NCR Voyix Corporation (VYX) Earnings Call Transcript & Summary

Welcome, everyone, to the Bank of America's still virtual leveraged finance conference. So we are committed to being in person next year. So looking forward to that. But nonetheless, we're thrilled to have NCR with us today, and the company's CFO, Tim Oliver. Tim, thanks so much for joining us again this year.

Completely my pleasure.

Great. So I thought we'd start out by asking you to provide an overview of really some of the company's key growth products, digital cloud-based offerings. Let's start out with banking. So obviously, ATM as a Service has become a much bigger part of the company with the Cardtronics acquisition. Another item that you talked about or product that you talk about quite a bit is digital banking. That can sound a little, I think, intangible sometimes. So if you could kind of explain exactly what that is and maybe give us some concrete examples of what that is and what the opportunity is.

Yes, sure. I think you hit on 2 of probably 4 very high-growth areas for us. I think the rest of our -- some of our businesses and particularly the ATM business grow at GDP or GDP a little bit. These grow much faster than that. So ATM as a Service. Think about -- Cardtronics today runs ATMs all over the planet, 280,000 machines, where they put them in hotels, they put them in convenience stores, they put them in sometimes in banks and they own and run those machines. The other -- they collect the fees on those machines to make sure that there's cash in them. They actually own the cash that's even in those machines, they run the ATM. And we call that ATM as a Service. When you take that business, add it to the legacy NCR business, you derisk our ATM business. You derisk our ATM hardware business, because now we can provide a soup-to-nuts solution for our bank customers and for our retailers around physical transactions inside their establishments, whether it's to take cash in or put cash out, we can do that for them. We can do it in a way that they can pay us by the month, they can pay us by the machine, they can pay us by the transaction. That's where we're headed with ATM as a Service. Right now, the legacy NCR business has very few machines we run that way. A few outside the U.S., 1 institution in the U.S. Currently, we've signed 3 or 4 other small, let's call it, community bank deals with systems of, say, 50 or fewer ATMs that we will take over and run for them. But the exciting part of ATM as a Service is when we convince the largest banks in the world to think about taking their fleets of thousands of ATMs and letting us take those on and run them as a service for them such that they never have to worry about physical transactions again, that's when we win. Those conversations are interesting. They're exciting. I had one on Thanksgiving Day with a very large bank, which means it probably wasn't a U.S. bank, but we did talk a little bit about that on Thanksgiving Day. And it was a wonderful conversation. So I feel really good about where ATM as a Service is going. The other you mentioned, digital banking. Digital banking is just this. So when you bank from your phone, that's digital banking. It's mobile banking. We are a leader in digital banking. We had a business here. We added 2 with 2 acquisitions. We added Terafina most recently. Terafina is an account opening technology. So it allows you to from your phone to open any type of account, whether it be a deposit account, it'd be a checking account, a savings account, even a loan that you can do from your phone, which is pretty powerful for banks. When you think about some of the younger folks entering the banking industry these days, they will never go to a branch. And so the ability to transact even through your phone is important. We've also added more capability to the portfolio by doing acquisition that added larger banks, added the capability of digital banking, to go much larger banks. Typically, we have played in the community banking world with our existing product. The new product allowed us to go to larger banks and to compete with folks that are, say, regional or super regional banks. But once you can tie that digital banking platform through all things mobile and allow people and tie it back to the ATMs and ultimately to the bank, it can be an incredibly profitable and fast-growing business. This is a double-digit growing business for us. That's very profitable and has recovered. We had some investment to make and some of the acquisitions we made, I feel good about where we are going forward.

Okay. Great. I think you said 1 of -- 2 of 4 products that are the growth products. Could you mean in banking or?

Yes. Well, in banking, I'd say you added payments. The payments business in banking is pretty exciting. We -- we're going to talk in December 9 to our investors, so I hope a bunch of folks from this call join us. We're going to do a 2.5-hour Investor Day virtually. I'm afraid again, Ana, as you described. But we'll get it done. And we're going to call out a payments business that's much larger than our merchant acquiring business. We're going to talk about the network, the Allpoint network. And we're talking about the switching capability and then add in our merchant acquiring business and talk about payments and networks as a singular entity, which is growing very rapidly. So think about a financial kiosk in the corner of a truck stop, they can transact digital, take digital assets and convert them to physical. And then if you want to take physical and convert back to digital, you can. So whether it be a digital currency, it'd be a gaming account, right, if you participate in online betting or sports betting, you could -- you have an asset there, whether it's loyalty points and other things. All of those digital assets exist and need to be converted to cash at times. If we can become that and transact across our network, it could be very valuable. So we're feeling good about the number of types of payments we can introduce through our devices and cause people to make that device much more useful [ than it manifests ].

Okay. Great. Yes, I did have payments on my list. So we might have some additional follow-up on that topic. So then to switch to retail, I did want to call out software-defined store platform. And I think for a lot of people, that is -- can also sound somewhat intangible. So if you can explain the conversion to platform lanes, I think it's like a KPI that you use as an indicator to watch and really what this all means in practice?

Yes. You're going to hear a lot about that on December 9, and I'll give you a preview right now. I had to learn this, so I'm glad you asked that. I'm getting smarter. Software-defined store means all of the devices in the store have been virtualized. So digitized and they're available on the platform. So whether it's a gas pump or it's a point-of-sale device, all of those things now are available through digital connection. All the data that's collected, all the transactions that take place are now centralized to a singular data set and through to a singular IT platform. That's a big deal for us because once that happens, now we have connectivity, so you have 80 or 100 of those truck stops. You now have connectivity across all 80 stores through your gas pumps, through the coffee that you sell, you know what you're selling. And by the way, we can even tie in the ATM that's in the corner now, so you know how much cash is coming out of that machine and what people are doing with it when they take it out. So really the software-defined stores to make sure that we virtualize the Edge devices inside of the store to make all of that data set available and make sure all of our capability can be pushed to those devices. Once that's done, then we can make you a platform lane. A platform lane takes that platform that I just described, takes that information and layers on top of it all the capabilities and functionality that we can provide. So whether that be data analytics, or it be -- to run your kitchen, if you have -- often in the truck stop, you have a kitchen or to run your point of sale. There's 14 different capabilities that we currently offer to our retail and store customers. And when they have the platform, they can buy all 14 from us if they like, they can buy 3 or 4. Most right now, 3 or 4. It gives us share of wallet to go take that is very, very easy to pull in the business. It also allows us, with an open API architecture, to pull in other people's capabilities, if we don't have it, bring it through the platform. We collect a small fee for tying them in through our relationship, and we manage that interface such that the customer doesn't have to.

Okay, helpful. More concrete. Great. And then so just to round out kind of our introduction here, so Hospitality. So Aloha Essentials, I think you guys have had this out there for a while. But it'd be helpful just to explain to the audience what that is and how it's differentiated.

Yes. So let's talk about Hospitality and the market. We serve about 80% of our customers that are enterprise customers, so big hundreds or thousands of stores. And then about 20% of our revenue is the small- and medium-sized business, so I think 50 stores or less. And you have different solution set for each of those. We have a product called Aloha. Aloha has been the trademark name for our point-of-sale restaurant, a software package for a very long time. We used to sell Aloha attached to a device. You buy a device, you get Aloha with it, you get a perpetual license, not Aloha. You pay us a little bit of money over time for maintenance on that software. But fundamentally, as a one-time sale, we walked away. We did a little maintenance. Aloha Essentials and Aloha Cloud or Aloha Silver, there's a variety of new Aloha products. These are all cloud-based or some on-prem cloud combination of a new software set that is scalable and modular. And so when you -- now when we go on Silver, Aloha Silver is the lower-end product. If we go to the Bartolotta's restaurants in Milwaukee. We were with them the other week. They have 15 restaurants. The perfect solution for them is Aloha Silver. They have 15 stores that can tie them all together. They can put it in very quickly. Within a day's time, we can have a store up and running. They pay us by the month. They don't buy a device, they pay us by the month and sometimes by the transaction. And it's just the service we provide, totally as-a-service solution for the small-, medium-sized business, and it's a payments-led sale. You must put your payments through us if you're going to use Aloha Silver, which is exactly what Toast and some of the other smaller competitors have been doing in the marketplace. We realized they were right in their selling model, so we've shifted that selling model. When you get larger than that, Aloha Essentials is a bundled offering that includes payments. I think effective next year, you won't be able to buy that bundle without payments that is similar to Silver, but much more robust. And it takes you back to the kitchen, it takes you through your supply chain, it takes you to your planning of your staffing. And so it's a very robust model that can grow with you. It can support an enterprise customer. Similar to Silver, it still has an on-prem capability, which some customers like, some are convinced they're not sure yet, so we will have to come up with an Aloha Essentials version that is entirely cloud-based, but that would be the next, I'd say, the next investment. But -- so think about the 2 being relatively similar, capability similar between the 2, where the more robust platform associated with Aloha Essentials. You'll hear us talk about those 2 platforms as the important sites for us going forward in Hospitality. We're likely to call it a KPI, take those together because those will be the ones that are most likely to have payments resident in them. They're all subscription-based. There's no hardware sales in those, and we get paid by the month and importantly by the transaction, which could be really profitable.

Okay, great. So awesome introduction of what's exciting for you guys right now. So switching to some of your targets, financial targets or kind of operational targets. So you've got the 80-60-40 mandate. And then so the 80% is your target to receive 80% of your -- or to generate 80% of your revenue from software and services. And as of this last quarter, you're getting pretty close. So you're actually at 76%. I would say that with some hardware delays because you're getting supply chain impacted, so there might have been a bit of a positive mix factor for you guys. What is your target for reaching that 80% on a sustained basis?

Yes. And I don't hate hardware, by the way. I think getting it to 20% was more to say we don't want people to understand the true value of these companies in software and services. We're likely to still sell hardware, but we will sell it as a subscription. It will be a resident in our solution sale, and so it won't be a hardware to sell anymore, right? So that's really what was the 80% was all about. I think there'll be periods of time where we have hardware sales that are north of 20% of the total company revenue. And if that happens, that's actually not a bad thing, right? If we get an upgrade cycle in the U.S., and then in North America in ATMs and we happen to have a huge share there, I'm happy to take that sale, right? And then I'm not going to get all of the platform, not all of my big U.S. or Canadian customers are going to allow me to serve them as a service from an ATM perspective, and I still want to keep my installed base high. So we'll still sell those. When peaks happen, we'll harvest them. But in general, our shift to recurring revenue into software and services-led revenue is reasonably close to getting to our 80% target and to our 60% target. To your point, 75%. I think we'll get to 80% very soon. The Cardtronics business is all software and services. It's all recurring and our hardware business continues to -- the amount of hardware we sell in any given quarter as just hardware has continued to decline over the last several quarters. To your point, I think the pandemic forced a little bit of that, but also the way we're selling, it's forcing it. If you can't buy hardware for me in the restaurant business any longer, unless you are McDonald's, right? If you're a McDonald's or a Starbucks, yes, you want to buy hardware, I'll sell it. Most other folks who aren't that large have to buy a solution from us, it's by nature then, we're going to migrate towards that 80%. I don't know if that feels better than 80%, but 80% feels pretty good. I think we'll be there in short order. Give us a year or so, we'll be there.

Okay. Great. Right. And the recurring revenue, it feels like you've arrived on the 60% target.

Yes. I think that's the one I take to 80%. I think -- if we're going to do new goals, I claim victory on the 80%, and I put it aside. I've transformed the revenue base, and I'm not selling hardware, really, I'm a solution seller now. And so we'll let that play out. On the recurring revenue side, good fintech companies that we want to be compared to tend to have more than 80%, more than 60%, close to 80% to 85% of the revenue is recurring. I'd like to get there. And I think that's a metric you're likely to hear us talk more about, start talking more about our ARR and those businesses and start to focus people on trying to shift the entirety of what we sell to be recurring and look more like a fintech solutions provider. And you may just take that number up from 60% to something more because to your point, we're through it. And the acquisition of Cardtronics helped us get there. Then you're probably going to ask me about the 20%, which is next, right, the EBITDA margin rate?

Well, actually, I wasn't, but if you want -- and I think I actually misspoke. I said 40%, but yes, the 20%, do you want -- yes, sure, go ahead. Go ahead and talk...

All I'd say there, put the 80-60-20 to bed. We're also nearly there. And I think when we put our forecast out for 2022, we're likely to be close to that number. And so we have to do something with that metric. You're going to hear us, I think, talk more about EBITDA, growing EBITDA dollars rather than worrying about the rate. Once our EBITDA margin rate gets to 20%-ish or so, I feel good. I feel I think it's competitive. It's reasonable for where we are. I think it will migrate up over time from there just through revenue mix. But I want to make sure we grow EBITDA margin dollars faster than we grow revenue. And that will mean in some businesses, rate goes up. In some businesses, we might actually sacrifice rate to go chase hard new revenue opportunities.

Okay. Got it. So hardware, and wanted to ask a few questions. I realize you're obviously very focused on software and service as being the majority, but the vast majority driver of the business. But you still obviously do have the hardware strategy to some degree, it's really sort of the leader for your software and services business. So both on the point of sale and on ATMs, what's the growth outlook right now? And in particular, on the ATMs, how much does the acquisition of Cardtronics impact your growth outlook on the hardware sales?

Yes. So let's take hardware in aggregate. ATM as a Service is agnostic to hardware type and platform agnostic to hardware type. So to the comment that we're a hardware-led sale, we're actually not any longer. So we don't care whose hardware you use. We want to get this, we want to win the solution. And so most of our solutions customers, our subscription customers have a mix of hardware, it's not all us. So that's the first thing. The other is the Cardtronics acquisition. I think it's likely to force an upgrade cycle in the machines to allow them to be much more capable. And whether that's a software upgrade or a hardware or a combo hardware and software upgrade, I'm not sure. But the Cardtronics machines today, for the most part, are cash in, cash out and some of them are just cash out. Our new ATMs are cash in and out and can do other transactions while you're there. We want to make all those devices multifunctional, it'd be much more capable than they are today. So I think it could really help our ATM fleet and help our ATM hardware business as that upgrade cycle takes place. If you look at the average age of the fleet out there, depending on where you live, your ATM could be 10 and 12 years old, it looks 10 and 12 years old, and it's not as capable as it needs to be. So you may see more hardware being built by us. I'm not sure we'll sell it all as hardware, but I think you're going to see an upgrade cycle and self-checkout and you can see an upgrade cycle in ATMs.

Okay. And again, even though hardware is an increasingly small part of your kind of focus, it can take up a lot of oxygen in the room with the supply chain issues right now. So just to touch on that. And obviously, it's been a huge topic at this conference this year, I'd say like the #1 topic in the sessions. So the company did highlight $100 million of cost pressures in 2021 from freight and input cost inflation. Any signs of that easing as you look into 2022? And then what's your ability to pass some of those costs on to customers?

Yes. And that's the most important part of this. So I won't give an update from what we talked about last quarter. I think it'd be incomplete if I did it. What I'd say is, at the time, we thought it's going to be a tough quarter, and it's likely it's playing out as a tough quarter. I don't think -- on the freight side, I don't think things are getting worse from a freight perspective. I just don't think they're getting better, meaning costs are up, and it seemed to be persistently up. I don't know why multimodal hasn't started to cause pricing to come back down. While people are competing harder on freight cost, maybe there's reasons for it to stay high, but it feels artificially high at this point. It feels like it should come down and they're just not yet. Other freight costs for us were associated with expedites caused by shortages of parts. Those part shortages are starting to abate. We are seeing componentry get a little bit easier to get. So when it comes to, say, for us, printers, scanners, things like that, that are, let's call it, electromechanical devices that we're able to get what we need. Chipsets are still tough. I get a little bit of echo, but the chipsets that we buy are still tight. We've got enough to make sure our customers get the product that they need, but we're not -- they're not excess. And so to the point we made in the last quarter, we're not getting all of the hardware revenue that we could get, but rather we're metering out those chips to make sure we get the hardware delivered that is most valuable to both us and to our customers. The -- and so that $100 million, which I mean I'm not going to update it, but it would probably a pretty good guess at the time. And we're working very hard at putting pricing through. Our first discussion on pricing with our customers happened in the [ 3rd ] [indiscernible] of July, and we're now starting to see fruits of that. We saw a little bit of price come through in Q3. We'll see more come through in Q4. I think I'm about 4 months lagged to the cost inflation. So I think 4 months from now, I will have caught up with where my costs are currently. If they still don't raise -- don't increase over those 4 months, I should be back to flat.

Okay. What about labor? How are you guys doing and having the labor that you need?

It's been tight, but fine. We've run light versus our headcount expectations for the full year. Our productivity of the folks who are working is high. And we've been successful in keeping our attrition rate to about double where it would be in a typical year, which doesn't concern us that much because there's almost no attrition in 2020. And so our feeling right now is that we're seeing in '21, 2 years' worth of attrition that really just some of the natural catch-up from the deferral of attrition prior to that. I'd say on the software engineering side, it's probably the toughest market right now to find people. There's a lot of demand that we -- our headquarters in Atlanta is in a market where there's a lot of demand for talent. We have talent all over the world, and we've been successful in finding really good people in other geographies, and we can't find them, the one that they -- that where attrition is high. So we just opened a major facility in Serbia. I think we're the largest player in Serbia now, over 5,000 people, and they're great. Their language skills are exceptional. Their work ethic is incredible. They're proud to be part of NCR. So same would be true in Dundee, the same would be true in India and in Poland. And so that's -- the strategy here is not so much to try and chase labor, but rather to have -- if we're going to have fewer people, have the best people, pay them well and make sure they're in the right places where we can continue to attract to retain talent.

Okay. Great. So I'm watching the clock, we've got about 6 minutes or so left. And I'm just going to skip ahead because given this, it is a credit conference, I want to hit on the capital structure. And then if we have time, I might double back to a few other topics. But -- so after levering to 4.5x to acquire Cardtronics, you set a goal of delevering back to 3.5 by year-end '22. How do you feel now about achieving that target?

We'll beat that, we'll beat that target. Mike and I had said at the time, we don't like leverage higher than 4. We just assume it would be a 3. We'll get back to 3 5 as soon as we can. Look, I think some of our equity investors even would rather have us be at 3 or below. So I'm not suggesting we get to 3.5 to stop delevering. I just think that we got to get there fast, and we'll beat that target.

Okay. And then how are you going to beat it? So is it a combination of debt repayment and EBITDA growth? I know you've got some balance on the revolver. So that's like an easy one to target for debt paydown if you have the cash flow for that.

Yes. That's exactly right. I hate to pay back my revolver because it's so inexpensive. But that is where I would apply it. Most likely, EBITDA will grow nicely. We'll get the synergies out from the acquisition, that will be helpful. We're going to get -- we've got a revolver on our receivables. We've now moved off balance sheet, so it's nonrecourse financing. That's helped a lot, which our treasury team did a wonderful job of getting that off our balance sheet, and we'll keep generating free cash flow. I mean the only way to do this is generate free cash flow on a predictable basis. And we've been doing that in the last, I don't know, 6, 7 quarters, we've been between $100 million and $150 million free cash flow. I think if we can keep that trend going, we'll be -- we'll have excess cash to spend.

Okay. When will you consider resuming share buybacks?

Not until we get below 3.5.

Okay. M&A. So far in 2021, I think you've made 3 tuck-in acquisitions for a total of about -- well, I added it up. I think it was $126 million. And one, I think, in each of the key end market segments, retail banking, Hospitality, what should we expect for continued pace for these kinds of tuck-ins?

Hard to predict, right, because they have to be -- there's 2 sides to any transaction. There's a likelihood we continue to do those and that our typical cadence is about $250 million a year of these types of deals. They're too different. One is very technology-rich and brings very little revenue profit, but it helps accelerate our technology innovation. And the others are [ small edge deals ] that bring actually good revenue, good profit, the more around distribution and integration efforts, one to serve the services side, if you will, of our business. Those are the flavor of the ones we've done thus far and the ones we've done over the last several years. So I think once we get down to 3.5x, it's likely to get back to $250 million -- about $200 million to $250 million from the $150 million spend, but it's hard to predict when that will take place.

Okay. Any potential appetite for larger acquisitions similar to Cardtronics?

Well, I love the Cardtronics deal. We didn't really know what's going to happen. We got thrown into the -- as you remember it, it wasn't really our choice to start that process, but it got started, so we engaged ourselves. We've got a lot to get done and get integrated in the short run. I think 2022 is the year in which we've got to execute on the synergies of the transaction we already did. We're really excited about that. But I think -- look, this transaction played out so well for us. It's so powerful. It's helping us, really helping us generate more revenue growth and be more profitable than we've done before. Cash flow has been excellent. We're going to delever to beat our targets to get ourselves delevered again. So I'm hopeful we'll prove in this big deal that we're capable of doing them and doing them well. And if we ever to have the opportunity to do one this accretive again, that people will feel the same way, that we did a good job with the last one that you can count on us to if we have to lever up again to delever quickly.

Okay. Do you have what you need now in the payment space with the JetPay acquisition? Or is there a potential more acquisitions in that area?

I like what we have. I think more importantly than JetPay, the addition of the Allpoint network from the Cardtronics acquisition gives us a very unique standing in payments.

Okay. And then final moments that we have just -- you talked about there's still a lot to do on integration. What's left to do or where are you most focused right now on the Cardtronics acquisition? And how do you feel about this synergy realization progress?

Yes. I think people are coming together really well. Cultures are jelling. We're keeping all the people we want to keep and they seem happy. The brands are coming together fine. Our customers are receiving the combination really well. That's important. So customers, employees, our product sets are taking a little longer to bring together. So we go to market differently. The revenue synergies, I think, is what's going to -- we're going to work on over the next year. Cost comes out easy. It's not that much. It's just a natural thing. It will be the revenue synergies in both retail and in banking that will be most exciting over the next 12 months.

Okay. Great. So with that, I think we're -- unfortunately out of time. A lot of other things I would have like to have delved into. But any final comments or kind of key takeaways you'd like to make?

No, Ana. Thank you. These are great questions. We're happy to do -- well, if you need us again, we're happy to do. Whatever you need us to do, we're happy to answer questions. And December 9...

Oh, great. Well, what I need you to do is to meet us in person next year.

So I'm happy to do it. We're trying to come to New York for a few days in December to start to get back on the road because we haven't seen our investors in a while, and we love to get out and meet people. So if you wanted to host us in New York, Ana, we'd be happy to come to you.

Oh, I'd love to host you in New York. I was talking in Florida next year for our conference, but happy to see you even sooner in New York. Yes. Okay. Great. Well, Tim, thank you so much for being with us. And I think Michael Nelson is in the room there as well. So Michael, thanks so much and really looking forward to the Analyst Day.

Okay. Great. Thank you.

Okay. Take care. Bye-bye. _