NCR Voyix Corporation (VYX) Earnings Call Transcript & Summary

Joining us as we get later in the day. Again, it's almost embarrassing. I have to say it every time, but it's like a disclosure. I'm Dan Perlin. I head the fintech practice here at RBC. And I'm delighted to be joined by my good friend, Michael Nelson, who is the Treasurer and Head of Investor Relations at NCR. So thanks so much for taking the time, get out of Atlanta.

My pleasure. Always great to be here. We've been looking forward to it for quite a while.

Good. Good. I'm going to just let you get this out of the -- out in the open, strategic review process. Anything to just -- I know you're not going to want to tell us anything specifically about where you are. But like -- just how does it feel in the organization? Or if there is even anything...

Yes. No, I'd love to provide an update. I mean, clearly, it's a main -- a large focus of investors right now, update on the strategic review. Maybe as a little bit of background, may be helpful for those that aren't as familiar with NCR and the strategic review. We announced back in February that we were going to go through a comprehensive strategic review to look at potential options to unlock value. It was really driven by, quite frankly, the depressed level of the stock price and valuation of the company. We're now 4 years into this management team, transforming the company from what was previously a largely hardware-centric company to a software and services-led as a service company with a higher mix of recurring revenues. And while we've done a really excellent job transforming the company over the last 4 years, the valuation multiple of the company trades at a lower multiple today than it did 4 years ago. That's really what led to us kicking off the strategic review. Back in February, just to lay out some parameters, we said it was going to be roughly a 6-month strategic review period. It's always impossible to time these things, but we wanted to try to put some guardrails and manage expectations for the process. I'd say where we sit today relative to that time line, we're right on track. I feel really good about the progress that we're making along the strategic review. When we started the review in February, I think we looked at -- we laid out a whole host of options, I mean, basically left everything and threw in the kitchen sink and then some of all the alternatives we're potentially looking at. At this point, we've narrowed them down. And I think the Board is currently looking at a couple of different options. Clearly, one is to potentially sell the company as a whole. Also looking at paths to potentially split into more than one segment and perhaps execute on something there. The conversations with potential suitors have been extremely constructive. And I would say that what encourages me is that I do think that thinking about some of the other companies that have gone through a reported strategic review process, and I think what differentiates NCR is a couple of things. Number one is we have extremely strong earnings power, generate some significant EBITDA and earnings as well as free cash flow production as well as if you think about what I just started off with the transformation of the company, so we're really 4 years into a transformation. And I think as a company, as a management team, the Board, we've proven our ability to execute and to transform the company. And I think that there's now an opportunity to further accelerate that transformation and to execute on the strategy. I think all that places us in a pretty unique position. So overall, again, relative to the time frame that we laid out in February, we're making great progress, and I feel really good about the time line.

I was not expecting you to give that much detail. So thanks for sharing, man. That's awesome. When we talk about the economic backdrop, there's all kinds of moving parts that we're seeing. I guess what I wanted to just get from you is as you look across the operation as a whole and you're looking across the various segments and geographies, just what are you seeing out there right now? Do you see any major discernible differences in terms of patterns of transacting or buying or when you're talking to consumers or customers on the enterprise side? Like just anything that you would be willing to share in terms of expectations?

Sure. The demand environment has been solid really across all of our segments. If you think about in the Banking segment, our shift towards ATM as a Service, where we're offering banks the opportunity to completely outsource the end-to-end management of their ATM network to NCR, right, that really shifts the model from just selling hardware, software, hardware maintenance to a complete end-to-end as a Service offering, driving recurring revenue. We're actually seeing some pretty significant interest from both community banks as well as some of the larger global banks out there. So we've been extremely optimistic and really encouraged, I would say, about the receptivity of our ATM as a Service offering. Digital Banking, our Terafina acquisition, which is our digital account opening, continues to do well in the marketplace. I mean Digital Banking, we're winning in the marketplace. Terafina has been a phenomenal acquisition for us. It has really opened the doors to both attracting new customers onto our Digital Banking platform as well as provide us an opportunity to cross-sell and upsell existing customers on to the Terafina Digital Banking platform. So we feel good about that. In retail, we're winning the upgrade imperative for point-of-sale software that we're really seeing across our customer base, particularly amongst our grocery and convenience and fuel retailers really shifting their business, shifting the lanes onto our platform. And when they shift from a traditional point-of-sale software to our platform, we typically get double the ARPU. And what we're really looking at there is we have 1.5 million lanes that run our POS software. We're looking to migrate those customers on to the platform, seeing some nice success there. You've seen that in some of the KPIs that we release. Self-checkout, I mean that's been a strong secular story, right? I mean you have things like the labor shortages, wage pressures and just changing consumer preferences. I think that's a nice secular story there. In Hospitality, really 2 different kind of businesses there, 2 markets. The enterprise customers, which represents 80% of our restaurant business, our enterprise customers. We classify enterprise customers as restaurants with 50 or more locations. There, we're seeing continued opening of new stores and refreshing existing -- remodeling existing locations. And then in the SMB market, we recently came out with a new offering. You may have seen Aloha Cloud. That's a payments-led offering. And we're really -- that is now doing extremely well, competitively head-to-head against all the other competitors in the marketplace. And as a payments-led offering, that is really generating increased payment sites for us and payment volume.

No, it sounds good. Like if you didn't know the backdrop that we were in, you'd say it was business as usual in terms of making all the progress that you've been probably getting for so long. But let's just talk a bit about some of the headwinds that you did have in the quarter in the context of the current environment, right? So when we think about manufacturing for hardware and some of the difficulties in terms of components and costs associated with that, what can you tell us as you sit here kind of today? Again, not necessarily always saying what exactly happened post quarter but...

Sure. So let me maybe frame a question for those that are unfamiliar. So in the first quarter, we got hit with a multitude of macro headwinds that really accelerated through the quarter, starting with inflationary pressures that -- we haven't seen hyperinflation at that rate in over 40 years. We had interest rates that basically doubled in the quarter that impacts our cost to rent cash in the ATMs that we own. The Omicron variant that spread, particularly through the Crown countries, impacted some of the transaction volumes over our Allpoint network in the Crown countries as well as some of the lockdowns in China. And then obviously, the war in Ukraine. All of that hit us all at once in the quarter, and it resulted in us -- really, we went into painstaking detail on highlighting the full year impact on all of that which total, call it, $150 million of EBITDA impact for the full year. We then talked about mitigating actions to offset $50 million to $100 million. So call it, the midpoint of that $75 million reduction and really laid out a strategy, 2-pronged strategy, to offset that -- those headwinds, split roughly 50-50 between price actions and cost reduction. So we put in place actions to increase price that would generate roughly $200 million of annualized benefit by raising price and put in place actions to reduce costs that would generate roughly $200 million of annualized benefit by lowering costs. So really combined, we're obviously looking to over-solve for the headwinds based upon the uncertainty for the remainder of the year and particularly coming out of a quarter where all of those headwinds accelerated through the quarter. So really looking to over-solve. I'd say as we sit today over the last, call it, 6 weeks or so, we've seen a stabilization in the inflationary pressures around the supply chain, particularly around transportation, microprocessors. Those are probably 2 of the biggest headwinds that hit us from a supply chain perspective. And we have seen a stabilization thus far. So I think it's too soon to declare victory, but certainly extremely pleased that we've actually seen the headwinds stabilize.

That's good. That's really good because it was -- it came on abruptly and viciously.

Yes. And it accelerated in the quarter. So that was really when we took these actions, and we'll continue to execute. It was given the uncertainty of how quickly things accelerated, but they have seemed to stabilize, at least for now. Some of that macro, I will say some of that has been actions that we took internally like the microprocessor as an example. We were -- we had one particular microprocessor that we relied on to read the notes in some of the devices. We reengineered the devices to be able to now use various chips, and that has clearly also helped to alleviate some of the pressures. But even from a macro perspective, I'd say at this point, things have somewhat stabilized.

Sounds good. That's good to hear. Let's spend a second on your payments and network business. This was one of the newer segments that you guys brought out to investors this year. Maybe talk a little bit about what you're seeing in terms of transactional growth. But here, I'm saying the difference between like the Allpoint network and the acquiring business. How do they differ? And then what are you seeing, I guess, in terms of...

Sure. So let me start with the merchant acquiring piece. So I just mentioned earlier we're having significant success in building and attracting new restaurant customers, particularly SMB restaurant customers. And that's really driving -- and that's with the Aloha Cloud offering, Aloha Essentials. And we're now going to market with a bundled offering where the de facto is it's a payments offering and the customer doesn't have a choice. That's a little different strategy from what the company NCR historically went to market with. Now that we're going with a payments-led strategy, all bundled, we're seeing a pretty significant uptick in customers taking the payments solution as well as existing customers migrating over to the payment solution. So really pleased with the traction that we see there. In terms of the Allpoint network, I mentioned earlier that in the first quarter, we had headwinds within the Crown country, right? So really 2 different types of trends there. Think about North America and the Crown countries being U.K., Australia, South Africa and Canada, where those transaction volumes were negatively impacted. The Omicron wave went kind of later than it did here in North America. We've seen those transaction volumes rebound. So coming into the second quarter, transaction volumes in the Crown countries have rebounded, and they continue to grow in North America. One of the things also that's driving some of the transaction volume aside from sort of same-store sales, if you will, is that we've also started to roll out some different types of transactions that could be executed across the Allpoint network, which historically was a withdrawal, a cash withdrawal network. Now with NCR Pay360, there's additional types of transactions that we're driving through each of those endpoints.

Interesting. So it sounds like you're winning business within the restaurant space, which is encouraging to hear. And it's such a crowded -- it's a crowded group.

Sure.

Is this net new business like the restaurant is brand-new to their own existence and they're shopping all the various opportunities they've chosen you? Or are you displacing someone that maybe had a legacy relationship? Is it...

It's both. We're seeing success both. I mean there continues to be new restaurant formations, but we are certainly winning our fair share of competitive takeaways.

Okay. Okay. That's great to see. And that's even -- and then the other thing you mentioned, which I thought resonated, was on the payment conversion side. Normally, when we would have talked about payments, it would have been like, well, it came with a new solution, and that was kind of the way we retained it. In this example, it sounds like you're actually being able to convert legacy players who had other acquirers and bring them over into your system.

We are. We are beginning to see that. Clearly, that's -- there's a little delay there because they may already be under contract. But as they come off contract, we are going back to them, particularly if they're an NCR Aloha customer, right?

Already.

Already. It's an easier sell. They're already doing business with us, the POS device. The software that's running that restaurant is NCR. The only missing piece is payments. So we are starting.

You read a bunch of articles nowadays about ATMs and branches being consolidated, but they're actually putting -- they're looking to put a lot more ATMs to work. Are you -- one, is that more headline fodder? Or is that real practice? I mean it sounds like ATM as a Service is gaining a lot of share, and I didn't know if that was in conjunction with what we've been reading around kind of branch...

I think they are related. I mean if you just think about the manager, the head of a bank and part of the whole branch strategy, the branch strategy is likely to reduce the number of branch locations and at least reduce the size, the footprint of the branches. And many times, they replace that with an ITM or interactive teller machine. That could do about 90% of the transactions as a teller. They will also look to, in many cases, redeploy those ATMs off-prem. While they're reducing the branch footprint, we're going in there with the offering of, hey, listen, you could just outsource the complete end-to-end management of the ATM network. It's not part of their core competency, outsource it to NCR. We will manage everything and -- yes, and that's really starting to gain some traction.

Yes. Can you talk about the pipeline you've got in and around Digital Banking, if we kind of pivot a little bit in terms of potential wins, how they branch into the P&L from implementation cycles? Have they improved? Have the cycles kind of compressed a little bit now that everything seems to be a little bit more normalized?

The Digital Banking cycle, onboarding and even decommissioning...

Yes. You got both.

We have both. It's a delay, right? So in the first quarter, we had a couple of customers that told us like years ago, they were going to be coming off of the platform, deconvert. And we have 2 large -- much larger customers in Wintrust and associated bank that will be onboarding in the third quarter, right? They were signed last year. So there's still that delay. I'd say I feel good about the pipeline. And that's the thing about Digital Banking, right? There is probably more visibility in that business than virtually any other part of our business because of the high percentage of recurring revenue and the long lead time to both onboard and churn, but feel really good about where the funnel is going.

Yes. Any difference in terms of bank conversations about spending real money in an environment where rates were going higher?

Well, look -- so I think what the banks, and really all of our customers for that matter, are looking to do is to drive efficiencies, right? And if you just think about the banking channel, there's various different channels. Digital Banking, it's the center of the self-service banking channel. And you used to start with the ATM. Now it starts with the digital channel, and the banks are looking to integrate the digital channel with the ATM channel with the branch network, right? That's where our channel services platform, the software platform, for banking comes into play and is really one of the key drivers to growth within banking is we offer the opportunity for these banks to integrate all of those channels with our software platform.

Yes. Okay. So it sounds like demand trends still are pretty good. The implementation cycle has some puts and takes. But in the back half of the year, you've got some big clients coming on in the third quarter, and so that should be potentially positive while they don't come on and ramp immediately.

Right. So I think -- I would expect -- right, when you get to the back half of the year, Digital Banking should -- revenue should accelerate.

Yes. Anything to call out as we think about self-serve banking in aggregate? So we were talking a little bit about the ATM as a Service in particular. This was also an area, if I remember correctly, you had a lot of conversion early on into software, right, for traditional digital banking. So as we think about that conversion cycle continuing, where are you maybe in the process to get the vast majority of that over? And I can't remember what percentage actually you guys had...

Actually, so in -- the Banking business was the first segment where we started the shift from moving from an upfront perpetual license to a recurring revenue subscription model. We're actually -- at this point, we've passed the tipping point, if you will, within Banking. So the majority of the software that we sell today in Banking is on a subscription or [ year-by-year ] term basis. And as I mentioned, the new -- the incremental software that we're selling like the channel services platform, right, like check image capture, deposit -- mobile deposit, the software that drives the ATM, the whole ATM as a Service model. If you think about we're now selling a full stack of software, services, solutions where the whole ATM as a Service model, it basically doubles our ARPU, at least within the customer over a 5-year contract because of all of the incremental software and the services that we're selling on a subscription basis. I expect that will continue to go forward to drive. We're earlier in the cycle of converting from upfront to recurring revenue in retail and Hospitality, but Banking is the furthest along.

So leading into retail and speaking of inflation, putting pressure on businesses that have relatively thin margins, i.e. groceries, and that's a big part of that business. What can you tell us about the demands on those clients and how you're helping them reduce their costs here, again, driving efficiency, reducing cost? Is this where you're finding more of the SCO channel going? Or is it in other aspects of that?

It's a combination of self-checkout and point-of-sale software, right? So clearly, the self-checkout, I think it's easy to understand the value proposition there given the -- with the wage pressures and labor shortages. It's a very short payback period on deploying self-checkout. So there, we're seeing traditional customers like the big-box retailers increase the penetration of lanes, right, and convert assisted lanes to self-checkout lanes. We're now starting to see segments of the market that did not traditionally deploy self-checkout, like department specialty retail, like a Best -- Bed Bath & Beyond, like Bed Bath & Beyond or the convenience in fuel retailers, start to deploy. So a lot of the gas stations, think about it, are starting to deploy self-checkout. So it's really expanding the TAM for our self-checkout market. And then the conversion that I mentioned earlier of winning the upgrade imperative for point-of-sale software, part of that value proposition is the retailers, and particularly the grocery stores, they need to shift due to all the changes that happened during COVID, right? Curbside pickup, online ordering, delivery, right, all of that -- I mean you think about Freshop, right? Freshop is -- that's a business that we acquired. That's basically a white label Instacart, right? That takes the power, right? So that brings the customer back to the grocer who is losing the ownership of their customer. That has been a tremendous driver. And really, by moving on to the software platform, it allows our customers to drive more efficiency and reduce costs. And we garner a larger share of wallet. So their total spend won't necessarily increase, but our share of wallet goes up significantly?

Okay. So that's a win-win.

Yes.

How have you been able to, if at all, take the incremental cost of components and those kinds of things that you've had to put into SCO, which an ATM, I think it's one thing, but in SCO, it sounds like it's a much bigger demand, right? It has a very simple value proposition. Is there -- are there abilities for you to pass on some of the incremental costs of manufacturing that equipment to these consumers or these merchants yet?

Yes. Clearly, we are...

You are starting to see this?

Yes. I mean because the reality is even if you're looking at -- there's a couple of different components there, right? Anytime you're dealing with a piece of hardware, right, every one of our competitors is dealing with the same exact inflationary headwinds that we are. So I don't think there is another competitor that could provide that solution for -- at a significantly lower cost than what we're going to market with. But again, across all the solutions, in self-checkout in particular, the key point of competitive differentiation, it's not the metal. It's the software. The software that runs the self-checkout, it's really the driver why we have the largest #1 global market share of self-checkout, I think, more than double the second-closest competitor. And again, it's the software that's a key point of competitive differentiation.

Yes. Hospitality, I want to go back to this one more time because it has found a very crowded playing field or a much more crowded playing field than I think a couple of years ago with some of the more public entrants that came into that space. But when you sit around and you look at the competitive environment that you guys are faced with today, who do you end up like butting heads against the most? And when you win against those individuals, like why do you think that's the case?

So 2 very different marketplaces: again, enterprise and SMB, right? And honestly, I think this is the piece that a lot of investors lose sight of. 80% of our restaurant business are enterprise customers. There are very few competitors, strong competitors, in the enterprise space. Most, if not all of the new entrants that you're talking about, are in the SMB space.

Totally.

Okay? So that's 20% of our business. But still, honestly, several years ago, we did not have a competitive product in the marketplace. We did not have a payments-led solution. Over the last 12-plus months, I'd say, we've, of course, corrected that. Over the last several years, we've invested heavily in Hospitality in the software platform. You know that from following us. So while we talked about some of the heightened costs over the last several years investing in the platform, all the investments that we've made the last several years are starting to bear fruit as we have an extremely competitive offering to go head-to-head against those strongest new entrants in the marketplace. And we're starting to win back our fair share of those deals, again, with the payments-led offering.

That's cool. Free cash flow, the guidance you guys gave last quarter for the full year, I guess, I think it was $400 million to $500 million. Just remind us like why you're so confident in that and what the drivers are to kind of get you from what was a really difficult first quarter to what will likely be a much more stable...

Sure. So just a quick comment on the first quarter. I think the reported free cash flow was negative $10 million in the first quarter. We realized that we had roughly $150 million of what I would call increased employee-related expenses relative to the year ago quarter associated with changes that we made to the 401(k). And we paid out a bonus to our employees, which were not paid the prior year. So those increased employee-related expenses is about $150 million. And really, when you look out through the remainder of the year, it's just converting the net income to free cash flow. I would expect to see some improvement in working capital, particularly around inventory as we go through later in the year. And even as you look at the expectation for the ramp in profitability for the year, we talked about sort of modest sequential improvement through the year. I would expect the flow-through to free cash flow to follow through. So probably a little bit more back-end weighted as income increases through the year.

Yes. All right. In the last couple of seconds we have here, the leverage ratio, I think, is around 3.9, something like that. Given the strategic review process, is that on hold? Or are you continuing to kind of whittle that down throughout the year, all else equal?

Yes. I mean so when we -- obviously, we levered up to make the Cardtronics acquisition. And we made a commitment at the time to our banks, to our debt holders and our equity holders that we were going to delever as rapidly as possible. We were at an uncomfortably high leverage ratio for the company, and we made a commitment. We delevered to at least 3 -- below 3.5x by the end of 2022. At 3.9 at the end of the first quarter, I see a clear path to hitting that getting below 3.5x by the end of the year.

Cool. Well, good luck on all this stuff, man. I mean the underlying business sounds like it's doing pretty good, and the strategic review process there was a lot more detail here than I expected. So it sounds like it's going well, all else equal, as long as the market can participate probably. So thanks again, buddy.

Thanks, Dan. Always a pleasure.

I appreciate it. Always a great time.