter. We're watching very actively our supply chains, things like chips and can we get access to chips to build POS, so ATM. We've been able to do that so far. The team has actually done a nice job, one can see having managing supply chains in-house and then managing engineering. While we're looking for supply, the engineering team is finding ways that they can engineer around maybe different chips, maybe different components. So far, we've been able to keep up with this through second quarter, in the third quarter. I don't -- I wouldn't say that -- from where we sit today, things are going to be different when we called out in the second quarter call, which is some elevated costs with the ability to deliver. We still think this is a temporal. We don't think it goes on forever. How far it stretches into '22, we don't quite know yet. But we think 2 things will happen. One is we've started to push costs to price increases, both shipping and this price increases through our customer base. And if the cost they have, we think that will stick and offset the cost. And secondly, we do anticipate over time the supply chain will start to ease up going into '22.

Got it. And then just in terms of submissions here, inbound, very similar to a follow-up I had. How much of the increased supply chain cost do you think you can push to your customers? Does that start happening in Q3, Q4? Or is that more of a '22 thing? And do you view this environment as conducive to getting more aggressive from a market share standpoint?

Yes. I think the answer to the last one, I think it's conducive again for 2 aspects in the marketplace. One is we do think we can go out and take some price back just because we think everybody is going to be challenged in the same ways that we are with the cost structures. And secondly, again, our focus has been taking care of our customers. Most of these customers are long-term customers. They buy from us every year. So for us it's more important to deliver the hardware, deliver the ATM, deliver point of sale, deliver the SCO and take care of the customer needs even if it starts to impact our margin as opposed to try to push the work out. And so we've been doing that. We started the price increases in the third quarter starting to pass those on, on new orders. So the pricing will start to hit revenue in the fourth quarter and then heading into '22. We're watching that every day as we -- we've got a very good model now that our sales people have to use in terms of when they price, we can track what's going on in the market. We can track what's going on in the competition, and then we pass it on to the salespeople as they price. So we use that tool to bump up and push price increases, we're going to monitor and see how much of that sticks heading into the fourth quarter and then heading into next year. So again, I think -- we think the impact that we saw through the first half of the year and the impact in the second half of the year will be greatly mitigated heading into 2022.

Got it. Just maybe shifting gears a little bit. With respect to the payment side of the business, which we recognize is pretty small to NCR today, but potentially an important long-term driver. I've had folks ask me about how your payment strategy compares to the other bigger players in the space and what your major points of competitive differentiation might be in this regard and ultimately, how you gain share?

Yes. I mean the point of differentiation is one word, it's POS. So the entities, whether it's a retailer, whether it's a restaurant, selecting a POS, operating a POS, supporting the POS to run their business is much more critical than who is providing the payment transaction in the back end. So our strategy is tied to integrating it with the POS. It's interesting what's happened even over the last, let's say, 18 months. Let's take a restaurant as an example. So historical restaurant, all the payment took place at the POS at the terminal. And generally, it's a table service that have the wait staff to take your card at the table, check you out or you would pay rate at the terminal That has all changed and expanded. You may order online. When you order online, you may actually pay online, you may get it delivered, make it delivered directly by the restaurant, to make it a third-party aggregator that's delivering, look at Grubhub or Uber Eats. You may actually order online and then go there pick up. You may order online and go and eat in the restaurant, you may pay at the table. We have a pay-at-the-table feature with Aloha where it's kind of the -- you scan a QR code, you can pay directly, pops up a website. But what has happened now is for a restaurant, you may have 2, 3 maybe even 4 different avenues that you're taking payments. They're not all integrated to single merchant acquirer. We think that's a difficult strategy in term of the restaurants from where we order online, order for -- say, you order for pickup, you get there, something is always wrong with that order. When you go into the restaurant and you want to get it adjusted, that may be a different payment mechanism than at the counter of the restaurant. The same thing happens at a retailer. So we think the need to have a tightly integrated POS with the ability to do payments. Payments are wonderful if everything works the way it's supposed to work. As soon as something doesn't work, the item wasn't delivered, the item wasn't delivered right, customer comes back, wants to exchange, you need to have some integration, some consistency across the various channels. So we think that's going to be an advantage to our strategy. Ours is a long-term strategy over time as we continue to add and shift our model on our POS. We're going to integrate payments for an SMB restaurant today when you buy our Aloha Central package, we don't give the option to go to a different payments. So it comes bundled in. And the take rate on that is extremely high. So we know it works, and we'll keep doing that, with our product, with our POS and then additionally, going back to existing clients and convincing them that it's better to have an integrated payment provider with their POS than they have different parties.

Got it. When I think about you joining NCR a little more than 3 years ago, you kind of put the company into a mode where they were kind of stabilizing businesses, investing in businesses. And I think you'd admit then in certain areas like digital banking and hospitality, NCR was losing share. How do you feel those businesses are positioned today in that regard? And do you believe you're back to achieving growth in parity with underlying market or in excess?

Yes. I mean I think that's a good observation, Matt, in terms of where -- when I walked into the other focus, and again, just where NCR was back in mid-2018. Our initial focus back in 2018 was to really focus on the customer. And I'd say our focus today will still be focused on the customer. Focus on the customer, meaning that in the segments we compete in listening to our customers, delivering service, delivering best-in-class service to those customers, making sure our customers were satisfied. We shifted our whole customer SAT methodology to an NPS score. We track that. We incent all of our managers to an NPS score. It's a simple formula. The customers are happy that they're satisfied. If they're willing to recommend and promote us, they're going to be willing to buy more components from us. We shifted the mindset from selling a product to selling a suite of products, selling multiple products over time, becomes very important to have strong customer relationships. So we started to focus on customer. We focused on our employees, the culture, building the organization that people want to be part of, building an organization that they feel we're going to be a winner. And then last, we really sit and focus to a software-first customer, call it digital-first, but lead with our software products, lead with a platform of products, it needs vertical, whether it's retail, hospitality or banking, so that when you get in the door and you start an integration with the POS, you started integration with software-defined store on the retail side, you start with delivering slow, you start with adding on payments. You start with adding on, on the front end, on digital front end that's consumer-driven. So be able to deliver all those products is kind of the road map and the strategy that we're on. I think we've won back the hearts and souls of the segments that we competed it. Digital banking, we referenced, the team has done a phenomenal job of rebuilding our reputation in the marketplace, rebuilding our status with customer looking at our status with the prospects, We're winning. Clearly, we start winning in 2020 more than we're losing. 2021, you're seeing that carry on with very strong growth. We expect to be exiting the year double-digit growth in digital banking. The ability to go in and cross-sell, things like Terafina, the online front opening to go and cross-sell our channel services platform so that entities can deliver a retail experience across their other platforms. We feel really good about where we sit with Digital Banking right now. Retail reestablishing cloud-based strategy and running on a product called Emerald on top of the platform where we can add components over time. We can migrate existing customers. We've had great success literally going back and winning back clients who 3, 4 years ago had made a switch, they've come back to NCR on our cloud-based strategy for retail. We obviously win the market with our SCO platform. SCO, if you use the product at a Whole Foods, use the product at Walmart, it's not really a hardware product. It's a software product. It's easier to experience product and we're winning in that space. So retail, I think we've got a nice year in terms of next gen where people want to go. And then hospitality. We've done a great job in the SMB space with a lot of essentials bundling. In the enterprise, where you need scale and mass to compete not only across other country, but in some cases, across the globe, like a Starbucks or McDonald's or Wendy's or Burger King, where they need that help really has to go at the different geographies. So I really think -- and we track internally NPS, our NPS score was -- did a huge jump up in 2020. We've put a focus on during this pandemic, take care of our clients. it showed in our NPS score, it's showing in our sales and it's carrying over into '21. So I think if there's a single thing we've done is to improve that relationship with customer, improve customer SAT. And if we don't get that right, it's really hard to get the growth back, and we've really got a good momentum on that aspect.

Got it. We only have about 2 minutes left, but I did get another inbound talking about the fact that you have such a large installed base, whether we think about POS lanes, whether we think about hospitality locations, what's the right way to think about payment capture rates on the installed base looking out over the next couple of years, but maybe also over, say, a 5- to 10-year period. What would be a realistic penetration rate? Is 50% achievable? Is it 20%? What's the right way to think about that?

Yes. We look at payment opportunity that TAM when we did the acquisition to get into the space really driven by our POS and driven by our gateway protocol connected payments. So those are the 2 drivers that we believe gives us a hook into a retailer, into a restaurant in terms of adding payments. The TAM of the dollars flowing through at a margin that we would get on that basis points is a pretty big number. We strip out then. We strip out the really large guys. They're really large big box players, large-scale players are always going to go out and drive your own payments. We suspect over time, most of them are going to go to more of an intelligent switch, use these cost routing, we'll look -- we'll start to play in that move our gateway into more of a switch. But our real bread and butter is going to be when you see Aloha Central, we go out and bundle up, everything comes together, you see Aloha Central growth. Those, we think, will continue to come with a very high percentage of payments. When you see us migrate into next-gen platform lines on retail with Emerald and the products in the retail side, you're going to start to see it, paying on the tax rate on those. So the TAM that we target, which is a subset of kind of all the money fund for our system, but a very large number, we had targeted originally a 15% to 20% penetration that we would get in our base being POS or a gateway connected client, I still feel really good about that again. We're not -- ours is not a race. Ours is long term. As we migrate from legacy, if you talk about legacy, retail, we're talking about 1.5 million lanes, getting those moved to the next gen. In the restaurant space, we talked about all the different restaurants by site, whether it's enterprise or table service that we're moving over. And when we move them all over, we want to test a payment. So in that vein of 15%, 20%, that's what our team is what we're focused on.

Perfect. With that, we're actually a minute or 2 over time. So I really appreciate it, Mike, Michael, thank you both for your time today.

Thanks for having us. Appreciate it.

Thank you.