NCR Voyix Corporation (VYX) Earnings Call Transcript & Summary

All right. Well, good morning, everyone, and let me be the first to welcome everyone to RBC's TIMT conference this year. I think this is the second virtual conference. So pretty soon, at some point in the future, we'll get out there and we'll be able to see you live. I'm super excited to kick off the conference today with one of our favorite companies and also one of our favorite CEOs in NCR. From the company, we have Mike Hayford. Mike, as I said, is the Chief Executive Officer and has really gone through a transformational process since joining the company, which has really been multiple years in the making. And he's had to live through pandemics and all kinds of things when he inherited it. So Mike, it's just a pleasure to finally be back with you again and talk about some of the future opportunities kind of post this pandemic. So thanks for being here.

Thanks, Dan. Glad to be here.

Awesome. So what I thought we'd do is start maybe a little bit at a higher level, and then we'll kind of whittle our way down here. I do want to ask a little bit about the macro backdrop and what you're seeing in terms of your global operations. Are most of them in recovery mode, would you say? And then when you think about recovery, are you comparing that to 2019 levels? Or because your business has been in kind of a state of transition for so long, are you thinking about it in a different context?

Yes, that's an interesting way to put it, bouncing back to 2019 levels. We obviously looked as we've been planning how we've gone through '18, '19 to '20, '21 and then '22 looking forward. So we certainly look at it in that context. It's actually a little hard to judge across the footprint what is the recovery. I'd say in the U.S. particularly, we've had pretty solid return to business really cross-dimensionally. I think the only one that may be lagging just a bit is the bank -- some of the capital spending on the bank hardware side. We have -- in parts of the world, a little slower. As you're probably aware, the U.K. is just starting to open up in the last maybe 3, 4 weeks. And we're starting to see pickup in transaction volumes for like Cardtronics payment businesses over there. We're seeing a little pickup in Europe. But now you pick up the news and you see another outbreak going. So we try to monitor it. I think the one thing that we have learned is that our business can sustain some level of noise, and I think our expectation is we're going to see some rolling outbreaks even continuing as we go forward just based on the vaccination rates in the U.S. and parts of Europe. But it's not back to normal, but it's back to a level that we feel pretty good about operating. You can see our margins have done well this year. So we know we can rightsize the business on the hardware footprint and still do well as a company. So I think we're looking forward to '22. We put plans in place like we did for '21, like we did for 2020. And then we watched anxiously as the markets unfold. I do think that 2022 will be better. I think we'll continue to see forward progress from 2021.

Great. Now that's good to hear. It's -- I think it's a consistent message that things are just starting to kind of get back. And the fact that you're able to plan on the operating side of the equation as opposed to kind of being reactionary to everything is a good thing. I did want to touch on supply chain, though, and just kind of get that out of the way early on. It's something that you have mentioned over the past couple of quarters and understanding, by no means, are you alone in this regard. It's a huge theme that's in the market. But it would be helpful to kind of get an update and just hear from you what you're seeing. And then, in particular, what are some of the things that you're doing to kind of mitigate this risk associated with the business?

Yes. So as we get into the fourth quarter and you look at halfway into the fourth quarter, as we sit down and walk through this on a daily basis, at this stage, procuring the raw materials, procuring the supplies that go into our builds are put in place for the rest of the quarter. Our demand, I think we talked about demand, is running ahead of our ability maybe to procure everything and get it delivered on schedule. So we saw that in the third quarter. We're seeing that in the fourth quarter, that the demand is actually holding up well. It's the challenges of getting the components, getting the supplies and then getting the distribution in place. As we track the fourth quarter, we feel good about the plans we have in place to get there. The team is starting to slip into the beginning of 2022. And I think Tim talked on the last call about expecting the raw materials inventory to build up, just put a little bit more inventory when we can find it in our warehouses and in our books. So we actually -- in the fourth quarter, we feel that we've got that mapped out. Demand is there. I think demand is going to roll a little bit in 2022 just based on what we can provide in 2021. I think the one thing to keep in mind, our mix right now is -- we're targeting to get to 80% software services. We're not quite there yet. But I think we're -- last quarter, we were 24% hardware. So we're getting close to the point where the hardware footprint -- and you saw this even in the earnings, even though hardware is a little light for us in the third quarter, we still delivered the EBITDA and the earnings that we had anticipated delivering. So we're at a point now where hardware might impact revenue a little bit, but we don't see it impacting EBITDA overall. Even with the updated guidance that Tim gave around the impact of hardware supply costs to us, hardware distribution costs to us, our numbers for the year are still pretty on track where we get start of the year in terms of expectations. So what do we do to mitigate? There's a couple of things the team is doing. Obviously, attracting supply chain, attracting -- that we've engineered -- components engineering team has gone around and said, what else can we -- what else -- other kind of supply chains can we open up? So we've done that to the extent possible. They worked hard to get the components. As you know, the cost -- so the simple things like just getting a container have gone up dramatically year-over-year. So the cost in moving components around has gone up. We factored that in our plans. We have pushed forward across all the lines of business price increases -- two types of price increases. One is a price increase. One is a surcharge fee for distribution. We think those are sticking. And as we talked about, just getting them rolled out. We still have some backlog of items that we've already signed. So we'll start to see some price increases hit in the fourth quarter. And then we do expect going into next year, assuming things stay the way they are, we know our competitors have the same pressure, we expect those price increases to hold going into 2022.

Yes. It's interesting, when you joined the company, you had some supply chain issues you had to fix, and I'm just harkening back to those days. But the reason I bring that up is because you spend so much time with the team revamping that supply chain. And my question here around that is simply because you spend so much time back then, you feel like you're in a competitive position to actually win. Like this is -- it's not a great thing to have happen. But when you look around the space, could this actually turn out to be an opportunity for you relative to your peers who are probably in the worst of situations?

Yes. I am -- I hope so. I think that's probably happening a little bit in certain segments. We know that, for example, in the second quarter, we had a blowout SCO order, which kind of shifted some of the stuff in the third quarter. That was simply our ability to actually deliver the SCO to the marketplace, and some of our competitors were not able to do this. We ended up with a competitive win. Once you get those competitive wins, you get first crack at that order next time around. So we think that's true. I would say how -- we went to a lot of pain in 2018. We set out some plants. We opened up some new plants. We enlisted third parties so we have some more scale and heft in terms of who's building for us in certain parts of the world. We added suppliers. We added a lot of strength to our management team around the supply chain. We brought in a really solid supply chain expert. I do think that's paying dividends in 2021. And I expect going forward, that's going to help us out. And as you said in the marketplace, we have chosen not to chase deals at the expense of margin simply because we just think that's fool's gold in this marketplace. So we've walked away from a handful of deals. I don't think some of our competitors were taking those. I just don't think that's going to be good business long term. So we've held pretty tight, and it's benefited us. Our clients are quite appreciative of the fact that we'll work with them, we'll prioritize. For example the hospitality industry, it's all about new store openings. So if you have a new store opening, we'll get that prioritized at the top. If you're refurbing a store, we'll make that trade-off, working with you. So I think that will carry forward in a good way going forward.

That's good. That's good to hear. So let's shift gears a little bit and start talking about the segments. Specifically, we'll start with banking. I wanted to talk a little bit about ATMs. I know this is -- over time, this will become an increasingly smaller percentage of the business. But it's still fairly prominent. And you did mention like the demand cycle a little bit in the last quarter. So I wanted to get your sense of what you're seeing there today and then the competitive landscape you mentioned. But I think you said last time you're starting to see some banks come back, in particular, in the majors and maybe mid-markets. And then you called out Europe maybe having some areas of potential strength or at least interest. Is that what you're still seeing? And has it improved at all?

Yes. I would -- so fourth quarter '21 going all the way back to the fourth quarter of 2020 and maybe even earlier, it's probably the first time we started to see banks start to look around, do some refreshes, a little bit of movement on recyclers. I think they're in states that we have historically seen. And so I think we feel as good about the pipeline today as we have for 18 months. And as that fills in, that will be a positive. Now we are actively pushing -- rather than do a transaction or trying to sign up ATM-as-a-service with some of the community banks, some of the mid-tier banks, actually the activity in the pipeline around ATM-as-a-service is stronger overseas. It's pretty strong in Australia. It's pretty strong in India. It's pretty strong in Europe. We're starting to see some of it in the U.S. We still think that that's going to be where we take the business. We take it to a subscription business. We take it to recurring. We take it to a full stack. It increases the addressable market crossed by 2 to 3 times. So we think we turned a business which has maybe a flat growth curve into a slight growth curve just because we're extending the addressable market.

Yes. Software in this segment broadly, and let's remove kind of digital banking for the moment, has been a big part of the conversation around this as-a-service model. So I'm just wondering, where are we on that journey of taking software to recurring? Because this was an area that you actually started well before, I think, maybe even any of the other segments in the process of going down this recurring path. So where are we in that journey? And then secondarily, we get the question all the time, what is the software specifically that you're transitioning from like, let's say, legacy license to more of a recurring model? So is that ATM? Is it branch software? So any context around that, I think, would be helpful for us.

Yes. So we actually at this point are moving all of our software all out that we can, including the ATM stack software. That was the last piece to what we started doing in the last year. Now some customers still have an install and kind of perpetual purchase of that, but the bulk of it now is going out in subscription, which has actually dampened some of the surge in growth numbers, but it's created a backlog. It's created some more predictability. We've talked about the fact that in banking, we started that towards the end of '18 into '19. And so that one is now at the point where the revenues coming that we've built the backlog are offsetting what gets deferred on new deals signing up. So it's kind of the tipping point here at the end of 2021. So we really talk about the headwinds in banking. We're starting to see headwinds a little bit in the side in the retail business as an example as we've done some deals. We've pushed them into subscription as opposed to upfront. Back to your question on banking. So the ATM stack, there's products that run the ATM. There's products that do marketing up at ATMs. There's products that do cash management on top of ATMs. There's products that do ATM monitoring. So all those stacks are now sold as a subscription basis. And again, if you really push hard, the one component to activate enterprise piece or the NDC piece that runs on the ATM, you could get that if you're a large buyer. I don't want to -- but that's a small piece of it. There's some other components. We did some -- attempting to capture password privates, having quite a bit of success. That was a perpetual product. We had a license to maintenance stream. That's all transaction-based now or subscription-based. So in some cases, if it's captured on the phone, we do it on a transaction basis. If it was captured in back office branch, it's a monthly subscription. So that team actually -- I'd say the team that's most skeptical of the transition to subscription and just recurring, and they've done the best job as its job.

Yes. No, it's been fun to watch. I'll spend a second on digital banking, right? This is a popular topic given the fact that the pandemic has clearly pulled forward just an enormous amount of demand in and around this. And I think you're starting to see that resonate in your numbers. Your user growth, I think, was up 9%, revenue commensurate with that. But given the narrative around the digital banking demand, I'm wondering, at what point do you see your business really starting to inflect up? It is making really good progress, but it hasn't quite made that huge inflection up, which would be consistent maybe with the way that people are thinking about what digital banking should deliver on a promise.

Yes. I mean so digital bank, we started that journey and we started a pretty simple goal and focus, and that was to retain all those clients. As you know, in this business, where it's a pure SaaS business, it's -- the imperative is you have to hold your customer base. And we have been doing it for a number of years. We've got focused on that in '18. And I think into '19, we did a much better job. So as we get to 2020, we did kind of a flip over. We're holding our customers and we're starting to grow, and you saw that in the numbers in 2021. So now we have -- the only trend you have now is on some consolidation in the market. So if a customer gets acquired, we might lose that portfolio. So now it's generally additive as we go out and win accounts, as we go out and cross-sell new products. Our small business product has been very successful. The tariff feed income [indiscernible] very successful. So that's what we're seeing build on kind of the momentum in the last couple of quarters. We expect that to move even more forward. Next year in 2022 is the anticipation that we have. We think there are some markets there and some products that we can still continue to expand in. Our focus in digital banking is what we see big -- actually all the banks, big banks, but for our market, regional banks and mini banks. They're taking digital banking. They start with a mobile device. They go to a laptop device. But then they really -- they have to transform what's behind it. They have to transform what they do in a branch, to transform what they do at an ATM. And they're really looking for what is the best mix of channels and then how to integrate those channels. So we're doing all 3 of those things with our clients, and we're providing an integration layer with [indiscernible] CSP that sits under all 3 of those channels. Now what's happening then is customers come back to us and say, "Now, help us with the branch. Help us redo some of the legacy teller. Help us redo the servicing. Help us redo the account opening." So I think that's what's going to drive a lot of our growth in '22 and '23.

Interesting. So digital banking ends up being a little bit more at the tip of the spear that drives some of this other cross-selling opportunity that we might not have otherwise thought would have been in that order. So that's pretty interesting. Cardtronics. You own it now, right? Congratulations. Long haul. The question, though, is now that it's yours and you've seen everything, you've been able to tweak it up to this point, maybe you can remind us the strategic importance and in particular, the revenue synergies that might emerge from this as we think about the next several years. Where should we be focusing our attention as outsiders looking in to see how this opportunity really has transformed or will transform the company?

Yes. And that's a great -- Dan, thank you for leading into our Investor Day at December 9. We hope you can all -- I think it's 10:00 in the morning Eastern Time. But we're doing -- we did an Investor Day last December. We decided to do another one this December really to give an update on where we're going with Cardtronics and what does that bring to our portfolio. It boils down into -- I simplified it into 2 product sets strategically, which both are revenue drivers for us. So one is we talk about ATM-as-a-service and the ability to actually do a full stack all the way from selling the hardware and signing the SOC, do the the break/fix, managing the CIT, managing the device, driving the device, switching the transactions. We can do all of those things now, whereas in the past, we're doing maybe 30% to 40% of that stack. That's something Cardtronics brings to us. So I would like to say, we were building the most ATMs in the marketplace. We were servicing, supporting the most. We weren't driving a single ATM. We were not running a single ATM. Cardtronics -- with Cardtronics, we now run 280,000 ATMs around the globe. So we all of a sudden went from not doing anything to being the leader, being able to operate an ATM fleet. So ATM-as-a-service gives us a tremendous capability to go and grow that business. The other product that brings, which I think is a very unique asset, I think it's probably not well understood, is the off-line networks. The off-line network is 55,000 devices. I call them financial kiosks. Some people might call them ATMs, but we really look at them as a financial kiosk to deliver products to a channel that others may need. So others may need -- there are banks that have an actual customer base that have a local geographic footprint. There are other banks, you can think about neobanks like a Chime, who don't have any physical footprint, but they have customers all over. When they need to do a physical transaction, they need some place to send them. So whether that's cash-out, whether that's cash deposit, whether that's pay some bills, whether that's get crypto, add a device, whether that's currency transactions, whether that's doing money transfers. So the ability to leverage the 55,000 devices around the globe, most of them in the U.S., to deliver financial transactions is the other half of what we picked up with Cardtronics. And you'll see us talk about what else can we do. Again, a very unique talent, serve the unbanked, the underbanked, serve segments of the market that are banked in the nontraditional way. And then quite frankly, community banks to extend the footprint of physical reach that they are very interested in doing. So that's what Cardtronics brings to NCR.

Yes. No, I'm excited to see what you have to say at the Analyst Day. But Circle K, I guess, was one of the recent relationships that you signed with this Allpoint network, right? That brings it kind of to life. That was -- is that -- that's kind of a distribution asset that marries to Allpoint. Is that kind of the way to think about it?

Yes. It's a great example. So Circle K, as a long-term customer of NCR, POS customer of NCR delivering -- extending capabilities with things like SCO, but then also adding the Allpoint networks of putting again financial kiosks in a Circle K for the retail foot traffic, which they all like, try to bring people into the store. We get transaction around -- get transaction fees off of that. And having those relationships with the retailers, whether that's convenience fuel stores, whether that's drugstores or whether it's big box stores, allows us to put more devices and penetrate more in the marketplace. So it's a great comment. It's a financial product that's distributed through our retail segment.

Yes. Yes. No, it's a great pivot to get to retail. So let's talk about retail now. So you talk about this NCR Commerce platform. I want to remind everybody, in your words, kind of what does that mean? What does that entail as you think about this transition? Each one of your business segments is obviously going through a big transition, but that seems to be the bigger moniker around the retail market.

Yes. So retail strategy is clearly straightforward as we go into a retailer. And we're actually -- we're really strong in the large -- very large retailers all over the globe. And to some degree, we want to take that a little bit down market. So mid-tier market, chain -- grocery store chains, 200, 300, 400 grocery stores, drugstore chains like that, where they don't have the ability to spend to keep up with super large retailers. So bringing the technology down to them, provided as a service level, financial care as a service, we call it, or Retail as a Service, put in the NCP or NCR Commerce platform. So that underlying platform allows you to plug in. We use a platform for 2 things. One is it becomes a way to transition off of legacy. So in some cases, we start with the ability to virtualize all the devices in the store and manage the lanes and then start moving down the path to get you to a cloud-based solution. Some of them start with MREL, start with the POS cloud-based solution, then they go to virtualization [indiscernible]. Then once you're on the platform, then you can plug in other products, you can plug in loyalty, you can plug in rewards, you can plug in marketing, you can plug in the software side or the SCO side. You can then go to the front end, our Freshop product, which provides consumer-based front end where they can order. You can plug in third-party products through open APIs. We can then add capabilities. Maybe it's reporting capability, maybe some other capabilities that you'd like to deliver. And then eventually, we've got the connectivity for our payments. So we'd like to be able to add on the new operator in the store, whether it's an assisted lane or a self-serve lane, whether it's a pickup, whether it's a delivery, that we bundle all that out and execute the payment on the back end for you. So that's really what the platform is all about. So we're going to -- we'll talk about that in the context of some customers at Investor Day. But to show how that journey works, we think we're still at the early stages of that journey. We think in terms of the marketplace, our product has gotten out. We've got some mind share. We've had some successes. We're able to implement very quickly in that marketplace and get them started down that path to a future platform.

Yes. No, I mean, it seems like a really good time for that type of product to be introduced to the market. In particular, I wanted to talk about Emerald software, which does seem to be gaining a fair amount of momentum around this retail POS. The question there is not so much what's driving the demand, although you're welcome to kind of expound on that. It's -- the question is, is there more of this that's happening as a result of upgrade cycles that are from your existing book of business that you're able to bring into this modern architecture? In other words, you've got this great feeder pool, which could last for a long time to bring upgrades. Or is it as much about new clients that are coming onto the platform as they need to have a much more modern architecture when they think about their enterprise.

Yes, that's -- it's a great question, Dan. So we started with the focus that said we're the industry leader globally. We have 1.5 million lanes we're operating on our legacy POS systems. So we said let's take those 1.5 million lanes and the corresponding customers and move them down this journey to get them on our next-gen cloud-based product, get them on the Emerald product, get them on the NCP, NCR Commerce platform. And so that was the initial focus. We got out and signed up a number of our clients and started moving them. What's happened is as we had that success, we've had other retailers, not clients of NCR, come knock on the door and say, "Wow, we see this working at the grocery store down the street or a convenience store or whatever, and we would really like to talk about your technology." So we started to add new customers. Again, if we hold, serve 1.5 million lanes of existing customers to get those migrated, it's a great book of business. It extends the amount of spend that we can get out of these clients. So our focus is getting the share of wallet from those clients. And then also moves us forward in tomorrow's subscription business as you know instead of having kind of the perpetual onetime type fees that will be a subscription business. So that alone would be a great shift for that business over the next 4 or 5 years. But what we're seeing is planting new flags and adding new clients on top of that.

Yes. No, that's awesome. And it sounds like most of it, as you said, was enterprise today, but it sounds like maybe you're looking for other opportunities to move downstream a little bit.

Yes. I'd say enterprise, that's very top end of enterprise. We're very, very strong around the globe. And in between enterprise and SMB, there's a big set of the mid-tier market that has the need for all the technology to compete with the enterprise. They're running grocery stores with 16 lanes. They've got assisted lanes, self checkout lanes, they've got delivery, they've got pickup, they've got home order. So all the things that everybody else needs. They don't have the capital spend. They don't have the annual IT budget to compete with a very large player. So for us, that market is prime for our offering as a service.

That's awesome. All right. Let's talk about hospitality over the next 3 or 4 minutes that we've got left. These conversations can go quick. This was definitely a standout in the quarter, very strong kind of demand backdrop that we're hearing from a lot of the players. What I want to know is, as you're thinking about Aloha Essentials and you're rolling that out, which you've seen a lot of sites -- I mean, up 100-some-odd percent. I think you're talking about 7,000-or-so sites. Is that out of the 100-or-so thousand in total operation? Or is that just a number? Yes, so where -- how fast do you think you can get to that kind of penetration over the next several years? You started the journey, but there's still a lot of white space left.

Yes. Yes. So you can see we're going to pick up a little bit of pace, build steam as we go. The focus internally is how can we build a better upsell, how do we build a better implementation model. So I'd say the gating factor right now is the amount of time it takes to get a client on, get them up and running. So we're working on how do we streamline that. The target is to get it down to 30% of the current amount of time it takes to bring on a client. We're releasing some new technology in the SMB space, which we think will better allow us to compete with those, not only on the install, but also on the support model. We think that will be good in the SMB. And then the other -- enterprise market. We've seen the enterprise market is large-scale players who now need -- run into the situation -- they're trying to open stores, they're trying to refresh stores. And they're kind of realizing that a large-scale player across all the U.S. or, in many cases, across the whole world is important to them for us to be able to prioritize. We have a great distribution set out in Nashville where we actually literally install the software, put out components, shrink wrap it on a pallet and then send it to the opening new franchise store, unload it and install it. So the ability to do that at scale has become more and more important to the really large franchise companies. And so we're seeing the enterprise actually do quite well this year as well for us.

You bring a really interesting quarter end thought about. So when you have these enterprise clients, which is where you guys have really had your dominance over the years in a lot of ways -- I mean, it's changing, but that seems to be your sweet spot. So as they are expanding and reemerging and opening up new locations, presumably, they're not going to Toast to retrofit some of the front ends from an enterprise provider on a global basis, right? They have to rely on companies like yourself, and that becomes a very finite group, right, even though there's a ton of people on the SMB side.

Yes, a ton of sites. Yes, I don't think that's a market that Toast is really interested in playing at this point. And quite frankly, the Toast product doesn't really serve the need. So in that marketplace, what we're doing with Aloha to take it to next-gen cloud is a little different than like what we do with Silver, which is much more Toast-like, where it's pure cloud system to an SMB player. In those enterprise accounts, they need the ability -- if the networks go down, they need the ability -- if they lose on the environment that they can still do a transaction. So the ability to do a stored forward, the ability to capture, the ability to operate even for days without having a network behind is very important. So taking Aloha and then lifting out the key components that need to be used for distributing software, keep components for managing menus, key components for reporting, et cetera, which we've done what they're very interested in and then what runs at a register POS system at the restaurant itself has to be stand-alone when needed. So again, what they're running into is we're opening a [indiscernible] some very large names, over 160 restaurants in the U.S. next year just to keep pace with all the new restaurant openings. Otherwise, they lose market share, and they need to be able to punch them out with some consistency. We're seeing that across the board with a lot of those large enterprise accounts.

That's super encouraging. We're at the 8:30 mark, which means we're out of time. I need to be mindful of that. But thanks again. The story is, as I say, a lot of times -- like you just got to catch a break, man. And I'm hopeful that 2022 is the year where it can be a little bit more and kind of normal environment, and that's the break for us. So thanks again, really appreciate it, and looking forward to the Analyst Day, which I think is December 9. Is that right?

December 9, yes. Thanks, Dan.

All right, with the commercial. So all right. We'll see you there. Thank you. Bye-bye.

Thank you.