NCR Voyix Corporation (VYX) Earnings Call Transcript & Summary

Welcome. I'm Ana Goshko from Bank of America. And this is our 2022 leverage finance conference, and we're thrilled to be back in person in Boca Raton, and we're also thrilled to have NCR with us today, and we have Tim Oliver, the company's CFO. So Tim, thanks so much for being with us.

Yes, my pleasure. It's been a great conference. We had some terrific meetings.

Great. just diving into it. So the big topic is that NCR is in the process of separating into 2 stand-alone entities. So I definitely want to dive into the to new businesses that you'll be standing up. But why don't we start with the question of why the spin?

Yes. So we started a strategic review process back in July of '21 with our Board. We went public with that in February of '22, just in time for award to start and for inflation to take off for gas prices get out of hand. And so and ultimately, debt markets to shut down. And while there were rumors we may have had a Holdco transaction or some other types of external transactions, those couldn't happen in the debt markets as we encountered them back a few months ago. And so we decided to take the control back to take the process off other people's hands and take control of ourselves and to do the split cells. Every person we talk to and there were dozens who thought about a piece of our company or even the holdco, they would have done exactly what we're going to do. What they said was these are 2 -- at least 2 separate companies, they'll be better off a part. And we couldn't we didn't find obvious investors, either -- I don't think we even find them today for NCR in the public markets or as strategic buyers for the whole of NCR. It's too complicated. There's too many end markets you need to understand. And so this is our way of simplifying things, taking an ATM company that's a really good ATM company. I get it, some people aren't drilled with ATMs and I think cash is going to go away we don't agree. But more importantly, we have a great ATM business. It's a leader in the world. And when it spins out by itself and you put the Cardtronics business with it, it's going to look really good in comparison to some other folks in this space. And then importantly, we leave our growth businesses together. And we can go invest in retail, go invest in hospitality and invest in digital banking to spur growth over there. And there'll be 2 separate investor sets they'll trade, I think, at different multiples. I think they'll trade with different volatilities as well. I think the ATM business will be very much a utilitarian stock. You should pay a dividend, it should be repeatable. And I think the underlying secular growth story on the other half of the company is exceptional. So we feel good about the strategy now. It doesn't preclude all the people we talk to from coming back. And bringing another idea and financing. And so what we have said when we announced it wasn't -- we're spinning the company because we couldn't get a transaction done. What should have said is this is not the right time to get a transaction done we're going to take things into our own control and go get this company ready to be to separate companies.

Okay. So in many ways, you're doing the work that someone else would have done and that value actually will accrue to you instead of leaving it on the table potentially...

That's right, it's more efficient from a tax perspective. It's more efficient from a debt breakage perspective. Yes. So we'll accelerate it. And if debt markets change and appetite for pieces of the company or the whole change. There's nothing we're doing that would preclude that from proceeding.

Okay. Got it. So let's start by talking about the 2 parts of the business that you're kind of standing up as separate entities, and then we'll talk more about some of the separation mechanics. Is that at a good plan? Okay. So Commerce Co, I think, as you highlighted, that includes retail hospitality, digital banking, that's really going to be the RemainCo. They're all very software-centric for NCR, and then you've got payments in there as well. recurring revenue is about 55% of that, right? And your EBITDA margin right now is about 16%.

Yes. Yes, not high enough. That business has suffered this year more from supply chain issues and the others of market was tough early in the year. So margin rates on hardware in that business still have not come back to where they need to be. And they're a little behind the curve on that shift to recurring revenue, right? The other half is at 65%. So when they get that number up, I think their margin rates will start to climb nicely and when they start to attach payments in both retail and hospitality, you're really going to see margin rates climb. I think that's a high 20s EBITDA margin business.

Okay. Yes. So you preempted my question. So a high 20% EBITDA margin on that part. And then recurring revenue as a percent of base like where do you want to get that to?

So that business, it's going to take a little longer. The retail business is the big revenue base in that RemainCo. That business is less far down the path on making the conversion to recurring revenue streams. They still have some very large U.S. customers who buy hardware. And we like that business, it's a good business, but it does keep that rate down. David needs to convert in that business is customers is lanes is 1.5 million lanes to be platform lines. And right now, we've got about 3% of our installed base converted platform lanes. When we get them there, the ARPU comes up dramatically, it's a terrific business, it's repeatable, it's subscription-based, but we need to get them there faster.

Yes. So for the audience, when you refer to Emerald, what does that really mean and what's the scale and the opportunity?

Huge. So 1.5 million lanes. If you throw in the hospitality business, enterprise clients who look kind of like a retailer in a lot of ways, they look like Walmart. It's probably approaching 2 million lanes of which we only have 40,000 converted over. There's 2 ways to get people there. Emerald, which is a full up ERP implementation of kind of a rip and replace type deal. And then there's also what we call SDS, software-defined store, where you take all of the existing infrastructure, you virtualize it at the edge and you bring it up into the cloud so that you can manage it from there without actually having to replace all the hardware and to have to rip out and put in a new ERP system. We've had real success with SDS because it's not as big a commitment by the customer, but we get similar to pull-through on ARPU. So I think Emerald is a beautiful package, and we put it in place at some major retailers, some grocers, they love it. But it's a big commitment, it's a big time commitment, and that's going to take a little longer. Once we get them to SDS, they can still make the decision to go full on Emerald or not. So I'm not sure -- I think SDS is going to grow more quickly in the short run. I think you can see more virtualized in the edge because it's faster, it gets people on the platform and particularly in an environment where maybe is a slowdown in spending, right? They may go with a less capital-intensive solution. But the Emerald package is robust. It's complete. It's ready to go, and those who bought it really, really like it.

Okay. What are the current trends you're seeing in hospitality? And what's your opportunity there?

It's been a wonderful year in hospitality. They've -- I think we had a little bit of a post-COVID bounce earlier in the year. They've got growth rates up into the high teens. They're now settling in at 8% or 10% as they lap that using comp. The -- it's been a product-driven growth rate for us. We launched a Aloha Cloud product. That product competes directly with Toast. They've done a wonderful job of coming out with a product that was tied to the payment stream in the low end of the market, the fewer restaurants, right, not at the enterprise level, the SMB space. They -- and we didn't have a product to compete particularly well. 3 or 4 months ago, maybe 2 quarters ago, we rolled out Aloha Cloud, which competes directly with Toast. It does steal their really good idea tie payments in, and it's allowed us to win back some of our rightful share in that space. It also gives people a migration path when they go from being a single location or 10 locations to being 30 and 40 locations to be able to scale up to Aloha they're fully capable of Aloha as their business gets more complex and their business model gets more for flow.

Okay. So digital banking, I mean, I think the plan is to keep your higher-growth businesses on the Commerce Co and the RemainCo. But to some degree, you could argue that digital banking because of the -- like the end market could fit better with the ATM code from more of a Finco perspective. What is the real rationale? Is there some dyssynergy from moving the system.

No dyssynergy, no dyssynergy. There's a few customers who buy digital banking and buy might buy ATM as a service. The ATM as a Service business is a fledgling business right now. there's no customers who are directly impacted the selling channel will need to be incentivized on both sides to sell the other. So the digital banking crowd will have to get an extra big if they sell ATM as a service and vice versa, if the team as a service grabs a digital banking deal, they should get compensated for that, and we can build a kind of from a contractually into the model. But the rest is completely separate. There's very little overlap. So -- but you could argue it has banking in the title, right? So maybe you should stay with the banking business. There are common customers. But it's really the characteristics of the business, fast-growing, subscription-based, high investment, right, very high investment. And I think that's it fits better on the other side. It carries a different leverage portfolio perhaps in the ATM business, we think can carry more leverage. And so we thought it was better to leave it there. It's truly RemainCo, right? The objective was to get the ATM businesses out by themselves with the Cardtronics ATM as a Service platform to redefine what ATM is to us, which is not a hardware company. It's a solutions company, let it stand on its own and then have remain co. But you could argue that RemainCo still portfolio is still a little bit complicated and you might want to simplify it further.

Okay. So as we've mentioned, a lot of software-centric areas within Commerce Co. So for software providers, the transition from perpetual to term and subscription is often -- or is typically a headwind to revenue in EBITDA, where are you in this transition?

So you can't buy software from us in the banking side of the house, that's not subscription. So we're done -- we're through that software shift, and it's actually a net positive. On the banking side, as we start to shift hardware to subscription based, that's going to be a whole new wave of suppression on revenue growth. And it's substantial. I mean the only way that, that model works is that we grab more share of wallet every time we sell a device as a service. We can't -- we're not going to lease machines to people, right? We're selling to banks. They don't need us to finance their machines. It's -- this is about grabbing more share of wallet, doubling or tripling the ARPU for every device. And so despite the fact that less of the revenue is front-end loaded, the actual impact to revenue growth isn't that terrible. So I'm thinking it's probably next year about $120 million headwind to revenue as we convert to as a service on the ATM side. On the hospitality side, we sell as a service already. There's no -- in the SMB space. When you get on a platform, those lanes are all as a service. We do have a relatively large hardware component to the retail space that is SCO that does sell with some software, but a predominance of the price is associated with the hardware. So that business has the furthest to go. It's not yet started to sell SCO as a service. When it does, you'll see a similar impact to their hardware revenue line getting spread out over 5 years. But again, I think when you sell SCO as a service, you'll grab a lot more wallet share, and it should mute some of that impact. But I think the ATM as a Service business, if it goes faster, if we grab more share quicker, you're going to see more of an impact to -- immediately to revenue, but we'll describe it, we'll call it out, and we'll tell you that it's padding future period growth and our ship share is up, and we're producing the number of devices, and we're getting a nice ARPU pull through. But we'll have to -- and margin should get a little better if that happens, we'll have to be very clear as we go through it. I think we were in the software side. We used to call out the since now it's a net positive, we don't talk about it as much. But I think we'll have to do the same on the hardware side.

Okay. So just finishing up on the Commerce Co side. So payments. So how material is that now since you've I mean the JetPay acquisition and what's the penetration target?

So we've not penetrated nearly far enough. I think the original model for JetPay, we're not close. We bought a card not present platform. We needed a card present. We've had to rewrite a lot of what we bought. And the first place we've launched recently was an SMB and hospitality and they're killing it. They're up 1,000 sites last quarter. There are 1,000 sites before that. It's working really well.

So how long since you've relaunched that.

Five months. It's going very, very well. The attach rate there is north of 90% of every new site we stand up, takes our payment solutions. So that's a great outcome. We don't have a solution yet for JetPay and the retail side of the house. And that's something we're pulling forward to get done as rapidly as possible. The success we've seen on the hospitality side suggests we can have the same on the retail side. We have to get a product that's ready to go. So I think we're 6 to 9 months out from having that product ready.

Okay. So shifting more to ATM Co now. So it's 67% recurring revenue, 18% EBITDA margin. So kind of paradoxically, I think how Commerce Co is positioned as the higher growth, potentially higher valuation business, but ATM Co, obviously has both a higher percentage of recurring revenue and marginally higher EBITDA margin right now, right? So what are your targets for those 2 metrics?

I think that this is a slow growth business. I think it's a GDP-plus grower once we get through this wave. I think you'll get CPI increases built into all our new software and services. And so you can see a nice modest growth rate here. I think this business should have margin rates that are north of 20, get into the mid-20s, not as high as the high 20s like the other after the business because most of the revenue we're going to pick up is service and solution revenue, most of which will do ourselves, some of which will outsource. And so the profitability won't be quite as high. But good, predictable margins that are better than today. I think there's probably 2 to 3 points of margin suppression right now just due to supply chain issues this year and other things. I think we'll get north of in that business soon and then create up into the mid-20s.

Yes. I think you already touched on the ATM as a service transition. Overall, how do the economics of the business change for you?

So you take a capital -- a business is not very capital-intensive, and you could make it capital-intensive, right, you have to own all the devices. We'll find off-balance sheet financing, nonrecourse financing in most markets that we go into. And those that we can't, like some overseas markets where the assets just aren't as financeable, aren't as collateral [ indiscernible ] securitizable, we'll have more -- we'll put more revenue upfront and change the way we contract. So it doesn't hurt cash flow too badly. The uptake has been really good in India. Where we've not had to buy the fleet, we've actually stepped into other people's fleets, and we'll replace them as we go upgrade as we go. Those have been terrific deals. The economics there, I would say, typical service revenue margins in India, so low teens for now, but that's without any remember somebody else's software and hardware still. So as we roll in our devices and our software stack that will get better. The deals we've seen in the U.S. on ATM as a Service have been very good, very good profitability. We've -- I think most of those wins have been at community banks or credit unions, so 300 devices at a time, 400 devices at a time where their cost to run those machines is so high that when you look at our footprint of running 280,000 devices, it's really easy for us to drive good economics for our customer and to help them take a lot of cost out of the organization. So the pricing has been good. The profitability has been very good. an uptake on the idea has been sound. We had a nice deal last week. We announced a Bank Santander. We took on several thousand machines for them. All other machines in the U.K., we're going to run for them. It's our first big bank who could and should be able to do it themselves who said, "No, no, you guys should do this for me. I like this model."

Good. So Cardtronics with regard to the integration, the synergy realization, update on the progress there? And then anything unexpected, either positive or challenges. I would say that I think some of us were surprised by the -- I think we were so used to the prior interest rate environment that we were in with the sharp rates there. You had the cost of running cash, which never really seemed to be a big line item and all of a sudden it was.

You're right. I wish the rates were a little higher when we negotiated the buy. Look, it wasn't going to be a 0 interest rate environment forever. We do have $4.5 billion of cash sitting in machines that we rent all over the planet, and that has gotten more expensive. And so we've done a few things. We -- first, we've put some hedges in place. We've got 3-year hedges in place that help a lot. We put them in at the right time. We can change our pricing model to a step function changes and interest allow us to go back and change our pricing model in many of the machines that we have. And we started putting less cash in the machines. So we've got almost $1 billion less cash out there in machines than we had before interest rates were high or higher. It is a headwind next year in profitability. We'll have to go find ways to offset that but transaction volumes are up, which is good. And they're up after kind of what I'll call, tough comparisons in that we had some government stimulus packages to money in the previous year. that cause a lot of transaction volumes. And so I think we've offset those with much higher value transactions. So they're doing well. As far as things have surprised us, you know what, I don't think when we did the Cardtronics acquisition we presume we'd be spinning it off. And I think what's really exciting is it makes that ATM business valuable. The entire strategy of ATM as a Service comes out of the expertise of the folks in Cardtronics. And it legitimizes the strategy we had before we bought Cardtronics, it makes us legit players in that space. And so the most exciting thing is that -- I think it makes our future proofs our ATM business, and it makes us an obvious winner as we go forward. Integration has gone fine. They -- most of the cost out action was completed relatively quickly. I don't think you could tell Cardtronics person from an NCR legacy person in our building anymore. It's all 1 team working pretty well together.

Okay. Great. So on hardware. Obviously, there were headwinds this year on supply chain shipping constraints and inflationary costs. What is the status of these issues? And what's the backlog like?

Yes. And they just kept coming, right, we couldn't catch our breath better, better. We -- if we take them in order -- inflation here, it's here to stay. We did a better job of getting price this year. We'll do a better job at getting price next year. It's not enough to cover all of our inflation, but how we'll offset that with the rest of productivity. Our premium freight costs are down and down considerably. We were air freighting very heavy things around the world, $28 million premium airfreight in a single quarter in the first quarter of this year, just so we never missed a delivery. We did not want to miss a customer delivery and so we did it. And so that has started to come down already. That $100 million run rate a year, that's going to be less than half of that next year. The -- we can put stuff on boats again. Both are available and they cost less than they did just a few months ago. That's gotten better. And our component costs have come way down. They spiked. It wasn't an 8% increase. It was an 800% increase, right? It was an awful spike in chip costs and some electrical component costs. Those have stabilized, not because the market's gotten that much better because we went out and requalified 300 chipsets across all our devices across all our customers to diversify our supply chain and make sure we can get the chips we need when we need them and at a price that's affordable. We -- a POS device, they sell for about $1,000 a piece, right? They've sold for $1,000 a piece for a very long time. The chip going into that device exceeded $1,000 for a period of time earlier this year. You know right away. But we didn't -- we deliver because that's what we said we do. So I think we'll see an absence of that next year. So I think what has been a significant headwind will become a modest tailwind next year.

Okay. How do you run that business with regard to margin and free cash flow, the hardware side? It's not really a is I mean...

Yes. We're not a hardware company. So you run it as tight as you can. You only do the things you can do better than others. You outsource the manufacturing of devices that are undifferentiated that people can do cheaper than you can do it, you control the design, you don't necessarily need to control the manufacturing of it, you probably get out of plants in Budapest and other people do it for you like we did, you get -- you closed the Manaus because you can't make any money in Manaus, you get out of there. You consolidate into a single facility in Chennai. And then you do in Chennai, those things that you do really well. So we've simplified the SKU set. We have a much smaller number of SKUs and much more commonality in parts across them, and it makes manufacturing much easier and much faster, much less expensive.

So since this is a debt conference, we definitely have to end with some on some debt question. So you're planning higher standalone leverage at ATM Co versus Commerce Co. So why is the ATM Co cash profile stronger in terms of being able to service more debt? Is that because you've got higher R&D and Caval intensity...

It's exactly, the investment necessary in the commerce business in the hospital -- retail and hospitality and particularly digital banking, they're very high investment businesses. It's very nice growth rates, but very high investment. Whereas on the other side of the in house we invest in our software stack to keep it fresh but it's not a whole redo like it as it's been done on the retail side. It's entirely about capital investment.

Okay. And then you really laid out, I think, the planned debt structure. So I think there's 2 bonds that you will have to retire. 3 bonds,would you like to rate on them leave them in place at RemainCo and then recap the Jet structure at ATM Co. Is that fair?

Yes. We've got a lot of term loan A and Bs. We'll keep that structure in place with both companies. We have $3.3 billion in bonds, $2.3 billion can stay outstanding at RemainCo. I think that's probably the right amount of fixed debt for that business, and we'll augment that with a little bit of our existing term loan customers. Our partners rather have done a great job for us. They'll be there for us to help that business on the term loan side. And then we'll have to do about $1 billion of new bonds at SpinCo. And we'll fill in the gap over there with a...

As to be gone. Is that part of the spin mechanic.

Yes, there's a certain amount of indebtedness with a certain duration which you need to put -- right for 7 years. So -- but look, it's worth the tax break. So yes, we'll do that every day. So I think it's doable. If we had to do it in today's market, we could do it. The biggest constraint at 1 point in time was the OID on term loans. That's come back down the term loan market -- term loan B market is back open again. And so I think we'd love to see rates stabilize here. But with only $1 billion out of the total debt stack, I don't think rate is going to be the determinant of whether we can get this transaction done. That said, we're not in a hurry. If markets aren't willing to finance the transaction or the spin at the time we're ready to go, we'll wait. We'll get ready as fast as we can, and we'll make sure we have the right market.

Okay. Well, that is that also prompted a question. So that is -- so one of the questions that investors ask most frequently is, are the capital markets conducive to financing and your answer is that if they're not, you can wait.

Yes. I'd say right now, they feel fine if we could get spend on today and getting it done by ourselves. So there's less debt breakage, everything else, it'd be harder. It's still hard for an outside party to do it, but for us, I think we can get this done. I think the availability of each layer in the desk back is pretty good where we are today. I don't like the rate, but we can stomach the rate. But you're right, if we get out to October, November and it improves and makes it easy, if it's worse, we'll get good advice from our bankers and figure out when the right time to go.

Okay. And then pension is actually staying with ATM Co. So that's being with ATM Co. And what's the underfunded position and how much funding do you spend...

So it's about $400 million. I haven't met yet with the PBGC. They've already called this. We'll meet with them and figure out what the right prefunding is that $400 million really doesn't have a required contribution until about 2027 already. So it's a tolerable level under funding. It doesn't really seem fair to lay that on one of the 2 entities where we should prefund some of that. And also both entities will still be responsible for that indebtedness. They'll have to guarantee it because of the way pensions work. So I don't think we'll go and share the whole thing. I don't think we'll fund the whole thing. I don't think that's economic, but I do think we'll -- in my delevering calculations of the $500 million or so, I've included in that some funding of the pension plan.

Okay. And then your debt paydown target from now until the spin is about $500 million with free cash flow.

So I don't know whether we paid debt down delever -- so net debt. But if you had to deploy cash today, and we just get off the road with or seeing some equity investors, and they agreed with debt holders for the first time, while they said, no, you need to delever, don't buy that stock delever because going into next year with a recession on the horizon, perhaps, we'd love to see all our companies just derisk themselves a bit. So we'll accumulate generate the cash. We need to generate between $500 million and $800 million of cash between now and then. There are other ways to bring equity into the organization as you go through a spin as well with some outside money perhaps. And the totality of that number has to be at least $500 million to help us execute the transaction, get leverage ratios to a point where the 2 businesses can stand alone on their own. Everything after that is gravy and makes them each more competitive it gives them each more strategic room and gives the ATM company the ability to pay a dividend. And that really is our goal here is to differentiate these 2. liberate them to go, grow the way they want to grow on 1 side. and convert to the ATM as a Service and the other. I think the low end of the range as we described really would be a nice place to get to. I'm not sure we could get there by the fall of next year without some outside capital. But I think give us another few months and we could. So that might impact timing as well.

Okay. So intriguing comment by bringing in equity.

So what Well, so Mike and I have a history together, right? We've been through one of these spins before. And when we went through the spin, as you know, there's a 20% of the equity doesn't need to go to your existing shareholders. It can go to somebody else and that somebody else usually pays money for that, and you can use that to delever. So when I think about optionality from here, the factor doing it ourselves doesn't limit us at all optionality still there. In fact, it might increase it. But I think there's some ways to bring capital into the company to help delever just at or before the time of spend that could be really valuable to each of the 2 entities.

Okay. Great. I think we're actually out of time. Tim, thank you so much for being with us.

All right. Thanks.